As filed with the Securities and Exchange Commission on September 30, 1997
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
SANDBOX ENTERTAINMENT CORPORATION
(Exact name of Registrant as specified in its charter)
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Delaware 7372 86-0699474
(State or other jurisdiction (Primary Standard Industrial I.R.S. Employer
of incorporation Classification Code Number) Identification No.)
or organization)
---------------
2231 E. Camelback, Suite 324
Phoenix, Arizona 85016
(602) 468-6400
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices and principal place of business)
---------------
Chad M. Little, President
SANDBOX ENTERTAINMENT
CORPORATION
2231 E. Camelback, Suite 324
Phoenix, Arizona 85016
(602) 468-6400
FAX (602) 468-6401
(Name, address, including zip code, and
telephone number, including area code, of
agent for service)
---------------
Copy to:
Thomas H. Curzon, Esq. Stuart D. Freedman, Esq.
Joseph M. Udall, Esq. Stephen J. Schulte, Esq.
Christopher S. Stachowiak, Esq. Schulte Roth & Zabel LLP
Osborn Maledon, P.A. 900 Third Avenue
2929 North Central Avenue New York, NY 10022
Phoenix, Arizona 85012-2794 (212) 756-2000
(602) 207-1288 FAX (212) 593-5955
FAX (602) 235-9444
---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
If this Form is filed pursuant to Rule 462(d) under the Securities Act to
request automatic effectiveness of exhibits filed post-effectively, please check
the following box. [_]
---------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum Amount of
Title of Each Class of Amount to be Aggregate Offering Registration
Securities to be Registered Registered (1) Price (1)(2) Fee
- ---------------------------- -------------- ------------------- ------------
<S> <C> <C> <C>
Series B Convertible Preferred Stock,
$.001 par value........................... $ $6,086,400 $1,844.37
Common Stock, $.001 par value (3) $
</TABLE>
(1) Includes _____ shares of Series B Convertible Preferred Stock to be issued
upon conversion of certain convertible promissory notes in the aggregate
principal amount of $540,000 effective upon consummation of this offering.
See "Certain Transactions."
(2) Estimated in accordance with Rule 457(i) solely for the purpose of
calculating the registration fee.
(3) The Common Stock registered hereby is reserved for issuance to the holders
of the Preferred Stock upon conversion of the Preferred Stock in accordance
with the Company's Certificate of Incorporation. See "Description of
Capital Stock".
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 1997
Shares
[SANDBOX ENTERTAINMENT LOGO]
Series B Convertible Preferred Stock
(par value $.001 per share)
All of the ___ shares of Series B Convertible Preferred Stock ("Series B
Preferred Stock") offered hereby are being sold by Sandbox Entertainment
Corporation ("Sandbox" or the "Company"). There has been no public market for
any class or series of capital stock of the Company and there will be no public
market in the Series B Preferred Stock, the Common Stock into which it is
convertible, or in any other class or series of capital stock of the Company
after this offering. The Series B Preferred Stock will be subject to substantial
restrictions on transfer and conversion under the Company's Certificate of
Incorporation. See "Description of Capital Stock". The Company currently has no
intention to list any of its securities, including the Series B Preferred Stock
and the Common Stock, on any stock exchange or for trading in the NASDAQ stock
market or over the counter. It is currently anticipated that the offering price
will be between $___ and $___ per share. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 13.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price to Underwriting Proceeds to
Public Discounts(1) Company(2)
------ ------------ ----------
Per Share....... $ $ $
Total(3)........ $ $ $
- ----------
(1) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended, and to issue warrants to the Underwriter to purchase the number of
shares of Series B Preferred Stock equal to 8% of the shares of Series B
Preferred Stock issued in this offering at 110% of the price to the public
in this offering. See "Underwriting".
(2) Before deducting estimated expenses of $250,000, payable by the Company.
---------------
The shares offered hereby are offered by the Underwriter as specified
herein, subject to receipt and acceptance by it and subject to its right to
reject any order in whole or in part. It is expected that delivery of share
certificates will be made through the offices of Wit Capital Corporation in New
York, New York, on or about , 1997 against payment therefor in immediately
available funds.
WIT CAPITAL CORPORATION
---------------
The date of this Prospectus is ____________________, 1997
<PAGE>
[Inside Cover]
Sandbox - The Interactive Entertainment Network
Picture of www.sandbox.net, the Company's home Web page, accompanied by text,
links to the Company's other Web sites - CNNfn FINAL BELL and CNN/SI SPORTSIM,
showing links to the Company's other Web pages and services, including "Win
Prizes and Sand Dollars, Free Registration and Password, Games and Web Shows,
All About Sandbox, Sandcastle Program, Talk to Us and Help", and a link to
description of the Company's Sand Dollars Smart Card.
None of the links will be in effect and the reader will not be able to use the
links to view the sites indicated.
INFORMATION ON THE COMPANY'S WEB SITES SHALL NOT BE DEEMED TO CONSTITUTE A PART
OF THIS PROSPECTUS.
2
<PAGE>
[Pull Out Left]
Final Bell - A Real Life Stock Market Simulation.
Picture of www.finalbell.com, the Company's Final Bell Web home page,
accompanied by text, banner advertisement and showing a link to MetLife's
www.lifeadvice.com Web page, links to sponsors' Web pages - CNNfn and PC Quote,
links to the Company's other Web pages and services, including "PLAY FOR FREE -
Play the Market, Trade Center Portfolio, Mini Games, Prizes, Getting Started,
SHARPEN YOUR SKILLS - The Exchange, Prime Portfolio, Prizes, Getting Started, BE
PART OF THE GROUP - Group Action, ALL THE INFO YOU NEED - Trading Tools, How to
Pick Stocks, The Motley Fool, News and Quotes, Traders' Library, TODAY ON FINAL
BELL and WHAT'S NEW IN PLAY THE MARKET", and links to description of the Grand
Prize and upcoming IBM Blue Chip Challenge.
None of the links will be in effect and the reader will not be able to use the
links to view the sites indicated.
INFORMATION ON THE COMPANY'S WEB SITES SHALL NOT BE DEEMED TO CONSTITUTE A PART
OF THIS PROSPECTUS.
3
<PAGE>
[Pull Out Right]
SportSim - The Ultimate Sports Fantasy Site for Any Fan
Picture of www.sportsim.com, the Company's SportSim Web home page, accompanied
by text, and showing links to CNN/SI's Web pages, links to the Company's other
Web pages and services, including "PRE-GAME - Fantasy Football and Get in the
Game, PRIZES, DISPLAY ON DESKTOP, CLICK HERE TO START, PLAYER LOGIN, SPORTSIM
NEWS - The Commish Shows Off New Feature and Answers Owner Questions, Special
Prizes for Your Patience, How Do You Rate, Check the New Full Contact Grand
Prize Standings and More News Items, Scrolling News Ticker setting forth current
information regarding such items as status of the game, trivia questions and
sports information, picture of NFL Players Association Logo and a link to the
Web page for Stat's Inc., the statistical data service to SportSim site.
None of the links will be in effect and the reader will not be able to use the
links to view the sites indicated.
INFORMATION ON THE COMPANY'S WEB SITES SHALL NOT BE DEEMED TO CONSTITUTE A PART
OF THIS PROSPECTUS.
4
<PAGE>
No person is authorized in connection with the offering made hereby to give any
information or to make any representations other than as contained in this
Prospectus, and if given or made, such information or representations must not
be relied upon as having been authorized by the Company or by any Underwriter.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy by any person in any jurisdiction in which it is unlawful for such
person to make such offering or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances imply that
the information herein is correct as of any date subsequent to the date hereof.
----------------
INFORMATION ON THE COMPANY'S WEB SITES SHALL NOT BE DEEMED TO CONSTITUTE A PART
OF THIS PROSPECTUS.
-----------------
TABLE OF CONTENTS
Prospectus Summary.............................................................6
Venture Capital Investing......................................................8
The Offering..................................................................10
Risk Factors..................................................................13
Use of Proceeds...............................................................26
Dividend Policy...............................................................27
Capitalization................................................................27
Dilution......................................................................28
Selected Financial Data.......................................................29
Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................................30
Business......................................................................36
Management....................................................................54
Certain Transactions..........................................................59
Principal Stockholders........................................................63
Description of Capital Stock..................................................67
Shares Eligible for Future Sale...............................................71
Underwriting..................................................................72
Legal Matters.................................................................74
Experts.......................................................................74
Available Information.........................................................74
Index to Financial Statements................................................F-1
Appendix A; Script of Audio Video
Presentation of the Company..................................................A-1
The Company is not currently a reporting company under the Securities
Exchange Act of 1934. Following this offering, the Company intends to furnish to
its stockholders annual reports containing audited financial statements examined
by an independent accounting firm and quarterly reports for the first three
quarters of each fiscal year containing interim unaudited financial information.
Each purchaser of securities hereunder must expressly agree to receive this
Prospectus and all stockholder reports and communications, including but not
limited to all quarterly and annual reports and proxy statements, by delivery of
such materials to such purchaser's last known mailing address or electronic mail
address, at the Company's discretion, listed on the Company's records, or by
delivery of a notice to such mailing address or electronic mailing address, at
the Company's discretion, which directs such purchaser to a specific Web address
where such materials can be found, read and printed.
-----------------
Sandbox(R) is a registered trademark of the Company. Final Bell(TM) and
SportSim(TM) among other marks, are common law trademarks of the Company. This
Prospectus also includes trade names, trademarks and references to intellectual
property owned by other companies.
-----------------
5
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. Prospective investors should carefully consider the information
set forth under the heading "Venture Capital Investing" and "Risk Factors".
Except as otherwise specified, all information in this Prospectus reflects a
one-for-two and one-half reverse split of the Company's Common Stock and Series
A Convertible Preferred Stock (the "Reverse Stock Split"), to be effective prior
to consummation of this offering. See "Description of Capital Stock" and Note 13
of Notes to Financial Statements.
The following summary contains forward-looking statements that involve risks
and uncertainties. Such forward-looking statements include, but are not limited
to, statements regarding future events and the Company's plans and expectations.
The Company's actual results may differ materially from such statements. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed below in "Risk Factors", as well as those discussed
elsewhere in this Prospectus. See also "Special Note on Forward-Looking
Statements".
The Company
Sandbox Entertainment Corporation ("Sandbox" or the "Company") is a software
development company that intends to use its proprietary technology to become a
leading provider of games and simulations on the World Wide Web (the "Web"). The
Company's proprietary technology is designed to enable Sandbox to create and
support, in a cost effective manner, a variety of scalable, highly interactive
and informative games and simulations. Sandbox's flagship products are Final
Bell, an on-line stock market simulation, and SportSim, an on-line fantasy
sports simulation. The Company generates revenue from advertisers interested in
reaching specific target groups, such as existing or potential on-line
individual investors through Final Bell and sports enthusiasts through SportSim.
Sandbox seeks to attract a targeted audience by basing its games and simulations
on subjects, such as finance or sports, that are of great interest to Internet
users. The Company then seeks to motivate the audience to spend extended time on
and return repeatedly to the Sandbox Web sites by providing, free of charge, the
enjoyment of head-to-head competition, useful information and a chance to win
cash prizes and merchandise.
Final Bell is a stock market simulation in which players compete with one
another to build the highest-valued stock portfolio. By placing risk-free game
dollars in actual stocks on a daily basis, players can use Internet resources to
model and track their own personal simulated portfolios. SportSim gives
participants the ability to play sports fantasy leagues on-line by building and
competing with their own fantasy teams. SportSim fully automates the drafting
and trading process to simplify league management and allow for more
sophisticated gaming. Fantasy Football, the initial SportSim game, was launched
on July 15, 1997, and 83,800 teams were participating as of September 5, 1997,
making it, in the Company's estimation, the largest fantasy football game on the
Internet. Final Bell was ranked third among the most active investment sites on
the Web by Lycos in a July 1997 ranking and at September 5, 1997, there were
29,213 active portfolios in game number 5 of Final Bell.
The Company's growth strategy is to increase advertising revenue by the
ongoing introduction of new and enhanced features to its flagship products,
SportSim and Final Bell, and by the creation of new games and simulations
targeted at different audiences. The Company also intends to seek to create
additional revenue streams in the form of product sales, such as the sale of
more sophisticated CD-ROM variations of its games and simulations, and through
licensing its proprietary gaming engines for use on non-competing third party
Web sites.
As part of its strategy, the Company has entered into alliances with media
companies that already enjoy substantial brand awareness among Internet users.
In July 1997, Sandbox entered into Co-Branding and Marketing Agreements with
CNNfn and CNN/SI, affiliates of the Cable News Network, Inc. ("CNN") and of the
Turner Broadcasting System. In exchange for agreed-upon percentages of
advertising revenue, CNNfn and CNN/SI provide content, celebrity endorsements,
advertising sales support, and promotion for Internet and CD-ROM versions of
Final Bell and SportSim on their cable channels and Web Sites. Under these
agreements, Sandbox retains all rights to its proprietary simulations as well as
ownership of the related participant databases. The Company spent substantial
time, effort and money in the six month period ending June 30, 1997 putting
these co-branding relationships in place. Since July 1997, CNN has heavily
promoted the Final Bell and SportSim sites. CNN's media support for the
promotion of the SportSim site was valued by CNN at an estimated $5.5 million
for
6
<PAGE>
the initial 5 weeks following launch. Promotional support included impressions
on CNN Headline News, CNN and CNN/SI cable networks, print promotion by Sports
Illustrated magazine and interactive promotion on the CNN/SI Web site. The
result has been a substantial increase in traffic to the Company's Web sites
since the CNN agreements were signed. Page views delivered by the combination of
all Sandbox sites totaled 21,520,000 in August 1997, as compared to 3,625,000
page views in February 1997, the Company's previous busiest month before
entering into the CNN agreements.
The Company's co-branding relationship with CNN has generated significant
interest among leading advertisers in the Sandbox "integrated advertising"
concept, which offers Sandbox advertisers "beyond the banner" advertising
choices. "Integrated advertising" involves establishing a game or simulation Web
site with a co-branding or development partner and then offering advertisers the
opportunity to integrate their promotions within a specific game or simulation
on such Web site through sponsorships. By involving advertisers in the creation
of a message, Sandbox differentiates itself from the many Internet companies
competing through banner sales for limited advertising dollars. As of September
30, 1997, the Company had entered into an agreement with IBM providing for
$180,000 in cash to the Company to sponsor the Trade Center and other planned
simulations within Final Bell through March 14, 1998, an agreement with Saturn
Corporation providing for $180,000 in cash to the Company to sponsor Full
Contact, a fantasy football game within SportSim, through January 31, 1998, and
an agreement with Metropolitan Life Insurance Company ("MetLife") providing for
$138,000 in cash to the Company to sponsor planned simulations on Final Bell
from November 10, 1997 to May 4, 1998. Except for certain exclusivity
provisions, co-branding and sponsorships do not reduce the Company's available
inventory of banner advertising, a form of Internet advertising similar to
billboards on which Internet users can click to visit an advertiser's Web site
to get further information about the advertiser or its products. During the
three months ending September 30, 1997, the Company entered into an agreement
with iVillage providing for $71,700 in cash to the Company for banner
advertising through December 31, 1997, and the Company invoiced approximately
$14,000 for banner advertising to MetLife.
The Company seeks to use its proprietary technology to develop databases of
participant demographic information designed to be of considerable value to
advertisers. This information is obtained by registering visitors to its Web
Sites, tracking their preferences, and rewarding participants for providing
information about their purchasing preferences. Total registered participants in
Sandbox's database for all sites approximated 242,975 at September 5, 1997.
The Company believes that the popularity of its games and simulations should
lead to opportunities to market additional products to end-users and to license
its gaming engines to Web Site developers. In August 1997, the Company
introduced a CD-ROM version of its Final Bell simulation, featuring an
appearance by Lou Dobbs of CNN. The Final Bell CD enhances the features of the
on-line simulation by providing rapid access from disk to such bandwidth
intensive elements as video, sound and graphics. The Company has agreed with
CNN/SI to introduce CD-ROM versions of SportSim. The Company believes that its
CD-ROM games and simulations should be attractive to both participants and
advertisers with their superior video, sound and graphics, larger prize pools
and advertisements that have a more TV-like feel. As the Company's Internet
games and simulations are accepted, Sandbox intends to seek to supplement its
advertising revenues by charging end-users for access to premium games and
simulations. The Company also intends to license simplified versions of its
games and simulations for use by third party Web site developers.
At September 1, 1997, Sandbox had 22 full-time employees and is led by a
team experienced in the fields of network technology, marketing management,
computer art, advertising and graphic design. The Company has financed its
development to date through investment capital provided by three venture capital
firms, and by private investors and by entering into strategic alliances with
other media companies such as CNN providing for the exchange of goods and
services.
The Company reincorporated in Delaware on April 25, 1996 under the name
Sandbox Entertainment Corporation. The Company's offices are located at 2231
East Camelback, Suite 324, Phoenix, Arizona 85016, and its telephone number is
602-468-6400.
7
<PAGE>
VENTURE CAPITAL INVESTING
The Company is engaging in a public offering of its Series B Preferred Stock
as an alternative to another round of venture capital financing.
In venture capital investing, investors seek to achieve superior returns
through the capital appreciation of their equity investments realized in
companies in which they invest ("portfolio companies"), through subsequent
public offerings and/or sales of the portfolio companies. In seeking superior
returns, venture capital investors assume significantly greater investment risks
than those incurred when investing in the securities of established public
companies, including the risk of loss of their entire investment and the risk
arising from lack of liquidity of their investment. Portfolio companies may have
few tangible assets, limited financial resources, and a limited operating
history that in some instances may be characterized by limited revenues and
continuing operating losses. Venture capitalists traditionally seek to address
these risks by carefully evaluating specific portfolio investments, by
attempting to build a portfolio of venture capital investments to diversify risk
and increase the likelihood that returns, on an aggregate basis, will be
attractive, and by negotiating for and obtaining a variety of contractual
protections from the portfolio companies in which they invest.
Contractual protections often obtained by venture capitalists include
representation on or control over the Board of Directors of the portfolio
company, and contractual veto rights governing such issues as the incurrence of
indebtedness, changes in the business plan, the execution and termination of
material contracts, including the employment agreements of senior executives,
and mergers, acquisitions and sales of assets other than in the ordinary course
of business. The holders of the Series A Preferred Stock obtained a number of
these contractual protections in connection with their investments in the
Company, and currently have three representatives on the Company's Board of
Directors. See "Certain Transactions" and "Description of Capital Stock --
Series A Preferred Stock". However, in light of the broad distribution of the
Series B Preferred Stock anticipated in connection with the offering, the
Company and the Underwriter have determined that it is not practicable for the
holders of the Series B Preferred Stock to have and to exercise many of these
rights. Accordingly, the holders of the Series B Preferred Stock do not have a
right, as a separate class, to designate members to the Company's Board of
Directors, nor do such holders have contractual or other veto rights regarding
the incurrence of indebtedness, changes in the Company's business plan,
execution or termination of material contracts, or, except as specifically
described under "Description of Capital Stock", mergers, acquisitions or sales
of assets of the Company.
As portfolio companies anticipate that they will require additional rounds
of private equity financing in order to implement their business plans, venture
capitalists often obtain contractual pre-emptive or right of first refusal
rights to purchase equity securities issued by portfolio companies for cash in
subsequent financings. These rights are obtained to protect the investors
against the potential for dilution that may occur in subsequent private
issuances of equity securities. The holders of the Series A Preferred Stock
have, but the holders of the Series B Preferred Stock will not have, such rights
with respect to subsequent issuances of equity securities by the Company.
However, in addition to the benefit of the antidilution provisions described
under "Description of Capital Stock -- Series B Preferred Stock", in the event
that the Company issues additional Common Stock or securities convertible or
exchangeable for Common Stock for an aggregate consideration of $1,000,000 or
more within one year of consummation of the offering of the Series B Preferred
Stock at a consideration per share less than the conversion price of the Series
B Preferred Stock, the conversion price of the Series B Preferred Stock will be
reduced to such lower conversion price.
The holders of the Series B Preferred Stock will be subject to restrictions
on transfer substantially similar to those that would be imposed if investors
were affiliates of the Company and had purchased shares of Series B Preferred
Stock in a private placement as opposed to a public offering. Accordingly,
during the Restricted Period (as defined below), the Series B Preferred Stock
will neither be convertible into Common Stock nor be transferable except as
follows: (1) to family members or affiliates (as such term is defined in Rule
12b-2 promulgated under the Securities Exchange Act of 1934, as amended), (2)
pursuant to the laws of descent and distribution, (3) in the event of bankruptcy
or insolvency of the holder, (4) as approved by the Board of Directors in its
sole and absolute discretion, or (5) by the Underwriter in connection with the
initial distribution of the Series B Preferred Stock. After expiration of the
Restricted Period, there will continue to be no public market for the Series B
Preferred
8
<PAGE>
Stock or the Common Stock into which it is convertible. Except for the
registration rights of certain holders of the Series A Preferred Stock, the
Company is under no obligation to register the Series B Preferred Stock, Common
Stock or any other capital stock of the Company. See "Certain Transactions --
Registration Rights".
The "Restricted Period" shall begin on the date of the closing of the
offering of the Series B Preferred Stock (the "Closing Date") and end on the
earlier of (i) 24 months following the Closing Date, (ii) 180 days after the
consummation of a Qualifying Public Offering, or (iii) the occurrence of any of
the following: (1) any merger, consolidation, or other corporate reorganization
in which the stockholders of the Company do not own a majority of the
outstanding shares of the surviving corporation, (2) prior to the consummation
by the Company of a Qualifying Public Offering, any transaction or series of
related transactions in which in excess of 50% of the Company's voting power is
transferred or in which all or substantially all of the assets of the Company
are sold, or (3) subsequent to the consummation by the Company of a Qualifying
Public Offering, the acquisition, directly or indirectly, by any individual or
entity or group (as such term is used in Section 13(d)(3) of the Exchange Act)
of beneficial ownership (as defined in Rule 13d-3 promulgated under the Exchange
Act, except that such individual or entity shall be deemed to have beneficial
ownership of all shares that any such individual or entity has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), of more than 25% of the aggregate outstanding voting power of capital
stock of the Company.
Unlike the holders of the Series A Preferred Stock, holders of the Series B
Preferred Stock do not have tag-along rights, which are the rights to
participate on a pro rata basis in sales to third parties by the controlling
stockholders of the Company, but will have, as a class, approval rights with
respect to such sales by certain controlling stockholders of 50% or more of
their beneficial ownership in the Company if the holders of the Series B
Preferred Stock do not receive, in connection with such transaction, cash or
marketable securities at least equal to 125% of the original issue price of the
Series B Preferred Stock, subject to antidilution adjustments. See "Description
of Capital Stock".
9
<PAGE>
The Offering
<TABLE>
<CAPTION>
<S> <C>
Issue:............................................. shares of Series B Preferred Stock
Dividends.......................................... Dividends and distributions equal to the dividend
and distribution, if any, declared on the number of
shares of Common Stock into which such shares of
Series B Preferred Stock are convertible (without
regard to the Restricted Period).
Conversion into Common Stock....................... Convertible, at the option of the holder, at any
time following the Restricted Period, into Common
Stock at an initial conversion rate of one share of
Common Stock for each share of Series B Preferred
Stock, subject to antidilution adjustments.
Automatically converts into Common Stock at the
then applicable conversion rate 180 days following
consummation of a Qualified Public Offering.
Liquidation Preference............................. $ per share.
Voting Rights...................................... The holders of the Series B Preferred Stock will be
entitled to vote as a class with the holders of the
Common Stock and in such event are entitled to one
vote for each share of Common Stock into which the
Series B Preferred Stock is convertible (without
regard to the Restricted Period). In addition, the
approval of the holders of the Series B Preferred
Stock, voting separately as a class, shall be
required for certain mergers, consolidations, sales
of substantially all of assets, changes in control,
and substantial dispositions by management, unless
the holders of the Series B Preferred Stock are to
receive cash or marketable securities valued at an
amount at least equal to 125% of the original issue
price of the Series B Preferred Stock (subject to
adjustment for antidilution events).
Transfer Restrictions.............................. During the Restricted Period, the Series B
Preferred Stock will not be transferable except as
follows: (1) to family members or affiliates (as
such term is defined in Rule 12b-2 promulgated
under the Securities Exchange Act of 1934, as
amended), (2) pursuant to the laws of descent and
distribution, (3) in the event of bankruptcy or
insolvency of the holder, (4) as approved by the
Board of Directors in its sole and absolute
discretion, or (5) by the Underwriter in connection
with the initial distribution of the Series B
Preferred Stock.
Capital Stock to be outstanding after the offering. 1,254,572 shares of Common Stock (1)
792,500 shares of Series A Preferred Stock (2)
shares of Series B Preferred Stock (3)
shares of Common Stock on a fully diluted
basis (4)
Use of Proceeds.................................... Product and services marketing and development,
additional staffing costs, repayment of debt,
potential acquisition of products and technologies,
working capital and other general corporate
purposes.
</TABLE>
10
<PAGE>
Summary Consolidated Financial Data
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 30
--------------------------------------------------------
1995 1996 1996 1997
<S> <C> <C> <C> <C>
Statement of Operations Data:
Internet revenues ..................... $ -- $ 241,322 $ 27,001 $ 77,757
Non-Internet revenues (5) ............. 462,417 154,845 150,497 --
----------- ----------- ----------- -----------
Total revenues ................... 462,417 396,167 177,498 77,757
Production and engineering
expenses ............................ 594,219 986,593 543,293 451,854
Sales and marketing expenses .......... 130,760 505,954 202,090 286,426
General and administrative
expenses ............................ 223,676 304,897 132,726 212,097
----------- ----------- ----------- -----------
Total operating expenses ......... 948,655 1,797,444 878,109 950,377
----------- ----------- ----------- -----------
Operating loss ........................ (486,238) (1,401,277) (700,611) (872,620)
Other expense, net .................... 20,852 76,232 26,514 63,003
----------- ----------- ----------- -----------
Net loss .............................. $ (507,090) $(1,477,509) $ (727,125) $ (935,623)
=========== =========== =========== ===========
Net loss per common share (6) ......... $ (0.28) $ (0.76) $ (0.38) $ (0.46)
Shares used in computation (6) ........ 1,804,773 1,954,391 1,903,984 2,030,265
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997
---------------------------------------
Actual As Adjusted (7)
Balance Sheet Data:
<S> <C>
Cash and cash equivalents.................................. $ 1,952
Working capital (deficit).................................. (930,618)
Total assets............................................... 409,043
Notes payable.............................................. 327,000
Long term debt, including current portion.................. 875,596
Total stockholders' equity (deficit)....................... (954,135)
</TABLE>
(1) Based on 1,254,572 shares outstanding as of September 1, 1997 and excludes
(a) 244,966 shares of Common Stock issuable upon exercise of outstanding stock
options, (b) 303,200 shares of Common Stock issuable upon exercise of
outstanding warrants, (c) 207,462 shares of Common Stock reserved for future
issuance under the 1995 Equity Incentive Plan, and (d) Common Stock reserved for
issuance upon conversion of Series A Preferred Stock and Series B Preferred
Stock. See "Capitalization".
(2) Based on 792,500 shares outstanding as of September 1, 1997 and excludes
295,000 shares of Series A Preferred Stock issuable upon exercise of outstanding
warrants. See "Capitalization".
(3) Based on no shares of Series B Preferred Stock outstanding prior to this
offering and excludes ____ shares issuable upon exercise of warrants granted to
the Underwriter effective upon the commencement of this offering at the public
offering price and includes ___ shares issuable upon conversion of certain
convertible promissory notes effective upon consummation of this offering. See
"Capitalization" and "Certain Transactions".
(4) Includes the shares issuable upon conversion of the Series A Preferred Stock
(including the shares excluded in note (2) to this table), the Series B
Preferred Stock (including the shares excluded in note (3) to this table) and
the shares of Common Stock excluded in note (1) to this table.
(5) Non-Internet revenues are revenues generated from the production of
traditional and interactive marketing programs and materials for client
companies.
(6) Adjusted to give effect to the Reverse Stock Split. The effect of the
conversion of each outstanding share of Series A Preferred Stock into one share
of Common Stock is not included in the adjustment because the effect would be
anti-dilutive. Includes certain common share equivalents in accordance with SAB
83 (see Note 1 of Notes to the Financial Statements).
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<PAGE>
(7) Adjusted to give effect to the sale of ______ shares of Series B Preferred
Stock offered by the Company hereby at an assumed public offering price of $___
per share, and the application of the proceeds thereof, and ___ shares of Series
B Preferred Stock issuable upon the conversion of certain convertible promissory
notes effective upon consummation of this offering. See "Use of Proceeds" and
"Capitalization".
12
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RISK FACTORS
Except for historical information contained herein, this Prospectus contains
forward-looking statements that involve risks and uncertainties. Such
forward-looking statements include, but are not limited to, statements regarding
future events and the Company's plans and expectations. The Company's actual
results may differ materially from such statements. Factors that cause or
contribute to such differences include, but are not limited to, those discussed
below as well as those discussed elsewhere in this Prospectus.
The securities offered hereby involve a high degree of risk and should be
regarded as speculative. As a result, the purchase of Series B Preferred Stock
should be considered only by persons who can reasonably afford a loss of their
entire investment. In addition to the other information in this Prospectus, the
following risk factors, among others, should be considered carefully in
evaluating the Company and its business before purchasing the shares of Series B
Preferred Stock offered hereby.
No Public Market; No Liquidity
There is no public market for the shares of Series B Preferred Stock or the
Common Stock into which it is convertible (the "Conversion Shares"), and none is
expected to develop in the foreseeable future. In addition, such shares may not
be transferred (subject to certain limited exceptions) during the Restricted
Period. See "Venture Capital Investing" and "Description of Capital Stock --
Series B Preferred Stock". Accordingly, a purchaser of Series B Preferred Stock
offered hereby is not likely to be able to transfer such shares prior to the
expiration of the Restricted Period and may have substantial difficulty
transferring such shares after expiration of the Restricted Period. The
certificates evidencing the Series B Preferred Stock and the Conversion Shares
will bear a legend referring to these restrictions on transfer. In the limited
circumstances in which transfer of shares may be effected, the lack of liquidity
will have a material adverse effect on the price that could otherwise be
obtained for the shares in a public market.
Limited Operating History
The Company was founded in 1991 and its initial business did not involve the
Internet. In 1995, the Company began transitioning from a marketing consultancy
and services firm to a developer of games and simulations designed for the
Internet. Since March 1996, the Company has focused exclusively on its Internet
business and first recognized revenues from its Internet operations at that
time. Accordingly, the Company has an extremely limited operating history upon
which an evaluation of the Company and its prospects can be based. The Company's
principal current and anticipated source of revenues is the sale of advertising
space on its Web sites. The Company generated its first such revenues in March
1996. Since June 30, 1996, advertising revenues have accounted for substantially
all of the Company's revenues through June 30, 1997. Because the Company
anticipates that advertising revenues alone will not generate operating profits
in the foreseeable future, the Company believes that its future success will
depend, in part, on its ability to generate revenues and profits from other
sources, such as sales of CD-ROM versions of its games and the licensing of its
proprietary gaming software, which cannot be assured. The Company's prospects
must be considered in light of the risks, expenses and difficulties being
encountered by companies in the new and rapidly evolving market for Internet
products, content and services. To address these risks, the Company must, among
other things effectively develop new relationships and maintain existing
relationships with media partners like CNN, its advertising customers, their
advertising agencies and other third parties, provide original and compelling
games and simulations and products to Internet users, continuously develop and
upgrade its technology, develop additional revenue streams to supplement its
advertising revenue, respond to competitive developments, increase the ability
of its hardware and software infrastructure to adequately handle increasing
volumes of traffic without significant interruption, and attract, retain and
motivate qualified personnel. There can be no assurance that the Company will
succeed in addressing such risks and the failure to do so would have a material
adverse effect on the Company's business, prospects, financial condition or
operating results.
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Anticipation of Continuing Cash Losses; Negative Net Worth
Since inception of its Internet business, the Company has incurred
substantial costs to develop its technology, to create, introduce and enhance
its games and simulations, to build traffic on its Web sites, to establish
relationships with strategic partners and advertisers and to build an
administrative organization. The Company expects to continue to incur
substantial costs for these purposes, and in particular to incur increased
staffing costs for engineering and marketing. The Company has incurred
significant losses in each of its fiscal quarters and years since the inception
of its Internet business, and expects to continue to incur significant losses on
both a quarterly and annual basis for the foreseeable future. At June 30, 1997,
the Company had a working capital deficiency of $930,618 and a negative net
worth of approximately $950,000, and during the six months ended June 30, 1997
experienced operating cash requirements (net loss plus principal repayments
under capital lease obligations) of approximately $165,000, which requirements
are projected to significantly increase in the immediate future as the Company
implements certain planned increases in operating expenses. The Company has
earned only limited revenue to date from its Internet activities and its ability
to generate significant revenue is subject to substantial uncertainty. There can
be no assurance that the Company will ever generate sufficient revenue to meet
its operating expenses or achieve or maintain profitability. Further, in view of
the rapidly evolving nature of the Company's business and its limited operating
history, the Company believes that period-to-period comparisons of its financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance. See "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Need for Additional Financing; Continuing as Going Concern
The Company is incurring operating losses as it moves from early stage
toward full scale deployment of its technologies. The operating losses have
created a net capital deficiency which requires that the Company obtain
additional financial resources to meet its business objectives and such
committed financing is not yet in place. These conditions raise substantial
doubt about the ability of the Company to continue as a going concern. See
"Report of Independent Auditors" and Note 12 of "Notes to Financial Statements".
The Company believes that the net proceeds from this offering, together with
available funds, including the Company's bank and equipment lease lines of
credit, will be sufficient to meet its anticipated cash needs for working
capital for at least the next 15 months. Thereafter, if cash generated by
operations is insufficient to satisfy the Company's liquidity requirements, the
Company may be required to sell additional equity or debt securities. The sale
of additional equity or convertible debt securities could result in substantial
additional dilution to the Company's stockholders, including the holders of the
Series B Preferred Stock. There can be no assurance that financing will be
available to the Company in amounts or on terms acceptable to it. In addition,
the Company anticipates that it will need to acquire an additional $1 million of
equipment prior to the commencement of its SportSim basketball season and mid
season football in the fourth quarter of 1997. The Company intends to finance
these equipment acquisitions by arranging for additional lease financing. There
can be no assurance that the Company will be able to secure such additional
lease financing on terms acceptable to the Company. See "Risk Factors Capacity
Constraints and System Disruptions."
Unpredictability of Future Revenues and Profitability; Potential Fluctuations in
Quarterly Operating Results; Seasonality
To be successful, the Company intends in the future to derive revenue from a
mix of banner and "integrated advertising" on its Web sites, CD-ROM sales and
license fees. However, as a result of the Company's limited operating history
and the emerging nature of the markets in which its competes, the Company is
unable to accurately forecast its revenues. Through June 30, 1997 much of the
Company's advertising has been in the form of barter, in which the Company has
exchanged advertising on its Web sites in exchange for advertising, editorial
and software content and prizes. The Company has only very limited CD-ROM
revenue and no license fee revenue. The Company's future prospects are
substantially dependent upon its success in generating revenues from sources
other than advertising, such as CD-ROM sales, and end-user fees for playing
premium games and
14
<PAGE>
simulations, and its inability or failure to do so could have a material adverse
effect on its business, prospects, financial condition or operating results.
The Company's current and anticipated future expense levels are based
largely on management's assessment of the Company's prospects and its estimates
of future revenues. Expense levels are to a significant extent fixed.
Accordingly, the Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall, and a shortfall in actual
prospects, revenue as compared to estimated revenue could have an immediate
adverse effect on the Company's business, prospects, financial condition or
operating results that would be material. In addition, the Company currently
intends to significantly increase its sales and marketing expenses, particularly
for additional sales and marketing staff necessary to develop and maintain
relationships with advertising customers, their advertising agencies and other
third parties, and to increase its production and engineering expenses,
including to increase engineering staff levels necessary to develop and produce
new and compelling games and simulations to Internet users, as well as to
continuously improve its existing technology and develop new technology.
Increases in operating expenses may also occur in response to increased hardware
and software infrastructure requirements to handle larger amounts of traffic and
to competitive developments and to attract, retain and motivate qualified
personnel. To the extent these expenditures do not result in a substantial
increase in revenues, the Company's business, prospects, financial condition or
operating results would be materially adversely affected.
The Company's quarterly operating results may fluctuate significantly in the
future as a result of a variety of other factors, many of which are outside the
Company's control. Factors that may adversely affect the Company's quarterly
operating results include the level of use of the Internet, demand for Internet
advertising, seasonal trends in both Internet use and advertising placements,
including the interest level in the subject matter of the Company's specific
Internet offerings, the addition or loss of advertisers, the advertising
budgeting cycles of individual advertisers, the level of traffic on the
Company's Internet sites, the amount and timing of capital expenditures and
other costs relating to the expansion of the Company's Internet operations, the
number of participants who register to play the Company's games and simulations,
the introduction of new sites and services by the Company or its competitors,
price competition or pricing changes in the industry, technical difficulties or
system downtime, general economic conditions and economic conditions specific to
the Internet and Internet media.
The Company expects that, as it adds more games and simulations related to
major U.S. sports, its revenue will be higher leading up to and during major
U.S. sport seasons for which the Company is operating a SportSim fantasy site
and lower at other times of the year. The Company also believes that advertising
in traditional media generally is lower in the first and third calendar quarters
of each year, and that advertising expenditures fluctuate significantly with
economic cycles. Depending on the extent to which the Internet is accepted as an
advertising medium, seasonality and cyclicality in the level of Internet
advertising expenditures could become more pronounced. The foregoing factors
could have a material adverse effect on the Company's business, prospects,
financial condition or operating results.
Due to any or all of the foregoing factors, it is likely that the Company's
operating results will fall below the expectations of investors in some future
quarter. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Emerging Market for the Company's Services
The market for Internet games and simulations is at a very early stage of
development, is rapidly evolving and is characterized by an increasing number of
entrants that are introducing or developing competing products and services. As
is typical in the case of a new and rapidly evolving industry, demand and market
acceptance for recently introduced products and services such as the Company's
are subject to a high level of uncertainty and risk. Because the market for the
Company's games and simulations is new and evolving, it is difficult to predict
with any assurance the market's size, growth rate or durability. In addition, it
is not known whether individuals will utilize the Internet to any significant
degree as a means of purchasing goods and services. The adoption of the Internet
for commerce, particularly by those individuals and companies which historically
have relied upon traditional means of commerce, will require a broad acceptance
of new methods of conducting business and
15
<PAGE>
exchanging information. There can be no assurance that the market for the
Company's games and simulations will develop or that demand for the Company's
service will increase or be sustainable. If the market fails to develop,
develops more slowly than expected or becomes saturated with competitors, or if
the Company's games and simulations do not achieve or sustain market acceptance,
the Company's business, prospects, financial condition or operating results
would be materially adversely affected.
Dependence on Advertising Revenues; Competition for Advertisers
Since March 1996, substantially all of the Company's operating revenues have
been and are currently derived from on-line advertising. The success of the
Company's business strategy will depend to a significant extent on the Company's
ability to increase its advertising revenue. See "Business -- Advertising and
Sales". There can be no assurance that such revenue expansion can be
accomplished.
Each of the Company's advertising contracts can be terminated by the
advertising customer at any time on very short notice. Consequently, the
Company's advertising customers may move their advertising to competing Internet
sites, or from the Internet to traditional media, quickly and at low cost,
thereby increasing the Company's exposure to competitive pressures and
fluctuations in net revenues and operating results. In selling Internet
advertising, the Company also depends to a significant extent on advertising
agencies, which exercise substantial control over the placement of advertising
for the Company's existing and potential advertising customers. Furthermore,
substantially all of the Company's revenues to date have been derived from a
limited number of advertising customers. The Company's success will depend on
its ability to broaden and diversify its base of advertising customers. If the
Company loses advertising customers, fails to attract new advertisers or is
forced to reduce advertising rates in order to retain or attract advertisers,
the Company's business, prospects, financial condition or operating results will
be materially adversely affected. See "Business -- Advertising and Sales".
There is intense competition for the sale of advertising on Web sites, even
those which generate a high volume of traffic. This has resulted in a wide range
of rates quoted by different vendors for a variety of advertising services, and
difficulty in projecting levels of Internet advertising revenue that will be
realized generally or by any specific company. Competition for advertisers among
Web sites, as well as competition with other traditional media for advertising
placements, have resulted in significant price competition. Most of the
Company's banner advertisements to date have been sold on the basis of the
number of "impressions", or times that an advertisement appears in page views
downloaded by participants, rather than on the number of "click-throughs", or
participant requests for additional information made by clicking on the
advertisement or other basis. There can be no assurance that the Company's
future advertising customers will continue to pay on a per-impression basis
rather than on some other basis. In addition, there can be no assurance that
advertisers will accept the internal and third-party measurements of impressions
delivered by the Company's Web sites, or that such measurements will not contain
errors.
The Company expects to decrease its reliance on impression-based marketing
in the future as its advertising strategy becomes more focused on "integrated
advertising." "Integrated advertising" involves establishing a game or
simulation Web site with a co-branding partner and then offering advertisers the
opportunity to integrate their promotions within the game or simulation itself
through sponsorships. "Integrated advertising" is generally sold on a case by
case basis at negotiated rates based on several factors, including the number of
impressions, brand identity, user marketing data retrieval, targeted delivery,
proof of use and image building. During the three months ended September 30,
1997, the Company entered into agreements with IBM, MetLife and Saturn
Corporation to act as sponsors. See "Business - Strategy". However, there can be
no assurance that advertisers will continue to accept "integrated advertising"
as a viable marketing strategy.
The foregoing factors and uncertainties could have a material adverse effect
on the Company's business, prospects, financial condition or operating results.
See "Risk Factors -- Competition" and "Business --Advertising and Sales".
16
<PAGE>
Uncertain Acceptance of the Internet as an Entertainment and Advertising Medium
Use of the Internet by consumers is at a very early state of development,
and market acceptance of the Internet as a medium for information,
entertainment, commerce and advertising is subject to a high level of
uncertainty. The Company believes that its future success depends on its ability
to significantly increase revenues, which will require, among other things, the
development and acceptance of the Internet as an advertising medium.
The Company's advertising customers generally have only limited experience
with the Internet as an advertising medium and neither its advertisers nor their
advertising agencies have devoted a significant portion of their advertising
budgets to Internet-based advertising in the past. Some of the largest
advertisers in the United States have no experience with the Internet as an
advertising medium and are not devoting any portion of their advertising budgets
to Internet-based advertising. In order for the Company to generate advertising
revenues, advertisers and advertising agencies must direct a portion of their
budgets to the Internet and, specifically, to the Company's Internet offerings.
There can be no assurance that advertisers or advertising agencies will be
persuaded to allocate or continue to allocate portions of their budgets to
Internet-based advertising, or, if so persuaded, that they will find
Internet-based advertising to be more effective than in advertising in
traditional media such as print, broadcast and cable television, or in any event
decide to advertise or continue to advertise on the Company's Internet site(s)
or in its products. Acceptance of the Internet among advertisers and advertising
agencies will also depend to a large extent on the level of use of the Internet
by consumers, which is highly uncertain, and on the acceptance of new methods of
conducting business and exchanging information. Advertisers and advertising
agencies that have invested substantial resources in traditional methods of
advertising may be reluctant to modify their media buying behavior or their
systems and infrastructure to use Internet-based advertising. Furthermore, no
standards to measure the effectiveness of Internet-based advertising have yet
gained widespread acceptance, and there can be no assurance that such standards
will be adopted or adopted broadly enough to support widespread acceptance of
Internet-based advertising. If Internet-based advertising is not widely accepted
by advertisers and advertising agencies, the Company's business, prospects,
financial condition or operating results will be materially adversely affected.
See "Business -- Advertising and Sales".
Uncertain Acceptance of the Company's Products; Recent Product Launches; Product
Development
The Company's future success depends upon its ability to deliver original
and compelling Internet games and simulations in order to attract participants
with demographic characteristics valuable to the Company's advertising
customers. In July 1997, the Company launched its most recent products,
SportSim, an interactive, on-line sports fantasy game, as a feature of the
CNN/SI Web site, and CNNfn Final Bell, an interactive, on-line stock market
simulation. While the Company has previously offered versions of Final Bell, its
fantasy sports game is new and unproven. In addition, the Company's success
depends on its ability to develop its business plan to generate revenues through
product sales. The Company began offering for sale a CD-ROM version of Final
Bell in September 1997, and has contracted with CNN/SI to offer a CD-ROM version
of SportSim in 1998. At September 5, 1997, 83,800 teams were participating in
the fantasy football game in SportSim and there were 29,213 active portfolios in
game number 5 of CNNfn Final Bell. However, there are no assurances that these
games or the related CD-ROM offerings will be successful.
Sandbox seeks to differentiate its games and simulations from its
competitors by basing them on subjects of great interest to targeted groups of
Internet users and motivating such participants to both spend extended time on
and return repeatedly to the Sandbox Web sites by providing, free of charge, the
enjoyment of head-to-head competition, useful information and a chance to win
meaningful cash prizes and merchandise. However, there are no assurances that
the Company will be successful in achieving these goals.
The Company intends to exploit the scalability and adaptability of its
software to cost effectively create new products that reach additional targeted
audiences on the Internet. With the Company's products, the data needed to run a
game or simulation comes from external sources, such as sporting events or the
stock market, or will be created as a set of parameters by the players
themselves, as may be the case in some of the Company's future simulations.
However, there are no assurances that the Company will be able to access
external data and licenses
17
<PAGE>
required to operate new games or simulations, or that parameters set by the
players themselves will be sufficient to support new games or simulations.
Further, there can be no assurance that the Company's games and simulations
will be attractive to a sufficient number of Internet users to generate
meaningful advertising and product revenues. There also can be no assurance that
the Company will be able to anticipate, monitor and successfully respond to
rapidly changing consumer tastes and preferences through the development of new,
compelling games and simulations so as to attract a sufficient number of
participants to its sites. Internet users can freely navigate and instantly
switch among a large number of Internet sites, many of which offer original and
continuously changing content, making it difficult for the Company to
distinguish its content and attract and retain participants. In addition, many
other Internet sites offer very specific, highly targeted content that could
have greater appeal than the Company's sites to particular subsets of the
Company's target audience. If the Company is unable to develop Internet games
and simulations that allow it to attract, retain and expand a loyal participant
base possessing demographic characteristics attractive to advertisers, and to
offer such games and simulations free from system disruptions, the Company will
be unable to generate advertising revenues, and its business, prospects,
financial condition or operating results will be materially adversely affected.
See "Business -- Advertising and Sales".
Dependence on CNN and other Third Parties for Internet Operations
The Company has recently entered into Co-Branding and Marketing Agreements
with CNN/SI and CNNfn. The Company anticipates that these agreements, and the
Company's relationship with CNN, will result, over time, in the generation of
significant cash revenues for the Company, although there are no assurances that
such revenues will be realized. The CNN/SI Agreement expires October 31, 1998,
with an option at CNN's discretion to renew for up to two subsequent one-year
terms. The CNNfn Agreement expires July 15, 1999. The termination or expiration
without renewal of either of these agreements and/or the deterioration of the
Company's relationship with CNN would have a material adverse effect on the
Company's business, prospects, financial condition or operating results. In
addition, as CNN/SI and CNNfn are primarily responsible for the marketing and
sale of banner advertising for the CNN/SI SportSim and CNNfn Final Bell Web
Sites, their failure to market and sell sufficient banner advertising on such
sites at attractive terms could have a material adverse effect on the Company's
business, prospects, financial condition or operating results. See "Business --
Advertising and Sales".
To date, the Company has used barter arrangements to significantly increase
traffic and brand recognition rather than incurring cash expense for this
purpose. Barter arrangements involve the Company's exchange of advertising space
on its Web site for reciprocal space in other media publications or other Web
sites or receipt of tangible goods used as game prizes or access to editorial or
software content. The Company remains dependent on these third party barter
arrangements and without such arrangements would experience significant cash
flow difficulties.
The Company's most significant barter transactions to date have been with
USA Today (the original sponsor of Final Bell), PC Quote, Motley Fool, Neural
and TheStreet.com. In the USA Today arrangement, the media company's logos and
other identifying marks appeared throughout the Final Bell site. In turn, Final
Bell appeared on all of USA Today's Money Line Web pages, as well as elsewhere
on their financial Web site. In the arrangement with PC Quote, which runs
through November 13, 1997, text links to PC Quote appear on all Final Bell
pages, and PC Quote receives 200,000 banners each month. In exchange, the
Company receives 200,000 banners and promotion of Final Bell through links on
the PC Quote home page, Micro Watch page and Quote Watch page. The Company also
receives charting and graphing tools which are utilized in its Trade Center area
within Final Bell. The Company also receives promotion from the Motley Fool,
another leading financial information source, through links appearing on the
Motley Fool home page, and from appropriate points on America OnLine, and
editorial content from The Fools School. In turn, the Company provides links to
the Motley Fool from the Exchange area within Final Bell and banner promotion.
The Company is also currently involved in an exchange relationship with Neural,
which involves the trade of banner advertising for a nightly data feed of stock
prices and, until July 1997, had an arrangement with TheStreet.com for the
exchange of promotion on the Company's Exchange pages for daily editorial
content. The Company believes that the services and tools provided
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<PAGE>
in barter transactions to date are readily available from other sources,
although there are no assurances that the Company would be able to replace such
services and tools on terms acceptable to the Company.
Other Internet sites, particularly search engines, directories and other
navigational tools managed by Internet service providers and Web browser
companies, may significantly affect traffic to the Company's Internet sites. The
Company's ability to develop original and compelling Internet games and
simulations is also dependent on maintaining relationships with and using
products provided by third party vendors of Internet development tools and
technologies. Developing and maintaining satisfactory relationships with third
parties could become more difficult and more expensive as competition increases
among Internet content providers. If the Company is unable to develop and
maintain satisfactory relationships with such third parties on acceptable
commercial terms, or if the Company's competitors are better able to leverage
such relationships, the Company's business, prospects, financial condition or
operating results will be materially adversely affected. In addition, the
occurrence of a players' strike or other work stoppage, to the extent that the
Company is dependent on sports' statistics, could have a material adverse effect
on the Company's business, prospects, financial condition or operating results.
Potential Liability for Internet Content; Kolbe/Humanagement Litigation
To the extent that the Company publishes and distributes content over the
Internet, the Company faces potential liability for defamation, negligence,
copyright, patent or trademark infringement and other claims based on the nature
and content of the materials that it publishes or distributes. Such claims have
been brought, and sometimes successfully pressed, against on-line services.
Although the Company carries general liability insurance, the Company's
insurance may not cover potential claims of this type or may not be adequate to
indemnify the Company for all liability that may be imposed. Any imposition of
liability that is not covered by insurance or is in excess of insurance coverage
would have a material adverse effect on the Company's business, prospects,
financial condition or operating results. Further, regardless of the merits of
any asserted claim(s) against the Company, the defense of such claim(s) would be
disruptive to the Company's operations, require the time and attention of the
Company's senior management and would likely be costly.
On July 1, 1997, counsel for the Company received written notification from
plaintiffs' counsel in Kolbe, et al. v. Humanagement, Inc., et al., Case No.
CIV-95-1861-PHX-RCB, U.S. District Court for the District of Arizona (the
"Litigation"), that plaintiffs intend to add the Company as a defendant in the
lawsuit, in which a preliminary injunction against defendants has been granted
regarding, among other things, claims for contributory copyright infringement in
connection with products marketed by Humanagement, a start-up company in the
personality testing business, including certain materials Humanagement placed on
a Web site operated by Humanagement on a Company server for a certain period of
time. Plaintiffs have asserted claims for damages of $1,000,000 against
Humanagement and assert that Humanagement violated the preliminary injunction
while its Web site operated on a Company server. The Company does not believe,
in light of the limited extent of its involvement in the matter and the highly
uncertain status of the law relating to the liability of Internet access
providers, that plaintiffs' potential claims of contributory infringement
against the Company, which do not involve the Company's technology or its
business of games or simulations on the Internet, have merit, and the Company
intends to vigorously defend against them. However, the Company is not yet in a
position to fully evaluate plaintiffs' claims. Moreover, the Company makes no
assurances that it will not be named in an amended complaint by plaintiffs or
that it will not be required to pay damages, which may materially and adversely
affect the Company, as a result of such suit. In addition, if a complaint were
filed adding the Company as a defendant, it is uncertain whether, or on what
basis, if at all, the Company's or Humanagement's insurer(s) will agree to
defend or indemnify the Company. Regardless of the merits of plaintiffs'
potential claims against the Company, the defense of such claims could be
disruptive to the Company's operations, require the time and attention of the
Company's senior management and could be costly.
Competition
The market for Internet services and products is relatively new, intensely
competitive and rapidly changing. Since the Internet's commercialization in the
early 1990's, the number of Web sites on the Internet competing for consumers'
attention and spending has proliferated with relatively few barriers to entry,
and the Company expects
19
<PAGE>
that competition will continue to intensify. The Company presently competes, or
will compete, as the scope of its games and simulations expands, directly and
indirectly, for advertisers, viewers, players and licenses and other events with
the following categories of companies: (i) on-line services offering interactive
games to targeted participants in association with existing and new brands (such
as Starwave Corporation, Interactive Imaginations, Inc. (Riddler), Sony Station
and YoYodyne Entertainment); (ii) on-line services or Web sites targeted to
sports enthusiasts generally (such as ESPNet SportsZone and CBS's SportsLine) or
to enthusiasts of particular sports (such as Web sites maintained by Major
League Baseball, the NFL, the NBA and the NHL); (iii) on-line services or Web
sites targeted to existing or potential investors, such as E-TRADE, SMG2000,
NASDAQ, the New York Stock Exchange and the American Stock Exchange; (iv)
publishers and distributors of traditional off-line media (such as television,
radio and print), including those targeted to specific audiences, many of which
have established or may establish Web sites; (v) general purpose consumer
on-line services such as America Online, CompuServe and Microsoft Network; (vi)
vendors of information, merchandise, products and services distributed through
other means, including retail stores, mail, facsimile and private bulletin board
services; and (vii) Web search and retrieval services, such as Excite, InfoSeek,
Lycos and Yahoo!, and other high-traffic Web sites, such as those operated by
C|NET and Netscape. The Company anticipates that the number of its direct and
indirect competitors will increase in the future.
Management believes that the Company's most significant competition for its
fantasy football game and future sports-related games and simulations is from
ESPNet SportsZone and CBS's SportsLine, which are Web sites offering a variety
of sports content. The Company views its most significant competitors with
regard to its stock market simulation as E-TRADE Group, Inc., an on-line
investment services provider that operates a similar on-line stock market
trading game, SMG2000, an electronic educational simulation program sponsored by
the Securities Industry Foundation for Economic Education and certain corporate
sponsors, and, to a lesser extent, other on-line brokerage services such as
Quote.Com and PC Quote, which offer the ability to build portfolios but
generally do not provide for simulated trading activity.
Many of the Company's current and potential competitors have longer
operating histories, significantly greater financial, technical and marketing
resources, significantly greater name recognition, and substantially larger
participant or membership bases and broader product and service offerings than
the Company and, therefore, have a significantly greater ability to attract
advertisers and participants. In addition, many of these competitors may be able
to respond more quickly than the Company to new or emerging technologies and
changes in Internet user requirements and to devote greater resources than the
Company to the development, promotion and sale of their services. There can be
no assurance that the Company's current or potential competitors will not
develop products and services comparable or superior to those developed by the
Company or adapt more quickly than the Company to new technologies, evolving
industry trends or changing Internet user preferences. Increased competition
could result in price reductions, reduced margins or loss of market share, any
of which would materially and adversely affect the Company's business,
prospects, financial condition or operating results. In addition, as the Company
expands internationally it may face new competition. There can be no assurance
that the Company will be able to compete successfully against current and future
competitors, or that competitive pressures faced by the Company would not have a
material adverse effect on its business, prospects, financial condition or
operating results. See "Business-Competition".
Managing Potential Growth
The Company has rapidly and significantly expanded its Internet operations
and anticipates that significant expansion of its Internet operations will
continue to be required in order to exploit potential market opportunities. This
rapid growth has placed, and is expected to continue to place, a significant
strain on the Company's management, operational, technical and financial
resources. In order to manage the expected growth of its operations, the Company
will be required to implement and improve its operational and financial systems,
procedures and controls, including the improvement of its accounting and other
internal management systems, on a timely basis, and to train, manage and expand
its employee base. The Company will also be required to more than treble its
full time staff and currently anticipates that over the next two and one-half
years it will hire approximately 57 full time employees: 24 in production, 15 in
engineering; 16 in marketing and sales and 2 in
20
<PAGE>
general and administration. Although the resulting increase in staffing costs
would be substantial, the Company intends to manage, to the extent possible, its
personnel costs by not filling projected positions until they can be justified
by corresponding increases in revenue, although there can be no assurance that
it will be able to do so. Further, the Company's management will be required to
successfully maintain relationships with various advertising customers,
advertising agencies, other Internet sites and services, Internet service
providers and other third parties and to maintain control over the strategic
direction of the Company in a rapidly changing environment. There can be no
assurance that the Company's current personnel, systems, procedures and controls
will be adequate to support the Company's future operations, that management
will be able to identify, hire, train, motivate or manage required personnel or
that management will be able to successfully identify and exploit existing and
potential market opportunities. If the Company is unable to manage growth
effectively, the Company's business, prospects, financial condition or operating
results will be materially adversely affected.
Dependence on Key Personnel
The Company's performance is substantially dependent on the continued
services of Chad M. Little, James A. Layne, Lonnie A. Whittington, Matthew
Stanton, Michael Turico and the other members of its senior management team, as
well as on the Company's ability to retain and motivate its other officers and
key employees. The Company has entered into employment agreements or engagement
letter agreements with Messrs. Little, Stanton and Turico, which generally
provide the employee's title, starting salary, bonus and benefits, moving
allowance (if applicable) and incentive stock options (if any). All of the
employment agreements are "at-will" and none of the agreements provide for
material payments to the employee on termination. The Company and its executive
officers, including Messrs. Layne and Whittington, have also entered into
Proprietary Rights and Non-Compete Agreements that generally prohibit disclosure
of Confidential Information (as defined therein), assign to the Company all
rights in Inventions (as defined therein), and include certain non-compete and
non-solicitation covenants. Although the Company intends to apply for a "key
person" life insurance policy on Chad M. Little, the Company's Chief Executive
Officer, in the amount of $5 million, the loss of Mr. Little or one of the
executives named above, for whatever reason, could have a material adverse
effect on the Company's business, prospects, financial condition or operating
results.
The Company's future success depends on its continuing ability to attract
and retain highly qualified personnel. Competition for such personnel among
companies with operations involving computer technology and the Internet is
intense, and there can be no assurance that the Company will be able to retain
its existing employees or that it will be able to attract, assimilate or retain
sufficiently qualified personnel in the future. The Company intends to hire
approximately 57 employees over the next two and one-half years. The inability
to attract and retain the necessary technical, managerial, editorial and sales
personnel could have a material adverse effect on the Company's business,
prospects, financial condition or operating results. See "Business --Employees".
Risks of Technological Change
The market for Internet products and services is characterized by rapid
technological developments, frequent new product introductions and evolving
industry standards. The emerging character of these products and services and
their rapid evolution will require that the Company continually improve the
performance, features and reliability of its Internet games and simulations,
particularly in response to competitive offerings. There can be no assurance
that the Company will be successful in responding quickly, cost effectively and
sufficiently to these developments. In addition, the widespread adoption of new
Internet technologies or standards could require substantial expenditures by the
Company to modify or adapt its Internet sites and services and could
fundamentally affect the character, viability and frequency of Internet-based
advertising, either of which could have a material adverse effect on the
Company's business, prospects, financial condition or operating results. In
addition, new Internet services or enhancements offered by the Company may
contain design flaws or other defects that could require costly modifications or
result in a loss of consumer confidence, either of which could have a material
adverse effect on the Company's business, prospects, financial condition or
operating results. See "Business -- Intellectual Property".
21
<PAGE>
Dependence on Continued Growth in Use of the Internet
Rapid growth in the use of the Internet is a recent phenomenon, and there
can be no assurance that acceptance and use of the Internet will continue to
develop or that a sufficient base of participants will emerge to support the
Company's business. Revenues from the Company's Internet operations will depend
largely on the widespread acceptance and use of the Internet as a source of
information and entertainment and as a vehicle for commerce in goods and
services. The Internet may not be accepted as a viable commercial medium for a
number of reasons, including potentially inadequate development of the necessary
network infrastructure, timely development of enabling technologies or
commercial support for Internet-based advertising. To the extent that the
Internet continues to experience an increase in participants, an increase in
frequency of use or an increase in the bandwidth requirements of participants,
there can be no assurance that the Internet infrastructure will be able to
support the demands placed upon it. In addition, the Internet could lose its
viability as a commercial medium due to delays in the development or adoption of
new standards and protocols required to handle increased levels of Internet
activity, or due to increased government regulation. Use of the Internet as a
source of information retrieval or entertainment could be inhibited by
employers' use of "firewalls" to block employees' access to sites on the Web.
Changes in or insufficient availability of telecommunications services to
support the Internet also could result in slower response times and could
adversely affect use of the Internet generally and of the Company's Internet
site(s) in particular. If use of the Internet does not continue to grow or grows
more slowly than expected, or if the Internet infrastructure does not
effectively support growth that may occur, the Company's business, prospects,
financial condition or operating results would be materially adversely affected.
Capacity Constraints and System Disruptions
The satisfactory performance, reliability and availability of the Internet
site(s) on which the Company's games and simulations are offered ("Games Sites")
and the Company's network infrastructure are critical to attracting Internet
users and maintaining relationships with advertising customers. Success of a
product is dependent, in part, upon the Company maintaining participant access
to product sales without significant disruption or delay, which requires, among
other things, that the Company estimate and provide hardware and software
systems adequate to handle anticipated traffic. The Company's advertising
revenues are directly related to the number of advertisements delivered by the
Company to participants. System interruptions that result in the unavailability
of the Game Sites or slower response times for participants would reduce the
number of advertisements delivered and reduce the attractiveness of the Game
Sites to participants and advertisers. In August and September 1997, the Company
underestimated the amount of traffic that Final Bell and SportSim would
generate, and experienced system disruptions and delays, which required the
Company to acquire additional hardware and software and which caused some
participant dissatisfaction. These upgrades to its server and database capacity,
which were made over a three-week period and totaled approximately $500,000,
more than doubled the Company's capacity to handle traffic to its Web sites. In
addition, the Company anticipates that it will need to acquire an additional $1
million of equipment prior to the commencement of its SportSim basketball season
and mid-season football. Furthermore, as additional games and simulations are
brought on-line, the Company expects additional upgrades will be required. While
the Company believes that the steps it has taken to increase its ability to
handle larger amounts of traffic, and to communicate with and address the
concerns of its participants, there are no assurances that such system
disruptions will not adversely affect the Company's business, prospects,
financial condition or operating results. Similarly, although the Company is
increasing its systems infrastructure acquisition plans in light of the most
current information and estimates available to it, there are no assurances that
it will accurately foresee traffic levels, system requirements or other facts
that might result in system interruptions, or that such system interruptions
will not occur.
In August and September 1997, also in response to the surge in traffic to
its Web sites, the Company was required to make arrangements with Teleport
Communications Group, Inc. a third party telecommunications service provider
("TSP") to house its Web sites and obtain a more direct link between the Company
and Genuity, Inc., the Company's Internet service provider ("ISP"). The Company
believes that its TSP and ISP are capable of handling its anticipated traffic
growth in the foreseeable future and can provide expanded bandwidth for
communications as Internet technology improves in this area. However, any
failure of the TSP or ISP to perform as anticipated or any unforeseeable
increase in traffic on its Web sites will require the Company to make other
22
<PAGE>
third party arrangements or expand and adapt its network infrastructure. The
Company's inability or failure to make such arrangements or add additional
software and hardware to accommodate increased traffic on its Web sites may
cause unanticipated system disruptions and result in slower response times.
There can be no assurance that the Company will make such arrangements or expand
its network infrastructure on a timely basis to meet increased demand. Any
increase in system interruptions or slower response times resulting from the
foregoing factors could have a material adverse effect on the Company's
business, prospects, financial condition or operating results.
The Company's Web site operations housed at the TSP's facility are
vulnerable to interruption by fire, earthquake, power loss, telecommunications
failure and other events beyond the Company's or the TSP's control. The TSP
provides certain safeguards against such events. The Company's contract with its
TSP provides that the switch room is maintained at a temperature of
approximately 70 degrees and a 50% humidity level and the AC power is backed up
by a generator. In addition, the Company's procedures require that software be
backed up daily, and stored off-site so that it could be used to restore the
Company's Web site operations in the event of catastrophe. However, there is no
assurance that in the event of a catastrophe, the Company would be able to
locate sufficient equipment to run its Web site operations on a timely basis. If
the TSP or ISP fails for any reason, the Company would have to make other third
party arrangements. The Company carries business interruption insurance, but
there is no assurance that such insurance would be sufficient to compensate the
Company for lost revenues that may occur from a substantial system failure, and
any losses or damages incurred by the Company could have a material adverse
effect on its business, prospects, financial condition or operating results. See
"Business -- Facilities."
Importance of Proprietary Rights
The Company regards its databases, products and gaming engines as
proprietary and attempts to protect them under a combination of patent,
copyright, trade secret and trademark laws and contractual restrictions on
employees and third parties. Despite these precautions, it may be possible for
unauthorized parties to copy the Company's software or to reverse engineer or
obtain and use information the Company regards as proprietary. Existing trade
secret and copyright laws provide only limited protection. Certain provisions of
the license and distribution agreements to be used by the Company, including
provisions protecting against unauthorized use, copying, transfer and
disclosure, may be unenforceable under the laws of certain jurisdictions and the
Company may be required to negotiate limits on these provisions from time to
time. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. There can be no assurance that the protections put in place by the
Company will be adequate. The Company has two U.S. patent applications pending
with respect to certain of its technologies. There can be no assurance that
patents will issue as a result of these applications, the extent of the
protection any such patent(s) might afford, or whether the rights granted
thereunder will provide a competitive advantage to the Company. See "Business --
Intellectual Property".
Significant and protracted litigation may be necessary to protect the
Company's intellectual property rights, to determine the scope of the
proprietary rights of others or to defend against claims of infringement. The
Company is not currently involved in any litigation with respect to intellectual
property rights, and, with the exception of the Kolbe/Humanagement Litigation
described above, is not aware of any threatened claims. There can be no
assurance that third-party claims, with or without merit, alleging infringement
will not be asserted against the Company in the future. Such assertions can be
time consuming and expensive to defend and could require the Company to
discontinue the use of certain software or processes, to discontinue certain
product lines, to incur significant litigation costs and expenses and to develop
or acquire non-infringing technology or obtain licenses to the alleged
infringing technology. There can be no assurance that the Company would be able
to develop or acquire alternative technologies or to obtain such licenses or, if
licenses were obtainable, that the terms would be commercially acceptable to the
Company.
23
<PAGE>
Government Regulation and Legal Uncertainties
The Company is subject to various laws and governmental regulations
applicable to businesses generally. The Company believes it is currently in
compliance with such laws and that such laws do not have a material impact on
its operations. In addition, although there are currently few laws or
regulations directly applicable to access to or commerce on the Internet, due to
the increasing popularity and use of the Internet, it is possible that more
stringent consumer protection laws and regulations may be adopted with respect
to the Internet, covering issues such as participant privacy and expression,
pricing, intellectual property, information security, anti-competitive
practices, the convergence of traditional channels with Internet commerce,
characteristics and quality of products and services and the taxation of
subscription fees or gross receipts of Internet service providers. The enactment
or enforcement of such federal or state laws or regulations in the future may
increase the Company's cost of doing business or decrease the growth of the
Internet, which could in turn decrease the demand for the Company's products and
services, increase the Company's costs, or otherwise have an adverse effect on
the Company's business, prospects, financial condition or operating results.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, libel and personal
privacy is uncertain, may take years to resolve and could expose the Company to
substantial liability for which the Company might not be indemnified by content
providers or other third parties. Any such new legislation or regulation or the
application of existing laws and regulations to the Internet could have a
material adverse effect on the Company's business, prospects, financial
condition or operating results.
The Company's use of prizes in its games and simulations may be subject to
state and federal laws governing lotteries and gambling. Such laws vary from
jurisdiction to jurisdiction and are complex and uncertain. The Company seeks to
design its prizing structure to fall within exemptions from such laws, but there
can be no assurance that the Company's prizing structure will be exempt from all
applicable laws. Failure to comply with applicable laws could have a material
adverse effect on the Company's business, prospects, financial condition or
operating results.
Tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in Internet commerce. New state
tax regulations may subject the Company to additional state sales and income
taxes. As the Company's games and simulations are available over the Internet in
multiple states and foreign countries, such jurisdictions may claim that the
Company is required to qualify to do business as a foreign corporation in each
such state and foreign country. The failure by the Company to qualify as a
foreign corporation in a jurisdiction where it is required to do so could
subject the Company to taxes and penalties for the failure to qualify. It is
possible that the governments of other states and foreign countries also might
attempt to regulate the Company's transmissions of content on its Web sites or
prosecute the Company for violations of their laws. There can be no assurance
that violations of local laws will not be alleged or charged by state or foreign
governments, that the Company might not unintentionally violate such law or that
such laws will not be modified, or new laws enacted, in the future.
In addition, several telecommunications carriers are seeking to have
telecommunications over the Internet regulated by the Federal Communications
Commission (the "FCC") in the same manner as other telecommunications services.
For example, America's Carriers Telecommunications Association has filed a
petition with the FCC for this purpose. In addition, because the growing
popularity and use of the Internet has burdened the existing telecommunications
infrastructure and many areas with high Internet use have begun to experience
interruptions in phone service, local telephone carriers, such as Pacific Bell,
have petitioned the FCC to regulate Internet service providers in a manner
similar to long distance telephone carriers and to impose access fees on the
Internet service providers. If either of these petitions are granted, or the
relief sought therein is otherwise granted, the costs of communicating on the
Internet could increase substantially, potentially slowing the growth in use of
the Internet. Any such new legislation, regulation or application or
interpretation of existing laws could have a material adverse effect on the
Company's business, prospects, financial condition or operating results. See
"Business -- Government Regulation".
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<PAGE>
Significant Unallocated Net Proceeds
The Company intends to use the net proceeds of this offering primarily for
product and services marketing and development, additional staffing costs and
repayment of debt. In addition, the Company could also use proceeds for
potential acquisitions of products and technologies complementary to the
Company's business and for working capital and other general corporate purposes.
Pending such uses, the Company intends to invest the net proceeds from this
offering in short-term, investment-grade, interest-bearing securities. The
Company has no other specific uses for the proceeds of this offering, and the
exact uses of such proceeds will be subject to the discretion of management. See
"Use of Proceeds".
Determination of the Offering Price
The offering price for the Series B Preferred Stock will be determined by
the Underwriter after negotiations with the Company, and should not be regarded
as an indication of any future market price of the Series B Preferred Stock or
the Conversion Shares. Among the factors that will be considered in determining
the offering price are prevailing market conditions, the history and prospects
of the Company and its industry in general, the valuation of competitors of the
Company, the Company's current operations and earnings potential, the Company's
management, the lack of liquidity for the Series B Preferred Stock and risks
associated with an investment in the Company.
Control by Existing Stockholders
Upon completion of this offering, (i) holders of Series A Preferred Stock
will have the ability to vote % of the outstanding voting stock of the Company
on an as-converted, fully diluted basis, and (ii) members of the Company's
senior management will have the ability to vote % of the outstanding voting
stock of the Company on an as-converted, fully diluted basis. As a result, these
stockholders, if they act as a group, will be able to control all matters
requiring shareholder approval, including the election of directors and approval
of significant corporate transactions. Such control may have the effect of
delaying or preventing a change in control of the Company. See "Management",
"Principal Stockholders" and "Description of Capital Stock".
Anti-Takeover Effect of Certain Charter Provisions
The Board of Directors has the authority to issue up to 1,400,000 shares of
Series A Preferred Stock, _____ shares of Series B Preferred Stock and _____
shares of "blank check" Preferred Stock junior to the Series A Preferred Stock
and Series B Preferred Stock, but otherwise with such rights, preferences,
privileges and restrictions, including voting rights, as may be determined by
the Board of Directors without any further vote or action by the holders. The
rights of the stockholders may be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change of control of the Company without further
action by the stockholders and may adversely affect the voting and other rights
of the stockholders. The Company has no present plans to issue any shares of
Preferred Stock, other than the Series B Preferred Stock offered hereby and in
connection with the conversion of certain convertible promissory notes,
effective upon consummation of this offering.
Dilution
Investors participating in this offering will incur immediate and
substantial dilution. To the extent that outstanding options and warrants to
purchase the Company's capital stock are exercised, there will be further
dilution. See "Dilution".
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<PAGE>
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, this Prospectus contains
forward-looking statements. Such forward-looking statements involve risks and
uncertainties and include, but are not limited to, statements regarding future
events and the Company's plans and expectations. The Company's actual results
may differ materially from such statements. Factors that cause or contribute to
such differences include, but are not limited to, those discussed above in "Risk
Factors", as well as those discussed elsewhere in this Prospectus. Although the
Company believes that the assumptions underlying its forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the results contemplated in such forward-looking
statements will be realized. In addition, as disclosed above under "Risk
Factors", the business and operations of the Company are subject to substantial
risks which increase the uncertainties inherent in the forward-looking
statements included in this Prospectus. The inclusion of such forward-looking
information should not be regarded as a representation by the Company or any
other person that the future events, plans or expectations contemplated by the
Company will be achieved.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the _____ shares of Series
B Preferred Stock offered by the Company hereby are estimated to be
approximately $______, based on an assumed offering price of $_____ per share,
after deducting estimated underwriting discounts and offering expenses.
The Company expects to use the net proceeds from this offering primarily for
product and services marketing and development, additional staffing costs, and
repayment of debt. In addition, the Company could also use proceeds for
potential acquisitions of products and technologies complementary to the
Company's business and for working capital and other general corporate purposes.
However, the Company expects to continue to incur operating losses in the
foreseeable future, and, to the extent of such losses, the net proceeds will be
applied to pay the Company's cost of operations. The amounts actually expended
by the Company to cover operating losses and for working capital purposes will
vary significantly depending on a number of factors, including future revenue
growth, if any, and the amount of cash used or generated by the Company's
operations. See "Risk Factors -- Anticipation of Continuing Cash Losses;
Negative Net Worth" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
The Company anticipates that approximately $1,212,423 of the net proceeds
will be used for the reduction of debt, consisting of $500,000 outstanding under
a $500,000 revolving bank line of credit due March 5, 1998, bearing interest at
a prime rate plus 1.5%, $109,058 outstanding pursuant to a note payable to Glenn
Gomez in fifteen equal quarterly installments beginning September 30, 1997 at a
prime interest rate, $40,000 outstanding pursuant to notes payable to certain
investors, including Douglas and Susan Greenwood and the Pickwick Group, LLC
which is controlled by them, due October 28, 1997 bearing interest at 10%,
$490,000 outstanding pursuant to bridge loans payable to various investors
payable on the consummation of this offering bearing interest at 10% and $73,365
plus accrued interest currently due to Chad Little, James Layne, and Lonnie and
Michele Whittington under various loans and obligations all of which were
incurred prior to November 1995, and bearing interest at rates from 0% to 10%.
In addition, the Company estimates that, through December 1998, $1,291,000 of
the net proceeds will be used to expand product and services marketing and
development, approximately $1,327,500 will be expended in staffing costs for 31
additional employees and approximately $520,000 will be used as working capital
to support the Company's operations. Depending on the availability of proceeds
after the uses described above, the Company may also use proceeds for potential
acquisitions of products and technologies complementary to the Company's
business, although the Company has no present plans, understandings or
commitments, nor is it currently engaged in any negotiations, with respect to
any such acquisition or investment. Pending use of the net proceeds for the
purposes described above, the Company intends to invest such funds in
short-term, interest-bearing investment-grade obligations.
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DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently anticipates that it will retain future earnings, if any,
to fund the development and growth of its business and does not anticipate
paying any cash dividends in the foreseeable future. The Loan and Security
Agreement dated September 5, 1996, between the Company and Silicon Valley Bank,
as amended, contains a covenant that the Company will not pay or declare any
dividends on the Company's stock (except for dividends payable solely in the
Company's stock) without Silicon Valley Bank's prior written consent.
CAPITALIZATION
The following table sets forth, as of June 30, 1997, the capitalization of
the Company giving effect to the Reverse Stock Split: (a) on an actual basis;
(b) on a pro forma basis giving effect to the conversion of $540,000 aggregate
principal amount of convertible promissory notes issued in May and July 1997
into shares of Series B Preferred Stock effective upon consummation of this
offering; and (c) on a pro forma as-adjusted basis to reflect the sale of the
shares of Series B Preferred Stock offered by the Company hereby (at an assumed
offering price of $ per share and after deduction of underwriting discounts and
commissions and estimated offering expenses) and the application of the net
proceeds therefrom. This information is qualified in its entirety by the more
detailed information and financial statements contained elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
June 30, 1997
--------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- -----------
<S> <C> <C>
Notes payable: ............................................................. $ 327,000 $ 327,000
=========== ===========
Long-Term Debt, including current portion .................................. $ 875,596 $ 633,721
Stockholders' Equity (Deficit):
Common Stock, 10,000,000 authorized, 1,254,572 issued and outstanding
actual, pro forma and pro forma as adjusted (1) ............................ 1,254 1,254
Series A Preferred Stock, 1,400,000 authorized, 792,500 shares issued and
outstanding actual, pro forma and pro forma as adjusted (2) ................ 1,585,000 1,585,000
Series B Preferred Stock, 1,200,000 authorized, no shares issued and
outstanding actual, shares issued and outstanding pro forma and ____ shares
issued and outstanding pro forma as adjusted (3) ........................... -- 478,125
Paid-in capital .......................................................... 339,761 373,511
Accumulated deficit ...................................................... (2,880,150) (2,880,150)
----------- -----------
Total stockholders' equity (954,135) (442,260)
----------- -----------
Total capitalization .................................................. $ (78,539) $ 191,461 $
======================================
</TABLE>
- -----------
(1) Based on 1,254,572 shares outstanding as of September 1, 1997 and excludes
(a) 244,966 shares of Common Stock issuable upon exercise of outstanding stock
options, (b) 303,200 shares of Common Stock issuable upon exercise of
outstanding warrants, (c) 207,462 shares of Common Stock reserved for future
issuance under the 1995 Equity Incentive Plan, and (d) ___ shares of Common
Stock issuable upon conversion of Series A Preferred Stock and Series B
Preferred Stock.
(2) Based on 792,500 shares outstanding as of September 1, 1997 and excludes
295,000 shares of Series A Preferred Stock issuable upon exercise of outstanding
warrants.
(3) Based on no shares of Series B Preferred Stock outstanding prior to this
offering and excludes ___ shares issuable upon exercise of warrants granted to
the Underwriter effective upon commencement of this offering at the public
offering price.
27
<PAGE>
DILUTION
The pro forma net tangible book value (deficit) of the Company as of June
30, 1997, was approximately ($___) or ($___) per share of Common Stock. Pro
forma net tangible book value per share represents the amount of the Company's
net tangible assets less total liabilities divided by the number of shares of
Common Stock outstanding on a pro forma basis after giving effect to (i) the
Reverse Stock Split, (ii) the conversion of each share of Series A Preferred
Stock outstanding as of June 30, 1997 into one share of Common Stock, (iii) the
sale of ___ shares of Series B Preferred Stock offered hereby by the Company at
an assumed offering price of $___ per share after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company, (iv) the conversion of $540,000 aggregate principal amount of
convertible promissory notes into ___ shares of Series B Preferred at a
conversion price equal to an assumed offering price of $___ per share, effective
upon consummation of this offering and (v) the conversion of each share of
Series B Preferred Stock into one share of Common Stock. On this basis, the
Company's pro forma net tangible book value at June 30, 1997 would have been
$___ or $___ per share of Common Stock. This represents an immediate dilution of
$___ per share to new investors purchasing shares of Series B Preferred Stock in
this offering. The following table illustrates this dilution:
<TABLE>
<S> <C>
Assumed offering price per share ...............................................
Pro forma net tangible book value (deficit) per share at June 30, 1997.....
Increase per share attributable to new investors...........................
Pro forma net tangible book value per share after the offering..................
Net tangible book value dilution per share to new investors.....................
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1997,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing stockholders
and by the new investors, after giving effect to (i) the Reverse Stock Split,
(ii) the conversion of each share of Series A Preferred Stock outstanding as of
June 30, 1997 into one share of Common Stock, (iii) the sale of ___ shares of
Series B Preferred Stock offered hereby by the Company at an assumed offering
price of $___ per share after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company, (iv) the
conversion of $540,000 aggregate principal amount of convertible promissory
notes into ___ shares of Series B Preferred at a conversion price equal to an
assumed offering price of $___ per share, effective upon consummation of this
offering and (v) the conversion of each share of Series B Preferred Stock into
one share of Common Stock.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
---------------------------------------------------------- Price
Number Percent Amount Percent Per Share
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders......
New Investors..............
</TABLE>
The foregoing information assumes no exercise of outstanding options or
warrants. As of June 30, 1997 there were 194,446 shares of Common Stock reserved
for issuance upon exercise of outstanding options, of which 10,785 shares were
then exercisable, 218,200 shares of Common Stock reserved for issuance upon
exercise of outstanding warrants, all of which are currently exercisable,
160,000 shares of Series A Preferred Stock reserved for issuance upon exercise
of outstanding warrants all of which are currently exercisable, and 792,500
shares of Common Stock reserved for issuance upon conversion of the Series A
Preferred Stock. During the period from June 30, 1997 to September 1, 1997, the
Company (a) granted additional options under the 1995 Equity Incentive Plan to
purchase 50,520 shares of Common Stock at a price of $.75 per share, (b) granted
warrants to purchase 85,000 shares of Common Stock at $5.00 per share, subject
to increase to the offering price 30 days after closing of the offering, and
warrants to purchase 135,000 shares of Series A Preferred Stock at $2.00 per
share, subject to certain adjustments after the offering, and (c) reserved an
additional 50,520 shares for future issuance under the 1995 Equity Incentive
Plan. 20,584 of the options granted after June 30, 1997 are currently
exercisable. See "Management -- Stock Plans", "Certain Transactions" and Note 7
and 8 to Financial Statements.
28
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus. The Selected Statement of Operations Data
presented below for the years ended December 31, 1995 and 1996, and the Balance
Sheet Data at December 31, 1996 presented below, are derived from the Company's
financial statements which have been audited by Ernst & Young LLP, independent
auditors, included elsewhere herein. The Statement of Operations Data presented
below for the six months ended June 30, 1996 and 1997, and the Balance Sheet
Data at June 30, 1997 presented below, are derived from unaudited financial
statements included elsewhere in this Prospectus that have been prepared by the
Company on the same basis as the audited financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the financial position
and results of operations for these periods. Historical results are not
necessarily indicative of the results of operations to be expected in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
1995 1996 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Internet revenues ......................... $ -- $ 241,322 $ 27,001 $ 77,757
Non-Internet revenues ..................... 462,417 154,845 150,497 --
----------- ----------- ----------- -----------
Total revenues ................... 462,417 396,167 177,498 77,757
Costs and operating expenses:
Production and engineering ............. 594,219 986,593 543,293 451,854
Sales and marketing .................... 130,760 505,954 202,090 286,426
General and administrative ............. 223,676 304,897 132,726 212,097
----------- ----------- ----------- -----------
Total costs and operating expenses 948,655 1,797,444 878,109 950,377
----------- ----------- ----------- -----------
Operating loss ............................ (486,238) (1,401,277) (700,611) (872,620)
Other income (expense):
Interest expense ....................... (25,759) (76,760) (26,590) (64,637)
Other .................................. 4,907 528 76 1,634
----------- ----------- ----------- -----------
Total other income (expense) ..... (20,852) (76,232) (26,514) (63,003)
----------- ----------- ----------- -----------
Net loss .................................. $ (507,090) $(1,477,509) $ (727,125) $ (935,623)
=========== =========== =========== ===========
Net loss per common share (1) ............. $ (0.28) $ (0.76) $ (0.38) $ (0.46)
Shares used in computation (1) ............ 1,804,773 1,954,391 1,903,984 2,030,265
</TABLE>
December 31, June 30,
1996 1997
------------- --------------
Balance Sheet Data:
Cash and cash equivalents................. $ 20,519 $ 1,952
Working capital (deficit)................. 200,150 (930,618)
Total assets.............................. 750,155 409,043
Notes payable............................. -- 327,000
Long term debt, including current portion. 648,645 875,596
Total stockholders' equity (deficit)...... (63,734) (954,135)
(1) Adjusted to give effect to the Reverse Stock Split. The effect of the
conversion of each outstanding share of Series A Preferred Stock into one share
of Common Stock is not included in the adjustment because the effect would be
anti-dilutive. Includes certain common share equivalents in accordance with SAB
83 (see Note 1 of Notes to the Financial Statements).
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Except for historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. Such
forward-looking statements include, but are not limited to, statements regarding
future events and the Company's plans and expectations. The Company's actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed above in "Risk Factors", as well as those discussed elsewhere in this
Prospectus. See "Special Note on Forward-Looking Statements".
Overview
From its inception in 1991 through mid 1995, the Company's primary business
was the production of traditional and interactive marketing programs and
materials for client companies. In May 1995, the Company produced its first
Web-based game, Cyberhunt. In August 1995, as a result of the decision to change
the Company's principal business focus to the Internet and the ongoing
production of interactive Web-based games and simulations, the Company hired
certain key members of its engineering staff, began acquiring equipment to
support its product development and Web site related activities, and commenced a
phase-out of its fee-for-service business. The Company's principal current and
anticipated source of revenues is the sale of banner advertising and "integrated
advertising" on its Web sites. The Company generated its first such revenues in
March 1996, and since June 30, 1996, advertising revenues have accounted for
substantially all of the Company's revenues. Accordingly, the Company has an
extremely limited operating history upon which an evaluation of the prospects
for its interactive games and simulations and the related sale of advertising
may be based. Because, the Company anticipates that advertising revenues alone
will not generate operating profits in the foreseeable future, the Company
intends to seek to create additional revenue streams in the form of product
sales, such as the sale of more sophisticated CD-ROM variations of its games and
simulations, and through licensing its proprietary gaming engines for use on
non-competing third party Web sites. These efforts to increase revenues are
projected to require significantly increased costs and expenses in future
periods.
The Company's operating costs and expenses have grown substantially since
the August 1995 change in its business model. Added expenses result from
increased personnel costs, principally in engineering staff, advertising and
promotional costs related to efforts directed at increasing traffic to its Web
sites, increased facilities costs, principally rent and depreciation on
equipment, and interest costs associated with the acquisition of equipment. The
Company currently intends to continue to increase its operating expenses in
order to develop new, and enhance existing, interactive games or simulations, to
fund increased sales and marketing activities, and to develop new Internet
related products. However, to the extent possible, the Company intends to incur
expenses only as related opportunities for additional revenues become available,
and in so doing manage the extent of its operating losses. In addition, to the
extent that additional revenue streams can be derived from products based on
existing games and simulations, the Company believes the cost of developing such
products should be relatively low.
As part of its strategy, the Company has entered into partnerships with
media companies such as CNN and other Internet publishers and service providers
whose brands already enjoy substantial awareness among Internet users. These
arrangements generally provide for the exchange on Sandbox' Web site of
advertising space for reciprocal space in the partner's media publications or
for the receipt of tangible goods used as game prizes or access to editorial or
software content. The Company has devoted substantial time, effort and money to
developing these relationships, particularly those with CNN and with USA Today,
the previous title sponsor of Final Bell, as a strategy for leveraging its cash
resources. By providing significant advertising impressions to these partners,
the Company in turn has received valuable promotion, editorial content, software
and services of significant value. See "Business - Strategy - Barter
Relationships to Conserve Cash". CNN's media support for the promotion of the
SportSim site was valued at an estimated $5.5 million by CNN for the initial 5
weeks following launch. The Company believes that these exchange transactions
have resulted in its achieving traffic levels which would have otherwise been
unattainable without increasing its expenditures in advertising and promotion,
and in so doing it
30
<PAGE>
has been able to limit its operating expenses.
The Company has incurred significant operating losses in each of its fiscal
quarters and years since the inception of its Internet business, and expects to
continue to incur significant operating losses on both a quarterly and annual
basis for at least the next two years. At June 30, 1997, the Company had a
working capital deficiency of $930,618 and a negative net worth of approximately
$950,000, and during the six months ended June 30, 1997 experienced operating
cash requirements (net loss plus principal repayments under capital lease
obligations) of approximately $165,000, which requirements are projected to
significantly increase in the immediate future as the Company implements its
planned increases in operating expenses. There can be no assurance that the
Company will be able to generate sufficient advertising revenues or product
sales revenues in the future to cover its costs and expenses, and to the extent
that such expenses precede or are not subsequently followed by increased
revenue, the Company's business, prospects, financial condition or operating
results could be materially and adversely affected.
The Company believes that its advertising revenues could be higher leading
up to and during major U.S. sports seasons for which the Company is operating a
SportSim fantasy site, and lower at other times of the year. The Company
believes that advertising in traditional media are generally lower in the first
and third calendar quarters of each year, and that advertising expenditures
fluctuate significantly with economic cycles. Depending on the extent to which
the Internet is accepted as an advertising medium, seasonality and cyclicality
in the level of Internet advertising expenditures could become more pronounced.
The foregoing factors could have a material adverse effect on the Company's
business, prospects, financial condition or operating results. See "Risk Factors
- -- Unpredictability of Future Revenues and Profitability; Potential Fluctuations
in Quarterly Operating Results; Seasonality".
Results of Operations
Revenues
Total Revenues. Total revenues for the six months ended June 30, 1996 were
$177,498 and for the year ended December 31, 1996 were $396,167. Total revenues
for the first six months of 1997 were $77,757.
Internet Revenues. Revenues attributable to the Company's Internet
operations, which commenced in March 1996, were $27,001 during the six months
ended June 30, 1996, $214,321 during the six months ended December 31, 1996, and
$77,757 during the six months ended June 30, 1997. To date, Internet revenues
have consisted solely of income derived from the sale of banners and
sponsorships. Advertising revenues are recognized in the period in which
advertisements are delivered. The Company's ability to increase revenues for
Internet advertising will depend on numerous factors, which include, but are not
limited to, demand for advertising on the Internet, the Company's ability to
increase the number of page views or impressions it can deliver by enhancing
existing games and adding new games, and by its ability to maintain or increase
its advertising rates. Certain of these factors are not within the control of
the Company. See "Risk Factors -- Unpredictability of Future Revenues" and "Risk
Factors -- Dependence on Advertising Revenue".
The Company's Internet revenues of $77,757 for the six months ended June 30,
1997 represented an increase from the $27,001 recorded during the comparable
period in 1996, but a decline from the $214,321 of Internet revenues recorded
for the six month period ended December 31, 1996. The Company believes this
decline is attributable to several factors. In the spring of 1997, the Company
determined that CNN would likely be a stronger strategic partner for Final Bell
than USA Today, and was therefore required to devote its limited sales and
marketing resources to planning for and negotiating the CNN alliances. In
addition, the market for Internet advertising was generally weaker in the first
few months of 1997 than during the last six months of 1996, and this resulted in
lower demand for the Company's banner and sponsorship advertising. Revenues from
advertising also declined as a result of the Company's decision to terminate its
outside sales representation firm and begin building an in-house sales staff to
provide for the substantial ongoing support necessary to generate demand for
sponsorships and "integrated advertising." Because sponsorships and "integrated
advertising" require a higher level of commitment from advertisers, both
financially and in terms of input into the marketing process, the
31
<PAGE>
Company anticipates that revenues from sponsorships and "integrated advertising"
will generally require greater lead times and more specialized selling efforts
than banner advertising sales.
Since June 30, 1997, as a result of focusing its internal staff on the sale
of "integrated advertising", the Company has entered into a sponsorship
agreement with IBM providing for $180,000 in cash to the Company to sponsor the
Trade Center and other planned simulations within Final Bell through March 14,
1998, an agreement with Saturn Corporation providing for $180,000 in cash to the
Company to sponsor Full Contact, a fantasy football game within SportSim,
through January 31, 1998 and an agreement with MetLife providing for $138,000 in
cash to the Company to sponsor planned simulations on Final Bell from November
10, 1997 to May 4, 1998. During the three months ending September 30, 1997, the
Company entered into an agreement with iVillage providing for $71,700 in cash to
the Company for banner advertising through December 31, 1997, and the Company
invoiced approximately $14,000 for banner advertising to MetLife.
Costs and Expenses
Total Costs and Expenses. The Company's total costs and expenses for the
six-month periods ending June 30, 1996, December 31, 1996 and June 30, 1997 were
$878,109, $919,335, and $950,377, respectively. Total costs and expenses for the
year ended December 31, 1996 were $1,797,444. The principal components of
expense have been sales and marketing expenses, payroll and facilities and
related expenses for production and engineering, and general and administrative
costs. Detail of each of these categories and their respective percentages of
revenue is as follows:
<TABLE>
<CAPTION>
For the six-month period ended For the year ended
June 30, 1996 December 31, 1996 June 30, 1997 December 31, 1996
------------------ ----------------- -------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and
marketing $ 202,090 114% $ 303,864 139% $ 286,426 368% $ 505,954 128%
Production and
engineering 543,293(1) 306 443,300 203 451,854 581 986,593 249
General and
administrative 132,726 75 172,171 79 212,097 273 304,897 77
Operating
loss (700,611) (395) (700,666) (320) (872,620) (1,122) (1,401,277) (353)
Net loss $(727,125) (410)% $(750,384) (343)% $(935,623) (1,203)% $(1,477,509) (373)%
</TABLE>
(1) $162,332 of this amount is related to the Company's fee-for-service
business, which was phased out in early 1996.
Sales and Marketing Expenses. Sales and marketing expenses consist of
advertising, promotional costs, payroll for the Company's sales and marketing
staff, commissions, public relations, prize expense, and travel and
entertainment expenses. Sales and marketing expenses were $202,090, $303,864 and
$286,426 for the six month periods ended June 30, 1996, December 31, 1996 and
June 30, 1997, respectively.
The Company intends to significantly increase its sales and advertising
expenses with the planned addition of 16 employees, including sales
representatives in New York, San Francisco and Chicago, a significant increase
in commission expense for those sales persons and CNN, and additional
expenditures for advertising, promotion and prizes. See "Business -- Advertising
and Sales" and "Use of Proceeds". The Company believes that additions to sales
and marketing expenses are essential to increasing its revenues and Web site
traffic, as well as the general recognition in the Internet advertising and
participant communities of the Sandbox "brand" of interactive games and
simulations. The Company intends to incur these expenses only as related
opportunities for additional revenues become available, and in so doing manage
the size of its fixed sales and marketing expenses. Nevertheless, there can be
no assurance that planned expenditures will have the desired effects, or that
the Company will be able to effectively limit its fixed expenses as it plans.
See "Risk Factors -- Dependence on Advertising Revenues; Customer Concentration;
Competition for Advertisers".
32
<PAGE>
As part of a strategy to leverage its cash resources, the Company has
entered into partnerships with media companies such as CNN and other Internet
publishers and service providers whose brands already enjoy substantial
awareness among Internet users. These arrangements generally provide for the
exchange on Sandbox' Web site of advertising space for reciprocal space in the
partner's media publications or for the receipt of tangible goods used as game
prizes or access to editorial or software content. Since the inception of its
Internet business, the Company has provided significant advertising impressions
to these partners, and in turn received valuable promotion, editorial content,
software and services. See "Business - Strategy - Barter Relationships to
Conserve Cash".
The Company's partners in these exchange arrangements were USA Today
Information Network, PC Quote, Inc., The Motley Fool, TheStreet.com, and Neural
Applications Corporation. USA Today was the original sponsor of Final Bell, and
the Company estimates that during the first six months of 1997 it received
approximately 6,000,000 impressions per month from USA Today. Impressions are
the number of times that an advertisement appears in page views downloaded by
participants. In the USA Today arrangement, the Company received promotion on
USA Today's Money section home page, and rotated through USA Today's home page.
In exchange, USA Today's logos and other identifying marks appeared throughout
the Final Bell site. Under the PC Quote contract, which expires in November
1997, the Company receives promotion of Final Bell through graphic links on the
PC Quote home page, Micro Watch page and Quote Watch page, 200,000 banners and
charting and graphing tools accessed from the Trade Center area of the game.
Based upon PC Quote's estimates of traffic to its home page, the Company's links
on the PC Quote home page received approximately 4,500,000 impressions per month
during the six months ended June 1997. In exchange, the Company provides text
links to PC Quote's sites on all Final Bell pages and delivers 200,000 banner
advertisements each month. In the Motley Fool arrangement, the Company receives
promotion through links appearing on the Motley Fool home page, from various
points on America OnLine, and editorial content from The Fools School, while the
Company provides links to Motley Fool from the Exchange area within Final Bell
and banner promotion. Based upon Motley Fool's 1997 Media Kit, the Company
estimates that it received approximately 4,200,000 impressions through Motley
Fool's Web site between March 15 and June 30 1997. Under the Company's contract
with TheStreet.com, which ended in July 1997, the Company received impressions
and TheStreet's Daily Wake-up Call and one equity story every weekday morning.
Based upon information provided to the Company by TheStreet, which is a
subscription site, the Company received approximately 200,000 impressions
between March and May 1997. The Company delivered approximately 400,000
impressions to TheStreet during the comparable period. Under its contract with
Neural Applications Corporation, Sandbox receives reciprocal banners from
Neural, but more importantly receives the nightly closing price data feed which
it uses to drive its Final Bell simulation. In exchange, the Company provides a
total of 550,000 impressions per month on Final Bell to promote Neural's
NetProphet and InvetorsEdge products.
Production and Engineering Expenses. Production and engineering expenses
are expenses incurred to develop and maintain the Company's Internet sites and
its games, simulations and other interactive products. Production and
engineering expenses include payroll as well as an allocated share of total
costs for facilities and equipment. The increase in these costs resulted
primarily from expenditures to develop new games and simulations, and
development of proprietary technologies and costs incurred to enhance the
quality of existing Web sites. Production and engineering expenses were $543,293
(of which $380,961 was related to Internet activities), $443,300 and $451,854
for the six month periods ending June 30, 1996, December 31, 1996 and June 30,
1997, respectively. The Company anticipates that production and engineering
expenses will increase in the second half of 1997, compared to those incurred
during the first six months. The increase is related to additional personnel
costs, including those for software engineers, customer service and product
management staff, for equipment and facilities costs necessary for new product
development, and for expenditures to enhance existing game and site performance.
The Company intends to add approximately 40 employees over the course of two and
one-half years, but only as specific new product development commences. See "Use
of Proceeds". Costs related to the development of new products are expensed in
the period incurred.
General and Administrative Expenses. General and administrative expenses
consist of payroll and related expenses for executive, finance and
administrative personnel, professional fees and other general corporate
expenses. For the six month periods ending June 30, 1996, December 31, 1996 and
June 30, 1997, these expenses were $132,726, $172,171 and $212,097,
respectively. The increase in these costs in 1997 is primarily attributable
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<PAGE>
to legal and accounting costs, including those incurred in connection with
negotiation of financing transactions in mid-1997, and to additional personnel
costs, principally in the finance area. The Company anticipates that increases
in general and administrative costs for staff additions in the near future will
not be significant, but that costs will increase in the future due to increased
professional and other services related to its anticipated growth, and to costs
associated with its status as a publicly owned company. See "Risk Factors --
Managing Potential Growth".
Other Income (Expense). Other income (expense) consists primarily of
interest income and interest expense. Interest expense for the six month periods
ended June 30, 1996, December 31, 1996 and June 30, 1997 was $26,590, $50,170
and $64,637, respectively. These expenses related principally to the costs of
leases obtained to finance equipment acquisitions and to its revolving bank line
of credit. The Company expects to use a portion of the offering proceeds to
repay certain outstanding indebtedness, which will reduce its interest costs.
See "Use of Proceeds".
Income Taxes. The Company had net losses in 1995 and 1996 and has net
operating loss carryforwards of approximately $1,950,000 for federal and state
income tax purposes at December 31, 1996, which expire in years 2000 through
2010. Utilization of these carryforwards is dependent on the Company's future
profitability, and will be subject to limitation (see Note 10 of Notes to
Financial Statements).
Liquidity and Capital Resources
The Company has financed its operations and operating losses from January 1,
1995 through June 30, 1997 primarily through private sales of Common Stock and
Series A Preferred Stock, which through June 30, 1997 totaled approximately
$1,877,321 in net proceeds, $327,000 of bank financing, borrowings from
stockholders and others of approximately $420,323 and capital lease financings
of approximately $465,954.
Net cash used by operating activities was $348,605, $1,495,500 and $651,734
for 1995, 1996 and the first six months of 1997, respectively. The principal
uses of cash for all periods were to fund the Company's operating losses. Recent
monthly recurring cash requirements (based on the Company's July 1997 net loss
adjusted for non-cash expenditures and debt service) approximated $225,000 and
is expected to increase to approximately $280,000 as a result of debt service
requirements for the fourth quarter 1997. The Company's cash requirements will
expand further as it begins to implement its growth strategy through increased
expenditures for product and services marketing and staff increases in the sales
and marketing and production and engineering areas.
Net cash used by investing activities was negligible. Net cash used by
investing activities excludes acquisition of equipment under capital lease
obligations of $139,618, $115,365 and $210,971 for 1995, 1996 and the first six
months of 1997, respectively.
Net cash provided by financing activities was $405,870, $1,442,697 and
$633,167 for 1995, 1996 and the first six months of 1997, respectively, and
consisted primarily of proceeds from the issuance of Series A Preferred Stock
and debt. The Company expects to use approximately $1.2 million of the net
proceeds of this offering to repay certain indebtedness. As of September 25,
1997 the Company was indebted to certain stockholders, warrant holders, their
affiliates and others in the principal amount of $1,186,328 pursuant to
promissory notes issued with various due dates, $540,000 of which converts into
shares of Series B Preferred Stock upon the consummation of this offering at the
public offering price. The Company intends to repay the remaining amount in full
from the proceeds of this offering. At June 30, 1997, the Company was indebted
to Chad Little, James Layne, and Lonnie and Michelle Whittington under various
loans and obligations totaling $107,981, which amount represents sums due for
equipment and client lists contributed to the Company, bonuses accrued but
unpaid, and for premises rent, all of which was incurred prior to November 1995,
and which bear interest at rates from 0% to 10%. The Company intends to pay
approximately $73,365 of these amounts, which sum is included above, from the
proceeds of this offering. See "Certain Transactions".
As of June 30, 1997, the Company had borrowed $327,000 under a $400,000
revolving bank line of credit, which has subsequently been increased to
$500,000, due March 5, 1998. At September 1, 1997, the Company had
34
<PAGE>
drawn the full amount under this line of credit. The borrowings under this line
bear interest at a prime rate plus 1.5% and are secured by substantially all of
the Company's assets. The Company intends to repay the borrowings in full from
the proceeds of this offering (subject to the right to reborrow). As of June 30,
1997, the Company was also indebted under a separate equipment lease line of
credit in the principal amount of $111,240. The lease line provides for advances
up to $500,000 through April, 1998, and draws of $100,000 or more are payable in
equal monthly installments over 36 months. Borrowings under this lease line bear
interest at variable rates between 10% and 14%. The average rate at June 30,
1997 was approximately 12%. The Company was also indebted at June 30, 1997 under
23 other equipment leases totaling approximately $266,000. These leases had
original terms ranging from 24 to 60 months. The Company will need to obtain
additional equipment lease financing to meet its anticipated need to acquire an
additional $1 million of equipment prior to the commencement of its SportSim
basketball season and mid-season football, and as new games and simulations are
brought on-line, additional equipment upgrades will be required. The Company
intends to provide for its capital equipment needs by arranging for equipment
lease or loan financing following the completion of this offering, but there can
be no assurances that such lease financing will be available on terms acceptable
to the Company.
As of June 30, 1997 the Company's principal source of liquidity was $73,000
available to it under its revolving bank line of credit, although as of
September 1, 1997 the Company had drawn the full $400,000 then available to it
under the line. In addition, at June 30, 1997, the Company had a working capital
deficiency of $930,618, and was continuing to sustain cash operating losses. To
address this situation, the Company negotiated an increase in its revolving bank
line of $100,000, and raised an additional $760,000 from investors by issuing
subordinated promissory notes. The Company is incurring operating losses as it
moves from early stage to the full scale deployment of its technologies. The
operating losses have created a net capital deficiency which requires that the
Company obtain additional financial resources to meet its business objectives,
and such committed financing is not yet in place. These conditions raise
substantial doubt about the ability of the Company to continue as a going
concern. See "Report of Independent Auditors" and Note 12 to "Notes to Financial
Statements". The Company believes that the net proceeds from this offering of
approximately $3,150,000 after commissions, expenses and debt repayment,
together with available funds, including the Company's revolving bank line of
credit, will be sufficient to meet its anticipated cash needs for working
capital for at least the next 15 months.
If cash generated by operations is insufficient to satisfy the Company's
liquidity requirements, the Company may be required to sell additional equity or
debt securities. The sale of additional equity or convertible debt securities
would result in additional dilution to the Company's stockholders. There can be
no assurance that financing will be available to the Company in amounts or on
terms acceptable to it. See "Risk Factors -- Need for Additional Financing;
Continuing as Going Concern".
New Accounting Pronouncements. In October 1995, SFAS No. 123, Accounting for
Stock-Based Compensation, was issued. SFAS No. 123 allows either adoption of a
fair value based method of accounting for employee stock options and similar
equity instruments or for employee awards continuation of the measurement of
compensation cost relating to such plans using the intrinsic value based method
of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock issued To Employees". The Company has elected to continue
to use the intrinsic value based method for employee awards. Accordingly, pro
forma disclosures required to be presented by SFAS No. 123 for companies
continuing to utilize the intrinsic value based method are presented in Note 8
of Notes to Financial Statements and have been determined as if the Company had
accounted for its stock-based compensation plans under the fair value method.
In February 1997, SFAS No. 128, Earnings Per Share, was issued. SFAS No.
128 simplifies the methodology of computing earnings per share, and requires the
presentation of basic and diluted earnings per share in certain cases. SFAS No.
128 must be adopted for the year ending December 31, 1997 and be retroactively
reflected in the financial statements. Adoption of SFAS No. 128 is not expected
to have a material impact on the Company's results of operations.
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BUSINESS
Except for historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. Such
forward-looking statements include, but are not limited to, statements regarding
future events and the Company's plans and expectations. The Company's actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed above in "Risk Factors", as well as those discussed elsewhere in this
Prospectus. See also "Special Note on Forward-Looking Statements".
Sandbox Entertainment Corporation ("Sandbox" or the "Company") is a software
development company that intends to use its proprietary technology to become a
leading provider of games and simulations on the World Wide Web (the "Web"). The
Company's proprietary technology is designed to enable Sandbox to create and
support, in a cost effective manner, a variety of scalable, highly interactive
and informative games and simulations. Sandbox's flagship products are Final
Bell, an on-line stock market simulation, and SportSim, an on-line fantasy
sports simulation. The Company generates revenue from advertisers interested in
reaching specific target groups, such as existing or potential on-line
individual investors through Final Bell and sports enthusiasts through SportSim.
Sandbox seeks to attract a targeted audience by basing its games and simulations
on subjects, such as finance or sports, that are of great interest to Internet
users. The Company then seeks to motivate the audience to spend extended time on
and return repeatedly to the Sandbox Web sites by providing, free of charge, the
enjoyment of head-to-head competition, useful information and a chance to win
cash prizes and merchandise.
Final Bell is a stock market simulation in which players compete with one
another to build the highest-valued stock portfolio. By placing risk-free game
dollars in actual stocks on a daily basis, players can use Internet resources to
model and track their own personal simulated portfolios. SportSim gives
participants the ability to play sports fantasy leagues on-line by building and
competing with their own fantasy teams. SportSim fully automates the drafting
and trading process to simplify league management and allows for more
sophisticated gaming. Fantasy Football, the initial SportSim game, was launched
on July 15, 1997, and 83,800 teams were participating as of September 5, 1997,
making it, in the Company's estimation, the largest fantasy football game on the
Internet. Final Bell was ranked third among the most active investment sites on
the Web by Lycos in a July 1997 ranking and at September 5, 1997, there were
29,213 active portfolios in game number 5 of Final Bell.
The Company's growth strategy is to increase advertising revenue by the
ongoing introduction of new and enhanced features to its flagship products,
SportSim and Final Bell, and by the creation of new games and simulations
targeted at different audiences. The Company also intends to seek to create
additional revenue streams in the form of product sales, such as the sale of
more sophisticated CD-ROM variations of its games and simulations, and through
licensing its proprietary gaming engines for use on non-competing third party
Web sites.
As part of its strategy, the Company has entered into alliances with media
companies that already enjoy substantial brand awareness among Internet users.
In July 1997, Sandbox entered into Co-Branding and Marketing Agreements with
CNNfn and CNN/SI, affiliates of the Cable News Network, Inc. ("CNN") and of the
Turner Broadcasting System. In exchange for agreed-upon percentages of
advertising revenue, CNNfn and CNN/SI provide content, celebrity endorsements,
advertising sales support, and promotion for Internet and CD-ROM versions of
Final Bell and SportSim on their cable channels and Web Sites. Under these
agreements, Sandbox retains all rights to its proprietary simulations as well as
ownership of the related participant databases. The Company spent substantial
time, effort and money in the six-month period ending June 30, 1997 putting
these co-branding relationships in place. Since July 1997, CNN has heavily
promoted the Final Bell and SportSim sites. CNN's media support for the
promotion of the SportSim site was valued by CNN at an estimated $5.5 million
for the initial 5 weeks following launch. Promotional support included
impressions on CNN Headline News, CNN and CNN/SI cable networks, print promotion
in Sports Illustrated magazine and interactive promotion on the CNN/SI Web site.
The result has been a substantial increase in traffic to the Company's Web sites
since the CNN agreements were signed. Page views delivered by the combination of
all Sandbox sites totaled 21,520,000 in August 1997, as compared to 3,625,000
page views in February 1997, the Company's previous busiest month before
entering into the CNN agreements.
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The Company's co-branding relationship with CNN has generated significant
interest among leading advertisers in the Sandbox "integrated advertising"
concept, which offers Sandbox advertisers "beyond the banner" advertising
choices. "Integrated advertising" involves establishing a game or simulation Web
site with a co-branding or development partner and then offering advertisers the
opportunity to integrate their promotions within a specific game or simulation
on such Web site through sponsorships. By involving advertisers in the creation
of a message, Sandbox differentiates itself from the many Internet companies
competing through banner sales for limited advertising dollars. As of September
30, 1997, the Company had entered into an agreement with IBM providing for
$180,000 in cash to the Company to sponsor the Trade Center and other planned
simulations within Final Bell through March 14, 1998, an agreement with Saturn
Corporation providing for $180,000 in cash to the Company to sponsor Full
Contact, a fantasy football game within SportSim, through January 31, 1998 and
an agreement with MetLife providing for $138,000 in cash to the Company to
sponsor planned simulations on Final Bell from November 10, 1997 to May 4, 1998.
Except for certain exclusivity provisions, co-branding and sponsorships do not
reduce the Company's available inventory of banner advertising, a form of
Internet advertising similar to billboards on which Internet users can click to
visit an advertiser's Web site to get further information about the advertiser
or its products. During the three months ending September 30, 1997, the Company
entered into an agreement with iVillage providing for $71,700 in cash to the
Company for banner advertising through December 31, 1997, and the Company
invoiced approximately $14,000 for banner advertising to MetLife.
The Company seeks to use its proprietary technology to develop databases of
participant demographic information designed to be of considerable value to
advertisers. This information is obtained by registering visitors to its Web
Sites, tracking their preferences, and rewarding participants for providing
information about their purchasing preferences. Total registered participants in
Sandbox's database for all sites approximated 242,975 at September 5, 1997.
The Company believes that the popularity of its games and simulations should
lead to opportunities to market additional products to end-users and to license
its gaming engines to Web Site developers. In August 1997, the Company
introduced a CD-ROM version of its Final Bell simulation, featuring an
appearance by Lou Dobbs of CNN. The Final Bell CD enhances the features of the
on-line simulation by providing rapid access from disk to such bandwidth
intensive elements as video, sound and graphics. The Company has agreed with
CNN/SI to introduce CD-ROM versions of SportSim. The Company believes that its
CD-ROM games and simulations should be attractive to both participants and
advertisers with their superior video, sound and graphics, larger prize pools
and advertisements that have a more TV-like feel. As the Company's Internet
games and simulations are accepted, Sandbox intends to seek to supplement its
advertising revenues by charging end-users for access to premium games and
simulations. The Company also intends to license simplified versions of its
games and simulations for use by third party Web site developers.
At September 1, 1997, Sandbox had 22 full-time employees and is led by a
team experienced in the fields of network technology, marketing management,
computer art, advertising and graphic design. The Company has financed its
development to date through investment capital provided by three venture capital
firms, and by private investors and by entering into strategic alliances with
other media companies such as CNN providing for the exchange of goods and
services.
The Market
The Company believes that its target markets are the individuals who seek
entertainment and education on the Internet and advertisers who seek to reach
those individuals.
A January 1997 estimate by Matrix Information and Directory Services placed
current world-wide Internet use at 57 million persons. According to Jupiter
Communications' 1996 Online Advertising Report, Web advertising revenues totaled
over $300 million in 1996, and are projected to reach $5 billion by the year
2000. According to a Forrester Research study dated April 1, 1997, Internet game
play is forecasted to generate more than $1.6 billion in yearly revenues by the
turn of the century. Of this total, more than $1.3 billion is expected to come
from advertising and sponsorships, while CD-ROM sales are expected to account
for $200 million and pay-for-play revenue provides the remaining $100 million.
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As the Internet has become more accessible, functional and widely used by
consumers and businesses, its commercial potential has grown. The Company
believes that the Internet is emerging as a medium through which businesses can
interactively inform, educate, entertain and conduct business with millions of
individuals. The Company also believes that the emergence of the Internet as a
mainstream medium is creating opportunities for companies that can provide
compelling content to large numbers of consumers.
Through the Web, Internet content providers are able to deliver timely,
personalized content in a manner not possible through other media. This content
can be continuously updated, distributed to a large number of participants on a
real-time basis and accessed by participants at any time. The interactive nature
of the Web allows content providers to present information tailored to the
individual participant's preferences or demographic characteristics, and
facilitates person to person or group to group interaction on an unprecedented
level.
The Company has aimed its initial co-branded products at the popular sports
and finance markets. Participatory and spectator sports are among the leading
pastimes for Americans as demonstrated by the popularity of sports media and by
the time and money consumers spend on sports events, products and services. The
U.S. sports business has become the country's 11th biggest industry, according
to a study released by the Georgia Institute of Technology, generating total
output of $152 billion in 1995, or just over 2 per cent of gross domestic
product. Nielsen Media Research reports that the total amount spent on sports
television advertising in the U.S. in 1996 was over $4.6 billion. According to
International Events Group, which tracks sponsorship spending, of the $5.4
billion spent on advertising sponsorships in North America, more than $3 billion
goes to sports. Total sponsorship spending for 1997 is projected at $5.9
billion, a record high in the category. The publishing industry benefits from
the popularity of sports, and includes SPORTS ILLUSTRATED magazine, which had
weekly circulation of 3.2 million and generated $522 million in advertising
revenue in 1996. Due to the popularity of sports among males between the ages of
18 and 49, advertisers consider sports events and media as attractive venues to
reach this audience.
Although interest in the U.S. financial markets and related financial news
is not as broad as in the U.S. sports market, it has traditionally been strong
among persons in higher income brackets who are a highly sought after consumer
class by advertisers. According to SRI Consulting, a subsidiary of SRI
International (formerly Stanford Research Institute), some 16.5 million
households currently have the motivation or capability to use on-line financial
services. A Forrester Research study dated August 1997 projects that the number
of on-line brokerage accounts will accelerate from nearly 1.5 million in 1996 to
14.4 million by 2001, and a study by Piper Jaffray estimates that on-line
trading commissions will reach $2.2 billion in the year 2001, more than eight
times the amount collected in 1996. Feeding this growing interest is the
availability of financial information in all media, including on the Internet,
which is rapidly changing the way stocks are traded.
The Company intends to add additional products by creating, with prospective
advertisers and sponsors serving as development partners, games and simulations
that will appeal to specific target markets. The Company has conceptual plans
for simulations designed to appeal to groups which it believes are presently not
served effectively by existing Web programming. These include simulations based
on relationships and designed to appeal to women, educational games for young
adults, as well as simulations created for such diverse groups as those
interested in politics, general business and international sports.
Strategy
The Company's objective is to be a leading provider of Internet games and
simulations that capitalize on the interactive nature of the Internet. The
Company seeks to utilize its proprietary technology to create games and
simulations that feature ease of access and participation, to provide value to
advertisers, and to cost effectively create new games and simulations to reach
new targeted audiences. The Company seeks to provide entertaining and
educational games and simulations that will capture the interest and imagination
of targeted audiences and use its "beyond the banner" advertising strategy to
attract advertisers wishing to reach these audiences. In addition, the Company
seeks to enter into strategic relationships to enhance traffic to its Web sites.
Finally, the Company is seeking to expand its revenue base beyond advertising by
developing additional revenue streams from end-users for
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product sales, such as CD-ROMS, and through licensing its proprietary gaming
engines for use on Web sites in niche markets.
Leverage Proprietary Technology Platforms
The Company has proprietary technology that enables it to create games and
simulations that feature ease of access and participation by players and to
provide value to advertisers. The Company's software allows participants to
compete in head-to-head competition without the installation or download of
additional software other than the participant's web browser. With the Company's
products, the data needed to run a game or simulation comes from external
sources, such as sporting events, the stock market or the competition between
players, or will be created as a set of parameters by the players themselves, as
may be the case in some of the Company's future simulations. The software also
allows two-way communication between the participant and advertiser through
direct response "cards", "coupons" and survey mechanisms. The Company's dynamic
advertising tools supply the advertisers with the capability of delivering
customized content to targeted demographic groups. After a player registers for
a game, Company software records the player's movements and actions. Player
identification and tracking is vital for a successful advertising strategy
because it assures advertisers that the targeted consumer is seeing the
advertisement. The Company's technology also facilitates targeted advertising to
specific audiences, thereby creating fewer "wasted views" for the advertiser.
The Company also intends to exploit the scalability and adaptability of its
proprietary technology to support existing product growth and to cost
effectively create new products that reach additional targeted audiences.
Because new products based on the Company's existing gaming engines can be
rapidly and easily customized, the Company believes that these games or
simulations can be created with relatively modest development costs, and once
completed, will support large participant bases with comparatively limited
additional expenditures for ongoing maintenance. For example, the Company
intends to market a Final Bell version focused on students, a junior version for
children ages 11 to 16 and a third version for people unfamiliar with the stock
market. In the same manner, the Company intends to repackage SportSim to reach
new audiences with specific sports affinities.
Provide Compelling Games and Simulations Targeted at Specific Audiences
To build large participant databases with demographics and psychographics
(the psychology of why people buy) that are appealing to advertisers, Sandbox
bases its games and simulations on subjects, such as finance or sports, that the
Company believes are of great interest to Internet users. The Company then seeks
to motivate the audience to spend extended time on and return repeatedly to the
Sandbox Web sites by providing, free of charge, the enjoyment of head-to-head
competition, useful information and a chance to win cash prizes and merchandise.
The Company's games and simulations are designed to allow participants to tailor
their level of involvement to best suit their time and interests.
The Company intends to add additional products by creating games and
simulations in conjunction with prospective advertisers and sponsors serving as
development partners, which will appeal to specific target markets. The Company
has conceptual plans for simulations designed to appeal to groups which it
believes are presently not served effectively by existing Web programming. These
include simulations based on interpersonal relationships designed to appeal to
women, educational games for young adults, as well as simulations created for
such diverse groups as those interested in politics, general business and
international sports.
Prize Incentive Structure
The Company's prize and incentive structure is designed to motivate
participants to visit the Company's Web sites, register and provide demographic
and psychographic statistics, spend time on the site viewing and clicking on
advertisements and complete questionnaires. The Company has determined that
participants in its games prefer a smaller grand prize and several other prizes
with more chances to win, as opposed to one large grand prize which several of
the Company's competitors offer. The Company offers prizes for winning a game,
placing in the top three or improving one's position during certain games. In
Final Bell, grand prize winners for each two month simulation win prizes valued
at between $2,500 and $3,000, such as a Bose Home Theater System, and second or
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third prize winners are awarded merchandise valued at $400 to $600. Participants
in Final Bell "mini games" have opportunities to win Sand Dollars which are
exchangeable in the Company's Toy Store for products ranging from T-shirts and
caps to a Sony Play Station. In SportSim, the grand prize winner for the 1997-98
football season will receive a 51" television and satellite dish valued at
$3,000. Weekly grand prizes valued at $1,000, and daily awards valued at up to
$500, include televisions and other electronic merchandise. There is also a
separate prize structure for players joining the games at mid-season, and for
the playoffs. Purchasers of the Company's Final Bell CD compete every two months
for an Internet shopping spree valued at $10,000, and in daily and weekly
competitions for additional prizes valued at $6,000. The Company also utilizes
its Sand Dollar technology to incentivize participants to take certain actions,
such as answering marketing questionnaires, providing psychographic data,
clicking on certain advertisements, or visiting a sponsor's Web site, by
awarding Sand Dollars totaling approximately $3,000 every four months.
Strategic Relationships to Build Traffic
The Company seeks to establish strategic relationships with companies that
reach a large number of potential Internet users through multiple media channels
and in so doing increase consumer awareness of its products and marketing
agreements and build traffic to its Web sites. The Company has recently entered
into co-branding and marketing agreements with CNNfn and CNN/SI, affiliates of
the Cable News Network, Inc. and the Turner Broadcasting System. In the CNNfn
arrangement, CNNfn has become the co-branding partner for the Final Bell
simulation, providing content, celebrity endorsements and editorial promotion
for both the on-line version of Final Bell and the CD-ROM version on its cable
channel and Web site. In the CNN/SI arrangement, SportSim is co-branded with
CNN/SI (a joint partnership between CNN and Sports Illustrated) and receives
content, celebrity endorsements and editorial promotion on several media
outlets, including the CNN/SI cable network, CNN Headline News, Turner's other
cable networks, Sports Illustrated and the CNN/SI Web site. The agreements both
provide that the sales force for the Turner networks will also market the games
to prospective advertisers. Since July 1997, CNN has heavily promoted the Final
Bell and SportSim sites. CNN's media support for the promotion of the SportSim
site was valued by CNN at an estimated $5.5 million for the initial 5 weeks
following launch. Promotional support included impressions on CNN Headline News,
CNN and CNN/SI cable networks, print promotion in Sports Illustrated magazine
and interactive promotion on the CNN/SI Web site. The result has been a
substantial increase in traffic to the Company's Web sites since the CNN
agreements were signed. Page views to the Company's Web sites have increased
from 3,625,000 during February 1997, the Company's previous busiest month before
the CNN agreements to 21,520,000 in August 1997. The Company seeks to continue
the growth in traffic to its sites and to encourage its co-branding partners to
continue to promote the sites as they have to date.
"Beyond the Banner" Advertising Strategy
The Company seeks to enhance the value to advertisers of its proprietary
databases by offering alternatives to traditional banner advertising. The
Company's "beyond the banner" advertising strategy focuses on delivering
"integrated advertising" directed at a target audience through the ability to
customize advertising messages. "Integrated advertising" offers companies the
ability to sponsor a specific Sandbox game or simulation and place
advertisements within the game or simulation content itself. The Company
believes that by purchasing "integrated advertising" in connection with one of
the Company's games or simulations, advertisers can direct their brand to a
targeted group and create a more lasting and penetrating impression. During the
three-month period ending September 30, 1997, the Company entered into strategic
relationships with IBM and MetLife to sponsor simulations on Final Bell, and
with Saturn Corporation to sponsor games on SportSim. The Company seeks to
continue to add leading advertisers to act as sponsors of its games and
simulations.
Barter Relationships to Conserve Cash
To date, the Company has used barter arrangements to significantly increase
traffic and brand recognition rather than incurring cash expense for this
purpose. Barter arrangements involve the Company's exchange of advertising space
on its Web sites for reciprocal space in other media publications or other Web
sites or receipt of tangible goods used as game prizes or access to editorial or
software content. The Company remains dependent on these third party barter
arrangements and without such arrangements would experience significant cash
flow difficulties.
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USA Today
- ---------
The Company's most significant barter transactions to date have been with
USA Today, the original sponsor of Final Bell. USA Today was the original
sponsor of Final Bell, and the Company estimates that during the first six
months of 1997, it received approximately 6,000,000 impressions per month from
USA Today. In the USA Today arrangement, the Company received promotion on USA
Today's Money section home page, and rotated through USA Today's home page. In
exchange, USA Today's logos and other identifying marks appeared throughout the
Final Bell site.
PC Quote
- --------
Under the PC Quote contract, which expires in November, 1997, the Company
receives promotion of Final Bell through graphic links on the PC Quote home
page, Micro Watch page and Quote watch page, 200,000 banners, and charting and
graphing tools accessed from the Trade Center area within Final Bell. Based upon
information provided to the Company by PC Quote, the link on the home page alone
would have received approximately 4,500,000 impressions per month during the six
months ended June 1997. In exchange, the Company provides text links to PC
Quote's sites on all Final Bell pages, in addition to delivering 200,000 banner
advertisements each month.
Motley Fool
- -----------
In an additional significant sponsorship relationship, the Company receives
promotion from the Motley Fool, another leading financial information source,
through links appearing on the Motley Fool home page, from various points on
America OnLine, and editorial content from The Fools School. Based upon Motley
Fool's 1997 Media Kit, the Company estimates that it received approximately
4,200,000 impressions between March 15 and June 30 1997 through Motley Fool's
Web site, while providing links to Motley Fool from the Exchange area within
Final Bell and banner promotion.
TheStreet.com
- -------------
This arrangement, which ended in July 1997, shared similarities with the
Motley Fool alliance in that TheStreet provided Sandbox with impressions and
editorial content in the form of TheStreet's Daily Wake-up Call and one equity
story every weekday morning. Based upon information provided to the Company by
TheStreet, which is a subscription site, Sandbox received approximately 200,000
impressions between March and May 1997. The Company delivered approximately
400,000 impressions to TheStreet during the same period.
Neural
- ------
Under its contract with Neural Applications Corporation, the Company
exchanges banners with Neural, but more importantly receives the nightly closing
price data feed which it utilizes to drive its Final Bell simulation. The
Company provides a total of 550,000 impressions per month on Final Bell to
promote Neural's NetProphet and InvestorsEdge products.
The Company believes that the approximate 60,000,000 impressions it received
under these barter relationships during the first six months of 1997
significantly increased traffic to its sights, provided significant brand
recognition of its games and simulations and were instrumental as a part of its
overall growth strategy.
Develop Multiple Revenue Opportunities
To supplement its advertising revenue, the Company is focusing on methods of
generating revenue directly from consumers and Web site developers. For example,
the Company has developed a CD-ROM version of Final Bell and intends to create a
CD-ROM version of SportSim. The Company believes that CD-ROM versions of Sandbox
products can be produced with relatively minimal incremental development
expense, and will allow the purchaser to enjoy significantly expanded content,
as well as bandwidth intensive graphics, audio and video components. The
development costs for the Final Bell CD from outside vendors totaled
approximately $20,000. In addition to its direct on-line marketing of these
products to end-users, the Company's co-branding or media partners may promote
the products through television, cable, on-line or print advertising. The CD-ROM
products also provide the Company an additional medium for sales advertising or
sponsorships with a more TV-like feel.
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As the Company's Internet games and simulations are accepted, it intends to
seek to supplement its advertising-based revenues by charging end-users for
access to premium games. The Company also intends to seek to license simplified
versions of its games and simulations for use by third party Web site
developers. For instance, the Company intends to offer private-label sports
fantasy licenses for use on the Web sites of local newspapers to enable these
newspapers to enhance Web site traffic and obtain demographic information about
their readers. The Company anticipates that licensed products would continue to
be housed on the Company servers thus creating a potential for a recurring
revenue stream for site maintenance. The Company anticipates that licenses would
prohibit placement of advertising or use of sponsorships on the site hosting the
game or simulation. The Company intends to establish license fees scaled by size
of traffic.
Development and Production Process
Since the inception of its Internet business, the Company has continuously
refined the process by which it has developed new games, incorporating with each
new title, many of the marketing and software techniques developed previously.
The Company's early games and simulations were created specifically for event
driven promotions and included the initial development of many of the Company's
proprietary software programs and gaming engines. Succeeding games and
simulations have, in part, been built on the foundations of source code,
technology and proprietary gaming components developed in earlier games and
simulations, and together with innovations developed by the Company are combined
to offer a more exciting, easy-to-use, product for both players and advertisers.
* The Company currently employs the following development and production
process for the creation of new games and simulations. The Company
believes that the following steps are important to reducing risks
associated with new product development, meeting deadlines and
producing quality products.
* The Company conducts informal surveys with potential and existing
advertisers and advertising agencies to identify targeted audiences
that these advertisers wish to reach.
* After identifying desired audiences, the Company formulates creative
approaches for new games and simulations to reach these audiences.
Ideas are sketched out in the form of "comps" or graphic outlines
describing how the product would look and run from a high level.
* These comps provide the sales force with the ability to make marketing
presentations to potential development or pre-paid advertising
partners. Development partners are companies that might be interested
in paying for program development in order to obtain access to, or a
license of, the finished product, while pre-paid advertisers are
companies interested in reserving advertising space prior to product
launch.
* Before, during and after the location of development and pre-paid
advertising partners, the Company will also use the comps to locate a
co-branding partner if one is required. Typically co-branding partners
are not cash paying clients, but instead provide promotion for the
co-branded site through their media channels to drive traffic, which
adds brand value to increase sales potential. In return, co-branding
partners can use the co-branded sites to further extend their brand
names or images, provide added value to their end-users and/or expand
their advertising inventory.
* After these partners and advertisers have been identified, the Company
moves to the production phase. Pencil outlines are produced which
detail the functionality, layout and look and feel of the product.
Engineering takes part in this process to review proper functionality
of the game design and verify that existing technology is being
utilized to the fullest extent. Sandbox staff and external partners
make changes to the product at this time. Once pencil outlines have
been agreed upon, computer generated comps are produced which describe
the design and functionality of the product in greater detail.
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* Once computer comps have been completed and agreed upon, the Company's
engineering staff begins production of the simulation. The computer
software design process uses the Company's existing gaming technology
whenever feasible. The production takes place on a testing server
system that duplicates the one used for the final product. This allows
for beta testing of the product prior to actual launch.
To date, the Company has invested in the production of six titles, each one
building on the elements of experience and software of its predecessors.
Originally introduced in May 1995, Cyberhunt was a thriller enhanced by Real
Audio, Quicktime Video and Shockwave. The game was conceived by Sandbox founder,
Chad Little, and incorporated software designed by the Company's engineering
staff that is still used today in all of the Company's products. These programs
include dynamic page creation, header and footer technology that provides
dynamic navigation, registration mechanisms, and the ability to display dynamic
advertising.
The next products developed by the Company were the Road Trip to Super Bowl
XXX (October 1995) and the Road Trip to the College World Series (Spring 1996).
Unlike Cyberhunt, these games were linear in nature, but extended the concept of
locating a target market for advertisers based on specific events. The Road
Trips took Web participants on cross-country excursions, and allowed them to
watch as actual collegiate travelers encountered famous landmarks and
fascinating cities across the United States. Daily journal entries took
participants through two journeys, first to the January 1996 Super Bowl and then
to the College World Series later that spring. Contestants followed along with
the actual travelers and competed for prizes with games that tested their skills
on a variety of subjects. In the Road Trip to Super Bowl XXX, the Company
developed its earliest prize pool and inventory mechanisms, and continued
implementing improvements to its dynamic page creation software. In the Road
Trip to the College World Series, video diaries by the student travelers were
incorporated into the game.
The Company also launched its next title, the Court of Last Resort, in the
spring of 1996. The Court of Last Resort was the Company's first effort to
include content created by game participants themselves. This "court" was an
on-line vehicle for the resolution of disputes between ordinary people. Site
participants were solicited to offer real disputes, and "jurors" could listen to
RealAudio "testimonies", review evidence and cast their vote. It was during this
period that the Company also developed the Sand Dollar prizing mechanism that it
continues to use extensively to reward participants for providing useful
demographic and psychographic data, and began the initial conceptualization of
Final Bell.
Final Bell was the first simulation to incorporate significant input from a
development partner (Charles Schwab). Final Bell again used existing technology,
but the Company further refined its software to incorporate the use of external
data in the form of a closing stock price feed. In the course of developing
Final Bell, the Company also conducted informal surveys with advertisers and
advertising agencies to establish that participants interested in the stock
market and investing represented an attractive target market to those potential
customers. The Company has also used the same proprietary tools it provides to
advertising clients, the ability to survey participants and track preferences,
to evaluate potential new products. In the second quarter of 1997, the Company
surveyed participants in Final Bell asking whether such participants would be
likely to purchase an enhanced CD-ROM version of the simulation and, based on a
favorable response, proceeded to produce and distribute the CD product in
September 1997.
The Company's past experience in developing new products and the flexible
nature of its software technology has enabled it to move quickly to produce
SportsSim. SportSim and Final Bell are similar in that both titles utilize
external data to drive the competition, but each employs different rules and
mechanisms for game play. Development of SportSim began late in the first
quarter of 1997 and was completed in time for the launch of Fantasy Football in
July. In the same fashion, each of the Sandbox' future games or simulations are
likely to have unique software components, but the Company expects that its
experience in game development and the utilization of existing code should
result in shortened development times, improved capabilities and enhanced
performance for all new products.
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Internet Sites and Related Products
The Company's flagship products are available at www.finalbell.com and
www.sportsim.com. In addition, the Company's home site, www.sandbox.net contains
information regarding the Company, its products, prizes and prize mechanisms,
registration, help and participant input.
The Company's programs generally allow a participant to play as frequently
or infrequently as he or she desires, seeking to win a grand prize at the end of
a game or other pre-defined period or one of several smaller prizes offered
during and at the end of each game. Players can also compete in individual
secondary games, called "mini games". "Mini games" allow participants to compete
in less time intensive games, or to try out programs with minimal effort.
Final Bell
Final Bell (www.finalbell.com): Final Bell, a co-branded product with CNNfn,
is an on-line stock market simulation that challenges and educates investors and
potential investors. Participants can click on CNN's site at www.cnnfn.com, on
Sandbox site at www.sandbox.net and directly on the Final Bell site. In the
simulation, players compete with one another as they attempt to build the
highest-valued stock portfolio. By placing risk-free game dollars in actual
stocks on a daily basis, investors can model and track their own personal
portfolios on the Internet. The CNNfn Final Bell simulation consists of two
games, Play The Market and Prime Portfolio, which together generated
approximately 5% of CNNfn's traffic in August, 1997.
Play The Market: This simulation enables a player to increase the value of
his or her portfolio through a variety of "mini-games" and to supplement
earnings from the basic stock trading activities. For example, players earn
rewards for successfully answering trivia questions. These rewards are then
added to the value of the player's portfolios, with the player achieving the
greatest portfolio value earning the grand prize.
Prime Portfolio. This simulation is a "purist" version of the Final Bell
game. Prime Portfolio does not include any "mini-games", creating a more
realistic simulation and appealing to a different target audience. Players can
only increase the value of their portfolios by traditional trading activities.
SportSim
SportSim (www.sportsim.com): SportSim, a component of CNN/SI's sports site,
is the Company's most comprehensive simulation to date. Similar to Final Bell,
SportSim can also be found by direct links from the Sandbox or CNN/SI site or by
going directly to the SportSim site. Fantasy Football, the site's inaugural set
of sports games launched in July 1997, generated approximately 30% of CNN/SI's
traffic in August 1997. The Company is contractually obligated with CNN/SI to
provide fantasy games for professional football, basketball, baseball (at
CNN/SI's request), golf and hockey, and (if permissible from a rights
standpoint) the NCAA basketball tournament. SportSim gives participants the
ability to play sports fantasy leagues on-line. Participants have the
opportunity to build their own fantasy teams and choose players or trade with
other team owners. Traditional off-line leagues ("rotisserie leagues") are
offered nationwide by hundreds of newspapers, magazines, mail services and
private individuals. The rotisserie leagues are especially labor intensive as
league managers must manually process trades, drafts and other interactions
among players. By fully automating the drafting and trading process, Sandbox has
dramatically simplified league management and allowed for more sophisticated
gaming. Typically, Internet fantasy sports have been offered on a pay-for-play
basis and are not advertising supported. SportSim does not rely on pay-for-play
revenues. The Company believes SportSim has become the largest fantasy football
site on the Internet, in part by offering free participation in Fantasy Football
(there is a charge if a participant fields more than one team).
Like Final Bell, SportSim's Fantasy Football provides a variety of games
requiring a different level of time commitment from the participant.
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Full Contact - Designed for the true football fanatic, this game will last
the full NFL season. A participant drafts his or her fantasy team at the
beginning of the season and "manages" that team throughout the season, including
trading players, dealing with injuries and keeping up with the most current NFL
data. Full Contact requires the highest level of player commitment and
knowledge. It also provides a significant opportunity for the Company to utilize
its "integrated advertising" approach as the player returns to the site
repeatedly over a five month period.
Coach's Clipboard - This game is designed for a more moderate level of
involvement. Participants assemble teams on a weekly basis from a pre-selected
group of players. Prizes are awarded weekly and statistics do not carry over to
the next week. Participants may participate at various points throughout the
season without being committed to regular weekly participation.
Game Breakers - Aimed at the casual sports fan, this game focuses on
individual game match-ups. The object of the game is to select the professional
player in each key position that the participant believes will excel in the
designated game of the week.
Overtime - A collection of "mini-games" designed to be fun for participants
of all skill and interest levels. These mini-games include a daily trivia game
and contests to select the best overall professional player and team defense for
a given week in the season. Participants may return at a variety of intervals
ranging from daily to monthly.
Planned Internet Games and Simulations
The Company intends to broaden its product offerings by identifying target
audiences for new games and simulations, by modifying its game engines to
produce new games and simulations targeted at such audiences, and by including
advertisers interested in those audiences in the actual creative process as
development partners. In accordance with the Company's development and
production process, new games and simulations are generally not developed and
brought to market until the Company has obtained a commitment from a development
partner to co-brand or license the finished product and a minimum amount of
pre-paid advertising has been sold. The Company has not yet received such
commitments for these games and simulations and accordingly there can be no
assurance that they will be produced by the Company.
Final Bell Real-Time. In addition to Final Bell versions targeted at
students, children ages 11 - 16 and people unfamiliar with the stock market, the
Company intends to develop an enhanced version of the existing product called
Final Bell Real-Time. Final Bell Real-Time will allow participants to trade
stocks throughout the day, creating a more realistic simulation for the avid
player.
Simulations Based on Participant Content. In order to reach a variety of
totally new market segments, the Company intends to place major emphasis on
developing a variety of simulations that are based on participant-created,
rather than externally generated, data. Code named "Bots", these programs would
allow participants to establish an on-line "cyber-representative", or avatar, in
a variety of participant created "virtual realities". Avatars of different
participants then compete or otherwise interact in real-time for prizes. For
instance, in a political simulation participants would be challenged to create
the ultimate politician in the hopes of winning or managing elected office.
Participants would be allotted a limited number of units to be allocated among
several criteria which would determine the characteristics of their candidate.
The Company is evaluating Bot-like simulations based on a variety of topics. The
Company believes that there could be significant market interest in simulations
that are based on participant created data, although the Company has not
conducted any market surveys.
Other Potential Products and Services
Because the Company anticipates that advertising revenues alone will not
generate operating profits in the foreseeable future, the Company believes that
its future success will depend, in part, on its ability to generate revenues and
profits from other sources. In September 1997, the Company began marketing the
CD-ROM version of its Final Bell stock market simulation. The CD version of the
game, which was produced in conjunction with
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CNNfn, allows individuals to play Final Bell in the same manner as they
currently do; however, their browsers will draw game components requiring high
band-width from a CD-ROM. This solves a critical problem with Internet load
times. The participant plays the game on the Internet, but the pages are built
as a hybrid from the CD-ROM and on-line, thus providing a richer experience with
high-resolution graphics, video and animation. The initial marketing and sale of
the Final Bell CD-ROMs will be via the Internet, to registered Final Bell
participants, although the Company may elect to market its CD-ROM products
through third parties. The Company has agreed with CNN/SI to produce a CD-ROM
version of SportSim in 1998.
Advertising and Sales
Advertising
The Company markets its ability to provide "beyond the banner" advertising
solutions. Such solutions exploit the interactive capabilities of the Web, by
allowing advertisers to market to participants on a "one-to-one" basis, as
differentiated from the "one-to-many" approach of traditional media advertising.
The Company can help customize the advertiser's message to appeal to individual
participants. Furthermore, where traditional advertising separates the marketing
message from the program, the Company can integrate messages into the programs.
The Company believes that this approach creates the opportunity for a more
penetrating advertising impression. These placement and integration
methodologies allow advertising content to become part of the game or simulation
itself. The advertiser's product, service or message is integrated through
identifying graphics, or hot links are created on displayed messages to create
additional interaction. The Company also utilizes "home page integration"
techniques to create incentives for participants to visit an advertiser's Web
site. Players who choose to visit linked sites are rewarded with prizes, coupons
or Sand Dollars good for selected purchases at the on-line Sandbox Toy Store.
Past examples of placement and integration techniques include the use of
e.Schwab's on-line brokering interface for the Final Bell game.
As of September 30, 1997, the Company had entered into an agreement with IBM
providing for $180,000 in cash to the Company to sponsor the Trade Center and
other planned simulations on Final Bell through March 14, 1998, an agreement
with Saturn Corporation providing for $180,000 in cash to the Company to sponsor
Full Contact, a fantasy football game within SportSim, through January 31, 1998
and an agreement with MetLife providing for $138,000 in cash to the Company to
sponsor planned simulations on Final Bell from November 10, 1997 to May 4, 1998.
Except for certain exclusivity provisions, co-branding and sponsorships do
not reduce the Company's available inventory of banner advertising, a form of
Internet advertising similar to billboards on which Internet users can click to
visit an advertiser's Web site to get further information about the advertiser
or its products. During the three months ending September 30, 1997, the Company
entered into an agreement with iVillage providing for $71,700 in cash to the
Company for banner advertising through December 31, 1997, and the Company
invoiced $14,000 for banner advertising to MetLife. The simplest and least
expensive advertising product offered by the Company, banners are the commodity
Internet advertising vehicle, and seek to compel participants to visit a Web
site to get further information about a company or product. Each banner
presented to a participant is known as an impression, and much as is the case in
traditional media, advertisers typically purchase a guaranteed number of
impressions on a volume basis to communicate with a broad audience.
The Company offers advertisers sponsorship opportunities, in which Company
program titles are made available to clients and customized to suit a marketer's
specific needs. This alternative entitles an advertiser to have its name
displayed on every page of the sponsored area of the game and may include the
name of the sponsor in the title, such as CNNfn's Final Bell or CNN/SI's
SportSim. Program sponsorships deliver the broadest audience exposure to the
advertisers. Sponsorships are individually negotiated agreements that generally
are for a longer period (from 2 to 12 months) than banner arrangements. In
sponsorships, an advertiser has the exclusive right to sponsor a certain game or
simulation or feature within a game or simulation and integrate its advertising
message into the content. The Company believes that the revenue from game
sponsorships is generally incremental to banner income because it does not
decrease the Company's available inventory of banner slots. However, after a
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sponsorship is sold, sponsors may receive category exclusivity in which event
banners may not be sold to a sponsor's competitor on the sponsored game,
simulation or feature thereof.
The Company believes that its expertise in providing "integrated
advertising" is an important marketing tool. A March 1997 study by Jupiter
Communications predicted that while not as dominant a media form as banners,
sponsorships and "intermercials" (ads that are viewed when changing pages within
a Web site), will increasingly be an important part of the on-line media mix,
and will rise in proportion to banner advertising from 20% this year to
approximately one-half by 2002.
The Company believes that the combination of its products and technology,
together with co-branding arrangements with leading media companies, should
allow it to charge advertisers higher banner rates than for more commodity-like
products. Banner Internet advertising packages are based on a cost per thousand
impressions delivered (CPM). The average CPM for Yahoo, a search engine product
that attracts a broad but highly undifferentiated audience, was between $20 and
$23 in the first and second quarter of 1997 as set forth in their publicly filed
financial statements. Standard banner rates for CNNfn Final Bell and CNN/SI
SportSim, which were launched in the third quarter of 1997, range from $25 to
$60.
Sales
In addition to its Vice President of Sales, the Company employs a sales
representative in New York, and intends to hire 16 additional employees in sales
and marketing, including sales representatives for the New York, San Francisco
and Chicago markets, over the next two and one-half years. Company sales
representatives will focus principally on "integrated advertising" and
sponsorship opportunities, which typically require more time and involvement to
bring to fruition than banner advertising sales. The Company also expects that
its internal sales force will be responsible for the origination of any product
licensing arrangements. The Company expects that during the term of its
co-branding relationships with CNNfn and CNN/SI, the majority of banner sales on
the Final Bell and SportSim sites will be produced by the Turner Networks' sales
staff of approximately 250 persons. In addition, the Company believes that the
strength of the CNNfn and CNN/SI brands and CNN's existing advertising
relationships should provide sales leads and otherwise facilitate the placement
of sponsorships. The Company has recently completed the introduction of the
Turner Networks' sales staff to the Company's products. The Company's sales
representative in New York coordinates selling efforts, and seeks to facilitate
effective communication and cooperation between the Company and the Turner at
his location in Turner Broadcasting's New York City offices.
Co-Branding and Marketing Agreements with CNN/SI and CNNfn
The Company believes that its success in selling advertising or products on
the Internet will depend on attaining certain minimum levels of participant
traffic. The Company has established strategic relationships to increase
consumer awareness of its products and to build traffic to its Web sites. In
June and July of 1997, the Company entered into Co-Branding and Marketing
Agreements with CNN/SI ("CNN/SI"), a division of Cable News Network, Inc.
("CNN"), and CNNfn ("CNNfn"), also a division of CNN, respectively. The CNN/SI
Agreement expires October 31, 1998, with an option at CNN's discretion to renew
for up to two subsequent one year terms. The CNNfn Agreement expires July 15,
1999.
The CNN/SI Agreement generally provides that the Company develop, maintain,
host and update Web sites based on fantasy sports games, initially professional
football, but expanding to professional basketball, baseball (on CNN/SI's
request), golf, hockey and (if permissible from a rights standpoint) college
basketball. CNN/SI has the right to use the game to advertise its Web site, the
SportSim site and the availability of the games. In exchange, CNN/SI has agreed
to use reasonable efforts to promote the games and the SportSim site, and to
build traffic for the games and the SportSim site in accordance with a
promotional plan. The agreement provides that both parties will cooperate
regarding the sale of advertising and sponsorships for the SportSim sites, but
CNN/SI has final approval regarding banner advertising and the Company has final
approval regarding sponsorships. The Company is responsible for all development,
maintenance, hosting and updating costs, as well as the costs of obtaining all
third-party rights. Where extraordinary costs are required to integrate an
advertiser, and the parties agree to such costs, the parties generally split
such costs evenly. Net advertising and sponsorship revenues are divided among
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the parties. The Company is required to implement a tracking system to monitor
traffic on the sites, page views and other relevant data. In addition, the
Company is required to create CD-ROM enhancements for the games that include
CNN/SI elements and feature heavier use of graphics and animation and an
enhanced non-cash prize structure. The Company generally retains ownership of
such CD-ROM products (except to the CNN/SI elements therein), while net revenues
from the sale of CD-ROM products through mutually agreed channels are divided
among the parties. Any other merchandising or licensing net revenues relating to
the games, sites or the CD-ROM products are also divided among the parties. The
Company retains all rights to its games and simulations as well as ownership of
participant databases.
The CNNfn Agreement generally provides that the Company develop, maintain,
host and update a Web site based on Sandbox's Final Bell stock market simulation
game. CNNfn has the right to use the game to advertise its Web site, the Final
Bell site and the availability of the simulation. In exchange, CNNfn has agreed
to use reasonable efforts to promote and to build traffic for Final Bell in
accordance with a promotional plan. The CNNfn Agreement provides that CNNfn will
promote Final Bell as follows: (1) on its parent CNN site on the day of the
launch, (2) by including on its Web site a ticker headline promoting the launch
of the Final Bell for such time as the editorial staff deems appropriate, (3) by
use of text links and ticker headlines to inform its Web site visitors about
Final Bell (placement and play of these links and headlines are at the
discretion of the editorial staff), (4) by providing navigation to Final Bell
from the "Markets" section and the "Your Money" section of its Web site, and
from other sections or pages it deems appropriate, and (5) by providing Web site
banner promotion to Final Bell. The CNNfn Agreement also provides for the
appearance of Lou Dobbs on the CD-ROM product. The agreement provides that both
parties will cooperate regarding the sale of advertising and sponsorships for
the Final Bell site, but CNNfn has final approval regarding banner advertising
and the Company has final approval regarding sponsorships. The Company is
responsible for all development, maintenance, hosting and updating costs, as
well as the costs of obtaining all third-party rights. Where extraordinary costs
are required to integrate advertisements or sponsorships, and the parties agree
to such costs, the parties generally split such costs evenly. Net banner
advertising revenues are divided among the parties on a 60/40 basis, with the
party responsible for selling the advertising entitled to retain the higher
percentage. Regardless of which party is responsible for the sale of
sponsorships, net sponsorship revenue is divided evenly. The Company is required
to implement a tracking system to monitor traffic on the site, page views and
other relevant data. In addition, the Company is required to create CD-ROM
enhancements for the games that include CNNfn elements and feature heavier use
of graphics and animation and an enhanced non-cash prize structure. The Company
generally retains ownership of such CD-ROM products (except to the CNNfn
elements therein), while net revenues from the sale of CD-ROM products through
mutually agreed channels are divided evenly among the parties, provided that
CNNfn retains a slightly higher percentage if Lou Dobbs is featured on the
CD-ROM. Any other merchandising or licensing net revenues relating to the games,
sites or the CD-ROM products are also divided on a 70/30 basis with Sandbox
entitled to 70%. The Company retains all rights to its games and simulations as
well as ownership of participant databases.
Pursuant to the CNN Agreements, the Company has issued warrants to purchase
its Common Stock to CNNfn for 52,000 shares and to CNN/SI for 8,000 shares, as
adjusted to reflect the Reverse Stock Split. CNNfn's warrant is subject to a
vesting schedule whereby 12,000 shares generally vest upon signing of the CNNfn
Agreement (with certain forfeiture provisions), and the balance of 40,000 shares
vest over the course of the initial year of the CNNfn Agreement at the rate of
10,000 each quarter provided CNNfn has provided certain cable television
advertising to the Company.
There can be no assurance that either the CNN/SI Agreement or the CNNfn
Agreement will be extended beyond their stated terms. Furthermore, CNN/SI and
CNNfn have substantial discretion in the substance and quantity of the
promotional services they provide in connection with the games and sites, and
there can be no assurance that the promotional services they provide will enable
the games and sites to attract sufficient advertising and sponsorship revenues
to generate profits for the Company. The Company's ability to succeed in its
co-branding relationships with CNN/SI and CNNfn will have a material impact on
the Company's business, prospects, financial condition or operating results. See
"Risk Factors - Dependence on CNN or Other Third Parties for Internet
Operations".
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Competition
The market for Internet services and products is relatively new, intensely
competitive and rapidly changing. Since the Internet's commercialization in the
early 1990's, the number of Web sites on the Internet competing for consumers'
attention and spending has proliferated with relatively few barriers to entry,
and the Company expects that competition will continue to intensify. The Company
presently competes, or will compete, as the scope of its games and simulations
expands, directly and indirectly, for advertisers, viewers, players and licenses
and other events with the following categories of companies: (i) on-line
services offering interactive games and simulations to targeted participants in
association with existing and new brands (such as Starwave Corporation,
Interactive Imaginations, Inc. (Riddler), Sony Station and YoYodyne
Entertainment); (ii) on-line services or Web sites targeted to sports
enthusiasts generally (such as ESPNet SportsZone and CBS's SportsLine) or to
enthusiasts of particular sports (such as Web sites maintained by Major League
Baseball, the NFL, the NBA and the NHL); (iii) on-line services or Web sites
targeted to existing or potential investors generally, such as E-TRADE, SMG2000,
the NASDAQ Stock Market, the New York Stock Exchange and the American Stock
Exchange; (iv) publishers and distributors of traditional off-line media (such
as television, radio and print), including those targeted to specific audiences,
many of which have established or may establish Web sites; (v) general purpose
consumer on-line services such as America Online, CompuServe and Microsoft
Network; (vi) vendors of information, merchandise, products and services
distributed through other means, including retail stores, mail, facsimile and
private bulletin board services; and (vii) Web search and retrieval services,
such as Excite, InfoSeek, Lycos and Yahoo!, and other high-traffic Web sites,
such as those operated by C|NET and Netscape. The Company anticipates that the
number of its direct and indirect competitors will increase in the future.
The Company believes that its proprietary technologies and its ability to
create new games and simulations at relatively low incremental costs give it a
competitive advantage. However, many of the Company's current and potential
competitors have longer operating histories, significantly greater financial,
technical and marketing resources, significantly greater name recognition and
substantially larger participant or membership bases than the Company and,
therefore, have a significantly greater ability to attract advertisers and
participants. In addition, many of these competitors may be able to respond more
quickly than the Company to new or emerging technologies and changes in Internet
user requirements and to devote greater resources than the Company to the
development, promotion and sale of their services. There can be no assurance
that the Company's current or potential competitors will not develop products
and services comparable or superior to those developed by the Company or adapt
more quickly than the Company to new technologies, evolving industry trends or
changing Internet user preferences. Increased competition could result in price
reductions, reduced margins or loss of market share, any of which would
materially and adversely affect the Company's business, prospects, financial
condition or operating results. In addition, as the Company expands
internationally it may face new competition. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors, or that competitive pressures faced by the Company would not have a
material adverse effect on its business, prospects, financial condition or
operating results. See "Risk Factors-Competition".
The Company believes that the following sites, which utilize the interactive
capabilities of the Internet to engage a targeted group of participants, and
also leverage existing brands for credibility and promotion, provide the most
direct competition:
Starwave (http://www.starwave.com) - Founded in 1993, Starwave was
originally financed by Microsoft cofounder and technology investor Paul Allen
and is now controlled by the Walt Disney Co. Starwave produces such sites as
ESPNET SportZone, Mr. Showbiz and Family Planet. Starwave has acquired strong
brands and produces a wide variety of content for delivery on the Web, including
fantasy baseball and football games available on ESPNET SportsZone.
CBS Sportsline (http://www.cbs.sportsline.com) -- Sportsline was founded in
1994. Through a strategic alliance with CBS, Inc. finalized in March 1997,
Sportsline produces a full service sports information site, including fantasy
gaming, similar to ESPNET SportZone.
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Riddler (http://www.riddler.com) - The Riddler site offers contestants
multiple opportunities to win prizes by finding the answers to trivia questions
or solving riddles. The site is based on limited content, offering
low-involvement puzzles and games.
Yoyodyne (http://www.yoyodyne.com) - Yoyodyne is an e-mail based, on-line
gaming system positioned as a direct marketing vehicle. Participants can play
e-mail-based games sponsored by corporations seeking to market a product or
execute a promotion via the Internet. These games test players' knowledge of
trivia, sports and other areas of interest.
E-TRADE (http://www.etrade.com) -- E-TRADE Group, Inc. is an on-line stock
brokerage firm which offers the U.S. E-TRADE Stock Market Trading Game, which is
similar to the Company's Final Bell.
SMG2000 (http://www.smg2000.com) -- The SMG2000 is an electronic simulation
of Wall Street trading sponsored by the Securities Industry Foundation for
Economic Education and various corporate sponsors designed to help students and
adults understand the stock market.
Government Regulation and Legal Uncertainties
The Company is subject to various laws and governmental regulations
applicable to businesses generally. The Company believes it is currently in
material compliance with such laws and that such laws do not have a material
adverse impact on its operations. In addition, although there are currently few
laws or regulations directly applicable to access to or commerce on the
Internet, due to the increasing popularity and use of the Internet, it is
possible that more stringent federal, state, local and international laws and
regulations may be adopted with respect to the Internet, covering issues such as
participant privacy and expression, consumer protection, pricing, payment
methodologies, financing practices, intellectual property, information security,
anti-competitive practices, the convergence of traditional channels with
Internet commerce, characteristics and quality of products and services and the
taxation of subscription fees or gross receipts of Internet service providers.
The enactment or enforcement of such laws or regulations or others in the future
may increase the Company's cost of doing business or decrease the growth of the
Internet, which could in turn decrease the demand for the Company's products and
services, increase the Company's costs, or otherwise have an adverse effect on
the Company's business, financial condition or operating results. Moreover, the
applicability to the Internet of existing laws in various jurisdictions
including laws and regulations relating to matters such as property ownership,
libel and personal privacy is uncertain, may take years to resolve and could
expose the Company to substantial liability for which the Company might not be
indemnified by content providers or other third parties. Any such new
legislation or regulation or the application of existing laws and regulations to
the Internet could have a material adverse effect on the Company's business,
prospects, financial condition or operating results. See "Risk Factors --
Government Regulation and Legal Uncertainties".
The Company's use of prizes in its games and simulations may be subject to
federal, state, local and international laws governing lotteries and gambling.
Such laws vary from jurisdiction to jurisdiction and are complex and uncertain.
The Company seeks to design its prizing structure to fall within exemptions from
such laws, but there can be no assurance that the Company's prizing structure
will be exempt from all applicable laws. Failure to comply with applicable laws
could have a material adverse affect on the Company's business, prospects,
financial condition or operating results.
Intellectual Property
Through the use of its proprietary technology, the Company believes it can
enhance the value of advertising on its sites by delivering customized
advertising messages to individual participants depending on the demographic and
psychographic data recorded in the Company's proprietary database. The Company's
gaming and simulation engines and other Internet products are also proprietary.
See "Business - Development and Production Process".
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The Company regards its databases, products and gaming engines as
proprietary and attempts to protect them under a combination of patent,
copyright, trade secret and trademark laws and contractual restrictions on
employees and third parties. Despite these precautions, it may be possible for
unauthorized parties to copy the Company's software or to reverse engineer or
obtain and use information the Company regards as proprietary. Existing trade
secret and copyright laws provide only limited protection. Certain provisions of
the license and distribution agreements to be used by the Company, including
provisions protecting against unauthorized use, copying, transfer and
disclosure, may be unenforceable under the laws of certain jurisdictions and the
Company may be required to negotiate limits on these provisions from time to
time. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. there can be no assurance that the protections put in place by the
Company will be adequate. The Company has two U.S. patent applications pending
with respect to certain of its technologies. there can be no assurance that
patents will issue as a result of these applications, the extent of the
protection any such patent(s) might afford, or whether the rights granted
thereunder will provide a competitive advantage to the Company.
Significant and protracted litigation may be necessary to protect the
Company's intellectual property rights, to determine the scope of the
proprietary rights of others or to defend against claims of infringement. The
Company is not currently involved in any litigation with respect to intellectual
property rights, and with the exception of the Kolbe/Humanagement Litigation
described in "Risk Factors - Kolbe/Humanagement Litigation", is not aware of any
threatened claims. There can be no assurance that third party claims, with or
without merit, alleging infringement will not be asserted against the Company in
the future. Such assertions can be time consuming and expensive to defend and
could require the Company to discontinue the use of certain software or
processes, to discontinue certain product lines, to incur significant litigation
costs and expenses and to develop or acquire non-infringing technology or obtain
licenses to the alleged infringing technology. There can be no assurance that
the Company would be able to develop or acquire alternative technologies or to
obtain such licenses or, if licenses were obtainable, that the terms would be
commercially acceptable to the Company.
Employees
At September 1, 1997, the Company had a total of 22 full time employees, 15
in engineering and product development, 4 in sales and marketing, and 3 in
finance and administration. The Company's performance is substantially dependent
on the continued services of Chad M. Little, James A. Layne, Lonnie A.
Whittington, Matthew Stanton, Michael Turico and the other members of its senior
management team, as well as on the Company's ability to retain and motivate its
other officers and key employees. The Company's engineering staff, was most
recently employed by Motorola and is essential to the development of new games
and simulations as well as to the maintenance of the Company's Web sites. The
Company's future success also depends in large part upon its ability to attract
and retain new qualified employees. Competition for such personnel is intense,
and there can be no assurance that the Company will be able to retain either its
senior management or other key employees or that it will be able to attract and
retain such additional qualified personnel in the future. In order to execute
its business strategy, the Company intends to add significantly to its
engineering and sales staffs, and to the extent that the Company is unable to
find highly qualified personnel in these disciplines, or to employ them at
salaries the Company deems feasible or appropriate, the Company's business may
be materially adversely effected. The Company also anticipates that significant
expansion of its administrative operations will be required in order to execute
its strategy. This rapid growth has placed, and is expected to continue to
place, a significant constraints on the Company's management. In order to manage
the expected growth of its operations, the Company will be required to implement
and improve its operational and financial systems, procedures and controls. Such
improvement will require the Company to expand its administrative, finance and
accounting staffs, and there can be no assurance that the Company will be able
to identify, hire, train, motivate or manage these personnel as well. The
Company's employees are not represented by any collective bargaining
organization, and the Company considers its relations with its employees to be
good. See "Risk Factors - Dependence on Key Personnel".
51
<PAGE>
Facilities
The Company's corporate headquarters are located in Phoenix, Arizona in an
8,159 square foot facility that houses the Company's administrative and finance,
engineering and product development, sales and marketing and administrative
functions. The Company leases the facility under a lease which expires on June
30, 2002. The Company believes that its existing facilities are adequate for its
current requirements, although additional space will be required to accommodate
anticipated increases in employment. The Company believes that such additional
space can be obtained on commercially reasonable terms.
In August and September 1997, the Company underestimated the amount of
traffic that Final Bell and SportSim would generate, and experienced system
disruptions and delays, which required the Company to acquire additional
hardware and software and which caused some participant dissatisfaction. These
upgrades to its server and database capacity, which were made over a three week
period and totaled approximately $500,000, more than doubled the Company's
capacity to handle traffic to its Web sites. In addition, the Company
anticipates that it will need to acquire an additional $1 million of equipment
prior to the commencement of its SportSim basketball season and mid-season
football in the fourth quarter of 1997. Furthermore, as additional games and
simulations are brought on-line, the Company expects additional upgrades will be
required. While the Company believes that the steps it has taken to increase its
ability to handle larger amounts of traffic, and to communicate with and address
the concerns of its participants, there are no assurances that such system
disruptions will not adversely affect the Company's business, prospects,
financial condition or operating results. Similarly, although the Company is
increasing its systems infrastructure acquisition plans in light of the most
current information and estimates available to it, there are no assurances that
it will accurately foresee traffic levels, system requirements or other facts
that might result in system interruptions, or that such system interruptions
will not occur.
In August and September 1997, also in response to the surge in traffic to
its Web sites, the Company was required to make arrangements with Teleport
Communications Group, Inc., a third party telecommunications service provider
("TSP") to house its Web sites and obtain a more direct link between the Company
and Genuity, Inc. the Company's Internet service provider ("ISP"). The Company
believes that its TSP and ISP are capable of handling its anticipated traffic
growth in the foreseeable future and can provide expanded bandwidth for
communications as Internet technology improves in this area. However, any
failure of the TSP or ISP to perform as anticipated or any unforeseeable
increase in traffic on its Web sites will require the Company to make other
third party arrangements or expand and adapt its network infrastructure. The
Company's inability or failure to make such arrangements or add additional
software and hardware to accommodate increased traffic on its Web sites may
cause unanticipated system disruptions and result in slower response times.
There can be no assurance that the Company will make such arrangements or expand
its network infrastructure on a timely basis to meet increased demand. Any
increase in system interruptions or slower response times resulting from the
foregoing factors could have a material adverse effect on the Company's
business, prospects, financial condition and operating results.
The Company's Web site operations housed at the TSP's facility are
vulnerable to interruption by fire, earthquake, power loss, telecommunications
failure and other events beyond the Company's or the TSP's control. The TSP
provides certain safeguards against such events. The switch room is monitored 24
hours a day, 7 days a week and maintained at a temperature of 70 degrees with
relative humidity at 50% and the AC power is backed up by a generator. In
addition, the Company's procedures require that software be backed up daily and
stored off-site so that it could be used to restore the Company's Web site
operations in the event of catastrophe. However, there is no assurance that in
the event of a catastrophe, the Company would be able to locate sufficient
equipment to run its Web site operations on a timely basis. If the TSP or ISP
fails for any reason, the Company would have to make other third party
arrangements. The Company carries business interruption insurance, but there is
no assurance that such insurance would be sufficient to compensate the Company
for lost revenues that may occur from a substantial system failure, and any
losses or damages incurred by the Company could have a material adverse effect
on its business, prospects, financial condition and operating results. See "Risk
Factors - Capacity Constraints and System Disruptions".
52
<PAGE>
Legal Proceedings
The Company is not currently a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, would have a material
adverse affect on the Company's financial position or results of operations. On
July 1, 1997, counsel for the Company received written notification from
plaintiffs' counsel in Kolbe, et al. v. Humanagement, Inc. et al., that
plaintiffs intend to add the Company as a defendant in the lawsuit, in which a
preliminary injunction against defendants has been granted regarding, among
other things, claims for copyright infringement. See "Risk Factors-
Kolbe/Humanagement Litigation". From time to time, the Company may be involved
in other litigation relating to claims arising out of its operations in the
normal course of business.
53
<PAGE>
MANAGEMENT
Directors and Executive Officers
The Company's directors and executive officers and their ages as of June 30,
1997 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Chad M. Little(1) 28 President, Chief Executive Officer and Director
James A. Layne 44 Vice President of Marketing, Secretary and Director
Lonnie A. Whittington 48 Vice President of Creative Direction, Assistant
Secretary and Director
Mark Gorchoff 48 Vice President of Finance and Chief Financial Officer
Michael S. Turico 47 Vice President of Engineering and Director
Matthew Stanton 33 Vice President of Sales
John Hall(1) 52 Director
Todd Stevens(2) 38 Director
Brian Burns(1),(2) 38 Director
</TABLE>
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Chad M. Little founded the Company's predecessor in 1991 and has served as
President, Chief Executive Officer and director of the Company since that time.
For the two years prior to founding the Company, Mr. Little held a position with
Audio Visual Graphics in graphic software design. Mr. Little is also the creator
of Cyberhunt, which the Company believes was the first interactive game
broadcast (on May 1, 1995) on the Web. Mr. Little received an Associate degree
in Graphic Design from the Collins School of Design in 1989.
James A. Layne has served as Vice President, Secretary and director of the
Company since March 1992. Mr. Layne previously served as a Regional Sales
Manager for Union Carbide, and was Director of Operations responsible for new
business development and client-based strategic direction for Mark Anderson &
Associates, a national business-to-business advertising agency. Mr. Layne
received a B.S. in Biology from the University of Hawaii in 1976.
Lonnie A. Whittington has served as Vice President, Creative Direction and
director of the Company since March 1992. Mr. Whittington owned and operated an
advertising agency for fifteen years prior to joining the Company. In addition,
Mr. Whittington taught graphic design, typography, product design and
presentation technique at Arizona State University from 1976 to 1985. Mr.
Whittington also served as a visiting lecturer and associate professor at the
College of Art at Arizona State University. Mr. Whittington received a B.S. in
Industrial Design from Ohio State University in 1972.
Mark Gorchoff has served as Vice President and Chief Financial Officer of
the Company since January 1997. Prior to joining the Company, Mr. Gorchoff
served as the Chief Financial and Administrative Officer of Peerless Office
Supply, from November 1991 to July 1996, as the Vice President of Finance at
Inertia Dynamics Corporation, a manufacturing company, as Credit Department
Manager for Bank One of Columbus, N.A., and as an Assistant Vice President with
First Interstate Bank of Arizona. Mr. Gorchoff received a B.S. and an MBA from
Ohio State University, and is a CPA.
Michael S. Turico has served as Engineering Director, and a director of the
Company, since August 1995 and as a Vice President of Engineering since July
1997. Prior to his employment with the Company, Mr. Turico served as Director of
Operations of OnWord Information, a network information provider, from August
1994 to August 1995, Info Enterprises, a wholly-owned subsidiary of Motorola,
from June 1991 to August 1994, and prior to that period in a number of senior
technical management positions within Motorola itself.
54
<PAGE>
Matthew Stanton has served as the Company's Director of Sales since July
1996 and as a Vice President of Sales since July 1997. Prior to his employment
with the Company, Mr. Stanton was employed with Katz Media, a leading media
sales representative firm, from June 1990 through July 1996, most recently as
Director of Sales for its new media division, Millennium Marketing, and before
that as Sales Manager of its Los Angeles National Cable Communications Office.
Prior to his employment with Katz Media, he was employed by R. H. Donnelly and
Miller Brewing Company in various sales and marketing capacities.
John Hall has served as a director of the Company since February 1996. Mr.
Hall has been a general partner of Newtek Ventures, a venture capital investor
in the Company since 1988. Prior to that Mr. Hall held positions with Cadnetix
Corporation, a developer of computer aided design software, as Vice President -
Finance and Chief Financial Officer, and with Intel as Controller -
International Group. Mr. Hall also serves as a director of Right Angle Software,
a developer of process and documentation software, SalesLogix Corporation, a
developer of sales force automation software, and Nextwave Design Automation, a
developer of design automation software. Mr. Hall received a B.S. in Accounting
and Finance and an MBA from San Jose State University.
Todd Stevens has served as a director of the Company since February 1996.
Mr. Stevens has been Managing Director of Wasatch Venture Corporation, a venture
capital investor in the Company, since June 1993. Prior to that Mr. Stevens was
a Partner with Stevens Wood, Inc., a consulting firm, from November 1991 to June
1993. Mr. Stevens also serves as a director for MACC Private Equities, Inc., a
publicly traded Small Business Investment Company. Mr. Stevens received a B.A.
in Accounting and Management from the University of Utah and an MBA from Harvard
University.
Brian Burns has served as a director of the Company since October 1996.
Since April 1994, Mr. Burns has been Vice President - Finance and Chief
Financial Officer of Anderson & Wells, Co., the general partner of Sundance
Venture Partners, L.P., a venture capital investor in the Company. Prior to
that, Mr. Burns held similar positions with AFP, Inc., a chain of retail
photography studios, from July 1993 to April 1994, and Sunven Capital Corp., a
venture capital investor. Mr. Burns received a B.S. in Accounting from Arizona
State University.
Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until the next annual meeting of stockholders and
until their successors have been duly elected and qualified.
Committees of the Board Of Directors
The Audit Committee of Company's Board of Directors was formed on September
10, 1997 and is responsible for reviewing audit functions, including accounting
and financial reporting practices of the Company, the adequacy of the Company's
system of internal accounting control, the quality and integrity of the
Company's financial statements and relations with independent auditors. The
Compensation Committee of the Company's Board of Directors was also formed on
September 10, 1997 and is responsible for establishing the compensation of the
Company's directors, officers and employees, including salaries, bonuses,
commission, and benefit plans, and administering the Company's stock plans and
other forms of or matters relating to compensation.
Director Compensation
Directors do not currently receive any cash compensation from the Company
for their service as members of the Board of Directors, although they are
reimbursed for certain expenses in connection with attendance at Board and
Committee meetings. Non-employee directors are eligible to receive equity-based
incentives under the Company's 1995 Stock Incentive Plan, but have not received
any awards under the Plan as of September 1, 1997.
Executive Compensation
The following table sets forth all compensation received for services
rendered to the Company in all capacities during the last fiscal year by Mr.
Little, the Company's Chief Executive Officer. None of the Company's executive
officers earned salary and bonus during fiscal year 1996 in excess of $100,000.
55
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards(1)
Name and Principal Year Salary ($) Bonus ($) Securities All Other
Position (a) (b) (c) (d) Underlying Compensation
Options/SARS ($)
(#)(2) (i)
(g)
<S> <C> <C> <C> <C> <C>
Chad M. Little 1996 $76,355 -0- -0- -0-
President and Chief
Executive Officer
</TABLE>
(1) The column for "Other Annual Compensation" has been omitted because the
aggregate value of perquisites and other personal benefits does not exceed the
lesser of $50,000 or 10% of the total annual salary and bonus reported for Mr.
Little.
(2) The Common Stock of the Company is not publicly traded. The Board of
Directors, in connection with the award of stock options and other stock grants
that it makes from time to time, determines the fair market value of the Common
Stock as of the award date. For the purpose of calculating the value recognized
upon exercise of options and at fiscal year-end, the Company has used the most
recent Board determination of fair market value made prior to the exercise date,
or fiscal year-end, as the case may be.
Option Grants, Exercises and Fiscal Year-End Values
The following table sets forth certain information regarding the stock
option grants during fiscal year ended December 31, 1996 to Mr. Little.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
Numbers of Securities Percent of Total
Underlying Options/SARs Options/SARs Granted to
Granted (#)(1) Employees in Fiscal Exercise or Base Price
Name Year (2) ($/Sh)(3) Expiration Date
(a) (b) (c) (d) (e)
<S> <C> <C>
Chad M. Little -0- -0-
</TABLE>
(1) The options granted are incentive stock options that vest in increments of
20% per year with the first such increment vesting on the one year anniversary
of the grant, with vesting of all shares upon a change in control of the Company
(as defined in the applicable stock option award agreement).
(2) Based on an aggregate of 77,414 shares subject to options granted to
employees in the fiscal year ended December 31, 1996.
(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant, as determined by the Board of
Directors.
The following table provides information regarding the exercise of stock
options during 1996 and year-end option values for Mr. Little. Mr. Little did
not exercise any stock options during 1996.
56
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal
Year and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Acquired on Options/SARs at FY End Options/SARs at FY End
Name Exercise (#) Value Realized ($)(1) (#) ($) (1)
Exercisable/Unexercisable Exercisable/Unexercisable
(a) (b) (c) (d) (e)
<S> <C> <C> <C> <C>
Chad M. Little -0- -0- -0- -0-
</TABLE>
(1) The Common Stock of the Company is not publicly traded. The Board of
Directors, in connection with the award stock options and other stock grants
that it makes from time to time, determines the fair market value of the Common
Stock as of the award date. For the purpose of calculating the value recognized
upon exercise of options and at fiscal year-end, the Company has used the most
recent Board determination of fair market value made prior to the exercise date,
or fiscal year-end, as the case may be.
Employment Agreements
Each of the stock option award agreements between the Company and its
executive officers provides that upon a change in control of the Company (as
defined in the applicable agreement), all shares then exercisable under the
standard vesting schedule, in the case of stock options, shall vest.
The Company has entered into employment agreements or engagement letter
agreements with Messrs. Little, Stanton and Turico, which generally provide such
officer's title, starting salary, bonus and benefits, moving allowance (if
applicable) and initial stock option awards (if any). All of the employment
agreements are "at-will" and none of the agreements provide for material
severance payments to any such officer on termination. The Company and each of
its executive officers, including Messrs. Whittington and Layne have also
entered into Proprietary Rights and Non-Compete Agreements that generally
prevent disclosure of Confidential Information (as defined therein), assign to
the Company all rights in Inventions (as defined therein) and include certain
non-compete and non-solicitation covenants.
Employee Benefit Plans
1995 Equity Incentive Plan
The 1995 Equity Incentive Plan ("Incentive Plan") was adopted by the Board
of Directors and approved by the stockholders on August 1, 1995. The Incentive
Plan authorizes awards of Incentive Stock Options ("ISOs"), Non-Qualified Stock
Options ("NQSOs"), Stock Appreciation Rights ("SARs"), Performance Units,
Restricted Stock and other Common Stock based awards to officers, directors,
employees, consultants and advisors of the Company. The total number of shares
of Common Stock available for awards under the Incentive Plan, as amended, is
518,000, subject to certain adjustments described in the Incentive Plan. During
the year ended December 31, 1996, the Company granted options to purchase 77,414
shares pursuant to the Incentive Plan. From January 1, 1997 through September 1,
1997, the Company granted options to purchase 88,520 shares (net of
cancellations) pursuant to the Incentive Plan.
The Incentive Plan is administered by the Board or a Committee appointed by
the Board from time to time. The Board or authorized Committee has the exclusive
authority to administer the Incentive Plan, including the power to determine
eligibility, the types of awards to be granted, the price and the timing of
awards.
An ISO is a stock option that satisfies the requirements specified in
Section 422 of the Internal Revenue Code (the "Code"). Under the Code, ISOs may
only be granted to employees and are eligible for certain favorable tax
treatment. Generally, the issuing corporation is not entitled to a deduction
with respect to an ISO. A NQSO is any
57
<PAGE>
stock option other than an Incentive Stock Option. The issuing corporation is
generally entitled to a corresponding tax deduction in the same amount and in
the same year in which the employee recognizes such income, provided that it
satisfies applicable withholding obligations.
An SAR is the right granted to an employee to receive the appreciation in
the value of a share of Common Stock over a certain period of time. Under the
Incentive Plan, the Company may pay that amount in cash, or in Common Stock, or
in a combination of both. An issuer of an SAR generally receives a tax deduction
in an amount equal to taxable income recognized by the employee with respect to
the SAR provided that it satisfies applicable withholding obligations.
Performance Units may also be granted to an eligible employee. Typically, each
Performance Unit will be deemed to be the equivalent of one share of Common
Stock. An award of Performance Units does not entitle an employee to any
ownership, dividend, voting or other rights of a stockholder until distribution
is made in the form of shares of stock, if the award is paid in stock. The value
of the employee's Performance Units is generally measured by the fair market
value of an equivalent number of shares of the Common Stock. At the end of the
performance period, if the employee has satisfied certain performance criteria
established by the Committee, the employee will be entitled to a payment equal
to the difference between the value of the Performance Units on the date of
grant and the value of such units at the end of the performance period. The
award may be payable in either cash, Common Stock or a combination of both. The
issuing corporation generally is entitled to a tax deduction in an amount equal
to taxable income recognized by the employee.
Under the Restricted Stock feature of the Incentive Plan, an eligible
employee may purchase or be granted a specific number of shares of the Common
Stock. However, vested rights to such stock may be subject to certain
restrictions or be conditioned on the attainment of certain performance goals.
If the employee violates any of the restrictions during the period specified by
the committee or the performance standards fairly to be satisfied, the stock may
be forfeited. The issuer of restricted stock generally is entitled to a tax
deduction in an amount equal to taxable income recognized by the employee at the
same time, provided that it satisfies applicable withholding obligations.
The Board or authorized Committee may provide in the written instrument
evidencing the grant for acceleration of vesting of options and other
exercisable rights granted under the Incentive Plan upon a change in control as
defined in the Plan. To date, such instruments include a provision granting
discretion to the Board to waive or accelerate vesting of options, or waive or
extend expiration dates, subject to limitations set forth in the Plan.
Although permitted to issue SARs, Performance Units and Restricted Stock
under the 1995, to date the Company has only issued Options, and currently
intends to only issue Options in the future.
Option Grants to Executives and Others
In August 1995, Tracer granted Michael S. Turico, an executive officer and
director of the Company, an incentive stock option to purchase 34,788 shares of
Common Stock at an exercise price of $.0025 per share vesting over 5 years. In
February 1997, (a) the Company and Mr. Turico agreed to cancel the unvested
portion of this option, (b) Mr. Turico exercised the vested portion of 6,956
shares of Common Stock, and (c) the Company granted to him a new incentive stock
option to purchase 31,832 shares of Common Stock of the Company at an exercise
price of $.25 per share vesting over 4 years.
In May 1996, the Company granted a nonqualified stock option to Newtek to
purchase 52,614 shares of Common Stock of the Company at an exercise price of
$.25 per share. 26,307 shares vested immediately and were exercised on July 15,
1996, 13,155 shares vested during the period ending September 1, 1997, 4,385 of
which were exercised on December 12, 1996, and the remaining 13,152 vest in
approximately equal amounts on March 1, 1998, September 1, 1998 and March 1,
1999.
In January 1997, the Company granted an incentive stock option to Mark
Gorchoff, an executive officer of the Company, to purchase 18,000 shares of
Common Stock of the Company at an exercise price of $.25 per share vesting over
five years.
58
<PAGE>
In February 1997, the Company granted an incentive stock option to Matthew
Stanton, an executive officer of the Company, to purchase 20,000 shares of
Common Stock of the Company at an exercise price of $.25 per share, vesting over
five years beginning as of July 9, 1996, his original hire date. In July 1997,
the Company granted Mr. Stanton an additional incentive stock option to purchase
20,000 shares of Common Stock of the Company at an exercise price of $.75 per
share, 10,000 shares of which vested immediately with the remaining 10,000
shares vesting over five years.
401(k) Plan
Effective December 28, 1993, the Company adopted a retirement savings plan
(the "401(k) Plan") that covers all employees of the Company meeting certain
eligibility requirements. An employee may make voluntary contributions to the
401(k) Plan, subject to Internal Revenue Service limitations. Employee
contributions are invested in selected equity mutual funds or a money market
fund at the direction of the employee. Employee contributions are fully vested
and nonforfeitable at all times . The 401(k) Plan permits, but does not require,
additional contributions to the 401(k) Plan by the Company. The Company
presently does not intend to make discretionary contributions to the 401(k) Plan
until it achieves significant profitability.
CERTAIN TRANSACTIONS
Effective April 25, 1996, the Company completed a migratory merger pursuant
to which it reincorporated in Delaware, changed its name to Sandbox
Entertainment Corporation and effected a five to one stock split. All references
herein to the Company include its predecessor, Tracer Design, Inc., if
applicable. The description below has been adjusted to reflect (i) the foregoing
five-to-one stock split, (ii) a twenty-five for one stock split as of July 13,
1995, (iii) a two-for one stock split as of February 12, 1996, (iv) certain
antidilution adjustments required by the issuance of Series A Preferred Stock in
February 1996, and (v) the Reverse Stock Split.
In July 1995, Glenn Gomez, a beneficial owner of more than 5% of the Common
Stock, loaned the Company $116,328 pursuant to a six year note bearing interest
at the prime rate announced by Bank One Arizona, N.A. In connection with this
loan, Mr. Gomez purchased 91,836 shares of Common Stock for a total purchase
price of $183,672. In July 1995, the Company, and Messrs. Little, Layne,
Whittington and Gomez entered a Restated Stockholders' Agreement (the
"Stockholders Agreement"), which imposes certain restrictions on transfer and
grants a right of first refusal by each stockholder to the Company and each of
the other stockholders. Jon Kailey and Kristin Kailey and Frank X. Helstab
became parties to the Stockholders' Agreement in February 1996 and May 1996,
respectively.
In October 1995, certain investors loaned the Company an aggregate of
$40,000 pursuant to one year term notes bearing interest at 15%. In connection
with these loans, these investors were issued ten year warrants to purchase an
aggregate of 122,400 shares of Common Stock at an exercise price of $2.00 per
share. The shares issued upon exercise of these warrants are subject to the
Stockholders' Agreement. In connection with this financing, Pickwick Group LLC
("Pickwick") and its sole manager and principal member Douglas Greenwood (and
his spouse Susan Greenwood) (the "Greenwoods"), collectively beneficial owners
of more than 5% of the Common Stock, loaned the Company an aggregate of $15,000
and were issued ten year warrants to purchase an aggregate of 45,900 shares of
Common Stock at $2.00 per share. In connection with this financing, an
additional ten year warrant was issued to Pickwick to purchase 91,800 shares of
Common Stock at $2.00 per share in consideration for its payment of $204 and
assistance in arranging the $40,000 in loans.
In October 1996, the Company amended the term notes issued in connection
with the October 1995 financing to extend the maturity by an additional six
months and to decrease the interest rate from 15% to 10%. In connection with
these amendments, the Company issued the noteholders ten year warrants to the
lenders to purchase an aggregate of 2,000 shares of Common Stock at $2.00 per
share, of which Pickwick and the Greenwoods received warrants to purchase 750
shares. In April 1997, the Company again amended the term notes to extend the
maturity an additional six months. In connection with these amendments, the
Company issued the noteholders ten
59
<PAGE>
year warrants to purchase an aggregate of 2,000 shares of Common Stock at $2.00
per share, of which Pickwick and the Greenwoods received warrants to purchase
750 shares.
In February 1996, the Company entered into that certain Series A Preferred
Stock Purchase Agreement (the "Stock Purchase Agreement"), pursuant to which the
Company sold (a) 140,000 shares of Series A Preferred Stock and warrants to
purchase 35,000 shares of Series A Preferred Stock to Wasatch Venture
Corporation ("Wasatch") for a purchase price of $350,000 and (b) 40,000 shares
of Series A Preferred Stock and warrants to purchase 10,000 shares of Series A
Preferred Stock to Newtek Ventures II, L.P. ("Newtek") for a purchase price of
$100,000. John Hall, general partner of Newtek, and Todd Stevens, managing
director of Wasatch, became directors of the Company following consummation of
such purchase. Wasatch and Newtek each beneficially own more than 5% of the
Company's Common Stock. In connection with the Stock Purchase Agreement, the
Company also granted to Wasatch and Newtek certain demand and piggy-back
registration rights, a right of first offer on any new issuances of capital
stock by the Company, certain limitations on the size and composition of the
Board of Directors, and certain information and inspection rights pursuant to an
Investor Rights Agreement (the "Investor Rights Agreement") dated February 13,
1996. The right of first offer generally grants holders of Series A Preferred
Stock the right of first offer to purchase its pro rata share of New Securities
(as defined in the Investor Rights Agreement to exclude securities issued in a
registered public offering, among other exclusions) that the Company proposes to
issue. Such right terminates on the closing of a firmly underwritten public
offering on Form S-1 (or successor form) resulting in aggregate gross proceeds
to the Company of at least $5 million. The size of the Board of Directors is
limited to 7 directors under the Investor Rights Agreement. Also in connection
with the Stock Purchase Agreement, Chad Little, James Layne and Lonnie
Whittington gave Wasatch and Newtek a right of co-sale regarding sales by each
of such individuals pursuant to a Co-Sale Agreement (the "Co-Sale Agreement")
dated February 13, 1996. In connection with the consummation of the Stock
Purchase Agreement, the Company paid Frank Helstab, as a consultant, $15,750 in
cash and issued him a warrant to purchase 52,614 shares of Common Stock at an
exercise price of $.005 per share, which Mr. Helstab exercised in May 1996.
In May 1996, Wasatch and Newtek each exercised the Series A Preferred
warrants issued in connection with the February 1996 financing and purchased
additional shares of Series A Preferred Stock in the Company pursuant to the
terms and conditions of the Stock Purchase Agreement. Wasatch purchased 150,000
additional shares of Series A Preferred Stock in the Company for a price of
$300,000 and Newtek purchased 100,000 additional shares of Series A Preferred
Stock in the Company for a price of $200,000.
In November 1996, Wasatch, Newtek, Sundance Venture Partners, L.P.
("Sundance") and Wayne Sorensen ("Sorensen") each purchased 25,000, 25,000,
225,000 and 25,000 shares of Series A Preferred Stock, respectively, at $2.00
per share pursuant to the terms and conditions of the Stock Purchase Agreement,
which included rights under the Investor Rights Agreement and under the Co-Sale
Agreement. Brian Burns, a director of the Company, is a managing partner of
Sundance, a beneficial owner of more than 5% of the Company's Common Stock. A
portion of Sundance's purchase was completed in January 1997.
In May 1997, the following holders of Series A Preferred Stock loaned the
Company an aggregate of $270,000 in the following amounts: Wasatch - $100,000;
Newtek - $50,000; Sundance - $100,000; and Sorensen - $20,000. Such loans were
made pursuant to one year convertible subordinated promissory notes bearing 10%
interest that automatically convert into shares of Series B Preferred Stock upon
the consummation of this offering at a conversion price equal to the public
offering price for the Series B Preferred Stock if the effective date of this
offering is on or before November 21, 1997. If this offering is not consummated
on or before November 21, 1997, such notes are convertible into shares of Series
A Preferred Stock at a conversion price of $2.00 per share. In connection with
these loans, the Company also issued to investors seven year warrants to
purchase the following numbers of shares of Series A Preferred Stock at an
exercise price of $2.00 per share: Wasatch - 50,000 shares; Newtek - 25,000
shares; Sundance - 50,000 shares; and Sorensen - 10,000 shares. The exercise
price of these warrants will increase from $2.00 per share to the public
offering price if the effective date of this offering is on or before November
21, 1997; provided, however, that the warrants may be exercised within the 30
days following the consummation of this offering at $2.00 per share.
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<PAGE>
In July 1997, the following holders of Series A Preferred Stock loaned the
Company an aggregate of $270,000 in the following amounts: Wasatch - $100,000;
Newtek - $60,000; Sundance - $100,000; and Sorensen - $10,000. Such loans were
made pursuant to one year convertible subordinated promissory notes bearing 10%
interest that automatically convert into shares of Series B Preferred Stock upon
the consummation of this offering at a conversion price equal to the public
offering price for the Series B Preferred Stock if this offering is consummated
on or before January 20, 1998. If this offering is not consummated on or before
January 20, 1998, such notes are convertible under certain circumstances into
shares of Series A Preferred Stock at a conversion price of $2.00 per share. In
connection with these loans, the Company also issued to investors seven year
warrants to purchase the following numbers of shares of Series A Preferred Stock
at an exercise price of $2.00 per share: Wasatch - 50,000 shares; Newtek -
30,000 shares; Sundance - 50,000 shares; and Sorensen - 5,000 shares. These
warrants are exercisable at any time during the term of the warrants. The
exercise price of these warrants will increase from $2.00 per share to the
public offering price for the Series B Preferred Stock if this offering is
consummated by January 20, 1998; provided, however, that the warrants may be
exercised within the 30 days following the consummation of this offering at
$2.00 per share.
In August and September 1997, the Company raised $490,000 from various
"accredited investors" (as defined in Rule 501 of Regulation D as promulgated by
the SEC under the Act). Such loans were made pursuant to subordinated notes
bearing interest at 10% payable in two years or out of the proceeds of this
offering. In connection with these loans, the Company also issued to investors
three year warrants to purchase that number of shares of Common Stock determined
by dividing the amount loaned by $5.00 per share for an aggregate of 98,000
shares of Common Stock. The exercise price of the warrants is $5.00 per share
until 30 days after the consummation of this offering at which point the
exercise price will be the offering price for the Series B Preferred Stock if
that price is greater than $5.00 per share. As part of this transaction, the
Company received $125,000 from a trust controlled by the parents of Mr. Little,
a director and chief executive officer of the Company, for which this trust
received warrants to purchase 25,000 shares of Common Stock of the Company. The
Company also received $100,000 from Mr. Gomez in exchange for a note and a
warrant to purchase 20,000 shares of Common Stock of the Company. The Company
placed the remaining $265,000 of this private offering with various investors
using the assistance of FOX & Company Investments, Inc. For its efforts, FOX and
its brokers received $25,200 and three year warrant(s) to purchase 5,300 shares
of Common Stock which warrants have an exercise price of $5.00 per share until
30 days after the consummation of this offering at which point the exercise
price will be the offering price in this offering if that price is greater than
$5.00 per share.
Registration Rights
Upon the completion of this offering, certain holders of the Series A
Preferred Stock (the "Rightsholders") will be entitled to require the Company to
register under the Securities Act up to a total of 1,327,500 shares of Common
Stock issuable upon conversion of Series A Preferred Stock (including all Series
A Preferred warrants and convertible notes on a fully diluted basis) held by the
Rightsholders (collectively, the "Registrable Shares") pursuant to the terms of
an Investors' Rights Agreement (the "Investors' Rights Agreement"). The
Investors' Rights Agreement provides that in the event the Company proposes to
register any of its securities under the Securities Act at any time or times,
the Rightsholders, subject to certain exceptions, shall be entitled to include
Registrable Shares in such registration. However, the managing underwriter of
any such offering may exclude for marketing reasons some of such Registrable
Shares from such registration. In addition, certain Rightsholders have
additional rights, subject to certain conditions and limitations, to require the
Company to prepare and file a registration statement under the Securities Act
with respect to their Registrable Shares. The Company is generally required to
bear the expenses of all such registrations, except underwriting discounts and
commissions. The Company has also granted "piggy-back" registration rights to
certain Common Stock warrant holders to include up to 303,200 shares of Common
Stock issuable upon exercise of such warrants in a registration statement under
the Securities Act pursuant to terms and conditions similar to the "piggy-back"
registration rights held by the Rightsholders under the Investors' Rights
Agreement.
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The Company believes that all of the transactions described above were on
terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All of the Company's securities referenced above
were sold at prices equal to the fair market value of such securities, as
determined by the Board of Directors, on the date of issuance.
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Although the Company has no present intention to do so, it may in the future
enter into other transactions and agreements incident to its business with its
directors, officers, principal stockholders and other affiliates. The Company
intends for all such transactions and agreements to be on terms no less
favorable to the Company than those obtainable from unaffiliated third parties
on an arm's-length basis. In addition, the approval of a majority of the
Company's disinterested directors will be required for any such transactions or
agreements.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the voting securities as of September 1, 1997, as
adjusted to reflect the Reverse Stock Split, and as adjusted to reflect the sale
of the Series B Preferred Stock offered hereby and the conversion of certain
convertible promissory notes into shares of Series B Preferred Stock upon the
consummation of this offering, by (i) each stockholder beneficially owning more
than 5% of the outstanding shares of any class of the Company's voting
securities, (ii) each director of the Company, (iii) each executive officer, and
(iv) all executive officers and directors as a group
<TABLE>
<CAPTION>
Percentage of Shares
--------------------
Number of Beneficially Owned (1)
--------- ----------------------
Shares
------
Name and Address of Beneficial Beneficially Before the After the
------------------------------ ------------ ---------- ---------
Title of Class Owner Owned Offering Offering
- -------------- ----- ----- -------- --------
<S> <C> <C> <C> <C>
Series A Wasatch Venture Corporation (2) 550,000 61.6% %
Preferred One South Main, Suite 1340
Stock Salt Lake City, UT 84111
Newtek Ventures II, L.P. (3) 285,000 33.6% %
500 Washington Street,
Suite 720
San Francisco, CA 94111
Sundance Venture Partners, L.P.(4) 425,000 47.6% %
c/o Anderson & Wells
400 East Van Buren, Suite 750
Phoenix, AZ 85004
Wayne Sorensen (5) 55,000 6.8% %
1925 E. Michigan Avenue
Salt Lake City, UT 85108
All executive officers and 1,260,000 96.7% %
directors as a group(6)
Series B Wasatch Venture Corporation (7) 0%
Preferred One South Main, Suite 1340
Stock Salt Lake City, UT 84111
Newtek Ventures II, L.P. (8) 0%
500 Washington Street,
Suite 720
San Francisco, CA 94111
Sundance Venture Partners, L.P. (9) 0%
c/o Anderson & Wells
400 East Van Buren, Suite 750
Phoenix, AZ 85004
Wayne Sorensen (10) 0%
1925 E. Michigan Avenue
Salt Lake City, UT 85108
All executive officers and directors 0%
as a group (11)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Percentage of Shares
--------------------
Number of Beneficially Owned (1)
--------- ----------------------
Shares
------
Name and Address of Beneficial Beneficially Before the After the Fully
------------------------------ ------------ ---------- --------- -----
Title of Class Owner Owned Offering Offering Diluted(12)
- -------------- ----- ----- -------- -------- -----------
<S> <C> <C> <C> <C>
Common Chad M. Little (13) 635,000 50.6%
Stock 2231 E. Camelback, Suite 324
Phoenix, AZ 85016
James A. Layne (14) 295,000 23.5%
2231 E. Camelback, Suite 324
Phoenix, AZ 85016
Lonnie A. Whittington (15) 295,500 23.5%
2231 E. Camelback, Suite 324
Phoenix, AZ 85016
Wasatch Venture Corporation (16) 550,000 30.5%
One South Main, Suite 1340
Salt Lake City, UT 84111
Newtek Ventures II, L.P. (17) 324,461 21.0% %
500 Washington Street,
Suite 720
San Francisco, CA 94111
Sundance Venture Partners, L.P.(18) 425,000 25.3% %
c/o Anderson & Wells
400 East Van Buren, Suite 750
Phoenix, AZ 85004
Pickwick Group LLC (19) 139,200 10.0% %
172 Dan's Highway
New Canaan, Conn. 06840
Glenn Gomez (20) 111,836 8.8% %
1950 Stemmons Freeway
Suite 3054
Dallas, TX 75207
All executive officers and directors 2,116,037 81.4%
as a group (21)
</TABLE>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Percentages are based on the total number of
shares outstanding at September 1, 1997, plus the total number of outstanding
options, warrants or convertible notes held by each person that are exercisable
within 60 days of such date assuming completion of this offering. Shares
issuable upon exercise of outstanding options, warrants and convertible notes,
however, are not deemed outstanding for purposes of computing the percentage
ownership of any other person. Except as indicated in the footnotes to this
table and pursuant to applicable community property laws, each stockholder named
in the table has sole voting and investment power with respect to the shares set
forth opposite such stockholder's name.
(2) Includes 100,000 shares of Series A Preferred Stock issuable upon conversion
of warrants.
(3) Includes 55,000 shares of Series A Preferred Stock issuable upon conversion
of warrants.
(4) Includes 100,000 shares of Series A Preferred Stock issuable upon conversion
of warrants.
(5) Includes 15,000 shares of Series A Preferred Stock issuable upon conversion
of warrants.
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<PAGE>
(6) Includes the shares described above in Footnote 2 for Wasatch Venture
Corporation for which Todd Stevens, a director, is an affiliate; the shares
described above in Footnote 3 for Newtek Venture Corporation for which John
Hall, a director, is an affiliate; and the shares described above in Footnote 4
for Sundance Venture Partners, L.P. for which Brian Burns, a director, is an
affiliate.
(7) Includes _______ shares of Series B Preferred Stock issuable upon conversion
of certain convertible notes, which notes are convertible upon the consummation
of this offering assuming the offering price equals the conversion price.
(8) Includes _______ shares of Series B Preferred Stock issuable upon conversion
of certain convertible notes, which notes are convertible upon the consummation
of this offering assuming the offering price equals the conversion price.
(9) Includes _______ shares of Series B Preferred Stock issuable upon conversion
of certain convertible notes, which notes are convertible upon the consummation
of this offering assuming the offering price equals the conversion price.
(10) Includes _______ shares of Series B Preferred Stock issuable upon
conversion of certain convertible notes, which notes are convertible upon the
consummation of this offering assuming the offering price equals the conversion
price.
(11) Includes the shares described above in Footnote 7 for Wasatch Venture
Corporation for which Todd Stevens, a director, is an affiliate; the shares
described above in Footnote 8 for Newtek Ventures II, L.P. for which John Hall,
a director, is an affiliate; and the shares described above in Footnote 9 for
Sundance Venture Partners, L.P. for which Brian Burns, a director, is an
affiliate.
(12) Fully diluted percentages are based on the percentage of Common Stock held
after conversion into Common Stock of all (i) outstanding shares of Series A
Preferred Stock (ii) shares of Series B Preferred Stock issued upon conversion
of certain convertible promissory notes effective upon consummation of this
offering and (iii) shares of Series B Preferred Stock issued in the offering.
The Commission's beneficial ownership rules were not considered in calculating
fully diluted percentages.
(13) Includes 25,000 shares exercisable pursuant to a warrant held by a
revocable trust created by Mr. Little's parents. Also includes Mr. Little's
right to vote 100,000 shares owned by Mr. Layne and 100,000 shares owned by Mr.
Whittington pursuant to an irrevocable proxy, which proxy will terminate on May
7, 1999. In the event that either Mr. Layne or Mr. Whittington transfers any of
the 295,000 share owned by each, Mr. Little's right to vote will not apply to
the transferred shares, but will continue to apply to up to 100,000 shares that
continue to be owned by Mr. Layne or Mr. Whittington after such transfer(s).
(14) Includes 100,000 shares for which Mr. Little is also shown as beneficial
owner due to Mr. Little's irrevocable right to vote these shares. See Footnote
13.
(15) Includes 100,000 shares for which Mr. Little is also shown as beneficial
owner due to Mr. Little's irrevocable right to vote these shares. See Footnote
13.
(16) Includes 550,000 shares of Series A Preferred Stock and Series B Preferred
Stock currently held or obtainable upon exercise of options or warrants or
conversion of promissory notes that are convertible into Common Stock within 60
days. See Footnotes 2 and 7.
(17) Includes options to purchase 8,770 shares of Common Stock that are
exercisable within 60 days and 285,000 shares of Series A Preferred Stock and
Series B Preferred Stock currently held or obtainable upon exercise of options
or warrants or conversion of promissory notes that are convertible into Common
Stock within 60 days. See Footnotes 3 and 8.
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<PAGE>
(18) Includes 425,000 shares of Series A Preferred Stock and Series B Preferred
Stock currently held or obtainable upon exercise of options or warrants or
conversion of promissory notes that are convertible into Common Stock within 60
days. See Footnotes 4 and 9.
(19) Includes 107,600 shares of Common Stock issuable upon exercise of warrants
held by Pickwick Group, LLC and 31,600 shares issuable upon exercise of warrants
held by Douglas and Susan Greenwood; Mr. Greenwood is a principal member of
Pickwick Group, LLC.
(20) Includes 20,000 shares of Common Stock that will be issuable upon exercise
of a warrant that the Company has agreed to issue to Mr. Gomez on or before
September 23, 1997.
(21) Includes the shares described above in Footnote 13 for Mr. Little (but
excluding the 200,000 shares owned by Messrs. Layne and Whittington that Mr.
Little is entitled to vote); the shares described above in Footnote 14 for Mr.
Layne; the shares described above in Footnote 15 for Mr. Whittington; the shares
described above in Footnote 16 for Wasatch Venture Corporation for which Todd
Stevens, a director, is an affiliate; the shares described above in Footnote 17
for Newtek Ventures II, L.P. for which John Hall, a director, is an affiliate;
the shares described above in Footnote 18 for Sundance Venture Partners, L.P.
for which Brian Burns, a director, is an affiliate; and vested options to
purchase 10,000 shares of Common Stock held by Matthew Stanton.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, as adjusted to reflect the Reverse Stock
Split, the authorized capital stock of the Company consists of 10,000,000 shares
of Common Stock, $0.001 par value, 3,600,000 shares of Preferred Stock, $0.001
par value, of which 1,400,000 shares have been designated Series A Preferred
Stock and 1,200,000 shares have been designated Series B Preferred Stock. The
Company's Restated Certificate of Incorporation provides that each holder of
Common Stock and Preferred Stock, other than the holders of record of the Common
Stock and the Preferred Stock immediately prior to the filing of the Restated
Certificate of Incorporation with the Delaware Secretary of State, shall,
subject to the rules and regulations promulgated by the Securities and Exchange
Commission, be deemed to have agreed to receive all stockholder reports and
communications, including but not limited to all prospectuses, quarterly and
annual reports and proxy statements, by delivery of such materials to such
holder's last known mailing address or electronic mail address, at the Company's
discretion, listed on the Company's records, or by delivery of a notice to such
mailing address or electronic mailing address, at the Company's discretion,
which directs such holder to a specific Web address where such materials can be
found, read and printed.
Common Stock
As of September 1, 1997, the Company had issued and outstanding 1,254,572
shares of Common Stock held of record by 11 stockholders, warrants to purchase
an aggregate of 303,200 shares of Common Stock, options to purchase an aggregate
of 244,996 shares of Common Stock and 1,087,500 shares of Common Stock reserved
for issuance upon conversion into Common Stock of shares of Series A Preferred
Stock outstanding and issuable upon exercise of warrants.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders and do not have
cumulative voting rights. Subject to the preferences that may be applicable to
outstanding Preferred Stock, including Series A Preferred Stock and Series B
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. See "Dividend Policy". In the event of a liquidation,
dissolution or winding up of the Company, holders of the Common Stock are
entitled to share ratably (together with the holders of Series A Preferred Stock
and Series B Preferred Stock on an as-converted basis) in all assets remaining
after payment of liabilities and the liquidation preferences of any then
outstanding Preferred Stock, including Series A Preferred Stock and Series B
Preferred Stock. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and nonassessable. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of the Series A Preferred Stock and Series B Preferred Stock,
and any Preferred Stock hereafter authorized by the Board of Directors.
Series A Preferred Stock
As of September 1, 1997, the Company had issued and outstanding 792,500
shares of Series A Preferred Stock held of record by 6 stockholders, warrants to
purchase an aggregate of 295,000 shares of Series A Preferred Stock and notes
convertible under certain circumstances into approximately 270,000 shares of
Series A Preferred Stock at a conversion price of $2.00 per share. These notes
will automatically convert into shares of Series B Preferred Stock at a
conversion price equal to the public offering price for the Series B Preferred
Stock if the effective date of this offering is on or before November 21, 1997
(for one-half of the notes) and if this offering is consummated by January 20,
1998 (for the other half of the notes). See "Certain Transactions."
The following summary sets forth the material terms and provisions of the
Series A Preferred Stock, and is qualified in its entirety by reference to the
terms and provisions of the Company's Certificate of Incorporation.
Ranking. The Series A Preferred Stock with respect to rights upon
liquidation, dissolution and winding-up, ranks pari passu in right of payment to
the Series B Preferred Stock and senior to the Common Stock.
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<PAGE>
Dividends and Distributions. Holders of shares of Series A Preferred Stock
are entitled to receive ratably such dividends as may be declared by the Board
of Directors out of funds legally available therefor prior and in preference to
any dividends paid to the holders of Series B Preferred Stock and Common Stock
at the rate of 9% per annum; provided, however, that in no event shall any
dividend be declared or paid with respect to the Series A Preferred Stock until
the second anniversary of the date the Company's Restated Certificate of
Incorporation is filed with the Delaware Secretary of State in connection with
consummation of this offering. See "Dividend Policy".
Voting. Holders of the Series A Preferred Stock are entitled to vote as a
class with the holders of the Common Stock and Series B Preferred Stock and in
such event are entitled to one vote for each share of Common Stock into which
the Series A Preferred Stock is convertible. Accordingly, the holders of the
Series A Preferred Stock are currently entitled to one vote per share. In
addition, the approval of the holders of at least two-thirds of the outstanding
shares of Series A Preferred Stock, voting separately as a class, shall be
required to approve the following matters: (i) any material or adverse change in
the rights, preferences or privileges of the holders of the Series A Preferred
Stock, (ii) amend or repeal any provision of, or add any provision to, the
Company's Certificate of Incorporation or Bylaws, (iii) any increase in the
number of authorized shares of Preferred Stock, or (iv) the authorization,
creation or issuance of any shares of any class or series of stock having any
preference or priority equal or superior to the Series A Preferred Stock with
respect to voting, redemption, dividends, or upon liquidation. The affirmative
vote of the holders of at least two-thirds of the Series A Preferred Stock,
voting separately as a class, will be required to approve (i) any merger,
consolidation, or corporate reorganization, or other business transaction in
which 50% or more of the voting power or all, or substantially all, of the
assets of the Company are sold, or (ii) any transaction in which the
stockholders of the Company do not own a majority of the outstanding shares of
the surviving corporation. The holders of Series A Preferred Stock do not have
cumulative voting rights. The holders of Series A Preferred Stock, voting
together as a single class, shall be entitled to elect one director. All other
directors and any vacancies shall be filled by vote of the holders of the Common
Stock and the Preferred Stock, voting together as a single class.
Conversion. Each share of Series A Preferred Stock is convertible, at the
option of each holder thereof, into one share of Common Stock, subject to
anti-dilution adjustments. Immediately upon the consummation of a Qualifying
Public Offering (as defined herein), each share of Series A Preferred Stock
shall be converted, without further action, into one share of Common Stock,
subject to anti-dilution adjustments.
"Qualifying Public Offering" means a firm commitment underwritten public
offering following which the Company has a market capitalization of at least $25
million and which results in proceeds to the Company of at least $5 million (net
of underwriting discounts and commissions and offering expenses).
Anti-Dilution. In the event that additional shares of Common Stock or
securities exercisable or convertible into common stock are issued without
consideration or at a price less than the applicable conversion price for the
Series A Preferred Stock in effect on the date of and immediately prior to such
issue, then, subject to certain exceptions, the applicable conversion price of
the Series A Preferred Stock shall be reduced, concurrently with such issue, to
a price determined by multiplying such conversion price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of shares of Common Stock which
the aggregate consideration received by the Company for the total number of
additional shares of Common Stock so issued would purchase at such conversion
price; and the denominator of which shall be the number of shares of Common
Stock outstanding immediately prior to such issue plus the number of such
additional shares of Common Stock so issued.
Liquidation. In the event of a liquidation, dissolution or winding up of the
Company, holders of Series A Preferred Stock shall be entitled to receive a
liquidation preference equal to $2.00 per share of the Series A Preferred Stock
plus an amount equal to all declared and unpaid dividends thereon, prior to the
making of any payments to the holders of Common Stock. After such liquidation
preference and payment of the liquidation preference of the Series B Preferred
Stock, the Series A Preferred Stock shall be entitled to share ratably with the
Common Stock and the Series B Preferred Stock in all assets remaining on an as
converted basis. If upon liquidation, dissolution or winding up of the Company,
the liquidation preference with respect to the Series A
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Preferred Stock and Series B Preferred Stock are not paid in full, the holders
of the Series A Preferred Stock and the Series B Preferred Stock will share
ratably in any distribution of the assets of the Company in proportion to the
preferential amounts to which they are entitled.
Series B Preferred Stock
The following summary sets forth the material terms and provisions of the
Series B Preferred Stock, and is qualified in its entirety by reference to the
terms and provisions of the Certificate of Designation establishing the Series B
Preferred Stock and the Company's Certificate of Incorporation, as amended.
Ranking. The Series B Preferred Stock will, with respect to rights upon
liquidation, dissolution and winding-up, rank pari passu in right of payment to
the Series A Preferred Stock and senior to the Common Stock.
Dividends and Distributions. Holders of shares of Series B Preferred Stock
will be entitled to receive, when, as and if declared by the Board of Directors,
a dividend or distribution equal to the dividend or distribution, if any,
declared on the number of shares of Common Stock into which such shares of
Series B Preferred Stock are convertible (without regard to the Restricted
Period, as hereinafter defined).
Voting. Holders of the Series B Preferred Stock are entitled to vote as a
class with the holders of the Common Stock and Series A Preferred Stock and in
such event are entitled to one vote for each share of Common Stock into which
the Series B Preferred Stock is convertible (without regard to the Restricted
Period). Accordingly, the holders of the Series B Preferred Stock are initially
entitled to one vote per share. In addition, the approval of the holders of a
majority of the outstanding shares of Series B Preferred Stock, voting
separately as a class, shall be required to approve the following matters: (i)
any material or adverse change in the rights, preferences or privileges of the
holders of the Series B Preferred Stock (whether by amendment to the Certificate
of Incorporation, merger, consolidation, or otherwise), (ii) any increase in the
number of authorized shares of Series B Preferred Stock, or (iii) the
authorization, creation or issuance of any shares of any class or series of
stock having any preference or priority superior to the Series B Preferred
Stock. The affirmative vote of the holders of a majority of the Series B
Preferred Stock, voting separately as a class, will be required to approve (i)
any merger, consolidation, or corporate reorganization, or other business
transaction in which 50% or more of the voting power or all, or substantially
all, of the assets of the Company are sold, or (ii) any transaction in which
Chad M. Little, James A. Layne and Lonnie Whittington cease to own at least 50%
of the shares they own on the date hereof in the aggregate; provided that no
such separate class vote shall be required if the holders of the Series B
Preferred Stock are to receive cash or marketable securities valued at an amount
at least equal to 125% of the original issue price of the Series B Preferred
Stock (subject to adjustment for certain anti-dilution events). The holders of
Series B Preferred Stock do not have cumulative voting rights.
Conversion; Restrictions on Transfer. Following the expiration of the
Restricted Period (as defined below), each share of Series B Preferred Stock
will be convertible, at the option of each holder thereof, into one share of
Common Stock, subject to certain anti-dilution adjustments. On the date 180 days
following the consummation of a Qualifying Public Offering (as defined below),
each share of Series B Preferred Stock shall be automatically converted, without
further action, into one share of Common Stock, subject to certain anti-dilution
adjustments.
The "Restricted Period" shall begin on the date of the closing of this
offering (the "Closing Date") and end on the earlier of (i) 24 months following
the Closing Date, (ii) 180 days after the consummation of a Qualifying Public
Offering, or (iii) the occurrence of any of the following: (1) any merger,
consolidation, or other corporate reorganization in which the shareholders of
the Company do not own a majority of the outstanding shares of the surviving
corporation, (2) prior to the consummation by the Company of a Qualifying Public
Offering, any transaction or series of related transactions in which in excess
of 50% of the Company's voting power is transferred or in which all or
substantially all of the assets of the Company are sold, or (3) subsequent to
the consummation by the Company of a Qualifying Public Offering, the
acquisition, directly or indirectly, by any individual or entity or group (as
such term is used in Section 13(d)(3) of the Exchange Act) of beneficial
ownership (as defined in Rule 13d-3 promulgated under the Exchange Act, except
that such individual or entity shall be deemed to have beneficial ownership of
all shares that any such individual or entity has the right to acquire, whether
such right is
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exercisable immediately or only after the passage of time), of more than 25% of
the aggregate outstanding voting power of capital stock of the Company.
"Qualifying Public Offering" means a firm commitment underwritten public
offering following which the Company has a market capitalization of at least $30
million and which results in proceeds to the Company of at least $5 million (net
of underwriting discounts and commissions and offering expenses); provided that
the term "Qualifying Public Offering" shall not include another "public venture
capital transaction" in which the securities issued are not freely transferable
following issuance.
Anti-Dilution. In the event that additional shares of Common Stock or
securities exercisable or convertible into common stock are issued without
consideration or at a price less than the applicable conversion price for the
Series B Preferred Stock in effect on the date of and immediately prior to such
issue, then, subject to certain exceptions, the applicable conversion price of
the Series B Preferred Stock shall be reduced, concurrently with such issue, to
a price determined by multiplying such conversion price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of shares of Common Stock which
the aggregate consideration received by the Company for the total number of
additional shares of Common Stock so issued would purchase at such conversion
price; and the denominator of which shall be the number of shares of Common
Stock outstanding immediately prior to such issue plus the number of such
additional shares of Common Stock so issued.
Further, in the event that additional shares of Common Stock or securities
exercisable or convertible into Common Stock with a purchase price in excess of
$1 million in the aggregate are issued, within one year of the Closing Date, at
a price less than the then current conversion price for the Series B Preferred
Stock, the conversion price in respect of the Series B Preferred Stock shall be
reduced to the issue price of such securities. Holders of Series B Preferred
Stock shall be entitled, upon conversion, to receive all other distributions
made in respect of the Common Stock as if such Series B Preferred Stock had been
converted on the date of such event.
Transfer Restrictions. During the Restricted Period, the Series B Preferred
Stock will not be transferable except as follows: (i) to family members or
affiliates (as such term is defined in Rule 12b-2 promulgated under the
Securities Exchange Act of 1934, as amended) of any holder of Series B Preferred
Stock, (ii) pursuant to the laws of descent and distribution, (iii) in the event
of bankruptcy or insolvency of the holder, (iv) as approved by the Board of
Directors in its sole and absolute discretion, or (v) by the Underwriter in
connection with the initial distribution of the Series B Preferred Stock.
Following expiration of the Restricted Period, substantial practical limitations
on the transfer of Series B Preferred Stock will continue to exist. See "Risk
Factors - No Public Market; No Liquidity".
Liquidation. In the event of a liquidation, dissolution or winding up of the
Company, holders of Series B Preferred Stock shall be entitled to receive a
liquidation preference equal to $_______ per share of the Series B Preferred
Stock plus an amount equal to all declared and unpaid dividends thereon, prior
to the making of any payments to the holders of Common Stock. After such
liquidation preference and payment of the liquidation preference of the Series A
Preferred Stock, the Series B Preferred Stock shall be entitled to share ratably
with the Common Stock and the Series A Preferred Stock in all assets remaining
on an as converted basis. If upon liquidation, dissolution or winding up of the
Company, the liquidation preference with respect to the Series A Preferred Stock
and Series B Preferred Stock are not paid in full, the holders of the Series A
Preferred Stock and the Series B Preferred Stock will share ratably in any
distribution of the assets of the Company in proportion to the preferential
amounts to which they are entitled.
Warrants and Convertible Notes
Upon completion of this offering, an aggregate of 218,200 shares of Common
Stock will be issuable upon exercise of outstanding warrants at an exercise
price of $2.00 per share, 190,800 shares of Common Stock will be issuable upon
exercise of outstanding warrants at an exercise price of $5.00 per share,
295,000 shares of Series A Preferred Stock will be issuable upon exercise of
outstanding warrants at an exercise price of $2.00 per share, and
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<PAGE>
___________ shares of Series B Preferred Stock will be issuable upon conversion
of convertible promissory notes at a conversion price of $____ per share. The
options and warrants may also be exercised on a cashless basis, requiring the
Company to issue a certain number of shares of Common Stock, which is less than
the face amount of the warrants, calculated pursuant to a set formula outlined
in the warrant and based on the fair market value of the Common Stock at the
time of such cashless exercise. All of these warrants and convertible notes are
currently outstanding. See "Certain Transactions".
Delaware Law and Certain Charter Provisions
Under the Certificate of Incorporation there will be as of the closing of
this offering ____ unissued and unreserved shares of Common Stock, 312,500
unissued and unreserved shares of Series A Preferred Stock, _____ unissued and
unreserved shares of Series B Preferred Stock, and _____ shares of Preferred
Stock for which the Board of Directors has authority to issue in series junior
to the Series A and Series B Preferred Stock, but otherwise with such rights,
preferences and restrictions as it deems appropriate in its discretion, after
giving effect to the sale of the shares offered hereby and the reservation of
shares for issuance upon exercise of outstanding warrants, conversion of
convertible debt, conversion of preferred stock and exercise of options granted
pursuant to the 1995 Stock Incentive Plan. The unissued and unreserved shares
may be utilized for a variety of corporate purposes, including future private
placements or public offerings to raise additional capital and for facilitating
corporation acquisitions. Except pursuant to certain employee benefit plans
described in this Prospectus, the Company does not currently have any plans to
issue additional shares of Common Stock, Series A Preferred Stock or Series B
Preferred Stock, although the Company may be required to sell additional equity
or debt securities to satisfy its liquidity requirements. See "Risk Factors --
Need for Additional Financing". One of the effects of unissued and unreserved
shares of capital stock may be to enable the Board of Directors to render more
difficult or discourage an attempt to obtain control of the Company by means of
a merger, tender offer, proxy contest or otherwise, and thereby to protect the
continuity of the Company's management. If, in the due exercise of its fiduciary
obligations, for example, the Board of Directors determines that a takeover
proposal is not in the Company's best interest, such shares could be issued by
the Board of Directors without stockholder approval in one or more private
transactions or other transactions that might prevent or render more difficult
or costly the completion of the takeover transaction by diluting the voting or
other rights of the proposed acquiror or insurgent stockholder group, by
creating a substantial voting block in institutional or other hands that might
undertake to support the position of the incumbent Board of Directors, or by
effecting an acquisition that might complicate or preclude the takeover.
SHARES ELIGIBLE FOR FUTURE SALE
There is no public market for the shares of Series B Preferred Stock or the
Common Stock into which it is convertible (the "Conversion Shares"), and none is
expected to develop in the foreseeable future.
Upon completion of this offering, the Company will have outstanding
1,263,342 shares of Common Stock and 792,500 shares of Series A Preferred Stock
and _____ shares of Series B Preferred Stock that are convertible into Common
Stock. The shares of Series B Preferred Stock will be subject to restrictions on
transfer until the earlier of (i) 24 months following the Closing Date, (ii) 180
days after the consummation of a Qualifying Public Offering, or (iii) the
occurrence of any of the following: (1) any merger, consolidation, or other
corporate reorganization in which the stockholders of the Company do not own a
majority of the outstanding shares of the surviving corporation, (2) prior to
the consummation by the Company of a Qualifying Public Offering, any transaction
or series of related transactions in which in excess of 50% of the Company's
voting power is transferred or in which all or substantially all of the assets
of the Company are sold, or (3) subsequent to the consummation by the Company of
a Qualifying Public Offering, the acquisition, directly or indirectly, by any
individual or entity or group (as such term is used in Section 13(d)(3) of the
Exchange Act) of beneficial ownership (as defined in Rule 13d-3 promulgated
under the Exchange Act, except that such individual or entity shall be deemed to
have beneficial ownership of all shares that any such individual or entity has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time), of more than 25% of the aggregate outstanding voting
power of capital stock of the Company (the "Restricted Period"). Following
expiration of the Restricted Period, substantial practical limitations on the
transfer of Series B Preferred Stock will continue to exist. See "Risk Factors
71
<PAGE>
- - No Public Market; No Liquidity". The remaining 1,263,342 shares of Common
Stock and 792,500 shares of Series A Preferred Stock (collectively, the
"Restricted Securities") held by existing stockholders were issued and sold by
the Company in reliance on exemptions from the registration requirements of the
Securities Act. Most of the Restricted Securities will be subject to lock-up
agreements or contractual restrictions on transfer as described below. The
remaining Restricted Securities, and the Restricted Securities subject to
lock-up agreements and contractual restrictions upon the expiration of such
agreements and restrictions, may be sold in any public market that may develop
in the future only if registered or pursuant to an exemption from registration
such as Rules 144, 144(k), 144A or 701 under the Securities Act, which are
summarized below.
As of the effectiveness of this offering (the "Effective Date"),
approximately _____ of the Restricted Securities are eligible for sale in the
public market in reliance on Rule 144(k) under the Securities Act; however,
_____ of these shares are subject to the lock-up agreements described below in
"Underwriting" (the "Lock-Up Agreements") and the contractual restrictions on
transfer set forth in various agreements described below (the "Contractual
Restrictions"). Beginning 90 days after the Effective Date, approximately _____
additional Restricted Securities will become eligible for sale in the public
market, pursuant to Rule 144 and Rule 701 of the Securities Act; _____ of these
shares, however, are also subject to the Lock-Up Agreements and the Contractual
Restrictions. Beginning 180 days after the Effective Date, upon the expiration
of the Lock-Up Agreements, approximately _____ additional shares will become
eligible for sale in the public market, subject in some cases to the provision
of Rule 144, but _____ of these shares will remain subject to the Contractual
Restrictions. In addition, holders of approximately _____ shares of Restricted
Securities have the right to require the Company in certain circumstances to
register such shares for sale under the Securities Act. See "Description of
Capital Stock -- Registration Rights".
All directors, officers and certain other stockholders, who hold in the
aggregate _____ shares of Common Stock and _____ shares of Series A Preferred
Stock convertible into Common Stock, options to purchase _____ shares of Common
Stock, and warrants to purchase _____ shares of Common Stock and _____ shares of
Series A Preferred Stock have agreed, pursuant to agreements with the
representatives of the Underwriters, that they will not, without the prior
written consent of a representative of the Underwriters, sell or otherwise
dispose of any such shares, options or warrants during the 180-day period
following the Effective Date. In addition, certain stockholders are subject to
contractual restrictions on transfer pursuant to the terms of their stock-based
awards under the 1995 Equity Incentive Plan, the Restated Stockholders'
Agreement dated as of July 13, 1995, and the Co-Sale Agreement dated February
13, 1996. However, _____ of these shares are subject to the Lock-Up Agreements.
In general, under Rule 144 as currently in effect, beginning 90 days after
the Effective Date, an affiliate of the Company, or person (or persons whose
shares are aggregated) who has beneficially owned Restricted Securities for at
least one year will be entitled to sell in any three-month period a number of
shares that does not exceed 1% of the then outstanding shares of the Company's
Common Stock (approximately 12,633 shares immediately after the offering). Sales
pursuant to Rule 144 are subject to certain requirements relating to manner of
sale, notice and availability of current public information about the Company. A
person (or person whose shares are aggregated) who is not deemed to have been an
affiliate of the Company at any time during the 90 days immediately preceding
the sale and who has beneficially owned Restricted Securities for at least two
years is entitled to sell such shares pursuant to Rule 144(k) without regard to
the limitations described above.
An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits non-affiliates to
sell their Rule 701 shares without having to comply with Rule 144's holding
period restrictions, in each case commencing 90 days after the Effective Date.
UNDERWRITING
Wit Capital Corporation (the "Underwriter") has entered into an underwriting
agreement with the Company pursuant to which, and subject to the terms and
conditions thereof, it has agreed to purchase all of the shares of Series B
Preferred Stock offered hereby.
72
<PAGE>
The Underwriter proposes to offer the Series B Preferred Stock to the public
at the offering price set forth on the cover page of this Prospectus After the
initial offering, the offering price may be reduced by the Underwriter. No
reduction shall change the amount of proceeds to be received by the Company as
set forth on the cover page of this Prospectus. The Underwriters have advised
the Company that they do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
The Underwriter intends to contact prospective investors by publicizing the
offering through a posting on the Underwriter's Web site and by e-mail and other
solicitation of prospective investors from selected Internet databases.
Prospective investors who so consent will receive a prospectus through
electronic delivery.
All directors, officers and 5% stockholders of the Company who hold in
aggregate _____ shares of Common Stock and _____ shares of Series A Preferred
Stock convertible into Common Stock, options to purchase _____ shares of Common
Stock, and warrants to purchase _____ shares of Common Stock and ____ shares of
Series A Preferred Stock have agreed, pursuant to agreements with the
Underwriter, that they will not, without the prior written consent of the
Underwriter, sell or otherwise dispose of any such shares, options or warrants
until the expiration of 30 days following the expiration or early termination of
the Restricted Period. In addition, certain directors, officers, and
stockholders of the Company are subject to contractual restrictions on transfer
pursuant to the terms of their stock-based awards under the 1995 Equity
Incentive Plan, the Restated Stockholders' Agreement dated as of July 13, 1995,
and the Co-Sale Agreement dated February 13, 1996.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933 or contribute to payments the Underwriter may be required
to make in respect thereof. The Company has granted the Underwriter warrants to
purchase the number of shares of Series B Preferred Stock equal to 8% of the
shares of Series B Preferred Stock distributed in this offering. The warrants
are exercisable, in whole or in part, until the fifth anniversary of the
consummation of this offering at an exercise price equal to 110% of the per
share price in this offering.
To date, Wit Capital Corporation has acted as an underwriter in only one
public offering. The limited experience of the Underwriter may adversely affect
the proposed offering of the Series B Preferred Stock offered hereby.
Prior to this offering, there has been no public market for any class or
series of capital stock of the Company. The offering price for the Series B
Preferred Stock will be determined through negotiations between the Company and
the Underwriter, and should not be regarded as an indication of any future
market price of the Series B Preferred Stock or Common Stock. Among the factors
to be considered in determining the initial offering price for the Series B
Preferred Stock are prevailing market conditions, the history and prospects of
the Company and its industry in general, market valuations of other comparable
companies, estimates of the business and earnings potential of the Company, the
present state of the Company's development, the lack of liquidity of the Series
B Preferred Stock, risks associated with an investment in the Company and other
factors deemed relevant.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article IX of the Company's Certificate of Incorporation provides that the
Company shall indemnify directors, officers, and their legal representatives to
the fullest extent permitted by the Delaware General Corporate Law ("DGCL"). The
DGCL contains an extensive indemnification provision which permits a corporation
to indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. In suits by or in
73
<PAGE>
the right of a corporation, only expenses and not judgments, fines, and amounts
paid in settlement may be indemnified against. In addition, if the director or
officer has been adjudged to be liable to the corporation in such a suit,
indemnification of expenses must be approved by a court.
Article VIII of the Company's Certificate of Incorporation provides that
directors of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty. However, this
provision does not eliminate or limit the liability of a director for breach of
the director's duty of loyalty to the Company or its stockholders, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, for the payment of dividends or distributions or the
redemption or purchase of the Company's shares of stock in violation of the
DGCL, or for any transaction from which the director derives an improper
personal benefit. This provision does not affect any liability of a director or
officer under the federal securities laws.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
LEGAL MATTERS
The validity of the issuance of the shares of Series B Preferred Stock
offered by the Company will be passed upon by Osborn Maledon, P.A., Phoenix,
Arizona. Schulte Roth & Zabel LLP, New York, New York, is acting as counsel for
the Underwriters in connection with certain legal matters relating to the shares
of Series B Preferred Stock offered hereby.
EXPERTS
The financial statements of Sandbox Entertainment Corporation at December
31, 1996, and for each of the two years in the period ended December 31, 1996,
appearing in this Prospectus and Registration Statement, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
SB-2 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act, with respect to the Series B Preferred
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which have been
omitted in accordance with the rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit, each such statement being qualified in all respects by such reference.
For further information with respect to the Company and the Series B Preferred
Stock offered hereby, reference is made to the Registration Statement and the
exhibits and schedules thereto. Copies of the Registration Statement and the
exhibits and schedules thereto may be inspected, without charge, at the offices
of the Commission, or obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The
Company is also required to file electronic versions of these documents with the
Commission through the Commission's Electronic Data Gathering, Analysis and
Retrieval System ("EDGAR"). The Commission
74
<PAGE>
maintains a World Wide Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. This Prospectus is available on
the Underwriter's Web site at http://www.witcapital.com. Information contained
in the Company's Web sites shall not be deemed a part of this Prospectus.
75
<PAGE>
Index to Financial Statement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..............................................F-2
Audited Financial Statements
Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited)...........................F-3
Statements of Operations for the years ended December 31, 1995 and 1996 and
the six-month periods ended June 30, 1996 and 1997 (unaudited)..............................F-4
Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1995
and 1996 and the six-month period ended June 30, 1997 (unaudited)...........................F-5
Statements of Cash Flows for the years ended December 31, 1995 and 1996 and
the six-month periods ended June 30, 1996 and 1997 (unaudited)..............................F-6
Notes to Financial Statements..................................................................F-7
</TABLE>
F-1
<PAGE>
Report of Ernst & Young LLP Independent Auditors
The Board of Directors and Stockholders
Sandbox Entertainment Corporation
We have audited the accompanying balance sheet of Sandbox Entertainment
Corporation as of December 31, 1996, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the two years in the
period ended December 31, 1996. These financial statements are the
responsibility of Sandbox Entertainment Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sandbox Entertainment
Corporation at December 31, 1996, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 12 to the financial statements, the Company is incurring
operating losses as it moves from early stage toward full scale deployment of
its technologies. The operating losses have created a net capital deficiency
which requires that the Company obtain additional financial resources to meet
its business objectives and such committed financing is not yet in place. These
conditions raise substantial doubt about the ability of the Company to continue
as a going concern. Management's plans as to these matters are also discussed in
Note 12. The financial statements do not include any adjustment that could
result from the outcome of this uncertainty.
Phoenix, Arizona
March 14, 1997, except for Note 13,
as to which the date is
November ___, 1997 Ernst & Young LLP
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion of
the restatement of the capital accounts described in Note 13 to the financial
statements.
Phoenix, Arizona
September 29, 1997 /s/ Ernst & Young LLP
F-2
<PAGE>
Sandbox Entertainment Corporation
Balance Sheet
<TABLE>
<CAPTION>
June 30
December 31 1997
1996 (unaudited)
--------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 20,519 $ 1,952
Accounts receivable, less allowance for doubtful accounts of $1,355 at
December 31, 1996 and $0 at June 30, 1997 215,025 1,947
Receivables from stockholders 251,095 --
Prepaid expenses and other current assets 11,539 3,973
--------------------------
Total current assets 498,178 7,872
Property and equipment, net 222,099 371,295
Other assets 29,878 29,876
--------------------------
Total assets $ 750,155 $ 409,043
==========================
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Note payable to a bank $ -- $ 327,000
Accounts payable and accrued expenses 165,244 160,582
Current portion of long-term debt and capital lease obligations 132,784 450,908
--------------------------
Total current liabilities 298,028 938,490
Note payable to a bank 175,000 --
Long-term debt, including related parties, less current portion 152,221 137,680
Capital lease obligations, less current portion 188,640 287,008
Commitments and Contingencies -- --
Stockholders' equity (deficit):
Series A Convertible Preferred Stock, par value $.001 per share;
1,400,000 shares authorized, 787,500 and 792,500 shares issued
and outstanding at December 31, 1996 and June 30, 1997,
respectively, at liquidation value 1,575,000 1,585,000
Common Stock, par value $.001 per share; 10,000,000 shares
authorized, 1,225,148 and 1,254,572 shares issued and outstanding
at December 31, 1996 and June 30, 1997, respectively 1,225 1,254
Paid-in capital 304,568 339,761
Accumulated deficit (1,944,527) (2,880,150)
--------------------------
Total stockholders' equity (deficit) (63,734) (954,135)
--------------------------
Total liabilities and stockholders' equity (deficit) $ 750,155 $ 409,043
==========================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Sandbox Entertainment Corporation
Statements of Operations
<TABLE>
<CAPTION>
Six Months Ended June 30
Year Ended December 31 1996 1997
1995 1996 (unaudited) (unaudited)
---------------------------------------------------------
<S> <C> <C> <C> <C>
Internet revenues $ -- $ 241,322 $ 27,001 $ 77,757
Non-Internet revenues 462,417 154,845 150,497 --
---------------------------------------------------------
Total revenues 462,417 396,167 177,498 77,757
Costs and expenses:
Production and engineering 594,219 986,593 543,293 451,854
Sales and marketing 130,760 505,954 202,090 286,426
General and administrative 223,676 304,897 132,726 212,097
---------------------------------------------------------
Total costs and expenses 948,655 1,797,444 878,109 950,377
---------------------------------------------------------
Operating loss (486,238) (1,401,277) (700,611) (872,620)
Other income (expense):
Interest expense (25,759) (76,760) (26,590) (64,637)
Other 4,907 528 76 1,634
--------------------------------------------------------
Net loss $ (507,090) $(1,477,509) $ (727,125) $ (935,623)
========================================================
Loss per common share $ (0.28) $ (0.76) $ (0.38) $ (0.46)
========================================================
Shares used in computation 1,804,773 1,954,391 1,903,984 2,030,265
========================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Sandbox Entertainment Corporation
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Series A Convertible Retained
Preferred Stock Common Stock Paid-in Earnings
Shares Amount Shares Amount Capital (Deficit) Total
------ ------ ------ ------ ------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 -- $ -- 1,000,000 $ 1,000 $ 11,265 $ 40,072 $ 52,337
Issuance of common stock -- -- 20,408 20 183,652 -- 183,672
Receipt of stock subscription -- -- -- -- 100,008 -- 100,008
Paid-in capital-warrants issued -- -- -- -- 476 -- 476
Net loss -- -- -- -- -- (507,090) (507,090)
-----------------------------------------------------------------------------------------
Balance at December 31, 1995 -- -- 1,020,408 1,020 295,401 (467,018) (170,597)
Issuance of Series A Preferred Stock 787,500 1,575,000 -- -- -- -- 1,575,000
Exercise of stock options -- -- 30,692 31 7,641 -- 7,672
Paid-in capital-warrants issued -- -- -- -- 500 -- 500
Equity based compensation -- -- -- -- 1,200 -- 1,200
Other -- -- 174,048 174 (174) -- --
Net loss -- -- -- -- -- (1,477,509) (1,477,509)
-----------------------------------------------------------------------------------------
Balance at December 31, 1996 787,500 1,575,000 1,225,148 1,225 304,568 (1,944,527) (63,734)
Issuance of Series A Preferred Stock
(unaudited) 5,000 10,000 -- -- -- -- 10,000
Exercise of stock options (unaudited) -- -- 29,424 29 440 -- 469
Paid-in-capital-warrants issued
(unaudited) -- -- -- -- 34,753 -- 34,753
Net loss (unaudited) -- -- -- -- -- (935,623) (935,623)
-----------------------------------------------------------------------------------------
Balance at June 30, 1997 (unaudited) 792,500 $ 1,585,000 1,254,572 $ 1,254 $ 339,761 $(2,880,150) $ (954,135)
=========================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Sandbox Entertainment Corporation
Statements of Cash Flow
<TABLE>
<CAPTION>
Six Months Ended June 30
Year Ended December 31 1996 1997
1995 1996 (unaudited) (unaudited)
---------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $(507,090) $(1,477,509) $(727,125) $(935,623)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 58,321 96,046 49,476 68,102
Loss on disposal of property and equipment 4,322 15,657 -- --
Provision for doubtful accounts 5,130 1,355 -- --
Equity-based expenses 476 1,700 -- --
Changes in operating assets and liabilities:
Accounts receivable 54,465 (197,430) (27,669) 213,078
Prepaid expenses and other assets 6,877 5,835 24,553 7,371
Accounts payable and accrued expenses 28,896 58,846 15,012 (4,662)
--------------------------------------------------------
Net cash used by operating activities (348,603) (1,495,500) (665,753) (651,734)
Cash flows from investing activities
Purchases of property and equipment (9,128) (427) (427) --
------------------------------------------------------
Net cash used by investing activities (9,128) (427) (427) --
Cash flows from financing activities
Borrowings from bank -- 175,000 -- 152,000
Borrowings from others, including stockholders,
net 150,323 -- -- 270,000
Principal payments under capital lease
obligations (28,133) (63,880) (26,585) (50,897)
Cash proceeds from issuance of stock 183,672 1,331,577 975,000 262,064
Cash proceeds from stock subscriptions 100,008 -- -- --
--------------------------------------------------------
Net cash provided by financing activities 405,870 1,442,697 948,415 633,167
--------------------------------------------------------
Increase (decrease) in cash and cash equivalents 48,139 (53,230) 282,235 (18,567)
Cash and cash equivalents at beginning of period 25,610 73,749 73,749 20,519
--------------------------------------------------------
Cash and cash equivalents at end of period $ 73,749 $ 20,519 $ 355,984 $ 1,952
========================================================
Supplemental cash flow information
Assets acquired under capital lease obligations $ 139,618 $ 115,365 $ 81,862 $ 210,971
========================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of June 30, 1997 and for the periods
ended June 30, 1996 and 1997 is unaudited.)
1. Nature of Operations and Summary of Significant Accounting Policies
Business and Organization
Sandbox Entertainment Corporation (the Company) is a Delaware corporation
originally formed as an Arizona corporation on February 25, 1992 and
reincorporated in Delaware (by migratory merger) on April 25, 1996. The Company
is a software development company that intends to use its proprietary technology
to become a leading provider of games and simulations on the World Wide Web.
Interim Financial Statements
The interim financial statements as of June 30, 1997 and for the six month
periods ended June 30, 1996 and June 30, 1997 are unaudited, have been prepared
from the books and records of the Company and, in the opinion of management,
contain all adjustments (consisting only of normal recurring accruals) necessary
for such statements to be in accordance with generally accepted accounting
principles. Results for the six months ended June 30, 1997 are not necessarily
indicative of the results for the entire year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a remaining
maturity of three months or less to be cash equivalents.
Receivables from Stockholders
Receivables from stockholders include a $250,000 subscription for 125,000 shares
of Series A Preferred Stock and a $1,095 subscription for 4,385 shares of Common
Stock through the exercise of stock options. These subscriptions were collected
in January 1997.
Property and Equipment
Property and equipment are stated at cost and are depreciated over the estimated
useful lives of the assets (three to seven years) using the straight-line
method.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes.
Revenue Recognition
Internet revenues are derived from the sale of advertising space in the
Company's games and simulations. Such revenues are recognized in the period the
advertisement is displayed, provided that no significant Company obligations
remain and collection of the resulting receivable is probable. Company
obligations typically include guarantees of a minimum number of "impressions",
or times that any advertisement is viewed by players of the Company's games. To
the extent minimum guaranteed impressions are not met, the Company defers
recognition of the corresponding revenue.
The Company exchanges advertising space on its Web sites for reciprocal
advertising space in other media publications or Web sites or for access to
editorial or software content utilized in its games and simulations. While
management believes such arrangements are of substantial value to the Company no
revenue or expense is
F-7
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of June 30, 1997 and for the periods
ended June 30, 1996 and 1997 is unaudited.)
recorded with respect to such arrangements. Prior to 1997 the Company had
recorded revenues and expenses for its estimates of such amounts and such
amounts have been reclassified to conform with the 1997 presentation.
In 1996 and prior years, the Company generated non-Internet revenues from the
production of traditional and interactive marketing programs for client
companies. Revenue from the related services was recognized as the services were
performed.
Product Development
Costs incurred in the development of the Company's games, simulations and Web
site are charged to expense as incurred.
Advertising and Public Relations Costs
Advertising and public relations costs are expensed as incurred. Advertising and
public relations expense was approximately $24,000 and $146,000 for the years
ended December 31, 1995 and 1996, respectively, and $71,000 and $29,000 for the
six months ended June 30, 1996 and June 30, 1997, respectively.
Loss Per Common Share
Loss per common share is calculated using weighted average common shares
outstanding and equivalents. Common share equivalents have been excluded as
antidilutive, except that, in accordance with Staff Accounting Bulletin No. 83
and staff positions, common and equivalent shares, warrants and options issued
within one year of the initial filing of the proposed offering at amounts less
than the expected offering price (See Note 13) are deemed to have been issued in
contemplation of the offering and have been treated as outstanding for all
periods presented using the treasury stock method.
On December 31, 1997, the Company must adopt Statement of Financial Accounting
Statements No. 128, "Earnings Per Share" (SFAS No. 128) which changes the
methodology for computing earnings per share. Due to the Company's losses, SFAS
No. 128 is not expected to have a material impact on the Company's earnings per
share.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-8
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of June 30, 1997 and for the periods
ended June 30, 1996 and 1997 is unaudited.)
2. Like Kind Exchanges
The Company has entered into several strategic relationships in which it
exchanges advertising space on a Company Web site for reciprocal advertising
space in other media publications or on other Web sites or for access to
editorial or software content utilized in its games and simulations. Management
believes that such arrangements have been instrumental in developing user
awareness of the Company's games and simulations and are in large part
responsible for the growing number of participants presently accessing the
Company's Web sites. In addition, such arrangements have enabled the Company to
conserve its cash resources through the exchange of available advertising space
on its Web sites for advertising and editorial content and software tools that
otherwise may have required cash resources. While the Company believes that such
arrangements are of considerable importance to the growth of the business and
have assisted the Company in developing a user base that management believes
will be instrumental in obtaining increasingly greater amounts of cash revenues
in the future, no accounting recognition is given in the financial statements
for such arrangements.
3. Property and Equipment
Property and equipment consists of the following:
June 30
December 31 1997
1996 (unaudited)
-----------------------------
Computer equipment $349,929 $560,900
Furniture and fixtures 30,891 30,891
Leasehold improvements 8,803 8,803
-----------------------------
389,623 600,594
Less accumulated depreciation and amortization 167,524 229,299
-----------------------------
$222,099 $371,295
=============================
Substantially all property and equipment is held under capital lease agreements.
Amortization of leased assets is included in depreciation and amortization
expense.
4. Line of Credit
At December 31, 1996 and June 30, 1997, the Company has borrowed $175,000 and
$327,000, respectively, from a bank on a $400,000 revolving line of credit,
which was subsequently increased to $500,000, collateralized by substantially
all of the Company's assets. Accrued interest payments are due monthly on the
line of credit at the bank's prime rate plus 1.50 percent per annum (9.75
percent at December 31, 1996 and 10.00 percent at June 30, 1997). The revolving
line of credit is subject to renewal on March 5, 1998. The Company had $225,000
and $73,000 available under the line of credit at December 31, 1996 and June 30,
1997, respectively. The Company's borrowing agreement prohibits payment of cash
dividends.
F-9
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of June 30, 1997 and for the periods
ended June 30, 1996 and 1997 is unaudited.)
5. Long-Term Debt
Long-term debt consists of the following
<TABLE>
<CAPTION>
June 30
December 31 1997
1996 (unaudited)
----------------------------------------
<S> <C> <C>
Convertible Subordinated Notes, $270,000 principal, net (See Note 13) $ -- $ 241,875
Note payable to an individual, interest at prime rate (8.25 percent at
December 31, 1996 and 8.50 percent at June 30, 1997), quarterly payments
of $7,271 plus interest beginning September 30, 1997 116,328 116,328
Notes payable to various individuals, interest at 10.00 percent, due
October 28, 1997 39,667 39,667
Stockholder loans, interest at 8.00 percent through 10.00 percent,
unspecified repayment terms not sooner than June 30, 1998 50,434 50,434
----------------------------------------
206,429 448,304
Less current portion 54,208 310,624
----------------------------------------
$ 152,221 $ 137,680
========================================
</TABLE>
The Convertible Subordinated Notes will automatically convert into Series B
Preferred Stock upon completion of the proposed offering (See Note 13). The pro
forma effect of this conversion, had it occurred on the first day of the year
ended December 31, 1996 or the six-month period ended June 30, 1997, is not
material to the Company's operating results.
Future maturities of long-term debt consist of the following:
Year Ending
December 31
--------------------------------------
1997 $ 54,208
1998 29,082
1999 29,082
2000 29,082
2001 14,541
Thereafter 50,434
----------------
$ 206,429
================
6. Leases
The Company leases office facilities and equipment under capital and operating
leases that expire in various years through November 2000. Future minimum annual
payments under capital leases (including leases with related parties) and
noncancellable operating leases with initial terms of one year or more consisted
of the following at December 31, 1996:
F-10
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of June 30, 1997 and for the periods
ended June 30, 1996 and 1997 is unaudited.
<TABLE>
<CAPTION>
Operating
Capital Leases Leases
-------------------------------------
<S> <C> <C>
1997 $117,739 $ 99,714
1998 100,937 105,905
1999 52,761 112,085
2000 15,932 102,806
2001 -- --
Thereafter 49,213 --
------------------------------------
Total minimum lease payments 336,582 $420,510
==================
Amounts representing interest 69,366
------------------
Present value of net minimum lease payments (including
current portion of $78,576) $267,216
==================
</TABLE>
Total rent expense for all operating leases amounted to approximately $36,000
and $104,000 and for the years ended December 31, 1995 and 1996, respectively,
and $55,000 and $53,000 for the six months ended June 30, 1996 and 1997,
respectively.
7. Capital Shares
Each share of Series A Preferred Stock is voting and is convertible, at the
option of the holder, into one share of Common Stock. The Series A Preferred
Stock is entitled to a 9 percent noncumulative dividend prior to payment of any
dividends on the Common Stock. All Series A Preferred Stock will automatically
be converted upon a public offering of common stock that meets certain minimum
price, market value and proceeds criteria.
Upon the liquidation, dissolution, or winding up of the Company, the Series A
Preferred Stockholders are entitled to receive, prior to and in preference to
any distribution made to other stockholders, a liquidation preference equal to
$2.00 per share of Series A Preferred Stock. Should the net assets of the
Company exceed this amount, the Series A Preferred Stockholders are also
entitled to receive a pro rata amount of the remaining distribution.
As of July 13, 1995, February 12, 1996, and April 25, 1996, the Company's Board
of Directors approved stock splits of twenty-five for one, two for one, and five
for one, respectively, with respect to the Common Stock. All share amounts have
been retroactively adjusted to reflect these splits (See Note 13).
During 1996, the Company issued 174,048 additional shares of common stock to
certain stockholders based upon a revaluation of the Company at the time of the
initial issuance of the Series A Preferred Stock executed unilaterally by the
Company, on a one-time basis.
8. Stock Options and Warrants
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), in accounting for its
employee stock options because, as discussed below, the alternative fair value
accounting provided for under Statement of Financial Standards No. 123,
Accounting and Disclosure of Stock-Based Compensation (SFAS No. 123), requires
the use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, no compensation expense is recognized on
option grants to the extent the exercise price of the Company's employee stock
options equals or exceeds the fair market value of the underlying stock on the
date of the grant.
F-11
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of June 30, 1997 and for the periods
ended June 30, 1996 and 1997 is unaudited.)
During 1995, the Board of Directors authorized the implementation of an equity
incentive plan for certain employees, directors, consultants and independent
contractors. The Company has reserved 207,462 shares for future issuance under
the plan as of June 30, 1997. Under the plan, options to purchase stock of the
Company will be granted to participants at an exercise price to be determined by
the Board. Incentive stock options granted under the plan may be granted to
employees only and may not have an exercise price less than the fair market
value of the stock as of the date of the grant. Incentive stock options have a
maximum term of ten years, or in some circumstances, five years.
Pro forma information regarding net loss is required by SFAS No. 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that statement. The fair value for these options
was estimated at the date of grant using a minimum value pricing model with the
following assumptions for 1995 and 1996: risk-free interest rate of 5 percent,
dividend yield of 0 percent and an expected life of the option from three to
seven years. The pro forma effect of SFAS No. 123 was not material for the years
ended December 31, 1995 or 1996 or the six months ended June 30, 1996 and 1997.
However, the pro forma effects of applying SFAS No. 123 for these periods are
not likely to be representative of the effects on reported net loss for future
years. The weighted average fair values of options granted in 1995 and 1996 were
$0.00 and $0.02, respectively, with weighted average remaining contractual lives
of approximately nine years and ten years, respectively.
Option activity under the equity incentive plan is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Price
Shares
-------------------------------------
<S> <C> <C>
Outstanding at January 1, 1995 -- $ --
Granted 139,148 .01
-------------------------------------
Outstanding at December 31, 1995 139,148 .01
Granted 77,414 .25
Exercised (30,692) .25
-------------------------------------
Outstanding at December 31,1996 185,870 .06
Granted 149,324 .25
Canceled (111,324) .01
Exercised (29,424) .02
-------------------------------------
Outstanding at June 30, 1997 194,446 $.25
=====================================
Exercisable at December 31, 1996 32,624 $.01
=====================================
Exercisable at June 30, 1997 10,785 $.25
=====================================
</TABLE>
At December 31, 1996 and June 30, 1997, respectively, warrants for the purchase
of 216,200 and 218,200 shares of Common Stock are outstanding. The warrants are
exercisable at a price of $2.00 per share and may be exercised on a net basis.
Certain of these warrants were issued in conjunction with loans in 1995 and
subsequent renewals and expire ten years from the date of issuance. The Company
has also issued warrants for its Series A and Series B Preferred Stock (See Note
13). The fair value of the warrants issued has been recorded as a debt discount
which is being amortized to expense over the repayment term.
9. Benefit Plans
The Company has a 401(k) Retirement Savings Plan (Plan) covering substantially
all employees. Under terms of the Plan, employees may make voluntary
contributions, subject to Internal Revenue Service limitations. The
F-12
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of June 30, 1997 and for the periods
ended June 30, 1996 and 1997 is unaudited.)
Company may make discretionary annual contributions to the Plan, or may be
required to make payments to the Plan to meet ERISA requirements. The Company
made compliance payments of $2,000 and $14,000 for Plan years ending December
31, 1995 and 1996.
10. Income Taxes
At December 31, 1996, the Company has net operating loss carryforwards of
approximately $1,950,000 for U.S. federal and state income tax purposes that
expire in years 2000 through 2010. A valuation allowance of $791,000 has been
recognized at December 31, 1996 to offset a portion of the Company's deferred
tax assets.
Deferred income taxes reflect the net tax effects 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 items as of December 31, 1996 are as follows:
Deferred tax assets:
Net operating loss carryforwards $ 780,000
Valuation allowances 1,000
Nondeductible liabilities 20,000
Other 1,000
---------
Total deferred tax assets 802,000
Valuation allowance for deferred tax assets (791,000)
---------
Net deferred taxes 11,000
Deferred tax liabilities:
Tax in excess of book depreciation (11,000)
---------
Net deferred taxes $ --
=========
The amount of the Company's loss carryforwards ultimately available to offset
future taxable income in any one year will be subjected to annual limitations as
a result of changes in ownership of the Company's common stock through equity
offerings including offerings that have recently occurred.
11. Contingencies
The Company, in the ordinary course of business, may be a party to litigation
and claims. The ultimate resolution and financial liability to the Company from
such matters cannot be estimated with certainty. However, based on its
examination of such matters, the Company believes that the ultimate resolution
will not have a material effect on its operations or financial position.
The Company is not currently a party to any legal proceedings that management
believes the adverse outcome of which, individually or in the aggregate, would
have a material adverse effect on the Company's financial position or results of
operations. On July 1, 1997, counsel for the Company received written
notification from plaintiffs' counsel in Kolbe, et al. v. Humanagement, Inc. et
al., that plaintiffs intend to add the Company as a defendant in the lawsuit, in
which a preliminary injunction against defendants has been granted regarding,
among other things, claims for contributory copyright infringement. The Company
does not believe, in light of the limited extent of its involvement in the
matter and the highly uncertain status of the law relating to the liability of
Internet access providers for information posted by third party Web sites, that
plaintiffs' potential claims have merit.
F-13
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of June 30, 1997 and for the periods
ended June 30, 1996 and 1997 is unaudited.)
12. Going Concern
The Company is incurring operating losses as it moves from early stage to the
full scale deployment of its technologies. The operating losses have created a
net capital deficiency which requires that the Company obtain additional
financial resources to meet its business objectives, and such committed
financing is not yet in place. These conditions raise substantial doubt about
the ability of the Company to continue as a going concern.
As discussed in Note 13, the Company has raised an additional $1,030,000 in debt
financing from certain stockholders and related parties subsequent to December
31, 1996 to fund its operations. The Company also plans to file a Registration
Statement with the Securities and Exchange Commission which management expects
will provide an additional $5 million in equity to the Company, if declared
effective. Management believes that the proceeds from the proposed offering,
along with the Company's bank and equipment leasing lines of credit, will
provide sufficient resources for the Company to continue its operations.
13. Subsequent Events
In March 1997, the Company obtained a $500,000 commitment for lease financing of
property, plant and equipment acquisition. In connection with obtaining this
commitment, the Company issued warrants to purchase 30,000 shares of Series A
Preferred Stock at $2.00 per share. 5,000 of the warrants were subsequently
exercised. On September 27, 1997, the Company received an increase in this
commitment to $650,000.
In May 1997, certain Series A Preferred stockholders loaned the Company
$270,000. Each stockholder received a one year convertible subordinated
promissory note bearing 10% interest that automatically converts into shares of
Series B Preferred Stock upon the consummation of the offering described in the
last paragraph herein at a conversion price equal to the offering price of the
Series B Preferred Stock if the effective date of this offering is on or before
November 21, 1997. In connection with these loans, the stockholders also
received warrants to purchase 135,000 shares of Series A Preferred Stock at an
exercise price of $2.00 per share, which exercise price will increase to the
public offering price of the Series B Preferred Stock if the effective date of
this offering is on or before November 21, 1997; provided, however, that the
warrants may be exercised within the 30 days following the consummation of the
offering at $2.00 per share. These warrants are exercisable at any time during
the term of the warrants and expire in May 2004. The fair value of the warrants
have been recorded as a debt discount in the June 30, 1997 Financial Statements.
In July 1997, certain Series A Preferred stockholders loaned the Company an
additional $270,000. Each stockholder received a one year convertible
subordinated promissory note bearing 10% interest that automatically converts
into shares of Series B Preferred Stock upon the consummation of the offering
described in the last paragraph herein at a conversion price equal to the public
offering price of the Series B Preferred Stock if the offering is consummated on
or before January 20, 1998. In connection with these loans, the stockholders
also received warrants to purchase 135,000 shares of Series A Preferred Stock at
an exercise price of $2.00 per share, which exercise price will increase to the
public offering price of the Series B Preferred Stock if the effective date of
this offering is on or before January 20, 1998; provided, however, that the
warrants may be exercised within 30 days following the consummation of the
offering at $2.00 per share. These warrants are exercisable at any time during
the term of the warrants and expire in July 2004.
In August and September 1997, the Company borrowed $490,000 from various
"accredited investors" (as defined in Rule 501 of Regulation D as promulgated by
the SEC under the Act). These borrowings bear interest at 10% and are due upon
the earlier of the successful completion of a proposed public offering or two
years. In connection with these loans, the lenders received warrants to purchase
103,300 shares of Common Stock at an exercise price of $5.00 per share. The
warrants expire in August 2000 and are exercisable immediately.
F-14
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of June 30, 1997 and for the periods
ended June 30, 1996 and 1997 is unaudited.)
In September 1997, the Company's Board of Directors authorized the Company to
register up to _____ shares of Series B Preferred Stock with the Securities and
Exchange Commission on Form SB-2. In connection with the proposed offering, the
Board also authorized a one-for-two and one-half reverse split of the Company's
Common Stock and Series A Convertible Preferred Stock to be effective upon the
effective date of the offering. All share and per share amounts in the
accompanying financial statements have been adjusted to reflect the split.
F-15
<PAGE>
APPENDIX A
SCRIPT OF ROAD SHOW AUDIO VIDEO PRESENTATION OF THE COMPANY TO BE DISPLAYED
ON-LINE BY HTML LINK TO THE UNDERWRITER'S WEB SITE
Visual:
Text on screen: This audio video presentation is part of the Company's
Prospectus dated September 30, 1997. This presentation is made in conjunction
with such Prospectus, is qualified in its entirety by such Prospectus and should
be viewed in conjunction with such Prospectus.
Pictorial chart of the Company depicting Chad M. Little, the Company's Chief
Executive Officer, Lonnie A. Whittington, Vice President of Creative Direction,
James A. Layne, Vice President of Marketing, Mark Gorchoff, Chief Financial
Officer, Michael S. Turico, Vice President of Engineering, and Matthew Stanton,
Vice President of Sales. Upon clicking on any of the executive officers, the
viewer will see such officers seated at a conference table in the Company's
offices with background promotional pictures of the Company's co-branded
products, CNNfn Final Bell and CNN/SI SportSim. The viewer will then hear such
officer's presentation, the text of which is set forth below.
Text on screen: Welcome to the Sandbox Road Show. Click on any of the
Company's executive officers to see and hear a presentation of the Company from
such officer.
Chad M. Little's Presentation: Welcome to Sandbox Entertainment Corporation.
I am Chad Little, the Chief Executive Officer. In 1991 Lonnie Whittington, Jim
Layne and I started Sandbox with the goal of using technology to pioneer more
effective ways of communicating with consumers. As the business grew in parallel
with the acceptance of the Internet, we were presented with the opportunity to
accomplish our original goal by developing on-line games and simulations. Our
initial game, Cyberhunt, was the first corporate-sponsored event on the
Internet. It was a success in that not only was it fun and highly educational,
but advertisers paid for the development and hosting of the on-line game. This
theme has become a common thread throughout our development process.
The addition of Mike Turico and his engineering group in 1995 allowed us to
expand our games and focus on improving and producing new software for our Road
Trip series. With our enhanced technological capabilities in place Mike, Lonnie
and Jim focused their respective technological, creative and marketing teams
toward producing Final Bell. This was the first Sandbox simulation driven by
external data to produce creative integration opportunities for advertisers.
These creative integration opportunities have allowed us to develop a more
robust user experience, further building demands for our products. We believe
that the successful launches of Final Bell and, most recently, SportSim
demonstrates the potential future growth of our business.
Concurrently, we understood the importance of brand reliance and searched
for a powerful co-marketing partner both on- and off-line to help promote our
simulations. We found such a partner in CNNfn and CNN/SI. To continue our sales
momentum we brought on Matt Stanton. To fill out our management team, we brought
in Mark Gorchoff as Sandbox's CFO.
We've learned a tremendous amount since we launched that first game. Our
participants are looking for our products to be fun, highly interactive,
educational if possible, and helpful in creating a sense of competition and
community. For our advertisers, we have to give them more than just exposure for
their products and services. We have to provide ways in which they can integrate
their messages into the content that will create a more lasting impression on
their customers. For ourselves, we need to continually focus on creating
scaleable products that require less overhead in order to reach more people than
our competitors. To accomplish all of this, we recognize the need to keep our
working environment productive and fun. After all, this is the interactive
entertainment business.
A-1
<PAGE>
We recognize that our success depends on our accomplishing five objectives.
We must:
* Maintain creative excellence
* Aggressively pursue high-quality co-marketing and development partners
* Continue to develop scalable software to handle continued growth
* Increase the visibility of our sales force efforts, while we maintain
fiscal responsibility
It's the people who make up the company. I believe we not only have a
top-notch management staff, but a team of employees that provide expertise in
marketing, sales, copy, graphics, engineering, marketing, creative and finance.
Assembling the best team is integral to reaching our goals and our vision of
providing the best possible products for our customers to interact with and the
highest quality interaction with our sponsors.
I hope you will view the presentation of each Sandbox executive officer to
get their perspective of the Company and a more complete picture of the Sandbox
management team. Remember, these presentations are a part of, and not a
substitute for, the Company's Prospectus, which you should read carefully before
investing money.
You have my personal invitation to come see what we've created. I encourage
you to take a tour of SportSim or Final Bell, and consider becoming a regular
part of our community.
We would love to have you as an investor, a participant in the Sandbox and a
member of the Sandbox community.
Thank You.
Lonnie A. Whittington's Presentation: Hello, my name is Lonnie Whittington,
co-founder and Creative Director of Sandbox Entertainment. With two and a half
years in the interactive entertainment business, I feel like an Internet
pioneer, but I've been in advertising and graphic design for over 25.
In late 1994, Jim Layne, Chad Little and I had been crafting advertising
messages for the high tech business-to-business community. Our success in
traditional advertising came from the fact that we, as the three founders, had
strong talents in the three disciplines of sales, creativity and technology.
None of the sites that we saw on the Internet had this combination, so we saw a
tremendous opportunity to be successful in applying our talents to the emerging
Internet medium.
Creativity and experimentation allowed us to quickly learn what variety of
concepts and techniques worked well. After we ran Cyberhunt in May of 1995, our
first "full length feature" was the three-month-long Arizona Super Bowl Road
Trip event. I was responsible for helping develop daily content, including the
route, story and daily game. Although the pace was grueling, it was gratifying
to receive favorable comments from users all over the world. We were dedicated
to creating a content-rich event and to pushing the limits of how the users
react as well as how to integrate advertisers into the game. That is still my
motivation as well as the focus of the content.
I think Final Bell is the perfect title for the Internet and it's one of the
more gratifying projects for me to help put together. It's a terrific
combination of gaming-type entertainment and education. Speaking selfishly, I
have learned more about the stock market from my involvement with Final Bell
than I have with my sporadic self-learning over the last twenty years, which is
also reflected in responses from the players. Many players say that they
appreciate Final Bell because they can practice buying and selling stocks
without the pesky worry about losing real money.
Now, we have SportSim, the fantasy sports site. It's exciting watching the
enthusiasm of an entirely different set of players. The way it came about was
very interesting. Two of our employees are avid sports fans. They were told that
they could create the ultimate sports site so, they set about evaluating
existing sites and listing all the functions that would make ours superior.
Their research was exhaustive as well as fun for both of them. Their
documentation made launching SportSim one of the easiest, albeit the most
complicated games we have created to date.
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My vision for Sandbox is based on three principles:
o Creating unique content where the users are an integral part of an
entertaining and educational experience.
o Offering a platform from which the advertiser can direct their message so
that it is entertaining and rewarding for the viewer.
o Experimenting with the medium and the technology to constantly find
creative new ways to interact with the audience.
Brian Aldiss, a British science fiction writer once said, "Whatever
creativity is, it is in part a solution to a problem." I'm sure that you'll
agree that the entire concept of the Internet is an organic problem. It grows
and changes daily. Everything in this new medium moves at the speed of light and
most of the conventions that were once the rules are no longer applicable. That
is both the opportunity and the challenge.
Thank you for taking the time to view this presentation. I ask you to please
view the presentation of each Sandbox executive officer to get their perspective
of the Company. The presentations are a part of, and not a substitute for, the
Company's Prospectus.
James A. Layne's Presentation: Hello, I'm Jim Layne, a founder and Vice
President of Marketing of Sandbox Entertainment. Prior to joining Sandbox, I was
the Director of Operations for the Phoenix office of Mark Anderson Associates, a
national Business-to-Business Full Service Marketing Communications Agency.
Sandbox's earliest foray onto the Internet, Cyberhunt, was successful in
that IBM and ATT Multimedia bought sponsorships of the contest. Our products
employ creative ways to promote user interaction, while using technological
innovation to achieve marketing integration. Our goal is to build a diverse,
loyal and committed customer base; therefore our marketing strategy is to create
meaningful distinction in our product and ensure that all of our programming
provides users with an entertaining and rewarding experience. My job is to
develop, build and protect each brand name. Having the Sandbox Entertainment
brand behind a program allows the user to interact with a quality program that
presents a personalized experience.
Sandbox's marketing objectives are to:
* Understand our participants and their needs
* Understand our advertisers and their needs
* Aggressively continue to pursue co-marketing partnerships.
The individual games are built on a common foundation. The participant is
presented with familiarity with overall navigation, accuracy in the data
presented, top quality administrational aspects of the game, logical, clear and
concise presentation of information and a high level of customer support.
Because Sandbox pays attention to these details, the player's experience is
focused on the real strategy behind the game: competing for prizes, building a
community with other players and, most importantly, being entertained in a fun
and educational way! Additionally, Sandbox has developed a variety of ways to
motivate the users. As an example, our Sand Dollar program allows users to earn
Sand Dollars, which can be redeemed for prizes when the user wins a contest.
To help our advertisers, our products are created with the objective of
registering an audience. Once a user registers with us, we begin to build a
database of demographic and psychographic information about that participant.
With our technology, we can target pertinent messages to each visitor, based on
information they have given us or in reaction to completed events within our
programs. Our strength is helping advertisers gain information about our
audience, assisting them to begin and maintain a dialogue with the customer and
actually aiding them in the direct marketing of their products. Bottom line: The
more we know about our audience, the easier it will be for us to win battles for
future advertising and marketing dollars.
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Our latest challenge has been to find a way to cost effectively promote our
products on an ongoing basis and increase the likelihood that we continue to
reach a sizable audience. Early this year, we created a marketing partnership
with a major media company in order to get the sort of promotion needed to
sustain an audience that is attractive to the advertising community. We have
forged such a relationship with CNN.
We believe Final Bell and SportSim are program brands users consciously
relate to for their entertainment, and the brands need to be nurtured because
they have to compete for the user's mind share as reference points for financial
and sports simulations. Since the products are co-branded with sponsor's names,
the challenge is to create strong individual brands that users will remember.
Strong business partnerships are essential. We have to think beyond existing
products and technology to serve our present and new customer groups. With the
success of our current games, the levels of marketing opportunities with other
partners have increased. We are being sought after for our expertise in gaming,
web delivery of information, creative marketing and technology. Our products can
be adapted for media navigators and aggregators in addition to being the web
component for CD-ROM technology. We evaluate these possible relationships based
on the creation of priority market niches, which are defined by user and
advertiser needs, in conjunction with the profit potential. In developing these
marketing relationships, our focus lies in opportunities for promotion through
various media, distribution of products through retail outlets and major content
aggregators.
We believe we have accomplished a lot over the past two years, and I look
forward to even greater challenges ahead.
Thank you for your interest in Sandbox Entertainment Corporation and for
taking the time to view this presentation. Please view the presentation of each
Sandbox executive officer to get their perspective of the Company. These
presentations are a part of, and not a substitute for, the Company's Prospectus.
Thank You.
Mark Gorchoff's Presentation: Hello, I'm Mark Gorchoff, Chief Financial
Officer and the newest member of the management group. Shortly after I had
joined Sandbox last December, we learned quickly from the Final Bell launch what
a potent combination education and competition could be. Additionally, we began
the process of clarifying the other elements of our current strategy--the key
role that media partners and development partners will play in our continuing
growth as well as the need to focus on adding additional revenue streams to our
income model.
I believe our approach to developing and marketing new products is a prudent
one. By identifying parties who might be interested in assisting us with program
development costs, we reduce the up-front impact of new product launches. Then,
when we add a co-branding or media partner such as CNN to the mix, we believe we
significantly improve the likelihood that the product will receive the necessary
levels of traffic and promotion.
Our business model also allows us to selectively apply financial resources
to support our growth. We have the ability to add new production, engineering
and customer support personnel incrementally. We do this after we have positive
feedback about the product from our intended development and media partners. We
also plan to increase our sales and marketing expenditures by applying these
same disciplines. Whether the expense involves adding in-house sales
representation in the major media cities or planning a campaign that involves
the full range of advertising and promotional activities, the idea is to
directly tie the expenditures to what the products demand, and to preserve
capital.
We expect that approximately $1.2 million of offering proceeds will go to
retire debt. Of this number, $500,000 will be used to pay our bank under a
revolving line of credit, and can be re-borrowed as the need arises. We expect
to utilize the balance of offering proceeds, or approximately $3.2 million, in
roughly equal proportions to add to our engineering and sales staffs, and for
product and services marketing. I want to emphasize, however, that we believe
these funds, if spent in the manner described, will allow us to develop and
market several new products over the coming months.
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I also wanted to take a moment to talk to you about the risks and rewards of
Public Venture Capital Offerings. You have the ability as an individual investor
to participate in the sort of deal usually reserved for venture capitalists or
institutional lenders. It's exciting to be a part of a young and growing
company, especially one in an emerging industry such as the Internet and
interactive entertainment. But of course, there are risks. In the Sandbox Public
Venture Capital Offering, investors will be financing the growth of an early
stage company, and like venture capitalists, be buying an illiquid security.
Please make sure you review the Prospectus to learn about and understand the
risks.
From the bottom up, we've got a great bunch of people at Sandbox, a good mix
of skills and a common vision. I'm looking forward to doing some exciting
things.
Thank you for your interest in Sandbox Entertainment Corporation and for
taking the time to view this presentation. I hope you will view the presentation
of each Sandbox executive officer to get their perspective of the Company and a
more complete picture of the Sandbox management team.
Michael Turico's Presentation: Hello, my name is Michael Turico the Director
of Engineering at Sandbox Entertainment.
Since my staff and I joined Sandbox from Motorola two years ago, we've been
challenged to meet the increased growth and complexity in the Company's products
and processes. When we created Cyberhunt in 1995, we wanted to test the notion
that this would gain support from advertisers for the games. We thought it had
the potential to bring numerous participants to the site. On its first day,
Cyberhunt drew 20,000 page-views, and we considered that a success. Currently,
we reach a daily average of 1.6 million page views!
When we developed our first simulation, Final Bell, we integrated actual
data from outside sources. In addition to stock prices, we incorporated complex
elements such as stock splits, dividends and delistings into the simulation.
This is what makes the game appear life-like. Final Bell was a major step along
the path that proved invaluable when we launched SportSim.
With SportSim we felt the potential was enormous. Our challenge was to
prepare the network for an audience that we initially estimated to be 20,000
teams for our Full Contact fantasy football event. But we had no idea that our
partnership with CNN/SI would be as powerful as it turned out. By the time the
season was ready to begin, 83,800 teams had signed up, and suddenly we were
being overwhelmed by our own popularity, and we experienced system delays and
disruptions in August and September 1997.
As a result, and due to our commitment to scalability and customer
satisfaction, we had to test and install a T3 line in a day and a half. On the
average, this process takes 30 to 45 days to complete. We also had to order and
install a new Sparc Enterprise 5000 database server, as well as six additional
web servers. This project usually takes about 10 days. Again, we finished in a
day and a half.
While Cyberhunt required five programs to run, more than 200 have been
created for the execution of fantasy football. Before June of 1997, we were
signing on an average of 500 new registrants each day. When SportSim began
running with CNN in August, we averaged 700 new registrants each hour and
averaged 1.6 page-views each day.
The overriding theme here is the challenge to develop new games that have a
scaleable architecture. In producing our games, we work with creative by
discovering what the focus of the game is and offering solutions on better ways
for user interaction. We also research and test improvements towards
functionality, which is a crucial aspect of our games. We are an integral part
of the creative process, from the original penciling all the way through the
final computer comps.
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So where do we go from here? None of us thinks that we've reached the
pinnacle. In October, we'll begin a whole new set of projects, including fantasy
basketball, mid-season football sign-ups and the Final Bell CD contest. We're
excited to tackle these challenges and to see what lies beyond.
Please view the presentation of each Sandbox executive officer to get their
perspective of the Company. The presentations are a part of, and not a
substitute for, the Company's Prospectus.
Thank You.
Matthew Stanton's Presentation: My name is Matt Stanton. I'm the Vice
President of Sales at Sandbox Entertainment. I joined the Company in July of
1996. I wanted to join Sandbox because of the opportunity to implement
"beyond-the-banner" advertising, where traditional advertisers enter into
sponsorships of our games and simulations. This integrated advertising approach
is innovative to the Internet market where banner advertising has become
commonplace.
Prior to joining Sandbox, I worked for two divisions of Katz Media. Most
recently, I was Director of Sales for their new media division, Millennium
Marketing. Millennium served as the national rep firm for several interactive
companies, including Sandbox Entertainment. Prior to that, I managed the Los
Angeles and Washington DC offices for the Katz cable division, National Cable
Communications.
Before Katz, I was at Miller Brewing Company, where I learned the value of
branding, the basis for creating new market segments and the factors that
influence individual buying behavior. My experience in working with branding
strategies, statistical analysis and consumption trends has been a great help
throughout my career.
The qualities most important to "new media" sales management require
understanding the unique nature of the on-line advertising community. Large
advertising agencies earn substantial revenue from the placement of costly mass
media, such as network television, radio, cable and national print.
Traditionally these forms are relatively easy to evaluate, sell to the client
and execute. However, implementation in more targeted media, such as direct mail
or spot cable, represents a significantly greater challenge to those involved.
The targeting of qualified consumers in a cost effective way requires a lot more
effort, therefore making it easier to avoid this medium. In addition, managing
an interactive media campaign is time-consuming and has the added challenge of
being based on a technology that is beyond the experience of many agency
personnel.
We offer two primary products to the advertiser: banners and integrated
sponsorships. Banners are the standard vehicle of Internet advertising.
Integrated sponsorships, however, afford advertisers with customized
applications of our proprietary technology. These applications enable the
sponsor to expose users to their products and services in an engaging and
non-intrusive manner. As we successfully explore and sell sponsorships that go
beyond the banner we believe Sandbox is trending toward the future of Internet
advertising.
In our relationship with CNN, both of our top-tier sponsors, IBM and Saturn
Corporation, were compelled enough by our unique sponsorship opportunities that
they pulled money from other areas of marketing dollars to fund their
sponsorships with us. Both cited not only our technology as a critical factor in
their decision, but also our innovative approach to integrating their message
into the content. We believe this is also the primary reason CNN chose us as a
partner.
The relationship with CNN is a win-win for both parties. The CNNfn and
CNN/SI brands provide Sandbox with an audience of selective blue chip
advertisers, while our capabilities attract additional revenues that the CNN
brands would not otherwise capture. The relationship also extends our sales
effort. CNN has one of the top media sales forces in the country and, as part of
our relationship, they have agreed to sell our products, extending our own sales
efforts.
Another lesson I have learned in my career is the importance of being able
to juggle the demands of a large number of clients with varying needs. This is
one of the key skills I look for, and instill in the members of our sales force.
It is an understanding that is critical knowledge for the building of an
internal sales force and the
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management of an external sales force who is responsible for the sale of many
products beyond your own. CNN's Turner and Sports Illustrated's Time Warner
sales forces represent such a relationship to Sandbox Entertainment. They sell
several cable networks, interactive, print and co-branded products as well. To
enhance our relationship, part of my responsibilities are to help them earn more
money by simplifying this process and creating a multimedia opportunity
attractive to their clients. My experience selling Turner networks for our
affiliates makes this an enjoyable and very familiar task.
Thank you for your interest in Sandbox Entertainment Corporation and for
taking the time to view this presentation. Please view the presentation of the
other Sandbox executive officers to get their perspective of the Company and
receive a more complete picture of our Sandbox management team. The
presentations are a part of, and not a substitute for, the Company's Prospectus.
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================================================================================
Shares
SANDBOX ENTERTAINMENT CORPORATION
Series B Preferred Stock
(par value $.001 per share)
---------------
[SANDBOX ENTERTAINMENT LOGO]
---------------
Wit Capital Corporation
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Other Expenses of Issuance and Distribution
The following table sets forth the estimated costs and expenses in
connection with the offering described in the Registration Statement, other than
underwriting commissions and discounts. All of such costs and expenses will be
borne by the Company.
Registration Fee.............. $ 1,844
Accounting Fees and Expenses.. *
Legal Fees and Expenses....... *
Printing Expenses............. *
Blue Sky Fees and Expenses.... *
Miscellaneous.................
--------
Total......................... $250,000
========
- ------------------
*To be completed by amendment
Item 25. Indemnification of Directors and Officers
Article IX of the Company's Certificate of Incorporation provides that the
Company shall indemnify directors, officers, and their legal representatives to
the fullest extent permitted by the Delaware General Corporate Law ("DGCL"). The
DGCL contains an extensive indemnification provision which permits a corporation
to indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. In suits by or in the
right of a corporation, only expenses and not judgments, fines, and amounts paid
in settlement may be indemnified against. In addition, if the director or
officer has been adjudged to be liable to the corporation in such a suit,
indemnification of expenses must be approved by a court.
Article VIII of the Company's Certificate of Incorporation provides that
directors of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty. However, this
provision does not eliminate or limit the liability of a director for breach of
the director's duty of loyalty to the Company or its stockholders, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, for the payment of dividends or distributions or the
redemption or purchase of the Company's shares of stock in violation of the
DGCL, or for any transaction from which the director derives an improper
personal benefit. This provision does not affect any liability of a director or
officer under the federal securities laws.
Article III, Section 9 of the Company's Bylaws provides that the Company's
indemnification obligations as set forth in the Company's Certificate of
Incorporation are a contract right and include the right by an indemnified party
to be paid such person's expenses of the defense of any action by the Company in
advance of its final disposition upon delivery to the Company of an undertaking
by such person to repay all amounts so advanced if it should ultimately be
determined that such person was not entitled to be indemnified.
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The Company does not currently carry directors' and officers' liability
insurance. Article III, Section 9 of the Company's Bylaws permit the Company to
maintain insurance to protect itself and its officers, directors, and
representatives against liability, whether or not the Company would have the
power to indemnify any such officer, director or other representative under the
DGCL.
Item 26. Recent Sales of Unregistered Securities
Effective April 25, 1996, the Company completed a migratory merger pursuant
to which it reincorporated in Delaware, changed its name to Sandbox
Entertainment Corporation and effected a five-to-one stock split. Since
September 1, 1994, the Company has sold and issued securities in the
transactions described below, as adjusted to reflect (i) the foregoing
five-to-one stock split, (ii) a twenty-five for one stock split as of July 13,
1995, (iii) a two-for-one stock split as of February 12, 1996, (iv) certain
antidilution adjustments required by the issuance of Series A Preferred Stock in
February 1996, and (v) the Reverse Stock Split.
1. As of September 1, 1997, the Company has granted 244,966 shares of Common
Stock to employees and consultants at prices ranging from $.0025 to $.75 per
share upon their exercise of options under the 1995 Stock Incentive Plan, as
amended. As of September 1, 1997, these employees and consultants have exercised
options to purchase 60,116 shares of Common Stock, the exercise prices of which
were paid in cash.
2. The Company issued 1,000,000 shares of Common Stock in private placements
to the Company's three founders in exchange for an aggregate payment of
$12,265.00 in cash.
3. The Company issued 194,456 shares of Common Stock at a price of $2.00 per
share to three stockholders for a total aggregate payment of $388,912.
4. The Company issued warrants to purchase an aggregate of 409,000 shares of
Common Stock at exercise prices ranging from $2.00 to $5.00 per share in
connection with loans and loan extensions to the Company. No separate
consideration was paid to the Company for issuance of the warrants.
5. The Company issued warrants to purchase an aggregate of 60,000 shares of
Common Stock at an exercise price of $5.00 per share, in connection with
co-branding and marketing agreements with CNNfn and CNN/SI. No separate
consideration was paid to the Company for issuance of the warrants.
6. In connection with equity investments in and loans to the Company, the
Company issued 792,500 shares of Series A Preferred Stock at a price of $2.00
per share, warrants to purchase an aggregate of 295,000 shares of Series A
Preferred Stock at an exercise price of $2.00 per share, and $540,000 in
convertible subordinated promissory notes which automatically convert into
shares of Series B Preferred Stock upon consummation of this offering at the per
share offering price to the public. The warrant prices and note conversion
prices are subject to certain adjustments. See "Certain Transactions".
7. In connection with an extension of the Company's equipment lease line
from $500,000 to $650,000, the Company issued to its lease lender warrants to
purchase 10,000 shares of Series A Preferred Stock at an exercise price of $4.00
per share.
No underwriter was involved in any of the above issuances of securities. All
of the above securities were issued in reliance upon the exemption set forth in
Section 4(2) of the Securities Act (including, in certain instances Regulation D
promulgated thereunder) on the basis that they were issued under circumstances
not involving a public offering, or, in the case of certain options and warrants
to purchase Common Stock, Rule 701 of the Securities Act.
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Item 27. Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
1* Form of Underwriting Agreement.
3(a) Certificate of Incorporation.
3(b) Certificate of Amendment to Certificate of Incorporation.
3(c) Form of Restated Certificate of Incorporation to be filed in
connection with the closing of the offering made pursuant to
this Registration Statement.
3(d) Form of Certificate of Designation of Series B Preferred Stock
to be filed in connection with the closing of the offering made
pursuant to this Registration Statement.
3(e) Bylaws of the Company.
4(a) Loan and Security Agreement and Schedule thereto dated September
6, 1996 between the Company and Silicon Valley Bank.
4(b) Amendment to Loan and Security Agreement dated September 15,
1997 between the Company and Silicon Valley Bank.
4(c) Promissory Note dated July 13, 1995 in the principal amount of
$116,328 payable to Glenn Gomez.
4(d) Warrant Purchase Agreement between Tracer Design, Inc. and
Pickwick Group, LLC, dated September 15, 1995.
4(e) Stock Subscription Warrant to purchase 5,100 shares of Common
Stock of Tracer Design, Inc. held by Pickwick Group, LLC, dated
September 15, 1995.
4(f) Form of Loan and Warrant Purchase Agreement dated October 25,
1995 by and between Tracer Design, Inc. and the investors listed
on Schedule 4(f) attached thereto.
4(g) Form of Stock Subscription Warrant dated October 25, 1995 to
purchase shares of common stock of Tracer Design, Inc. A list of
warrant holders is attached thereto as Schedule 4(g).
4(h) Form of Term Note dated October 25, 1995; Tracer Design, Inc. as
Maker; Holders are listed on Schedule 4(h) attached thereto.
4(i) Form of April 25, 1996 Substitute Stock Subscription Warrant to
purchase shares of Common Stock of the Company in substitution
for the Stock Subscription Warrants dated October 25, 1995 held
by the investors listed on Schedule 4(i) attached thereto.
4(j) Form of Amendment to Loan and Warrant Purchase Agreement and
Term Note dated October 25, 1996 between the Company and the
investors listed on Schedule 4(j) attached thereto.
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4(k) Form of Stock Subscription Warrant dated October 25, 1996 to
purchase shares of Common Stock of the Company held by the
investors listed on Schedule 4(k) attached thereto.
4(l) Form of April 1997 Amendment to Loan and Warrant Purchase
Agreement and Term Note dated April 25, 1997 between the Company
and the investors listed on Schedule 4(l) attached thereto.
4(m) Form of Stock Subscription Warrant dated April 25, 1997 to
purchase shares of Common Stock of the Company held by the
investors listed on Schedule 4(m) attached thereto.
4(n) Form of Bridge Note and Warrant Purchase Agreement dated May 9,
1997 between the Company and the investors listed on Schedule
4(n) attached thereto.
4(o) Form of Stock Subscription Warrant dated May 9, 1997 to purchase
shares of Series A Preferred Stock of the Company held by the
investors listed on Schedule 4(o) attached thereto.
4(p) Form of Convertible Subordinated Promissory Note dated May 9,
1997; the Company as Maker. A list of Holders is attached
thereto as Schedule 4(p).
4(q) Form of July 1997 Bridge Note and Warrant Purchase Agreement
dated July 25, 1997 between the Company and the investors listed
on Schedule 4(q) attached thereto.
4(r) Form of July 1997 Stock Subscription Warrant dated July 25, 1997
to purchase shares of Series A Preferred Stock of the Company
held by the investors listed on Schedule 4(r) attached thereto.
4(s) Form of July 1997 Convertible Subordinated Promissory Note dated
July 25, 1997; the Company as Maker. A list of Holders is
attached thereto as Schedule 4(s).
4(t) Form of Two Year Note and Warrant Purchase Agreement between the
Company and the Investors listed on Schedule 4(t) attached
thereto.
4(u) Form of Subordinated Promissory Note with the Company as Maker.
A list of the Holders is attached thereto as Schedule 4(u).
4(v) Form of Stock Subscription Warrant to purchase shares of Common
Stock of the Company held by the investors listed on Schedule
4(v) attached thereto.
5* Opinion of Osborn Maledon, P.A. as to the validity of the
securities being registered.
9(a) Proxy dated May 7, 1996 of Lonnie Whittington granting Chad
Little the right to vote 100,000 shares of Common Stock.
9(b) Proxy dated May 7, 1996 of James Layne granting Chad Little the
right to vote 100,000 shares of Common Stock.
10(a) Master Lease Agreement dated March 31, 1997 between the Company
and Third Coast Venture Lease Partners I, L.P., and Silicon
Valley Bank.
10(b) May 6, 1997 Addendum No. 1 to the Master Lease Agreement dated
March 31, 1997 between the Company and Third Coast Venture Lease
Partners I, L.P., and Silicon Valley Bank.
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10(c) Subordination Agreement between the Company and Third Coast
Venture Lease Partners I, L.P., and Silicon Valley Bank, dated
May 6, 1997.
10(d) September 27, 1997 Addendum No. 2 to the Master Lease Agreement
dated March 31, 1997 between the Company and Third Coast Venture
Lease Partners I, L.P.
10(e) Series A Preferred Stock Purchase Agreement by and among Tracer
Design, Inc. and Wasatch Venture Corporation and Newtek Ventures
II, L.P., dated February 13, 1996.
10(f) Investor Rights Agreement dated February 13, 1996 between the
Company and various Series A Preferred stockholders.
10(g) Co-Sale Agreement dated February 13, 1996 between the Company,
Chad M. Little, Lonnie A. Whittington, James A. Layne and
various Series A Preferred stockholders.
10(h) Form of Stock Subscription Warrant dated February 13, 1996 to
purchase shares of Series A Preferred Stock of Tracer held
investors listed on Schedule 10(h) attached thereto.
10(i) Holliman Stock Purchase Agreement between Tracer Design, Inc.
and John M. Holliman III, dated February 28, 1996.
10(j) Wasatch and Newtek Stock Purchase Agreement by and among the
Company and Wasatch Venture Corporation and Newtek Ventures II,
L.P., dated May 6, 1996.
10(k) Sundance Stock Purchase Agreement by and among the Company and
Sundance Venture Partners, L.P., Wasatch Venture Corporation,
Newtek Ventures II, L.P., Wayne Sorensen, Chad M. Little, Lonnie
A. Whittington and James A. Layne, dated November 11, 1996.
10(l) Co-Branding and Marketing Agreement dated as of July 11, 1997
between the Company and CNNfn.
10(m) Stock Subscription Warrant issued to CNNfn to purchase 52,000
shares of Common Stock of the Company at an exercise price of
$5.00 per share.
10(n)** Co-Branding and Marketing Agreement dated as of June 20, 1997,
between the Company and CNN/SI.
10(o) Stock Subscription Warrant issued to CNN/SI to purchase 8,000
shares of Common Stock of the Company at an exercise price of
$5.00 per share.
10(p) Source Code License Agreement dated February 23, 1996 between
the Company and INFO Enterprises, Inc.
10(q) License Agreement dated July 28, 1997 between the Company and
the National Football League Players Incorporated.
10(r) Letter Agreement dated March 27, 1997 between the Company and
STATS, Inc., as amended July 7, 1997.
10(s) Office Lease dated September 8, 1995 between the Company and
Anchor Center Properties, Inc.
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10(t) Collocation Agreement by and between the Company and TCG, dated
August 28, 1997.
10(u) 1995 Equity Incentive Plan of the Company (the "Plan") dated
August 1, 1995, as amended.
10(v) Form Incentive Stock Option Award Agreement under the Plan.
10(w) Form Nonqualified Stock Option Award Agreement under the Plan.
10(x) Employment Agreement dated February 19, 1992 between the Company
and Chad M. Little.
10(y) Employment Agreement between Tracer Design, Inc. and Mike
Turico, dated August 1, 1995.
10(z) Engagement Letter by the Company to Mark Gorchoff dated as of
December 30, 1996.
10(aa) Engagement Letter by the Company to Matt Stanton dated as of
June 20, 1996.
10(bb) Form Proprietary Rights and Non-Compete Agreement.
10(cc) Retainer/Non-Circumvention Agreement dated May 16, 1995 between
the Company and Frank X. Helstab.
10(dd) Letter Agreement dated May 30, 1996 between Newtek Ventures II,
L.P. and the Company for certain consulting services.
10(ee) Letter Agreement between the Company and Fox & Company
Investments, Inc., dated August 11, 1997.
10(ff) Telephone Service Agreement dated November 17, 1995 between
Tracer Design, Inc. and Equity Telecommunications.
10(gg) Internet Access Agreement dated September 1, 1995 between the
Tracer Design, Inc. and MCI.
10(hh) Contract Agreement for Public Relations dated January 20, 1996
between Tracer Design, Inc. and Technology Solutions.
10(ii) Internet Access Agreement dated December 9, 1996 between the
Company and Genuity and related agreement with TCG.
11 Statement of Computation of Weighted Average Shares Outstanding.
23(a) Consent of Ernst & Young, LLP, Independent Auditors.
23(b)* Consent of Osborn Maledon, P.A. (included in Exhibit 5).
24(a) Power of Attorney of Michael S. Turico.
24(b) Power of Attorney of Todd J. Stevens.
24(c) Power of Attorney of Brian N. Burns.
II-6
<PAGE>
24(d) Power of Attorney of Lonnie A. Whittington.
24(e) Power of Attorney of James A. Layne.
24(f) Power of Attorney of Matthew D. Stanton.
24(g) Power of Attorney of John E. Hall.
27 Financial Data Schedule.
* To be filed by amendment.
** Confidential treatment has been requested with respect to
portions of this Exhibit.
II-7
<PAGE>
Item 28. Undertakings
The undersigned Registrant hereby undertakes that it will provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-8
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Phoenix,
State of Arizona, on the 30th day of September, 1997.
SANDBOX ENTERTAINMENT CORPORATION
By: /s/ CHAD M. LITTLE
------------------------------------
Chad M. Little
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September 30, 1997.
Signature Title
--------- -----
/s/ CHAD M. LITTLE Chief Executive Officer;
------------------------------ Director
Chad M. Little
/s/ MARK GORCHOFF Chief Financial Officer;
------------------------------ Chief Accounting Officer
Mark Gorchoff
James A. Layne )
Lonnie A. Whittington ) At least a majority of the
Michael S. Turico ) Board of Directors*
Todd J Stevens )
John E. Hall
Brian N. Burns )
By: /s/ CHAD M. LITTLE As attorney-in-fact for the above
------------------------- directors marked by an asterisk
(Chad M. Little pursuant to powers of attorney duly
Attorney-in-Fact) executed by such persons.
II-9
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
------ ----------------------
1* Form of Underwriting Agreement.
3(a) Certificate of Incorporation.
3(b) Certificate of Amendment to Certificate of Incorporation.
3(c) Form of Restated Certificate of Incorporation to be filed in
connection with the closing of the offering made pursuant to
this Registration Statement.
3(d) Form of Certificate of Designation of Series B Preferred Stock
to be filed in connection with the closing of the offering made
pursuant to this Registration Statement.
3(e) Bylaws of the Company.
4(a) Loan and Security Agreement and Schedule thereto dated September
6, 1996 between the Company and Silicon Valley Bank.
4(b) Amendment to Loan and Security Agreement dated September 15,
1997 between the Company and Silicon Valley Bank.
4(c) Promissory Note dated July 13, 1995 in the principal amount of
$116,328 payable to Glenn Gomez.
4(d) Warrant Purchase Agreement between Tracer Design, Inc. and
Pickwick Group, LLC, dated September 15, 1995.
4(e) Stock Subscription Warrant to purchase 5,100 shares of Common
Stock of Tracer Design, Inc. held by Pickwick Group, LLC, dated
September 15, 1995.
4(f) Form of Loan and Warrant Purchase Agreement dated October 25,
1995 by and between Tracer Design, Inc. and the investors listed
on Schedule 4(f) attached thereto.
4(g) Form of Stock Subscription Warrant dated October 25, 1995 to
purchase shares of common stock of Tracer Design, Inc. A list of
warrant holders is attached thereto as Schedule 4(g).
4(h) Form of Term Note dated October 25, 1995; Tracer Design, Inc. as
Maker; Holders are listed on Schedule 4(h) attached thereto.
4(i) Form of April 25, 1996 Substitute Stock Subscription Warrant to
purchase shares of Common Stock of the Company in substitution
for the Stock Subscription Warrants dated October 25, 1995 held
by the investors listed on Schedule 4(i) attached thereto.
4(j) Form of Amendment to Loan and Warrant Purchase Agreement and
Term Note dated October 25, 1996 between the Company and the
investors listed on Schedule 4(j) attached thereto.
II-10
<PAGE>
4(k) Form of Stock Subscription Warrant dated October 25, 1996 to
purchase shares of Common Stock of the Company held by the
investors listed on Schedule 4(k) attached thereto.
4(l) Form of April 1997 Amendment to Loan and Warrant Purchase
Agreement and Term Note dated April 25, 1997 between the Company
and the investors listed on Schedule 4(l) attached thereto.
4(m) Form of Stock Subscription Warrant dated April 25, 1997 to
purchase shares of Common Stock of the Company held by the
investors listed on Schedule 4(m) attached thereto.
4(n) Form of Bridge Note and Warrant Purchase Agreement dated May 9,
1997 between the Company and the investors listed on Schedule
4(n) attached thereto.
4(o) Form of Stock Subscription Warrant dated May 9, 1997 to purchase
shares of Series A Preferred Stock of the Company held by the
investors listed on Schedule 4(o) attached thereto.
4(p) Form of Convertible Subordinated Promissory Note dated May 9,
1997; the Company as Maker. A list of Holders is attached
thereto as Schedule 4(p).
4(q) Form of July 1997 Bridge Note and Warrant Purchase Agreement
dated July 25, 1997 between the Company and the investors listed
on Schedule 4(q) attached thereto.
4(r) Form of July 1997 Stock Subscription Warrant dated July 25, 1997
to purchase shares of Series A Preferred Stock of the Company
held by the investors listed on Schedule 4(r) attached thereto.
4(s) Form of July 1997 Convertible Subordinated Promissory Note dated
July 25, 1997; the Company as Maker. A list of Holders is
attached thereto as Schedule 4(s).
4(t) Form of Two Year Note and Warrant Purchase Agreement between the
Company and the Investors listed on Schedule 4(t) attached
thereto.
4(u) Form of Subordinated Promissory Note with the Company as Maker.
A list of the Holders is attached thereto as Schedule 4(u).
4(v) Form of Stock Subscription Warrant to purchase shares of Common
Stock of the Company held by the investors listed on Schedule
4(v) attached thereto.
5* Opinion of Osborn Maledon, P.A. as to the validity of the
securities being registered.
9(a) Proxy dated May 7, 1996 of Lonnie Whittington granting Chad
Little the right to vote 100,000 shares of Common Stock.
9(b) Proxy dated May 7, 1996 of James Layne granting Chad Little the
right to vote 100,000 shares of Common Stock.
10(a) Master Lease Agreement dated March 31, 1997 between the Company
and Third Coast Venture Lease Partners I, L.P., and Silicon
Valley Bank.
10(b) May 6, 1997 Addendum No. 1 to the Master Lease Agreement dated
March 31, 1997 between the Company and Third Coast Venture Lease
Partners I, L.P., and Silicon Valley Bank.
II-11
<PAGE>
10(c) Subordination Agreement between the Company and Third Coast
Venture Lease Partners I, L.P., and Silicon Valley Bank, dated
May 6, 1997.
10(d) September 27, 1997 Addendum No. 2 to the Master Lease Agreement
dated March 31, 1997 between the Company and Third Coast Venture
Lease Partners I, L.P.
10(e) Series A Preferred Stock Purchase Agreement by and among Tracer
Design, Inc. and Wasatch Venture Corporation and Newtek Ventures
II, L.P., dated February 13, 1996.
10(f) Investor Rights Agreement dated February 13, 1996 between the
Company and various Series A Preferred stockholders.
10(g) Co-Sale Agreement dated February 13, 1996 between the Company,
Chad M. Little, Lonnie A. Whittington, James A. Layne and
various Series A Preferred stockholders.
10(h) Form of Stock Subscription Warrant dated February 13, 1996 to
purchase shares of Series A Preferred Stock of Tracer held
investors listed on Schedule 10(h) attached thereto.
10(i) Holliman Stock Purchase Agreement between Tracer Design, Inc.
and John M. Holliman III, dated February 28, 1996.
10(j) Wasatch and Newtek Stock Purchase Agreement by and among the
Company and Wasatch Venture Corporation and Newtek Ventures II,
L.P., dated May 6, 1996.
10(k) Sundance Stock Purchase Agreement by and among the Company and
Sundance Venture Partners, L.P., Wasatch Venture Corporation,
Newtek Ventures II, L.P., Wayne Sorensen, Chad M. Little, Lonnie
A. Whittington and James A. Layne, dated November 11, 1996.
10(l) Co-Branding and Marketing Agreement dated as of July 11, 1997
between the Company and CNNfn.
10(m) Stock Subscription Warrant issued to CNNfn to purchase 52,000
shares of Common Stock of the Company at an exercise price of
$5.00 per share.
10(n)** Co-Branding and Marketing Agreement dated as of June 20, 1997,
between the Company and CNN/SI.
10(o) Stock Subscription Warrant issued to CNN/SI to purchase 8,000
shares of Common Stock of the Company at an exercise price of
$5.00 per share.
10(p) Source Code License Agreement dated February 23, 1996 between
the Company and INFO Enterprises, Inc.
10(q) License Agreement dated July 28, 1997 between the Company and
the National Football League Players Incorporated.
10(r) Letter Agreement dated March 27, 1997 between the Company and
STATS, Inc., as amended July 7, 1997.
10(s) Office Lease dated September 8, 1995 between the Company and
Anchor Center Properties, Inc.
II-12
<PAGE>
10(t) Collocation Agreement by and between the Company and TCG, dated
August 28, 1997.
10(u) 1995 Equity Incentive Plan of the Company (the "Plan") dated
August 1, 1995, as amended.
10(v) Form Incentive Stock Option Award Agreement under the Plan.
10(w) Form Nonqualified Stock Option Award Agreement under the Plan.
10(x) Employment Agreement dated February 19, 1992 between the Company
and Chad M. Little.
10(y) Employment Agreement between Tracer Design, Inc. and Mike
Turico, dated August 1, 1995.
10(z) Engagement Letter by the Company to Mark Gorchoff dated as of
December 30, 1996.
10(aa) Engagement Letter by the Company to Matt Stanton dated as of
June 20, 1996.
10(bb) Form Proprietary Rights and Non-Compete Agreement.
10(cc) Retainer/Non-Circumvention Agreement dated May 16, 1995 between
the Company and Frank X. Helstab.
10(dd) Letter Agreement dated May 30, 1996 between Newtek Ventures II,
L.P. and the Company for certain consulting services.
10(ee) Letter Agreement between the Company and Fox & Company
Investments, Inc., dated August 11, 1997.
10(ff) Telephone Service Agreement dated November 17, 1995 between
Tracer Design, Inc. and Equity Telecommunications.
10(gg) Internet Access Agreement dated September 1, 1995 between the
Tracer Design, Inc. and MCI.
10(hh) Contract Agreement for Public Relations dated January 20, 1996
between Tracer Design, Inc. and Technology Solutions.
10(ii) Internet Access Agreement dated December 9, 1996 between the
Company and Genuity and related agreement with TCG.
11 Statement of Computation of Weighted Average Shares Outstanding.
23(a) Consent of Ernst & Young, LLP, Independent Auditors.
23(b)* Consent of Osborn Maledon, P.A. (included in Exhibit 5).
24(a) Power of Attorney of Michael S. Turico.
24(b) Power of Attorney of Todd J. Stevens.
24(c) Power of Attorney of Brian N. Burns.
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<PAGE>
24(d) Power of Attorney of Lonnie A. Whittington.
24(e) Power of Attorney of James A. Layne.
24(f) Power of Attorney of Matthew D. Stanton.
24(g) Power of Attorney of John E. Hall.
27 Financial Data Schedule.
* To be filed by amendment.
** Confidential treatment has been requested with respect to
portions of this Exhibit.
II-14
Exhibit 3(a)
CERTIFICATE OF INCORPORATION
OF
SANDBOX ENTERTAINMENT CORPORATION
Pursuant to the General Corporation Law
of the State of Delaware
ARTICLE I
The name of the corporation shall be Sandbox Entertainment Corporation.
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle 19801. The name of the Corporation's registered
agent is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
ARTICLE IV
The aggregate number of shares that the Corporation shall have
authority to issue is Twelve Million (12,000,000) divided into Ten Million
(10,000,000) shares of Common Stock, each with par value of $.001, and Two
Million (2,000,000) shares of Preferred Stock, each with par value of $.001. The
Preferred Stock shall be issued in one series, which shall be designated "Series
A Preferred Stock" and consist of Two Million (2,000,000) shares. The terms and
provisions are as follows:
1. Definitions. For purposes of this Article, the following definitions
shall apply:
(a) "Company" shall mean the Corporation.
(b) "Convertible Securities" shall mean any evidences of
indebtedness, shares or other securities (other than shares of Preferred Stock)
convertible into or exchangeable for Common Stock.
<PAGE>
(c) "Employee Sale" shall mean the sale or grant of any right
to purchase (including any option or warrant) shares of Common Stock to any
employee, officer or director of, or consultant to, the Company pursuant to any
employee, officer, director or consultant plan or agreement adopted or approved
by the Board of Directors of the Company, and any exercise of any such right.
Employee Sale shall also mean the sale or grant of any right to purchase
(including any option or warrant) shares of Common Stock after February 13, 1996
to any bank, equipment lessor or other similar financial institution if and to
the extent that the transaction in which such sale or grant is to be made is
approved by the Company's Board of Directors.
(d) "Liquidation Preference" shall mean eighty cents ($.80)
per share for the Series A Preferred Stock.
(e) "Options" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire Common Stock or Convertible
Securities.
(f) "Original Issue Date" shall mean the date upon which
shares of a particular series of Preferred Stock are first issued. For the
Series A Preferred Stock, the Original Issue Date shall be February 13, 1996.
(g) "Original Issue Price" shall mean eighty cents ($.80) per
share for the Series A Preferred Stock.
(h) "Preferred Stock" shall mean the Series A Preferred Stock.
2. Dividends.
(a) Dividend Preference. The holders of outstanding shares of
Preferred Stock shall be entitled to receive dividends, out of any assets at the
time legally available therefore, prior and in preference to any declaration or
payment of any dividend (payable other than in Common Stock of this Corporation)
on the Common Stock of this Corporation, at the rate of nine percent (9%) of the
Original Issue Price per share per annum or, if greater (as determined on an
as-converted basis for the Preferred Stock), an amount equal to that paid on the
outstanding shares of Common Stock of this Corporation, when, as and if declared
by the Board of Directors, provided, however, that the Board of Directors is
under no obligation to pay dividends to such holders, and such dividends, if
any, shall be noncumulative. No rights shall accrue to the holders of the
Preferred Stock if dividends are not declared in any prior year. Such dividends
may be payable quarterly or otherwise as the Board of Directors may from time to
time determine. If and to the extent that the Board of Directors of the Company
shall declare and set aside for payment any other and further amount of cash or
property as a distribution, such distribution shall be made with equal priority
to the Common Stock and the Preferred Stock, with each share of Preferred Stock
being treated for such purpose as if it had been converted into Common Stock at
the then-effective Conversion Rate. For such purpose, all shares of Preferred
Stock held by each holder of
2
<PAGE>
Preferred Stock shall be aggregated, and any resulting fractional share of
Common Stock shall be disregarded.
(b) Priority of Dividends. The Company shall make no
Distribution (as defined below) to the holders of shares of Common Stock in any
fiscal year unless and until dividends shall have been paid, or declared and set
apart, upon all shares of Preferred Stock.
(c) Distribution. As used in this section, "Distribution"
means the transfer of cash or property without consideration, whether by way of
dividend or otherwise (except a dividend in shares of the Company) or the
purchase of shares of the Company (other than in connection with the repurchase
of shares of Common issued to or held by employees, consultants, officers and
directors upon termination of their employment or services pursuant to
agreements providing for the right of said repurchase) for cash or property.
(d) Consent to Certain Distributions. The holders of
outstanding shares of Preferred Stock shall be deemed to have consented to all
distributions or payments to existing or terminated employees, consultants,
officers and directors of the Company in connection with the termination of
employment by or services to the Company and relating to the repurchase of
shares of capital stock issued to or held by such individuals pursuant to
agreements with the Company for such repurchases.
3. Liquidation Rights.
(a) Liquidation Preference. In the event of any liquidation,
dissolution or winding up of the Company, either voluntary or involuntary, the
holders of the Preferred Stock shall be entitled to receive, out of the assets
of the Company, the Liquidation Preference specified for each share of Preferred
Stock then held by them plus an amount equal to all declared and unpaid
dividends thereon, if any, to the date that payment is made, before any payment
shall be made or any assets distributed to the holders of Common Stock.
(b) Priority. If upon the liquidation, dissolution or winding
up of the Company, the assets to be distributed among the holders of the
Preferred Stock are insufficient to permit the payment to such holders of the
full Liquidation Preference for their shares, then the entire assets of the
Company legally available for distribution shall be distributed with equal
priority and pro rata among the holders of the Preferred Stock in proportion to
the numbers of shares of Preferred Stock held by them multiplied by the
Liquidation Preference for such shares of Preferred Stock.
(c) Remaining Assets. After the payment to the holders of
Preferred Stock of the full preferential amounts specified herein, any remaining
assets of the Company shall be distributed ratably to the holders of the
Company's capital stock then outstanding, with each share of Preferred Stock
being treated for such purpose as if it had been converted into Common Stock at
the then effective Conversion Rate (as defined below). For such purpose, all
shares of
3
<PAGE>
Preferred Stock held by each holder of Preferred Stock shall be aggregated, and
any resulting fractional share of Common Stock shall be disregarded. When the
holders of the Preferred Stock have received a total distribution per share
equal to their Liquidation Preference, any remaining assets of the Company shall
be distributed ratably to the holders of the Company's capital stock then
outstanding, with each share of Preferred Stock being treated for such purpose
as if it had been converted into Common Stock at then-effective Conversion Rate.
(d) Reorganization. For purposes of this Section 3, a
liquidation, dissolution or winding up of the Company shall be deemed to be
occasioned by, or to include, (a) the acquisition of the Company by another
entity by means of any transaction or series of related transactions (including,
without limitation, any reorganization, merger or consolidation but excluding
any merger effected exclusively for the purpose of changing the domicile of the
Company); or (b) a sale or lease of all or substantially all of the assets of
the Company; in each case, unless the Company's shareholders of record as
constituted immediately prior to such acquisition, sale or lease (by virtue of
securities issued as consideration for the Company's acquisition or sale or
otherwise) hold at least 50% of the voting power of the surviving or acquiring
entity, or unless otherwise agreed by a majority of the outstanding shares of
each class of outstanding stock.
4. Conversion. The holders of the Preferred Stock shall have conversion
rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share at the office of the Corporation or any transfer agent
for the Preferred Stock, into that number of fully-paid and nonassessable shares
of Common Stock that is equal to eighty cents ($.80) divided by the appropriate
Conversion Price (as hereinafter defined). The Conversion Price for the Series A
Preferred Stock shall be eighty cents ($.80) and shall be subject to adjustment
as provided herein. (The number of shares of Common Stock into which each share
of Preferred Stock may be converted is hereinafter referred to as the
"Conversion Rate" for each such series.) Upon any decrease or increase in the
Conversion Price or the Conversion Rate for a series, as described in this
Section 4, the Conversion Rate or Conversion Price for such series, as the case
may be, shall be appropriately increased or decreased.
(b) Automatic Conversion. Each share of Preferred Stock shall
automatically be converted into shares of Common Stock at the then-effective
Conversion Rate for such share immediately upon the consummation of a firmly
underwritten public offering on Form S-1 (or successor form) that gives the
Company a market valuation of at least $25 million and results in proceeds to
the Company in the public offering of at least $5 million (net of underwriting
discounts and commissions and offering expenses) (a "Qualifying Public
Offering").
(c) Mechanics of Conversion. No fractional shares of Common
Stock shall be issued upon conversion of Preferred Stock. In lieu of any
fractional shares to which the holder
4
<PAGE>
would otherwise be entitled, the Corporation shall pay cash equal to such
fraction multiplied by the then fair market value of such fractional shares as
determined by the Board of Directors of the Corporation. Before any holder of
Preferred Stock shall be entitled to convert the same into full shares of Common
Stock, and to receive certificates therefor, he shall surrender the certificate
or certificates therefor, duly endorsed, at the office of the Corporation or of
any transfer agent for the Preferred Stock, and shall give written notice to the
Corporation at such office that he elects to convert the same; provided,
however, that in the event of an automatic conversion pursuant to paragraph 4(b)
above, the outstanding shares of Preferred Stock shall be converted
automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
Corporation or its transfer agent; provided further, however, that the
Corporation shall not be obligated to issue certificates evidencing the shares
of Common Stock issuable upon such automatic conversion unless either the
certificates evidencing such shares of Preferred Stock are delivered to the
Corporation or its transfer agent as provided above, or the holder notifies the
Corporation or its transfer agent that such certificates have been lost, stolen
or destroyed and executes an agreement satisfactory to the Corporation to
indemnify the Corporation from any loss incurred by it in connection with such
certificates.
The Corporation shall, as soon as practicable after such delivery, or
after such agreement and indemnification, issue and deliver at such office to
such holder of Preferred Stock, a certificate or certificates for the number of
shares of Common Stock to which he shall be entitled as aforesaid and a check
payable to the holder in the amount of any cash amounts payable as the result of
a conversion into fractional shares of Common Stock, plus any declared and
unpaid dividends on the converted Preferred Stock. Such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the shares of Preferred Stock to be converted, and the
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date; provided, however, that if
the conversion is in connection with an underwritten offer of securities
registered pursuant to the Securities Act of 1933, as amended, the conversion
may, at the option of any holder tendering Preferred Stock for conversion, be
conditioned upon the closing of the sale of securities pursuant to such
offering, in which event the person(s) entitled to receive the Common Stock
issuable upon such conversion of the Preferred Stock shall not be deemed to have
converted such Preferred Stock until immediately prior to the closing of the
sale of such securities.
(d) Adjustments to Conversion Price for Diluting Issues.
(i) Special Definition. For purposes of this
paragraph 4(d), "Additional Shares of Common" shall mean all shares of Common
Stock issued (or, pursuant to paragraph 4(d)(iii), deemed to be issued) by the
Corporation after the Original Issue Date of a particular series of Preferred
Stock, other than:
(1) shares of Common Stock issued or
issuable upon conversion of shares of Preferred Stock;
5
<PAGE>
(2) shares of Common Stock issued or
issuable in an Employee Sale;
(3) shares of Common Stock issued or
issuable as a dividend or distribution on Preferred Stock or pursuant to any
event for which adjustment is made pursuant to paragraph 4(d)(vi), (vii) or
(viii) hereof,
(ii) No Adjustment of Conversion Price. No adjustment
in the Conversion Price of a particular share of Preferred Stock shall be made
in respect of the issuance of Additional Shares of Common unless the
consideration per share for an Additional Share of Common issued or deemed to be
issued by the Corporation is less than or equal to the Conversion Price in
effect on the date of, and immediately prior to such issue, for such share of
Preferred Stock.
(iii) Deemed Issue of Additional Shares of Common.
(1) Options and Convertible Securities. In
the event the Corporation at any time or from time to time after the Original
Issue Date of a particular series of Preferred Stock shall issue any Options or
Convertible Securities or shall fix a record date for the determination of
holders of any class of securities entitled to receive any such Options or
Convertible Securities, then the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provisions contained therein
for a subsequent adjustment of such number) of Common Stock issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible Securities or exercise
of such Options, shall be deemed to be Additional Shares of Common issued as of
the time of such issue or, in case such a record date shall have been fixed, as
of the close of business on such record date, provided that Additional Shares of
Common shall not be deemed to have been issued unless the consideration per
share (determined pursuant to paragraph 4(d)(v) hereof) of such Additional
Shares of Common would be less than the Conversion Price of such series of
Preferred Stock in effect on the date of and immediately prior to such issue, or
such record date, as the case may be, and provided further that in any such case
in which Additional Shares of Common are deemed to be issued:
(a) no further adjustment in the
Conversion Price of such series of Preferred Stock shall be made upon the
subsequent issue of Convertible Securities or shares of Common Stock upon the
exercise of such Options or conversion or exchange of such Convertible
Securities;
(b) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase in the consideration payable to the Corporation, or decrease in the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Conversion Price of such series of Preferred Stock
computed upon the original issue thereof (or upon the occurrence of a record
date with respect
6
<PAGE>
thereto), and any subsequent adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed to reflect such increase
or decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities;
(c) no readjustment pursuant to
clause (b) above shall have the effect of increasing the Conversion Price of
such series of Preferred Stock to an amount which exceeds the lower of (i) the
Conversion Price of such Series of Preferred Stock on the original adjustment
date, or (ii) the Conversion Price of such Series of Preferred Stock that would
have resulted from any issuance of Additional Shares of Common between the
original adjustment date and such readjustment date;
(d) upon the expiration of any such
Options of conversion or exchange under such Convertible Securities which shall
not have been exercised, the Conversion Prices computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto) and any
subsequent adjustments based thereon shall, upon such expiration, be recomputed
as if:
i) in the case of
Convertible Securities or Options for Common Stock, the only Additional Shares
of Common issued were the shares of Common Stock, if any, actually issued upon
the exercise of such Options or the conversion or exchange of such Convertible
Securities and the consideration received therefor was the consideration
actually received by the Corporation for the issue of such exercised Options
plus the consideration actually received by the Corporation upon such exercise
or for the issue of all such Convertible Securities which were actually
converted or exchanged, plus the additional consideration, if any, actually
received by the Corporation upon such conversion or exchange, and
ii) in the case of Options
for Convertible Securities, only the Convertible Securities, if any, actually
issued upon the exercise thereof were issued at the time of issue of such
Options, and the consideration received by the Corporation for the Additional
Shares of Common deemed to have been then issued was the consideration actually
received by the Corporation for the issue of such exercised Options, plus the
consideration deemed to have been received by the Corporation (determined
pursuant to paragraph 4(d)(v)) upon the issue of the Convertible Securities with
respect to which such Options were actually exercised, and
(e) if such record date shall have
been fixed and such Options or Convertible Securities are not issued on the date
fixed therefor, the adjustment previously made in the Conversion Prices which
became effective on such record date shall be canceled as of the close of
business on such record date, and thereafter the Conversion Prices shall be
adjusted pursuant to this paragraph 4(d)(iii) as of the actual date of their
issuance.
(2) Stock Dividends. In the event the
Corporation at any time or from time to time after the Original Issue Date of a
particular series of Preferred Stock
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shall declare or pay any dividend on the Common Stock payable in Common Stock,
and with respect to which no similar Common Stock dividend is to be distributed
to holders of such series of Preferred Stock, then and in any such event,
Additional Shares of Common shall be deemed to have been issued immediately
after the close of business on the record date for the determination of holders
of any class of securities entitled to receive such dividend.
(iv) Adjustment of Conversion Price Upon Issuance of
Additional Shares of Common. In the event this Corporation shall issue
Additional Shares of Common (including Additional Shares of Common deemed to be
issued pursuant to paragraph 4(d)(iii)) without consideration or for a
consideration per share less than the applicable Conversion Price for the
Preferred Stock in effect on the date of and immediately prior to such issue,
then and in such event, the applicable Conversion Price of the Preferred Stock
shall be reduced, concurrently with such issue, to a price (calculated to the
nearest cent) determined by multiplying such Conversion Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of shares of Common Stock which
the aggregate consideration received by the Corporation for the total number of
Additional Shares of Common so issued would purchase at such Conversion Price;
and the denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue plus the number of such Additional
Shares of Common so issued; and provided further that, for the purposes of this
paragraph 4(d)(iv), all shares of Common Stock issuable upon exercise,
conversion or exchange of outstanding Options, Preferred Stock and Convertible
Securities, as the case may be, shall be deemed to be outstanding Common Stock,
and immediately after any Additional Shares of Common are deemed issued pursuant
to paragraph 4(d)(iii), such Additional Shares of Common shall be deemed to be
outstanding.
(v) Determination of Consideration. For purposes of
this subsection 4(d), the consideration received by the Corporation for the
issue of any Additional Shares of Common shall be computed as follows:
(1) Cash and Property. Such consideration
shall:
(a) insofar as it consists of cash,
be computed at the aggregate amount of cash received by the Corporation
excluding amounts paid or payable for accrued interest or accrued dividends;
(b) insofar as it consists of
property other than cash, be computed at the fair value thereof at the time of
such issue, as determined in good faith by the Board; and
(c) in the event Additional Shares
of Common are issued together with other shares or securities or other assets of
the Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (a) and (b) above, as
determined in good faith by the Board.
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(2) Options and Convertible Securities. The
consideration per share received by the Corporation for Additional Shares of
Common deemed to have been issued pursuant to paragraph 4(d)(iii)(1), relating
to Options and Convertible Securities, shall be determined by dividing
(x) the total amount, if any,
received or receivable by the Corporation as consideration for the issue of such
Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of
such consideration) payable to the Corporation upon the exercise of such Options
or the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities by
(y) the maximum number of shares of
Common Stock (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(3) Stock Dividends. Any Additional Shares
of Common deemed to have been issued relating to stock dividends shall be deemed
to have been issued for no consideration.
(vi) Adjustments for Subdivisions or Combinations of
Common. In the event the outstanding shares of Common Stock shall be subdivided
(by stock split or otherwise than by payment of a dividend in Common Stock),
into a greater number of shares of Common Stock, the Conversion Prices in effect
immediately prior to such subdivision shall, concurrently with the effectiveness
of such subdivision, be proportionately decreased. In the event the outstanding
shares of Common Stock shall be combined (by reclassification or otherwise) into
a lesser number of shares of Common Stock, the Conversion Prices in effect
immediately prior to such combination shall, concurrently with the effectiveness
of such combination, be proportionately increased.
(vii) Adjustments for Other Distributions. In the
event the Corporation at any time or from time to time makes or fixes a record
date for the determination of holders of Common Stock entitled to receive any
distribution payable in securities of the Corporation other than shares of
Common Stock and other than as otherwise adjusted in this Section 4, then and in
each such event provision shall be made so that the holders of Preferred Stock
shall receive upon conversion thereof, in addition to the number of shares of
Common Stock receivable thereupon, the amount of securities of the Corporation
which they would have received had their Preferred Stock then converted into
Common Stock on the date of such event and had they thereafter, during the
period from the date of such event to and including the date of conversion,
retained such securities receivable by them as aforesaid during such period,
subject to all other adjustments
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called for during such period under this Section 4 with respect to the rights of
the holders of the Preferred Stock.
(viii) Adjustments for Reclassification, Exchange and
Substitution. If the Common Stock issuable upon conversion of the Preferred
Stock shall be changed into the same or a different number of shares of any
other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of shares
provided for above), the Conversion Prices then in effect shall, concurrently
with the effectiveness of such reorganization or reclassification, be
proportionately adjusted such that the Preferred Stock shall be convertible
into, in lieu of the number of shares of Common Stock which the holders would
otherwise have been entitled to receive, a number of shares of such other class
or classes of stock equivalent to the number of shares of Common Stock that
would have been subject to receipt by the holders upon conversion of the
Preferred Stock immediately before that change.
(e) No Impairment. The Corporation will not, by amendment of
its certificate of incorporation or through any reorganization, transfer of
assets, 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 hereunder by the Corporation but will at all times
in good faith assist in the carrying out of all the provisions of this Section
(b)(4) and in the taking of all such action as may be necessary or appropriate
in order to protect the Conversion Rights of the holders of the Preferred Stock
against impairment.
(f) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of any Conversion Price pursuant to this Section 4,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Preferred Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any holder of
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Prices at the time in effect, and (iii) the number of shares of
Common Stock and the amount, if any, of other property which at the time would
be received upon the conversion of Preferred Stock.
(g) Notices of Record Date. In the event that this Corporation
shall propose at any time:
(i) to declare any dividend or distribution upon its
Common Stock, whether in cash, property, stock or other securities, whether or
not a regular cash dividend and whether or not out of earnings or earned
surplus;
(ii) 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;
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(iii) to effect any reclassification or
recapitalization of its Common Stock outstanding involving a change in the
Common Stock; or
(iv) to merge with or into any other Corporation, or
sell, lease or convey all or substantially all its property or business, or to
liquidate, dissolve or wind up;
then, in connection with each such event, this Corporation shall send to the
holders of the Preferred Stock at least 20 days' prior written notice of the
date on which a record shall be taken for such event (and specifying the date on
which the holders of Common Stock shall be entitled thereto) or for determining
rights to vote in respect of the matters referred to in (iii) and (iv) above.
Each such written notice shall be given by first class mail, postage
prepaid, addressed to the holders of Preferred Stock at the address for each
such holder as shown on the books of this Corporation.
(h) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of the Preferred Stock, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all then outstanding shares of the Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of the Preferred Stock,
the Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
5. Voting. Except as otherwise expressly provided herein or as required
by law, the holders of Preferred Stock and the holders of Common Stock shall
vote together and not as separate classes.
(a) Preferred Stock. Each holder of shares of Preferred Stock
shall be entitled to the number of votes equal to the number of shares of Common
Stock into which such shares of Preferred Stock held by such holder of Preferred
Stock could then be converted. The holders of shares of the Preferred Stock
shall be entitled to vote on all matters on which the Common Stock shall be
entitled to vote, unless otherwise required by applicable law. The holders of
the Preferred Stock shall be entitled to notice of any shareholders' meeting in
accordance with the Bylaws of the Company. Fractional votes shall not, however,
be permitted and any fractional voting rights resulting from the above formula
(after aggregating all shares into which shares of Preferred Stock held by each
holder could be converted), shall be disregarded.
(b) Common Stock. Each holder of shares of Common Stock shall
be entitled to one vote for each share thereof held.
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(c) Election of Directors. The holders of the Preferred Stock,
voting together as a single class, shall be entitled to elect one director. All
other directors, and any vacancies on the Board of Directors, shall be filled by
vote of the holders of the Common Stock and the Preferred Stock, voting together
as a single class.
6. Amendments and Changes.
(a) No Series Voting. Other than as provided by law, there
shall be no series voting.
(b) Approval by Class. As long as any of the Preferred Stock
shall be issued and outstanding, the Company shall not, without first obtaining
the approval (by vote or consent as provided by law) of the holders of
two-thirds (66-2/3%) of the total number of shares of the Preferred Stock then
outstanding:
(i) alter or change the rights, preferences or
privileges of the holders of Preferred Stock materially or adversely;
(ii) amend or repeal any provision of, or add any
provision to, the Company's Certificate of Incorporation or Bylaws;
(iii) increase the authorized number of shares of
Preferred Stock;
(iv) authorize, create or issue shares of any class
or series of stock having any preference or priority equal or superior to the
Preferred Stock with respect to voting, redemption, dividends, or upon
liquidation; or
(v) amend this Section 6(b).
(c) Consent of Class. Consent of the holders of at least
two-thirds of all outstanding Preferred Stock shall be required for
(i) any merger, consolidation, or other corporate
reorganization in which the shareholders of the Corporation do not own a
majority of the outstanding shares of the surviving corporation; or
(ii) any transaction or series of related
transactions in which in excess of 50% of the Corporation's voting power is
transferred or in which all or substantially all of the assets of the
Corporation are sold.
7. Notices. Any notice required by the provisions of this Article IV to
be given to the holders of Preferred Stock shall be deemed given if deposited in
the United States mail, postage
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prepaid, and addressed to each holder of record at such holder's address
appearing on the books of the Company.
ARTICLE V
The incorporator of the Corporation and his address is as follows:
Chad M. Little
2231 East Camelback Road, Suite 324
Phoenix, AZ 85016
ARTICLE VI
The business and affairs of this Corporation shall be conducted by a
Board of Directors, the size of which shall be as established from time to time
as set forth in the Corporation's Bylaws. The following named person shall
constitute the initial Board of Directors, until his successor or successors are
elected and qualify:
Chad M. Little
2231 East Camelback Road, Suite 324
Phoenix, AZ 85016
ARTICLE VII
The known place of business of the Corporation is as follows: 2231 East
Camelback Road, Suite 324, Phoenix, Arizona 85016. Said place of business shall
be subject to change hereafter in accordance with applicable law.
ARTICLE VIII
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director; provided, however that nothing contained herein shall
eliminate or limit the liability of a director of the Corporation to the extent
provided by applicable laws (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or knowing violation of law, (iii)
for authorizing the payment of an unlawful dividend or the an unlawful
repurchase of stock pursuant to Section 174 of the General Corporation Law of
Delaware, or (iv) for any transaction from which the director derived an
improper personal benefit. The limitation of liability provided herein shall
continue after a
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director has ceased to occupy such position as to acts or omissions occurring
during such director's term or terms of office.
No repeal or modification of the foregoing paragraph by the
stockholders of this Corporation shall adversely affect any right or protection
of a director existing at the time of such repeal or modification.
ARTICLE IX
The Corporation shall indemnify any person against expenses, including
without limitation, attorneys' fees, judgments, fines and amounts paid in
settlement, actually and reasonably incurred by reason of the fact that he or
she is or was a director or officer of the Corporation, or is or was serving at
the request of the Corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, in all circumstances in
which, and to the extent that, such indemnification is permitted and provided
for by the laws of the State of Delaware as then in effect.
No repeal or modification of the foregoing paragraph by the
stockholders of this Corporation shall adversely affect any right or protection
of a director or officer existing at the time of such repeal or modification.
ARTICLE X
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE XI
Except as otherwise provided in this Certificate of Incorporation, in
furtherance and not in limitation of the powers conferred by statute, the Board
of Directors of this corporation is expressly authorized to make, alter, amend,
rescind or repeal the bylaws of the corporation.
ARTICLE XII
Elections of directors need not be by written ballot except and to the
extent provided in the bylaws of the Corporation.
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ARTICLE XIII
The Corporation reserves the right to repeal, alter, amend or rescind
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred on stockholders
herein are granted subject to this reservation.
ARTICLE XIV
The Corporation shall not be subject to the provisions of Section 203
of the Delaware General Corporation Law.
The undersigned, being the incorporator hereinbefore named for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, does hereby declare and certify that this is his act and deed
and the facts herein stated are true, and accordingly have hereunto set his hand
this 18th day of April, 1996.
INCORPORATOR:
/s/ Chad M. Little
---------------------------------
Chad M. Little
15
Exhibit 3(b)
CERTIFICATE OF AMENDMENT TO CERTIFICATE
OF INCORPORATION OF SANDBOX ENTERTAINMENT CORPORATION
a Delaware corporation
Pursuant to Section 242 of the General Corporation Law of the State of
Delaware, SANDBOX ENTERTAINMENT CORPORATION, a corporation organized and
existing under the laws of the state of Delaware, hereby certifies as follows:
1. The name of the corporation is SANDBOX ENTERTAINMENT CORPORATION,
the same name under which the corporation was originally incorporated. The date
the corporation filed its original Certificate of Incorporation with the
Secretary of State was April 18, 1996.
2. The Certificate of Incorporation of the Corporation has not yet been
amended.
3. The text of the Certificate of Incorporation is hereby amended to
delete the introductory paragraph of Article IV and replace it with the
following:
ARTICLE IV
The aggregate number of shares that the Corporation
shall have authority to issue is Thirteen Million Five Hundred
Thousand (13,500,000) divided into Ten Million (10,000,000)
shares of Common Stock, each with par value of $.001, and
Three Million Five Hundred Thousand (3,500,000) shares of
Preferred Stock, each with par value of $.001. The Preferred
Stock shall be issued in one series, which shall be designated
"Series A Preferred Stock" and consist of Three Million Five
Hundred Thousand (3,500,000) shares. The terms and provisions
are as follows:
IN WITNESS WHEREOF, the undersigned has signed this Certificate of
Amendment to Certificate of Incorporation as of the 18th day of April, 1997.
/s/ Chad M. Little
---------------------------------------
Chad M. Little
ATTEST:
/s/ James A. Layne
- -------------------------------------------
James A. Layne, Secretary
EXHIBIT 3(c)
FORM OF
RESTATED
CERTIFICATE OF INCORPORATION
OF
SANDBOX ENTERTAINMENT CORPORATION
Pursuant to the General Corporation Law
of the State of Delaware
Sandbox Entertainment Corporation was originally incorporated in Delaware
under the name Sandbox Entertainment Corporation by filing its original
Certificate of Incorporation with the Delaware Secretary of State on April 18,
1996, which was thereafter amended by that certain Certificate of Amendment to
Certificate of Incorporation filed with the Delaware Secretary of State on April
22, 1997. This Restated Certificate of Incorporation ("Certificate") restates,
integrates and further amends the Corporation's prior Certificate of
Incorporation and was duly adopted by the Corporation's Board of Directors with
the approval of the stockholders in accordance with Delaware General Corporation
Law Section 245.
ARTICLE I
The name of the Corporation shall be Sandbox Entertainment Corporation.
The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle 19801. The name of the Corporation's registered
agent is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
The aggregate number of shares that the Corporation shall have authority
to issue is __________________________ (______________) divided into Ten Million
(10,000,000) shares of Common Stock, each with par value of $.001 ("Common
Stock"), and
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________________________ (______________) shares of Preferred Stock, each with
par value of $.001 ("Preferred Stock"). Effective as of the date of filing of
this Certificate with the Delaware Secretary of State, each share of Common
Stock and Preferred Stock then outstanding shall be deemed to be divided into
0.400 shares of Common Stock or Preferred Stock, as the case may be; provided,
however, that in lieu of delivering any fractional share, the Corporation shall
pay in cash the fair value of such fractions based on the fair value of such
shares, as determined by the Board of Directors.
Preferred Stock may be issued from time to time in one or more series,
each of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Authority is
hereby expressly granted to the Board of Directors from time to time to issue
the Preferred Stock in one or more series, and in connection with the creation
of any such series, by resolution or resolutions providing for the issue of the
shares thereof, to determine and fix such voting powers, full or limited, or no
voting powers, and such designations, preferences and relative participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof, including without limitation thereof, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be stated and expressed in such resolutions, all to the full extent now or
hereafter permitted by The General Corporation Law of Delaware. Without limiting
the generality of the foregoing, except as otherwise provided herein or in the
resolutions providing for the issuance of any series of Preferred Stock, the
resolutions providing for issuance of any series of Preferred Stock may provide
that such series shall be superior or rank equally or be junior to the Preferred
Stock of any other series to the extent permitted by law.
Each holder of Common Stock and Preferred Stock, other than the holders of
record of the Common Stock and the Preferred Stock immediately prior to the
filing of this Restated Certificate of Incorporation with the Delaware Secretary
of State, shall, subject to the rules and regulations promulgated by the
Securities and Exchange Commission, be deemed to have agreed to receive all
stockholder reports and communications, including but not limited to all
prospectuses, quarterly and annual reports and proxy statements, by delivery of
such materials to such holder's last known mailing address or electronic mail
address, at the Corporation's discretion, listed on the Corporation's records,
or by delivery of a notice to such mailing address or electronic mailing
address, at the Corporation's discretion, which directs such holder to a
specific Web address where such materials can be found, read and printed.
ARTICLE V
One Million Four Hundred Thousand (1,400,000) shares of the authorized and
unissued Preferred Stock are hereby designated Series A Preferred Stock ("Series
A Preferred Stock") with the following rights and limitations.
1. Definitions. For purposes of this Article V, the following definitions
shall apply:
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(a) "Company" shall mean the Corporation.
(b) "Convertible Securities" shall mean any evidences of
indebtedness, shares or other securities (other than shares of Series A
Preferred Stock) convertible into or exchangeable for Common Stock.
(c) "Employee Sale" shall mean the sale or grant of any right to
purchase (including any option or warrant) shares of Common Stock to any
employee, officer or director of, or consultant to, the Company pursuant to any
employee, officer, director or consultant plan or agreement adopted or approved
by the Board of Directors of the Company, and any exercise of any such right.
Employee Sale shall also mean the sale or grant of any right to purchase
(including any option or warrant) shares of Common Stock or Preferred Stock to
any bank, equipment lessor or other similar financial institution, and not to a
related party, if and to the extent that the transaction in which such sale or
grant is to be made is approved by the Company's Board of Directors.
(d) "Liquidation Preference" shall mean Two Dollars ($2.00) per
share for the Series A Preferred Stock.
(e) "Options" shall mean rights, options or warrants to subscribe
for, purchase or otherwise acquire Common Stock or Convertible Securities.
(f) "Original Issue Date" shall mean February 13, 1996 for the
Series A Preferred Stock..
(g) "Original Issue Price" shall mean Two Dollars ($2.00) per share
for the Series A Preferred Stock.
2. Dividends.
(a) Dividend Preference. The holders of outstanding shares of Series
A Preferred Stock shall be entitled to receive dividends, out of any assets at
the time legally available therefore, prior and in preference to any declaration
or payment of any dividend (payable other than in Common Stock of this
Corporation) on the Common Stock of this Corporation, at the rate of nine
percent (9%) of the Original Issue Price per share per annum or, if greater (as
determined on an as-converted basis for the Series A Preferred Stock), an amount
equal to that paid on the outstanding shares of Common Stock of this
Corporation, when, as and if declared by the Board of Directors, provided,
however, that (i) the Board of Directors is under no obligation to pay dividends
to such holders, (ii) such dividends, if any, shall be noncumulative and (iii)
in no event shall any dividend be declared or paid with respect to the Series A
Preferred Stock until after the second (2nd) anniversary of the date that this
Restated Certificate of Incorporation is filed with the Delaware Secretary of
State. No rights shall accrue to the holders of the Series A Preferred Stock if
dividends are not declared in any prior year. Such dividends may be payable
quarterly or otherwise as the Board of Directors may from time to time
determine. If and to the extent that
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the Board of Directors of the Company shall declare and set aside for payment
any other and further amount of cash or property as a distribution, such
distribution shall be made with equal priority to the Common Stock and the
Series A Preferred Stock, with each share of Series A Preferred Stock being
treated for such purpose as if it had been converted into Common Stock at the
then-effective Series A Conversion Rate (as defined below). For such purpose,
all shares of Series A Preferred Stock held by each holder of Series A Preferred
Stock shall be aggregated, and any resulting fractional share of Common Stock
shall be disregarded.
(b) Priority of Dividends. The Company shall make no Distribution
(as defined below) to the holders of shares of Common Stock in any fiscal year
unless and until dividends shall have been paid, or declared and set apart, upon
all shares of Series A Preferred Stock.
(c) Distribution. As used in this section, "Distribution" means the
transfer of cash or property without consideration, whether by way of dividend
or otherwise (except a dividend in shares of the Company) or the purchase of
shares of the Company (other than in connection with the repurchase of shares of
Common Stock issued to or held by employees, consultants, officers and directors
upon termination of their employment or services pursuant to agreements
providing for the right of said repurchase) for cash or property.
(d) Consent to Certain Distributions. The holders of outstanding
shares of Series A Preferred Stock shall be deemed to have consented to all
distributions or payments to existing or terminated employees, consultants,
officers and directors of the Company in connection with the termination of
employment by or services to the Company and relating to the repurchase of
shares of capital stock issued to or held by such individuals pursuant to
agreements with the Company for such repurchases.
3. Liquidation Rights.
(a) Liquidation Preference. In the event of any liquidation,
dissolution or winding up of the Company, either voluntary or involuntary, the
holders of the Series A Preferred Stock shall be entitled to receive, out of the
assets of the Company, the Liquidation Preference specified for each share of
Series A Preferred Stock then held by them plus an amount equal to all declared
and unpaid dividends thereon, if any, to the date that payment is made, before
any payment shall be made or any assets distributed to the holders of Common
Stock.
(b) Priority. If upon the liquidation, dissolution or winding up of
the Company, the assets to be distributed among the holders of the Series A
Preferred Stock are insufficient to permit the payment to such holders of the
full Liquidation Preference for their shares, then the entire assets of the
Company legally available for distribution shall be distributed with equal
priority and pro rata among the holders of the Series A Preferred Stock and the
holders of any other series of Preferred Stock entitled to participate pari
passu with the holders of the Series A Preferred Stock, in proportion to the
numbers of shares of Preferred Stock held by them multiplied by the Liquidation
Preference for such shares of Preferred Stock.
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Remaining Assets. After the payment to the holders of Series A
Preferred Stock of the full Liquidation Preference specified herein, and any
other preferential amounts with respect to any other series of Preferred Stock,
any remaining assets of the Company shall be distributed ratably to the holders
then outstanding Common Stock, Series A Preferred Stock and any other series of
Preferred Stock designated as participating with respect to the remaining assets
on liquidation, with each share of Preferred Stock being treated for such
purpose as if it had been converted into Common Stock at the then effective
Series A Conversion Rate (as defined below) or designated conversion rate for
any other series of Preferred Stock. For such purpose, all shares of Preferred
Stock held by each participating holder of Preferred Stock shall be aggregated,
and any resulting fractional share of Common Stock shall be disregarded.
4. Conversion. The holders of the Series A Preferred Stock shall have
conversion rights as follows (the "Series A Conversion Rights"):
(a) Right to Convert. Each share of Series A Preferred Stock shall
be convertible, at the option of the holder thereof, at any time after the date
of issuance of such share at the office of the Corporation or any transfer agent
for the Series A Preferred Stock, into that number of fully-paid and
nonassessable shares of Common Stock that is equal to Two Dollars ($2.00)
divided by the appropriate Series A Conversion Price (as hereinafter defined).
The Series A Conversion Price for the Series A Preferred Stock shall be Two
Dollars ($2.00) and shall be subject to adjustment as provided herein. (The
number of shares of Common Stock into which each share of Series A Preferred
Stock may be converted is hereinafter referred to as the "Series A Conversion
Rate.") Upon any decrease or increase in the Series A Conversion Price or the
Series A Conversion Rate, as described in this Section 4, the Series A
Conversion Rate or Series A Conversion Price, as the case may be, shall be
appropriately increased or decreased.
(b) Automatic Conversion. Each share of Series A Preferred Stock
shall automatically be converted into shares of Common Stock at the
then-effective Series A Conversion Rate for such share immediately upon the
consummation of a firmly underwritten public offering on Form S-1 (or successor
form) that gives the Company a market valuation of at least $25 million and
results in proceeds to the Company in the public offering of at least $5 million
(net of underwriting discounts and commissions and offering expenses) (a
"Qualifying Public Offering").
(c) Mechanics of Conversion. No fractional shares of Common Stock
shall be issued upon conversion of Series A Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then fair
market value of such fractional shares as determined by the Board of Directors
of the Corporation. Before any holder of Series A Preferred Stock shall be
entitled to convert the same into full shares of Common Stock, and to receive
certificates therefor, he shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of any transfer
agent for the Series A Preferred Stock, and shall give written notice to the
Corporation at such office that he elects to convert the same; provided,
however, that in the event of an automatic conversion pursuant to paragraph 4(b)
above, the outstanding shares of Series A Preferred Stock shall be converted
automatically without any further action by the holders of such
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shares and whether or not the certificates representing such shares are
surrendered to the Corporation or its transfer agent; provided further, however,
that the Corporation shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such automatic conversion unless either the
certificates evidencing such shares of Series A Preferred Stock are delivered to
the Corporation or its transfer agent as provided above, or the holder notifies
the Corporation or its transfer agent that such certificates have been lost,
stolen or destroyed and executes an agreement satisfactory to the Corporation to
indemnify the Corporation from any loss incurred by it in connection with such
certificates.
The Corporation shall, as soon as practicable after such delivery, or
after such agreement and indemnification, issue and deliver at such office to
such holder of Series A Preferred Stock, a certificate or certificates for the
number of shares of Common Stock to which he shall be entitled as aforesaid and
a check payable to the holder in the amount of any cash amounts payable as the
result of a conversion into fractional shares of Common Stock, plus any declared
and unpaid dividends on the converted Series A Preferred Stock. Such conversion
shall be deemed to have been made immediately prior to the close of business on
the date of such surrender of the shares of Series A Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date; provided,
however, that if the conversion is in connection with an underwritten offer of
securities registered pursuant to the Securities Act of 1933, as amended, the
conversion may, at the option of any holder tendering Series A Preferred Stock
for conversion, be conditioned upon the closing of the sale of securities
pursuant to such offering, in which event the person(s) entitled to receive the
Common Stock issuable upon such conversion of the Series A Preferred Stock shall
not be deemed to have converted such Series A Preferred Stock until immediately
prior to the closing of the sale of such securities.
(d) Adjustments to Series A Conversion Price for Diluting Issues.
(i) Special Definition. For purposes of this paragraph 4(d),
"Additional Shares of Common" shall mean all shares of Common Stock issued (or,
pursuant to paragraph 4(d)(iii), deemed to be issued) by the Corporation after
the Original Issue Date, other than:
(1) shares of Common Stock issued or issuable upon
conversion of shares of Series A Preferred Stock;
(2) shares of Common Stock issued or issuable in an
Employee Sale;
(3) shares of Common Stock issued or issuable as a
dividend or distribution on Series A Preferred Stock or pursuant to any event
for which adjustment is made pursuant to paragraph 4(d)(vi), (vii) or (viii)
hereof,
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(ii) No Adjustment of Series A Conversion Price. No adjustment
in the Series A Conversion Price of a particular share of Series A Preferred
Stock shall be made in respect of the issuance of Additional Shares of Common
unless the consideration per share for an Additional Share of Common issued or
deemed to be issued by the Corporation is less than or equal to the Series A
Conversion Price in effect on the date of, and immediately prior to such issue,
for such share of Series A Preferred Stock.
(iii) Deemed Issue of Additional Shares of Common.
(1) Options and Convertible Securities. In the event the
Corporation at any time or from time to time after the Original Issue Date shall
issue any Options or Convertible Securities or shall fix a record date for the
determination of holders of any class of securities entitled to receive any such
Options or Convertible Securities, then the maximum number of shares (as set
forth in the instrument relating thereto without regard to any provisions
contained therein for a subsequent adjustment of such number) of Common Stock
issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities or exercise of such Options, shall be deemed to be Additional Shares
of Common issued as of the time of such issue or, in case such a record date
shall have been fixed, as of the close of business on such record date, provided
that Additional Shares of Common shall not be deemed to have been issued unless
the consideration per share (determined pursuant to paragraph 4(d)(v) hereof) of
such Additional Shares of Common would be less than the Series A Conversion
Price in effect on the date of and immediately prior to such issue, or such
record date, as the case may be, and provided further that in any such case in
which Additional Shares of Common are deemed to be issued:
(a) no further adjustment in the Series A
Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(b) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any increase in
the consideration payable to the Corporation, or decrease in the number of
shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof, the Series A Conversion Price computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities;
(c) no readjustment pursuant to clause (b) above
shall have the effect of increasing the Series A Conversion Price to an amount
which exceeds the lower of (i) the Series A Conversion Price on the original
adjustment date, or (ii) the Series A Conversion Price that would have resulted
from any issuance of Additional Shares of Common between the original adjustment
date and such readjustment date;
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(d) upon the expiration of any such Options or the
conversion or exchange rights of such Convertible Securities which shall not
have been exercised, the Series A Conversion Prices computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto) and
any subsequent adjustments based thereon shall, upon such expiration, be
recomputed as if:
(i) in the case of Convertible Securities or
Options for Common Stock, the only Additional Shares of Common issued were the
shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities and the
consideration received therefor was the consideration actually received by the
Corporation for the issue of such exercised Options plus the consideration
actually received by the Corporation upon such exercise or for the issue of all
such Convertible Securities which were actually converted or exchanged, plus the
additional consideration, if any, actually received by the Corporation upon such
conversion or exchange, and
(ii) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options, and the
consideration received by the Corporation for the Additional Shares of Common
deemed to have been then issued was the consideration actually received by the
Corporation for the issue of such exercised Options, plus the consideration
deemed to have been received by the Corporation (determined pursuant to
paragraph 4(d)(v)) upon the issue of the Convertible Securities with respect to
which such Options were actually exercised, and
(e) if such record date shall have been fixed and
such Options or Convertible Securities are not issued on the date fixed
therefor, the adjustment previously made in the Series A Conversion Prices which
became effective on such record date shall be canceled as of the close of
business on such record date, and thereafter the Series A Conversion Prices
shall be adjusted pursuant to this paragraph 4(d)(iii) as of the actual date of
their issuance.
(2) Stock Dividends. In the event the Corporation at any
time or from time to time after the Original Issue Date shall declare or pay any
dividend on the Common Stock payable in Common Stock, and with respect to which
no similar Common Stock dividend is to be distributed to holders of Series A
Preferred Stock, then and in any such event, Additional Shares of Common shall
be deemed to have been issued immediately after the close of business on the
record date for the determination of holders of any class of securities entitled
to receive such dividend.
(iv) Adjustment of Series A Conversion Price Upon Issuance of
Additional Shares of Common. In the event this Corporation shall issue
Additional Shares of Common (including Additional Shares of Common deemed to be
issued pursuant to paragraph 4(d)(iii)) without consideration or for a
consideration per share less than the applicable Series A Conversion Price in
effect on the date of and immediately prior to such issue, then and in such
event, the applicable Series A Conversion Price shall be reduced, concurrently
with such issue, to
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a price (calculated to the nearest cent) determined by multiplying such Series A
Conversion Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue plus the
number of shares of Common Stock which the aggregate consideration received by
the Corporation for the total number of Additional Shares of Common so issued
would purchase at such Series A Conversion Price; and the denominator of which
shall be the number of shares of Common Stock outstanding immediately prior to
such issue plus the number of such Additional Shares of Common so issued; and
provided further that, for the purposes of this paragraph 4(d)(iv), all shares
of Common Stock issuable upon exercise, conversion or exchange of outstanding
Options, Preferred Stock and Convertible Securities, as the case may be, shall
be deemed to be outstanding Common Stock, and immediately after any Additional
Shares of Common are deemed issued pursuant to paragraph 4(d)(iii), such
Additional Shares of Common shall be deemed to be outstanding.
(v) Determination of Consideration. For purposes of this
subsection 4(d), the consideration received by the Corporation for the issue of
any Additional Shares of Common shall be computed as follows:
(1) Cash and Property. Such consideration shall:
(a) insofar as it consists of cash, be computed at
the aggregate amount of cash received by the Corporation excluding amounts paid
or payable for accrued interest or accrued dividends;
(b) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board; and
(c) in the event Additional Shares of Common are
issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (a) and (b) above, as
determined in good faith by the Board.
(2) Options and Convertible Securities. The
consideration per share received by the Corporation for Additional Shares of
Common deemed to have been issued pursuant to paragraph 4(d)(iii)(1), relating
to Options and Convertible Securities, shall be determined by dividing
(a) the total amount, if any, received or
receivable by the Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Corporation upon the exercise of such Options or
the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities by
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<PAGE>
(b) the maximum number of shares of Common Stock
(as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number) issuable
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(3) Stock Dividends. Any Additional Shares of Common
deemed to have been issued relating to stock dividends shall be deemed to have
been issued for no consideration.
(vi) Adjustments for Subdivisions or Combinations of Common.
In the event the outstanding shares of Common Stock shall be subdivided (by
stock split or otherwise than by payment of a dividend in Common Stock), into a
greater number of shares of Common Stock, the Series A Conversion Price in
effect immediately prior to such subdivision shall, concurrently with the
effectiveness of such subdivision, be proportionately decreased. In the event
the outstanding shares of Common Stock shall be combined (by reclassification or
otherwise) into a lesser number of shares of Common Stock, the Series A
Conversion Price in effect immediately prior to such combination shall,
concurrently with the effectiveness of such combination, be proportionately
increased.
(vii) Adjustments for Other Distributions. In the event the
Corporation at any time or from time to time makes or fixes a record date for
the determination of holders of Common Stock entitled to receive any
distribution payable in securities of the Corporation other than shares of
Common Stock and other than as otherwise adjusted in this Section 4, then and in
each such event provision shall be made so that the holders of Series A
Preferred Stock shall receive upon conversion thereof, in addition to the number
of shares of Common Stock receivable thereupon, the amount of securities of the
Corporation which they would have received had their Series A Preferred Stock
then converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including the
date of conversion, retained such securities receivable by them as aforesaid
during such period, subject to all other adjustments called for during such
period under this Section 4 with respect to the rights of the holders of the
Series A Preferred Stock.
(viii) Adjustments for Reclassification, Exchange and
Substitution. If the Common Stock issuable upon conversion of the Series A
Preferred Stock shall be changed into the same or a different number of shares
of any other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of shares
provided for above), the Series A Conversion Price then in effect shall,
concurrently with the effectiveness of such reorganization or reclassification,
be proportionately adjusted such that the Series A Preferred Stock shall be
convertible into, in lieu of the number of shares of Common Stock which the
holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares of
Common Stock that would have been subject to receipt by the holders upon
conversion of the Series A Preferred Stock immediately before that change.
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<PAGE>
(e) No Impairment. The Corporation will not, by amendment of its
certificate of incorporation or through any reorganization, transfer of assets,
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 hereunder by the Corporation but will at all times in good
faith assist in the carrying out of all the provisions of this Section (4) and
in the taking of all such action as may be necessary or appropriate in order to
protect the Series A Conversion Rights of the holders of the Series A Preferred
Stock against impairment.
(f) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of any Series A Conversion Price pursuant to this
Section 4, the Corporation at its expense shall promptly compute such adjustment
or readjustment in accordance with the terms hereof and furnish to each holder
of Series A Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Series A Conversion Price at the time in effect, and
(iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of Series A
Preferred Stock.
(g) Notices of Record Date. In the event that this Corporation shall
propose at any time:
(i) to declare any dividend or distribution upon its Common
Stock, whether in cash, property, stock or other securities, whether or not a
regular cash dividend and whether or not out of earnings or earned surplus;
(ii) 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;
(iii) to effect any reclassification or recapitalization of
its Common Stock outstanding involving a change in the Common Stock; or
(iv) to merge with or into any other Corporation, or sell,
lease or convey all or substantially all its property or business, or to
liquidate, dissolve or wind up;
then, in connection with each such event, this Corporation shall send to the
holders of the Series A Preferred Stock at least 20 days' prior written notice
of the date on which a record shall be taken for such event (and specifying the
date on which the holders of Common Stock shall be entitled thereto) or for
determining rights to vote in respect of the matters referred to in (iii) and
(iv) above.
Each such written notice shall be given by first class mail, postage
prepaid, addressed to he holders of Series A Preferred Stock at the address for
each such holder as shown on the books of this Corporation.
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(h) Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of the Series A Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
then outstanding shares of the Series A Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of the Series A
Preferred Stock, the Corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
5. Voting. Except as otherwise expressly provided herein or as required by
law, the holders of Preferred Stock and the holders of Common Stock shall vote
together and not as separate classes.
(a) Series A Preferred Stock. Each holder of shares of Series A
Preferred Stock shall be entitled to the number of votes equal to the number of
shares of Common Stock into which such shares of Series A Preferred Stock held
by such holder of Preferred Stock could then be converted. The holders of shares
of the Series A Preferred Stock shall be entitled to vote on all matters on
which the Common Stock shall be entitled to vote, unless otherwise required by
applicable law. The holders of the Series A Preferred Stock shall be entitled to
notice of any shareholders' meeting in accordance with the Bylaws of the
Company. Fractional votes shall not, however, be permitted and any fractional
voting rights resulting from the above formula (after aggregating all shares
into which shares of Series A Preferred Stock held by each holder could be
converted), shall be disregarded.
(b) Common Stock. Each holder of shares of Common Stock shall be
entitled to one vote for each share thereof held.
(c) Election of Directors. The holders of the Series A Preferred
Stock, voting together as a single class, shall be entitled to elect one
director. Except as otherwise provided in a certificate of designation for
another series of Preferred Stock, all other directors, and any vacancies on the
Board of Directors, shall be filled by vote of the holders of the Common Stock
and the Series A Preferred Stock, voting together as a single class.
6. Amendments and Changes.
(a) No Series Voting. Other than as provided by law, there shall be
no series voting.
(b) Approval by Class. As long as any of the Series A Preferred
Stock shall be issued and outstanding, the Company shall not, without first
obtaining the approval (by vote or consent as provided by law) of the holders of
two-thirds (66-2/3%) of the total number of shares of the Series A Preferred
Stock then outstanding:
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(i) alter or change the rights, preferences or privileges of
the holders of Preferred Stock materially or adversely;
(ii) amend or repeal any provision of, or add any provision
to, the Company's Certificate of Incorporation or Bylaws;
(iii) increase the authorized number of shares of Preferred
Stock;
(iv) authorize, create or issue shares of any class or series
of stock having any preference or priority equal or superior to the Series A
Preferred Stock with respect to voting, redemption, dividends, or upon
liquidation; or
(v) amend this Section 6(b).
(c) Consent of Class. Consent of the holders of at least two-thirds
of all outstanding Series A Preferred Stock shall be required for
(i) any merger, consolidation, or other corporate
reorganization in which the shareholders of the Corporation do not own a
majority of the outstanding shares of the surviving corporation; or
(ii) any transaction or series of related transactions in
which in excess of 50% of the Corporation's voting power is transferred or in
which all or substantially all of the assets of the Corporation are sold.
7. Notices. Any notice required by the provisions of this Article V to be
given to the holders of Series A Preferred Stock shall be deemed given if
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at such holder's address appearing on the books of the Company.
ARTICLE VI
1. The business and affairs of this Corporation shall be conducted by a Board of
Directors, the size of which shall be as established from time to time as set
forth in the Corporation's Bylaws.
ARTICLE VII
1. The known place of business of the Corporation is as follows: 2231 East
Camelback Road, Suite 324, Phoenix, Arizona 85016. Said place of business shall
be subject to change hereafter in accordance with applicable law.
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ARTICLE VIII
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director; provided, however that nothing contained herein shall
eliminate or limit the liability of a director of the Corporation to the extent
provided by applicable laws (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or knowing violation of law, (iii)
for authorizing the payment of an unlawful dividend or the an unlawful
repurchase of stock pursuant to Section 174 of the General Corporation Law of
Delaware, or (iv) for any transaction from which the director derived an
improper personal benefit. The limitation of liability provided herein shall
continue after a director has ceased to occupy such position as to acts or
omissions occurring during such director's term or terms of office.
No repeal or modification of the foregoing paragraph by the stockholders
of this Corporation shall adversely affect any right or protection of a director
existing at the time of such repeal or modification.
ARTICLE IX
The Corporation shall indemnify any person against expenses, including
without limitation, attorneys' fees, judgments, fines and amounts paid in
settlement, actually and reasonably incurred by reason of the fact that he or
she is or was a director or officer of the Corporation, or is or was serving at
the request of the Corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, in all circumstances in
which, and to the extent that, such indemnification is permitted and provided
for by the laws of the State of Delaware as then in effect.
No repeal or modification of the foregoing paragraph by the stockholders
of this Corporation shall adversely affect any right or protection of a director
or officer existing at the time of such repeal or modification.
ARTICLE X
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
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ARTICLE XI
Except as otherwise provided in this Certificate of Incorporation, in
furtherance and not in limitation of the powers conferred by statute, the Board
of Directors of this corporation is expressly authorized to make, alter, amend,
rescind or repeal the bylaws of the corporation.
ARTICLE XII
Elections of directors need not be by written ballot except and to the
extent provided in the bylaws of the Corporation.
ARTICLE XIII
The Corporation reserves the right to repeal, alter, amend or rescind any
provision contained in this Certificate, in the manner now or hereafter
prescribed by statute, and all rights conferred on stockholders herein are
granted subject to this reservation.
ARTICLE XIV
The Corporation shall not be subject to the provisions of Section 203 of
the Delaware General Corporation Law.
The undersigned, being the President of the Corporation, does hereby
declare and certify that this is his act and deed and the facts herein stated
are true, and accordingly have hereunto set his hand this ____ day of ________,
1997.
By:
------------------------------------
Chad M. Little, President
15
Exhibit 3(d)
FORM OF
CERTIFICATE OF DESIGNATION
OF
SANDBOX ENTERTAINMENT CORPORATION
UNDER SECTION 151 OF THE DELAWARE GENERAL CORPORATION LAW, SANDBOX
ENTERTAINMENT CORPORATION, a Delaware corporation (the "Company"), certifies as
follows:
FIRST: Under the authority contained in Article V of the Restated
Certificate of Incorporation of the Company, as amended, the Board of Directors
of the Company has classified ______________ of the authorized but unissued
shares of Preferred Stock of the Company, par value $0.001 per share, as shares
of "Series B Convertible Preferred Stock".
SECOND: The following resolution was duly adopted by the Board of
Directors as of ____________, ____________ and such resolution has not been
modified as is in full force and effect on the date hereof:
RESOLVED, that the Board of Directors hereby creates, from the
authorized but unissued shares of Preferred Stock of the Company, par value
$0.001 per share, a series of preferred stock to consist of
__________________________ (___________) shares, and hereby fixes the voting
powers, designation, preferences and relative, participating, optional or other
special rights, and the qualifications, limitations or restrictions thereof, of
the shares of such series, in addition to those set forth in the Restated
Certificate of Incorporation, as amended, as follows:
(1) Designation. The designation of the preferred stock created by this
resolution shall be "Series B Convertible Preferred Stock" and the number of
shares constituting the Series B Convertible Preferred Stock (hereinafter
referred to as the "Series B Preferred Stock") shall be ______________ shares.
Shares of the Series B Preferred Stock shall have a par value of $.001 per
share. The number of authorized shares of the Series B Preferred Stock may be
reduced by further resolution duly adopted by the Board of Directors and by the
filing of a certificate pursuant to the provisions of the General Corporation
Law of the State of Delaware
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stating that such reduction has been so authorized, but the number of authorized
shares of the Series B Preferred Stock shall not be increased.
(2) Definitions. For purposes of this Article, the following
definitions shall apply:
(a) "Company" shall mean Sandbox Entertainment Corporation.
(b) "Convertible Securities" shall mean any evidences of
indebtedness, shares or other securities (other than shares of Series B
Preferred Stock) convertible into or exchangeable for Common Stock.
(c) "Employee Sale" shall mean the sale or grant of any right
to purchase (including any option or warrant) shares of Common Stock to any
employee, officer or director of, or consultant to, the Company pursuant to any
employee, officer, director or consultant plan or agreement adopted or approved
by the Board of Directors of the Company, and any exercise of any such right.
Employee Sale shall also mean the sale or grant of any right to purchase
(including any option or warrant) shares of Common Stock or Preferred Stock to
any bank, equipment lessor or similar financial institution, and not to a
related party, if and to the extent that the transaction in which such sale or
grant is to be made is approved by the Company's Board of Directors.
(d) "Liquidation Preference" shall mean $___ per share for the
Series B Preferred Stock.
(e) "Options" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire Common Stock or Convertible
Securities.
(f) "Original Issue Date" shall mean the date upon which
shares of the Series B Preferred Stock are first issued.
(g) "Original Issue Price" shall mean $___ per share for the
Series B Preferred Stock.
(h) "Preferred Stock" shall mean the Series A Preferred Stock
and Series B Preferred Stock.
(i) "Qualifying Public Offering" means a firm commitment
underwritten public offering following which the Company has a market
capitalization of at least $30 million and which results in proceeds to the
Company of at least $5 million (net of underwriting discounts and commissions
and offering expenses); provided that the term "Qualifying Public Offering"
shall not include a public offering in which the securities issued are not
freely transferable following issuance.
(j) "Restricted Period" shall mean the period which shall
begin on the date of the closing of the offering of the Series B Preferred Stock
(the "Closing Date") and end on the earlier of (i) two years following the
Closing Date, (ii) 180 days after the consummation of a
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Qualifying Public Offering, (iii) the occurrence of any of the following: (1)
any merger, consolidation, or other corporate reorganization in which the
shareholders of the Company immediately prior to consummation of such merger,
consolidation or other corporate reorganization do not own a majority of the
outstanding shares of the surviving corporation, (2) prior to the consummation
by the Company of a Qualifying Public Offering, any transaction or series of
related transactions in which in excess of 50% of the Company's voting power is
transferred or in which all or substantially all of the assets of the Company
are sold, or (3) subsequent to the consummation by the Company of a Qualifying
Public Offering, the acquisition, directly or indirectly, by any individual or
entity or group (as such term is used in Section 13(d)(3) of the Exchange Act)
of beneficial ownership (as defined in Rule 13d-3 promulgated under the Exchange
Act, except that such individual or entity shall be deemed to have beneficial
ownership of all shares that any such individual or entity has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), of more than 25% of the aggregate outstanding voting power of the
capital stock of the Company; or (iv) the date determined by the Board of
Directors as to all of the outstanding Series B Preferred Stock.
(k) "Series A Preferred Stock" shall mean the Series A
Convertible Preferred Stock, par value $.001, of the Company.
(3) Dividends.
(a) Dividend Preference. Each holder of outstanding shares of
Series B Preferred Stock shall be entitled to receive, out of any assets at the
time legally available therefor, dividends equal to the dividends, if any,
declared on the number of shares of Common Stock into which such shares of
Series B Preferred Stock are then convertible (without regard to whether the
Restricted Period has then terminated or expired). Such dividends may be payable
quarterly or otherwise as the Board of Directors may from time to time
determine. If and to the extent that the Board of Directors of the Company shall
declare and set aside for payment on the Common Stock or any other class of
capital stock ranking junior to the Series B Preferred Stock as to dividends an
amount of cash or property as a distribution, such distribution shall be made
with equal priority to the Common Stock, the Series A Preferred Stock and the
Series B Preferred Stock, with each share of Series B Preferred Stock being
treated for such purpose as if it had been converted into Common Stock at the
then-effective Conversion Rate. For such purpose, all shares of Preferred Stock
held by each holder of Series B Preferred Stock shall be aggregated, and any
resulting fractional share of Common Stock shall be disregarded.
(b) Priority of Dividends. The Company shall make no
Distribution (as defined below) to the holders of shares of Common Stock or any
other class of capital stock ranking junior to the Series B Preferred Stock as
to dividends in any fiscal year unless and until the full amount of dividends
shall have been paid, or declared and set apart, upon all shares of Series B
Preferred Stock. When dividends are not paid in full upon the shares of Series B
Preferred Stock and any other series of preferred stock ranking on a parity as
to dividends with the Series B Preferred Stock, full dividends declared upon the
shares of the Series B Preferred Stock and such parity stock shall be declared
pro rata so that the amount of dividends declared per share on the Series B
Preferred Stock and on such other parity stock shall in all cases bear to
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each other the same ratio as the aggregate liquidation preference on the shares
of the Series B Preferred Stock and such other parity stock bear to each other.
(c) Distribution. As used in this section, "Distribution"
means the transfer of cash or property without consideration, whether by way of
dividend or otherwise (except a dividend in shares of the Company) or the
purchase of shares of capital stock of the Company (other than in connection
with the repurchase of shares of Common Stock issued to or held by employees,
consultants, officers and directors upon termination of their employment or
services pursuant to agreements providing for the right of said repurchase) for
cash or property.
(d) Consent to Certain Distributions. The holders of
outstanding shares of Series B Preferred Stock shall be deemed to have consented
to all distributions or payments to existing or terminated employees,
consultants, officers and directors of the Company in connection with the
termination of employment by or services to the Company and relating to the
repurchase of shares of capital stock issued to or held by such individuals
pursuant to agreements with the Company for such repurchases; provided that the
aggregate amount of such distributions or payments does not exceed $100,000.
(4) Liquidation Rights
(a) Liquidation Preference. In the event of any liquidation,
dissolution or winding up of the Company, either voluntary or involuntary, the
holders of the Series B Preferred Stock shall be entitled to receive, out of the
assets of the Company, the Liquidation Preference specified for each share of
Series B Preferred Stock then held by them plus an amount equal to all declared
and unpaid dividends thereon, if any, to the date that payment is made, before
any payment shall be made or any assets distributed to the holders of Common
Stock.
(b) Priority. If upon the liquidation, dissolution or winding
up of the Company, the assets to be distributed among the holders of the
Preferred Stock are insufficient to permit the payment to such holders of the
full Liquidation Preference for their shares, then the entire assets of the
Company legally available for distribution shall be distributed with equal
priority and pro rata among the holders of the Preferred Stock in proportion to
the numbers of shares of Preferred Stock held by them multiplied by the
Liquidation Preference for such shares of Preferred Stock.
(c) Remaining Assets. After the payment to the holders of
Preferred Stock of the full preferential amounts specified herein, any remaining
assets of the Company shall be distributed ratably to the holders of the
Company's capital stock then outstanding, with each share of Preferred Stock
being treated for such purpose as if it had been converted into Common Stock at
the then-effective Conversion Rate (as defined below). For such purpose, all
shares of Preferred Stock held by each holder of Preferred Stock shall be
aggregated, and any resulting fractional share of Common Stock shall be
disregarded.
(5) Conversion. The holders of the Series B Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
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<PAGE>
(a) Right to Convert. Each share of Series B Preferred Stock
shall be convertible, at the option of the holder thereof, at any time from and
after the expiration of the Restricted Period at the office of the Company or
any transfer agent for the Preferred Stock, into that number of fully paid and
nonassessable shares of Common Stock that is equal to the Original Issue Price
divided by the appropriate Conversion Price (as hereinafter defined), subject to
anti-dilution adjustments. The initial Conversion Price for the Series B
Preferred Stock shall be equal to the Original Issue Price, and shall be subject
to adjustment as provided herein. (The number of shares of Common Stock into
which each share of Series B Preferred Stock may be converted is hereinafter
referred to as the "Conversion Rate".) Upon any decrease or increase in the
Conversion Price or the Conversion Rate for the Series B Preferred Stock, as
described in this Section 5, the Conversion Rate or Conversion Price for the
Series B Preferred Stock, as the case may be, shall be appropriately increased
or decreased.
(b) Automatic Conversion. On the date 180 days following the
consummation of a Qualifying Public Offering, each share of Series B Preferred
Stock shall automatically be converted into shares of Common Stock, at the then
effective Conversion Rate for such share of Series B Preferred Stock.
(c) Mechanics of Conversion. No fractional shares of Common
Stock shall be issued upon conversion of Series B Preferred Stock. In lieu of
any fractional shares to which the holder would otherwise be entitled, the
Company shall pay cash equal to such fraction multiplied by the then fair market
value of such fractional shares as determined by the Board of Directors of the
Company. Before any holder of Series B Preferred Stock shall be entitled to
convert the same into full shares of Common Stock, and to receive certificates
therefor, he shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Company or of any transfer agent for the Series B
Preferred Stock, and shall give written notice to the Company at such office
that he elects to convert the same; provided, however, that in the event of an
automatic conversion pursuant to paragraph 5(b) above, the outstanding shares of
Series B Preferred Stock shall be converted automatically without any further
action by the holders of such shares and whether or not the certificates
representing such shares are surrendered to the Company or its transfer agent;
provided further, however, that the Company shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such automatic
conversion unless either the certificates evidencing such shares of Series B
Preferred Stock are delivered to the Company or its transfer agent as provided
above, or the holder notifies the Company or its transfer agent that such
certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection with such certificates.
The Company shall, as soon as practicable after such delivery,
or after such agreement and indemnification, issue and deliver at such office to
such holder of Series B Preferred Stock, a certificate or certificates for the
number of shares of Common Stock to which he shall be entitled as aforesaid and
a check payable to the holder in the amount of any cash amounts payable as the
result of a conversion into fractional shares of Common Stock, plus any declared
and unpaid dividends on the converted Series B Preferred Stock. Such conversion
shall be deemed to have been made immediately prior to the close of business on
the date of such surrender of the shares of the Series B Preferred Stock to be
converted, and the person or persons
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<PAGE>
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock on such date; provided, however, that a holder of Series B
Preferred Stock may tender shares of Series B Preferred Stock for conversion,
conditioned upon and subject to the consummation of the expiration or early
termination of the Restricted Period, in which event the person(s) entitled to
receive the Common Stock issuable upon conversion of the Series B Preferred
Stock shall be deemed to have converted such Series B Preferred Stock
immediately upon such expiration or termination of the Restricted Period.
(d) Adjustments to Conversion Price for Diluting Issues.
(i) Special Definition. For purposes of this
paragraph 5(d), "Additional Shares of Common" shall mean all shares of Common
Stock issued (or, pursuant to paragraph 5(d)(iii), deemed to be issued) by the
Company after the Original Issue Date of the Series B Preferred Stock, other
than:
(1) shares of Common Stock issued or
issuable upon conversion of shares of Series B Preferred Stock or, with respect
to the Series A Preferred Stock, pursuant to paragraph 4(d) (vi), (vii) or
(viii) of the Article V of the Restated Certificate of Incorporation;
(2) shares of Common Stock issued or
issuable in an Employee Sale;
(3) shares of Common Stock issued or
issuable as a dividend or distribution on Preferred Stock or pursuant to any
event for which adjustment is made pursuant to paragraph 5(d)(vi), (vii) or
(viii) hereof or pursuant to paragraph 4(d) (vi), (vii) or (viii) of Article V
of the Restated Certificate of Incorporation.
(ii) No Adjustment of Conversion Price. No adjustment
in the Conversion Price of the Series B Preferred Stock shall be made in respect
of the issuance of Additional Shares of Common unless the consideration per
share for an Additional Share of Common issued or deemed to be issued by the
Company is less than or equal to the Conversion Price in effect on the date of,
and immediately prior to such issue, for such share of Series B Preferred Stock.
(iii) Deemed Issue of Additional Shares of Common.
(1) Options and Convertible Securities. In
the event the Company at any time or from time to time after the Original Issue
Date of the Series B Preferred Stock shall issue any Options or Convertible
Securities or shall fix a record date for the determination of holders of any
class of securities entitled to receive any such Options or Convertible
Securities, then the maximum number of shares (as set forth in the instrument
relating thereto without regard to any provisions contained therein for a
subsequent adjustment of such number) of Common Stock issuable upon the exercise
of such Options or, in the case of Convertible Securities and Options therefor,
the conversion or exchange of such Convertible
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<PAGE>
Securities or exercise of such Options, shall be deemed to be Additional Shares
of Common issued as of the time of such issue, in case such a record date shall
have been fixed, as of the close of business on such record date, provided that
Additional Shares of Common shall not be deemed to have been issued unless the
consideration per share (determined pursuant to paragraph 5(d)(v) hereof) of
such Additional Shares of Common would be less than the Conversion Price of the
Series B Preferred Stock in effect on the date of and immediately prior to such
issue, or such record date, as the case may be, and provided further that in any
such case in which Additional Shares of Common are deemed to be issued:
(a) no further adjustment in the
Conversion Price of the Series B Preferred Stock shall be made upon the
subsequent issue of Convertible Securities or shares of Common Stock upon the
exercise of such Options or conversion or exchange of such Convertible
Securities;
(b) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase in the consideration payable to the Company, or decrease in the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Conversion Price of the Series B Preferred Stock computed
upon the original issue thereof (or upon the occurrence of a record date with
respect thereto), and any subsequent adjustments based thereon, shall, upon any
such increase or decrease becoming effective, be recomputed to reflect such
increase or decrease insofar as it affects such Options or the rights of
conversion or exchange under such Convertible Securities;
(c) no readjustment pursuant to
clause (b) above shall have the effect of increasing the Conversion Price of the
Series B Preferred Stock to an amount which exceeds the lower of (i) the
Conversion Price of the Series B Preferred Stock on the original adjustment
date, or (ii) the Conversion Price of the Series B Preferred Stock that would
have resulted from any issuance of Additional Shares of Common between the
original adjustment date and such readjustment date;
(d) upon the expiration of any such
Options of conversion or exchange under such Convertible Securities which shall
not have been exercised, the Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto) and any
subsequent adjustments based thereon shall, upon such expiration, be recomputed
as if:
i) in the case of
Convertible Securities or Options for Common Stock, the only Additional Shares
of Common issued were the shares of Common Stock, if any, actually issued upon
the exercise of such Options or the conversion or exchange of such Convertible
Securities and the consideration received therefor was the consideration
actually received by the Company for the issue of such exercised Options plus
the consideration actually received by the Company upon such exercise or for the
issue of all such Convertible Securities which were actually converted or
exchanged, plus the additional consideration, if any, actually received by the
Company upon such conversion or exchange, and
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<PAGE>
ii) in the case of Options
for Convertible Securities, only the Convertible Securities, if any, actually
issued upon the exercise thereof were issued at the time of issue of such
Options, and the consideration received by the Company for the Additional Shares
of Common deemed to have been then issued was the consideration actually
received by the Company for the issue of such exercised Options, plus the
consideration deemed to have been received by the Company (determined pursuant
to paragraph 5(d)(v)) upon the issue of the Convertible Securities with respect
to which such Options were actually exercised, and
(e) if such record date shall have
been fixed and such Options or Convertible Securities are not issued on the date
fixed therefor, the adjustment previously made in the Conversion Prices which
became effective on such record date shall be canceled as of the close of
business on such record date, and thereafter the Conversion Price shall be
adjusted pursuant to this paragraph 5(d)(iii) as of the actual date of their
issuance.
(2) Stock Dividends. In the event the
Company at any time or from time to time after the Original Issue Date of the
Series B Preferred Stock shall declare or pay any dividend on the Common Stock
payable in Common Stock, and with respect to which no similar Common Stock
dividend is to be distributed to holders of the Series B Preferred Stock, then
and in any such event, Additional Shares of Common shall be deemed to have been
issued immediately after the close of business on the record date for the
determination of holders of any class of securities entitled to receive such
dividend.
(iv) Adjustment of Conversion Price Upon Issuance of
Additional Shares of Common. In the event this Company shall issue Additional
Shares of Common (including Additional Shares of Common deemed to be issued
pursuant to paragraph 5(d)(iii)) without consideration or for a consideration
per share less than the applicable Conversion Price for the Series B Preferred
Stock in effect on the date of and immediately prior to such issue, then and in
such event, the applicable Conversion Price of the Series B Preferred Stock
shall be reduced, concurrently with such issue, to a price (calculated to the
nearest cent) determined by multiplying such Conversion Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of shares of Common Stock which
the aggregate consideration received by the Company for the total number of
Additional Shares of Common so issued would purchase at such Conversion Price;
and the denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue plus the number of such Additional
Shares of Common so issued; and provided further that, for the purposes of this
paragraph 5(d)(iv), all shares of Common Stock issuable upon exercise,
conversion or exchange of outstanding Options, Preferred Stock and Convertible
Securities, as the case may be, shall be deemed to be outstanding Common Stock,
and immediately after any Additional Shares of Common are deemed issued pursuant
to paragraph 5(d)(iii), such Additional Shares of Common shall be deemed to be
outstanding.
Notwithstanding the foregoing in the event that
Additional Shares of Common are issued (or pursuant to paragraph 5(d)(iii),
deemed to be issued) for a purchase price in excess of $1,000,000 in the
aggregate within one year of the Closing Date, for a consideration per share
less than the applicable Conversion Price in effect on the date of and
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<PAGE>
immediately prior to such issue, then in such event the Conversion Price for the
Series B Preferred Stock shall be reduced, concurrently with such issue, to the
consideration per share of Common Stock (calculated to the nearest cent) paid
(or in the case of shares of Additional Common, deemed issued pursuant to
paragraph 5(d) (iii), deemed paid) in such issue.
(v) Determination of Consideration. For purposes of
this subsection 5(d), the consideration received by the Company for the issue of
any Additional Shares of Common shall be computed as follows:
(1) Cash and Property. Such consideration
shall:
(a) insofar as it consists of cash,
be computed at the aggregate amount of cash received by the Company excluding
amounts paid or payable for accrued interest or accrued dividends;
(b) insofar as it consists of
property other than cash, be computed at the fair value thereof at the time of
such issue, as determined in good faith by the Board; and
(c) in the event Additional Shares
of Common are issued together with other shares or securities or other assets of
the Company for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (a) and (b) above, as
determined in good faith by the Board.
(2) Options and Convertible Securities. The
consideration per share received by the Company for Additional Shares of Common
deemed to have been issued pursuant to paragraph 5(d)(iii)(1), relating to
Options and Convertible Securities, shall be determined by dividing
(a) the total amount, if any,
received or receivable by the Company as consideration for the issue of such
Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of
such consideration) payable to the Company upon the exercise of such Options or
the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities by
(b) the maximum number of shares of
Common Stock (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(3) Stock Dividends. Any Additional Shares
of Common deemed to have been issued relating to stock dividends shall be deemed
to have been issued for no consideration.
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<PAGE>
(vi) Adjustments for Subdivisions or Combinations of
Common. In the event the outstanding shares of Common Stock shall be subdivided
(by stock split or otherwise than by payment of a dividend in Common Stock),
into a greater number of shares of Common Stock, the Conversion Price in effect
immediately prior to such subdivision shall, concurrently with the effectiveness
of such subdivision, be proportionately decreased. In the event the outstanding
shares of Common Stock shall be combined (by reclassification or otherwise) into
a lesser number of shares of Common Stock, the Conversion Price in effect
immediately prior to such combination shall, concurrently with the effectiveness
of such combination, be proportionately increased.
(vii) Adjustments for Other Distributions. In the
event the Company at any time or from time to time makes or fixes a record date
for the determination of holders of Common Stock entitled to receive any
distribution payable in securities of the Company other than shares of Common
Stock and other than as otherwise adjusted in this Section 5, then and in each
such event provision shall be made so that the holders of Series B Preferred
Stock shall receive upon conversion thereof, in addition to the number of shares
of Common Stock receivable thereupon, the amount of securities of the Company
which they would have received had their Series B Preferred Stock then converted
into Common Stock on the date of such event and had they thereafter, during the
period from the date of such event to and including the date of conversion,
retained such securities receivable by them as aforesaid during such period,
subject to all other adjustments called for during such period under this
Section 5 with respect to the rights of the holders of the Series B Preferred
Stock.
(viii) Adjustments for Reclassification, Exchange and
Substitution. If the Common Stock issuable upon conversion of the Series B
Preferred Stock shall be changed into the same or a different number of shares
of any other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of shares
provided for above), the Conversion Price then in effect shall, concurrently
with the effectiveness of such reorganization or reclassification, be
proportionately adjusted such that the Series B Preferred Stock shall be
convertible into, in lieu of the number of shares of Common Stock which the
holders would otherwise have been entitled to receive, the number of shares of
such other class or classes of stock equivalent to the number of shares of
Common Stock that would have been subject to receipt by the holders upon
conversion of the Series B Preferred Stock immediately before that change.
(e) No Impairment. The Company will not, by amendment of its
articles of incorporation or through any reorganization, transfer of assets,
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 hereunder by the Company but will at all times in good
faith assist in the carrying out of all the provisions of this paragraph 5 and
in the taking of all such action as may be necessary or appropriate in order to
protect the Conversion Rights of the holders of the Series B Preferred Stock
against impairment.
(f) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of any Conversion Price pursuant to this Section 5,
the Company at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms
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<PAGE>
hereof and furnish to each holder of Series B Preferred Stock a certificate
setting forth such adjustments or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The Company shall, upon the
written request (which may include a request given by electronic delivery) at
any time of any holder of Series B Preferred Stock, furnish or cause to be
furnished to such holder a like certificate setting forth (i) such adjustments
and readjustments, (ii) the Conversion Price at the time in effect, and (iii)
the number of shares of Common Stock and the amount, if any, of other property
which at the time would be received upon the conversion of Preferred Stock.
(7) Notices of Record Date. In the event that this Company
shall propose at any time:
(i) to declare any dividend or distribution upon its
Common Stock, whether in cash, property, stock or other securities, whether or
not a regular cash dividend and whether or not out of earnings or earned
surplus;
(ii) 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;
(iii) to effect any reclassification or
recapitalization of its Common Stock outstanding involving a change in the
Common Stock;
(iv) to merge with or into any other Company, or
sell, lease or convey all or substantially all its property or business, or to
liquidate, dissolve or wind up; or
(v) to engage in a transaction that would result in
an early termination of the Restricted Period, or if the Board of Directors
shall propose an early termination of the Restricted Period.
then, in connection with each such event, this Company shall send to the holders
of the Series B Preferred Stock at least 20 days' prior written notice of the
date on which a record shall be taken for such event (and specifying the date on
which the holders of Common Stock shall be entitled thereto) or for determining
rights to vote in respect to the matters referred to in (iii) and (iv) above. In
addition the Company shall give the holders of the Series B Preferred Stock at
least 20 days' prior written notice of the scheduled expiration of the
Restricted Period.
Each such written notice may be given either (i) by first
class mail, postage prepaid, addressed to the holders of Series B Preferred
Stock at the address for each such holder as shown on the books of this Company
or (ii) if the holder has consented thereto by electronic delivery addressed to
such holder of Series B Preferred Stock at the e-mail address for such holder as
shown in the books of the Company.
(8) Reservation of Stock Issuable Upon Conversion. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of Series B Preferred Stock, such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all then
outstanding shares of the Series B Preferred Stock; and if at any time the
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number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of the Series B
Preferred Stock, the Company will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
(6) Restrictions of Transfer. On or prior to the Restricted Period, no
holder of the Series B Preferred Stock shall be entitled directly or indirectly
to sell, exchange, pledge, transfer or otherwise dispose of any shares of Series
B Preferred Stock except as follows:
(a) to family members or affiliates (as such term is defined
in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as
amended);
(b) pursuant to the laws of descent and distribution;
(c) in the event of bankruptcy or insolvency of the holder;
(d) as approved by the Board of Directors in its sole and
absolute discretion; or
(e) by the underwriter in connection with the initial
distribution of the Series B Preferred Stock.
(7) Voting. Except as otherwise expressly provided herein or as
required by law, the holders of Series B Preferred Stock, the holders of the
Series A Preferred Stock and the holders of Common Stock shall vote together and
not as separate classes. Each holder of shares of Series B Preferred Stock shall
be entitled to the number of votes equal to the number of shares of Common Stock
into which such shares of Series B Preferred Stock held by such holder of Series
B Preferred Stock could then be converted. The holders of shares of the Series B
Preferred Stock shall be entitled to vote on all matters on which the Common
Stock shall be entitled to vote (including as to the election of directors),
unless otherwise required by applicable law. The holders of the Series B
Preferred Stock shall be entitled to notice of any shareholders' meeting in
accordance with the Bylaws of the Company. Fractional votes shall not, however,
be permitted and any fractional voting rights resulting from the above formula
(after aggregating all shares into which shares of Series B Preferred Stock held
by each holder could be converted), shall be disregarded.
(8) Amendments and Changes.
(a) No Series Voting. Other than as provided by law, there
shall be no series voting.
(b) Approval by Class. As long as any of the Series B
Preferred Stock shall be issued and outstanding, the Company shall not, without
first obtaining the approval (by vote or consent as provided by law) of the
majority of the holders of the total number of shares of the Series B Preferred
Stock then outstanding, voting separately as a class:
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(i) materially or adversely alter or change the
rights, preferences or privileges of the holders of the Series B Preferred Stock
(whether by amendment to the Restated Certificate of Incorporation, merger,
consolidation, or otherwise);
(ii) increase the authorized number of shares of
Series B Preferred Stock; or
(iii) authorize, create or issue of any shares of any
class or series of stock having any preference or priority superior to the
Series B Preferred Stock with respect to dividends, redemption or upon
liquidation.
(c) Affirmative Vote of Class. The affirmative vote of the
holders of a majority of all outstanding Series B Preferred Stock, voting
separately as a class, shall be required to approve
(i) any merger, consolidation, or corporate
reorganization in which the shareholders of the Company do not own a majority of
the outstanding shares of the surviving corporation;
(ii) any transaction or series of related
transactions in which 50% or more of the Company's voting power is transferred
or in which all or substantially all of the assets of the Company are sold; or
(iii) any transaction or series of related
transactions in which Chad M. Little, James A. Layne and Lonnie Whittington
cease to own at least 50% of the shares of capital they own on the Closing Date;
provided, however, that no such separate class vote shall be required if each
holder of the Series B Preferred Stock shall receive in connection with the
transaction specified in clauses (i), (ii) or (iii) cash or marketable
securities valued at an amount at least equal to 125% of the then Conversion
Price times the number of shares of Common Stock into which such holder's Series
B Preferred Stock is then convertible (whether or not the Restricted Period has
then terminated or expired).
(9) No other Rights. The shares of the Convertible Preferred Stock
shall not have any relative, participating, optional or other special rights and
powers other than as set forth above in this Certificate of Designation and in
the Restated Certificate of Incorporation.
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IN WITNESS WHEREOF, SANDBOX ENTERTAINMENT CORPORATION has caused its
corporate seal to be hereunto affixed and this Certificate to be signed by its
President and Chief Executive Officer, Chad M. Little, this __th day of ____,
1997.
SANDBOX ENTERTAINMENT CORPORATION
By
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ATTEST:
- --------------------------------------
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Exhibit 3(e)
BYLAWS
OF
SANDBOX ENTERTAINMENT CORPORATION
A Delaware Corporation
ARTICLE I
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OFFICES
-------
SECTION 1. Registered Office. The registered office shall be at 1209
Orange Street, in the City of Wilmington, County of New Castle, State of
Delaware, and the name of the registered agent in charge thereof is The
Corporation Trust Company.
SECTION 2. Other Offices. The Corporation may also have an office or
offices at such other place or places, within or without the State of Delaware,
as the Board of Directors may from time to time designate as the business of the
Corporation may require.
ARTICLE II
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STOCKHOLDERS' MEETINGS
----------------------
SECTION 1. Annual Meetings. The Annual Meeting of Stockholders, for the
election of directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held at such place, on such date, and at such time as the Board of
Directors shall each year fix, which date shall be within thirteen months
subsequent to the last annual meeting of stockholders.
If the election of directors shall not be held on the day designated
herein for any annual meeting, or at any adjournment thereof, the Board of
Directors shall cause the election to be held at a special meeting of the
stockholders as soon thereafter as conveniently may be possible. At
<PAGE>
such meeting the stockholders may elect the directors and transact other
business with the same force and effect as at an annual meeting duly called and
held.
SECTION 2. Special Meetings. Special meetings of the stockholders shall
be held at the principal office of the Corporation in the State of Delaware, or
at such other place within or without the State of Delaware as may be designated
in the notice of said meeting, upon call of the Board of Directors, or of the
chairman of the board or the president, or of at least fifteen percent (15%) of
the issued and outstanding common stock of the Corporation.
SECTION 3. Notice and Purpose of Meetings. Notice of the purpose or
purposes and of the time and place within or without the State of Delaware of
every meeting of stockholders shall be given by the Chairman of the Board or by
the President or Vice President or the Secretary or an Assistant Secretary
either personally or by mail or by telegraph or by any other means of
communication not less than ten days, nor more than sixty days, before the
meeting, to each stockholder of record entitled to vote at such meeting. If
mailed, such notice shall be directed to each stockholder at his address as it
appears on the stock book unless he shall have filed with the Secretary of the
Corporation a written request that notices intended for him be mailed to some
other address, in which case it shall be mailed or transmitted to the address
designated in such request. Such further notice shall be given as may be
required by law. Except as otherwise expressly provided by statute, no notice of
a meeting of stockholders shall be required to be given to any stockholder who
shall attend such meeting in person or by proxy, or who shall, in person or by
attorney thereunto authorized, waive such notice in writing or by telegraph,
cable, radio, or wireless either before or after such meeting. Except where
otherwise required by law, notice of any adjourned meeting of the stockholders
of the Corporation shall not be required to be given.
2
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SECTION 4. Quorum. Except as otherwise provided by law, by the
Certificate of Incorporation, or as provided below, the presence, in person or
by proxy, of the holders of record of shares of the capital stock of the
Corporation possessing a majority of the aggregate number of votes to which all
outstanding shares of the capital stock of the Corporation are entitled, shall
constitute a quorum at all meetings of stockholders. Where a separate vote by a
class or classes is required, a majority of the outstanding shares of such class
or classes, present in person or represented by proxy, shall constitute a quorum
entitled to take action with respect to that vote on that matter. In the absence
of a quorum at any meeting or any adjournment thereof, the holders of shares
possessing a majority of the aggregate number of votes present and entitled to
be cast at such meeting or adjournment thereof may adjourn such meeting or
adjournment from time to time. At any such adjourned meeting at which a quorum
is present, subject to compliance with any additional notice required by law,
any business may be transacted which might have been transacted at the meeting
as originally called.
SECTION 5. Organization. Meetings of the stockholders shall be presided
over by the Chairman of the Board, or if he is not present, by the President, or
if they are not present, by a Vice President. The Secretary of the Corporation,
or in his absence, an Assistant Secretary, shall act as secretary of every
meeting, but if neither the Secretary nor an Assistant Secretary is present,
stockholders entitled to cast a majority of the votes present and entitled to be
cast at the meeting shall choose any person present to act as secretary of the
meeting.
SECTION 6. Voting. Except as otherwise provided in the Bylaws, the
Certificate of Incorporation, or in the laws of the State of Delaware, at every
meeting of the stockholders, each stockholder of the Corporation entitled to
vote at such meeting shall have one vote in person or
3
<PAGE>
by proxy for each share of stock having voting rights held by him and registered
in his name on the books of the Corporation. Any vote of stock of the
Corporation may be given by the stockholder entitled to vote in person or by a
proxy authorized (1) by a writing executed by such stockholder (or his duly
authorized agent) or (2) in such other manner as is permitted by the General
Corporation Law of the State of Delaware, and delivered to the secretary of the
meeting. Except as otherwise required by statute, by the Certificate of
Incorporation or these Bylaws, or in electing directors, all matters coming
before any meeting of the stockholders shall be decided by the affirmative vote
of stockholders entitled to cast a majority of the number of votes present and
entitled to be cast thereat, a quorum being present. At all elections of
directors the voting may but need not be by ballot and a plurality of the votes
cast thereat shall elect.
SECTION 7. List of Stockholders. A complete list of the stockholders
entitled to vote at the ensuing election, arranged in alphabetical order, and
showing the address of each stockholder and the number of shares registered in
the name of each stockholder shall be prepared by the Secretary, or other
officer of the Corporation having charge of said stock ledger. Such list shall
be open to the examination of any stockholder during ordinary business hours,
for a period of at least ten days prior to the election, either at a place
within the city, town or village where the election is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where said meeting is to be held, and the list shall be produced and kept
at the time and place of election during the whole time thereof, and subject to
the inspection of any stockholder who may be present.
SECTION 8. Consent of Stockholders. Any action required or permitted to
be taken at any meeting of the stockholders of the Corporation may be taken
without a meeting without prior
4
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notice and without a vote if a consent in writing setting forth the action so
taken shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
ARTICLE III
-----------
DIRECTORS
---------
SECTION 1. Management of Corporation. The property, affairs and
business of the Corporation shall be managed by its Board of Directors,
consisting of not more than fifteen persons, as determined by the Board of
Directors.
SECTION 2. Powers, Number, Qualification, Term, Quorum, and Vacancies.
The first Board of Directors shall consist of one or more persons to be
designated by the incorporator(s). Except as hereinafter provided, directors
shall be elected at the annual meeting of the stockholders and each director
shall be elected to serve for one year and until his successor shall be elected
and shall qualify. The directors shall have power from time to time, and at any
time, when the stockholders as such are not assembled in a meeting, regular or
special, to increase or decrease their own number to the extent provided in
these Bylaws. If the number of directors be increased, the additional directors
may be elected by a majority of the directors in office at the time of the
increase, or if not so elected prior to the next annual meeting of the
stockholders, they shall be elected by the stockholders.
Directors need not be stockholders.
5
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A majority of the members of the Board of Directors then in office
shall constitute a quorum for the transaction of business, and the act of a
majority of the directors present at such meeting shall be the act of the Board.
If at any meeting of the Board of Directors there shall be less than a quorum
present, a majority of those present may adjourn the meeting, without further
notice, from time to time until a quorum shall have been obtained.
In case one or more vacancies shall occur in the Board of Directors by
reason of death, resignation, or otherwise, except insofar as otherwise provided
in the case of a vacancy or vacancies occurring by reason of removal by the
stockholders, the remaining directors, although less than a quorum, may, by a
majority vote, elect a successor or successors for the unexpired term or terms.
SECTION 3. Meetings. Meetings of the Board of Directors shall be held
at such place within or outside the State of Delaware as may from time to time
be fixed by resolution of the Board of Directors, or as may be specified in the
notice of the meeting. Regular meetings of the Board of Directors shall be held
at such times as may from time to time be fixed by resolution of the Board of
Directors, and special meetings may be held at any time upon the call of the
Chairman of the Board of Directors, the President or any Vice-President or the
Secretary or any two directors by oral, telegraphic, facsimile or written notice
delivered or transmitted to each director not less than twenty-four (24) hours
before such meeting. A meeting of the Board of Directors may be held without
notice immediately after the annual meeting of stockholders. Notice need not be
given of regular meetings of the Board of Directors. Meetings may be held at any
time without notice if all the directors are present, or if at any time before
or after the meeting those not present waive notice of the meeting in writing.
6
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SECTION 4. Committees. The Board of Directors may, in its discretion,
by the affirmative vote of a majority of the whole Board of Directors, appoint
committees which shall have and may exercise such powers as shall be conferred
or authorized by the resolutions appointing them. A majority of any such
committee, if the committee be composed of more than two members, may determine
its action and fix the time and place of its meetings, unless the Board of
Directors shall otherwise provide. The Board of Directors shall have power at
any time to fill vacancies in, to change the membership of, or to discharge any
such committee. The committees shall keep regular minutes of their proceedings
and report the same to the Board of Directors when required.
SECTION 5. Dividends. Subject always to the provisions of the law and
the Certificate of Incorporation, the Board of Directors shall have full power
to determine whether any, and if any, what part of any, funds legally available
for the payment of dividends shall be declared in dividends and paid to
stockholders; the division of the whole or any part of such funds of the
Corporation shall rest wholly within the lawful discretion of the Board of
Directors, and it shall not be required at any time, against such discretion, to
divide or pay any part of such funds among or to the stockholders as dividends
or otherwise; and the Board of Directors may fix a sum which may be set aside or
reserved over and above the capital paid in of the Corporation as working
capital for the Corporation or as a reserve for any proper purpose, and from
time to time may increase, diminish, and vary the same in its absolute judgment
and discretion.
SECTION 6. Removal of Directors. At any meeting of the stockholders,
duly called as provided in these Bylaws, or by written consent of the
stockholders, any director or directors may by the affirmative vote of the
holders of a majority of all the shares of stock outstanding and
7
<PAGE>
entitled to vote for the election of directors be removed from office, either
with or without cause, and his successor or their successors may be elected at
such meeting or by such written consent, or the remaining directors may, to the
extent vacancies are not filled by such election, fill any vacancy or vacancies
created by such removal.
SECTION 7. Informal Action. Any action required or permitted to be
taken at any meeting of the Board of Directors or any committee thereof may be
taken without a meeting if all members of the Board or the committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board or the committee.
SECTION 8. Compensation. The members of the Board of Directors shall
not be entitled to fees, salaries, or other compensation for their services
except as determined by a majority vote of the Board. The members of the Board
of Directors may be reimbursed for their reasonable expenses as such members.
Nothing contained herein shall preclude any director from serving the
Corporation, or any parent, subsidiary or affiliated Corporation, as officer or
in any other capacity and receiving proper compensation therefor.
SECTION 9. Indemnification. The Certificate of Incorporation of the
Corporation provides certain rights of indemnification as set forth therein.
Each such right of indemnification shall be a contract right and shall include
the right to be paid by the Corporation expenses incurred by the person seeking
indemnification in defending any action, suit or proceeding in advance of its
final disposition upon delivery to the Corporation of an undertaking by or on
behalf of such person to repay all amounts so advanced if it should ultimately
be determined that he is not entitled to be indemnified under this Article or
otherwise.
8
<PAGE>
If a claim to indemnification under the Certificate of Incorporation
and this Article should not be paid in full by the Corporation within ninety
days after a written claim has been received by the Corporation at its principal
office, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of his claim. It shall be a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in defending any action, suit or proceeding in advance of its final
disposition where the required undertaking has been tendered to the Corporation,
the burden of proving which shall be on the Corporation), that the claimant has
not met the standards of conduct which would make it legally permissible under
the General Corporation Law of the State of Delaware for the Corporation to
indemnify the claimant for the amount claimed. Neither the failure of the
Corporation (including its board of directors, independent legal counsel, or its
stockholders) to have made a determination prior to the action that
indemnification of the claimant is proper in the circumstances because he has
met the applicable standard of conduct set forth in the General Corporation Law
of Delaware, nor an actual determination by the Corporation (including its board
of directors, independent legal counsel, or its stockholders) that the claimant
had not met such applicable standard of conduct shall be a defense to the action
nor create a presumption that claimant had not met the applicable standard of
conduct.
Such right of indemnification shall not be exclusive of any other right
which such directors, officers or representatives may have or hereafter acquire
under any provision of the Certificate of Incorporation, statute, by-law,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in their respective official capacities and as to action in another
capacity while serving as a director, officer or representative.
9
<PAGE>
The Corporation may maintain insurance, at its expense, to protect
itself and any such director, officer or representative against any such
expense, liability or loss, whether or not the Corporation would have the power
to indemnify him against such expense, liability or loss under the General
Corporation law of the State of Delaware.
ARTICLE IV
----------
OFFICERS
--------
SECTION 1. Election. The Board of Directors, as soon as may be
practicable after the annual meeting of stockholders held in each year, shall
elect a President, a Secretary and a Treasurer. Further, upon the nomination and
recommendation of the President, the Board of Directors may from time to time
elect a Chairman of the Board, a Controller, one or more Executive Vice
Presidents, Senior Vice Presidents, Vice Presidents, and such Assistant
Secretaries, Assistant Treasurers, Assistant Controllers and other officers,
agents, and employees as may be necessary or appropriate. More than one office
may be held by the same person, but the offices of President and Secretary shall
not both be held simultaneously by the same person. If a Chairman of the Board
is to be chosen, such Chairman shall be chosen from among the directors.
SECTION 2. Term and Removal. The term of office of all officers shall
be until their respective successors are elected and qualify, and any officer
may be removed from office, either with or without cause, at any time by the
affirmative vote of a majority of the members of the Board of Directors then in
office. A vacancy in any office arising from any cause may be filled for the
unexpired portion of the term by the Board of Directors.
10
<PAGE>
SECTION 3. The President; Chairman of the Board - Powers and Duties.
The President shall be the chief executive officer of the Corporation and, as
such, shall have such powers, authority and duties as ordinarily pertain to such
office and shall be responsible for the general supervision and coordination of
the affairs and operations of the Corporation. Further, the President shall
preside over all meetings of the stockholders and directors of the Corporation,
except to the extent the Board of Directors determines otherwise. The
President's primary responsibilities shall be to supervise the affairs and
operations of the Corporation and to conduct the affairs of the Corporation to
achieve such objectives as may be established from time to time by the Board of
Directors and to ensure that the activities of the various subsidiaries,
divisions and other operating units of the Corporation are properly coordinated.
He shall have final authority over the affairs, operations and budgets of such
subsidiaries, divisions and other operating units, and shall keep the Board of
Directors advised. He shall sign or countersign certificates, contracts, and
other instruments of the Corporation as authorized by the Board of Directors,
and shall perform all of the duties and enjoy all the powers which are delegated
to him by the Board of Directors, except in all instances as he may delegate
such authority and such duties to other officers of the Corporation. In the
event the Board of Directors elects a Chairman of the Board of Directors who is
not also the President, he shall have all the powers of the President in the
President's absence or inability to act and such other powers as the Board of
Directors shall designate.
SECTION 4. Vice Presidents - Powers and Duties. Each Vice President
shall have such powers and discharge such duties as may be assigned to him from
time to time by the President or
11
<PAGE>
by the Board of Directors upon recommendation of the President. One or more
Executive Vice Presidents and/or Senior Vice Presidents may be appointed.
SECTION 5. Secretary - Powers and Duties. The Secretary shall issue
notices for all meetings except that notice for special meetings of directors
called at the request of a majority of the directors may be issued by such
directors, shall keep minutes of all meetings, shall have charge of the seal and
the corporate minute books, and shall make such reports and perform such other
duties as are incident to his office, or are properly required of him by the
Board of Directors.
SECTION 6. Assistant Secretaries - Powers and Duties. The Assistant
Secretaries in order of their seniority shall, in the absence or disability of
the Secretary, perform the duties and exercise the powers of the Secretary, and
shall perform such other duties as the Board of Directors shall prescribe.
SECTION 7. Treasurer - Powers and Duties. The Treasurer shall have the
custody of all monies and securities of the Corporation and shall keep regular
books of account. He shall disburse the funds of the Corporation in payment of
the just demands against the Corporation or as may be ordered by the Board of
Directors, taking proper vouchers for such disbursements, and shall render to
the Board of Directors from time to time as may be required of him, an account
of all his transactions as Treasurer and of the financial condition of the
Corporation. He shall perform all duties incident to his office or that are
properly required of him by the Board of Directors.
SECTION 8. Assistant Treasurers - Powers and Duties. The Assistant
Treasurers in the order of their seniority shall, in the absence or disability
of the Treasurer, perform the duties and
12
<PAGE>
exercise the powers of the Treasurer, and shall perform such other duties as the
Board of Directors shall prescribe.
SECTION 9. Controller - Powers and Duties. The Controller shall keep
full and accurate accounting records for the Corporation, and shall render to
the Board of Directors from time to time, as may be required of him, reports of
operations and financial condition of the Corporation. He shall perform all
duties incident to his office or that are required of him from time to time by
the Board of Directors.
SECTION 10. Voting Corporation's Securities. Unless otherwise ordered
by the Board of Directors, the President, or in the event of his inability to
act (or in the event the President so designates), such officer as may be
designated by the Board of Directors to act in the absence thereof (or as may be
designated by the President), shall have full power and authority on behalf of
the Corporation to attend and to act and to vote (whether in person or by proxy)
at any meetings of security holders of corporations in which the Corporation may
hold securities, and at such meetings shall possess and may exercise (whether in
person or by proxy) any and all rights and powers incident to the ownership of
such securities, which as the owner thereof the Corporation might have possessed
and exercised, if present. The Board of Directors by resolution from time to
time may confer like powers upon any other person or persons.
SECTION 11. Divisional Officers. The Board of Directors may from time
to time establish and abolish one or more operating divisions of the
Corporation. The Board of Directors may assign one of the Vice Presidents of the
Corporation to any such division who shall, subject to the direction of the
Board of Directors and the President, supervise and control the business of such
division and all officers, agents, and employees of the Corporation whose
principal duties are
13
<PAGE>
in connection with the business of such division. The Vice President so assigned
to any such division may be appointed as the President of such division in
connection with the operation of its business. The Board of Directors may also
appoint one or more Vice Presidents, a Secretary, a Treasurer, and one or more
Assistant Treasurers or Secretaries of any such division, who shall hold their
offices for such terms and exercise such powers and perform such duties as shall
be determined by the Board or by the President of such division. Persons so
appointed by the Board of Directors as Vice President, Treasurer, Secretary,
Assistant Treasurer, or Assistant Secretary of a division need not also be
officers of the Corporation.
ARTICLE V
---------
CERTIFICATES OF STOCK
---------------------
SECTION 1. Form and Transfers. The interest of each stockholder of the
Corporation shall be evidenced by certificates for shares of stock, certifying
the number of shares represented thereby and in such form not inconsistent with
the Certificate of Incorporation as the Board of Directors may from time to time
prescribe.
Transfers of shares of the capital stock of the Corporation shall be
made only on the books of the Corporation by the registered holder thereof, or
by his attorney thereunto authorized by power of attorney duly executed and
filed with the Secretary of the Corporation, or with a transfer clerk or a
transfer agent appointed as in Section 4 of this Article provided, and on
surrender of the certificate or certificates for such shares properly endorsed
and the payment of all taxes thereon. The person in whose name shares of stock
stand on the books of the Corporation shall be deemed the owner thereof for all
purposes as regards the Corporation; provided that whenever any transfer of
shares shall be made for collateral security, and not absolutely, such fact,
14
<PAGE>
if known to the Secretary of the Corporation, shall be so expressed in the entry
of transfer. The Board may, from time to time, make such additional rules and
regulations as it may deem expedient, not inconsistent with these Bylaws,
concerning the issue, transfer, and registration of certificates for shares of
the capital stock of the Corporation.
The certificates of stock shall be signed by the President or a Vice
President and by the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer, and may be sealed with the seal of the Corporation. Such
seal may be a facsimile, engraved or printed. If such certificate is
countersigned (1) by a transfer agent or transfer clerk other than the
Corporation or its employee, or, (2) by a registrar other than the Corporation
or its employee, any other signature on the certificate may be a facsimile. In
case any officer, transfer agent, transfer clerk or registrar who has signed or
whose facsimile signature has been placed upon such certificate shall have
ceased to be such officer, transfer agent, transfer clerk or registrar before
such certificate is issued, it may be issued by the Corporation with the same
effect as if he were such officer, transfer agent, transfer clerk or registrar
at the date of its issue.
SECTION 2. Lost, Stolen, Destroyed, or Mutilated Certificate. No
certificate for shares of stock in the Corporation shall be issued in place of
any certificate alleged to have been lost, destroyed, or stolen, except on
production of such evidence of such loss, destruction, or theft and on delivery
to the Corporation, if the Board of Directors shall so require, of a bond of
indemnity in such amount (not exceeding twice the value of the shares
represented by such certificate), upon such terms and secured by such surety as
the Board of Directors may in its discretion require.
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SECTION 3. Transfer Agent and Registrar. The Board of Directors may
appoint one or more transfer clerks or one or more transfer agents and one or
more registrars, and may require all certificates of stock to bear the signature
or signatures of any of them.
ARTICLE VI
----------
FISCAL YEAR
-----------
The fiscal year of the Corporation shall begin on the first day of
January in each year and shall end on the thirty-first day of December next
following, unless otherwise determined by the Board of Directors.
ARTICLE VII
-----------
CORPORATE SEAL
--------------
The corporate seal of the Corporation shall consist of two concentric
circles, between which shall be the name of the Corporation, and in the center
shall be inscribed the year of its incorporation and the words, "Corporate Seal,
Delaware."
ARTICLE VIII
------------
AMENDMENTS
----------
Except as otherwise provided in the Certificate of Incorporation, the
Bylaws of the Corporation shall be subject to alteration, amendment, or repeal,
and new Bylaws not inconsistent with any provision of the Certificate of
Incorporation or statute, may be made, either by the affirmative vote of the
stockholders entitled to cast a majority of the number of votes present and
entitled to be cast at any annual or special meeting of the stockholders, a
quorum being present, or by the affirmative vote of a majority of the whole
Board, given at any regular or special meeting of the Board, provided that
notice of the proposal so to make, alter, amend, or repeal
16
<PAGE>
such Bylaws be included in the notice of such meeting of the Board or the
stockholders, as the case may be. Bylaws made, altered, or amended by the Board
may be altered, amended or repealed by the affirmative vote of stockholders
entitled to cast a majority of the number of votes present and entitled to be
cast at any annual or special meeting thereof.
17
Exhibit 4(a)
SILICON VALLEY BANK
QUICKSTART LOAN AND SECURITY AGREEMENT
Borrower: Sandbox Entertainment Corporation Address: 2231 East Camelback Road
--------------------------------- ------------------------
Suite 324
---------
Date: September 5, 1996 Phoenix, AZ 85016
--------------------------------- ------------------
THIS LOAN AND SECURITY AGREEMENT is entered into on above date between SILICON
VALLEY BANK ("Silicon"), whose address is 303 Tasman Drive, Santa Clara,
California 95054 and the borrower named above (jointly and severally, the
"Borrower"), whose chief executive office is located at the above address
("Borrower's Address').
1. Loans. Silicon will make loans to Borrower (the "Loans") in amounts
determined by Silicon in its reasonable business judgment up to the amount (the
"Credit Limit") shown on the Schedule to this Agreement (the "Schedule"),
provided to Event of Default and no event which, win notice or passage of time
or both, would constitute an Event of Default has occurred. All Loans and other
monetary Obligations will bear interest at the rate shown on the Schedule.
Interest will be payable monthly, on the date shown on the monthly billing from
Silicon. Silicon may, in its discretion, charge interest to Borrower's deposit
accounts maintained with Silicon.
2. Security Interest. As security for all present and future indebtedness,
guarantees, liabilities, and other obligations, of Borrower to Silicon
(collectively, the "Obligations'), Borrower hereby grants Silicon a continuing
security interest in all of Borrower's interest in the following types of
property, whether now owned or hereafter acquired, and wherever located (collec
- -tively, the "Collateral"): All "accounts," "general intangibles," "chattel
paper," "documents," "letters of credit," "instruments," "deposit accounts,"
"inventory," "farm products," "fixtures" and "equipment," as such terms are
defined in Division 9 of the California Uniform Commercial Code in effect on the
date hereof, and all products, proceeds and insurance proceeds of the foregoing.
3. Representations And Agreements of Borrower. Borrower represents to Silicon as
follows, and Borrower agrees that the following representations will continue to
be true, and that Borrower will comply with all of the following agreements
throughout the term of this Agreement.
3.1 Corporate Existence and Authority. Borrower, if a corporation, is and
will continue to be, duly authorized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation. The execution, delivery
and performance by Borrower of this Agreement and all other documents
contemplated hereby have been duly and validly authorized, and do not violate
any law or any provision of, and are not grounds for acceleration under, any
agreement of instrument which is binding upon Borrower.
3.2 Name; Places of Business. The name of Borrower set forth in this
Agreement is its correct name. Borrower shall give Silicon 15 days' prior
written notice before changing its name. The address set forth in the heading to
this Agreement is Borrower's chief executive office. In addition, Borrower has
places of business and Collateral is located only at the locations set forth on
the Schedule. Borrower will give Silicon at least 15 days prior written notice
before changing its chief executive office or locating the Collateral at any
other location.
3.3 Collateral. Silicon has and will at all times continue to have a
first-priority perfected security interest in all of the Collateral. Borrower
will immediately advise Silicon in writing of any material loss or damage to the
Collateral.
3.4 Financial Condition and Statements. All financial statements now or in
the future delivered to Silicon have been, and will be, prepared in conformity
with generally accepted accounting principles. Since the last date covered by
any such statement, there has been no material adverse change in the financial
condition or business of Borrower. Borrower will provide Silicon: (i) within 30
days after the end of each month, a monthly financial statement prepared by
Borrower, and such other information as Silicon shall reasonably request; (ii)
within 120 days following the end of Borrower's fiscal year, complete annual
financial statements, certified by independent certified public accountants
acceptable to Silicon and accompanied by the unqualified report thereon by said
independent certified public accountants; and (iii) other financial information
reasonably requested by Silicon from time to time.
3.5 Taxes; Compliance with Law. Borrower has filed, and will file, when
due, all tax returns and reports required by applicable law, and Borrower has
paid, and will pay, when due, all taxes,
-1-
<PAGE>
assessments, deposits and contributions now or in the future owned by Borrower.
Borrower has complied, and will comply, in all material respects, with all
applicable laws, rules and regulations.
3.6 Insurance. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance as is
customary in Borrower's industry.
3.7 Access to Collateral and Books and Records. At reasonable times, on
one business day notice, Silicon, or its agents, shall have the right to inspect
the Collateral, and the right to audit and copy Borrower's books and records.
3.8 Additional Agreements. Borrower shall not, without Silicon's prior
written consent, do any of the following: (i) enter into any transactions
outside the ordinary course of business; (ii) sell or transfer any Collateral,
except for the sale of finished inventory in the ordinary course of Borrower's
business, and the sale of obsolete or unneeded equipment in the primary course
of business, (iii) grant a security interest in intellectual property to any
third party (excluding Borrower's venture investors); (iv) pay or declare any
dividends on Borrower's stock (except for dividends payable solely in stock of
Borrower); or (v) redeem, retire, purchase or otherwise acquire, directly or
indirectly, any of Borrower's stock.
4. Term. This Agreement shall continue in effect until the maturity date set
forth on the Schedule (the "Maturity Date"). This Agreement may be terminated,
without penalty, prior to the Maturity Date as follows: (i) by Borrower,
effective three business days after written notice of termination is given to
Silicon; or (ii) by Silicon at any time after the occurrence of an Event of
Default, without notice, effective immediately. On the Maturity Date or on any
earlier effective date of termination. Borrower shall pay all Obligations in
full, whether or not such Obligations are otherwise then due and payable. No
termination shall in any way affect or impair any security interest or other
right or remedy of Silicon, nor shall any such termination relieve Borrower of
any Obligation to Silicon, until all of the Obligations have been paid and
performed in full.
5. Events of Default and Remedies. The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement (a) Any
representation, statement, report or certificate given to Silicon by Borrower or
any of its officers, employees or agents, now or in the future, in untrue or
misleading in a material respect; or (b) Borrower fails to pay when due any Loan
or any interest thereon or any other monetary Obligation; or (c) the total
Obligations outstanding at any time exceed the Credit Limit; or (d) Borrower
fails to perform any other non-monetary Obligation, which failure is not cured
within 5 business days after the date due; or (e) Dissolution, termination of
existence, insolvency or business failure of Borrower; or appointment of a
receiver, trustee or custodian, for all or any part of the property of,
assignment for the benefit of creditors by, or the commencement of any
proceeding by or against Borrower under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect; or (f) a material
change in the ownership of Borrower "resulting in change of control", without
the prior written consent of Silicon; or (g) a material adverse change in the
business, operations, or financial or other condition of Borrower. If an Event
of Default occurs, Silicon, shall have the right to accelerate and declare all
of the Obligations to be immediately due and payable, increase the interest rate
by an additional four percent per annum, and exercise all rights and remedies
accorded it by applicable law.
6. General. If any provision of this Agreement is held to be unenforceable, the
remainder of this Agreement shall still continue in full force and effect. This
Agreement and any other written agreements, documents and instruments executed
in connection herewith are the complete agreement between Borrower and Silicon
and supersede all prior and contemporaneous negotiations and oral
representations and agreements, all of which are merged and integrated in this
Agreement. There are no oral understandings, representations or agreements
between the parties which are not in this Agreement or in other written
agreements signed by the parties in connection this Agreement. The failure of
Silicon at any time to require Borrower to comply strictly with any of the
provisions of this Agreement shall not waive Silicon's right later to demand and
receive strict compliance. Any waiver of a default shall not waive any other
default. None of the provisions of this Agreement may be waived except by a
specific written waiver signed by an officer of Silicon and delivered to
Borrower. The provisions of this Agreement may not be amended, except in a
writing signed by Borrower and Silicon. Borrower shall reimburse Silicon for all
reasonable attorneys' fees and all other reasonable costs incurred by Silicon,
in connection with this Agreement (whether or not a lawsuit is filed). If
Silicon or Borrower files any lawsuit against the other predicated on a breach
of this Agreement, the prevailing party shall be entitled to recover its
reasonable costs and attorneys' fees from the non-prevailing party. Borrower may
not assign any rights under this Agreement without Silicon's prior written
consent. This Agree ment shall be governed by the laws of the State of
California.
7. Manual Waiver of Jury Trial. BORROWER AND SILICON EACH HEREBY WAIVE THE RIGHT
TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN
ANY WAY RELATING TO, THIS AGREEMENT OR ANY CONDUCT, ACT OR OMISSION OF SILICON
OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR
AFFILIATES.
Borrower:
Sandbox Entertainment Corp.
------------------------------
By /s/ Chad M. Little
----------------------------
SILICON VALLEY BANK
By: /s/ Kevin F. Conway
---------------------------
Title Assistant Vice President
------------------------
-2-
<PAGE>
SILICON VALLEY BANK
Schedule to
QuickStart Loan and Security Agreement (Master)
BORROWER: Sandbox Entertainment Corporation
-------------------------------------
DATE: September 5, 1996
-------------------------------------
This Schedule is an integral part of the Loan and Security Agreement
between Silicon Valley Bank ("Silicon") and the above-named borrower
("Borrower") of even date.
Credit Limit (Aggregate)
(Section 1): $4,000,000 (includes Equipment Advances, if any)
----------
Interest Rate (Section 1) A rate equal to the "Prime Rate" in effect from
time to time, plus 1.5% per annum. Interest
shall be calculated on the basis of a 360-day
year for the actual number of days elapsed.
'Prime Rate" means the rate announced from time
to time by Silicon as its "prime rate;" it is a
base rate upon which other rates charged by
Silicon are based, and it is not necessarily the
best rate available at Silicon. The interest
rate applicable to the Obligations shall change
on each date there is a change in the Prime
Rate.
Maturity Dates (Section 4): March 5, 1998
--------------------
Other Locations and Addresses
(Section 3.2): --------------------
Other Agreements: Borrower also agrees as follows:
1. Loan Fee. Borrower shall concurrently pay
silicon a non-refundable Loan Fee in the amount
of $3,000
------
2. Banking Relationship. Borrower shall at all
times maintain its primary banking relationship
with Silicon.
Borrower: Silicon:
Sandbox Entertainment Corp. SILICON VALLEY BANK
- --------------------------
By /s/ Chad M. Little By /s/ Kevin F. Conway
--------------------------- ---------------------------
President or Vice President Title Assistant Vice President
-------------------------
-3-
<PAGE>
SILICON VALLEY BANK
Schedule to
QuickStart Loan and Security Agreement (Equipment Advances)
BORROWER: Sandbox Entertainment Corporation
------------------------------------
DATE: September 5, 1996
------------------------------------
This Schedule is an integral part of the Loan and Security Agreement
between Silicon Valley Bank ("Silicon") and the above-named borrower
("Borrower") of even date.
Credit Limit (Equipment)
(Section 1): $4,000,000. Equipment Advances will be made only
on or prior to March 5, 1997 (the "Last Advance
Date") and only for the purpose of purchasing
equipment reasonably acceptable to Silicon.
Borrower must provide invoices for the equipment
to Silicon on or before the Last Advance Date.
Interest Rate (Section 1) A rate equal to the "Prime Rate" in effect from
time to time, plus 1.5% per annum. Interest
shall be calculated on the basis of a 360-day
year for the actual number of days elapsed.
'Prime Rate" means the rate announced from time
to time by Silicon as its "prime rate;" it is a
base rate upon which other rates charged by
Silicon are based, and it is not necessarily the
best rate available at Silicon. The interest
rate applicable to the Obligations shall change
on each date there is a change in the Prime
Rate.
Maturity Dates (Section 4): After the Last Advance Date, the unpaid
principal balance of the equipment Advances
shall be repaid in 24 equal monthly installments
of principal commencing on April 5, 1997 and
continuing on the same day of each month
thereafter until the entire unpaid principal
balance of the Equipment Advances has been paid
(subject to Silicon's right to accelerate the
Equipment Advances on an Event of Default).
Borrower: Silicon:
Sandbox Entertainment Corp. SILICON VALLEY BANK
- ----------------------------
By /s/ Chad M. Little By /s/ Kevin F. Conway
---------------------------- ---------------------------
President or Vice President Title Assistant Vice President
------------------------
-4-
<PAGE>
Approved by The Secretary of State of Arizona REV 10/90 FORM UCC-1
Space below used by filing office.
replaced California
UCC's
Return copy of recorded original to:
SILICON VALLEY BANK
3003 TASMAN DRIVE/NC661
SANTA CLARA, CA 95054
ARIZONA UNIFORM COMMERCIAL CODE
- -------------------------------
FINANCING STATEMENT - FORM UCC-1
This FINANCING STATEMENT is presented for filing
(recording) pursuant to the Arizona Uniform
Commercial Code.
1. Debtor(s) (last name first and address):
SANDBOX ENTERTAINMENT CORPORATION
2231 East Camelback Road, Ste. 324
Phoenix, AZ 85016
2. Secured Party(ies) and address:
SILICON VALLEY BANK
3003 TASMAN DRIVE/NC661
SANTA CLARA, CA 95054
3. Name and Address of Assignee of Secured
Party(ies):
4. XX If checked, products of collateral are
also covered.
5. This Financing Statement covers the following
types (or items) of property:
SEE EXHIBIT "A" ATTACHED HERETO AND MADE
A PART HEREOF.
6. If the collateral is crops, the crops are
growing or to be grown on the following
described real estate:
7. If the collateral is (a) goods which are or are to become fixtures: (b)
timber to be cut; or (c) minerals or the like (including oil and gas),
or accounts resulting from the sale thereof at the wellhead or minehead
to which the security interest attaches upon extraction, the legal
description of the real estate concerned is:
And, this Financing Statement is to be recorded in the office where a
mortgage on such real estate would be recorded. If the Debtor does not
have an interest of record, the name of a record owner is:
- --------------------------------------------------------------------------------
8. This Financing Statement is signed by the Secured Party instead of the
debtor to perfect or continue perfection of a security interest in:
|_| collateral already subject to a security interest in
jurisdiction when it was brought in to this state.
|_| proceeds of collateral because of a change in type
or use.
|_| collateral as to which the filing has lapsed or will lapse.
|_| collateral acquired after a change of name, identity,
or corporate structure of the Debtor.
- --------------------------------------------------------------------------------
SANDBOX ENTERTAINMENT CORPORATION
- --------------------------------------
- --------------------------------------
/s/ Chad M. Little
- --------------------------------------
SIGNATURE(S) OF DEBTOR(S) OR ASSIGNOR
(Use
whichever
is
applicable)
Dated:
--------------------------------
SILICON VALLEY BANK
- --------------------------------------
- --------------------------------------
SIGNATURE OF SECURED PARTY OF ASSIGNEE
-5-
<PAGE>
This FINANCING STATEMENT is presented for filing and will remain effective, with
certain exceptions for five years from the date of filing, pursuant to Section
9403 of the California Uniform Commercial Code.
1. DEBTOR (Last Name First - If An Individual
Sandbox Entertainment Corporation 1A. Soc Sec No. or Id No.
1B. MAILING ADDRESS
2231 East Camelback Road - Suite 324 1C. CITY, STATE 1D. ZIP CODE
2. ADDITIONAL DEBTOR (IF ANY)
Last Name First - If An Individual) 2A. Soc. Sec No. or Id No.
2B. MAILING ADDRESS 2C. CITY, STATE 2D. ZIP CODE
3. DEBTOR'S TRADE, NAMES OR STYLES (IF ANY) 2C. CITY, STATE 2D. ZIP CODE
4. SECURED PARTY
Name: SILICON VALLEY BANK
Mailing Address: 3003 Tasman Drive
Mail Sort NC661
Santa Clara, California 95054 4A. Soc Sec No. or Id No.
5. ASSIGNEE OF SECURED PARTY 5A. Soc Sec No. or Id No.
Name:
Mailing Address:
6. This FINANCING STATEMENT covers the following types or items of property
(include description of real property on which located and owner of record when
required by instruction 4).
Debtor hereby grants Secured Party a security interest in all of the following,
whether now owned or hereafter acquired, and wherever located, as collateral for
the payment and performance of all present and future indebtedness, liabilities,
guarantees and obligations of Debtor to Secured Party: All "accounts," "general
intangibles," "chattel paper," "documents," "letters of credit," "instruments,"
"deposit accounts," "inventory," "farm products," "fixtures" and "equipment," as
such terms are defined in Division 9 of the California Uniform Commercial Code
in effect on the date hereof, and all products, proceeds and insurance proceeds
of any or all of the foregoing.
7. CHECK IF APPLICABLE: X-PRODUCTS OF COLLATERAL ARE ALSO COVERED.
SIGNATURE(S) OF DEBTOR: DATE: C THIS SPACE FOR USE OF FILING OFFICER
O (DATE, TIME, FILE NUMBER AND FILING
By /s/ C. M. Little D OFFICER)
------------------------------ E
Title President
---------------------------
SIGNATURE(S) OF SECURED PARTY: 1
2
SILICON VALLEY BANK 3
4
By /s/ Kevin F. Conway 5
----------------------------- 6
Title Assistant Vice President 7
-------------------------- 8
9
RETURN COPY TO: 0
SILICON VALLEY BANK
3003 TASMAN DRIVE
MAIL SORT NC 661
SANTA CLARA, CALIFORNIA 95054
-7-
<PAGE>
Debtor: SANDBOX ENTERTAINMENT CORPORATION
Security Party: SILICON VALLEY BANK
EXHIBIT "A"
-----------
Debtor hereby grants Secured Party a security interest in all of the following,
whether now owned or hereafter acquired, and wherever located, as collateral for
the payment and performance of all present and future indebtedness, liabilities,
guarantees and obligations of Debtor to Secured Party: All "accounts," "general
intangibles," "chattel paper," "documents," "letters of credit," "instruments,"
"deposit accounts," "inventory," "farm products," "fixtures," and "equipment,'
as such terms are defined in the Uniform Commercial Code in effect on the date
hereof, and all products, proceeds and insurance process of any or all of the
foregoing.
Exhibit 4(b)
Silicon Valley Bank
AMENDMENT TO QUICKSTART LOAN AND SECURITY AGREEMENT
Borrower: Sandbox Entertainment Address: 2231 East Camelback, Suite 324
Corporation Phoenix, AZ 85016
Date: September 15, 1997
----------------------------
THIS AMENDMENT TO QUICKSTART LOAN AND SECURITY AGREEMENT IS ENTERED INTO ON THE
ABOVE DATE BETWEEN SILICON VALLEY BANK ("SILICON"), WHOSE ADDRESS IS 3003 TASMAN
DRIVE, SANTA CLARA, CALIFORNIA 95054 AND THE BORROWER NAMED ABOVE (JOINTLY AND
SEVERALLY, THE "BORROWER"), WHOSE CHIEF EXECUTIVE OFFICE IS LOCATED AT THE ABOVE
ADDRESS ("BORROWER'S ADDRESS").
The parties hereto agree to amend the QuickStart Loan and
Security Agreement between them dated September 5, 1996 (the "Loan Agreement"),
effective as of the date hereof, as follows: Capitalized terms used but not
defined herein shall have the same meanings set forth in the Loan Agreement.
1. Amended Schedule.The Schedule to the Loan and Security
Agreement is amended effective on the date hereof, to read as set forth in the
Amended Schedule to QuickStart Loan and Security Agreement attached hereto.
2. Facility Fee. Borrower shall pay to Silicon a fee in the
amount of $0.0.
3. Representations True. Borrower represents and warrants to
Silicon that all representations and warranties set forth in the Loan Agreement,
as amended hereby, are true and correct.
4. General Provisions. This Amendment, the Loan Agreement, and
any prior written amendments to the Loan Agreement signed by Silicon and the
Borrower, and other written documents between Silicon and borrower set forth in
full all of the representations and agreements of the parties with respect to
the subject matter hereof and supersede all prior discussions, representations,
agreements, and understandings between the parties with respect to the subject
matter hereof. Except as expressly amended, all of the terms and provisions of
the Loan Agreement, and all other documents and agreement between Silicon and
Borrower shall remain in full force and effect and the same are hereby ratified
and confirmed.
Borrower:
SANDBOX ENTERTAINMENT CORPORATION
---------------------------------
By /s/ Mark Gorchoff .
------------------------------
President or Vice President
Mark Gorchoff, Chief Financial Officer
Silicon:
SILICON VALLEY BANK
By /s/ Kevin Conway .
-------------------------------------------
Title Vice President .
---------------------------------------
<PAGE>
Silicon Valley Bank
Amended Schedule to
QuickStart Loan and Security Agreement (Master)
BORROWER: Sandbox Entertainment Corporation
Date: September 15, 1997
----------------------------
This Amended and Restated Schedule is an integral part of the
QuickStart Loan and Security Agreement between Silicon Valley Bank ("Silicon")
and the above-named borrower ("Borrower") dated as of September 5, 1996, as may
be further amended from time to time.
Credit Limit (Aggregate)
(Section 1): $500,000.00 (includes, without limitations,
Equipment Advances, if any, and the Merchant
Services Business Credit Card Reserve)
Interest Rate (Section 1): A rate equal to the "Prime Rate" in effect
from time to time, plus 1.5% per annum.
Interest shall be calculated on the basis of
a 360-day year for the actual number of days
elapsed. "Prime Rate" means the rate
announced from time to time by Silicon as
its "prime rate;" it is a base rate upon
which other rates charged by Silicon are
based, and it is not necessarily the best
rate available at Silicon. The interest rate
applicable to the Obligations shall change
on each date there is a change in the Prime
Rate. Maturity Date (Section 4): March 5,
1998
Other Locations and Addresses
(Section 3.2) 2720 E. Camelback Road
----------------------
Other Agreements: Borrower also agrees as follows:
1. Loan Fee. Borrower shall concurrently pay
Silicon a non-refundable Loan fee in the
amount of $0.0
2. Banking Relationship. Borrower shall at
all times maintain its primary banking
relationship with Silicon.
Borrower: Silicon:
SANDBOX ENTERTAINMENT CORP. SILICON VALLEY BANK
By /s/ Mark Gorchoff By /s/ Kevin Conway
---------------------------------------- -------------------------
Mark Gorchoff, Chief Financial Officer Title Vice President
--------------------------
Exhibit 4(c)
PROMISSORY NOTE
$116,328 Phoenix, Arizona July 13, 1995
FOR VALUE RECEIVED, Tracer Design, Inc. ("Maker") promises to pay to
Glenn Gomez ("Holder"), or order, at such address as the holder hereof may
specify, the principal sum of One Hundred Sixteen Thousand Three Hundred Twenty
Eight Dollars ($116,328), together with interest on the unpaid principal balance
at the rate of interest announced from time to time by Bank One Arizona, N.A.,
as its "prime rate" (the "Note Rate"). This Note shall be due and payable in
lawful money of the United States of America, as follows:
(a) All accrued but unpaid interest shall be due and payable
quarterly at the end of each of the first eight (8) quarters following
the date of this Note. That is, interest payments shall be due and
payable on each of September 30 and December 31, 1995, March 31, June
30, September 30 and December 31, 1996, and March 31, and June 30,
1997.
(b) Commencing on September 30, 1997 (the end of nine (9)
quarters following the date of this Note), and thereafter on each
December 31, March 31, June 30 and September 30 for an additional
fifteen (15) quarters, principal in the amount of Seven Thousand Two
Hundred Seventy and 50/100ths Dollars ($7,270.50), plus accrued and
unpaid interest shall be due and payable.
Maker shall have the right at any time or from time to time to pay all or a
portion of the principal and accrued interest without premium or penalty.
Prepayments shall apply first to accrued interest and then to principal.
Should default be made in the payment of any amount when due and Maker
fails to cure such default within thirty (30) days after written notice of
default, then the whole sum of principal plus interest shall become immediately
due and payable at the option of the Holder of this Note, with interest from and
after the date of such default at the Note Rate plus two percent (2%) per annum,
or if such rate of interest is not enforceable throughout the period beginning
with such default, at such lower rate(s) as shall from time to time be the
highest permissible rate(s) under applicable law.
In the event Maker shall file a petition in bankruptcy or any petition
or application for an y relief under any provision of the Bankruptcy Act or to
take advantage of any law pertaining to reorganization, insolvency or
readjustment of debt, or if the Maker shall make an assignment for the benefit
of creditors, be adjudicated a bankrupt or insolvent, commit any act of
bankruptcy, or answer a petition filed against Maker in any proceeding under the
Bankruptcy Act or any law pertaining to reorganization, insolvency or
readjustment of debt admitting the material allegations
1
<PAGE>
thereof, or if a court of competent jurisdiction shall enter an order, judgment
or decree appointing a receiver for the assets or affairs of Maker, this Note
shall become immediately due and payable without notice to Maker. Should suit be
brought to recover on this Note, or should the same be placed in the hands of an
attorney for collection, Maker promises to pay all reasonable attorney fees and
costs incurred in connection therewith. This Note shall be governed by and
construed in accordance with the laws of the State of Arizona, and suit hereon
may be brought in Superior Court, Maricopa County, Arizona, and for this purpose
Maker hereby expressly consents to the jurisdiction of said court.
Failure of Holder to exercise any option hereunder shall not constitute
a waiver of the right to exercise the same in the event of any subsequent
default or in the event of continuance of any existing default after demand for
strict performance hereof.
Maker waives demand, diligence, presentment for payment, protest and
notice of demand, protest, nonpayment and exercise of any option hereunder.
Maker agrees that the granting without notice of any extension or extensions of
time for payment of any sum or sums due hereunder or for the performance of any
covenant, condition or agreement hereof shall in no way release or discharge the
liability of the Maker.
Maker acknowledges that the principal amount of this Note is a loan
from Holder for use in Maker's business, and covenants with Holder that it will
use such loan as outlined in Maker's 1995 Business Plan - Executive Summary,
May, 1995, a copy of which has been delivered by Maker to Holder.
Until this Note has been paid in full:
a. Maker shall deliver its internally prepared quarterly
financial statements to Holder promptly after completion;
b. Maker shall deliver its annual audited financial statements
to Holder promptly after they are received by Maker;
c. Maker shall not take any of the following actions without
first discussing them with Holder and giving him an opportunity to
express his views:
(1) Incur additional debt;
(2) Pledge or otherwise grant a security interest in
Maker's assets, except for the granting of purchase money
security interests assets being acquired;
(3) Dispose of assets other than in the ordinary
course of business; or
(4) Pay dividends.
2
<PAGE>
Maker represents and warrants to and covenants with Holder that:
a. Maker is a corporation duly organized, validly existing and
in good standing under the laws of the State of Arizona, and has all
requisite power and authority to own its assets, conduct its business
as it is now conducted, and to execute, deliver and perform this Note;
b. The execution, delivery and performance of this Note have
been duly authorized by all necessary corporate action on the part of
Maker;
c. There is no pending or threatened suit, action, employee
controversy, legal or administrative action, arbitration or other
proceeding or governmental investigation by or against Maker; and
d. Maker is not in default under any of its material
obliagations to any third party.
TRACER DESIGN, INC.,
an Arizona corporation
By: /s/ Chad M. Little
--------------------------------------
Chad Little, President
"MAKER"
3
Exhibit 4(d)
WARRANT PURCHASE AGREEMENT
THIS WARRANT PURCHASE AGREEMENT (this "Agreement") is made effective as
of September 15, 1995, by and between TRACER Design, Inc., an Arizona
corporation ("TRACER"), and PICKWICK GROUP LLC, a Connecticut limited liability
company having a place of business at No. 172 Dan's Highway, New Canaan,
Connecticut 06840 ("Purchaser").
PREMISES: TRACER desires to issue and sell to Purchaser and Purchaser
desires to purchase a warrant to purchase 5,100 shares of the Class A Common
Stock, $.001 par value of TRACER (the "Warrant Shares"), a form of which is
attached to this Agreement as Exhibit I (the "Warrant"), on the terms and
subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement, TRACER and Purchaser agree as follows:
1. Issuance, Sale and Delivery of Warrant. At the Closing (defined in
Section 2) TRACER agrees to issue and sell to Purchaser and Purchaser agrees to
purchase from TRACER and accept the Warrant for an aggregate purchase price of
$204 (the "Purchase Price").
2. Closing. The issuance, sale, purchase and delivery of the Warrant
shall take place at the offices of TRACER on September 15, 1995 at 10 a.m. local
time, or at such other location, date and time as may be agreed upon between
Purchaser and TRACER (such transaction being the "Closing" and such date and
time being the "Closing Date"). At the Closing TRACER shall issue and deliver to
Purchaser the Warrant registered in the name of Purchaser. In exchange for such
delivery, Purchaser shall deliver its check payable to the order of "TRACER
Design, Inc." in the amount of the Purchase Price.
3. Representations and Warranties of TRACER. TRACER represents and
warrants to Purchaser as follows:
(a) Organization and Standing; Charter and Bylaws. TRACER is a
corporation duly organized and existing under and by virtue of the laws
of the State of Arizona and is in good standing under such laws. TRACER
has requisite corporate power and authority to own its property and to
carry on its business as presently conducted or as proposed to be
conducted.
(b) Corporate Power. TRACER has all requisite legal and
corporate power to sell and issue the Warrant to Purchaser and in all
other respects to carry out and perform its obligations under this
Agreement.
<PAGE>
(c) Capitalization. The authorized capital stock of TRACER
consists of 400,000 shares of preferred stock, $.001 par value, of
which no shares are issued and outstanding; 500,000 shares of class A
common stock, $.001 par value, of which 10,000 shares are issued and
outstanding, and 100,000 shares of class B common stock, $.001 par
value, of which no shares are issued and outstanding. Prior to the
Closing TRACER will have no equity securities issued or outstanding
except those disclosed on Exhibit II attached hereto, which contains a
list of all holders of capital stock of TRACER and their respective
shareholdings. Except as disclosed on Exhibit II, there are no
outstanding warrants, options, agreements, convertible securities or
other commitments pursuant to which the Corporation is or may become
obligated to issue any shares of its capital stock or other securities
of the Corporation, except as contemplated by this Agreement. There
are, and immediately upon consummation at the Closing of the
transactions contemplated hereby there will be, no preemptive or
similar rights to purchase or otherwise acquire shares of capital stock
of TRACER pursuant to any provision of law, the Certificate of
Incorporation or Bylaws of TRACER, or any agreement to which TRACER is
a party, or otherwise, except as contemplated by this Agreement and in
that certain Amended and Restated Stockholders' Agreement dated as of
July 13, 1995 by and among TRACER and the Stockholders party thereto
(the "Stockholders' Agreement"), a copy of which is attached as Exhibit
III. All shares of common stock and other securities issued by TRACER
prior to the Closing have been issued in transactions exempt from
registration under the Securities Act of 1933, as amendment (the
"Securities Act") and in compliance with applicable state securities
laws ("Blue Sky Laws"). TRACER does not believe that it has violated
the Securities Act or Blue Sky Laws in connection with the issuance of
any shares of common stock or other securities prior to the Closing.
(d) Authorization. All corporate action on the part of TRACER
necessary for the authorization, execution, and delivery of this
Agreement, and performance of all of TRACER's obligations hereunder,
including issuance and delivery of the Warrant, shall have been taken
prior to the Closing.
(e) Corporate Law Status. When the Warrant has been issued,
delivered and paid for in accordance with this Agreement, it will be
validly issued, fully paid and non-assessable and will be free and
clear of all liens, charges, restrictions, claims and encumbrances
imposed by or through any act or omission on the part of TRACER. The
issuance, sale or delivery of the Warrant is not subject to any
preemptive right of stockholders of TRACER or to any right of first
refusal or other right in favor of any person.
(f) Validity. This Agreement has been duly executed and
delivered by TRACER and constitutes the legal, valid and binding
obligation of TRACER, enforceable in accordance with its terms, except
as enforceability may be limited by
2
<PAGE>
applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditor's rights generally,
and except as enforceability may be subject to general principles of
equity, whether applied in a court of equity or at law or by an
arbitration panel.
4. Representations and Warranties of Purchaser. Purchaser represents
and warrants to TRACER, and where so stated, promises as follows:
(a) Unregistered Securities. Purchaser understands that the
Warrant has not been registered under the Securities Act of 1933 or any
state securities laws (collectively, "Securities Laws") in reliance
upon an exemption from registration accorded for nonpublic offerings.
Purchaser further recognizes that the Warrant may not be sold unless it
and the transaction in which it is to be sold have been registered
under the Securities Laws or an exemption from registration is
available for such sale. Purchaser accepts that the Warrant will bear a
legend to that effect. Further, Purchaser recognizes that TRACER has
made no representations as to registration of the Warrant under the
Securities Laws and that no registration is anticipated ever to occur.
(b) Investment Intent. Purchaser is acquiring the Warrant for
its own account for investment and not with a view to resale or
distribution. The Purchaser promises that it will not sell,
hypothecate, transfer or otherwise dispose of the Warrant, or attempt
so to do, unless it has been registered under the Securities Laws or,
in the opinion of counsel reasonably acceptable to TRACER and its
counsel, an exemption from registration is available.
(c) Negotiation; Access to Information. The terms of
Purchaser's purchase of the Warrant were established by negotiations
between Purchaser and TRACER's representative, and in connection
therewith, Purchaser was given access to the relevant information it
requested concerning TRACER's condition and operations, and the
opportunity to ask questions of and receive answers from TRACER's
representatives. Purchaser is knowledgeable and experienced in
financial and business matters and, on the basis of the information it
received concerning TRACER's condition and operations, Purchaser is in
a position to make an informed investment decision concerning its
investment in the Warrant and the risks attending such investment.
Further, in light of its financial position, Purchaser is able to bear
the economic risks of investment in the Warrant.
(d) Legends; Stop Transfer Orders. Purchaser hereby consents
and agrees that TRACER may imprint on any certificate evidencing the
Warrant or any of the Warrant Shares an appropriate legend or
notification to the effect that such shares are not freely transferable
and may be transferred only in compliance with applicable securities
laws. Purchaser further consents and agrees that TRACER may
3
<PAGE>
give appropriate "stop order" instructions in this regard to any
transfer agent for the Warrant or the Warrant Shares.
(e) Compliance; Indemnity. Purchaser hereby expressly promises
not to offer for sale or sell the Warrant or any of the Warrant Shares,
or any interest therein, except in compliance with the Securities Act
of 1933, as amended, and other applicable securities laws and
regulations, including those of the State of Arizona. Purchaser hereby
promises to indemnify TRACER, together with its officers and directors,
against any and all liabilities, losses, damages and expenses
(including reasonable attorney fees) arising (directly or indirectly)
from or in connection with any disposition of the Warrant or the
Warrant Shares, or any interest therein, in violation of (or allegedly
in violation of) applicable securities laws or regulations, including
all such expenses incurred in connection with the defense against any
such claim.
(f) No Transfer; Stockholder's Agreement. Purchaser promises
not to transfer the Warrant or any interest therein without the prior
written consent of TRACER. In addition, Purchaser acknowledges that in
connection with the exercise of the Warrant, any holder will be
required as a condition to such exercise to become bound by and
obligated under the Stockholder Agreement for so long as it shall be in
effect.
(g) Delivery of Investment Letter upon Exercise of Warrant. At
the request of TRACER, Purchaser shall deliver upon exercise of the
Warrant an investment letter in form and substance substantially to the
effect of Sections 4(a)-(e) above.
5. Conditions to the Obligations of Purchaser. The obligation of
Purchaser to purchase and pay for the Warrant on the Closing Date is, at
Purchaser's sole option, subject to satisfaction on or before the Closing Date
of the following conditions:
(a) Representations and Warranties to Be True. The
representations and warranties contained in Section 3 shall be true,
complete and correct on and as of the Closing Date with the same effect
as though such representations and warranties had been made on and as
of such date.
(b) Performance. TRACER shall have performed and complied with
all agreements contained herein and required to be performed or
complied with by it prior to or at the Closing Date.
(c) Proceedings. All corporate and other proceedings to be
taken by TRACER in connection with the transactions contemplated hereby
and all documents incident thereto shall be satisfactory in form and
substance to Purchaser and its counsel.
4
<PAGE>
(d) Survival. All covenants, representations and warranties
made in this agreement shall survive until the expiration of the term
of the Warrant.
6. Entire Agreement. This Agreement constitutes the sole and entire
agreement of the parties with respect to the subject matter hereof. This
Agreement may not be amended or modified, and no provisions may be waived,
without the written agreement of TRACER and Purchaser.
IN WITNESS WHEREOF, TRACER and the Purchaser have executed this
Agreement as of the day and year first above written.
TRACER:
TRACER Design, Inc.
By: /s/ Chad Little
-------------------------
Chad Little
Its President
PURCHASER:
PICKWICK GROUP LLC
By: /s/ Douglas C. W. Greenwood
------------------------------------
Douglas C. W. Greenwood
Its Manager
5
<PAGE>
EXHIBIT I
[attach Warrant]
<PAGE>
EXHIBIT II
Stockholders:
Chad Little 127,500 shares of Class A Common Stock
Lonnie Whittington 61,250
Jim Layne 61,250
Glenn Gomez 5,102
Stock Option Holders:
Mike Turico 8,697
Doug Hall 8,697
Dennis Wodarz 11,596
Donald Fairall 5,797
Potential Warrant/Stock Grant to Frank Helstab and/or Don Reynolds (32,909
shares; to be determined)
Potential increase in shares to Glenn Gomez of 5,102 shares in connection with
offering
<PAGE>
EXHIBIT III
[attach Stockholders' Agreement]
Exhibit 4(e)
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1993, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
STOCK SUBSCRIPTION WARRANT
to Purchase 5,100 Shares of the
Class A Common Stock, $.001 Par Value, of
TRACER Design, Inc., an Arizona corporation (the "Company")
DATE OF INITIAL ISSUANCE: As of September 15, 1995
THIS CERTIFIES THAT for value received, PICKWICK GROUP LLC or its
registered assigns (hereinafter called the "Holder") is entitled to purchase
from the Company, at any time during the Term of this Warrant, Five Thousand One
Hundred (5,100) shares of common stock, class A, $.001 par value, of the Company
(the "Common Stock"), at the Warrant Price, payable in lawful money of the
United States of America, to be paid upon the exercise of this Warrant. The
exercise of this Warrant shall be subject to the provisions, limitations and
restrictions herein contained and may be exercised in whole or in part.
1. Definitions. For all purposes of this Warrant, the following terms
shall have the meanings indicated:
Common Stock shall mean and include the Company's authorized Common Stock, $.001
par value as constituted at the date of this Warrant, and shall also include the
Company's authorized class B common stock, $.001 par value, and any capital
stock of any class or series of the Company now or hereafter authorized that is
not limited to a fixed sum or percentage of par value or of the purchase price
of such stock in respect of the rights of the holders thereof to participate in
dividends and/or in the distribution of assets upon the voluntary or involuntary
liquidation, dissolution or winding up of the Company.
Term of this Warrant shall mean the period beginning on the date initial
issuance hereof and ending on September 15, 2005.
Warrant Price shall mean Thirty Six Dollars ($36.00) per share, subject to
adjustment in accordance with Section 5 and Section 10.
<PAGE>
Warrant Shares shall mean the shares of Common Stock purchased or purchasable by
the Holder of this Warrant upon exercise hereof.
2. Exercise of Warrant. The Warrant shall be exercised, if at all, only
as follows:
(a) To exercise this Warrant in whole or in part, the Holder shall
deliver to the Company at its principal office, at any time
and from time to time during the Term of this Warrant: (i) the
notice of exercise in the form attached hereto as Exhibit A,
(ii) cash, certified or official bank check payable to the
order of the Company, wire transfer of funds to the Company's
account, or the surrender of evidence of any indebtedness of
the Company to the Holder (or any combination of the
foregoing) in the amount of the Warrant Price for each share
being purchased, and (iii) this Warrant.
(b) Notwithstanding any contrary provisions in this Warrant, if
the Current Market Price (as defined in Section 2(c) below)
exceeds the Warrant Price at the date of calculation, instead
of exercising this Warrant as described in Section 2(a) above,
the Holder may elect to receive Warrant Shares equal to the
value of this Warrant (or the portion thereof being
exercised), by delivering to the Company at its principal
office, at any time and from time to time during the Term of
this Warrant: (i) the notice of exercise in the form attached
hereto as Exhibit A, and (ii) this Warrant, in which event the
Company shall issue to the Holder a number of Warrant Shares
calculated using the following formula:
CS = WCS x (CMP-WP)
-------------------
CMP,
where CS = the number of Warrant Shares to be issued to the
Holder,
WCS = the number of Warrant Shares purchasable under the
Warrant, or if only a portion of the Warrant is
being exercised, the portion of the Warrant being
exercised at the date of such calculation,
CMP = the Current Market Price (as defined in Section
5(c) below) at the date of such calculation, and
WP = the Warrant Price, as adjusted to the date of such
calculation.
(c) For the purpose of any calculation made pursuant to this
Section 2, the "Current Market Price" at any date of one share
of Common Stock shall be deemed to be the average of the daily
closing prices for the 30 consecutive business days ending
2
<PAGE>
no more than 15 business days before such date (as adjusted
for any stock dividend, split, combination or reclassification
that took effect during such 30 business day period). The
closing price for each day shall be the last reported sales
price regular way or, if no such reported sales took place on
such day, the average of the last reported bid and asked
prices regular way, in either case on the principal national
securities exchange on which the Common Stock is listed or
admitted to trading (or if the Common Stock is not at the time
listed or admitted for trading on any such exchange, then such
price as shall be equal to the average of the last reported
bid and asked prices, as reported by the National Association
of Securities Dealers Automated Quotations System ("NASDAQ")
on such day, or if, on any such date, the security shall not
be quoted on the NASDAQ, then such price shall be equal to the
average of the last reported bid and asked prices on such day
as reported by The National Quotations Bureau Incorporated or
any similar reputable quotation and reporting service, if such
quotation is not reported by The National Quotation Bureau
Incorporated); provided, however, that if the Common Stock is
not traded in such manner that the quotations referred to in
this Section 2(c) are available for the period required
hereunder, the Current Market Price shall be determined by the
Board of Directors of the Company, acting in good faith.
(d) Each certificate for Warrant Shares shall bear the following
legend (and any additional legend required by (i) any
applicable state securities laws, and (ii) any securities
exchange upon which such Warrant Shares may, at the time of
such exercise be listed) on the face thereof, unless at the
time of exercise, such Warrant Shares shall be registered
under the Securities Act of 1933, as amended (the "Securities
Act");
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR UNDER APPLICABLE STATE
SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION
THEREFROM UNDER SAID ACT AND APPLICABLE STATE
SECURITIES LAWS."
In addition, for so long as that certain Amended and Restated
Stockholders' Agreement dated as of July 13, 1995, by and
between the Company, and certain shareholders of the Company
(the "Stockholders' Agreement") remains in effect, each
certificate for Warrant Shares shall bear the following
legend:
"THE SHARES OF STOCK REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO A STOCKHOLDERS'
AGREEMENT TO WHICH THE CORPORATION IS A
3
<PAGE>
PARTY, AND NONE OF SUCH SHARES, OR ANY INTEREST
THEREIN, SHALL BE TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF EXCEPT AS PROVIDED IN SUCH
AGREEMENT. A COPY OF THE STOCKHOLDERS' AGREEMENT IS
ON FILE IN THE OFFICE OF THE CORPORATION AND WILL BE
MADE AVAILABLE FOR INSPECTION TO ANY PROPERLY
INTERESTED PERSON WITHOUT CHARGE WITHIN FIVE (5)
WORKING DAYS AFTER THE CORPORATION'S RECEIPT OF A
WRITTEN REQUEST."
3. Covenants As to Common Stock. The Company covenants and agrees that:
(i) all shares of Common Stock that may be issued upon the exercise of this
Warrant will, upon issuance, be validly issued, fully paid and nonassessable,
and free from all taxes, liens and charges with respect to the issue thereof;
(ii) it will pay when due and payable any and all federal and state taxes (other
than federal or state income taxes, if any, which shall remain Holder's
responsibility) that may be payable in respect of the issue of this Warrant or
any Common Stock or the Warrant Shares; (iii) it will at all times have
authorized and reserved, free from preemptive rights, a sufficient number shares
of Common Stock to provide for the exercise of the rights represented by this
Warrant; (iv) if any shares of capital stock to be reserved for the purpose of
the issuance of shares upon the exercise of this Warrant require registration
with or approval of any governmental authority under any federal or state law
before such shares may be validly issued or delivered upon exercise, then the
Company shall in good faith and as expeditiously as possible endeavor to secure
such registration or approval, as the case may be; and (v) if and so long as the
Common Stock issuable upon the exercise of this Warrant is listed on any
national securities exchange, the Company, will, if permitted by the rules of
such exchange, list and keep listed on such exchange, upon official notice of
issuance, all shares of such Common Stock issuable upon exercise of this
Warrant.
4. Adjustment of Number of Shares. Upon each adjustment of the Warrant
Price as provided in Section 5 below, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest 1/10th of a share) obtained by multiplying the
Warrant Price in effect immediately before such adjustment by the number of
shares purchasable pursuant hereto immediately before such adjustment, and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
5. Adjustment of Warrant Price. The Warrant Price shall be subject to
adjustment from time to time as follows:
(a) If, at any time during the term of this Warrant, the number of
shares of Common Stock outstanding is increased by a stock
dividend payable in
4
<PAGE>
shares of Common Stock or by a subdivision or split-up of
shares of Common Stock, then, following the record date fixed
for the determination of Holders of Common Stock entitled to
receive such stock dividend, subdivision or split-up, the
Warrant Price shall be appropriately decreased so that the
number of shares of Common Stock issuable upon the exercise of
this Warrant shall be increased in proportion to such increase
in outstanding shares.
(b) If, at any time during the term of this Warrant, the number of
shares of Common Stock outstanding is decreased by a
combination of the outstanding shares of Common Stock, then,
following the record date for such combination, the Warrant
Price shall appropriately increase so that the number of
shares of Common Stock issuable upon the exercise hereof shall
be decreased in proportion to such decrease in outstanding
shares.
(c) All calculations under this Section 5 shall be made to the
nearest cent or to the nearest 1/10th of a share, as the case
may be.
(d) If the Company proposes to take any action of the types
described in Section 5(a) or (b), the Company shall forward at
the same time and in the same manner, to the Holder of this
Warrant, such notice, if any, that the Company shall give to
the Holders of capital stock of the Company.
6. Transfers. The Company may deem and treat the person in whose name
this Warrant is registered as the Holder and owner hereof. Notwithstanding the
foregoing, the Warrant and all rights hereunder are not transferable in whole or
in part without the prior written consent of the Company and compliance with
that certain Warrant Purchase Agreement of even date herewith between the
Company and Holder, and any attempted transfer without such consent and such
compliance shall be void. Transferability of the Warrant Shares is limited as
set forth in this Warrant and in the Stockholders' Agreement.
7. Mergers, Consolidations, Sales. In the case of any proposed
consolidation or merger of the Company with another entity, or the proposed sale
of all or substantially all of its assets to another person or entity, or any
proposed reorganization or reclassification of the capital stock of the Company,
then, as a condition of any such consolidation, merger, sale, reorganization or
reclassification, lawful and adequate provision shall be made pursuant to which
the Holder of this Warrant shall thereafter have the right to receive upon the
basis and upon the terms and conditions specified herein, in lieu of the shares
of Common Stock of the Company immediately purchasable hereunder, such shares of
stock, securities or assets as may, by virtue of such consolidation, merger,
sale, reorganization or reclassification, be issued or payable with respect to
or in exchange for the number of shares of such Common Stock purchasable
hereunder immediately before such consolidation, merger, sale reorganization or
reclassification. The Company shall forward at the same time and in the same
manner, to the Holder of this Warrant,
5
<PAGE>
such notice, if any, that the Company shall give to the Holders of capital stock
of the Company with respect to any proposed transaction described above or any
distribution of assets of the Company in dissolution or liquidation, or any
extraordinary dividend or other distribution on its Common Stock except out of
earned surplus or by way of a stock dividend payable in shares of its Common
Stock. This Warrant shall be binding upon any corporation or other person or
entity succeeding to the Company by merger, consolidation or acquisition of all
or substantially all of the Company's assets.
8. Registration Rights; Lockup Letter. (a) If at any time prior to the
expiration date of this Warrant, the Company proposes to register any of its
securities under the Securities Act, whether or not for sale for its own
account, on a form and in a manner which would permit registration of shares of
common stock for sale to the public under the Securities Act, it will each such
time give prompt written notice to the Holder of its intention to do so,
describing such securities and specifying the form and manner and the other
relevant facts involved in such proposed registration, and upon the written
request of the Holder delivered to the Company within 30 days after the giving
of any such notice (which request shall specify the shares of Common Stock
intended to be disposed of by the Holder and the intended method of disposition
thereof), the Company will take every reasonable effort to effect the
registration under the Securities Act, subject to Sections 8(b) and (c) below,
of all shares of Common Stock which the Company has been so requested to
register by the Holder to the extent requisite to permit the disposition (in
accordance with the intended methods thereof as aforesaid) of the shares of
Common Stock so to be registered, provided that:
(i) if, at any time after giving such written notice of its
intention to register any of its securities and prior to the effective
date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to
register such securities, the Company may, at its election, give
written notice of such determination to the Holder and thereupon shall
be relieved of its obligation to register any shares of Common Stock in
connection with such registration;
(ii) the Company shall not be obligated to effect any
registration of shares of Common Stock under this Section incidental to
the registration of any of its securities in connection with mergers,
acquisitions, exchange offers, dividend reinvestment plans, employee
stock ownership plans or stock option plans, thrift plans, pension
plans or other employee benefit plans; and
(iii) the Company shall not be obligated to effect any
registration of shares of Common Stock to the extent such shares are
validly excluded from an underwritten distribution pursuant to Section
8(c) below.
(c) If the managing underwriter for a firm commitment underwritten
registration advises the Company and the Holder of Common Stock that, in the
underwriter's opinion, the total amount of securities proposed to be sold in
such registration exceeds the amount of
6
<PAGE>
securities that can be sold in such an offering without negatively affecting the
offering or its price, then the number of outstanding shares of Common Stock
proposed to be included in such offering by persons other than the Company
and/or a stockholder exercising so-called "demand" registration rights (but
including Holder) shall be reduced pro rata among the holders of all such Common
Stock. Expenses of all registrations (excluding underwriting discounts and fees,
commissions and transfer taxes) shall be paid by the Company, including the
reasonable fees and disbursements for one counsel for all non-Company sellers as
a group.
(d) It shall be a condition precedent to the obligation of the Company
to take any action pursuant to this Section 8 in respect of the Warrant Shares
which are to be registered at the request of Holder that Holder shall furnish to
the Company such information regarding the Common Stock held by Holder and the
intended method of disposition thereof as the Company shall reasonably request
and as shall be required in connection with the action to be taken by the
Company.
(e) The Company shall not, without the Holder's written consent, and
the written consent of any Warrant Shares issued and outstanding, enter into any
agreement with any holder or prospective holder of any securities of the Company
that purports to grant "piggy back" registration rights unless such rights are
consistent with and expressly made subject to the rights and priorities set
forth in this Section 8.
(f) The Company will indemnify and hold harmless each Holder, each of
its managers, members, officers, directors, partners and agents, with respect to
each registration, qualification and compliance effected pursuant to this
Section 8 pursuant to an indemnity agreement or agreements in customary form.
Holder will indemnify and hold harmless the Company (and the underwriters if
requested) and their control persons with respect to any information provided by
Holder for inclusion in a registration statement, pursuant to an indemnity
agreement or agreements in customary form.
(g) Holder agrees to execute and deliver to the underwriters in
connection with any Company-initiated firm commitment underwritten offering and
registration a "lock-up" letter requested, if at all, by such underwriters,
regarding limitations on the transfer by Holder of Common Stock for a period
after effectiveness of such registration provided such "lock-up" letter is on
the same terms and conditions as are requested by the underwriters from all
other selling shareholders.
9. Notices. Any notice or other document required or permitted to be
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at 172 Dan's Highway, New Canaan, Connecticut
06840, or to such other address as shall have been furnished to the Company in
writing by the Holder. Any notice or other document required or permitted to be
given or delivered to the Company shall be delivered at or sent by registered or
certified mail to, the Company at 4206 North Central Avenue, Phoenix, Arizona
85012, or to such other address as shall have been furnished in writing to
7
<PAGE>
the Holder by the Company. Any notice so addressed and mailed by registered or
certified mail shall be deemed to be given when so mailed. Any notice so
addressed and otherwise delivered shall be deemed to be given when actually
received by the addressee.
10. Special Protections. Notwithstanding any other provision of this
Warrant, (i) Holder shall be entitled to receive, with respect to the Warrant
Shares, any dilution protections or registration rights that are more favorable
than are set forth herein to the extent that such protections or rights are
granted by the Company during the term of this Warrant to or for the benefit of
any of Chad Little, Jim Layne or Lonnie Whittington (or any person or entity,
other than the Company, controlled by, controlling, or under common control with
any of the foregoing persons or entities) with respect to Common Stock held by
any of the foregoing persons or entities, and (ii) if during the one year period
prior to October 18, 1996, the Company sells any Common Stock to any third party
(excluding warrants and options--and shares underlying such warrants and
options--granted to employees or financial consultants) at a per share price
that is less than the Warrant Price, the Warrant Price shall automatically be
adjusted to be equal to the price per share paid to the Company by such third
party.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly and authorized officer as of this 15th day of September, 1995.
THE COMPANY:
ATTEST: TRACER Design, Inc.
By: /s/ Lonnie A. Whittington By: /s/ Chad M. Little
------------------------------ -------------------------------
Its Asst. Secretary Its President
8
<PAGE>
FORM OF NOTICE OF EXERCISE
[To be signed only upon exercise of the Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
1. The undersigned hereby exercises the right to purchase ____ shares
of Common Stock that the undersigned is entitled to purchase by the terms of the
within Warrant according to the conditions thereof, and herewith makes payment
of the Warrant Price of such shares in full. All shares to be issued pursuant
hereto shall be issued in the name of and the initial address of such person to
be entered on the books of the Company shall be:
_______________________________________________________________________________.
The shares are to be issued in certificates of the following denominations:
_______________________________________________________________________________.
2. The undersigned hereby represents that the shares of the Company's
Common Stock to be delivered to it pursuant to the above-mentioned exercise of
the Warrant are being acquired by the undersigned as an investment and not with
a view to, or for sale in connection with, the distribution of any such shares.
The undersigned agrees to indemnify the Company and its subsidiaries, together
with their officers and directors, for any liabilities, losses, damages and
expenses (including reasonable attorney fees) arising from or in connection with
any disposition of the shares hereby being acquired, or any interest therein, in
violation of applicable securities laws or regulations. The undersigned further
represents that the undersigned has been given access to all information
requested by the undersigned to allow the undersigned to make a decision as to
the advisability of an investment in the Company's stock and the value of such
stock, and that undersigned has the skill and experience necessary to make such
decision. The undersigned also hereby agrees to be bound by, and to assume the
obligations of a Stockholder under, that certain Amended and Restated
Stockholders' Agreement dated as of July 13, 1995, by and among the Company and
the Stockholders party thereto, as the same may be amended from time to time.
[This paragraph 2 is not applicable if the Common Stock being acquired has been
registered under the Securities Act of 1933, as amended.]
_______________________________
[Type Name of Holder]
By: ________________________
Title: ________________________
Date: ________________________
9
Exhibit 4(f)
LOAN AND WARRANT PURCHASE AGREEMENT
THIS LOAN AND WARRANT PURCHASE AGREEMENT (this "Agreement") is made
effective as of October 25, 1995, by and between TRACER Design, Inc., an Arizona
corporation ("TRACER"), and ____________________________________________________
__________________________________________________________________("Purchaser").
PREMISES: TRACER desires to borrow $_______ (the "Loan") from
Purchaser, and Purchaser is willing to make such Loan to TRACER in consideration
of TRACER issuing to Purchaser a warrant to purchase ______ shares of the Class
A Common Stock, $.001 par value of TRACER (the "Warrant Shares"), a form of
which is attached to this Agreement as Exhibit I (the "Warrant"), on the terms
and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement, TRACER and Purchaser agree as follows:
1. Issuance, Sale and Delivery of Warrant. At the Closing (defined in
Section 2) TRACER agrees to issue and deliver to Purchaser and Purchaser agrees
to receive from TRACER the Warrant in consideration of Purchaser making the Loan
to TRACER.
2. Closing. The issuance and delivery of the Warrant shall take place
at the offices of TRACER on October 25, 1995 at 10 a.m. local time, or at such
other location, date and time as may be agreed upon between Purchaser and TRACER
(such transaction being the "Closing" and such date and time being the "Closing
Date"). At the Closing TRACER shall issue and deliver to Purchaser the Warrant
registered in the name of Purchaser, and a promissory note evidencing the Loan.
In exchange for such delivery, Purchaser shall deliver its check payable to the
order of "TRACER Design, Inc." in the amount of the Loan.
3. Representations and Warranties of TRACER. TRACER represents and
warrants to Purchaser as follows:
(a) Organization and Standing; Charter and Bylaws. TRACER is a
corporation duly organized and existing under and by virtue of the laws
of the State of Arizona and is in good standing under such laws. TRACER
has requisite corporate power and authority to own its property and to
carry on its business as presently conducted or as proposed to be
conducted.
(b) Corporate Power. TRACER has all requisite legal and
corporate power to sell and issue the Warrant to Purchaser and in all
other respects to carry out and perform its obligations under this
Agreement.
<PAGE>
(c) Capitalization. The authorized capital stock of TRACER
consists of 400,000 shares of preferred stock, $.001 par value, of
which no shares are issued and outstanding; 500,000 shares of class A
common stock, $.001 par value, of which 10,000 shares are issued and
outstanding, and 100,000 shares of class B common stock, $.001 par
value, of which no shares are issued and outstanding. Prior to the
Closing TRACER will have no equity securities issued or outstanding
except those disclosed on Exhibit II attached hereto, which contains a
list of all holders of capital stock of TRACER and their respective
shareholdings. Except as disclosed on Exhibit II, there are no
outstanding warrants, options, agreements, convertible securities or
other commitments pursuant to which the Corporation is or may become
obligated to issue any shares of its capital stock or other securities
of the Corporation, except as contemplated by this Agreement. There
are, and immediately upon consummation at the Closing of the
transactions contemplated hereby there will be, no preemptive or
similar rights to purchase or otherwise acquire shares of capital stock
of TRACER pursuant to any provision of law, the Certificate of
Incorporation or Bylaws of TRACER, or any agreement to which TRACER is
a party, or otherwise, except as contemplated by this Agreement and in
that certain Amended and Restated Stockholders' Agreement dated as of
July 13, 1995 by and among TRACER and the Stockholders party thereto
(the "Stockholders' Agreement"), a copy of which is attached as Exhibit
III. All shares of common stock and other securities issued by TRACER
prior to the Closing have been issued in transactions exempt from
registration under the Securities Act of 1933, as amendment (the
"Securities Act") and in compliance with applicable state securities
laws ("Blue Sky Laws"). TRACER does not believe that it has violated
the Securities Act or Blue Sky Laws in connection with the issuance of
any shares of common stock or other securities prior to the Closing.
(d) Authorization. All corporate action on the part of TRACER
necessary for the authorization, execution, and delivery of this
Agreement, and performance of all of TRACER's obligations hereunder,
including issuance and delivery of the Warrant, shall have been taken
prior to the Closing.
(e) Corporate Law Status. When the Warrant has been issued,
delivered and paid for in accordance with this Agreement, it will be
validly issued, fully paid and non-assessable and will be free and
clear of all liens, charges, restrictions, claims and encumbrances
imposed by or through any act or omission on the part of TRACER. The
issuance, sale or delivery of the Warrant is not subject to any
preemptive right of stockholders of TRACER or to any right of first
refusal or other right in favor of any person.
(f) Validity. This Agreement has been duly executed and
delivered by TRACER and constitutes the legal, valid and binding
obligation of TRACER, enforceable in accordance with its terms, except
as enforceability may be limited by
2
<PAGE>
applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditor's rights generally,
and except as enforceability may be subject to general principles of
equity, whether applied in a court of equity or at law or by an
arbitration panel.
4. Representations and Warranties of Purchaser. Purchaser represents
and warrants to TRACER, and where so stated, promises as follows:
(a) Unregistered Securities. Purchaser understands that the
Warrant has not been registered under the Securities Act of 1933 or any
state securities laws (collectively, "Securities Laws") in reliance
upon an exemption from registration accorded for nonpublic offerings.
Purchaser further recognizes that the Warrant may not be sold unless it
and the transaction in which it is to be sold have been registered
under the Securities Laws or an exemption from registration is
available for such sale. Purchaser accepts that the Warrant will bear a
legend to that effect. Further, Purchaser recognizes that TRACER has
made no representations as to registration of the Warrant under the
Securities Laws and that no registration is anticipated ever to occur.
(b) Investment Intent. Purchaser is acquiring the Warrant for
its own account for investment and not with a view to resale or
distribution. The Purchaser promises that it will not sell,
hypothecate, transfer or otherwise dispose of the Warrant, or attempt
so to do, unless it has been registered under the Securities Laws or,
in the opinion of counsel reasonably acceptable to TRACER and its
counsel, an exemption from registration is available.
(c) Negotiation; Access to Information. The terms of
Purchaser's purchase of the Warrant were established by negotiations
between Purchaser and TRACER's representative, and in connection
therewith, Purchaser was given access to the relevant information it
requested concerning TRACER's condition and operations, and the
opportunity to ask questions of and receive answers from TRACER's
representatives. Purchaser is knowledgeable and experienced in
financial and business matters and, on the basis of the information it
received concerning TRACER's condition and operations, Purchaser is in
a position to make an informed investment decision concerning its
investment in the Warrant and the risks attending such investment.
Further, in light of its financial position, Purchaser is able to bear
the economic risks of investment in the Warrant.
(d) Legends; Stop Transfer Orders. Purchaser hereby consents
and agrees that TRACER may imprint on any certificate evidencing the
Warrant or any of the Warrant Shares an appropriate legend or
notification to the effect that such shares are not freely transferable
and may be transferred only in compliance with applicable securities
laws. Purchaser further consents and agrees that TRACER may
3
<PAGE>
give appropriate "stop order" instructions in this regard to any
transfer agent for the Warrant or the Warrant Shares.
(e) Compliance; Indemnity. Purchaser hereby expressly promises
not to offer for sale or sell the Warrant or any of the Warrant Shares,
or any interest therein, except in compliance with the Securities Act
of 1933, as amended, and other applicable securities laws and
regulations, including those of the State of Arizona. Purchaser hereby
promises to indemnify TRACER, together with its officers and directors,
against any and all liabilities, losses, damages and expenses
(including reasonable attorney fees) arising (directly or indirectly)
from or in connection with any disposition of the Warrant or the
Warrant Shares, or any interest therein, in violation of (or allegedly
in violation of) applicable securities laws or regulations, including
all such expenses incurred in connection with the defense against any
such claim.
(f) No Transfer; Stockholder's Agreement. Purchaser promises
not to transfer the Warrant or any interest therein without the prior
written consent of TRACER. In addition, Purchaser acknowledges that in
connection with the exercise of the Warrant, any holder will be
required as a condition to such exercise to become bound by and
obligated under the Stockholder Agreement for so long as it shall be in
effect.
(g) Delivery of Investment Letter upon Exercise of Warrant. At
the request of TRACER, Purchaser shall deliver upon exercise of the
Warrant an investment letter in form and substance substantially to the
effect of Sections 4(a)-(e) above.
5. Conditions to the Obligations of Purchaser. The obligation of
Purchaser to make the Loan and receive the Warrant on the Closing Date is, at
Purchaser's sole option, subject to satisfaction on or before the Closing Date
of the following conditions:
(a) Representations and Warranties to Be True. The
representations and warranties contained in Section 3 shall be true,
complete and correct on and as of the Closing Date with the same effect
as though such representations and warranties had been made on and as
of such date.
(b) Performance. TRACER shall have performed and complied with
all agreements contained herein and required to be performed or
complied with by it prior to or at the Closing Date.
(c) Proceedings. All corporate and other proceedings to be
taken by TRACER in connection with the transactions contemplated hereby
and all documents incident thereto shall be satisfactory in form and
substance to Purchaser and its counsel.
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<PAGE>
(d) Survival. All covenants, representations and warranties
made in this agreement shall survive until the expiration of the term
of the Warrant.
6. Entire Agreement. This Agreement constitutes the sole and entire
agreement of the parties with respect to the subject matter hereof. This
Agreement may not be amended or modified, and no provisions may be waived,
without the written agreement of TRACER and Purchaser.
IN WITNESS WHEREOF, TRACER and the Purchaser have executed this
Agreement as of the day and year first above written.
TRACER:
TRACER Design, Inc.
By: ___________________________________
Chad Little
Its President
PURCHASER:
_________________________________________
By: ___________________________________
5
<PAGE>
EXHIBIT I
[attach Warrant]
<PAGE>
EXHIBIT II
Stockholders:
Chad Little 127,500 shares of Class A Common Stock
Lonnie Whittington 61,250
Jim Layne 61,250
Glenn Gomez 5,102
Stock Option Holders:
Mike Turico 8,697
Doug Hall 8,697
Dennis Wodarz 11,596
Donald Fairall 5,797
Warrant Holders:
Pickwick Group LLC 5,100 shares
Potential Warrant/Stock Grant to Frank Helstab and/or Don Reynolds (32,909
shares; to be determined)
Potential increase in shares to Glenn Gomez of 5,102 shares in connection with
offering
Potential Warrants to bridge lenders for $40,000 aggregate bridge loans (6,800
shares)
<PAGE>
EXHIBIT III
[attach Stockholders' Agreement]
<PAGE>
Schedule to Exhibit 4(f) - Form of Loan and Warrant Purchase Agreement
List of Purchasers:
Thomas Lescault
Terrance Morris
Douglas and Susan Greenwood
Pickwick Group LLC
Geoffrey Herter
Exhibit 4(g)
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1993, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
STOCK SUBSCRIPTION WARRANT
to Purchase _______ Shares of the
Class A Common Stock, $.001 Par Value, of
TRACER Design, Inc., an Arizona corporation (the "Company")
DATE OF INITIAL ISSUANCE: As of October 25, 1995
THIS CERTIFIES THAT for value received, ____________________________or
their registered assigns (hereinafter called the "Holder") are entitled to
purchase from the Company, at any time during the Term of this Warrant,
__________________________ (________) shares of common stock, class A, $.001 par
value, of the Company (the "Common Stock"), at the Warrant Price, payable in
lawful money of the United States of America, to be paid upon the exercise of
this Warrant. The exercise of this Warrant shall be subject to the provisions,
limitations and restrictions herein contained and may be exercised in whole or
in part.
1. Definitions. For all purposes of this Warrant, the following terms
shall have the meanings indicated:
Common Stock shall mean and include the Company's authorized Common Stock, $.001
par value as constituted at the date of this Warrant, and shall also include the
Company's authorized class B common stock, $.001 par value, and any capital
stock of any class or series of the Company now or hereafter authorized that is
not limited to a fixed sum or percentage of par value or of the purchase price
of such stock in respect of the rights of the holders thereof to participate in
dividends and/or in the distribution of assets upon the voluntary or involuntary
liquidation, dissolution or winding up of the Company.
Term of this Warrant shall mean the period beginning on the date of initial
issuance hereof and ending on October 25, 2005.
Warrant Price shall mean Thirty Six Dollars ($36.00) per share, subject to
adjustment in accordance with Section 5 and Section 10.
<PAGE>
Warrant Shares shall mean the shares of Common Stock purchased or purchasable by
the Holder of this Warrant upon exercise hereof.
2. Exercise of Warrant. The Warrant shall be exercised, if at all, only
as follows:
(a) To exercise this Warrant in whole or in part, the Holder shall
deliver to the Company at its principal office, at any time
and from time to time during the Term of this Warrant: (i) the
notice of exercise in the form attached hereto as Exhibit A,
(ii) cash, certified or official bank check payable to the
order of the Company, wire transfer of funds to the Company's
account, or the surrender of evidence of any indebtedness of
the Company to the Holder (or any combination of the
foregoing) in the amount of the Warrant Price for each share
being purchased, and (iii) this Warrant.
(b) Notwithstanding any contrary provisions in this Warrant, if
the Current Market Price (as defined in Section 2(c) below)
exceeds the Warrant Price at the date of calculation, instead
of exercising this Warrant as described in Section 2(a) above,
the Holder may elect to receive Warrant Shares equal to the
value of this Warrant (or the portion thereof being
exercised), by delivering to the Company at its principal
office, at any time and from time to time during the Term of
this Warrant: (i) the notice of exercise in the form attached
hereto as Exhibit A, and (ii) this Warrant, in which event the
Company shall issue to the Holder a number of Warrant Shares
calculated using the following formula:
CS = WCS x (CMP-WP)
-------------------
CMP,
where CS = the number of Warrant Shares to be issued to the
Holder,
WCS = the number of Warrant Shares purchasable under the
Warrant, or if only a portion of the Warrant is
being exercised, the portion of the Warrant being
exercised at the date of such calculation,
CMP = the Current Market Price (as defined in Section
5(c) below) at the date of such calculation, and
WP = the Warrant Price, as adjusted to the date of such
calculation.
(c) For the purpose of any calculation made pursuant to this
Section 2, the "Current Market Price" at any date of one share
of Common Stock shall be deemed to be the average of the daily
closing prices for the 30 consecutive business days ending
2
<PAGE>
no more than 15 business days before such date (as adjusted
for any stock dividend, split, combination or reclassification
that took effect during such 30 business day period). The
closing price for each day shall be the last reported sales
price regular way or, if no such reported sales took place on
such day, the average of the last reported bid and asked
prices regular way, in either case on the principal national
securities exchange on which the Common Stock is listed or
admitted to trading (or if the Common Stock is not at the time
listed or admitted for trading on any such exchange, then such
price as shall be equal to the average of the last reported
bid and asked prices, as reported by the National Association
of Securities Dealers Automated Quotations System ("NASDAQ")
on such day, or if, on any such date, the security shall not
be quoted on the NASDAQ, then such price shall be equal to the
average of the last reported bid and asked prices on such day
as reported by The National Quotations Bureau Incorporated or
any similar reputable quotation and reporting service, if such
quotation is not reported by The National Quotation Bureau
Incorporated); provided, however, that if the Common Stock is
not traded in such manner that the quotations referred to in
this Section 2(c) are available for the period required
hereunder, the Current Market Price shall be determined by the
Board of Directors of the Company, acting in good faith.
(d) Each certificate for Warrant Shares shall bear the following
legend (and any additional legend required by (i) any
applicable state securities laws, and (ii) any securities
exchange upon which such Warrant Shares may, at the time of
such exercise be listed) on the face thereof, unless at the
time of exercise, such Warrant Shares shall be registered
under the Securities Act of 1933, as amended (the "Securities
Act");
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR UNDER APPLICABLE STATE
SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION
THEREFROM UNDER SAID ACT AND APPLICABLE STATE
SECURITIES LAWS."
In addition, for so long as that certain Amended and Restated
Stockholders' Agreement dated as of July 13, 1995, by and
between the Company, and certain shareholders of the Company
(the "Stockholders' Agreement") remains in effect, each
certificate for Warrant Shares shall bear the following
legend:
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE
ARE SUBJECT TO A STOCKHOLDERS' AGREEMENT TO WHICH THE
CORPORATION IS A
3
<PAGE>
PARTY, AND NONE OF SUCH SHARES, OR ANY INTEREST
THEREIN, SHALL BE TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF EXCEPT AS PROVIDED IN SUCH
AGREEMENT. A COPY OF THE STOCKHOLDERS' AGREEMENT IS
ON FILE IN THE OFFICE OF THE CORPORATION AND WILL BE
MADE AVAILABLE FOR INSPECTION TO ANY PROPERLY
INTERESTED PERSON WITHOUT CHARGE WITHIN FIVE (5)
WORKING DAYS AFTER THE CORPORATION'S RECEIPT OF A
WRITTEN REQUEST."
3. Covenants As to Common Stock. The Company covenants and agrees that:
(i) all shares of Common Stock that may be issued upon the exercise of this
Warrant will, upon issuance, be validly issued, fully paid and nonassessable,
and free from all taxes, liens and charges with respect to the issue thereof;
(ii) it will pay when due and payable any and all federal and state taxes (other
than federal or state income taxes, if any, which shall remain Holder's
responsibility) that may be payable in respect of the issue of this Warrant or
any Common Stock or the Warrant Shares; (iii) it will at all times have
authorized and reserved, free from preemptive rights, a sufficient number shares
of Common Stock to provide for the exercise of the rights represented by this
Warrant; (iv) if any shares of capital stock to be reserved for the purpose of
the issuance of shares upon the exercise of this Warrant require registration
with or approval of any governmental authority under any federal or state law
before such shares may be validly issued or delivered upon exercise, then the
Company shall in good faith and as expeditiously as possible endeavor to secure
such registration or approval, as the case may be; and (v) if and so long as the
Common Stock issuable upon the exercise of this Warrant is listed on any
national securities exchange, the Company, will, if permitted by the rules of
such exchange, list and keep listed on such exchange, upon official notice of
issuance, all shares of such Common Stock issuable upon exercise of this
Warrant.
4. Adjustment of Number of Shares. Upon each adjustment of the Warrant
Price as provided in Section 5 below, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest 1/10th of a share) obtained by multiplying the
Warrant Price in effect immediately before such adjustment by the number of
shares purchasable pursuant hereto immediately before such adjustment, and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
5. Adjustment of Warrant Price. The Warrant Price shall be subject to
adjustment from time to time as follows:
(a) If, at any time during the term of this Warrant, the
number of shares of Common Stock outstanding is
increased by a stock dividend payable in
4
<PAGE>
shares of Common Stock or by a subdivision or
split-up of shares of Common Stock, then, following
the record date fixed for the determination of
Holders of Common Stock entitled to receive such
stock dividend, subdivision or split-up, the Warrant
Price shall be appropriately decreased so that the
number of shares of Common Stock issuable upon the
exercise of this Warrant shall be increased in
proportion to such increase in outstanding shares.
(b) If, at any time during the term of this Warrant, the
number of shares of Common Stock outstanding is
decreased by a combination of the outstanding shares
of Common Stock, then, following the record date for
such combination, the Warrant Price shall
appropriately increase so that the number of shares
of Common Stock issuable upon the exercise hereof
shall be decreased in proportion to such decrease in
outstanding shares.
(c) All calculations under this Section 5 shall be made
to the nearest cent or to the nearest 1/10th of a
share, as the case may be.
(d) If the Company proposes to take any action of the
types described in Section 5(a) or (b), the Company
shall forward at the same time and in the same
manner, to the Holder of this Warrant, such notice,
if any, that the Company shall give to the Holders of
capital stock of the Company.
6. Transfers. The Company may deem and treat the person in whose name
this Warrant is registered as the Holder and owner hereof. Notwithstanding the
foregoing, the Warrant and all rights hereunder are not transferable in whole or
in part without the prior written consent of the Company and compliance with
that certain Loan and Warrant Purchase Agreement of even date herewith between
the Company and Holder, and any attempted transfer without such consent and such
compliance shall be void. Transferability of the Warrant Shares is limited as
set forth in this Warrant and in the Stockholders' Agreement.
7. Mergers, Consolidations, Sales. In the case of any proposed
consolidation or merger of the Company with another entity, or the proposed sale
of all or substantially all of its assets to another person or entity, or any
proposed reorganization or reclassification of the capital stock of the Company,
then, as a condition of any such consolidation, merger, sale, reorganization or
reclassification, lawful and adequate provision shall be made pursuant to which
the Holder of this Warrant shall thereafter have the right to receive upon the
basis and upon the terms and conditions specified herein, in lieu of the shares
of Common Stock of the Company immediately purchasable hereunder, such shares of
stock, securities or assets as may, by virtue of such consolidation, merger,
sale, reorganization or reclassification, be issued or payable with respect to
or in exchange for the number of shares of such Common Stock purchasable
hereunder immediately before such consolidation, merger, sale reorganization or
reclassification. The Company shall forward at the same time and in the same
manner, to the Holder of this Warrant,
5
<PAGE>
such notice, if any, that the Company shall give to the Holders of capital stock
of the Company with respect to any proposed transaction described above or any
distribution of assets of the Company in dissolution or liquidation, or any
extraordinary dividend or other distribution on its Common Stock except out of
earned surplus or by way of a stock dividend payable in shares of its Common
Stock. This Warrant shall be binding upon any corporation or other person or
entity succeeding to the Company by merger, consolidation or acquisition of all
or substantially all of the Company's assets.
8. Registration Rights; Lockup Letter. (a) If at any time prior to the
expiration date of this Warrant, the Company proposes to register any of its
securities under the Securities Act, whether or not for sale for its own
account, on a form and in a manner which would permit registration of shares of
common stock for sale to the public under the Securities Act, it will each such
time give prompt written notice to the Holder of its intention to do so,
describing such securities and specifying the form and manner and the other
relevant facts involved in such proposed registration, and upon the written
request of the Holder delivered to the Company within 30 days after the giving
of any such notice (which request shall specify the shares of Common Stock
intended to be disposed of by the Holder and the intended method of disposition
thereof), the Company will take every reasonable effort to effect the
registration under the Securities Act, subject to Sections 8(b) and (c) below,
of all shares of Common Stock which the Company has been so requested to
register by the Holder to the extent requisite to permit the disposition (in
accordance with the intended methods thereof as aforesaid) of the shares of
Common Stock so to be registered, provided that:
(i) if, at any time after giving such written notice of its
intention to register any of its securities and prior to the effective
date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to
register such securities, the Company may, at its election, give
written notice of such determination to the Holder and thereupon shall
be relieved of its obligation to register any shares of Common Stock in
connection with such registration;
(ii) the Company shall not be obligated to effect any
registration of shares of Common Stock under this Section incidental to
the registration of any of its securities in connection with mergers,
acquisitions, exchange offers, dividend reinvestment plans, employee
stock ownership plans or stock option plans, thrift plans, pension
plans or other employee benefit plans; and
(iii) the Company shall not be obligated to effect any
registration of shares of Common Stock to the extent such shares are
validly excluded from an underwritten distribution pursuant to Section
8(c) below.
(c) If the managing underwriter for a firm commitment underwritten
registration advises the Company and the Holder of Common Stock that, in the
underwriter's opinion, the total amount of securities proposed to be sold in
such registration exceeds the amount of
6
<PAGE>
securities that can be sold in such an offering without negatively affecting the
offering or its price, then the number of outstanding shares of Common Stock
proposed to be included in such offering by persons other than the Company
and/or a stockholder exercising so-called "demand" registration rights (but
including Holder) shall be reduced pro rata among the holders of all such Common
Stock. Expenses of all registrations (excluding underwriting discounts and fees,
commissions and transfer taxes) shall be paid by the Company, including the
reasonable fees and disbursements for one counsel for all non-Company sellers as
a group.
(d) It shall be a condition precedent to the obligation of the Company
to take any action pursuant to this Section 8 in respect of the Warrant Shares
which are to be registered at the request of Holder that Holder shall furnish to
the Company such information regarding the Common Stock held by Holder and the
intended method of disposition thereof as the Company shall reasonably request
and as shall be required in connection with the action to be taken by the
Company.
(e) The Company shall not, without the Holder's written consent, and
the written consent of any Warrant Shares issued and outstanding, enter into any
agreement with any holder or prospective holder of any securities of the Company
that purports to grant "piggy back" registration rights unless such rights are
consistent with and expressly made subject to the rights and priorities set
forth in this Section 8.
(f) The Company will indemnify and hold harmless each Holder, each of
its managers, members, officers, directors, partners and agents, with respect to
each registration, qualification and compliance effected pursuant to this
Section 8 pursuant to an indemnity agreement or agreements in customary form.
Holder will indemnify and hold harmless the Company (and the underwriters if
requested) and their control persons with respect to any information provided by
Holder for inclusion in a registration statement, pursuant to an indemnity
agreement or agreements in customary form.
(g) Holder agrees to execute and deliver to the underwriters in
connection with any Company-initiated firm commitment underwritten offering and
registration a "lock-up" letter requested, if at all, by such underwriters,
regarding limitations on the transfer by Holder of Common Stock for a period
after effectiveness of such registration provided such "lock-up" letter is on
the same terms and conditions as are requested by the underwriters from all
other selling shareholders.
9. Notices. Any notice or other document required or permitted to be
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at_____________________________________________,
or to such other address as shall have been furnished to the Company in writing
by the Holder. Any notice or other document required or permitted to be given or
delivered to the Company shall be delivered at or sent by registered or
certified mail to, the Company at 4206 North Central Avenue, Phoenix, Arizona
85012, or to such other address as shall have been furnished in writing to the
Holder by the Company. Any
7
<PAGE>
notice so addressed and mailed by registered or certified mail shall be deemed
to be given when so mailed. Any notice so addressed and otherwise delivered
shall be deemed to be given when actually received by the addressee.
10. Special Protections. Notwithstanding any other provision of this
Warrant, (i) Holder shall be entitled to receive, with respect to the Warrant
Shares, any dilution protections or registration rights that are more favorable
than are set forth herein to the extent that such protections or rights are
granted by the Company during the term of this Warrant to or for the benefit of
any of Chad Little, Jim Layne or Lonnie Whittington (or any person or entity,
other than the Company, controlled by, controlling, or under common control with
any of the foregoing persons or entities) with respect to Common Stock held by
any of the foregoing persons or entities, and (ii) if during the one year period
prior to October 18, 1996, the Company sells any Common Stock to any third party
(excluding warrants and options--and shares underlying such warrants and
options--granted to employees or financial consultants) at a per share price
that is less than the Warrant Price, the Warrant Price shall automatically be
adjusted to be equal to the price per share paid to the Company by such third
party.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly and authorized officer as of this 25th day of October, 1995.
THE COMPANY:
ATTEST: TRACER Design, Inc.
By: ________________________ By: ________________________________
Its Secretary Its President
8
<PAGE>
FORM OF NOTICE OF EXERCISE
[To be signed only upon exercise of the Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
1. The undersigned hereby exercises the right to purchase shares of
Common Stock that the undersigned is entitled to purchase by the terms of the
within Warrant according to the conditions thereof, and herewith makes payment
of the Warrant Price of such shares in full. All shares to be issued pursuant
hereto shall be issued in the name of and the initial address of such person to
be entered on the books of the Company shall be:
_______________________________________________________________________________.
The shares are to be issued in certificates of the following denominations:
_______________________________________________________________________________.
2. The undersigned hereby represents that the shares of the Company's
Common Stock to be delivered to it pursuant to the above-mentioned exercise of
the Warrant are being acquired by the undersigned as an investment and not with
a view to, or for sale in connection with, the distribution of any such shares.
The undersigned agrees to indemnify the Company and its subsidiaries, together
with their officers and directors, for any liabilities, losses, damages and
expenses (including reasonable attorney fees) arising from or in connection with
any disposition of the shares hereby being acquired, or any interest therein, in
violation of applicable securities laws or regulations. The undersigned further
represents that the undersigned has been given access to all information
requested by the undersigned to allow the undersigned to make a decision as to
the advisability of an investment in the Company's stock and the value of such
stock, and that undersigned has the skill and experience necessary to make such
decision. The undersigned also hereby agrees to be bound by, and to assume the
obligations of a Stockholder under, that certain Amended and Restated
Stockholders' Agreement dated as of July 13, 1995, by and among the Company and
the Stockholders party thereto, as the same may be amended from time to time.
[This paragraph 2 is not applicable if the Common Stock being acquired has been
registered under the Securities Act of 1933, as amended.]
__________________________________
[Type Name of Holder]
By: ___________________________
Title: ___________________________
Date: ___________________________
9
<PAGE>
Schedule to Exhibit 4(g) - Form of Subscription Warrant, dated October 25, 1995.
List of Warrant Holders:
October 25, 1995 Loan and Warrant Purchase Agreement, Term Note and Warrants
Purchaser Shares Under Warrant
- --------- --------------------
Thomas Lescault 680
Terrance Morris 340
Douglas and Susan Greenwood 680
Pickwick Group, L.L.C. 340
Geoffrey Herter 680
10
Exhibit 4(h)
TERM NOTE
$__________ October 25, 1995
Phoenix, Arizona
FOR VALUE RECEIVED, TRACER Design, Inc. (the "Maker), an Arizona
corporation, promises to pay to the order of ____________________________
(collectively, the "Holder," which term shall also include subsequent holders
and other assignees of this Note) at Phoenix, Arizona, or at such other place as
Holder may from time to time designate in writing, the principal sum of
$______________ (______________________ Dollars) in immediately available funds,
together with interest in arrears as hereinafter provided on the unpaid
principal balance, from the date of this Note until such principal balance is
paid in full.
The principal amount of this Note shall bear interest at fifteen
percent (15%) per annum. Interest as herein provided shall be computed on a
daily basis and calculated on the basis of a 365- day year for the actual number
of days elapsed. Interest shall be simple, and not compounded, throughout the
term of this Note.
The entire indebtedness (principal and interest) evidenced by this
Note, if not sooner paid, shall be due and payable in full on October 25, 1996.
Maker shall have the right to prepay the principal balance of this Note
in full or in part at any time without penalty or premium.
If any of the following events takes place (each, an "Event of
Default"), Holder at its option may declare all principal and interest then
remaining unpaid and all other amounts payable under this Note immediately due
and payable:
(i) Maker fails to pay principal of or interest on this Note when
such payment is due, and such nonpayment continues for a
period of five business days; or
(ii) A receiver, liquidator or trustee of Maker or any substantial
part of Maker's assets or properties is appointed by a court
order and such appointment remains in effect for 60 days; or
(iii) Maker is adjudicated bankrupt or insolvent; or
(iv) Any of Maker's property is sequestered by or in consequence of
a court order and such order remains in effect for more than
60 days; or
(v) Maker files a petition in voluntary bankruptcy or requests
reorganization under any provision of any bankruptcy,
reorganization or insolvency law or consents to the filing of
any petition against him under any such law; or,
<PAGE>
(vi) Maker makes a formal or informal general assignment for the
benefit of his creditors, or admits in writing his inability
to pay debts generally when they become due, or consents to
the appointment of a receiver or liquidator of Maker or of all
or any part of his property.
If an Event of Default occurs and is continuing and Holder incurs costs
or expenses in connection with its collection of the principal of or interest on
this Note, such reasonable costs and expenses shall be paid by Maker and
constitute part of the indebtedness evidenced by this Note.
Presentment, demand, notice of dishonor, and protest are waived by
Maker. No delay by Holder in exercising any of the rights it may have hereunder
shall operate as a waiver of any of the rights Holder may have, and any waiver
granted for one occasion shall not operate as a waiver of any subsequent
default.
All rights and remedies existing under this Note are cumulative and in
addition to, and not exclusive of, any rights or remedies otherwise available.
This Note shall be governed by and construed in accordance with the
laws of the United States and the State of Arizona, without regard to such of
those laws as govern the choice of law or mandate reliance upon laws foreign to
such State.
This Note shall be binding upon and enforceable against Maker's heirs,
personal representatives and assigns, and shall inure to the benefit of and be
enforceable by Holder's heirs, personal representatives, successors and assigns.
When used in this Note, the term "business day" means any day other
than a Saturday, Sunday or other day on which Arizona-based banks are authorized
or required to be closed for the transaction of business under any applicable
law or administrative order.
In consideration for value received under this Note, Maker is
simultaneously granting to Holder a warrant to purchase from Maker up to
_______________ shares of common stock of Maker, on the terms and conditions of
the certain Loan and Warrant Purchase Agreement of even date herewith.
TRACER DESIGN, INC.
By ______________________________________
Its President
"Maker"
2
<PAGE>
Schedule to Exhibit 4(h) - Form of Term Note, dated October 25, 1995.
List of Holders and Principal Amounts of Term Notes:
October 25, 1995 Loan and Warrant Purchase Agreement, Term Note and Warrants
Purchaser Principal of Loan Under Term Note
- --------- ---------------------------------
Thomas Lescault $10,000
Terrance Morris $5,000
Douglas and Susan Greenwood $10,000
Pickwick Group LLC $5,000
Geoffrey Herter $10,000
3
Exhibit 4(i)
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1993, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
STOCK SUBSCRIPTION WARRANT
to Purchase _________ Shares of the
Common Stock, $.001 Par Value, of
SANDBOX ENTERTAINMENT CORPORATION ,
a Delaware corporation (the "Company")
in substitution for a
STOCK SUBSCRIPTION WARRANT to Purchase ________
Shares of the Class A Common Stock, $.001 Par Value,
of TRACER DESIGN, INC.,
an Arizona corporation ("Tracer") issued by Tracer as of October 25, 1995
DATE OF INITIAL ISSUANCE: As of April 25, 1996
THIS CERTIFIES THAT for value received, _________________ or his
registered assigns (hereinafter called the "Holder") is entitled to purchase
from the Company, at any time during the Term of this Warrant,
____________________ (________) shares of common stock, $.001 par value, of the
Company (the "Common Stock"), at the Warrant Price, payable in lawful money of
the United States of America, to be paid upon the exercise of this Warrant. The
exercise of this Warrant shall be subject to the provisions, limitations and
restrictions herein contained and may be exercised in whole or in part.
1. Definitions. For all purposes of this Warrant, the following terms
shall have the meanings indicated:
Common Stock shall mean and include the Company's authorized Common Stock, $.001
par value as constituted at the date of this Warrant, and shall also include the
Company's authorized class B common stock, $.001 par value, and any capital
stock of any class or series of the Company now or hereafter authorized that is
not limited to a fixed sum or percentage of par value or of the purchase price
of such stock in respect of the rights of the holders thereof to participate in
dividends and/or in the distribution of assets upon the voluntary or involuntary
liquidation, dissolution or winding up of the Company.
<PAGE>
Term of this Warrant shall mean the period beginning on the date of initial
issuance hereof and ending on October 25, 2005.
Warrant Price shall mean Eighty Cents ($.80) per share, subject to adjustment in
accordance with Section 5 and Section 10.
Warrant Shares shall mean the shares of Common Stock purchased or purchasable by
the Holder of this Warrant upon exercise hereof.
2. Exercise of Warrant. The Warrant shall be exercised, if at all, only
as follows:
(a) To exercise this Warrant in whole or in part, the Holder
shall deliver to the Company at its principal office, at any time and from time
to time during the Term of this Warrant: (i) the notice of exercise in the form
attached hereto as Exhibit A, (ii) cash, certified or official bank check
payable to the order of the Company, wire transfer of funds to the Company's
account, or the surrender of evidence of any indebtedness of the Company to the
Holder (or any combination of the foregoing) in the amount of the Warrant Price
for each share being purchased, and (iii) this Warrant.
(b) Notwithstanding any contrary provisions in this Warrant,
if the Current Market Price (as defined in Section 2(c) below) exceeds the
Warrant Price at the date of calculation, instead of exercising this Warrant as
described in Section 2(a) above, the Holder may elect to receive Warrant Shares
equal to the value of this Warrant (or the portion thereof being exercised), by
delivering to the Company at its principal office, at any time and from time to
time during the Term of this Warrant: (i) the notice of exercise in the form
attached hereto as Exhibit A, and (ii) this Warrant, in which event the Company
shall issue to the Holder a number of Warrant Shares calculated using the
following formula:
CS = WCS x (CMP-WP)
-------------------
CMP,
where CS = the number of Warrant Shares to be issued to the
Holder,
WCS = the number of Warrant Shares purchasable under
the Warrant, or if only a portion of the Warrant
is being exercised, the portion of the Warrant
being exercised at the date of such calculation,
CMP = the Current Market Price (as defined in Section
5(c) below) at the date of such calculation, and
2
<PAGE>
WP = the Warrant Price, as adjusted to the date of
such calculation.
(c) For the purpose of any calculation made pursuant to this
Section 2, the "Current Market Price" at any date of one share of Common Stock
shall be deemed to be the average of the daily closing prices for the 30
consecutive business days ending no more than 15 business days before such date
(as adjusted for any stock dividend, split, combination or reclassification that
took effect during such 30 business day period). The closing price for each day
shall be the last reported sales price regular way or, if no such reported sales
took place on such day, the average of the last reported bid and asked prices
regular way, in either case on the principal national securities exchange on
which the Common Stock is listed or admitted to trading (or if the Common Stock
is not at the time listed or admitted for trading on any such exchange, then
such price as shall be equal to the average of the last reported bid and asked
prices, as reported by the National Association of Securities Dealers Automated
Quotations System ("NASDAQ") on such day, or if, on any such date, the security
shall not be quoted on the NASDAQ, then such price shall be equal to the average
of the last reported bid and asked prices on such day as reported by The
National Quotations Bureau Incorporated or any similar reputable quotation and
reporting service, if such quotation is not reported by The National Quotation
Bureau Incorporated); provided, however, that if the Common Stock is not traded
in such manner that the quotations referred to in this Section 2(c) are
available for the period required hereunder, the Current Market Price shall be
determined by the Board of Directors of the Company, acting in good faith.
(d) Each certificate for Warrant Shares shall bear the
following legend (and any additional legend required by (i) any applicable state
securities laws, and (ii) any securities exchange upon which such Warrant Shares
may, at the time of such exercise be listed) on the face thereof, unless at the
time of exercise, such Warrant Shares shall be registered under the Securities
Act of 1933, as amended (the "Securities Act");
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION THEREFROM UNDER SAID
ACT AND APPLICABLE STATE SECURITIES LAWS."
In addition, for so long as that certain Amended and Restated
Stockholders' Agreement dated as of July 13, 1995, by and between the Company,
and certain shareholders of the Company (the "Stockholders' Agreement") remains
in effect, each certificate for Warrant Shares shall bear the following legend:
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
STOCKHOLDERS' AGREEMENT TO WHICH THE
3
<PAGE>
CORPORATION IS A PARTY, AND NONE OF SUCH SHARES, OR ANY INTEREST
THEREIN, SHALL BE TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF EXCEPT AS PROVIDED IN SUCH AGREEMENT. A COPY OF THE
STOCKHOLDERS' AGREEMENT IS ON FILE IN THE OFFICE OF THE CORPORATION AND
WILL BE MADE AVAILABLE FOR INSPECTION TO ANY PROPERLY INTERESTED PERSON
WITHOUT CHARGE WITHIN FIVE (5) WORKING DAYS AFTER THE CORPORATION'S
RECEIPT OF A WRITTEN REQUEST."
3. Covenants As to Common Stock. The Company covenants and agrees that:
(i) all shares of Common Stock that may be issued upon the exercise of this
Warrant will, upon issuance, be validly issued, fully paid and nonassessable,
and free from all taxes, liens and charges with respect to the issue thereof;
(ii) it will pay when due and payable any and all federal and state taxes (other
than federal or state income taxes, if any, which shall remain Holder's
responsibility) that may be payable in respect of the issue of this Warrant or
any Common Stock or the Warrant Shares; (iii) it will at all times have
authorized and reserved, free from preemptive rights, a sufficient number shares
of Common Stock to provide for the exercise of the rights represented by this
Warrant; (iv) if any shares of capital stock to be reserved for the purpose of
the issuance of shares upon the exercise of this Warrant require registration
with or approval of any governmental authority under any federal or state law
before such shares may be validly issued or delivered upon exercise, then the
Company shall in good faith and as expeditiously as possible endeavor to secure
such registration or approval, as the case may be; and (v) if and so long as the
Common Stock issuable upon the exercise of this Warrant is listed on any
national securities exchange, the Company, will, if permitted by the rules of
such exchange, list and keep listed on such exchange, upon official notice of
issuance, all shares of such Common Stock issuable upon exercise of this
Warrant.
4. Adjustment of Number of Shares. Upon each adjustment of the Warrant
Price as provided in Section 5 below, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest 1/10th of a share) obtained by multiplying the
Warrant Price in effect immediately before such adjustment by the number of
shares purchasable pursuant hereto immediately before such adjustment, and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
5. Adjustment of Warrant Price. The Warrant Price shall be subject to
adjustment from time to time as follows:
(a) If, at any time during the term of this Warrant, the
number of shares of Common Stock outstanding is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split-up of shares of
Common Stock, then, following the record date fixed for the determination of
Holders of Common Stock entitled to receive such stock dividend,
4
<PAGE>
subdivision or split-up, the Warrant Price shall be appropriately decreased so
that the number of shares of Common Stock issuable upon the exercise of this
Warrant shall be increased in proportion to such increase in outstanding shares.
(b) If, at any time during the term of this Warrant, the
number of shares of Common Stock outstanding is decreased by a combination of
the outstanding shares of Common Stock, then, following the record date for such
combination, the Warrant Price shall appropriately increase so that the number
of shares of Common Stock issuable upon the exercise hereof shall be decreased
in proportion to such decrease in outstanding shares.
(c) All calculations under this Section 5 shall be made to the
nearest cent or to the nearest 1/10th of a share, as the case may be.
(d) If the Company proposes to take any action of the types
described in Section 5(a) or (b), the Company shall forward at the same time and
in the same manner, to the Holder of this Warrant, such notice, if any, that the
Company shall give to the Holders of capital stock of the Company.
6. Transfers. The Company may deem and treat the person in whose name
this Warrant is registered as the Holder and owner hereof. Notwithstanding the
foregoing, the Warrant and all rights hereunder are not transferable in whole or
in part without the prior written consent of the Company and compliance with
that certain Warrant Purchase Agreement of even date herewith between the
Company and Holder, and any attempted transfer without such consent and such
compliance shall be void. Transferability of the Warrant Shares is limited as
set forth in this Warrant and in the Stockholders' Agreement.
7. Mergers, Consolidations, Sales. In the case of any proposed
consolidation or merger of the Company with another entity, or the proposed sale
of all or substantially all of its assets to another person or entity, or any
proposed reorganization or reclassification of the capital stock of the Company,
then, as a condition of any such consolidation, merger, sale, reorganization or
reclassification, lawful and adequate provision shall be made pursuant to which
the Holder of this Warrant shall thereafter have the right to receive upon the
basis and upon the terms and conditions specified herein, in lieu of the shares
of Common Stock of the Company immediately purchasable hereunder, such shares of
stock, securities or assets as may, by virtue of such consolidation, merger,
sale, reorganization or reclassification, be issued or payable with respect to
or in exchange for the number of shares of such Common Stock purchasable
hereunder immediately before such consolidation, merger, sale reorganization or
reclassification. The Company shall forward at the same time and in the same
manner, to the Holder of this Warrant, such notice, if any, that the Company
shall give to the Holders of capital stock of the Company with respect to any
proposed transaction described above or any distribution of assets of the
Company in dissolution or liquidation, or any extraordinary dividend or other
distribution on its Common Stock except out of earned surplus or by way of a
stock dividend payable in shares of its Common Stock. This Warrant shall be
binding upon any corporation or other person or entity
5
<PAGE>
succeeding to the Company by merger, consolidation or acquisition of all or
substantially all of the Company's assets.
8. Registration Rights; Lockup Letter.
(a) If at any time prior to the expiration date of this
Warrant, the Company proposes to register any of its securities under the
Securities Act, whether or not for sale for its own account, on a form and in a
manner which would permit registration of shares of common stock for sale to the
public under the Securities Act, it will each such time give prompt written
notice to the Holder of its intention to do so, describing such securities and
specifying the form and manner and the other relevant facts involved in such
proposed registration, and upon the written request of the Holder delivered to
the Company within 30 days after the giving of any such notice (which request
shall specify the shares of Common Stock intended to be disposed of by the
Holder and the intended method of disposition thereof), the Company will take
every reasonable effort to effect the registration under the Securities Act,
subject to Sections 8(b) and (c) below, of all shares of Common Stock which the
Company has been so requested to register by the Holder to the extent requisite
to permit the disposition (in accordance with the intended methods thereof as
aforesaid) of the shares of Common Stock so to be registered, provided that:
(i) if, at any time after giving such written notice of its
intention to register any of its securities and prior to the effective
date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to
register such securities, the Company may, at its election, give
written notice of such determination to the Holder and thereupon shall
be relieved of its obligation to register any shares of Common Stock in
connection with such registration;
(ii) the Company shall not be obligated to effect any
registration of shares of Common Stock under this Section incidental to
the registration of any of its securities in connection with mergers,
acquisitions, exchange offers, dividend reinvestment plans, employee
stock ownership plans or stock option plans, thrift plans, pension
plans or other employee benefit plans; and
(iii) the Company shall not be obligated to effect any
registration of shares of Common Stock to the extent such shares are
validly excluded from an underwritten distribution pursuant to Section
8(b) below.
(b) If the managing underwriter for a firm commitment
underwritten registration advises the Company and the Holder of Common Stock
that, in the underwriter's opinion, the total amount of securities proposed to
be sold in such registration exceeds the amount of securities that can be sold
in such an offering without negatively affecting the offering or its price, then
the number of outstanding shares of Common Stock proposed to be included in such
offering by persons other than the Company and/or a stockholder exercising
so-called
6
<PAGE>
"demand" registration rights (but including Holder) shall be reduced pro rata
among the holders of all such Common Stock. Expenses of all registrations
(excluding underwriting discounts and fees, commissions and transfer taxes)
shall be paid by the Company, including the reasonable fees and disbursements
for one counsel for all non-Company sellers as a group.
(c) It shall be a condition precedent to the obligation of the
Company to take any action pursuant to this Section 8 in respect of the Warrant
Shares which are to be registered at the request of Holder that Holder shall
furnish to the Company such information regarding the Common Stock held by
Holder and the intended method of disposition thereof as the Company shall
reasonably request and as shall be required in connection with the action to be
taken by the Company.
(d) The Company shall not, without the Holder's written
consent, and the written consent of any Warrant Shares issued and outstanding,
enter into any agreement with any holder or prospective holder of any securities
of the Company that purports to grant "piggy back" registration rights unless
such rights are consistent with and expressly made subject to the rights and
priorities set forth in this Section 8.
(e) The Company will indemnify and hold harmless each Holder,
each of its managers, members, officers, directors, partners and agents, with
respect to each registration, qualification and compliance effected pursuant to
this Section 8 pursuant to an indemnity agreement or agreements in customary
form. Holder will indemnify and hold harmless the Company (and the underwriters
if requested) and their control persons with respect to any information provided
by Holder for inclusion in a registration statement, pursuant to an indemnity
agreement or agreements in customary form.
(f) Holder agrees to execute and deliver to the underwriters
in connection with any Company-initiated firm commitment underwritten offering
and registration a "lock-up" letter requested, if at all, by such underwriters,
regarding limitations on the transfer by Holder of Common Stock for a period
after effectiveness of such registration provided such "lock-up" letter is on
the same terms and conditions as are requested by the underwriters from all
other selling shareholders.
9. Notices. Any notice or other document required or permitted to be
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at ______________________________________, or to
such other address as shall have been furnished to the Company in writing by the
Holder. Any notice or other document required or permitted to be given or
delivered to the Company shall be delivered at or sent by registered or
certified mail to, the Company at 4206 North Central Avenue, Phoenix, Arizona
85012, or to such other address as shall have been furnished in writing to the
Holder by the Company. Any notice so addressed and mailed by registered or
certified mail shall be deemed to be given when so mailed. Any notice so
addressed and otherwise delivered shall be deemed to be given when actually
received by the addressee.
7
<PAGE>
10. Special Protections. Notwithstanding any other provision of this
Warrant, (i) Holder shall be entitled to receive, with respect to the Warrant
Shares, any dilution protections or registration rights that are more favorable
than are set forth herein to the extent that such protections or rights are
granted by the Company during the term of this Warrant to or for the benefit of
any of Chad Little, Jim Layne or Lonnie Whittington (or any person or entity,
other than the Company, controlled by, controlling, or under common control with
any of the foregoing persons or entities) with respect to Common Stock held by
any of the foregoing persons or entities, and (ii) if during the one year period
prior to October 18, 1996, the Company sells any Common Stock to any third party
(excluding warrants and options--and shares underlying such warrants and
options--granted to employees or financial consultants) at a per share price
that is less than the Warrant Price, the Warrant Price shall automatically be
adjusted to be equal to the price per share paid to the Company by such third
party.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly and authorized officer as of this 25th day of April, 1996.
THE COMPANY:
ATTEST: SANDBOX ENTERTAINMENT CORPORATION
By: ________________________ By: ___________________________
Its Secretary Its President
8
<PAGE>
FORM OF NOTICE OF EXERCISE
[To be signed only upon exercise of the Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
1. The undersigned hereby exercises the right to purchase shares of
Common Stock that the undersigned is entitled to purchase by the terms of the
within Warrant according to the conditions thereof, and herewith makes payment
of the Warrant Price of such shares in full. All shares to be issued pursuant
hereto shall be issued in the name of and the initial address of such person to
be entered on the books of the Company shall be:
_______________________________________________________________________________.
The shares are to be issued in certificates of the following denominations:
_______________________________________________________________________________.
2. The undersigned hereby represents that the shares of the Company's
Common Stock to be delivered to it pursuant to the above-mentioned exercise of
the Warrant are being acquired by the undersigned as an investment and not with
a view to, or for sale in connection with, the distribution of any such shares.
The undersigned agrees to indemnify the Company and its subsidiaries, together
with their officers and directors, for any liabilities, losses, damages and
expenses (including reasonable attorney fees) arising from or in connection with
any disposition of the shares hereby being acquired, or any interest therein, in
violation of applicable securities laws or regulations. The undersigned further
represents that the undersigned has been given access to all information
requested by the undersigned to allow the undersigned to make a decision as to
the advisability of an investment in the Company's stock and the value of such
stock, and that undersigned has the skill and experience necessary to make such
decision. The undersigned also hereby agrees to be bound by, and to assume the
obligations of a Stockholder under, that certain Amended and Restated
Stockholders' Agreement dated as of July 13, 1995, by and among the Company and
the Stockholders party thereto, as the same may be amended from time to time.
[This paragraph 2 is not applicable if the Common Stock being acquired has been
registered under the Securities Act of 1933, as amended.]
__________________________________
[Type Name of Holder]
By: ___________________________
Title: ___________________________
Date: ___________________________
9
<PAGE>
Schedule to Exhibit 4(i) - Form of April 25, 1996 Substitute Stock Warrant
List of Sandbox Warrants Substituted for Tracer Design, Inc. Warrants:
April 25, 1996 Sandbox Warrants Substituted for Tracer Warrants
Holder Sandbox Warrant
- ------ ---------------
Terrance Morris 15,300
Thomas Lescault 30,600
Pickwick Group, L.L.C. 91,800
Douglas and Susan Greenwood 30,600
Geoffrey Herter 30,600
Pickwick Group, L.L.C. 15,300
10
Exhibit 4(j)
AMENDMENT TO LOAN AND WARRANT PURCHASE AGREEMENT
AND TO TERM NOTE
THIS AMENDMENT TO LOAN AND WARRANT PURCHASE AGREEMENT AND TO TERM NOTE
(this "Amendment") is made effective as of October 25, 1996, by and between
SANDBOX ENTERTAINMENT CORPORATION, a Delaware corporation ("Sandbox"), which was
formerly TRACER DESIGN, INC., an Arizona corporation (the "Predecessor"), and
____________________, whose address is _________________________________________
("Purchaser").
RECITALS
A. Pursuant to that certain Loan and Warrant Purchase Agreement dated
as of October 25, 1995 (the "Loan and Warrant Purchase Agreement"), the
Predecessor borrowed $_________ from Purchaser in consideration of the
Predecessor issuing to Purchaser a warrant (the "Initial Warrant") to purchase
__________ shares of the Class A Common Stock, $.001 par value of the
Predecessor (the "Initial Warrant Shares") at an exercise price of $____ per
share (after giving effect to certain subsequent stock splits and anti-dilutive
adjustments, the Initial Warrant is currently a warrant to purchase ____________
shares of the Common Stock, $.001 par value of Sandbox (the "Common Stock") at
an exercise price of $.80 per share), on the terms and subject to the conditions
set forth in the Loan and Warrant Purchase Agreement.
B. In connection with the Loan and Warrant Purchase Agreement, the
Predecessor also gave Purchaser a Term Note dated as of October 25, 1995 in the
principal amount of $_________ (the "Term Note"). Pursuant to its terms, the
Term Note is due and payable in full on October 25, 1996.
C. Sandbox wishes to amend the Term Note to, among other things, extend
the maturity date an additional six (6) months and lower the interest rate for
this extension period. Purchaser has agreed to such amendments to the Term Note
in consideration of Sandbox issuing to Purchaser a new warrant to purchase 625
shares of Common Stock (the "New Warrant Shares") at an exercise price of $.80
per share, pursuant to a warrant in the form attached hereto as Exhibit A (the
"New Warrant") on the terms and subject to the conditions of this Amendment.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement, Sandbox and Purchaser agree as follows:
1. Incorporation by Reference. The terms and conditions of the Loan and
Warrant Purchase Agreement, the Term Note and the Recitals above are
incorporated by reference. Any capitalized term used herein and not otherwise
defined shall have the meaning ascribed to such term in the Loan and Warrant
Purchase Agreement.
<PAGE>
2. Issuance, Sale and Delivery of New Warrant. At the New Closing
(defined in Section 3 hereto) Sandbox agrees to issue and deliver to Purchaser
and Purchaser agrees to receive from Sandbox the New Warrant in consideration of
Purchaser agreeing to the amendments contained herein.
3. Closing. The issuance and delivery of the New Warrant shall take
place at the offices of Sandbox as soon as possible on such date and at such
time as is mutually agreed upon by the parties (such transaction being the "New
Closing" and such date and time being the "New Closing Date"). At the New
Closing Sandbox shall issue and deliver to Purchaser the New Warrant registered
in the name of Purchaser and the Term Note shall be deemed amended as of October
25, 1996 as set forth herein.
4. Representations and Warranties of Sandbox. Sandbox makes the same
representations and warranties with respect to the issuance of the New Warrant
and the New Warrant Shares as of the New Closing Date that were made by the
Predecessor in Section 3 of the Loan and Warrant Purchase Agreement with respect
to the Initial Warrant and the Initial Warrant Shares, with the following
amendments:
(a) Organization and Standing; Charter and Bylaws. Sandbox is
a corporation duly organized and existing under and by virtue of the
laws of the State of Delaware.
(b) Capitalization. The authorized capital stock of Sandbox
consists of: 2,000,000 shares of Series A Preferred Stock, $.001 par
value, of which as of October 25, 1996 1,218,750 shares were issued and
outstanding (Sandbox has approved that certain Sundance Stock Purchase
Agreement, pursuant to which up to an additional 750,000 shares of
Series A Preferred Stock will be issued); 10,000,000 shares of Common
Stock, $.001 par value, of which 3,051,907 shares are issued and
outstanding. Prior to the New Closing, Sandbox will have no equity
securities issued or outstanding except those disclosed on Exhibit B
attached hereto, which contains a list of all holders of capital stock
of Sandbox and their respective share holdings. Except as disclosed on
Exhibit B hereto, there are no outstanding warrants, options,
agreements, convertible securities or other commitments pursuant to
which Sandbox is or may become obligated to issue any shares of its
capital stock or other securities of Sandbox, except as contemplated by
this Amendment and the Sundance Stock Purchase Agreement. Except for
certain rights of first offer under that certain Investor Rights
Agreement dated as of February 13, 1996 ("Investor Rights Agreement")
between the Predecessor and certain investors, which have been waived,
and in that certain Amended and Restated Stockholders' Agreement dated
as of July 13, 1995 (the "Stockholders' Agreement") by and among the
Predecessor and the Stockholders party thereto, a copy of which is
attached as Exhibit III to the Note and Warrant Purchase Agreement,
there are, and immediately upon consummation at the New Closing of the
transactions contemplated hereby there will be, no preemptive or
2
<PAGE>
similar rights to purchase or otherwise acquire shares of capital stock
of Sandbox pursuant to any provision of law, the Certificate of
Incorporation or Bylaws of Sandbox, or any agreement to which Sandbox
is a party, or otherwise.
5. Authorization to Close. Sandbox's obligation to issue the New
Warrant is conditioned upon its receipt of a consent and waiver from the
Investors that are parties to the Investors Rights Agreement in form and
substance acceptable to such Investors and Sandbox.
6. Representations and Warranties of Purchaser. Purchaser makes the
same representations and warranties with respect to the issuance of the New
Warrant and the New Warrant Shares that were made by Purchaser in Section 4 of
the Loan and Warrant Purchase Agreement with respect to the Initial Warrant and
Initial Warrant Shares. These representations include, without limitation,
Purchaser's promise not to transfer the New Warrant or any interest therein
without the prior written consent of Sandbox, and Purchaser's acknowledgment
that in connection with the exercise of the New Warrant, any holder will be
required as a condition to such exercise to become bound by and obligated under
the Stockholders' Agreement for so long as it shall be in effect.
7. Amendments to Term Note. At the New Closing, the Term Note shall be
amended as of October 25, 1996 as follows:
(a) Extension of Maturity Date. The Term Note is no longer due
and payable upon demand by Purchaser (the "Holder" as that term is
defined under the Term Note); however, Sandbox will pay Purchaser all
accrued interest through October 25, 1996 at the New Closing. The date
upon which the entire indebtedness (principal and interest) evidenced
by the Term Note shall be due and payable in full is extended from
October 25, 1996 until April 25, 1997.
(b) Interest Rate. The interest rate for principal amounts
under the Term Note shall be Ten Percent (10%) beginning as of October
25, 1996.
8. Entire Agreement. This Agreement constitutes the sole and entire
agreement of the parties with respect to the subject matter hereof. This
Agreement may not be amended or modified, and no provisions may be waived,
without the written agreement of Sandbox and Purchaser.
9. Counterparts. This Amendment may be executed in counterparts, each
of which shall be enforceable against the party actually executing the
counterpart, and all of which shall constitute one instrument.
IN WITNESS WHEREOF, Sandbox and the Purchaser have executed this
Agreement as of the day and year first above written.
[SIGNATURES APPEAR ON FOLLOWING PAGES]
3
<PAGE>
[SIGNATURE PAGE TO AMENDMENT TO LOAN AND WARRANT
PURCHASE AGREEMENT AND TO TERM NOTE]
SANDBOX:
SANDBOX ENTERTAINMENT CORPORATION
By: ___________________________________
Chad Little
Its President
PURCHASER:
_______________________________________
4
<PAGE>
EXHIBIT A
FORM OF NEW WARRANT
5
<PAGE>
EXHIBIT B
Capitalization Schedule
October 22, 1996
I. AUTHORIZED CAPITALIZATION
Total Common Stock, $.001 par value: 10,000,000
Total Series A Convertible Preferred Stock, $.001 par value: 2,000,000
----------
Total 12,000,000
II. OUTSTANDING
A. Common Stockholders
----------------------
Name Shares
---- ------
Chad M. Little(1) 1,025,000
James A. Layne(1) 737,500
Lonnie A. Whittington(1) 737,500
Glenn Gomez 229,590
R. Jon and Kristin Lavender Kailey 125,015
Frank X. Helstab 131,535
Newtek Ventures II, L.P. 65,767
---------
Total Common: 3,051,907
B. Series A Preferred Stockholders
----------------------------------
Wasatch Venture Corporation 812,500
Newtek Ventures II, L.P. 375,000
John M. Holliman III 31,250
---------
Total Series A Preferred: 1,218,750
Total Common/Preferred Outstanding: 4,270,657
- -----------------
(1) Little has the right to vote 250,000 shares held by Layne and
250,000 shares held by Whittington.
<PAGE>
C. Common Stock Options(2)
--------------------------
<TABLE>
<CAPTION>
Shares Price
------ -----
Name Optioned Per Share Vesting Schedule
- ---- -------- --------- ----------------
<S> <C> <C> <C>
Donald Fairall 57,970 $.10 11,590 shares on 8/1/96, 8/1/97 and 8/1/98;
11,600 shares on 8/1/99 and 8/1/00
10,000 $.10 2,000 shares on 10/22/97, 10/22/98,
10/22/99, 10/22/00, and 10/22/01
Mike Turico 86,970 $.10 17,390 shares on 8/1/96, 8/1/97 and 8/1/98;
17,400 shares on 8/1/99 and 8/1/00
10,000 $.10 2,000 shares on 10/22/97, 10/22/98,
10/22/99, 10/22/00, and 10/22/01
Dennis Wodarz 115,960 $.10 23,190 shares on 8/1/96, 8/1/97, 8/1/98 and
8/1/99; 23,200 shares on 8/1/00
10,000 $.10 2,000 shares on 10/22/97, 10/22/98,
10/22/99, 10/22/00, and 10/22/01
Doug Hall 86,970 $.10 17,390 shares on 8/1/96, 8/1/97 and 8/1/98;
17,400 shares on 8/1/99 and 8/1/00
10,000 $.10 2,000 shares on 10/22/97, 10/22/98,
10/22/99, 10/22/00, and 10/22/01
Newtek Ventures II, L.P. 65,768 $.10 10,962 on 9/1/96, 3/1/97, 9/1/97, 3/1/98,
------ 9/1/98 and 10,958 on 3/1/99
Total Common Options: 453,638
</TABLE>
- -----------------
(2) All of the options listed in this section are pursuant to the 1995
Equity Incentive Plan.
<PAGE>
D. Common Warrants
------------------
Shares Price Expiration
Name Under Warrant Per Share of Warrant
- ---- ------------- --------- ----------
Pickwick Group L.L.C. 229,500 $.80 9/15/05
Thomas Lescault 76,500 $.80 10/25/05
Terrance Morris 38,250 $.80 10/25/05
Douglas and Susan
Greenwood 76,500 $.80 10/25/05
Pickwick Group L.L.C. 38,250 $.80 10/25/05
Geoffrey Herter, M.D. 76,500 $.80 10/25/05
--------
Total Common Warrants 535,500
TOTAL COMMON OPTIONS AND WARRANTS: 989,138
III. RESERVED
Type Number of Shares For What Reserved
- ---- ---------------- -----------------
Common 603,178 1995 Equity Incentive Plan
Common 535,500 Common Warrants
Common 1,218,750 Series A Preferred Stock
---------
Total Common Reserved: 2,357,428
IV. SUMMARY
Total Common Outstanding 3,051,907
Total Preferred Outstanding 1,218,750
Total Outstanding 4,270,657
Total Warrants/Options Outstanding 989,138
Total Common Outstanding - Fully Diluted(3) 5,259,795
- ---------------
(3) Assumes exercise of all outstanding warrants and options and
conversion of all outstanding preferred.
<PAGE>
Schedule to Exhibit 4(j) - Form of Amendment to Loan and Warrant Purchase
Agreement and Term Note.
List of Purchasers:
Thomas Lescault
Terrance Morris
Douglas and Susan Greenwood
Pickwick Group LLC
Geoffrey Herter
Exhibit 4(k)
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1993, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
STOCK SUBSCRIPTION WARRANT
to Purchase ____________Shares of the
Common Stock, $.001 Par Value, of
SANDBOX ENTERTAINMENT CORPORATION,
a Delaware corporation (the "Company")
DATE OF INITIAL ISSUANCE: As of October 25, 1996
THIS CERTIFIES THAT for value received, _________________________ , or
his registered assigns (hereinafter called the "Holder") is entitled to purchase
from the Company, at any time during the Term of this Warrant,
______________________________ (______) shares of common stock, $.001 par value,
of the Company (the "Common Stock"), at the Warrant Price, payable in lawful
money of the United States of America, to be paid upon the exercise of this
Warrant. The exercise of this Warrant shall be subject to the provisions,
limitations and restrictions herein contained and may be exercised in whole or
in part.
1. Definitions. For all purposes of this Warrant, the following terms
shall have the meanings indicated:
Common Stock shall mean and include the Company's authorized Common Stock, $.001
par value as constituted at the date of this Warrant, and shall also include any
capital stock of any class or series of the Company now or hereafter authorized
that is not limited to a fixed sum or percentage of par value or of the purchase
price of such stock in respect of the rights of the holders thereof to
participate in dividends and/or in the distribution of assets upon the voluntary
or involuntary liquidation, dissolution or winding up of the Company.
Term of this Warrant shall mean the period beginning on the date of initial
issuance hereof and ending on October 25, 2006.
Warrant Price shall mean Eighty Cents ($.80) per share, subject to adjustment in
accordance with Section 5 and Section 10.
Warrant Shares shall mean the shares of Common Stock purchased or purchasable by
the Holder of this Warrant upon exercise hereof.
<PAGE>
2. Exercise of Warrant. The Warrant shall be exercised, if at all, only
as follows:
(a) To exercise this Warrant in whole or in part, the Holder
shall deliver to the Company at its principal office, at any time and from time
to time during the Term of this Warrant: (i) the notice of exercise in the form
attached hereto as Exhibit A, (ii) cash, certified or official bank check
payable to the order of the Company, wire transfer of funds to the Company's
account, or the surrender of evidence of any indebtedness of the Company to the
Holder (or any combination of the foregoing) in the amount of the Warrant Price
for each share being purchased, and (iii) this Warrant.
(b) Notwithstanding any contrary provisions in this Warrant,
if the Current Market Price (as defined in Section 2(c) below) exceeds the
Warrant Price at the date of calculation, instead of exercising this Warrant as
described in Section 2(a) above, the Holder may elect to receive Warrant Shares
equal to the value of this Warrant (or the portion thereof being exercised), by
delivering to the Company at its principal office, at any time and from time to
time during the Term of this Warrant: (i) the notice of exercise in the form
attached hereto as Exhibit A, and (ii) this Warrant, in which event the Company
shall issue to the Holder a number of Warrant Shares calculated using the
following formula:
CS = WCS x (CMP-WP)
-------------------
CMP,
where CS = the number of Warrant Shares to be issued to the
Holder,
WCS = the number of Warrant Shares purchasable under the
Warrant, or if only a portion of the Warrant is
being exercised, the portion of the Warrant being
exercised at the date of such calculation,
CMP = the Current Market Price (as defined in Section
5(c) below) at the date of such calculation, and
WP = the Warrant Price, as adjusted to the date of such
calculation.
(c) For the purpose of any calculation made pursuant to this
Section 2, the "Current Market Price" at any date of one share of Common Stock
shall be deemed to be the average of the daily closing prices for the 30
consecutive business days ending no more than 15 business days before such date
(as adjusted for any stock dividend, split, combination or reclassification that
took effect during such 30 business day period). The closing price for each day
shall be the last reported sales price regular way or, if no such reported sales
took place on such day, the average of the last reported bid and asked prices
regular way, in either case on the principal national securities exchange on
which the Common Stock is listed or admitted to trading (or if the Common Stock
is not at the time listed or admitted for trading on any such exchange, then
such price as shall be equal to the average of the last reported bid and asked
prices, as reported by the National Association of Securities Dealers Automated
Quotations System
2
<PAGE>
("NASDAQ") on such day, or if, on any such date, the security shall not be
quoted on the NASDAQ, then such price shall be equal to the average of the last
reported bid and asked prices on such day as reported by The National Quotations
Bureau Incorporated or any similar reputable quotation and reporting service, if
such quotation is not reported by The National Quotation Bureau Incorporated);
provided, however, that if the Common Stock is not traded in such manner that
the quotations referred to in this Section 2(c) are available for the period
required hereunder, the Current Market Price shall be determined by the Board of
Directors of the Company, acting in good faith.
(d) Each certificate for Warrant Shares shall bear the
following legend (and any additional legend required by (i) any applicable state
securities laws, and (ii) any securities exchange upon which such Warrant Shares
may, at the time of such exercise be listed) on the face thereof, unless at the
time of exercise, such Warrant Shares shall be registered under the Securities
Act of 1933, as amended (the "Securities Act");
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION THEREFROM UNDER SAID
ACT AND APPLICABLE STATE SECURITIES LAWS."
In addition, for so long as that certain Amended and Restated
Stockholders' Agreement dated as of July 13, 1995, by and between the Company,
and certain shareholders of the Company (the "Stockholders' Agreement") remains
in effect, each certificate for Warrant Shares shall bear the following legend:
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
STOCKHOLDERS' AGREEMENT TO WHICH THE CORPORATION IS A PARTY, AND NONE
OF SUCH SHARES, OR ANY INTEREST THEREIN, SHALL BE TRANSFERRED, PLEDGED,
ENCUMBERED OR OTHERWISE DISPOSED OF EXCEPT AS PROVIDED IN SUCH
AGREEMENT. A COPY OF THE STOCKHOLDERS' AGREEMENT IS ON FILE IN THE
OFFICE OF THE CORPORATION AND WILL BE MADE AVAILABLE FOR INSPECTION TO
ANY PROPERLY INTERESTED PERSON WITHOUT CHARGE WITHIN FIVE (5) WORKING
DAYS AFTER THE CORPORATION'S RECEIPT OF A WRITTEN REQUEST."
3. Covenants As to Common Stock. The Company covenants and agrees that:
(i) all shares of Common Stock that may be issued upon the exercise of this
Warrant will, upon issuance, be validly issued, fully paid and nonassessable,
and free from all taxes, liens and charges with respect to the issue thereof;
(ii) it will pay when due and payable any and all federal and state taxes (other
than federal or state income taxes, if any, which shall remain Holder's
responsibility) that may be payable in respect of the issue of this Warrant or
any Common Stock or the Warrant
3
<PAGE>
Shares; (iii) it will at all times have authorized and reserved, free from
preemptive rights, a sufficient number shares of Common Stock to provide for the
exercise of the rights represented by this Warrant; (iv) if any shares of
capital stock to be reserved for the purpose of the issuance of shares upon the
exercise of this Warrant require registration with or approval of any
governmental authority under any federal or state law before such shares may be
validly issued or delivered upon exercise, then the Company shall in good faith
and as expeditiously as possible endeavor to secure such registration or
approval, as the case may be; and (v) if and so long as the Common Stock
issuable upon the exercise of this Warrant is listed on any national securities
exchange, the Company, will, if permitted by the rules of such exchange, list
and keep listed on such exchange, upon official notice of issuance, all shares
of such Common Stock issuable upon exercise of this Warrant.
4. Adjustment of Number of Shares. Upon each adjustment of the Warrant
Price as provided in Section 5 below, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest 1/10th of a share) obtained by multiplying the
Warrant Price in effect immediately before such adjustment by the number of
shares purchasable pursuant hereto immediately before such adjustment, and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
5. Adjustment of Warrant Price. The Warrant Price shall be subject to
adjustment from time to time as follows:
(a) If, at any time during the term of this Warrant, the
number of shares of Common Stock outstanding is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split-up of shares of
Common Stock, then, following the record date fixed for the determination of
Holders of Common Stock entitled to receive such stock dividend, subdivision or
split-up, the Warrant Price shall be appropriately decreased so that the number
of shares of Common Stock issuable upon the exercise of this Warrant shall be
increased in proportion to such increase in outstanding shares.
(b) If, at any time during the term of this Warrant, the
number of shares of Common Stock outstanding is decreased by a combination of
the outstanding shares of Common Stock, then, following the record date for such
combination, the Warrant Price shall appropriately increase so that the number
of shares of Common Stock issuable upon the exercise hereof shall be decreased
in proportion to such decrease in outstanding shares.
(c) All calculations under this Section 5 shall be made to the
nearest cent or to the nearest 1/10th of a share, as the case may be.
(d) If the Company proposes to take any action of the types
described in Section 5(a) or (b), the Company shall forward at the same time and
in the same manner, to the Holder of this Warrant, such notice, if any, that the
Company shall give to the Holders of capital stock of the Company.
4
<PAGE>
6. Transfers. The Company may deem and treat the person in whose name
this Warrant is registered as the Holder and owner hereof. Notwithstanding the
foregoing, the Warrant and all rights hereunder are not transferable in whole or
in part without the prior written consent of the Company and compliance with
that certain Loan and Warrant Purchase Agreement of even date herewith between
the Company and Holder, and any attempted transfer without such consent and such
compliance shall be void. Transferability of the Warrant Shares is limited as
set forth in this Warrant and in the Stockholders' Agreement.
7. Mergers, Consolidations, Sales. In the case of any proposed
consolidation or merger of the Company with another entity, or the proposed sale
of all or substantially all of its assets to another person or entity, or any
proposed reorganization or reclassification of the capital stock of the Company,
then, as a condition of any such consolidation, merger, sale, reorganization or
reclassification, lawful and adequate provision shall be made pursuant to which
the Holder of this Warrant shall thereafter have the right to receive upon the
basis and upon the terms and conditions specified herein, in lieu of the shares
of Common Stock of the Company immediately purchasable hereunder, such shares of
stock, securities or assets as may, by virtue of such consolidation, merger,
sale, reorganization or reclassification, be issued or payable with respect to
or in exchange for the number of shares of such Common Stock purchasable
hereunder immediately before such consolidation, merger, sale reorganization or
reclassification. The Company shall forward at the same time and in the same
manner, to the Holder of this Warrant, such notice, if any, that the Company
shall give to the Holders of capital stock of the Company with respect to any
proposed transaction described above or any distribution of assets of the
Company in dissolution or liquidation, or any extraordinary dividend or other
distribution on its Common Stock except out of earned surplus or by way of a
stock dividend payable in shares of its Common Stock. This Warrant shall be
binding upon any corporation or other person or entity succeeding to the Company
by merger, consolidation or acquisition of all or substantially all of the
Company's assets.
8. Registration Rights; Lockup Letter.
(a) If at any time prior to the expiration date of this
Warrant, the Company proposes to register any of its securities under the
Securities Act, whether or not for sale for its own account, on a form and in a
manner which would permit registration of shares of common stock for sale to the
public under the Securities Act, it will each such time give prompt written
notice to the Holder of its intention to do so, describing such securities and
specifying the form and manner and the other relevant facts involved in such
proposed registration, and upon the written request of the Holder delivered to
the Company within 30 days after the giving of any such notice (which request
shall specify the shares of Common Stock intended to be disposed of by the
Holder and the intended method of disposition thereof), the Company will take
every reasonable effort to effect the registration under the Securities Act,
subject to Sections 8(b) and (c) below, of all shares of Common Stock which the
Company has been so requested to register by the Holder to the extent requisite
to permit the disposition (in accordance with the intended methods thereof as
aforesaid) of the shares of Common Stock so to be registered, provided that:
5
<PAGE>
(i) if, at any time after giving such written notice of its
intention to register any of its securities and prior to the effective
date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to
register such securities, the Company may, at its election, give
written notice of such determination to the Holder and thereupon shall
be relieved of its obligation to register any shares of Common Stock in
connection with such registration;
(ii) the Company shall not be obligated to effect any
registration of shares of Common Stock under this Section incidental to
the registration of any of its securities in connection with mergers,
acquisitions, exchange offers, dividend reinvestment plans, employee
stock ownership plans or stock option plans, thrift plans, pension
plans or other employee benefit plans; and
(iii) the Company shall not be obligated to effect any
registration of shares of Common Stock to the extent such shares are
validly excluded from an underwritten distribution pursuant to Section
8(b) below.
(b) If the managing underwriter for a firm commitment
underwritten registration advises the Company and the Holder of Common Stock
that, in the underwriter's opinion, the total amount of securities proposed to
be sold in such registration exceeds the amount of securities that can be sold
in such an offering without negatively affecting the offering or its price, then
the number of outstanding shares of Common Stock proposed to be included in such
offering by persons other than the Company and/or a stockholder exercising
so-called "demand" registration rights (but including Holder) shall be reduced
pro rata among the holders of all such Common Stock. Expenses of all
registrations (excluding underwriting discounts and fees, commissions and
transfer taxes) shall be paid by the Company, including the reasonable fees and
disbursements for one counsel for all non-Company sellers as a group.
(c) It shall be a condition precedent to the obligation of the
Company to take any action pursuant to this Section 8 in respect of the Warrant
Shares which are to be registered at the request of Holder that Holder shall
furnish to the Company such information regarding the Common Stock held by
Holder and the intended method of disposition thereof as the Company shall
reasonably request and as shall be required in connection with the action to be
taken by the Company.
(d) The Company shall not, without the Holder's written
consent, and the written consent of any Warrant Shares issued and outstanding,
enter into any agreement with any holder or prospective holder of any securities
of the Company that purports to grant "piggy back" registration rights unless
such rights are consistent with and expressly made subject to the rights and
priorities set forth in this Section 8.
(e) The Company will indemnify and hold harmless each Holder,
each of its managers, members, officers, directors, partners and agents, with
respect to each registration, qualification and compliance effected pursuant to
this Section 8 pursuant to an indemnity
6
<PAGE>
agreement or agreements in customary form. Holder will indemnify and hold
harmless the Company (and the underwriters if requested) and their control
persons with respect to any information provided by Holder for inclusion in a
registration statement, pursuant to an indemnity agreement or agreements in
customary form.
(f) Holder agrees to execute and deliver to the underwriters
in connection with any Company-initiated firm commitment underwritten offering
and registration a "lock-up" letter requested, if at all, by such underwriters,
regarding limitations on the transfer by Holder of Common Stock for a period
after effectiveness of such registration provided such "lock-up" letter is on
the same terms and conditions as are requested by the underwriters from all
other selling shareholders.
9. Notices. Any notice or other document required or permitted to be
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at _____________________________________________,
or to such other address as shall have been furnished to the Company in writing
by the Holder. Any notice or other document required or permitted to be given or
delivered to the Company shall be delivered at or sent by registered or
certified mail to, the Company at 2231 East Camelback Road, Suite 324, Phoenix,
AZ 85016, or to such other address as shall have been furnished in writing to
the Holder by the Company. Any notice so addressed and mailed by registered or
certified mail shall be deemed to be given when so mailed. Any notice so
addressed and otherwise delivered shall be deemed to be given when actually
received by the addressee.
10. Special Protections. Notwithstanding any other provisions of this
Warrant, Holder shall be entitled to receive, with respect to the Warrant
Shares, any dilution protections or registration rights that are more favorable
than are set forth herein to the extent that such protections or rights are
granted by the Company during the term of this Warrant to or for the benefit of
any of Chad Little, James Layne or Lonnie Whittington (or any person or entity,
other than the Company, controlled by, controlling, or under common control with
any of the foregoing persons or entities) with respect to Common Stock held by
any of the foregoing persons or entities.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly and authorized officer as of this 25th day of October, 1996.
THE COMPANY:
ATTEST: SANDBOX ENTERTAINMENT CORPORATION
By: ________________________ By: ____________________________
Its Secretary Its President
7
<PAGE>
FORM OF NOTICE OF EXERCISE
[To be signed only upon exercise of the Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
1. The undersigned hereby exercises the right to purchase ___ shares of
Common Stock that the undersigned is entitled to purchase by the terms of the
within Warrant according to the conditions thereof, and herewith makes payment
of the Warrant Price of such shares in full. All shares to be issued pursuant
hereto shall be issued in the name of and the initial address of such person to
be entered on the books of the Company shall be:
_______________________________________________________________________________.
The shares are to be issued in certificates of the following denominations:
_______________________________________________________________________________.
2. The undersigned hereby represents that the shares of the Company's
Common Stock to be delivered to it pursuant to the above-mentioned exercise of
the Warrant are being acquired by the undersigned as an investment and not with
a view to, or for sale in connection with, the distribution of any such shares.
The undersigned agrees to indemnify the Company and its subsidiaries, together
with their officers and directors, for any liabilities, losses, damages and
expenses (including reasonable attorney fees) arising from or in connection with
any disposition of the shares hereby being acquired, or any interest therein, in
violation of applicable securities laws or regulations. The undersigned further
represents that the undersigned has been given access to all information
requested by the undersigned to allow the undersigned to make a decision as to
the advisability of an investment in the Company's stock and the value of such
stock, and that undersigned has the skill and experience necessary to make such
decision. The undersigned also hereby agrees to be bound by, and to assume the
obligations of a Stockholder under, that certain Amended and Restated
Stockholders' Agreement dated as of July 13, 1995, by and among the Company and
the Stockholders party thereto, as the same may be amended from time to time.
[This paragraph 2 is not applicable if the Common Stock being acquired has been
registered under the Securities Act of 1933, as amended.]
___________________________________
[Type Name of Holder]
By: ____________________________
Title: ____________________________
Date: ____________________________
<PAGE>
Schedule to Exhibit 4(k) - Form of Stock Subscription Warrant, dated October 25,
1996.
List of Warrant Holders:
October 25, 1996 Sandbox Warrants
Holder Additional Sandbox Warrants
- ------ ---------------------------
Terrance Morris 250
Thomas Lescault 500
Pickwick Group, L.L.C. 250
Douglas and Susan Greenwood 500
Geoffrey Herter 500
9
Exhibit 4(l)
APRIL 1997 AMENDMENT TO LOAN AND WARRANT PURCHASE AGREEMENT
AND TO TERM NOTE
THIS APRIL 1997 AMENDMENT TO LOAN AND WARRANT PURCHASE AGREEMENT AND TO
TERM NOTE (this "Amendment") is made effective as of April 25, 1997, by and
between SANDBOX ENTERTAINMENT CORPORATION, a Delaware corporation ("Sandbox"),
which was formerly TRACER DESIGN, INC., an Arizona corporation (the
"Predecessor"), and ___________________________________, whose address is
_____________________________ ("Purchaser").
RECITALS
A. Pursuant to that certain Loan and Warrant Purchase Agreement dated
as of October 25, 1995 (the "Loan and Warrant Purchase Agreement"), the
Predecessor borrowed $__________ from Purchaser in consideration of the
Predecessor issuing to Purchaser a warrant (the "Initial Warrant") to purchase
________ shares of the Class A Common Stock, $.001 par value of the Predecessor
(the "Initial Warrant Shares") at an exercise price of $_______ per share (after
giving effect to certain subsequent stock splits and anti-dilutive adjustments,
the Initial Warrant is currently a warrant to purchase _____________ shares of
the Common Stock, $.001 par value of Sandbox (the "Common Stock") at an exercise
price of $.80 per share), on the terms and subject to the conditions set forth
in the Loan and Warrant Purchase Agreement.
B. In connection with the Loan and Warrant Purchase Agreement, the
Predecessor also gave Purchaser a Term Note dated as of October 25, 1995 in the
principal amount of $________ (the "Term Note"). Pursuant to its terms, the Term
Note is due and payable in full on October 25, 1996.
C. Pursuant to that certain Amendment to Loan and Warrant Purchase
Agreement and to Term Note dated as of October 25, 1996 (the "Amendment to Loan
and Warrant Purchase Agreement and to Term Note"), Sandbox and Purchaser amended
the Term Note to, among other things, extend the maturity date an additional six
(6) months and lower the interest rate for the extension period. Purchaser
agreed to such amendments to the Term Note in consideration of Sandbox issuing
to Purchaser a new warrant to purchase __________ shares of Common Stock (the
"October 1996 Warrant Shares") at an exercise price of $.80 per share.
D. Sandbox wishes again to amend the Term Note to, among other things,
extend the maturity date an additional six (6) months. Purchaser has agreed to
such amendments to the Term Note in consideration of Sandbox issuing to
Purchaser a new warrant to purchase _______ shares of Common Stock (the "April
1997 Warrant Shares") at an exercise price of $.80 per share, pursuant to a
warrant in the form attached hereto as Exhibit A (the "April 1997 Warrant") on
the terms and subject to the conditions of this Amendment.
<PAGE>
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement, Sandbox and Purchaser agree as follows:
1. Incorporation by Reference. The terms and conditions of the Loan and
Warrant Purchase Agreement, the Term Note, and the Amendment to Loan and Warrant
Purchase Agreement and to Term Note and the Recitals above are incorporated by
reference. Any capitalized term used herein and not otherwise defined shall have
the meaning ascribed to such term in the Loan and Warrant Purchase Agreement.
2. Issuance, Sale and Delivery of New Warrant. At the New Closing
(defined in Section 3 hereto) Sandbox agrees to issue and deliver to Purchaser
and Purchaser agrees to receive from Sandbox the April 1997 Warrant in
consideration of Purchaser agreeing to the amendments contained herein.
3. Closing. The issuance and delivery of the April 1997 Warrant shall
take place at the offices of Sandbox as soon as possible on such date and at
such time as is mutually agreed upon by the parties (such transaction being the
"New Closing" and such date and time being the "New Closing Date"). At the New
Closing Sandbox shall issue and deliver to Purchaser the April 1997 Warrant
registered in the name of Purchaser and the Term Note shall be deemed amended as
of April 25, 1997, as set forth herein.
4. Representations and Warranties of Sandbox. Sandbox makes the same
representations and warranties with respect to the issuance of the April 1997
Warrant and the April 1997 Warrant Shares as of the New Closing Date that were
made by the Predecessor in Section 3 of the Loan and Warrant Purchase Agreement
with respect to the Initial Warrant and the Initial Warrant Shares, with the
following amendments:
(a) Organization and Standing; Charter and Bylaws. Sandbox is
a corporation duly organized and existing under and by virtue of the
laws of the State of Delaware.
(b) Capitalization. As of April 17, 1997, the authorized
capital stock of Sandbox consists of: 2,000,000 shares of Series A
Preferred Stock, $.001 par value, of which 1,968,750 shares were issued
and outstanding; 10,000,000 shares of Common Stock, $.001 par value, of
which 3,136,429 shares are issued and outstanding. Sandbox is in the
process of negotiating a bridge financing that might close before or
after April 25, 1997 pursuant to which it anticipates issuing
additional shares of Series A Preferred Stock, shares of a new series
of Preferred Stock and/or shares of Common Stock (the "Bridge
Financing"). Sandbox is also in the process of negotiating an equipment
lease that might close before or after April 25, 1997 with Third Coast
Capital, L.L.C., pursuant to which Sandbox might issue warrant(s) for
the purchase of shares of Series A Preferred Stock and/or shares of
Common Stock (the "Equipment Financing"). To facilitate the Bridge
Financing and the Equipment
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<PAGE>
Financing, Sandbox will need to amend its Certificate of Incorporation
before or after April 25, 1997 to increase the total number of
authorized shares of Series A Preferred and/or Common Stock and to
possibly create a new class of Preferred Stock.
Prior to the New Closing and with the exception of the Bridge
Financing and the Equipment Financing, Sandbox will have no equity
securities issued or outstanding except those disclosed on Exhibit B
attached hereto, which contains a list of all holders of capital stock
of Sandbox and their respective share holdings. Except as disclosed on
Exhibit B hereto and as contemplated by this Amendment, the Bridge
Financing and the Equipment Financing, there are no outstanding
warrants, options, agreements, convertible securities or other
commitments pursuant to which Sandbox is or may become obligated to
issue any shares of its capital stock or other securities of Sandbox.
Except for certain rights of first offer under that certain Investor
Rights Agreement dated as of February 13, 1996 ("Investor Rights
Agreement") between the Predecessor and certain investors, which have
been waived, and in that certain Amended and Restated Stockholders'
Agreement dated as of July 13, 1995 (the "Stockholders' Agreement") by
and among the Predecessor and the Stockholders party thereto, a copy of
which is attached as Exhibit III to the Note and Warrant Purchase
Agreement, there are, and immediately upon consummation at the New
Closing of the transactions contemplated hereby there will be, no
preemptive or similar rights to purchase or otherwise acquire shares of
capital stock of Sandbox pursuant to any provision of law, the
Certificate of Incorporation or Bylaws of Sandbox, or any agreement to
which Sandbox is a party, or otherwise.
5. Authorization to Close. Sandbox's obligation to issue the April 1997
Warrant is conditioned upon its receipt of a consent and waiver from the
Investors that are parties to the Investors Rights Agreement in form and
substance acceptable to such Investors and Sandbox.
6. Representations and Warranties of Purchaser. Purchaser makes the
same representations and warranties with respect to the issuance of the April
1997 Warrant and the April 1997 Warrant Shares that were made by Purchaser in
Section 4 of the Loan and Warrant Purchase Agreement with respect to the Initial
Warrant and Initial Warrant Shares. These representations include, without
limitation, Purchaser's promise not to transfer the April 1997 Warrant or any
interest therein without the prior written consent of Sandbox, and Purchaser's
acknowledgment that in connection with the exercise of the April 1997 Warrant,
any holder will be required as a condition to such exercise to become bound by
and obligated under the Stockholders' Agreement for so long as it shall be in
effect.
7. Amendments to Term Note. At the New Closing, the Term Note shall be
amended as of April 25, 1997 as follows:
(a) Extension of Maturity Date. The Term Note is no longer due
and payable upon demand by Purchaser (the "Holder" as that term is
defined under the
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<PAGE>
Term Note); however, Sandbox will pay Purchaser all accrued interest
through April 25, 1997 at the New Closing. The date upon which the
entire indebtedness (principal and interest) evidenced by the Term Note
shall be due and payable in full is extended from April 25, 1997 until
October 25, 1997.
(b) Interest Rate. The interest rate for principal amounts
under the Term Note shall be Ten Percent (10%) beginning as of October
25, 1996.
8. Entire Agreement. This Agreement constitutes the sole and entire
agreement of the parties with respect to the subject matter hereof. This
Agreement may not be amended or modified, and no provisions may be waived,
without the written agreement of Sandbox and Purchaser.
9. Counterparts. This Amendment may be executed in counterparts, each
of which shall be enforceable against the party actually executing the
counterpart, and all of which shall constitute one instrument.
IN WITNESS WHEREOF, Sandbox and the Purchaser have executed this
Agreement as of the day and year first above written.
SANDBOX:
SANDBOX ENTERTAINMENT CORPORATION
By: ___________________________________
Chad Little
Its President
PURCHASER:
_____________________________________
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<PAGE>
EXHIBIT A
FORM OF APRIL 1997 WARRANT
5
<PAGE>
EXHIBIT B
SANDBOX ENTERTAINMENT CORPORATION
Capitalization Schedule
April 17, 1997
I. AUTHORIZED CAPITALIZATION
Total Common Stock, $.001 par value: 10,000,000
Total Series A Convertible Preferred Stock, $.001 par value: 2,000,000
----------
Total 12,000,000
II. OUTSTANDING
A. Common Stockholders
----------------------
Name Shares
---- ------
Chad M. Little(1) 1,025,000
James A. Layne(1) 737,500
Lonnie A. Whittington(1) 737,500
Glenn Gomez 229,590
R. Jon and Kristin Lavender Kailey 125,015
Frank X. Helstab 131,535
Newtek Ventures II, L.P. 76,729
Dennis Wodarz 25,190
Michael S. Turico 17,390
Douglas C. Hall 17,390
Donald L. Fairall, Jr. 13,590
------
Total Common: 3,136,429
B. Series A Preferred Stockholders
----------------------------------
Wasatch Venture Corporation 875,000
Newtek Ventures II, L.P. 437,500
John M. Holliman III 31,250
Wayne Sorensen 62,500
Sundance Venture Partners, L.P. 562,500
-------
Total Series A Preferred: 1,968,750
Total Common/Preferred Outstanding: 5,101,179
- ---------------
(1) Little has the right to vote 250,000 shares held by Layne and
250,000 shares held by Whittington.
<PAGE>
C. Common Stock Options(2)
--------------------------
<TABLE>
<CAPTION>
Name Type Shares Optioned Price Per Share Vesting Schedule
- ---- ---- ------ -------- ----- --------- ----------------
<S> <C> <C> <C> <C>
Donald Fairall ISO 54,380 $.10 2,000 shares vested 2/28/97 (were
exercised on 4/8/97), 13,590 shares
8/1/97 and 8/1/98; 13,600 shares on
8/1/99 and 8/1/00
Mike Turico ISO 79,580 $.10 2,000 shares vest immediately,
19,390 on 8/1/97 and 8/1/98;
19,400 shares on 8/1/99 and 8/1/00
Dennis Wodarz ISO 100,770 $.10 2,000 shares vested 2/28/97 (were
exercised 4/6/97), 25,190 8/1/97,
8/1/98 and 8/1/99; 25,200 shares on
8/1/00
Doug Hall ISO 79,580 $.10 2,000 shares vest immediately
19,390 shares on 8/1/97 and 8/1/98;
19,400 shares on 8/1/99 and 8/1/00
Newtek Ventures, II, NQSO 54,806 $.10 10,962 shares vested on 9/1/96 (were
L.P. exercised on 12/12/96); 10,962
shares shall vest on 3/1/97 9/1/97,
3/1/98, 9/1/98 and 10,958 on 3/1/99
Joseph Romano NQSO 6,000 $.10 All vested 2/28/97
Charles E. Butler, Jr. NQSO 6,000 $.10 All vested 2/28/97
Matt Stanton ISO 50,000 $.10 10,000 shares shall vest on 7/9/97,
7/9/98, 7/9/99, 7/9/00 and 7/9/01
Mark Gorchoff ISO 45,000 $.10 9,000 shares shall vest on 1/15/98,
1/15/99, 1/15/00, 1/15/01 and
1/15/02
</TABLE>
Total Common Options: 476,116
- ---------------
(2) All of the options listed in this section are pursuant to the 1995
Equity Incentive Plan.
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<PAGE>
D. Common Warrants
------------------
Shares Price Expiration
Name Under Warrant Per Share of Warrant
- ---- ------------- --------- ----------
Pickwick Group L.L.C. 229,500 $.80 9/15/05
Thomas Lescault 76,500 $.80 10/25/05
1,250 $.80 10/25/06
Terrance Morris 38,250 $.80 10/25/05
625 $.80 10/25/06
Douglas and Susan
Greenwood 76,500 $.80 10/25/05
1,250 $.80 10/25/06
Pickwick Group L.L.C. 38,250 $.80 10/25/05
625 $.80 10/25/06
Geoffrey Herter, M.D. 76,500 $.80 10/25/05
1,250 $.80 10/25/06
-------
Total Common Warrants 540,500
TOTAL COMMON OPTIONS AND WARRANTS: 1,016,616
III. RESERVED
Type Number of Shares For What Reserved
- ---- ---------------- -----------------
Common 603,178 1995 Equity Incentive Plan
Common 540,500 Common Warrants
Common 1,968,750 Series A Preferred Stock
---------
Total Common Reserved: 3,112,428
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<PAGE>
IV. SUMMARY
Total Common Outstanding 3,136,429
Total Preferred Outstanding 1,968,750
Total Outstanding 5,105,179
Total Warrants/Options Outstanding 1,016,616
---------
Total Common Outstanding - Fully Diluted(3) 6,121,795
- -----------------
(3) Assumes exercise of all outstanding warrants and options and
conversion of all outstanding preferred.
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<PAGE>
Schedule to Exhibit 4(l) - Form of April 1997 Amendment to Loan and Warrant
Purchase Agreement.
List of Purchasers:
Thomas Lescault
Terrance Morris
Douglas and Susan Greenwood
Pickwick Group LLC
Geoffrey Herter
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Exhibit 4(m)
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1993, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
STOCK SUBSCRIPTION WARRANT
to Purchase ________ Shares of the
Common Stock, $.001 Par Value, of
SANDBOX ENTERTAINMENT CORPORATION,
a Delaware corporation (the "Company")
DATE OF INITIAL ISSUANCE: As of April 25, 1997
THIS CERTIFIES THAT for value received, ________________, or his
registered assigns (hereinafter called the "Holder") is entitled to purchase
from the Company, at any time during the Term of this Warrant,
___________________________ (_______) shares of common stock, $.001 par value,
of the Company (the "Common Stock"), at the Warrant Price, payable in lawful
money of the United States of America, to be paid upon the exercise of this
Warrant. The exercise of this Warrant shall be subject to the provisions,
limitations and restrictions herein contained and may be exercised in whole or
in part.
1. Definitions. For all purposes of this Warrant, the following terms
shall have the meanings indicated:
Common Stock shall mean and include the Company's authorized Common Stock, $.001
par value as constituted at the date of this Warrant, and shall also include any
capital stock of any class or series of the Company now or hereafter authorized
that is not limited to a fixed sum or percentage of par value or of the purchase
price of such stock in respect of the rights of the holders thereof to
participate in dividends and/or in the distribution of assets upon the voluntary
or involuntary liquidation, dissolution or winding up of the Company.
Term of this Warrant shall mean the period beginning on the date of initial
issuance hereof and ending on April 25, 2007.
Warrant Price shall mean Eighty Cents ($.80) per share, subject to adjustment in
accordance with Section 5 and Section 10.
Warrant Shares shall mean the shares of Common Stock purchased or purchasable by
the Holder of this Warrant upon exercise hereof.
<PAGE>
2. Exercise of Warrant. The Warrant shall be exercised, if at all, only
as follows:
(a) To exercise this Warrant in whole or in part, the Holder
shall deliver to the Company at its principal office, at any time and from time
to time during the Term of this Warrant: (i) the notice of exercise in the form
attached hereto as Exhibit A, (ii) cash, certified or official bank check
payable to the order of the Company, wire transfer of funds to the Company's
account, or the surrender of evidence of any indebtedness of the Company to the
Holder (or any combination of the foregoing) in the amount of the Warrant Price
for each share being purchased, and (iii) this Warrant.
(b) Notwithstanding any contrary provisions in this Warrant,
if the Current Market Price (as defined in Section 2(c) below) exceeds the
Warrant Price at the date of calculation, instead of exercising this Warrant as
described in Section 2(a) above, the Holder may elect to receive Warrant Shares
equal to the value of this Warrant (or the portion thereof being exercised), by
delivering to the Company at its principal office, at any time and from time to
time during the Term of this Warrant: (i) the notice of exercise in the form
attached hereto as Exhibit A, and (ii) this Warrant, in which event the Company
shall issue to the Holder a number of Warrant Shares calculated using the
following formula:
CS = WCS x (CMP-WP)
-------------------
CMP,
where CS = the number of Warrant Shares to be issued to the
Holder,
WCS = the number of Warrant Shares purchasable under the
Warrant, or if only a portion of the Warrant is
being exercised, the portion of the Warrant being
exercised at the date of such calculation,
CMP = the Current Market Price (as defined in Section
5(c) below) at the date of such calculation, and
WP = the Warrant Price, as adjusted to the date of such
calculation.
(c) For the purpose of any calculation made pursuant to this
Section 2, the "Current Market Price" at any date of one share of Common Stock
shall be deemed to be the average of the daily closing prices for the 30
consecutive business days ending no more than 15 business days before such date
(as adjusted for any stock dividend, split, combination or reclassification that
took effect during such 30 business day period). The closing price for each day
shall be the last reported sales price regular way or, if no such reported sales
took place on such day, the average of the last reported bid and asked prices
regular way, in either case on the principal national securities exchange on
which the Common Stock is listed or admitted to trading (or if the Common Stock
is not at the time listed or admitted for trading on any such exchange, then
such price as shall be equal to the average of the last reported bid and asked
prices, as reported by the National Association of Securities Dealers Automated
Quotations System
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<PAGE>
("NASDAQ") on such day, or if, on any such date, the security shall not be
quoted on the NASDAQ, then such price shall be equal to the average of the last
reported bid and asked prices on such day as reported by The National Quotations
Bureau Incorporated or any similar reputable quotation and reporting service, if
such quotation is not reported by The National Quotation Bureau Incorporated);
provided, however, that if the Common Stock is not traded in such manner that
the quotations referred to in this Section 2(c) are available for the period
required hereunder, the Current Market Price shall be determined by the Board of
Directors of the Company, acting in good faith.
(d) Each certificate for Warrant Shares shall bear the
following legend (and any additional legend required by (i) any applicable state
securities laws, and (ii) any securities exchange upon which such Warrant Shares
may, at the time of such exercise be listed) on the face thereof, unless at the
time of exercise, such Warrant Shares shall be registered under the Securities
Act of 1933, as amended (the "Securities Act");
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION THEREFROM UNDER SAID
ACT AND APPLICABLE STATE SECURITIES LAWS."
In addition, for so long as that certain Amended and Restated
Stockholders' Agreement dated as of July 13, 1995, by and between the Company,
and certain shareholders of the Company (the "Stockholders' Agreement") remains
in effect, each certificate for Warrant Shares shall bear the following legend:
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
STOCKHOLDERS' AGREEMENT TO WHICH THE CORPORATION IS A PARTY, AND NONE
OF SUCH SHARES, OR ANY INTEREST THEREIN, SHALL BE TRANSFERRED, PLEDGED,
ENCUMBERED OR OTHERWISE DISPOSED OF EXCEPT AS PROVIDED IN SUCH
AGREEMENT. A COPY OF THE STOCKHOLDERS' AGREEMENT IS ON FILE IN THE
OFFICE OF THE CORPORATION AND WILL BE MADE AVAILABLE FOR INSPECTION TO
ANY PROPERLY INTERESTED PERSON WITHOUT CHARGE WITHIN FIVE (5) WORKING
DAYS AFTER THE CORPORATION'S RECEIPT OF A WRITTEN REQUEST."
3. Covenants As to Common Stock. The Company covenants and agrees that:
(i) all shares of Common Stock that may be issued upon the exercise of this
Warrant will, upon issuance, be validly issued, fully paid and nonassessable,
and free from all taxes, liens and charges with respect to the issue thereof;
(ii) it will pay when due and payable any and all federal and state taxes (other
than federal or state income taxes, if any, which shall remain Holder's
responsibility) that may be payable in respect of the issue of this Warrant or
any Common Stock or the Warrant
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<PAGE>
Shares; (iii) it will at all times have authorized and reserved, free from
preemptive rights, a sufficient number shares of Common Stock to provide for the
exercise of the rights represented by this Warrant; (iv) if any shares of
capital stock to be reserved for the purpose of the issuance of shares upon the
exercise of this Warrant require registration with or approval of any
governmental authority under any federal or state law before such shares may be
validly issued or delivered upon exercise, then the Company shall in good faith
and as expeditiously as possible endeavor to secure such registration or
approval, as the case may be; and (v) if and so long as the Common Stock
issuable upon the exercise of this Warrant is listed on any national securities
exchange, the Company, will, if permitted by the rules of such exchange, list
and keep listed on such exchange, upon official notice of issuance, all shares
of such Common Stock issuable upon exercise of this Warrant.
4. Adjustment of Number of Shares. Upon each adjustment of the Warrant
Price as provided in Section 5 below, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest 1/10th of a share) obtained by multiplying the
Warrant Price in effect immediately before such adjustment by the number of
shares purchasable pursuant hereto immediately before such adjustment, and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
5. Adjustment of Warrant Price. The Warrant Price shall be subject to
adjustment from time to time as follows:
(a) If, at any time during the term of this Warrant, the
number of shares of Common Stock outstanding is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split-up of shares of
Common Stock, then, following the record date fixed for the determination of
Holders of Common Stock entitled to receive such stock dividend, subdivision or
split-up, the Warrant Price shall be appropriately decreased so that the number
of shares of Common Stock issuable upon the exercise of this Warrant shall be
increased in proportion to such increase in outstanding shares.
(b) If, at any time during the term of this Warrant, the
number of shares of Common Stock outstanding is decreased by a combination of
the outstanding shares of Common Stock, then, following the record date for such
combination, the Warrant Price shall appropriately increase so that the number
of shares of Common Stock issuable upon the exercise hereof shall be decreased
in proportion to such decrease in outstanding shares.
(c) All calculations under this Section 5 shall be made to the
nearest cent or to the nearest 1/10th of a share, as the case may be.
(d) If the Company proposes to take any action of the types
described in Section 5(a) or (b), the Company shall forward at the same time and
in the same manner, to the Holder of this Warrant, such notice, if any, that the
Company shall give to the Holders of capital stock of the Company.
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<PAGE>
6. Transfers. The Company may deem and treat the person in whose name
this Warrant is registered as the Holder and owner hereof. Notwithstanding the
foregoing, the Warrant and all rights hereunder are not transferable in whole or
in part without the prior written consent of the Company and compliance with
that certain Loan and Warrant Purchase Agreement of even date herewith between
the Company and Holder, and any attempted transfer without such consent and such
compliance shall be void. Transferability of the Warrant Shares is limited as
set forth in this Warrant and in the Stockholders' Agreement.
7. Mergers, Consolidations, Sales. In the case of any proposed
consolidation or merger of the Company with another entity, or the proposed sale
of all or substantially all of its assets to another person or entity, or any
proposed reorganization or reclassification of the capital stock of the Company,
then, as a condition of any such consolidation, merger, sale, reorganization or
reclassification, lawful and adequate provision shall be made pursuant to which
the Holder of this Warrant shall thereafter have the right to receive upon the
basis and upon the terms and conditions specified herein, in lieu of the shares
of Common Stock of the Company immediately purchasable hereunder, such shares of
stock, securities or assets as may, by virtue of such consolidation, merger,
sale, reorganization or reclassification, be issued or payable with respect to
or in exchange for the number of shares of such Common Stock purchasable
hereunder immediately before such consolidation, merger, sale reorganization or
reclassification. The Company shall forward at the same time and in the same
manner, to the Holder of this Warrant, such notice, if any, that the Company
shall give to the Holders of capital stock of the Company with respect to any
proposed transaction described above or any distribution of assets of the
Company in dissolution or liquidation, or any extraordinary dividend or other
distribution on its Common Stock except out of earned surplus or by way of a
stock dividend payable in shares of its Common Stock. This Warrant shall be
binding upon any corporation or other person or entity succeeding to the Company
by merger, consolidation or acquisition of all or substantially all of the
Company's assets.
8. Registration Rights; Lockup Letter.
(a) If at any time prior to the expiration date of this
Warrant, the Company proposes to register any of its securities under the
Securities Act, whether or not for sale for its own account, on a form and in a
manner which would permit registration of shares of common stock for sale to the
public under the Securities Act, it will each such time give prompt written
notice to the Holder of its intention to do so, describing such securities and
specifying the form and manner and the other relevant facts involved in such
proposed registration, and upon the written request of the Holder delivered to
the Company within 30 days after the giving of any such notice (which request
shall specify the shares of Common Stock intended to be disposed of by the
Holder and the intended method of disposition thereof), the Company will take
every reasonable effort to effect the registration under the Securities Act,
subject to Sections 8(b) and (c) below, of all shares of Common Stock which the
Company has been so requested to register by the Holder to the extent requisite
to permit the disposition (in accordance with the intended methods thereof as
aforesaid) of the shares of Common Stock so to be registered, provided that:
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<PAGE>
(i) if, at any time after giving such written notice of its
intention to register any of its securities and prior to the effective
date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to
register such securities, the Company may, at its election, give
written notice of such determination to the Holder and thereupon shall
be relieved of its obligation to register any shares of Common Stock in
connection with such registration;
(ii) the Company shall not be obligated to effect any
registration of shares of Common Stock under this Section incidental to
the registration of any of its securities in connection with mergers,
acquisitions, exchange offers, dividend reinvestment plans, employee
stock ownership plans or stock option plans, thrift plans, pension
plans or other employee benefit plans; and
(iii) the Company shall not be obligated to effect any
registration of shares of Common Stock to the extent such shares are
validly excluded from an underwritten distribution pursuant to Section
8(b) below.
(b) If the managing underwriter for a firm commitment
underwritten registration advises the Company and the Holder of Common Stock
that, in the underwriter's opinion, the total amount of securities proposed to
be sold in such registration exceeds the amount of securities that can be sold
in such an offering without negatively affecting the offering or its price, then
the number of outstanding shares of Common Stock proposed to be included in such
offering by persons other than the Company and/or a stockholder exercising
so-called "demand" registration rights (but including Holder) shall be reduced
pro rata among the holders of all such Common Stock. Expenses of all
registrations (excluding underwriting discounts and fees, commissions and
transfer taxes) shall be paid by the Company, including the reasonable fees and
disbursements for one counsel for all non-Company sellers as a group.
(c) It shall be a condition precedent to the obligation of the
Company to take any action pursuant to this Section 8 in respect of the Warrant
Shares which are to be registered at the request of Holder that Holder shall
furnish to the Company such information regarding the Common Stock held by
Holder and the intended method of disposition thereof as the Company shall
reasonably request and as shall be required in connection with the action to be
taken by the Company.
(d) The Company shall not, without the Holder's written
consent, and the written consent of any Warrant Shares issued and outstanding,
enter into any agreement with any holder or prospective holder of any securities
of the Company that purports to grant "piggy back" registration rights unless
such rights are consistent with and expressly made subject to the rights and
priorities set forth in this Section 8.
(e) The Company will indemnify and hold harmless each Holder,
each of its managers, members, officers, directors, partners and agents, with
respect to each registration, qualification and compliance effected pursuant to
this Section 8 pursuant to an indemnity
6
<PAGE>
agreement or agreements in customary form. Holder will indemnify and hold
harmless the Company (and the underwriters if requested) and their control
persons with respect to any information provided by Holder for inclusion in a
registration statement, pursuant to an indemnity agreement or agreements in
customary form.
(f) Holder agrees to execute and deliver to the underwriters
in connection with any Company-initiated firm commitment underwritten offering
and registration a "lock-up" letter requested, if at all, by such underwriters,
regarding limitations on the transfer by Holder of Common Stock for a period
after effectiveness of such registration provided such "lock-up" letter is on
the same terms and conditions as are requested by the underwriters from all
other selling shareholders.
9. Notices. Any notice or other document required or permitted to be
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at ______________________________________,or to
such other address as shall have been furnished to the Company in writing by the
Holder. Any notice or other document required or permitted to be given or
delivered to the Company shall be delivered at or sent by registered or
certified mail to, the Company at 2231 East Camelback Road, Suite 324, Phoenix,
AZ 85016, or to such other address as shall have been furnished in writing to
the Holder by the Company. Any notice so addressed and mailed by registered or
certified mail shall be deemed to be given when so mailed. Any notice so
addressed and otherwise delivered shall be deemed to be given when actually
received by the addressee.
10. Special Protections. Notwithstanding any other provisions of this
Warrant, Holder shall be entitled to receive, with respect to the Warrant
Shares, any dilution protections or registration rights that are more favorable
than are set forth herein to the extent that such protections or rights are
granted by the Company during the term of this Warrant to or for the benefit of
any of Chad Little, James Layne or Lonnie Whittington (or any person or entity,
other than the Company, controlled by, controlling, or under common control with
any of the foregoing persons or entities) with respect to Common Stock held by
any of the foregoing persons or entities.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly and authorized officer as of this 25th day of April, 1997.
THE COMPANY:
ATTEST: SANDBOX ENTERTAINMENT CORPORATION
By: ________________________ By: __________________________
Its Secretary Its President
7
<PAGE>
FORM OF NOTICE OF EXERCISE
[To be signed only upon exercise of the Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
1. The undersigned hereby exercises the right to purchase ______ shares
of Common Stock that the undersigned is entitled to purchase by the terms of the
within Warrant according to the conditions thereof, and herewith makes payment
of the Warrant Price of such shares in full. All shares to be issued pursuant
hereto shall be issued in the name of and the initial address of such person to
be entered on the books of the Company shall be:
_______________________________________________________________________________.
The shares are to be issued in certificates of the following denominations:
_______________________________________________________________________________.
2. The undersigned hereby represents that the shares of the Company's
Common Stock to be delivered to it pursuant to the above-mentioned exercise of
the Warrant are being acquired by the undersigned as an investment and not with
a view to, or for sale in connection with, the distribution of any such shares.
The undersigned agrees to indemnify the Company and its subsidiaries, together
with their officers and directors, for any liabilities, losses, damages and
expenses (including reasonable attorney fees) arising from or in connection with
any disposition of the shares hereby being acquired, or any interest therein, in
violation of applicable securities laws or regulations. The undersigned further
represents that the undersigned has been given access to all information
requested by the undersigned to allow the undersigned to make a decision as to
the advisability of an investment in the Company's stock and the value of such
stock, and that undersigned has the skill and experience necessary to make such
decision. The undersigned also hereby agrees to be bound by, and to assume the
obligations of a Stockholder under, that certain Amended and Restated
Stockholders' Agreement dated as of July 13, 1995, by and among the Company and
the Stockholders party thereto, as the same may be amended from time to time.
[This paragraph 2 is not applicable if the Common Stock being acquired has been
registered under the Securities Act of 1933, as amended.]
___________________________________
[Type Name of Holder]
By: ____________________________
Title: ____________________________
Date: ____________________________
<PAGE>
Schedule to Exhibit 4(m) - Form of Stock Subscription Warrant dated April 25,
1997.
List of Warrant Holders:
April 25, 1997 Sandbox Warrants
Holder Additional Sandbox Warrants
- ------ ---------------------------
Terrance Morris 250
Thomas Lescault 500
Pickwick Group, L.L.C. 250
Douglas and Susan Greenwood 500
Geoffrey Herter 500
9
Exhibit 4(n)
BRIDGE NOTE AND WARRANT PURCHASE AGREEMENT
THIS BRIDGE NOTE AND WARRANT PURCHASE AGREEMENT (this
"Agreement") is made effective as of May 9, 1997 by and between Sandbox
Entertainment Corporation, a Delaware corporation ("Sandbox"), and
__________________, whose address is ____________________("Purchaser").
PREMISES: Sandbox desires to borrow $_________ (the "Loan") from
Purchaser, and Purchaser is willing to make such Loan to Sandbox in
consideration of Sandbox issuing to Purchaser a Convertible Promissory Note
evidencing the Loan in the form attached hereto as Exhibit I (the "Note") and a
warrant to purchase __________ shares of the Series A Preferred Stock, $.001 par
value, of Sandbox (the "Warrant Shares"), a form of which is attached to this
Agreement as Exhibit II (the "Warrant"), on the terms and subject to the
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement, Sandbox and Purchaser agree as follows:
1. Issuance, Sale and Delivery of the Note and the Warrant. At the
Closing (defined in Section 2) Sandbox agrees to issue and deliver to Purchaser
and Purchaser agrees to receive from Sandbox the Note and the Warrant in
consideration of Purchaser making the Loan to Sandbox .
2. Closing. The issuance and delivery of the Note and the Warrant shall
take place at the offices of Sandbox on April 30, 1997 at 10 a.m. local time, or
at such other location, date and time as may be agreed upon between Purchaser
and Sandbox (such transaction being the "Closing" and such date and time being
the "Closing Date"). At the Closing Sandbox shall issue and deliver to Purchaser
the Note and the Warrant registered in the name of Purchaser. In exchange for
such delivery, Purchaser shall deliver its check payable to the order of
"Sandbox Entertainment Corporation" in the amount of the Loan, or a wire
transfer of such amount, as agreed by the parties.
3. Representations and Warranties of Sandbox . Sandbox represents and
warrants to Purchaser as follows:
(a) Organization and Standing; Charter and Bylaws. Sandbox has
requisite corporate power and authority to own its property and to carry on its
business as presently conducted or as proposed to be conducted. Sandbox has all
requisite legal and corporate power to sell and issue the Note, Warrant and the
Warrant Shares to Purchaser and in all other respects to carry out and perform
its obligations under this Agreement.
<PAGE>
(b) Capitalization. The authorized capital stock of Sandbox is
set forth on Exhibit III attached hereto. All issued and outstanding shares of
Sandbox listed therein have been duly authorized and validly issued and are
fully paid and nonassessable. Sandbox has reserved sufficient shares of Series A
Preferred Stock and/or of Common Stock for the exercise and/or conversion of the
Series A Preferred Stock, stock options and warrants set forth in Exhibit III.
(c) Authorization. All corporate action on the part of Sandbox
necessary for the authorization, execution, and delivery of this Agreement, and
performance of all of Sandbox's obligations hereunder, including issuance and
delivery of the Note, the Warrant and the Warrant Shares, shall have been taken
prior to the Closing.
(d) Corporate Law Status. When the Note, Warrant, and the
Warrant Shares have been issued, delivered and paid for in accordance with this
Agreement, the Note, and the Warrant, they will be validly issued, fully paid
and non-assessable and will be free and clear of all liens, charges,
restrictions, claims and encumbrances imposed by or through any act or omission
on the part of Sandbox. With the exception of the rights of first offer held by
the holders of the Series A Preferred Stock of Sandbox pursuant to Section 2.1
of that certain Investor Rights Agreement (the "Investor Rights Agreement")
dated as of February 13, 1996 among Sandbox and certain Investors (as defined
therein), for which appropriate consents and waivers have been obtained, the
issuance, sale or delivery of the Note, the Warrant and the Warrant Shares are
not subject to any preemptive right of stockholders of Sandbox or to any right
of first refusal or other right in favor of any person that has not been waived
in writing.
(e) Validity. This Agreement has been duly executed and
delivered by Sandbox and constitutes the legal, valid and binding obligation of
Sandbox, enforceable in accordance with its terms, except as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditor's rights generally, and
except as enforceability may be subject to general principles of equity, whether
applied in a court of equity or at law or by an arbitration panel.
4. Representations and Warranties of Purchaser. Purchaser represents
and warrants to Sandbox, and where so stated, promises as follows:
(a) Unregistered Securities. Purchaser understands that the
Note, the Warrant and the Warrant Shares (the "Securities") have not been
registered under the Securities Act of 1933 or any state securities laws
(collectively, "Securities Laws") in reliance upon an exemption from
registration accorded for nonpublic offerings. Purchaser further recognizes that
the Securities may not be sold unless they and the transaction in which they are
to be sold has been registered under the Securities Laws or an exemption from
registration is available for such sale. Purchaser accepts that the Securities
will each bear a legend to that effect. Further, Purchaser recognizes that
Sandbox has made no representations as to registration of the Securities under
the Securities Laws.
2
<PAGE>
(b) Investment Intent. Purchaser is acquiring the Securities
for its own account for investment and not with a view to resale or
distribution. The Purchaser promises that it will not sell, hypothecate,
transfer or otherwise dispose of the Securities, or attempt so to do, unless
they have been registered, to the extent applicable, under the Securities Laws
or, in the opinion of counsel reasonably acceptable to Sandbox and its counsel,
an exemption from registration is available.
(c) Negotiation; Access to Information. The terms of
Purchaser's purchase of the Securities were established by negotiations between
Purchaser and Sandbox 's representative, and in connection therewith, Purchaser
was given access to the relevant information it requested concerning Sandbox 's
condition and operations, and the opportunity to ask questions of and receive
answers from Sandbox 's representatives. Purchaser is knowledgeable and
experienced in financial and business matters and, on the basis of the
information it received concerning Sandbox 's condition and operations,
Purchaser is in a position to make an informed investment decision concerning
its investment in the Securities and the risks attending such investment.
Further, in light of its financial position, Purchaser is able to bear the
economic risks of investment in the Securities.
(d) Accredited Investor. Purchaser acknowledges that he/she/it
is an "accredited investor" as defined in Rule 501 of Regulation D as
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933, as amended (the "Securities Act"), and shall submit to Sandbox such
further assurances of such status as may be reasonably requested by Sandbox.
(e) Legends; Stop Transfer Orders. Purchaser hereby consents
and agrees that Sandbox may imprint on any certificate evidencing the Securities
an appropriate legend or notification to the effect that such shares are not
freely transferable and may be transferred only in compliance with applicable
securities laws. Purchaser further consents and agrees that Sandbox may give
appropriate "stop order" instructions in this regard to any transfer agent for
the Securities.
(f) Compliance; Indemnity. Purchaser hereby expressly promises
not to offer for sale or sell any of the Securities, or any interest therein,
except in compliance with the Securities Act and other applicable securities
laws and regulations, including those of the State of Arizona. Purchaser hereby
promises to indemnify Sandbox , together with its officers and directors,
against any and all liabilities, losses, damages and expenses (including
reasonable attorney fees) arising (directly or indirectly) from or in connection
with Purchaser's disposition of any of the Securities, or any interest therein,
in violation of (or allegedly in violation of) applicable securities laws or
regulations, including all such expenses incurred in connection with the defense
against any such claim.
3
<PAGE>
(g) Delivery of Investment Letter upon Exercise of Warrant. At
the request of Sandbox, Purchaser shall deliver upon exercise of the Warrant an
investment letter in form and substance substantially to the effect of Sections
4(a)-(e) above.
5. Conditions to the Obligations of Purchaser. The obligation of
Purchaser to make the Loan and receive the Note and the Warrant on the Closing
Date is, at Purchaser's sole option, subject to satisfaction on or before the
Closing Date of the following conditions:
(a) Representations and Warranties to Be True. The
representations and warranties contained in Section 3 shall be true, complete
and correct on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of such date.
(b) Performance. Sandbox shall have performed and complied
with all agreements contained herein and required to be performed or complied
with by it prior to or at the Closing Date.
(c) Proceedings. All corporate and other proceedings to be
taken by Sandbox in connection with the transactions contemplated hereby and all
documents incident thereto shall be satisfactory in form and substance to
Purchaser and its counsel.
6. Conditions to the Obligations of Sandbox. The obligation of Sandbox
to issue the Note and the Warrant on the Closing Date is subject to satisfaction
on or before the Closing Date of the following condition:
(a) Consents and Waivers Received. Sandbox shall have obtained
all necessary consents and waivers from the Investors (as that term is defined
in the Investor Rights Agreement) pursuant to Section 2.1 of the Investor Rights
Agreement in connection with the issuance of the Note and the Warrant, including
but not limited to a consent to the treatment of the Warrant Shares and any
shares issuable to Purchaser upon conversion of the Note as "Shares" under the
Investor Rights Agreement and a waiver of the rights of first offer under the
Investor Rights Agreement by the Investors in connection with the issuance of
the Note and Warrant.
7. Miscellaneous.
(a) Survival. All covenants, representations and warranties
made herein shall survive the Closing.
(b) Governing Law. This Agreement shall be governed in all
respects by the laws of the State of Arizona as applied to agreements entered
into and performed entirely in the State of Arizona by residents thereof.
4
<PAGE>
(c) Notices. Any notice or other document required or
permitted to be given or delivered to Purchaser shall be delivered at, or sent
by certified or registered mail to, Purchaser at the address written on the
first page of this Agreement, or to such other address as shall have been
furnished to Sandbox in writing by Purchaser. Any notice or other document
required or permitted to be given or delivered to Sandbox shall be delivered at
or sent by registered or certified mail to, Sandbox at 2231 East Camelback Road,
Suite 324, Phoenix, AZ 85016, or to such other address as shall have been
furnished in writing to Purchaser by Sandbox. Any notice so addressed and mailed
by registered or certified mail shall be deemed to be given when so mailed. Any
notice so addressed and otherwise delivered shall be deemed to be given when
actually received by the addressee.
(d) Counterparts. This Agreement may be executed in
counterparts, each of which shall be enforceable against the party actually
executing the counterpart, and both of which together shall constitute one
instrument.
(e) Entire Agreement; Amendment. This Agreement constitutes
the sole and entire agreement of the parties with respect to the subject matter
hereof. Neither this Agreement nor any term hereof may be amended, waived,
discharged or terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or termination
is sought.
IN WITNESS WHEREOF, Sandbox and the Purchaser have executed this
Agreement as of the day and year first above written.
SANDBOX:
SANDBOX ENTERTAINMENT CORPORATION
By: _________________________
Title: _________________________
PURCHASER:
________________________________
By: _________________________
Title: _________________________
5
<PAGE>
EXHIBIT I
WARRANT
<PAGE>
EXHIBIT II
CONVERTIBLE PROMISSORY NOTE
<PAGE>
EXHIBIT III
SANDBOX ENTERTAINMENT CORPORATION
Capitalization Schedule
As of May 6, 1997
I. AUTHORIZED CAPITALIZATION
Total Common Stock, $.001 par value: 10,000,000
Total Series A Convertible Preferred Stock, $.001 par value: 3,500,000
----------
Total 13,500,000
II. OUTSTANDING
Total Common Outstanding 3,136,429
Total Preferred Outstanding 1,968,750
Total Outstanding 5,105,179
Total Warrants/Options Outstanding 1,096,616
---------
Total Common Outstanding - Fully Diluted1 6,201,795
- ---------------
1 Assumes exercise of all outstanding warrants and options and
conversion of all outstanding preferred.
<PAGE>
Schedule to Exhibit 4(n) - Form of Bridge Note and Warrant Purchase Agreement.
List of Purchasers:
Wasatch Venture Corporation
Newtek Ventures II, L.P.
Sundance Venture Partners, L.P.
Wayne Sorensen
Exhibit 4(o)
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1993, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
STOCK SUBSCRIPTION WARRANT
to Purchase _______ Shares of the
Series A Preferred Stock, $.001 Par Value, of
SANDBOX ENTERTAINMENT CORPORATION,
a Delaware corporation (the "Company")
DATE OF INITIAL ISSUANCE: May 9, 1997
THIS CERTIFIES THAT for value received, __________________, whose
address is _________________________________, or its permitted assigns
(hereinafter called the "Holder") is entitled to purchase from the Company, at
any time during the Term of this Warrant, __________ shares of Series A
Preferred Stock, $.001 par value, of the Company (subject to adjustment and to
conversion into a New Series Conversion Stock as provided herein), at the
Warrant Price, payable as provided herein upon the exercise of this Warrant. The
exercise of this Warrant shall be subject to the provisions, limitations and
restrictions herein contained and may be exercised in whole or in part.
1. Definitions. For all purposes of this Warrant, the following terms
shall have the meanings indicated:
Aggregate Loan Amount shall mean the aggregate principal face amount of all of
the series of Convertible Subordinated Promissory Notes of the Company issued in
connection with the Purchase Agreement having terms and conditions (but not
principal amounts) identical to the Convertible Subordinated Promissory Note
issued to Holder in connection with the Purchase Agreement.
Common Stock shall mean and include the Company's authorized Common Stock, $.001
par value, as constituted at the date of this Warrant, and shall also include
any capital stock of any class or series of the Company now or hereafter
authorized that is not limited to, or measured by, a fixed sum or percentage of
par value or of the purchase price of such stock in respect of the rights of the
holders thereof to participate in dividends and/or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Company, or that is not otherwise designated as "preferred stock" in the
Certificate of Incorporation of the Corporation.
<PAGE>
Equity Financing shall mean the issuance of any equity securities of the Company
in an equity financing or series of related equity financings for which the
aggregate gross proceeds total at least One Million Five Hundred Thousand
Dollars ($1,500,000) (excluding the Aggregate Loan Amount and any additional
amounts raised from any of the Initial Noteholders as part of such Equity
Financing).
New Series Conversion Price shall mean an amount equal to the price per share at
which the Company issues shares of such capital stock in the Equity Financing.
Initial Noteholders shall mean each of the initial holders of the series of
Convertible Subordinated Promissory Notes of the Company issued in connection
with the Purchase Agreement having terms and conditions (but not principal
amounts) identical to the Convertible Subordinated Promissory Note issued to
Holder in connection with the Purchase Agreement.
Purchase Agreement shall mean that certain Note and Warrant Purchase Agreement
of even date herewith between the Company and Holder pursuant to which Company
shall issue to Holder this Warrant and a Convertible Subordinated Promissory
Note.
Series A Preferred Stock shall mean and include the series of preferred stock of
the Company so denominated in the Certificate of Incorporation of the Company.
Term of this Warrant shall mean the period beginning on the date of initial
issuance hereof and ending on the seventh (7th) anniversary of the date of
initial issuance hereof.
Warrant Price shall mean Eighty Cents ($.80) per share, subject to adjustment in
accordance with Section 5, or, if the provisions of Section 9 hereof apply, the
New Series Conversion Price.
Warrant Shares shall mean the shares of Series A Preferred Stock purchased or
purchasable by the Holder of this Warrant upon exercise hereof, and/or the
shares of Common Stock purchased or purchasable upon exercise hereof.
2. Exercise of Warrant. The Warrant shall be exercised, if at all, only
as follows:
(a) To exercise this Warrant in whole or in part, the Holder
shall deliver to the Company at its principal office, at any time and from time
to time during the Term of this Warrant: (i) the notice of exercise in the form
attached hereto as Exhibit A, (ii) cash, certified or official bank check
payable to the order of the Company, wire transfer of funds to the Company's
account, or the surrender of evidence of any indebtedness of the Company to the
Holder (or any combination of the foregoing) in the amount of the Warrant Price
for each share being purchased, and (iii) this Warrant.
(b) Notwithstanding any contrary provisions in this Warrant,
if the Current Market Price (as defined in Section 2(c) below) exceeds the
Warrant Price at the date of calculation, instead of exercising this Warrant as
described in Section 2(a) above, the Holder may
2
<PAGE>
elect to receive Warrant Shares equal to the value of this Warrant (or the
portion thereof being exercised), by delivering to the Company at its principal
office, at any time and from time to time during the Term of this Warrant: (i)
the notice of exercise in the form attached hereto as Exhibit A, and (ii) this
Warrant, in which event the Company shall issue to the Holder a number of
Warrant Shares calculated using the following formula:
WS = WCS x (CMP-WP)
-------------------
CMP,
where WS = the number of Warrant Shares to be issued to the
Holder,
WCS = the number of Warrant Shares purchasable under the
Warrant, or if only a portion of the Warrant is
being exercised, the portion of the Warrant being
exercised at the date of such calculation,
CMP = the Current Market Price (as defined in Section
5(c) below) at the date of such calculation, and
WP = the Warrant Price, as adjusted to the date of such
calculation.
(c) For the purpose of any calculation made pursuant to this
Section 2, the "Current Market Price" at any date of one share of Common Stock
shall be deemed to be the average of the daily closing prices for the 20
consecutive business days ending 2 business days before such date (as adjusted
for any stock dividend, split, combination or reclassification that took effect
during such 20 business day period). The closing price for each day shall be the
last reported sales price regular way or, if no such reported sales took place
on such day, the average of the last reported bid and asked prices regular way,
in either case on the principal national securities exchange on which the Common
Stock is listed or admitted to trading (or if the Common Stock is not at the
time listed or admitted for trading on any such exchange, then such price as
shall be equal to the average of the last reported bid and asked prices, as
reported by the National Association of Securities Dealers Automated Quotations
System ("NASDAQ") on such day, or if, on any such date, the security shall not
be quoted on the NASDAQ, then such price shall be equal to the average of the
last reported bid and asked prices on such day as reported by The National
Quotations Bureau Incorporated or any similar reputable quotation and reporting
service, if such quotation is not reported by The National Quotation Bureau
Incorporated); provided, however, that if the Common Stock is not traded in such
manner that the quotations referred to in this Section 2(c) are available for
the period required hereunder, the Current Market Price shall be determined by
the Board of Directors of the Company in its reasonable, good faith judgment.
(d) Each certificate for Warrant Shares shall bear the
following legend (and any additional legend required by (i) any applicable state
securities laws, and (ii) any securities exchange upon which such Warrant Shares
may, at the time of such exercise be listed) on the face thereof:
3
<PAGE>
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION THEREFROM UNDER SAID
ACT AND APPLICABLE STATE SECURITIES LAWS."
3. Covenants As to Common Stock. The Company covenants and agrees that:
(i) all Warrant Shares that may be issued upon the exercise of this Warrant
will, upon issuance, be validly issued, fully paid and nonassessable, and free
from all taxes, liens and charges with respect to the issue thereof; (ii) it
will pay when due and payable any and all federal and state taxes (other than
federal or state income taxes, if any, which shall remain Holder's
responsibility) that may be payable in respect of the issue of this Warrant or
the Warrant Shares; (iii) it will at all times have authorized and reserved,
free from preemptive rights, a sufficient number shares of Series A Preferred
Stock and underlying Common Stock to provide for the exercise of the rights
represented by this Warrant; (iv) if any shares of capital stock to be reserved
for the purpose of the issuance of shares upon the exercise of this Warrant
require registration with or approval of any governmental authority under any
federal or state law before such shares may be validly issued or delivered upon
exercise, then the Company shall in good faith and as expeditiously as possible
endeavor to secure such registration or approval, as the case may be; and (v) if
the Series A Preferred Stock or, if applicable, the New Series Conversion Stock,
issuable under this Warrant has been converted to Common Stock and if and so
long as any Common Stock issuable upon the exercise of this Warrant is listed on
any national securities exchange, the Company, will, if permitted by the rules
of such exchange, list and keep listed on such exchange, upon official notice of
issuance, all shares of such Common Stock issuable upon exercise of this
Warrant.
4. Adjustment of Number of Shares. Upon each adjustment of the Warrant
Price as provided in Section 5 below, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest 1/10th of a share) obtained by multiplying the
Warrant Price in effect immediately before such adjustment by the number of
shares purchasable pursuant hereto immediately before such adjustment, and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
5. Adjustment of Warrant Price. The Warrant Price shall be subject to
adjustment from time to time as follows:
(a) If, at any time during the term of this Warrant, the
number of shares of Series A Preferred Stock outstanding is increased by a stock
dividend payable in shares of Series A Preferred Stock or by a subdivision or
split-up of shares of Series A Preferred Stock, then, following the record date
fixed for the determination of Holders of Series A Preferred Stock entitled to
receive such stock dividend, subdivision or split-up, the Warrant Price shall be
appropriately decreased so that the number of shares of Series A Preferred Stock
issuable upon the exercise of this Warrant shall be increased in proportion to
such increase in outstanding shares.
4
<PAGE>
(b) If, at any time during the term of this Warrant, the
number of shares of Series A Preferred Stock outstanding is decreased by a
combination of the outstanding shares of Series A Preferred Stock, then,
following the record date for such combination, the Warrant Price shall
appropriately increase so that the number of shares of Series A Preferred Stock
issuable upon the exercise hereof shall be decreased in proportion to such
decrease in outstanding shares.
(c) If all of the outstanding shares of Series A Preferred
Stock of the Company have been converted to Common Stock pursuant to Article
IV(4)(b) of the Certificate of Incorporation of Company (or any successor
section thereof) or if any action of the type described in Section 5(a) or (b)
occurs with respect to the Common Stock, then this Section 5 shall apply in the
same manner to such Common Stock in order to effect the appropriate adjustments
in the Warrant Price and number of shares of Common Stock to be issued
hereunder.
(d) All calculations under this Section 5 shall be made to the
nearest cent or to the nearest 1/10th of a share, as the case may be.
(e) If the Company proposes to take any action of the types
described in Section 5(a), (b) or (c), the Company shall forward at the same
time and in the same manner, to the Holder of this Warrant, such notice, if any,
that the Company shall give to the Holders of capital stock of the Company.
6. Transfers. The Company may deem and treat the person in whose name
this Warrant is registered as the Holder and owner hereof. Transferability of
the Warrant Shares is limited as set forth in this Warrant.
7. Mergers, Consolidations, Sales. In the case of any proposed
consolidation or merger of the Company with another entity, or the proposed sale
of all or substantially all of its assets to another person or entity, or any
proposed reorganization or reclassification of the capital stock of the Company,
then, as a condition of any such consolidation, merger, sale, reorganization or
reclassification, lawful and adequate provision shall be made pursuant to which
the Holder of this Warrant shall thereafter have the right to receive upon the
basis and upon the terms and conditions specified herein, in lieu of the Warrant
Shares immediately purchasable hereunder, such shares of stock, securities or
assets as may, by virtue of such consolidation, merger, sale, reorganization or
reclassification, be issued or payable with respect to or in exchange for the
number of shares of such Warrant Shares purchasable hereunder immediately before
such consolidation, merger, sale reorganization or reclassification. The Company
shall forward at the same time and in the same manner, to the Holder of this
Warrant, such notice, if any, that the Company shall give to the Holders of
capital stock of the Company with respect to any proposed transaction described
above or any distribution of assets of the Company in dissolution or
liquidation, or any extraordinary dividend or other distribution on its Series A
Preferred Stock except out of earned surplus or by way of a stock dividend
payable in shares of its Series A Preferred Stock. This Warrant shall be binding
upon any corporation or other person or entity succeeding to the Company by
merger, consolidation or acquisition of all or substantially all of the
Company's assets.
5
<PAGE>
8. Registration Rights. The Company and Holder agree that the Warrant
Shares issuable pursuant this Warrant shall be deemed to be "Shares" under that
certain Investor Rights Agreement dated as of February 13, 1996 (the "Investor
Rights Agreement") among the Company and certain Investors (as defined therein)
and that the Warrant Shares shall be entitled to all the rights and subject to
all of the restrictions as Shares under the Investor Rights Agreement. Pursuant
to a Consent and Waiver, the Investors shall have agreed prior to the execution
of this Warrant to the inclusion of the Warrant Shares as "Shares" under the
Investor Rights Agreement.
9. Conversion if an Equity Financing Occurs within Six Months. If an
Equity Financing closes within one hundred eighty (180) days of the date hereof,
the following definitions shall automatically change as follows:
(a) Warrant Price shall mean the New Series Conversion Price.
10. Miscellaneous.
(a) Notices. Any notice or other document required or
permitted to be given or delivered to the Holder shall be delivered at, or sent
by certified or registered mail to, the Holder at the address set forth on the
first page of this Warrant, or to such other address as shall have been
furnished to the Company in writing by the Holder. Any notice or other document
required or permitted to be given or delivered to the Company shall be delivered
at or sent by registered or certified mail to, the Company at 2231 East
Camelback Road, Suite 324, Phoenix, AZ 85016, or to such other address as shall
have been furnished in writing to the Holder by the Company. Any notice so
addressed and mailed by registered or certified mail shall be deemed to be given
when so mailed. Any notice so addressed and otherwise delivered shall be deemed
to be given when actually received by the addressee.
(b) Governing Law. This Warrant shall be governed in all
respects by the laws of the State of Arizona as applied to agreements entered
into and performed entirely in the State of Arizona by residents thereof.
(c) Entire Agreement; Amendment. This Warrant constitutes the
sole and entire agreement of the parties with respect to the subject matter
hereof. Neither this Warrant nor any term hereof may be amended, waived,
discharged or terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or termination
is sought.
(d) Counterparts. This Agreement may be executed in
counterparts, each of which shall be enforceable against the party actually
executing the counterpart, and both of which together shall constitute one
instrument.
6
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly and authorized officer as of this 9th day of May, 1997.
THE COMPANY:
ATTEST: SANDBOX ENTERTAINMENT CORPORATION
By: ________________________ By: ________________________________
Its Secretary Its President
ACCEPTED:
HOLDER:
_____________________________________
By: _______________________________
Title: ____________________________
7
<PAGE>
FORM OF NOTICE OF EXERCISE
[To be signed only upon exercise of the Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
1. The undersigned hereby exercises the right to purchase ________
shares of Series A Preferred Stock (or Common Stock, if applicable) that the
undersigned is entitled to purchase by the terms of the within Warrant according
to the conditions thereof, and herewith makes payment of the Warrant Price of
such shares in full. All shares to be issued pursuant hereto shall be issued in
the name of and the initial address of such person to be entered on the books of
the Company shall be:
_______________________________________________________________________________.
The shares are to be issued in certificates of the following denominations:
_______________________________________________________________________________.
2. The undersigned hereby represents that the shares of the Company's
Series A Preferred Stock (or Common Stock, if applicable) to be delivered to it
pursuant to the above-mentioned exercise of the Warrant are being acquired by
the undersigned as an investment and not with a view to, or for sale in
connection with, the distribution of any such shares. The undersigned agrees to
indemnify the Company and its subsidiaries, together with their officers and
directors, for any liabilities, losses, damages and expenses (including
reasonable attorney fees) arising from or in connection with any disposition of
the shares hereby being acquired, or any interest therein, in violation of
applicable securities laws or regulations. The undersigned further represents
that the undersigned has been given access to all information requested by the
undersigned to allow the undersigned to make a decision as to the advisability
of an investment in the Company's stock and the value of such stock, and that
undersigned has the skill and experience necessary to make such decision.
____________________________________
[Type Name of Holder]
By: _____________________________
Title: _____________________________
Date: _____________________________
<PAGE>
Schedule to Exhibit 4(o) - Form Stock Subscription Warrant dated May 9, 1997.
List of Warrant Holders and Number of Series A Preferred Shares:
Wasatch Venture Corporation - 50,000 shares
Newtek Ventures II, L.P. - 25,000 shares
Sundance Venture Partners, L.P. - 50,000 shares
Wayne Sorensen - 10,000 shares
9
Exhibit 4(p)
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECATED UNTIL REGISTERED UNDER THE ACT OR, IN THE
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY, SUCH
OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
SANDBOX ENTERTAINMENT CORPORATION
CONVERTIBLE SUBORDINATED PROMISSORY NOTE
----------------------------------------
May 9, 1997 $________
For value received, subject to the terms and conditions of this Note,
Sandbox Entertainment Corporation, a Delaware corporation (the "Company"),
hereby promises to pay to the order of ________________________, whose address
is ____________________________, or its permitted assigns (the "Holder") the
principal sum of ____________________Dollars ($________) plus simple interest
accrued on unpaid principal from the date hereof until paid (or converted, as
provided in Section 2) at the rate of ten percent (10%) per annum, or, at
Holder's option to convert such amount into equity securities of the Company as
provided in Section 2 hereof. Subject to the terms and conditions of this Note,
the unpaid principal amount of this Note and the unpaid interest accrued thereon
shall be payable in full at the principal office of the Company one year
following the date hereof.
The following is a statement of the rights of the holder of this Note
and the terms and conditions to which this Note is subject, and to which the
holder hereof, by the acceptance of this Note, agrees:
1. Definitions. Unless the context otherwise requires, as used in this
Note, the following terms shall have the following meanings:
1.1 "Aggregate Loan Amount" shall mean the aggregate principal
face amount of all the Notes.
1.2 "Aggregate Outstanding Indebtedness" shall mean the
aggregate unpaid principal under all the Notes at the time in question.
1.3 "Company" includes any corporation or other entity that
shall succeed to or assume the obligations of the Company under this Note.
1.4 "Conversion Price" shall respectively mean the Series A
Conversion Price or the New Series Conversion Price.
<PAGE>
1.5 "Conversion Stock" shall mean Series A Conversion Stock or
the New Series Conversion Stock.
1.6 "Equity Financing" shall mean the issuance of any equity
securities of the Company in an equity financing or series of related equity
financings for which the aggregate gross proceeds total at least One Million
Five Hundred Thousand Dollars ($1,500,000) (excluding the Aggregate Loan Amount
and any additional amounts raised from any of the initial Noteholders as part of
such Equity Financing).
1.7 "Notes" means the series of Convertible Promissory Notes
of the Company (of which this Note is one) having terms and conditions (but not
principal amounts) identical to this Note.
1.8 "Noteholder," "Holder," or similar terms, when the context
refers to a holder of this Note, shall mean any person who shall at the time be
the registered holder of this Note.
1.9 "New Series Conversion Stock" shall mean the class or
series of the Company's capital stock that is sold by the Company in the Equity
Financing.
1.10 "New Series Conversion Price" shall mean an amount equal
to the price per share at which the Company issues shares of such capital stock
in the Equity Financing.
1.11 "Sale of the Company" shall mean (a) any merger,
consolidation, or other corporate reorganization in which the shareholders of
the Company immediately prior to the transaction do not own a majority of the
outstanding shares of the surviving corporation, or (b) any transaction or
series of related transactions in which in excess of 50% of the Company's voting
power is transferred or in which all or substantially all of the assets of the
Company are sold.
1.12 "Senior Indebtedness" shall mean the principal of and
unpaid accrued interest on: (i) all indebtedness of the Company to commercial
banks or other financial institutions regularly engaged in the business of
lending money, which is for money borrowed by the Company now or hereafter
(whether or not secured), and (ii) any such indebtedness or any debentures,
notes or other evidence of indebtedness issued in exchange for such Senior
Indebtedness, or any indebtedness arising from the satisfaction of such Senior
Indebtedness by a guarantor.
1.13 "Series A Conversion Price" shall mean $0.80 price per
share.
1.14 "Series A Conversion Stock" shall mean the Series A
Preferred Stock of the Company.
2
<PAGE>
2. Conversion.
2.1 Upon an Equity Financing. If prior to the closing of the
Equity Financing within one hundred eighty (180) days from the date hereof (a)
the Company has not paid the entire unpaid principal amount of this Note and all
interest accrued thereon and (b) a conversion has not occurred pursuant to this
Section 2 with respect to the entire unpaid principal amount of this Note and
all interest accrued thereon, then upon the closing of the Equity Financing, the
entire unpaid principal amount of this Note shall automatically be converted
into shares of New Series Conversion Stock at the New Series Conversion Price,
and the Company shall pay any accrued, but unpaid interest. The Company shall
provide the Holder with twenty (20) days prior written notice of the occurrence
of an Equity Financing and the proposed terms thereof. Noteholder agrees to
execute and deliver to the Company, at the closing of the Equity Financing, any
and all documents with respect to such Equity Financing required to be signed by
investors in such Equity Financing ("Financing Documents"). Noteholder shall not
be entitled to receive any stock certificate representing shares of New Series
Conversion Stock to be issued upon conversion of this Note until this Note is
surrendered to the Company for cancellation and all relevant Financing Documents
have been duly executed by Noteholder and delivered to the Company.
2.2 Upon a Sale of the Company, Prepayment or After 180 Days.
From and after the one hundred and eightieth (180th) day following the date
hereof, immediately upon a Sale of the Company, or in the event Maker provides
Holder with written notification of Maker's intent to prepay this Note, Holder
shall have the option to convert the unpaid principal amount of this Note into
shares of Series A Conversion Stock at the Series A Conversion Price pursuant to
the form of Notice of Conversion attached hereto as Exhibit I. Noteholder shall
not be entitled to receive any stock certificate representing such Series A
Conversion Stock until this Note is surrendered to the Company for cancellation.
3. Issuance of Conversion Stock. As soon as practicable after
conversion of this Note into the applicable Conversion Stock as provided herein,
payment of any accrued but unpaid interest, and the surrender of this Note to
the Company at its principal office, the Company, at its expense, will cause to
be issued in the name of and delivered to the holder of this Note, a stock
certificate or certificates for the number of shares of Conversion Stock to
which the holder of this Note shall be entitled upon such conversion (bearing
such legends as may be required by applicable state and federal securities laws
in the opinion of legal counsel of the Company). If on any conversion of this
Note a fraction of a share results, then the Company will pay the Noteholder the
cash value of that fractional share, calculated on the basis of the applicable
Conversion Price.
4. Fully Paid Shares. All shares of Conversion Stock issued upon the
conversion of this Note shall be validly issued, fully paid and non-assessable.
3
<PAGE>
5. Subordination. The indebtedness evidenced by this Note (but not
Holder's conversion rights) is hereby expressly subordinated, to the extent and
in the manner hereinafter set forth herein, in right of payment to the prior
payment in full of all the Company's Senior Indebtedness.
5.1 Default on Senior Indebtedness. Upon any receivership,
insolvency, assignment for the benefit of creditors, bankruptcy, reorganization
or arrangements with creditors (whether or not pursuant to bankruptcy or other
insolvency laws), dissolution, liquidation or other marshaling of the assets and
liabilities of the Company (i) no amount shall be paid by the Company in respect
of the principal of or interest on this Note at the time outstanding, unless and
until any defaults on the Senior Indebtedness have been cured or waived or shall
have ceased to exist and principal and interest on such obligations has ben paid
current, and (ii) no claim or proof of claim shall be filed with the Company by
or on behalf of the Holder which shall assert any right to receive any payments
in respect of principal or interest on this Note except in the event that any
defaults on the Senior Indebtedness have been cured or waived or shall have
ceased to exist. If there occurs an event of default that has been declared in
writing with respect to any Senior Indebtedness, or in the instrument under
which it is outstanding, permitting the holder of such Senior Indebtedness to
accelerate the maturity thereof, then, unless and until such event of default
shall have been cured or waived or shall have ceased to exist, or all Senior
Indebtedness shall have been paid in full, no payment shall be made in respect
of the principal of or interest on this Note without the approval of the holders
of the Senior Indebtedness.
5.2 Undertaking. By its acceptance of this Note, the Holder
agrees to execute and deliver such documents as may be reasonably requested from
time to time by the Company or the lender of any Senior Indebtedness in order to
implement the foregoing provisions of this Section 5.
6. No Rights or Liabilities as Stockholder. This Note does not by
itself entitle the Noteholder to any voting rights or other rights as a
stockholder of the Company. In the absence of conversion of this Note, no
provisions of this Note, and no enumeration herein of the rights or privileges
of the holder shall cause such holder to be a stockholder of the Company for any
purpose.
7. No Impairment. The Company will not willfully avoid or seek to avoid
the observance or performance of any of the terms of this Note, 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 Noteholder against impairment. Without limiting the generality
of the foregoing, the Company 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 Conversion Stock upon any conversion of this Note.
8. Prepayment. The Company may at any time, without penalty, prepay in
whole or in part the principal amount, and/or any accrued interest outstanding
under this Note, provided that Maker shall first have given Holder at least 5
days prior written notice of Maker's intent to
4
<PAGE>
prepay, and Holder has not exercised its conversion right under Section 2.2. Any
prepaying shall be applied first to unpaid accrued interest until all such
interest has been paid, and then to unpaid principal. Any prepaying of this Note
shall be made pro rata among all holders of outstanding Notes according to the
original principal face amount of each such holder's Note.
9. Event of Default. The principal amount due hereunder together with
all accrued interest to date will accelerate and become due if an Event of
Default (as hereinafter defined) occurs. An "Event of Default" shall exist under
this Note if the Company: (i) petitions or applies to any tribunal for or
consents to the appointment of a receiver, (ii) admits in writing its inability
to pay the debts as they mature, (iii) makes a general assignment for the
benefit of its creditors, (iv) is adjudicated bankrupt or insolvent, or (v)
files voluntarily or has filed against it a petition in bankruptcy or a petition
or an answer seeking reorganization or an arrangement with creditors or to take
advantage of any bankruptcy, reorganization, insolvency, readjustment of debts,
dissolution or liquidation law or statute.
10. Restrictions on Transfer. Noteholder acknowledges that this Note
and the Conversion Stock issuable upon its conversion have not been registered
or qualified under federal or state securities laws. Accordingly, the
representations and warranties to be made by Noteholder in the Bridge Note and
Warrant Purchase Agreement, or similar agreement, to which the Company and the
original Noteholder will become parties (the "Purchase Agreement") shall be
deemed included herein and shall pertain to this Note and the Conversion Stock
issuable hereunder as though fully set forth herein. By acceptance of this Note,
the registered holder represents that the registered holder is purchasing this
Note for its own account and not with a view to, or for sale in connection with,
any distribution of this Note or the securities issuable upon conversion of this
Note.
11. Amendment; Waiver. Any term of this Note may be amended, and the
observance of any term of this Note may be waived (either generally or in a
particular instance and either retroactively or prospectively) only by the
written consent of the Company and the holders of Notes representing fifty-one
percent (51%) of the Aggregate Outstanding Indebtedness. Any amendment or waiver
effected in accordance with the previous sentence shall be binding upon each
holder (whether or not such holder consented to such amendment or waiver) and
each future holder or transferee of the Note and the Company.
12. Assignment. This Note may be assigned by the holder only with the
Company's prior written consent, only in compliance with the provisions of the
Purchase Agreement, and only if the assignee of this Note acknowledges in
writing to the Company that it is bound by all the terms and conditions of this
Note; provided that this Note may be assigned without such consent if assigned
or transferred to a Noteholder's general or limited partners.
13. Headings; References. The headings in this Note are for purposes of
convenience of reference only, and shall not be deemed to constitute a part of
this Note. Unless otherwise expressly noted, all references to Sections in this
Note refer to Sections of this Note.
5
<PAGE>
14. Registration Rights. The Company and Noteholder agree that the
Conversion Shares issuable pursuant this Note shall be deemed to be "Shares"
under that certain Investor Rights Agreement dated as of February 13, 1996 (the
"Investor Rights Agreement") among the Company and certain Investors (as defined
therein) and that the Conversion Shares shall be entitled to all the rights and
subject to all of the restrictions as Shares under the Investor Rights
Agreement. Pursuant to a Consent and Waiver, the Investors shall have agreed
prior to the execution of this Note to the inclusion of the Conversion Shares as
"Shares" under the Investor Rights Agreement.
15. Notices. Any notice or other document required or permitted to be
given or delivered to Noteholder shall be delivered at, or sent by certified or
registered mail to, Noteholder at the address written on the first page of the
Purchase Agreement, or to such other address as shall have been furnished to
Company in writing by Noteholder. Any notice or other document required or
permitted to be given or delivered to Company shall be delivered at or sent by
registered or certified mail to, Company at 2231 East Camelback Road, Suite 324,
Phoenix, AZ 85016, or to such other address as shall have been furnished in
writing to Noteholder by Company. Any notice so addressed and mailed by
registered or certified mail shall be deemed to be given when so mailed. Any
notice so addressed and otherwise delivered shall be deemed to be given when
actually received by the addressee.
16. Law Governing. This Note shall be construed and enforced in
accordance with, and governed by, the internal laws of the State of Arizona,
excluding the body of law applicable to conflicts of law.
17. Attorneys' Fees; Waiver of Presentment. The Company promises to pay
the holder hereof, without demand, all reasonable attorneys fees, costs and
other expenses incurred by such holder in enforcing any provision of this Note
and hereby waives presentment, notice of nonpayment, notice of dishonor,
protest, demand and diligence.
18. Terms Binding. By acceptance of this Note, the holder of this Note
(and each subsequent holder of this Note) accepts and agrees to be bound by all
the terms and conditions of this Note.
IN WITNESS WHEREOF, the Company has caused this Note to be signed in
its name the date first written above.
SANDBOX ENTERTAINMENT CORPORATION
By: _____________________________
Name:____________________________
Title:___________________________
6
<PAGE>
EXHIBIT I
FORM OF NOTICE OF CONVERSION
[To be signed only upon conversion of the Note pursuant to Section 2.2]
TO BE EXECUTED BY THE REGISTERED HOLDER TO CONVERT
THE WITHIN CONVERTIBLE SUBORDINATED PROMISSORY NOTE
1. The undersigned hereby exercises the right to purchase ___ shares of
Series A Preferred Stock that the undersigned is entitled to purchase by the
terms of the within Convertible Subordinated Promissory Note according to the
conditions thereof, and herewith makes payment of $0.80 per share for each share
of Series A Preferred Stock by surrendering the Note for conversion and
cancellation. All shares to be issued pursuant hereto shall be issued in the
name of and the initial address of such person to be entered on the books of the
Company shall be:
_______________________________________________________________________________.
The shares are to be issued in certificates of the following denominations:
_______________________________________________________________________________.
2. The undersigned hereby represents that the shares of the Company's
Series A Preferred Stock to be delivered to it pursuant to the above-mentioned
exercise of the Warrant are being acquired by the undersigned as an investment
and not with a view to, or for sale in connection with, the distribution of any
such shares. The undersigned agrees to indemnify the Company and its
subsidiaries, together with their officers and directors, for any liabilities,
losses, damages and expenses (including reasonable attorney fees) arising from
or in connection with any disposition of the shares hereby being acquired, or
any interest therein, in violation of applicable securities laws or regulations.
The undersigned further represents that the undersigned has been given access to
all information requested by the undersigned to allow the undersigned to make a
decision as to the advisability of an investment in the Company's stock and the
value of such stock, and that undersigned has the skill and experience necessary
to make such decision.
______________________________________
[Type Name of Holder]
By: _______________________________
Title: _______________________________
Date: _______________________________
<PAGE>
Schedule to Exhibit 4(p) - Form of Convertible Subordinated Promissory Note date
May 9, 1997.
List of Holders and Principal Amounts of Promissory Notes:
Wasatch Venture Corporation - $100,000
Newtek Ventures II, L.P. - $50,000
Sundance Venture Partners, L.P. - $100,000
Wayne Sorensen - $20,000
Exhibit 4(q)
JULY 1997 BRIDGE NOTE AND WARRANT PURCHASE AGREEMENT
THIS JULY 1997 BRIDGE NOTE AND WARRANT PURCHASE AGREEMENT (this
"Agreement") is made effective as of July 25, 1997 by and between Sandbox
Entertainment Corporation, a Delaware corporation ("Sandbox"), and
___________________________, whose address is __________________________________
("Purchaser").
PREMISES: Sandbox desires to borrow $_______ (the "Loan") from
Purchaser, and Purchaser is willing to make such Loan to Sandbox in
consideration of Sandbox issuing to Purchaser a Convertible Promissory Note
evidencing the Loan in the form attached hereto as Exhibit I (the "Note") and a
warrant to purchase _______ shares of the Series A Preferred Stock, $.001 par
value, of Sandbox (the "Warrant Shares"), a form of which is attached to this
Agreement as Exhibit II (the "Warrant"), on the terms and subject to the
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement, Sandbox and Purchaser agree as follows:
1. Issuance, Sale and Delivery of the Note and the Warrant. At the
Closing (defined in Section 2) Sandbox agrees to issue and deliver to Purchaser
and Purchaser agrees to receive from Sandbox the Note and the Warrant in
consideration of Purchaser making the Loan to Sandbox .
2. Closing. The issuance and delivery of the Note and the Warrant shall
take place at the offices of Sandbox on July 25, 1997 at 10 a.m. local time, or
at such other location, date and time as may be agreed upon between Purchaser
and Sandbox (such transaction being the "Closing" and such date and time being
the "Closing Date"). At the Closing Sandbox shall issue and deliver to Purchaser
the Note and the Warrant registered in the name of Purchaser. In exchange for
such delivery, Purchaser shall deliver its check payable to the order of
"Sandbox Entertainment Corporation" in the amount of the Loan, or a wire
transfer of such amount, as agreed by the parties.
3. Representations and Warranties of Sandbox. Sandbox represents and
warrants to Purchaser as follows:
(a) Organization and Standing; Charter and Bylaws. Sandbox has
requisite corporate power and authority to own its property and to carry on its
business as presently conducted or as proposed to be conducted. Sandbox has all
requisite legal and corporate power to sell and issue the Note, Warrant and the
Warrant Shares to Purchaser and in all other respects to carry out and perform
its obligations under this Agreement.
(b) Capitalization. The authorized capital stock of Sandbox is
set forth on Exhibit III attached hereto. All issued and outstanding shares of
Sandbox listed therein have been
<PAGE>
duly authorized and validly issued and are fully paid and nonassessable. Sandbox
has reserved sufficient shares of Series A Preferred Stock and/or of Common
Stock for the exercise and/or conversion of the Series A Preferred Stock, stock
options and warrants set forth in Exhibit III.
(c) Authorization. All corporate action on the part of Sandbox
necessary for the authorization, execution, and delivery of this Agreement, and
performance of all of Sandbox's obligations hereunder, including issuance and
delivery of the Note, the Warrant and the Warrant Shares, shall have been taken
prior to the Closing.
(d) Corporate Law Status. When the Note, Warrant, and the
Warrant Shares have been issued, delivered and paid for in accordance with this
Agreement, the Note, and the Warrant, they will be validly issued, fully paid
and non-assessable and will be free and clear of all liens, charges,
restrictions, claims and encumbrances imposed by or through any act or omission
on the part of Sandbox. With the exception of the rights of first offer held by
the holders of the Series A Preferred Stock of Sandbox pursuant to Section 2.1
of that certain Investor Rights Agreement (the "Investor Rights Agreement")
dated as of February 13, 1996 among Sandbox and certain Investors (as defined
therein), for which appropriate consents and waivers have been obtained, the
issuance, sale or delivery of the Note, the Warrant and the Warrant Shares are
not subject to any preemptive right of stockholders of Sandbox or to any right
of first refusal or other right in favor of any person that has not been waived
in writing.
(e) Validity. This Agreement has been duly executed and
delivered by Sandbox and constitutes the legal, valid and binding obligation of
Sandbox, enforceable in accordance with its terms, except as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditor's rights generally, and
except as enforceability may be subject to general principles of equity, whether
applied in a court of equity or at law or by an arbitration panel.
4. Representations and Warranties of Purchaser. Purchaser represents
and warrants to Sandbox, and where so stated, promises as follows:
(a) Unregistered Securities. Purchaser understands that the
Note, the Warrant and the Warrant Shares (the "Securities") have not been
registered under the Securities Act of 1933 or any state securities laws
(collectively, "Securities Laws") in reliance upon an exemption from
registration accorded for nonpublic offerings. Purchaser further recognizes that
the Securities may not be sold unless they and the transaction in which they are
to be sold has been registered under the Securities Laws or an exemption from
registration is available for such sale. Purchaser accepts that the Securities
will each bear a legend to that effect. Further, Purchaser recognizes that
Sandbox has made no representations as to registration of the Securities under
the Securities Laws.
(b) Investment Intent. Purchaser is acquiring the Securities
for its own account for investment and not with a view to resale or
distribution. The Purchaser promises that it will not sell, hypothecate,
transfer or otherwise dispose of the Securities, or attempt so to do,
2
<PAGE>
unless they have been registered, to the extent applicable, under the Securities
Laws or, in the opinion of counsel reasonably acceptable to Sandbox and its
counsel, an exemption from registration is available.
(c) Negotiation; Access to Information. The terms of
Purchaser's purchase of the Securities were established by negotiations between
Purchaser and Sandbox 's representative, and in connection therewith, Purchaser
was given access to the relevant information it requested concerning Sandbox 's
condition and operations, and the opportunity to ask questions of and receive
answers from Sandbox 's representatives. Purchaser is knowledgeable and
experienced in financial and business matters and, on the basis of the
information it received concerning Sandbox 's condition and operations,
Purchaser is in a position to make an informed investment decision concerning
its investment in the Securities and the risks attending such investment.
Further, in light of its financial position, Purchaser is able to bear the
economic risks of investment in the Securities.
(d) Accredited Investor. Purchaser acknowledges that he/she/it
is an "accredited investor" as defined in Rule 501 of Regulation D as
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933, as amended (the "Securities Act"), and shall submit to Sandbox such
further assurances of such status as may be reasonably requested by Sandbox.
(e) Legends; Stop Transfer Orders. Purchaser hereby consents
and agrees that Sandbox may imprint on any certificate evidencing the Securities
an appropriate legend or notification to the effect that such shares are not
freely transferable and may be transferred only in compliance with applicable
securities laws. Purchaser further consents and agrees that Sandbox may give
appropriate "stop order" instructions in this regard to any transfer agent for
the Securities.
(f) Compliance; Indemnity. Purchaser hereby expressly promises
not to offer for sale or sell any of the Securities, or any interest therein,
except in compliance with the Securities Act and other applicable securities
laws and regulations, including those of the State of Arizona. Purchaser hereby
promises to indemnify Sandbox , together with its officers and directors,
against any and all liabilities, losses, damages and expenses (including
reasonable attorney fees) arising (directly or indirectly) from or in connection
with Purchaser's disposition of any of the Securities, or any interest therein,
in violation of (or allegedly in violation of) applicable securities laws or
regulations, including all such expenses incurred in connection with the defense
against any such claim.
(g) Delivery of Investment Letter upon Exercise of Warrant. At
the request of Sandbox, Purchaser shall deliver upon exercise of the Warrant an
investment letter in form and substance substantially to the effect of Sections
4(a)-(e) above.
3
<PAGE>
5. Conditions to the Obligations of Purchaser. The obligation of
Purchaser to make the Loan and receive the Note and the Warrant on the Closing
Date is, at Purchaser's sole option, subject to satisfaction on or before the
Closing Date of the following conditions:
(a) Representations and Warranties to Be True. The
representations and warranties contained in Section 3 shall be true, complete
and correct on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of such date.
(b) Performance. Sandbox shall have performed and complied
with all agreements contained herein and required to be performed or complied
with by it prior to or at the Closing Date.
(c) Proceedings. All corporate and other proceedings to be
taken by Sandbox in connection with the transactions contemplated hereby and all
documents incident thereto shall be satisfactory in form and substance to
Purchaser and its counsel.
6. Conditions to the Obligations of Sandbox. The obligation of Sandbox
to issue the Note and the Warrant on the Closing Date is subject to satisfaction
on or before the Closing Date of the following condition:
(a) Consents and Waivers Received. Sandbox shall have obtained
all necessary consents and waivers from the Investors (as that term is defined
in the Investor Rights Agreement) pursuant to Section 2.1 of the Investor Rights
Agreement in connection with the issuance of the Note and the Warrant, including
but not limited to a consent to the treatment of the Warrant Shares and any
shares issuable to Purchaser upon conversion of the Note as "Shares" under the
Investor Rights Agreement and a waiver of the rights of first offer under the
Investor Rights Agreement by the Investors in connection with the issuance of
the Note and Warrant.
7. Reissuance of the Note and the Warrant. Sandbox agrees to reissue a
new Note and a new Warrant pursuant to the terms set forth on Exhibit IV if the
conditions set forth on Exhibit IV are not achieved.
8. Miscellaneous.
(a) Survival. All covenants, representations and warranties
made herein shall survive the Closing.
(b) Governing Law. This Agreement shall be governed in all
respects by the laws of the State of Arizona as applied to agreements entered
into and performed entirely in the State of Arizona by residents thereof.
(c) Notices. Any notice or other document required or
permitted to be given or delivered to Purchaser shall be delivered at, or sent
by certified or registered mail to, Purchaser
4
<PAGE>
at the address written on the first page of this Agreement, or to such other
address as shall have been furnished to Sandbox in writing by Purchaser. Any
notice or other document required or permitted to be given or delivered to
Sandbox shall be delivered at or sent by registered or certified mail to,
Sandbox at 2231 East Camelback Road, Suite 324, Phoenix, AZ 85016, or to such
other address as shall have been furnished in writing to Purchaser by Sandbox.
Any notice so addressed and mailed by registered or certified mail shall be
deemed to be given when so mailed. Any notice so addressed and otherwise
delivered shall be deemed to be given when actually received by the addressee.
(d) Counterparts. This Agreement may be executed in
counterparts, each of which shall be enforceable against the party actually
executing the counterpart, and both of which together shall constitute one
instrument.
(e) Entire Agreement; Amendment. This Agreement constitutes
the sole and entire agreement of the parties with respect to the subject matter
hereof. Neither this Agreement nor any term hereof may be amended, waived,
discharged or terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or termination
is sought.
IN WITNESS WHEREOF, Sandbox and the Purchaser have executed this
Agreement as of the day and year first above written.
SANDBOX:
SANDBOX ENTERTAINMENT CORPORATION
By: __________________________
Title: __________________________
PURCHASER:
___________________________
By: __________________________
Title: __________________________
5
<PAGE>
EXHIBIT I
WARRANT
<PAGE>
EXHIBIT II
CONVERTIBLE PROMISSORY NOTE
<PAGE>
EXHIBIT III
SANDBOX ENTERTAINMENT CORPORATION
Capitalization Schedule
As of July 21, 1997
I. AUTHORIZED CAPITALIZATION
Total Common Stock, $.001 par value: 10,000,000
Total Series A Convertible Preferred Stock, $.001 par value: 3,500,000
----------
Total 13,500,000
II. OUTSTANDING
Total Common Outstanding 3,136,429
Total Preferred Outstanding 1,981,250
Total Outstanding 5,117,679
Total Warrants/Options Outstanding 1,705,416
---------
Total Common Outstanding - Fully Diluted(1) 6,823,095
- ------------------
(1) Assumes exercise of all outstanding warrants and options and
conversion of all outstanding preferred.
<PAGE>
EXHIBIT IV
Reissuance of Note and Warrant
------------------------------
A. Upon the failure of any of the conditions set forth in Paragraph B
below, Sandbox shall within thirty (30) days of such failure reissue the Note
and the Warrant to Purchaser with the following changes:
1. The Definition of "Series A Conversion Price" in the Note
shall be deleted and replaced with the following:
"'Series A Conversion Price' shall mean $0.20 per share."
2. The definition of "Warrant Price" in the Warrant shall be
deleted and replaced with the following:
"'Warrant Price' shall mean Twenty Cents ($.20) per share,
subject to adjustment in accordance with Section 5, or, if the
provisions of Section 9 hereof apply, the New Series
Conversion Price.
B. The following events shall occur by close of business on the
following dates:
1. Sandbox shall have received funds (by check or wire) from
individuals or entities in an additional amount of at least $125,000
(net of commissions or finders' fees) on August 8, 1997;
2. Sandbox shall have a written commitment from individuals or
entities to loan Sandbox an additional $100,000 (net of commissions or
finders' fees) by close of business on August 15, 1997; and
3. Sandbox shall have received funds (by check or wire) from
individuals or entities in an additional amount of at least $100,000
(net of commissions or finders' fees) on September 26, 1997.
<PAGE>
Schedule to Exhibit 4(q) - Form of July 1997 Bridge Note and Warrant Purchase
Agreement.
List of Purchasers:
Wasatch Venture Corporation
Newtek Ventures II, L.P.
Sundance Venture Partners, L.P.
Wayne Sorensen
Exhibit 4(r)
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1993, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
JULY 1997 STOCK SUBSCRIPTION WARRANT
to Purchase _______ Shares of the
Series A Preferred Stock, $.001 Par Value, of
SANDBOX ENTERTAINMENT CORPORATION,
a Delaware corporation (the "Company")
DATE OF INITIAL ISSUANCE: July 25, 1997
THIS CERTIFIES THAT for value received, ___________________________,
whose address is ____________________________________________________, or its
permitted assigns (hereinafter called the "Holder") is entitled to purchase from
the Company, at any time during the Term of this Warrant, _______ shares of
Series A Preferred Stock, $.001 par value, of the Company (subject to adjustment
and to conversion into a New Series Conversion Stock as provided herein), at the
Warrant Price, payable as provided herein upon the exercise of this Warrant. The
exercise of this Warrant shall be subject to the provisions, limitations and
restrictions herein contained and may be exercised in whole or in part.
1. Definitions. For all purposes of this Warrant, the
following terms shall have the meanings indicated:
Aggregate Loan Amount shall mean the aggregate principal face amount of all of
the series of July 1997 Convertible Subordinated Promissory Notes of the Company
issued in connection with the Purchase Agreement having terms and conditions
(but not principal amounts) identical to the Convertible Subordinated Promissory
Note issued to Holder in connection with the Purchase Agreement.
Common Stock shall mean and include the Company's authorized Common Stock, $.001
par value, as constituted at the date of this Warrant, and shall also include
any capital stock of any class or series of the Company now or hereafter
authorized that is not limited to, or measured by, a fixed sum or percentage of
par value or of the purchase price of such stock in respect of the rights of the
holders thereof to participate in dividends and/or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Company, or that is not otherwise designated as "preferred stock" in the
Certificate of Incorporation of the Corporation.
<PAGE>
Equity Financing shall mean the issuance of any equity securities of the Company
in an equity financing or series of related equity financings for which the
aggregate gross proceeds total at least One Million Five Hundred Thousand
Dollars ($1,500,000) (excluding the Aggregate Loan Amount and any additional
amounts raised from any of the Initial Noteholders as part of such Equity
Financing).
New Series Conversion Price shall mean an amount equal to the price per share at
which the Company issues shares of such capital stock in the Equity Financing or
$2.00 per share if: (a) $2.00 per share is less than such price and (b) if the
Equity Financing is an IPO, this Warrant must is exercised within thirty (30)
days of the consummation of such IPO. For purposes of this Warrant, "IPO" shall
mean a public offering by the Company on Forms S-1, SB-1, or SB-2 (or successor
forms) that results in proceeds to the Company in the public offering of at
least $3,000,000 (net of offering expenses).
Initial Noteholders shall mean each of the initial holders of the series of July
1997 Subordinated Promissory Notes of the Company issued in connection with the
Purchase Agreement having terms and conditions (but not principal amounts)
identical to the July 1997 Subordinated Promissory Note issued to Holder in
connection with the Purchase Agreement.
Purchase Agreement shall mean that certain Note and Warrant Purchase Agreement
of even date herewith between the Company and Holder pursuant to which Company
shall issue to Holder this Warrant and a July 1997 Subordinated Promissory Note.
Series A Preferred Stock shall mean and include the series of preferred stock of
the Company so denominated in the Certificate of Incorporation of the Company.
Term of this Warrant shall mean the period beginning on the date of initial
issuance hereof and ending on the seventh (7th) anniversary of the date of
initial issuance hereof.
Warrant Price shall mean Eighty Cents ($.80) per share, subject to adjustment in
accordance with Section 5, or, if the provisions of Section 9 hereof apply, the
New Series Conversion Price.
Warrant Shares shall mean the shares of Series A Preferred Stock purchased or
purchasable by the Holder of this Warrant upon exercise hereof, and/or the
shares of Common Stock purchased or purchasable upon exercise hereof.
2. Exercise of Warrant. The Warrant shall be exercised, if at all, only
as follows:
(a) To exercise this Warrant in whole or in part, the Holder
shall deliver to the Company at its principal office, at any time and from time
to time during the Term of this Warrant: (i) the notice of exercise in the form
attached hereto as Exhibit A, (ii) cash, certified or official bank check
payable to the order of the Company, wire transfer of funds to the Company's
account, or the surrender of evidence of any indebtedness of the Company to the
Holder (or any
2
<PAGE>
combination of the foregoing) in the amount of the Warrant Price for each share
being purchased, and (iii) this Warrant.
(b) Notwithstanding any contrary provisions in this Warrant,
if the Current Market Price (as defined in Section 2(c) below) exceeds the
Warrant Price at the date of calculation, instead of exercising this Warrant as
described in Section 2(a) above, the Holder may elect to receive Warrant Shares
equal to the value of this Warrant (or the portion thereof being exercised), by
delivering to the Company at its principal office, at any time and from time to
time during the Term of this Warrant: (i) the notice of exercise in the form
attached hereto as Exhibit A, and (ii) this Warrant, in which event the Company
shall issue to the Holder a number of Warrant Shares calculated using the
following formula:
WS = WCS x (CMP-WP)
-------------------
CMP,
where WS = the number of Warrant Shares to be issued to the
Holder,
WCS = the number of Warrant Shares purchasable under the
Warrant, or if only a portion of the Warrant is
being exercised, the portion of the Warrant being
exercised at the date of such calculation,
CMP = the Current Market Price (as defined in Section
5(c) below) at the date of such calculation, and
WP = the Warrant Price, as adjusted to the date of such
calculation.
(c) For the purpose of any calculation made pursuant to this
Section 2, the "Current Market Price" at any date of one share of Common Stock
shall be deemed to be the average of the daily closing prices for the 20
consecutive business days ending 2 business days before such date (as adjusted
for any stock dividend, split, combination or reclassification that took effect
during such 20 business day period). The closing price for each day shall be the
last reported sales price regular way or, if no such reported sales took place
on such day, the average of the last reported bid and asked prices regular way,
in either case on the principal national securities exchange on which the Common
Stock is listed or admitted to trading (or if the Common Stock is not at the
time listed or admitted for trading on any such exchange, then such price as
shall be equal to the average of the last reported bid and asked prices, as
reported by the National Association of Securities Dealers Automated Quotations
System ("NASDAQ") on such day, or if, on any such date, the security shall not
be quoted on the NASDAQ, then such price shall be equal to the average of the
last reported bid and asked prices on such day as reported by The National
Quotations Bureau Incorporated or any similar reputable quotation and reporting
service, if such quotation is not reported by The National Quotation Bureau
Incorporated); provided, however, that if the Common Stock is not traded in such
manner that the quotations referred to in this Section 2(c) are available for
the period required hereunder, the Current Market Price shall be determined by
the Board of Directors of the Company in its reasonable, good faith judgment.
3
<PAGE>
(d) Each certificate for Warrant Shares shall bear the
following legend (and any additional legend required by (i) any applicable state
securities laws, and (ii) any securities exchange upon which such Warrant Shares
may, at the time of such exercise be listed) on the face thereof:
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION THEREFROM UNDER SAID
ACT AND APPLICABLE STATE SECURITIES LAWS."
3. Covenants As to Common Stock. The Company covenants and agrees that:
(i) all Warrant Shares that may be issued upon the exercise of this Warrant
will, upon issuance, be validly issued, fully paid and nonassessable, and free
from all taxes, liens and charges with respect to the issue thereof; (ii) it
will pay when due and payable any and all federal and state taxes (other than
federal or state income taxes, if any, which shall remain Holder's
responsibility) that may be payable in respect of the issue of this Warrant or
the Warrant Shares; (iii) it will at all times have authorized and reserved,
free from preemptive rights, a sufficient number shares of Series A Preferred
Stock and underlying Common Stock to provide for the exercise of the rights
represented by this Warrant; (iv) if any shares of capital stock to be reserved
for the purpose of the issuance of shares upon the exercise of this Warrant
require registration with or approval of any governmental authority under any
federal or state law before such shares may be validly issued or delivered upon
exercise, then the Company shall in good faith and as expeditiously as possible
endeavor to secure such registration or approval, as the case may be; and (v) if
the Series A Preferred Stock or, if applicable, the New Series Conversion Stock,
issuable under this Warrant has been converted to Common Stock and if and so
long as any Common Stock issuable upon the exercise of this Warrant is listed on
any national securities exchange, the Company, will, if permitted by the rules
of such exchange, list and keep listed on such exchange, upon official notice of
issuance, all shares of such Common Stock issuable upon exercise of this
Warrant.
4. Adjustment of Number of Shares. Upon each adjustment of the Warrant
Price as provided in Section 5 below, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest 1/10th of a share) obtained by multiplying the
Warrant Price in effect immediately before such adjustment by the number of
shares purchasable pursuant hereto immediately before such adjustment, and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
5. Adjustment of Warrant Price. The Warrant Price shall be subject to
adjustment from time to time as follows:
(a) If, at any time during the term of this Warrant, the
number of shares of Series A Preferred Stock outstanding is increased by a stock
dividend payable in shares of Series A Preferred Stock or by a subdivision or
split-up of shares of Series A Preferred Stock, then,
4
<PAGE>
following the record date fixed for the determination of Holders of Series A
Preferred Stock entitled to receive such stock dividend, subdivision or
split-up, the Warrant Price shall be appropriately decreased so that the number
of shares of Series A Preferred Stock issuable upon the exercise of this Warrant
shall be increased in proportion to such increase in outstanding shares.
(b) If, at any time during the term of this Warrant, the
number of shares of Series A Preferred Stock outstanding is decreased by a
combination of the outstanding shares of Series A Preferred Stock, then,
following the record date for such combination, the Warrant Price shall
appropriately increase so that the number of shares of Series A Preferred Stock
issuable upon the exercise hereof shall be decreased in proportion to such
decrease in outstanding shares.
(c) If all of the outstanding shares of Series A Preferred
Stock of the Company have been converted to Common Stock pursuant to Article
IV(4)(b) of the Certificate of Incorporation of Company (or any successor
section thereof) or if any action of the type described in Section 5(a) or (b)
occurs with respect to the Common Stock, then this Section 5 shall apply in the
same manner to such Common Stock in order to effect the appropriate adjustments
in the Warrant Price and number of shares of Common Stock to be issued
hereunder.
(d) All calculations under this Section 5 shall be made to the
nearest cent or to the nearest 1/10th of a share, as the case may be.
(e) If the Company proposes to take any action of the types
described in Section 5(a), (b) or (c), the Company shall forward at the same
time and in the same manner, to the Holder of this Warrant, such notice, if any,
that the Company shall give to the Holders of capital stock of the Company.
6. Transfers. The Company may deem and treat the person in whose name
this Warrant is registered as the Holder and owner hereof. Transferability of
the Warrant Shares is limited as set forth in this Warrant.
7. Mergers, Consolidations, Sales. In the case of any proposed
consolidation or merger of the Company with another entity, or the proposed sale
of all or substantially all of its assets to another person or entity, or any
proposed reorganization or reclassification of the capital stock of the Company,
then, as a condition of any such consolidation, merger, sale, reorganization or
reclassification, lawful and adequate provision shall be made pursuant to which
the Holder of this Warrant shall thereafter have the right to receive upon the
basis and upon the terms and conditions specified herein, in lieu of the Warrant
Shares immediately purchasable hereunder, such shares of stock, securities or
assets as may, by virtue of such consolidation, merger, sale, reorganization or
reclassification, be issued or payable with respect to or in exchange for the
number of shares of such Warrant Shares purchasable hereunder immediately before
such consolidation, merger, sale reorganization or reclassification. The Company
shall forward at the same time and in the same manner, to the Holder of this
Warrant, such notice, if any, that the Company shall give to the Holders of
capital stock of the Company with respect to any proposed transaction described
above or any distribution of assets of the Company in dissolution or
liquidation, or any extraordinary dividend or other distribution on its Series A
Preferred Stock
5
<PAGE>
except out of earned surplus or by way of a stock dividend payable in shares of
its Series A Preferred Stock. This Warrant shall be binding upon any corporation
or other person or entity succeeding to the Company by merger, consolidation or
acquisition of all or substantially all of the Company's assets.
8. Registration Rights. The Company and Holder agree that the Warrant
Shares issuable pursuant this Warrant shall be deemed to be "Shares" under that
certain Investor Rights Agreement dated as of February 13, 1996 (the "Investor
Rights Agreement") among the Company and certain Investors (as defined therein)
and that the Warrant Shares shall be entitled to all the rights and subject to
all of the restrictions as Shares under the Investor Rights Agreement. Pursuant
to a Consent and Waiver, the Investors shall have agreed prior to the execution
of this Warrant to the inclusion of the Warrant Shares as "Shares" under the
Investor Rights Agreement.
9. Conversion if an Equity Financing Occurs within Six Months. If an
Equity Financing closes within one hundred eighty (180) days of the date hereof,
the following definitions shall automatically change as follows:
(a) Warrant Price shall mean the New Series Conversion Price.
10. Miscellaneous.
(a) Notices. Any notice or other document required or
permitted to be given or delivered to the Holder shall be delivered at, or sent
by certified or registered mail to, the Holder at the address set forth on the
first page of this Warrant, or to such other address as shall have been
furnished to the Company in writing by the Holder. Any notice or other document
required or permitted to be given or delivered to the Company shall be delivered
at or sent by registered or certified mail to, the Company at 2231 East
Camelback Road, Suite 324, Phoenix, AZ 85016, or to such other address as shall
have been furnished in writing to the Holder by the Company. Any notice so
addressed and mailed by registered or certified mail shall be deemed to be given
when so mailed. Any notice so addressed and otherwise delivered shall be deemed
to be given when actually received by the addressee.
(b) Governing Law. This Warrant shall be governed in all
respects by the laws of the State of Arizona as applied to agreements entered
into and performed entirely in the State of Arizona by residents thereof.
(c) Entire Agreement; Amendment. This Warrant constitutes the
sole and entire agreement of the parties with respect to the subject matter
hereof. Neither this Warrant nor any term hereof may be amended, waived,
discharged or terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or termination
is sought.
(d) Counterparts. This Agreement may be executed in
counterparts, each of which shall be enforceable against the party actually
executing the counterpart, and both of which together shall constitute one
instrument.
6
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly and authorized officer as of this 25th day of July, 1997.
THE COMPANY:
ATTEST: SANDBOX ENTERTAINMENT CORPORATION
By: ________________________ By: ____________________________
Its Secretary Its President
ACCEPTED:
HOLDER:
___________________________
By: _____________________________
Title: __________________________
7
<PAGE>
FORM OF NOTICE OF EXERCISE
[To be signed only upon exercise of the Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
1. The undersigned hereby exercises the right to purchase shares of
Series A Preferred Stock (or Common Stock, if applicable) that the undersigned
is entitled to purchase by the terms of the within Warrant according to the
conditions thereof, and herewith makes payment of the Warrant Price of such
shares in full. All shares to be issued pursuant hereto shall be issued in the
name of and the initial address of such person to be entered on the books of the
Company shall be:
_______________________________________________________________________________.
The shares are to be issued in certificates of the following denominations:
_______________________________________________________________________________.
2. The undersigned hereby represents that the shares of the Company's
Series A Preferred Stock (or Common Stock, if applicable) to be delivered to it
pursuant to the above-mentioned exercise of the Warrant are being acquired by
the undersigned as an investment and not with a view to, or for sale in
connection with, the distribution of any such shares. The undersigned agrees to
indemnify the Company and its subsidiaries, together with their officers and
directors, for any liabilities, losses, damages and expenses (including
reasonable attorney fees) arising from or in connection with any disposition of
the shares hereby being acquired, or any interest therein, in violation of
applicable securities laws or regulations. The undersigned further represents
that the undersigned has been given access to all information requested by the
undersigned to allow the undersigned to make a decision as to the advisability
of an investment in the Company's stock and the value of such stock, and that
undersigned has the skill and experience necessary to make such decision.
___________________________________
[Type Name of Holder]
By: ____________________________
Title: ____________________________
Date: ____________________________
<PAGE>
Schedule to Exhibit 4(r) - Form of July 1997 Stock Subscription Warrant.
List of Purchasers and Number of Series A Preferred Shares:
List of Purchasers and Number of Series A Preferred Shares:
Wasatch Venture Corporation - 50,000 shares
Newtek Ventures II, L.P. - 30,000 shares
Sundance Venture Partners, L.P. - 50,000 shares
Wayne Sorensen - 5,000 shares
9
Exhibit 4(s)
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECATED UNTIL REGISTERED UNDER THE ACT OR, IN THE
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY, SUCH
OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
SANDBOX ENTERTAINMENT CORPORATION
JULY 1997 CONVERTIBLE SUBORDINATED PROMISSORY NOTE
--------------------------------------------------
July 25, 1997 $_________
For value received, subject to the terms and conditions of this Note,
Sandbox Entertainment Corporation, a Delaware corporation (the "Company"),
hereby promises to pay to the order of ___________________________, whose
address is __________________________ _________________________, or its
permitted assigns (the "Holder") the principal sum of ____________________
Dollars ($_______) plus simple interest accrued on unpaid principal from the
date hereof until paid (or converted, as provided in Section 2) at the rate of
ten percent (10%) per annum, or, at Holder's option to convert such amount into
equity securities of the Company as provided in Section 2 hereof. Subject to the
terms and conditions of this Note, the unpaid principal amount of this Note and
the unpaid interest accrued thereon shall be payable in full at the principal
office of the Company one year following the date hereof.
The following is a statement of the rights of the holder of this Note
and the terms and conditions to which this Note is subject, and to which the
holder hereof, by the acceptance of this Note, agrees:
1. Definitions. Unless the context otherwise requires, as used in this
Note, the following terms shall have the following meanings:
1.1 "Aggregate Loan Amount" shall mean the aggregate principal
face amount of all the Notes.
1.2 "Aggregate Outstanding Indebtedness" shall mean the
aggregate unpaid principal under all the Notes at the time in question.
1.3 "Company" includes any corporation or other entity that
shall succeed to or assume the obligations of the Company under this Note.
1.4 "Conversion Price" shall respectively mean the Series A
Conversion Price or the New Series Conversion Price.
<PAGE>
1.5 "Conversion Stock" shall mean Series A Conversion Stock or
the New Series Conversion Stock.
1.6 "Equity Financing" shall mean the issuance of any equity
securities of the Company in an equity financing or series of related equity
financings for which the aggregate gross proceeds total at least One Million
Five Hundred Thousand Dollars ($1,500,000) (excluding the Aggregate Loan Amount
and any additional amounts raised from any of the initial Noteholders as part of
such Equity Financing).
1.7 "Notes" means the series of July 1997 Promissory Notes of
the Company (of which this Note is one) having terms and conditions (but not
principal amounts) identical to this Note.
1.8 "Noteholder," "Holder," or similar terms, when the context
refers to a holder of this Note, shall mean any person who shall at the time be
the registered holder of this Note.
1.9 "New Series Conversion Stock" shall mean the class or
series of the Company's capital stock that is sold by the Company in the Equity
Financing.
1.10 "New Series Conversion Price" shall mean an amount equal
to the price per share at which the Company issues shares of such capital stock
in the Equity Financing.
1.11 "Sale of the Company" shall mean (a) any merger,
consolidation, or other corporate reorganization in which the shareholders of
the Company immediately prior to the transaction do not own a majority of the
outstanding shares of the surviving corporation, or (b) any transaction or
series of related transactions in which in excess of 50% of the Company's voting
power is transferred or in which all or substantially all of the assets of the
Company are sold.
1.12 "Senior Indebtedness" shall mean the principal of and
unpaid accrued interest on: (i) all indebtedness of the Company to commercial
banks or other financial institutions regularly engaged in the business of
lending money, which is for money borrowed by the Company now or hereafter
(whether or not secured), and (ii) any such indebtedness or any debentures,
notes or other evidence of indebtedness issued in exchange for such Senior
Indebtedness, or any indebtedness arising from the satisfaction of such Senior
Indebtedness by a guarantor.
1.13 "Series A Conversion Price" shall mean $0.80 price per
share.
1.14 "Series A Conversion Stock" shall mean the Series A
Preferred Stock of the Company.
2
<PAGE>
2. Conversion.
2.1 Upon an Equity Financing. If prior to the closing of the
Equity Financing within one hundred eighty (180) days from the date hereof (a)
the Company has not paid the entire unpaid principal amount of this Note and all
interest accrued thereon and (b) a conversion has not occurred pursuant to this
Section 2 with respect to the entire unpaid principal amount of this Note and
all interest accrued thereon, then upon the closing of the Equity Financing, the
entire unpaid principal amount of this Note shall automatically be converted
into shares of New Series Conversion Stock at the New Series Conversion Price,
and the Company shall pay any accrued, but unpaid interest. The Company shall
provide the Holder with twenty (20) days prior written notice of the occurrence
of an Equity Financing and the proposed terms thereof. Noteholder agrees to
execute and deliver to the Company, at the closing of the Equity Financing, any
and all documents with respect to such Equity Financing required to be signed by
investors in such Equity Financing ("Financing Documents"). Noteholder shall not
be entitled to receive any stock certificate representing shares of New Series
Conversion Stock to be issued upon conversion of this Note until this Note is
surrendered to the Company for cancellation and all relevant Financing Documents
have been duly executed by Noteholder and delivered to the Company.
2.2 Upon a Sale of the Company, Prepayment or After 180 Days.
From and after the one hundred and eightieth (180th) day following the date
hereof, immediately upon a Sale of the Company, or in the event Maker provides
Holder with written notification of Maker's intent to prepay this Note, Holder
shall have the option to convert the unpaid principal amount of this Note into
shares of Series A Conversion Stock at the Series A Conversion Price pursuant to
the form of Notice of Conversion attached hereto as Exhibit I. Noteholder shall
not be entitled to receive any stock certificate representing such Series A
Conversion Stock until this Note is surrendered to the Company for cancellation.
3. Issuance of Conversion Stock. As soon as practicable after
conversion of this Note into the applicable Conversion Stock as provided herein,
payment of any accrued but unpaid interest, and the surrender of this Note to
the Company at its principal office, the Company, at its expense, will cause to
be issued in the name of and delivered to the holder of this Note, a stock
certificate or certificates for the number of shares of Conversion Stock to
which the holder of this Note shall be entitled upon such conversion (bearing
such legends as may be required by applicable state and federal securities laws
in the opinion of legal counsel of the Company). If on any conversion of this
Note a fraction of a share results, then the Company will pay the Noteholder the
cash value of that fractional share, calculated on the basis of the applicable
Conversion Price.
4. Fully Paid Shares. All shares of Conversion Stock issued upon the
conversion of this Note shall be validly issued, fully paid and non-assessable.
3
<PAGE>
5. Subordination. The indebtedness evidenced by this Note (but not
Holder's conversion rights) is hereby expressly subordinated, to the extent and
in the manner hereinafter set forth herein, in right of payment to the prior
payment in full of all the Company's Senior Indebtedness.
5.1 Default on Senior Indebtedness. Upon any receivership,
insolvency, assignment for the benefit of creditors, bankruptcy, reorganization
or arrangements with creditors (whether or not pursuant to bankruptcy or other
insolvency laws), dissolution, liquidation or other marshaling of the assets and
liabilities of the Company (i) no amount shall be paid by the Company in respect
of the principal of or interest on this Note at the time outstanding, unless and
until any defaults on the Senior Indebtedness have been cured or waived or shall
have ceased to exist and principal and interest on such obligations has ben paid
current, and (ii) no claim or proof of claim shall be filed with the Company by
or on behalf of the Holder which shall assert any right to receive any payments
in respect of principal or interest on this Note except in the event that any
defaults on the Senior Indebtedness have been cured or waived or shall have
ceased to exist. If there occurs an event of default that has been declared in
writing with respect to any Senior Indebtedness, or in the instrument under
which it is outstanding, permitting the holder of such Senior Indebtedness to
accelerate the maturity thereof, then, unless and until such event of default
shall have been cured or waived or shall have ceased to exist, or all Senior
Indebtedness shall have been paid in full, no payment shall be made in respect
of the principal of or interest on this Note without the approval of the holders
of the Senior Indebtedness.
5.2 Undertaking. By its acceptance of this Note, the Holder
agrees to execute and deliver such documents as may be reasonably requested from
time to time by the Company or the lender of any Senior Indebtedness in order to
implement the foregoing provisions of this Section 5.
6. No Rights or Liabilities as Stockholder. This Note does not by
itself entitle the Noteholder to any voting rights or other rights as a
stockholder of the Company. In the absence of conversion of this Note, no
provisions of this Note, and no enumeration herein of the rights or privileges
of the holder shall cause such holder to be a stockholder of the Company for any
purpose.
7. No Impairment. The Company will not willfully avoid or seek to avoid
the observance or performance of any of the terms of this Note, 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 Noteholder against impairment. Without limiting the generality
of the foregoing, the Company 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 Conversion Stock upon any conversion of this Note.
8. Prepayment. The Company may at any time, without penalty, prepay in
whole or in part the principal amount, and/or any accrued interest outstanding
under this Note, provided that Maker shall first have given Holder at least 5
days prior written notice of Maker's intent to
4
<PAGE>
prepay, and Holder has not exercised its conversion right under Section 2.2. Any
prepaying shall be applied first to unpaid accrued interest until all such
interest has been paid, and then to unpaid principal. Any prepaying of this Note
shall be made pro rata among all holders of outstanding Notes according to the
original principal face amount of each such holder's Note.
9. Event of Default. The principal amount due hereunder together with
all accrued interest to date will accelerate and become due if an Event of
Default (as hereinafter defined) occurs. An "Event of Default" shall exist under
this Note if the Company: (i) petitions or applies to any tribunal for or
consents to the appointment of a receiver, (ii) admits in writing its inability
to pay the debts as they mature, (iii) makes a general assignment for the
benefit of its creditors, (iv) is adjudicated bankrupt or insolvent, or (v)
files voluntarily or has filed against it a petition in bankruptcy or a petition
or an answer seeking reorganization or an arrangement with creditors or to take
advantage of any bankruptcy, reorganization, insolvency, readjustment of debts,
dissolution or liquidation law or statute.
10. Restrictions on Transfer. Noteholder acknowledges that this Note
and the Conversion Stock issuable upon its conversion have not been registered
or qualified under federal or state securities laws. Accordingly, the
representations and warranties to be made by Noteholder in the July 1997 Bridge
Note and Warrant Purchase Agreement, or similar agreement, to which the Company
and the original Noteholder will become parties (the "Purchase Agreement") shall
be deemed included herein and shall pertain to this Note and the Conversion
Stock issuable hereunder as though fully set forth herein. By acceptance of this
Note, the registered holder represents that the registered holder is purchasing
this Note for its own account and not with a view to, or for sale in connection
with, any distribution of this Note or the securities issuable upon conversion
of this Note.
11. Amendment; Waiver. Any term of this Note may be amended, and the
observance of any term of this Note may be waived (either generally or in a
particular instance and either retroactively or prospectively) only by the
written consent of the Company and the holders of Notes representing fifty-one
percent (51%) of the Aggregate Outstanding Indebtedness. Any amendment or waiver
effected in accordance with the previous sentence shall be binding upon each
holder (whether or not such holder consented to such amendment or waiver) and
each future holder or transferee of the Note and the Company.
12. Assignment. This Note may be assigned by the holder only with the
Company's prior written consent, only in compliance with the provisions of the
Purchase Agreement, and only if the assignee of this Note acknowledges in
writing to the Company that it is bound by all the terms and conditions of this
Note; provided that this Note may be assigned without such consent if assigned
or transferred to a Noteholder's general or limited partners.
13. Headings; References. The headings in this Note are for purposes of
convenience of reference only, and shall not be deemed to constitute a part of
this Note. Unless otherwise expressly noted, all references to Sections in this
Note refer to Sections of this Note.
5
<PAGE>
14. Registration Rights. The Company and Noteholder agree that the
Conversion Shares issuable pursuant this Note shall be deemed to be "Shares"
under that certain Investor Rights Agreement dated as of February 13, 1996 (the
"Investor Rights Agreement") among the Company and certain Investors (as defined
therein) and that the Conversion Shares shall be entitled to all the rights and
subject to all of the restrictions as Shares under the Investor Rights
Agreement. Pursuant to a Consent and Waiver, the Investors shall have agreed
prior to the execution of this Note to the inclusion of the Conversion Shares as
"Shares" under the Investor Rights Agreement.
15. Notices. Any notice or other document required or permitted to be
given or delivered to Noteholder shall be delivered at, or sent by certified or
registered mail to, Noteholder at the address written on the first page of the
Purchase Agreement, or to such other address as shall have been furnished to
Company in writing by Noteholder. Any notice or other document required or
permitted to be given or delivered to Company shall be delivered at or sent by
registered or certified mail to, Company at 2231 East Camelback Road, Suite 324,
Phoenix, AZ 85016, or to such other address as shall have been furnished in
writing to Noteholder by Company. Any notice so addressed and mailed by
registered or certified mail shall be deemed to be given when so mailed. Any
notice so addressed and otherwise delivered shall be deemed to be given when
actually received by the addressee.
16. Law Governing. This Note shall be construed and enforced in
accordance with, and governed by, the internal laws of the State of Arizona,
excluding the body of law applicable to conflicts of law.
17. Attorneys' Fees; Waiver of Presentment. The Company promises to pay
the holder hereof, without demand, all reasonable attorneys fees, costs and
other expenses incurred by such holder in enforcing any provision of this Note
and hereby waives presentment, notice of nonpayment, notice of dishonor,
protest, demand and diligence.
18. Terms Binding. By acceptance of this Note, the holder of this Note
(and each subsequent holder of this Note) accepts and agrees to be bound by all
the terms and conditions of this Note.
IN WITNESS WHEREOF, the Company has caused this Note to be signed in
its name the date first written above.
SANDBOX ENTERTAINMENT CORPORATION
By: ___________________________
Name:__________________________
Title:_________________________
6
<PAGE>
EXHIBIT I
FORM OF NOTICE OF CONVERSION
[To be signed only upon conversion of the Note pursuant to Section 2.2]
TO BE EXECUTED BY THE REGISTERED HOLDER TO CONVERT
THE WITHIN JULY 1997 CONVERTIBLE SUBORDINATED PROMISSORY NOTE
1. The undersigned hereby exercises the right to purchase _______
shares of Series A Preferred Stock that the undersigned is entitled to purchase
by the terms of the within July 1997 Convertible Subordinated Promissory Note
according to the conditions thereof, and herewith makes payment of $0.80 per
share for each share of Series A Preferred Stock by surrendering the Note for
conversion and cancellation. All shares to be issued pursuant hereto shall be
issued in the name of and the initial address of such person to be entered on
the books of the Company shall be:
_______________________________________________________________________________.
The shares are to be issued in certificates of the following denominations:
_______________________________________________________________________________.
2. The undersigned hereby represents that the shares of the Company's
Series A Preferred Stock to be delivered to it pursuant to the above-mentioned
exercise of the Warrant are being acquired by the undersigned as an investment
and not with a view to, or for sale in connection with, the distribution of any
such shares. The undersigned agrees to indemnify the Company and its
subsidiaries, together with their officers and directors, for any liabilities,
losses, damages and expenses (including reasonable attorney fees) arising from
or in connection with any disposition of the shares hereby being acquired, or
any interest therein, in violation of applicable securities laws or regulations.
The undersigned further represents that the undersigned has been given access to
all information requested by the undersigned to allow the undersigned to make a
decision as to the advisability of an investment in the Company's stock and the
value of such stock, and that undersigned has the skill and experience necessary
to make such decision.
________________________________
[Type Name of Holder]
By: _________________________
Title: _________________________
Date: _________________________
<PAGE>
Schedule to Exhibit 4(s) - Form of July 1997 Convertible Subordinated Promissory
Note.
List of Holders and Principal Amounts of Promissory Notes:
List of Purchasers and Number of Series A Preferred Shares:
Wasatch Venture Corporation - $100,000
Newtek Ventures II, L.P. - $60,000
Sundance Venture Partners, L.P. - $100,000
Wayne Sorensen - $10,000
Exhibit 4(t)
TWO YEAR NOTE AND WARRANT PURCHASE AGREEMENT
THIS TWO YEAR NOTE AND WARRANT PURCHASE AGREEMENT (this "Agreement") is
made effective as of _________, 1997 by and between Sandbox Entertainment
Corporation, a Delaware corporation ("Sandbox"), and ___________________________
______________________________ ("Purchaser").
PREMISES: Sandbox desires to borrow $_______ (the "Loan") from
Purchaser, and Purchaser is willing to make such Loan to Sandbox in
consideration of Sandbox issuing to Purchaser a Subordinated Promissory Note
evidencing the Loan in the form attached hereto as Exhibit I (the "Note") and a
warrant to purchase ______ shares of the Common Stock, $.001 par value, of
Sandbox (the "Warrant Shares"), a form of which is attached to this Agreement as
Exhibit II (the "Warrant"), on the terms and subject to the conditions set forth
in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement, Sandbox and Purchaser agree as follows:
1. Issuance, Sale and Delivery of the Note and the Warrant. At the
Closing (defined in Section 2) Sandbox agrees to issue and deliver to Purchaser
and Purchaser agrees to receive from Sandbox the Note and the Warrant in
consideration of Purchaser making the Loan to Sandbox .
2. Closing. The issuance and delivery of the Note and the Warrant shall
take place at the offices of Sandbox on ________, 1997 at 10 a.m. local time, or
at such other location, date and time as may be agreed upon between Purchaser
and Sandbox (such transaction being the "Closing" and such date and time being
the "Closing Date"). At the Closing Sandbox shall issue and deliver to Purchaser
the Note and the Warrant registered in the name of Purchaser. In exchange for
such delivery, Purchaser shall deliver its check payable to the order of
"Sandbox Entertainment Corporation" in the amount of the Loan, or a wire
transfer of such amount, as agreed by the parties.
3. Representations and Warranties of Sandbox . Sandbox represents and
warrants to Purchaser as follows:
(a) Organization and Standing; Charter and Bylaws. Sandbox has
requisite corporate power and authority to own its property and to carry on its
business as presently conducted or as proposed to be conducted. Sandbox has all
requisite legal and corporate power to sell and issue the Note, Warrant and the
Warrant Shares to Purchaser and in all other respects to carry out and perform
its obligations under this Agreement.
(b) Capitalization. The authorized capital stock of Sandbox is
set forth on Exhibit III attached hereto. All issued and outstanding shares of
Sandbox listed therein have been duly authorized and validly issued and are
fully paid and nonassessable.
<PAGE>
(c) Authorization. All corporate action on the part of Sandbox
necessary for the authorization, execution, and delivery of this Agreement, and
performance of all of Sandbox's obligations hereunder, including issuance and
delivery of the Note, the Warrant and the Warrant Shares, shall have been taken
prior to the Closing.
(d) Corporate Law Status. When the Note, Warrant, and the
Warrant Shares have been issued, delivered and paid for in accordance with this
Agreement, the Note, and the Warrant, they will be validly issued, fully paid
and non-assessable and will be free and clear of all liens, charges,
restrictions, claims and encumbrances imposed by or through any act or omission
on the part of Sandbox. With the exception of the rights of first offer held by
the holders of the Series A Preferred Stock of Sandbox pursuant to Section 2.1
of that certain Investor Rights Agreement (the "Investor Rights Agreement")
dated as of February 13, 1996 among Sandbox and certain Investors (as defined
therein), for which appropriate consents and waivers have been obtained, the
issuance, sale or delivery of the Note, the Warrant and the Warrant Shares are
not subject to any preemptive right of stockholders of Sandbox or to any right
of first refusal or other right in favor of any person that has not been waived
in writing.
(e) Validity. This Agreement has been duly executed and
delivered by Sandbox and constitutes the legal, valid and binding obligation of
Sandbox, enforceable in accordance with its terms, except as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditor's rights generally, and
except as enforceability may be subject to general principles of equity, whether
applied in a court of equity or at law or by an arbitration panel.
4. Representations and Warranties of Purchaser. Purchaser represents
and warrants to Sandbox, and where so stated, promises as follows:
(a) Unregistered Securities. Purchaser understands that the
Note, the Warrant and the Warrant Shares (the "Securities") have not been
registered under the Securities Act of 1933 or any state securities laws
(collectively, "Securities Laws") in reliance upon an exemption from
registration accorded for nonpublic offerings. Purchaser further recognizes that
the Securities may not be sold unless they and the transaction in which they are
to be sold has been registered under the Securities Laws or an exemption from
registration is available for such sale. Purchaser accepts that the Securities
will each bear a legend to that effect. Further, Purchaser recognizes that
Sandbox has made no representations as to registration of the Securities under
the Securities Laws.
(b) Investment Intent. Purchaser is acquiring the Securities
for its own account for investment and not with a view to resale or
distribution. The Purchaser promises that it will not sell, hypothecate,
transfer or otherwise dispose of the Securities, or attempt so to do, unless
they have been registered, to the extent applicable, under the Securities Laws
or, in the opinion of counsel reasonably acceptable to Sandbox and its counsel,
an exemption from registration is available.
2
<PAGE>
(c) Negotiation; Access to Information. The terms of
Purchaser's purchase of the Securities were established by negotiations between
Purchaser and Sandbox 's representative, and in connection therewith, Purchaser
was given access to the relevant information it requested concerning Sandbox 's
condition and operations, and the opportunity to ask questions of and receive
answers from Sandbox 's representatives. Specifically, Purchaser has received
and reviewed Sandbox's Business Plan dated June, 1997, financial statement and
that Supplement to Business Plan dated August 1, 1997, including the Risk
Factors described therein. Purchaser is knowledgeable and experienced in
financial and business matters and, on the basis of the information it received
concerning Sandbox 's condition and operations, Purchaser is in a position to
make an informed investment decision concerning its investment in the Securities
and the risks attending such investment. Further, in light of its financial
position, Purchaser is able to bear the economic risks of investment in the
Securities.
(d) Accredited Investor. Purchaser acknowledges that he/she/it
is an "accredited investor" as defined in Rule 501 of Regulation D as
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933, as amended (the "Securities Act"), and shall submit to Sandbox such
further assurances of such status as may be reasonably requested by Sandbox.
(e) Legends; Stop Transfer Orders. Purchaser hereby consents
and agrees that Sandbox may imprint on any certificate evidencing the Securities
an appropriate legend or notification to the effect that such shares are not
freely transferable and may be transferred only in compliance with applicable
securities laws. Purchaser further consents and agrees that Sandbox may give
appropriate "stop order" instructions in this regard to any transfer agent for
the Securities.
(f) Compliance; Indemnity. Purchaser hereby expressly promises
not to offer for sale or sell any of the Securities, or any interest therein,
except in compliance with the Securities Act and other applicable securities
laws and regulations, including those of the State of Arizona. Purchaser hereby
promises to indemnify Sandbox , together with its officers and directors,
against any and all liabilities, losses, damages and expenses (including
reasonable attorney fees) arising (directly or indirectly) from or in connection
with Purchaser's disposition of any of the Securities, or any interest therein,
in violation of (or allegedly in violation of) applicable securities laws or
regulations, including all such expenses incurred in connection with the defense
against any such claim.
(g) Delivery of Investment Letter upon Exercise of Warrant. At
the request of Sandbox, Purchaser shall deliver upon exercise of the Warrant an
investment letter in form and substance substantially to the effect of Sections
4(a)-(f) above.
5. Conditions to the Obligations of Purchaser. The obligation of
Purchaser to make the Loan and receive the Note and the Warrant on the Closing
Date is, at Purchaser's sole option, subject to satisfaction on or before the
Closing Date of the following conditions:
3
<PAGE>
(a) Representations and Warranties to Be True. The
representations and warranties contained in Section 3 shall be true, complete
and correct on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of such date.
(b) Performance. Sandbox shall have performed and complied
with all agreements contained herein and required to be performed or complied
with by it prior to or at the Closing Date.
(c) Proceedings. All corporate and other proceedings to be
taken by Sandbox in connection with the transactions contemplated hereby and all
documents incident thereto shall be satisfactory in form and substance to
Purchaser and its counsel.
6. Conditions to the Obligations of Sandbox. The obligation of Sandbox
to issue the Note and the Warrant on the Closing Date is subject to satisfaction
on or before the Closing Date of the following condition:
(a) Consents and Waivers Received. Sandbox shall have obtained
all necessary consents and waivers from the Investors (as that term is defined
in the Investor Rights Agreement) pursuant to Section 2.1 of the Investor Rights
Agreement in connection with the issuance of the Note and the Warrant, including
but not limited to a consent to the treatment of the Warrant Shares and any
shares issuable to Purchaser upon conversion of the Note as "Shares" under the
Investor Rights Agreement and a waiver of the rights of first offer under the
Investor Rights Agreement by the Investors in connection with the issuance of
the Note and Warrant.
7. Miscellaneous.
(a) Survival. All covenants, representations and warranties
made herein shall survive the Closing.
(b) Governing Law. This Agreement shall be governed in all
respects by the laws of the State of Arizona as applied to agreements entered
into and performed entirely in the State of Arizona by residents thereof.
(c) Notices. Any notice or other document required or
permitted to be given or delivered to Purchaser shall be delivered at, or sent
by certified or registered mail to, Purchaser at the address written on the
first page of this Agreement, or to such other address as shall have been
furnished to Sandbox in writing by Purchaser. Any notice or other document
required or permitted to be given or delivered to Sandbox shall be delivered at
or sent by registered or certified mail to, Sandbox at 2231 East Camelback Road,
Suite 324, Phoenix, AZ 85016, or to such other address as shall have been
furnished in writing to Purchaser by Sandbox. Any notice so addressed and mailed
by registered or certified mail shall be deemed to be given when so mailed. Any
notice so addressed and otherwise delivered shall be deemed to be given when
actually received by the addressee.
4
<PAGE>
(d) Counterparts. This Agreement may be executed in
counterparts, each of which shall be enforceable against the party actually
executing the counterpart, and both of which together shall constitute one
instrument.
(e) Entire Agreement; Amendment. This Agreement constitutes
the sole and entire agreement of the parties with respect to the subject matter
hereof. Neither this Agreement nor any term hereof may be amended, waived,
discharged or terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or termination
is sought.
IN WITNESS WHEREOF, Sandbox and the Purchaser have executed this
Agreement as of the day and year first above written.
[SIGNATURES APPEAR ON THE FOLLOWING PAGES]
5
<PAGE>
[SIGNATURE PAGE FOR NOTE AND WARRANT PURCHASE AGREEMENT]
SANDBOX:
SANDBOX ENTERTAINMENT CORPORATION
By: _______________________
Title: _______________________
PURCHASER:
_______________________________
By:___________________________
Its:__________________________
______________________________
6
<PAGE>
EXHIBIT I
WARRANT
<PAGE>
EXHIBIT II
SUBORDINATED PROMISSORY NOTE
<PAGE>
EXHIBIT III
SANDBOX ENTERTAINMENT CORPORATION
Capitalization Schedule
As of August 1, 1997
<TABLE>
<CAPTION>
I. AUTHORIZED CAPITALIZATION
<S> <C> <C>
Total Common Stock, $.001 par value: 10,000,000
Total Series A Convertible Preferred Stock, $.001 par value: 3,500,000
----------
Total 13,500,000
II. OUTSTANDING
Total Common Outstanding 3,136,429
Total Preferred Outstanding 1,981,250
Total Outstanding 5,117,679
Total Warrants/Options Outstanding 2,042,916
Total Series A Preferred conversion stock upon conversion of the Series A
Preferred Stock Convertible Subordinated Promissory Notes(1) 675,000
-------
Total Common Outstanding - Fully Diluted(2) 7,835,595
</TABLE>
- ------------------
(1) The "Conversion Price" of this Note will increase from $.80 per
share to the price per share at which the Company issues shares of capital stock
in a subsequent Equity Financing that provides gross proceeds to the Company of
at least $1,500,000 and occurs within 180 days of the issue date of the Note. If
the Company does not raise an additional $225,000 (net of any commissions or
finders' fees) by certain deadlines, the last of which is September 26, 1997,
the "Series A Conversion Price" definition will change from $.80 per share to
$.20 per share, which will have the effect of quadrupling the number of
conversion shares.
(2) Assumes exercise of all outstanding warrants, options and
convertible notes and conversion of all outstanding preferred.
<PAGE>
Schedule to Exhibit 4(t) - Form of Two Year Note and Warrant Purchase Agreement
dated Auguat 5, 1997.
List of Purchasers and Number of Shares of Common Stock:
The Little Family Trust - 25,000
Glenn Gomez - 20,000
Individual Investors - 53,000
Exhibit 4(u)
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECATED UNTIL REGISTERED UNDER THE ACT OR, IN THE
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY, SUCH
OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
SANDBOX ENTERTAINMENT CORPORATION
---------------------------------
SUBORDINATED PROMISSORY NOTE
________, 1997 $_______
For value received, subject to the terms and conditions of this
Subordinated Promissory Note (the "Note"), Sandbox Entertainment Corporation, a
Delaware corporation (the "Company"), hereby promises to pay to the order of
________________________________, whose address is set forth on the signature
page to that certain Two Year Note and Warrant Purchase Agreement between Holder
and the Company, or his/her/its permitted assigns (the "Holder") the principal
sum of _______________________ Dollars ($_______) plus simple interest accrued
on unpaid principal from the date hereof until paid at the rate of ten percent
(10%) per annum. Subject to the terms and conditions of this Note, the unpaid
principal amount of this Note and the unpaid interest accrued thereon shall be
payable in full at the principal office of the Company on the second (2nd)
anniversary of the date hereof or upon the consummation of a Qualifying IPO (as
defined below) out the proceeds of such Qualifying IPO.
The following is a statement of the rights of the holder of this Note
and the terms and conditions to which this Note is subject, and to which the
holder hereof, by the acceptance of this Note, agrees:
1. Definitions. Unless the context otherwise requires, as used in this
Note, the following terms shall have the following meanings:
1.1 "Company" includes any corporation or other entity that
shall succeed to or assume the obligations of the Company under this Note.
1.2 "Noteholder," "Holder," or similar terms, when the context
refers to a holder of this Note, shall mean any person who shall at the time be
the registered holder of this Note.
<PAGE>
1.3 "Qualifying IPO" shall mean a registered offering by the
Company on Forms S-1, SB-1, or SB-2 (or successor forms) that results in
proceeds to the Company of at least $3,000,000 (net of offering expenses).
1.4 "Senior Indebtedness" shall mean the principal of and
unpaid accrued interest on: (i) all indebtedness of the Company to commercial
banks or other financial institutions regularly engaged in the business of
lending money, which is for money borrowed by the Company now or hereafter
(whether or not secured), (ii) all indebtedness and obligations of the Company
that are secured by any portion of the assets of the Company, and (iii) any such
indebtedness or any debentures, notes or other evidence of indebtedness issued
in exchange for such Senior Indebtedness, or any indebtedness arising from the
satisfaction of such Senior Indebtedness by a guarantor.
2. Subordination. The indebtedness evidenced by this Note (but not
Holder's conversion rights) is hereby expressly subordinated, to the extent and
in the manner hereinafter set forth herein, in right of payment to the prior
payment in full of all the Company's Senior Indebtedness.
2.1 Default on Senior Indebtedness. Upon any receivership,
insolvency, assignment for the benefit of creditors, bankruptcy, reorganization
or arrangements with creditors (whether or not pursuant to bankruptcy or other
insolvency laws), dissolution, liquidation or other marshaling of the assets and
liabilities of the Company (i) no amount shall be paid by the Company in respect
of the principal of or interest on this Note at the time outstanding, unless and
until any defaults on the Senior Indebtedness have been cured or waived or shall
have ceased to exist and principal and interest on such obligations has been
paid current, and (ii) no claim or proof of claim shall be filed with the
Company by or on behalf of the Holder which shall assert any right to receive
any payments in respect of principal or interest on this Note except in the
event that any defaults on the Senior Indebtedness have been cured or waived or
shall have ceased to exist. If there occurs an event of default that has been
declared in writing with respect to any Senior Indebtedness, or in the
instrument under which it is outstanding, permitting the holder of such Senior
Indebtedness to accelerate the maturity thereof, then, unless and until such
event of default shall have been cured or waived or shall have ceased to exist,
or all Senior Indebtedness shall have been paid in full, no payment shall be
made in respect of the principal of or interest on this Note without the
approval of the holders of the Senior Indebtedness.
2.2 Undertaking. By its acceptance of this Note, the Holder
agrees to execute and deliver such documents as may be reasonably requested from
time to time by the Company or the lender of any Senior Indebtedness in order to
implement the foregoing provisions of this Section 5.
3. No Impairment. The Company will not willfully avoid or seek to avoid
the observance or performance of any of the terms of this Note, but will at all
times in good faith
2
<PAGE>
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
Noteholder against impairment.
4. Prepayment. The Company may at any time, without penalty, prepay in
whole or in part the principal amount, and/or any accrued interest outstanding
under this Note. Any prepaying shall be applied first to unpaid accrued interest
until all such interest has been paid, and then to unpaid principal.
5. Event of Default. The principal amount due hereunder together with
all accrued interest to date will accelerate and become due if an Event of
Default (as hereinafter defined) occurs. An "Event of Default" shall exist under
this Note if the Company: (i) petitions or applies to any tribunal for or
consents to the appointment of a receiver, (ii) admits in writing its inability
to pay its debts as they mature, (iii) makes a general assignment for the
benefit of its creditors, (iv) is adjudicated bankrupt or insolvent, or (v)
files voluntarily or has filed against it a petition in bankruptcy or a petition
or an answer seeking reorganization or an arrangement with creditors or to take
advantage of any bankruptcy, reorganization, insolvency, readjustment of debts,
dissolution or liquidation law or statute.
6. Restrictions on Transfer. Noteholder acknowledges that this Note has
not been registered or qualified under federal or state securities laws.
Accordingly, the representations and warranties to be made by Noteholder in the
Two Year Note and Warrant Purchase Agreement, or similar agreement, to which the
Company and the original Noteholder are parties (the "Purchase Agreement") shall
be deemed included herein and shall pertain to this Note as though fully set
forth herein. By acceptance of this Note, the registered holder represents that
the registered holder is purchasing this Note for its own account and not with a
view to, or for sale in connection with, any distribution of this Note or any
interest herein.
7. Amendment; Waiver. Any term of this Note may be amended, and the
observance of any term of this Note may be waived (either generally or in a
particular instance and either retroactively or prospectively) only by the
written consent of the Company and Noteholder.
8. Assignment. This Note may be assigned by the holder only with the
Company's prior written consent, only in compliance with the provisions of the
Purchase Agreement, and only if the assignee of this Note acknowledges in
writing to the Company that it is bound by all the terms and conditions of this
Note. Any attempted assignment in violation of this Section shall be void.
9. Headings; References. The headings in this Note are for purposes of
convenience of reference only, and shall not be deemed to constitute a part of
this Note. Unless otherwise expressly noted, all references to Sections in this
Note refer to Sections of this Note.
10. Notices. Any notice or other document required or permitted to be
given or delivered to Noteholder shall be delivered at, or sent by certified or
registered mail to, Noteholder
3
<PAGE>
at the address written on the first page of the Purchase Agreement, or to such
other address as shall have been furnished to Company in writing by Noteholder.
Any notice or other document required or permitted to be given or delivered to
Company shall be delivered at or sent by registered or certified mail to,
Company at 2231 East Camelback Road, Suite 324, Phoenix, AZ 85016, or to such
other address as shall have been furnished in writing to Noteholder by Company.
Any notice so addressed and mailed by registered or certified mail shall be
deemed to be given when so mailed. Any notice so addressed and otherwise
delivered shall be deemed to be given when actually received by the addressee.
11. Law Governing. This Note shall be construed and enforced in
accordance with, and governed by, the internal laws of the State of Arizona,
excluding the body of law applicable to conflicts of law.
12. Attorneys' Fees; Waiver of Presentment. The Company promises to pay
the holder hereof, without demand, all reasonable attorneys fees, costs and
other expenses incurred by such holder in enforcing any provision of this Note
and hereby waives presentment, notice of nonpayment, notice of dishonor,
protest, demand and diligence.
13. Terms Binding. By acceptance of this Note, the holder of this Note
(and each subsequent holder of this Note) accepts and agrees to be bound by all
the terms and conditions of this Note.
IN WITNESS WHEREOF, the Company has caused this Note to be signed in
its name the date first written above.
SANDBOX ENTERTAINMENT CORPORATION
By: __________________________
Name:_________________________
Title:________________________
4
<PAGE>
Schedule to Exhibit 4(u) - Form Promissory Note.
List of Holders and Principal Amount:
The Little Family Trust - $125,000.
Glenn Gomez - $100,000.
Individual Investors - $265,000.
5
Exhibit 4(v)
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1993, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
STOCK SUBSCRIPTION WARRANT
to Purchase _______________ Shares of the
Common Stock, $.001 Par Value, of
SANDBOX ENTERTAINMENT CORPORATION,
a Delaware corporation (the "Company")
DATE OF INITIAL ISSUANCE: As of ______________________, 1997
THIS CERTIFIES THAT for value received,
_________________________________, or his/her/its registered assigns
(hereinafter called the "Holder"), is entitled to purchase from the Company, at
any time during the Term of this Warrant, ________________________________
_________________________ (____________________) shares of common stock, $.001
par value, of the Company (the "Common Stock"), at the Warrant Price, payable in
lawful money of the United States of America, to be paid upon the exercise of
this Warrant. The exercise of this Warrant shall be subject to the provisions,
limitations and restrictions herein contained and may be exercised in whole or
in part.
1. Definitions. For all purposes of this Warrant, the following terms
shall have the meanings indicated:
Common Stock shall mean and include the Company's authorized Common Stock, $.001
par value as constituted at the date of this Warrant, and shall also include any
capital stock of any class or series of the Company now or hereafter authorized
that is not limited to a fixed sum or percentage of par value or of the purchase
price of such stock in respect of the rights of the holders thereof to
participate in dividends and/or in the distribution of assets upon the voluntary
or involuntary liquidation, dissolution or winding up of the Company.
IPO shall mean a registered offering by the Company on Forms S-1, SB-1, or SB-2
(or successor forms) that results in proceeds to the Company of at least
$3,000,000 (net of offering expenses).
IPO Price shall mean the price per share at which the Company issues shares of
Common Stock in an IPO.
<PAGE>
Term of this Warrant shall mean the period beginning on the date of initial
issuance hereof and ending on the third (3rd) anniversary of the Date of Initial
Issuance of this Warrant set forth above.
Warrant Price shall mean Two Dollars ($2.00) per share, subject to adjustment in
accordance with Section 5; provided, that upon and after the thirtieth (30th)
day following the consummation of an IPO, the Warrant Price shall be the IPO
Price if the IPO Price is greater than $2.00 per share.
Warrant Shares shall mean the shares of Common Stock purchased or purchasable by
the Holder of this Warrant upon exercise hereof.
2. Exercise of Warrant. The Warrant shall be exercised, if at all, only
as follows:
(a) To exercise this Warrant in whole or in part, the Holder
shall deliver to the Company at its principal office, at any time and from time
to time during the Term of this Warrant: (i) the notice of exercise in the form
attached hereto as Exhibit A, (ii) cash, certified or official bank check
payable to the order of the Company, wire transfer of funds to the Company's
account, or the surrender of evidence of any indebtedness of the Company to the
Holder (or any combination of the foregoing) in the amount of the Warrant Price
for each share being purchased, and (iii) this Warrant.
(b) Notwithstanding any contrary provisions in this Warrant,
if the Current Market Price (as defined in Section 2(c) below) exceeds the
Warrant Price at the date of calculation, instead of exercising this Warrant as
described in Section 2(a) above, the Holder may elect to receive Warrant Shares
equal to the value of this Warrant (or the portion thereof being exercised), by
delivering to the Company at its principal office, at any time and from time to
time during the Term of this Warrant: (i) the notice of exercise in the form
attached hereto as Exhibit A, and (ii) this Warrant, in which event the Company
shall issue to the Holder a number of Warrant Shares calculated using the
following formula:
CS = WCS x (CMP-WP)
-------------------
CMP,
where CS = the number of Warrant Shares to be issued to the
Holder,
WCS = the number of Warrant Shares purchasable under the
Warrant, or if only a portion of the Warrant is
being exercised, the portion of the Warrant being
exercised at the date of such calculation,
CMP = the Current Market Price (as defined in Section
2(c) below) at the date of such calculation, and
WP = the Warrant Price, as adjusted to the date of such
calculation.
2
<PAGE>
(c) For the purpose of any calculation made pursuant to this
Section 2, the "Current Market Price" at any date of one share of Common Stock
shall be deemed to be the average of the daily closing bid and asked prices for
the Common Stock quoted in the Over-The-Counter Market Summary or the last
reported sale price of the Common Stock or the closing price quoted on the
NASDAQ National Market System or on any exchange on which the Common Stock is
listed, whichever is applicable, as published in the appropriate edition of the
Wall Street Journal for the five (5) trading days immediately prior to the date
of exercise of this Warrant; provided, however, that (i) if the Common Stock is
not traded in such manner that the quotations referred to in this Section 2(c)
are available for the period required hereunder, the Current Market Price shall
be the fair market value of the Common Stock as determined by the Board of
Directors of the Company, acting in good faith, and (2) for the 30 day period
commencing on the consummation of an IPO the Current Market Price shall be the
IPO Price.
(d) Each certificate for Warrant Shares shall bear the
following legend (and any additional legend required by (i) any applicable state
securities laws, and (ii) any securities exchange upon which such Warrant Shares
may, at the time of such exercise be listed) on the face thereof, unless at the
time of exercise, such Warrant Shares shall be registered under the Securities
Act of 1933, as amended (the "Securities Act");
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION THEREFROM UNDER SAID
ACT AND APPLICABLE STATE SECURITIES LAWS."
3. Covenants As to Common Stock. The Company covenants and agrees that:
(i) all shares of Common Stock that may be issued upon the exercise of this
Warrant will, upon issuance, be validly issued, fully paid and nonassessable,
and free from all taxes, liens and charges with respect to the issue thereof;
(ii) it will pay when due and payable any and all federal and state taxes (other
than federal or state income taxes, if any, which shall remain Holder's
responsibility) that may be payable in respect of the issue of this Warrant or
any Common Stock or the Warrant Shares; (iii) it will at all times have
authorized and reserved, free from preemptive rights, a sufficient number shares
of Common Stock to provide for the exercise of the rights represented by this
Warrant; (iv) if any shares of capital stock to be reserved for the purpose of
the issuance of shares upon the exercise of this Warrant require registration
with or approval of any governmental authority under any federal or state law
before such shares may be validly issued or delivered upon exercise, then the
Company shall in good faith and as expeditiously as possible endeavor to secure
such registration or approval, as the case may be; and (v) if and so long as the
Common Stock issuable upon the exercise of this Warrant is listed on any
national securities exchange, the Company, will, if permitted by the rules of
such exchange, list and keep listed on such exchange, upon official notice of
issuance, all shares of such Common Stock issuable upon exercise of this
Warrant.
3
<PAGE>
4. Adjustment of Number of Shares. Upon each adjustment of the Warrant
Price as provided in Section 5 below, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest 1/10th of a share) obtained by multiplying the
Warrant Price in effect immediately before such adjustment by the number of
shares purchasable pursuant hereto immediately before such adjustment, and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
5. Adjustment of Warrant Price. The Warrant Price shall be subject to
adjustment from time to time as follows:
(a) If, at any time during the term of this Warrant, the
number of shares of Common Stock outstanding is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split-up of shares of
Common Stock, then, following the record date fixed for the determination of
Holders of Common Stock entitled to receive such stock dividend, subdivision or
split-up, the Warrant Price shall be appropriately decreased so that the number
of shares of Common Stock issuable upon the exercise of this Warrant shall be
increased in proportion to such increase in outstanding shares.
(b) If, at any time during the term of this Warrant, the
number of shares of Common Stock outstanding is decreased by a combination of
the outstanding shares of Common Stock, then, following the record date for such
combination, the Warrant Price shall appropriately increase so that the number
of shares of Common Stock issuable upon the exercise hereof shall be decreased
in proportion to such decrease in outstanding shares.
(c) All calculations under this Section 5 shall be made to the
nearest cent or to the nearest 1/10th of a share, as the case may be.
(d) If the Company proposes to take any action of the types
described in Section 5(a) or (b), the Company shall forward at the same time and
in the same manner, to the Holder of this Warrant, such notice, if any, that the
Company shall give to the Holders of capital stock of the Company.
6. Transfers. The Company may deem and treat the person in whose name
this Warrant is registered as the Holder and owner hereof. Notwithstanding the
foregoing, the Warrant and all rights hereunder are not transferable in whole or
in part without the prior written consent of the Company and compliance with
that certain Note and Warrant Purchase Agreement of even date herewith between
the Company and Holder, and any attempted transfer without such consent and such
compliance shall be void. Transferability of the Warrant Shares is limited as
set forth in this Warrant.
7. Mergers, Consolidations, Sales. In the case of any proposed
consolidation or merger of the Company with another entity, or the proposed sale
of all or substantially all of its assets to another person or entity, or any
proposed reorganization or reclassification of the capital stock of the Company,
then, as a condition of any such consolidation, merger, sale, reorganization or
4
<PAGE>
reclassification, lawful and adequate provision shall be made pursuant to which
the Holder of this Warrant shall thereafter have the right to receive upon the
basis and upon the terms and conditions specified herein, in lieu of the shares
of Common Stock of the Company immediately purchasable hereunder, such shares of
stock, securities or assets as may, by virtue of such consolidation, merger,
sale, reorganization or reclassification, be issued or payable with respect to
or in exchange for the number of shares of such Common Stock purchasable
hereunder immediately before such consolidation, merger, sale reorganization or
reclassification. The Company shall forward at the same time and in the same
manner, to the Holder of this Warrant, such notice, if any, that the Company
shall give to the Holders of capital stock of the Company with respect to any
proposed transaction described above or any distribution of assets of the
Company in dissolution or liquidation, or any extraordinary dividend or other
distribution on its Common Stock except out of earned surplus or by way of a
stock dividend payable in shares of its Common Stock. This Warrant shall be
binding upon any corporation or other person or entity succeeding to the Company
by merger, consolidation or acquisition of all or substantially all of the
Company's assets.
8. Warrant Price Adjustment. If an IPO (as defined herein) does not
close within one hundred eighty (180) days of the date of this Warrant, the
Warrant Price definition shall automatically be deleted and replaced with the
following:
Warrant Price shall mean Eighty Cents ($.80) per share,
subject to adjustment in accordance with Section 5.
9. Miscellaneous.
(a) Notices. Any notice or other document required or
permitted to be given or delivered to the Holder shall be delivered at, or sent
by certified or registered mail to, the Holder at the address set forth on the
signature page of that certain Two Year Note and Warrant Purchase Agreement
between the Holder and Company of even date herewith, or to such other address
as shall have been furnished to the Company in writing by the Holder. Any notice
or other document required or permitted to be given or delivered to the Company
shall be delivered at or sent by registered or certified mail to, the Company at
2231 East Camelback Road, Suite 324, Phoenix, AZ 85016, or to such other address
as shall have been furnished in writing to the Holder by the Company. Any notice
so addressed and mailed by registered or certified mail shall be deemed to be
given when so mailed. Any notice so addressed and otherwise delivered shall be
deemed to be given when actually received by the addressee.
(b) Governing Law. This Warrant shall be governed in all
respects by the laws of the State of Arizona as applied to agreements entered
into and performed entirely in the State of Arizona by residents thereof.
(c) Entire Agreement; Amendment. This Warrant constitutes the
sole and entire agreement of the parties with respect to the subject matter
hereof. Neither this Warrant nor any term hereof may be amended, waived,
discharged or terminated other than by a written instrument signed
5
<PAGE>
by the party against whom enforcement of any such amendment, waiver, discharge
or termination is sought.
(d) Counterparts. This Agreement may be executed in
counterparts, each of which shall be enforceable against the party actually
executing the counterpart, and both of which together shall constitute one
instrument.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly and authorized officer as of the date first written above.
THE COMPANY:
ATTEST: SANDBOX ENTERTAINMENT CORPORATION
By:________________________ By:________________________________
Its Secretary Its President
ACCEPTED:
HOLDER:
- ---------------------------------
[Name]
6
<PAGE>
FORM OF NOTICE OF EXERCISE
[To be signed only upon exercise of the Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
1. The undersigned hereby exercises the right to purchase _______
shares of Common Stock that the undersigned is entitled to purchase by the terms
of the within Warrant according to the conditions thereof, and herewith makes
payment of the Warrant Price of such shares in full. All shares to be issued
pursuant hereto shall be issued in the name of and the initial address of such
person to be entered on the books of the Company shall be:
_______________________________________________________________________________.
The shares are to be issued in certificates of the following denominations:
_______________________________________________________________________________.
2. The undersigned hereby represents that the shares of the Company's
Common Stock to be delivered to it pursuant to the above-mentioned exercise of
the Warrant are being acquired by the undersigned as an investment and not with
a view to, or for sale in connection with, the distribution of any such shares.
The undersigned agrees to indemnify the Company and its subsidiaries, together
with their officers and directors, for any liabilities, losses, damages and
expenses (including reasonable attorney fees) arising from or in connection with
any disposition of the shares hereby being acquired, or any interest therein, in
violation of applicable securities laws or regulations. The undersigned further
represents that the undersigned has been given access to all information
requested by the undersigned to allow the undersigned to make a decision as to
the advisability of an investment in the Company's stock and the value of such
stock, and that undersigned has the skill and experience necessary to make such
decision. The undersigned also hereby agrees to be bound by, and to assume the
obligations of a Stockholder under, that certain Amended and Restated
Stockholders' Agreement dated as of July 13, 1995, by and among the Company and
the Stockholders party thereto, as the same may be amended from time to time.
[This paragraph 2 is not applicable if the Common Stock being acquired has been
registered under the Securities Act of 1933, as amended.]
________________________________
[Type Name of Holder]
By: _________________________
Title: _________________________
Date: _________________________
<PAGE>
Schedule to Exhibit 4(v) - Form Stock Subscription Agreement dated August 5,
1997.
List of Holders and Number of Common Shares:
The Little Family Trust - 25,000 shares.
Glenn Gomez - 20,000 shares.
Individual Investors - 53,000 shares.
8
Exhibit 9(a)
IRREVOCABLE PROXY
I, Lonnie A. Whittington, holder of Seven Hundred Thirty Seven Thousand
Five Hundred (737,500) shares (the "Shares") of the Common Stock of Sandbox
Entertainment Corporation, a Delaware corporation (the "Corporation"), hereby
make, constitute, and appoint Chad M. Little ("Little") with full power of
substitution, attorney and proxy for me, to appear and vote and otherwise act
for me at all annual, special and other meetings of the shareholders of the
Corporation, whether held in person or via telephone, and to consent to actions
without a meeting, for the purpose of transacting all such business as may
properly come before the shareholders of the Corporation, with respect to Two
Hundred Fifty Thousand (250,000) shares of my Common Stock in the Corporation.
This proxy is coupled with an interest and is IRREVOCABLE. This proxy
shall remain in effect for so long as I own any Proxied Shares, or three (3)
years, whichever is longer.
In the event I transfer any Shares, this proxy shall not apply to the
transferred Shares, but shall continue to apply to Two Hundred Fifty Thousand
(250,000) shares of my Common Stock in the Corporation I have remaining (the
"Proxied Shares"), or so many of the Proxied Shares as I continue to hold. The
Proxied Shares shall be adjusted to include any stock dividends or stock splits
with respect to the Proxied Shares.
Dated: May 7, 1996.
/s/ Lonnie A. Whittington
-------------------------------------
Lonnie A. Whittington
Exhibit 9(b)
IRREVOCABLE PROXY
I, James A. Layne, holder of Seven Hundred Thirty Seven Thousand Five
Hundred (737,500) shares (the "Shares") of the Common Stock of Sandbox
Entertainment Corporation, a Delaware corporation (the "Corporation"), hereby
make, constitute, and appoint Chad M. Little ("Little") with full power of
substitution, attorney and proxy for me, to appear and vote and otherwise act
for me at all annual, special and other meetings of the shareholders of the
Corporation, whether held in person or via telephone, and to consent to actions
without a meeting, for the purpose of transacting all such business as may
properly come before the shareholders of the Corporation with respect to Two
Hundred Fifty Thousand (250,000) shares of shareholders of the Corporation, with
respect to Two Hundred Fifty Thousand (250,000) shares of my Common Stock in the
Corporation.
This proxy is coupled with an interest and is IRREVOCABLE. This proxy
shall remain in effect for so long as I own any Proxied Shares, or three (3)
years, whichever is longer.
In the event I transfer any Shares, this proxy shall not apply to the
transferred Shares, but shall continue to apply to Two Hundred Fifty Thousand
(250,000) shares of my Common Stock in the Corporation I have remaining (the
"Proxied Shares"), or so many of the Proxied Shares as I continue to hold. The
Proxied Shares shall be adjusted to include any stock dividends or stock splits
with respect to the Proxied Shares.
Dated: May 7, 1996.
/s/ James A. Layne
---------------------------------
James A. Layne
Exhibit 10(a)
MASTER LEASE AGREEMENT
No. 101-19001-001
THIRD COAST VENTURE LEASE PARTNERS I, L.P.
900 North Franklin Street, Suite 700
Chicago, Illinois 60610
(312) 337-3303
Lessee: SANDBOX ENTERTAINMENT CORPORATION
Address: 2231 East Camelback, Suite #324
Phoenix, AZ 85016
Date: March 31,1997
Lessor hereby leases to Lessee and Lessee leases from Lessor, in accordance with
the terms and conditions hereinafter set forth, the Equipment. No respective
Schedule shall be construed as an independent separate lease unless assigned by
Lessor pursuant to Section 15 hereof. In the event of a conflict between the
terms of this Lease and the terms and conditions of a Schedule, the terms and
conditions of the Schedule shall govern and control that Schedule.
1. Definitions.
"Acceptance Date" shall mean (1) the date of delivery of the Equipment
to Lessee; (2) in the case of Equipment which is the subject of a sale and
leaseback between Lessor and Lessee, the date upon which Lessor purchases the
Equipment from Lessee; or (3) in the case of Equipment requiring installation,
the date of installation of the Equipment.
"Additions" shall mean all replacement parts, modifications,
improvements, repairs, additions, accessories and alterations incorporated in
the Equipment as now or hereafter affixed thereto including proceeds thereof.
"Article 2A" shall mean Uniform Commercial Code Article 2A-Leases as
adopted in the State of Illinois.
"Commencement Date" shall mean the Acceptance Date, except that if the
Acceptance Date is other than the first day of a calendar quarter, then the
Commencement Date shall be the first day of the calendar quarter following the
month which includes the Acceptance Date.
"Default Date" shall mean the date of occurrence of an Event of Default
as set forth in Section 13.
"Discount Rate" shall mean the charge on loans to depository
institutions by the Federal Reserve Banks in effect from time to time, as
published in the Wall Street Journal, Midwest Edition.
"Equipment" shall mean the equipment described in each Schedule
together with all Additions.
"Equipment Acceptance" shall mean the written confirmation by Lessee of
unconditional acceptance of the Equipment in form supplied by Lessor.
"Equipment Loss" shall mean the loss, damage, theft or destruction of
the Equipment, or any portion thereof, from any cause whatsoever.
"Event of Default" shall mean those events set forth in Section 13
hereof.
<PAGE>
"Fair Market Value" or "Fail Rental Value", as the case may be, shall
mean the value determined on the basis of and equal in amount to the value which
would be obtained in an arm's-length transaction between an informed and willing
buyer-user or lessee-user (other than a used equipment dealer) and an informed
and willing seller or lessor under no compulsion to sell or lease, on the
assumptions that: all such Equipment (a) is being sold "in place and in use";
(b) is free and clear of all liens and encumbrances; (c) is in the condition
required upon the return of the Equipment under Sections 4 and 6 of this Lease;
(d) and does not include any Additions which Lessee may have incorporated into
the Equipment as may be permitted under Section 3 of the Lease. In such
determination, costs of removal of the Equipment from the location of current
use by Lessee shall be in addition to such value(s).
"Initial Lease Term" shall mean the term of this Lease for any item of
Equipment as set forth in the Addendum or Schedule relating to such item of
Equipment.
"Lease" shall mean this Master Lease Agreement No. 101-19001-001 and
any Addenda executed pursuant to Section 24 hereof.
"Lessee" shall mean Sandbox Entertainment Corporation, a corporation
incorporated under the laws of Delaware, with its principal place of business at
2231 East Camelback, Suite 324, Phoenix, Arizona 85016.
"Lessor" shall mean Third Coast Venture Lease Partners I, L.P., a
Delaware limited partnership with its principal place of business at 900 North
Franklin Street, Suite 700, Chicago, Illinois 60610.
"Obligor" shall mean any guarantor or surety of any obligations of
Lessee to Lessor under this Lease and any Schedule hereto.
"Premises" shall mean the premises of Lessee where the Equipment is
located as set forth in the applicable Schedule.
"Prime Rate" shall mean the base rate on corporate loans posted by at
least 75% of the nation's 30 largest banks (or its equivalent) per annum in
effect from time to time, as published in the Wall Street Journal, Midwest
Edition.
"Schedule(s)" shall mean those equipment schedule(s) which may be
executed by Lessor and Lessee from time to time each of which is made a part
hereof.
"Service Charge" shall mean a charge equal to two percent (2%) per
month of the overdue payments or the maximum rate permitted by law, whichever is
less.
"Supplier" shall mean the vendor, dealer, seller, manufacturer or
supplier of the Equipment as defined in Article 2A.
2. Term and Rental. Lessee shall pay to Lessor, in addition to all other sums
due hereunder, an amount equal to the product of (i) the amount funded by
Lessor; multiplied by (ii) one-thirtieth of the applicable Monthly Rent Factor
(as such term is defined in the Addendum); multiplied by the number of days from
and including the date of such funding by Lessor to the Commencement Date of the
Initial Lease Term Lessee agrees to pay the total rental for the entire term
hereof, which shall be the total amount of all rental payments set forth in the
Schedule, plus such additional amounts as may become due hereunder or pursuant
to any written modification hereof or additional written agreement hereto.
Except as otherwise specified in the Schedule, rental payments hereunder shall
be monthly and shall be payable in advance on the first day of each month during
the term of this Lease beginning with the Commencement Date of the Initial Lease
Term and shall be sent to the address of the Lessor specified in this Lease or
in the Schedule or as otherwise directed by the Lessor in writing Rental
payments or any other payments due hereunder not made on or before the due date
shall be overdue and shall be subject to a Service Charge. If Lessor shall at
any time accept a rental payment after it shall become due, such acceptance
shall not constitute or be construed as a waiver of any or all of Lessor's
rights hereunder, including without limitation those rights of Lessor set forth
in Sections 13 and 14 hereof.
3. Title. This is an agreement of lease only. Lessee shall have no right, title
or interest in or to the Equipment leased hereunder, except as to the use
thereof subject to the terms and conditions of this Lease. All of the Equipment
shall remain personal property (whether or not the Equipment may at any time
become attached or affixed to real property). The Equipment is and shall remain
the sole and exclusive property of Lessor or its assignees. This Lease is
intended to constitute a true lease and not a sale of the related Equipment.
However, to the extent, at any time or from time to time, this Lease is
construed to be a transaction intended as security, Lessor retains
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and Lessee hereby grants to Lessor a security interest in and to the Equipment,
the proceeds of any sale thereof, the assignment, lease, or sublease thereof,
any insurance proceeds with respect thereto, and any other rights of Lessee,
tangible or intangible, in and to the Equipment, the Lease, and their proceeds;
provided, further, that Lessee may not, to the extent this Lease is construed to
be a transaction intended as security, sell or otherwise encumber the Equipment
without Lessor's prior written consent. No right, title or interest in the
Equipment shall pass to Lessee other than, conditioned upon Lessee's compliance
with and fulfillment of the terms and conditions of this Lease, the right to
maintain possession and use of the Equipment for the Lease Term as provided in
Schedule(s). Any Additions, whether before or after the Commencement Date, shall
become the property of Lessor upon being so incorporated or affixed and shall be
returned to Lessor as provided in Section 4. Upon the request of Lessor, Lessee
will affix to the Equipment labels or other markings supplied by Lessor
indicating Lessor's ownership of the Equipment and shall keep the same affixed
for the entire term of this Lease. Lessee agrees to promptly execute and deliver
or cause to be executed and delivered to Lessor and Lessor is hereby authorized
to record or file, any statement and/or instrument requested by Lessor for the
purpose of showing Lessor's interest in the Equipment, including without
limitation, financing statements, security agreements, and waivers with respect
to rights in the Equipment from any owners or mortgagees of any real estate
where the Equipment may be located. Lessee hereby appoints Lessor as Lessee's
limited attorney-in-fact to execute and record all documents necessary to
perfect or maintain the perfection of Lessor's interests hereunder or to make
claim for, receive payment of, and execute and endorse all documents, checks or
drafts for loss or damage under any insurance policy. Lessee shall pay Lessor
for any costs and fees relating to any filings hereunder including but not
limited to, costs, fees, searches, document preparation, documentary stamps,
privilege taxes and reasonable attorneys' fees. If any item of Equipment
includes computer software, Lessee shall execute and deliver and shall cause
Supplier (as hereinafter defined) to deliver all such documents as are necessary
to effectuate assignment of all applicable software licenses to Lessor. Lessee
shall at its expense: (a) indemnify, protect and defend Lessor's title to the
Equipment from and against all persons claiming against or through Lessee; (b)
at all times keep the Equipment free from any and all liens, encumbrances,
attachments, levies, executions, burdens, charges or legal process of any and
every type whatsoever; (c) give Lessor immediate written notice of any breach of
this Lease described in clause (b); and (d) indemnify, protect and save Lessor
harmless from any loss, cost or expense (including reasonable attorneys' fees)
caused by the Lessee's breach of any of the provisions of this Lease.
4. Acceptance and Return of Equipment. Lessor shall, at any time prior to
unconditional acceptance of all Equipment by Lessee, have the right to cancel
this Lease with respect to such Equipment (and if the Equipment or any portion
thereof has not previously been accepted, Lessor may refuse to pay for the
Equipment or any portion thereof or refuse to cause the same to be delivered)
if: (a) the Acceptance Date with respect to any item of Equipment to be leased
pursuant to any Schedule has not occurred within sixty (60) days of the
estimated Acceptance Date set forth in such Schedule or (b) there shall be, in
the reasonable judgment of Lessor, a material adverse change in the financial
condition or credit standing of Lessee or of any guarantor of Lessee's
performance under this Lease or failure of Lessee to substantially achieve
operational and financial objectives as set forth in Lessee's most recent
operating plan. Upon any cancellation by Lessor pursuant to this Section or the
provisions of any Schedule, Lessee shall forthwith reimburse to Lessor all sums
paid by Lessor with respect to such Equipment plus all costs and expenses of
Lessor incurred in connection with such Equipment and any interest or rentals
due hereunder in connection with such Equipment and shall pay to Lessor all
other sums then due hereunder, whereupon if Lessee is not then in default and
has fully performed all of its obligations hereunder, Lessor will, upon request
of Lessee, transfer to Lessee without warranty or recourse any rights that
Lessor may then have with respect to such Equipment. Lessee shall execute and
deliver to Lessor the Equipment Acceptance within fifteen (15) days after the
Acceptance Date. Lessee agrees, before execution of the aforesaid Equipment
Acceptance, to inform Lessor in writing of any defects in the Equipment, or in
the installation thereof, which have come to the attention of Lessee or its
agents and which might give rise to a claim by Lessee against the Seller or any
other person. If Lessee fails to give notice to Lessor of any such defects or
fails to deliver to Lessor the Equipment Acceptance as provided herein, it shall
be deemed an acknowledgment by Lessee (for purposes of this Lease only) that no
such defects in the Equipment or its installation exist and it shall be
conclusively presumed, solely as between Lessor and its assignees and Lessee,
that such Equipment has been unconditionally accepted by Lessee for lease
hereunder. Except as otherwise provided in any Schedule, Lessee shall provide
Lessor ninety (90) days prior written notice of its intention to return the
Equipment upon expiration of the Initial Lease Term. Upon expiration or the
cancellation or termination of the Lease with respect to any Equipment, Lessee
shall, at its own expense, assemble, crate, insure and deliver all of the
Equipment and all of the service records and all software and software
documentation subject to this Lease and any Schedules hereto to Lessor in the
same good condition and repair as when received, reasonable wear and tear
resulting only from proper use thereof excepted, to such reasonable destination
within the continental United States as Lessor shall designate. The Equipment
shall be deemed delivered to Lessor upon Lessor's execution of its certificate
of receipt. Lessee shall, immediately prior to such return of each item of
Equipment, provide to Lessor a letter from the manufacturer of the equipment or
another service organization reasonably acceptable to Lessor certifying that
said item is in good working order, reasonable wear and tear resulting only from
proper use thereof excepted, and all software is included thereon. If any
computer software requires relicensing when removed from Lessee's
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premises, Lessee shall bear all costs of such relicensing. If Lessee fails for
any reason to provide the notice set forth above or to re-deliver the Equipment
back to Lessor in accordance with the terms set forth above, Lessee shall pay to
Lessor, at Lessor's election, an amount equal to the highest monthly payment set
forth in the Schedule for a period of not less than three (3) months and at the
end of such period of time, Lessee shall return the Equipment to Lessor as
provided herein. If Lessee fails or refuses to return the Equipment as provided
herein at the end of any holdover period, Lessee shall pay to Lessor, at
Lessor's option, an amount equal to the highest monthly payment set forth in the
Schedule or the highest rate permitted by law, whichever is less, for each month
or portion thereof, until Lessee so returns the Equipment to Lessor.
5. Disclaimer of Warranties. The Lessee and Lessor agree that this Lease is a
Finance Lease as defined in Uniform Commercial Code Article 2A--Leases. The
Lessee also acknowledges that: (a) the Lessee has selected the Supplier and
directed the Lessor to purchase the Equipment from the Supplier; (b) the Lessee
has been informed in writing before signing this Lease, that the Lessee is
entitled under Article 2A to the promises and warranties, including those of any
third party, provided to the Lessor by the Supplier in connection with or as
part of the contract by which the Lessor acquired the Equipment; and (c) the
Lessee may communicate with the Supplier and receive an accurate and complete
statement of those promises and warranties, including any disclaimers and
limitations thereof or of any remedies in connection therewith. LESSEE HAS
EXCLUSIVELY SELECTED AND CHOSEN THE TYPE, DESIGN, CONFIGURATION, SPECIFICATION
AND QUALITY OF THE EQUIPMENT HEREIN LEASED AND THE SUPPLIER THEREOF, AS SET
FORTH IN THE SCHEDULES. LESSOR MAKES NO REPRESENTATION OR WARRANT, EITHER
EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING WITHOUT LIMITATION,
THE CONDITION OF THE EQUIPMENT, ITS MERCHANTABILITY OR ITS FITNESS,
ADAPTABILITY, ANY IMPLIED WARRANTY OF QUIET ENJOYMENT OR NON-INTERFERENCE OR
SUITABILITY FOR ANY PARTICULAR PURPOSE, AND, LESSEE LEASES, HIRES AND RENTS THE
EQUIPMENT AS IS." Lessee understands and agrees that neither Supplier, nor any
agent of Supplier, is an agent of Lessor or is in any manner authorized to waive
or alter any term or condition of this Lease. Lessor shall not be liable for any
loss or damage suffered by Lessee or by any other person or entity, direct or
indirect or consequential, including, but not limited to, business interruption
and injury to persons or property, resulting from non-delivery or late delivery,
installation, failure or faulty operation' condition, suitability or use of the
Equipment leased by Lessee hereunder, or for any failure of any representations,
warranties or covenants made by the Supplier. Any claims of Lessee shall not be
made against Lessor but shall be made, if at all, solely and exclusively against
Supplier, or any persons other than the Lessor. Lessor hereby authorizes Lessee
to enforce during the term of this Lease, in its name, but at Lessee's sole
effort and expense, all warranties, agreements or representations, if any, which
may have been made by Supplier to Lessor or to Lessee, and Lessor hereby assigns
to Lessee solely for the limited purpose of making and prosecuting any such
claim, all rights which Lessor may have against Supplier for breach of warranty
or other representation respecting the Equipment.
6. Care, Transfer and Use of Equipment. Lessee, at its own expense, shall
maintain the Equipment in good operating condition, repair and appearance in
accordance with Supplier's specifications and in compliance with all applicable
laws and regulations and shall protect the Equipment from deterioration except
for reasonable wear and tear resulting only from proper use thereof. When
generally offered, Lessee shall, at its expense, keep a _______ maintenance
contract (e.g. upgrades) in full force and effect on all Equipment (except
personal computers), throughout the term of this Lease and any Schedule hereto.
The disrepair or inoperability of the Equipment regardless of the cause thereof
shall not relieve Lessee of the obligation to pay rental hereunder. Lessee shall
not make any Addition to the Equipment (other than normal operating accessories
or controls) without prior written consent of Lessor. Lessee will not, and will
not permit anyone other than the authorized field engineering representatives of
Supplier or other maintenance organization reasonably acceptable to Lessor to
effect any inspection, adjustment, preventative or remedial maintenance or
repair to the Equipment. Lessee may not (a) relocate or operate the Equipment at
locations other than the Premises, except with Lessor's prior written consent,
which shall not be unreasonably withheld if such other location within the
continental United States, or (b) SELL, CONVEY, TRANSFER, ASSIGN, SUBLEASE,
ENCUMBER ALL OR ANY OF ITS INTERESTS IN THIS LEASE, ANY SCHEDULE OR ANY ITEMS OF
EQUIPMENT (INCLUDING PARTING WITH POSSESSION OF ANY ITEM OF EQUIPMENT) AND ANY
SUCH PURPORTED TRANSACTION SHALL BE NULL AND VOID AND OF NO FORCE OR EFFECT. In
the event of a relocation of the Equipment or any item thereof to which Lessor
consents, all costs (including, but not limited to, Uniform Commercial Code
filing fees, any additional property taxes or other taxes and any additional
expense of insurance coverage) resulting from any such relocation, shall be
promptly paid by Lessee upon presentation to Lessee of evidence supporting such
cost. Lessor shall have the right during normal hours upon reasonable notice to
Lessee, subject to applicable laws and regulations, to enter Lessee's Premises
in order to inspect, observe, affix labels or other markings, or to exhibit the
Equipment to prospective purchasers or future lessees thereof, or to otherwise
protect Lessor's interest therein.
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7. Net Lease. THIS LEASE AND ANY SCHEDULE HERETO IS A NET LEASE, AND ALL
PAYMENTS HEREUNDER ARE NET TO LESSOR. Al1 taxes, assessments, licenses, and
other charges (including, without limitation personal property taxes and sales,
franchise, gross receipt, use and leasing taxes and penalties and interest on
such taxes) imposed, levied or assessed on the ownership, possession, rental or
use of the Equipment during the term of this Lease and any Schedule hereto
(except for Lessor's federal or state net income taxes) shall be paid by Lessee
when due and before the same shall become delinquent, whether such taxes are
assessed or would ordinarily be assessed against Lessor or Lessee. To the extent
possible under applicable law, for personal property or ad valorem tax return
purposes only, Lessee shall include the Equipment on such returns as may be
required, which returns shall be timely filed by it. In any event, Lessee shall
file all tax returns required for itself or Lessor and Lessor hereby appoints
Lessee as its attorney-in-fact for such purpose. In case of failure by Lessee to
so pay said taxes, assessments, licenses or other charges, Lessor may pay all or
any part of such items, in which event the amount so paid by Lessor including
any interest or penalties thereon and reasonable attorneys' fees incurred by
Lessor shall be immediately paid by Lessee to Lessor as additional rental
hereunder. Lessee shall promptly pay all costs, expenses and obligations of
every kind and nature incurred in connection with the use or operation of the
Equipment which may arise or become due during the term of this Lease and any
Schedule hereto, whether or not specifically mentioned herein. In case of
failure by Lessee to comply with any provision of this Lease and any Schedule
hereto, Lessor shall have the right, but not the obligation, to effect such
compliance on behalf of Lessee. In such event, all costs and expenses incurred
by Lessor in effecting such compliance shall be immediately paid by Lessee to
Lessor as additional rental hereunder.
8. Indemnity. Lessee shall and does hereby agree to indemnify, defend and hold
Lessor and its assigns harmless from and against any and all liability, loss,
costs, injury, damage, penalties, suits, judgments, demands, claims, expenses
and disbursements (including without limitation, reasonable attorneys' fees) of
any kind whatsoever arising out of, on account of, or in connection with this
Lease, any Schedule hereto and the Equipment leased hereunder, including,
without limitation, its manufacture, selection, purchase, delivery, rejection,
installation, ownership, possession, leasing, renting, operation, control, use,
maintenance and the return thereof. Lessee's indemnity shall include any loss of
the tax benefits which Lessor, its affiliates, partners and assignees currently
are entitled to enjoy caused by (a) acts, omissions or misrepresentations of
Lessee and (b) acts of any governmental authority. Such items shall include, but
not be limited to the following if (i) Lessor shall not be entitled to
accelerated cost recover deductions (the "MACRS deductions") as allowed under
Section 168 of the Internal Revenue Code of 1986, as amended, ("the Code") based
on 100% of the Original Cost of the Equipment to Lessor and utilizing the
depreciable life and method referred to in the attached Schedule(s), or (ii) if
Lessor loses any other intended tax benefit as a result of any subsequent change
in the Code, (including a change in the maximum federal corporate income tax
rates from the rates in effect under the Code as of the date of this Lease
hereinafter referred to as a "Tax Rate Change") or rules and regulations
promulgated pursuant thereto, whether or not retroactive, which impacts Lessor's
intended return and economics from this transaction, or (iii) if Lessor is
required to recognize income other than rent as contemplated under the Lease, or
(iv) if any item of income, gain, loss or deduction is treated as having been
derived from or allocable to sources outside the U.S. This indemnity shall
survive the Initial Lease Term or earlier cancellation or termination of this
Lease and any Schedule hereto.
9. Insurance. Commencing on the date that risk of loss or damage passes to
Lessor from the Supplier and continuing until Lessee has re-delivered the
Equipment to Lessor and Lessor has accepted receipt of the Equipment from
Lessee, Lessee shall, at its own expense, keep the Equipment insured against all
risks of loss or damage from every and any cause whatsoever in such amounts (but
in no event less than the greater of the replacement value thereof or the amount
set forth in the applicable casualty schedule, whichever is higher and with a
deductible amount not to exceed $5,000.00) and in such form as is satisfactory
to Lessor. All such insurance policies shall protect Lessor and Lessor's
assignee(s) as principal loss payees as their interests may appear. Lessee shall
also, at its own expense, carry public liability insurance, with Lessor and
Lessor's assignee(s) as an additional insured, in such amounts with such
companies and in such form as is satisfactory to Lessor, with respect to injury
to person or property resulting from or based in any way upon or in any way
connected with or relating to the installation, use or alleged use, or operation
of any or all of the Equipment, or its location or condition. Not less than ten
(10) days prior to the Acceptance Date, Lessee shall deliver to Lessor
satisfactory evidence of such insurance and shall further deliver evidence of
renewal of each such policy not less than thirty (30) days prior to expiration
thereof. Each such policy shall contain an endorsement providing that the
insurer will give Lessor and it's assignees not less than thirty (30) days prior
written notice of the effective date of any alteration, change, cancellation, or
modification of such policy or the failure by Lessee to timely pay all required
premiums, costs or charges with respect thereto. Upon Lessor's request, Lessee
shall cause its insurance agent(s) to execute and deliver to Lessor Loss Payable
Clause Endorsement and Additional Insured Endorsement (bodily injury and
property damage liability insurance) forms provided to Lessee by Lessor and name
any assignees of Lessor designated by Lessor. Each policy shall be primary
without rights of contribution from any other insurance which is carried by
Lessor and shall expressly provide that all of the provisions thereof, except
the limits of liability, shall operate in the same manner as if there were a
separate policy covering each insured. Each policy shall provide
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for payment to Lessor and its assignees notwithstanding any action, inaction or
breach of representation or warranty by Lessee or Lessor. In case of the failure
to procure or maintain such insurance, Lessor shall have the right, but not the
obligation, to obtain such insurance and there shall be no recourse against
Lessor or its assignees for payment of such premiums or other amounts with
respect thereto. Any premium paid by Lessor shall be immediately due and payable
by Lessee to Lessor as additional rent hereunder. The maintenance of any policy
or policies of insurance pursuant to this Section shall not limit any obligation
or liability of Lessee pursuant to Sections 8 or 10 or any other provision of
this Lease and any Schedule hereto. Lessee shall, to the extent reasonably
possible, obtain liability insurance required hereunder on an occurrence basis
rather than a claims made basis. To the extent that the Lessee must obtain some
or all of this coverage on a claims made basis, Lessee shall provide Lessor with
satisfactory evidence that the retroactive date of the claims made policy is
prior to the Commencement Date or the date of Delivery and Acceptance by Lessee,
whichever is earlier; that the then remaining aggregate amount of Lessee's
coverage is and will be sufficient to meet the minimum amount of coverage
required hereunder, and that the policy will either remain in force, be renewed,
or a satisfactory discovery period will be purchased to cover any claims which
might arise hereunder in the future. Lessee's obligation to keep the Equipment
insured as provided herein shall continue until the Equipment is returned to
Lessor pursuant to Section 4 hereof.
10. Risk of Loss. Until such time as the Equipment is returned and delivered to
and accepted by Lessor, pursuant to the terms of this Lease and any Schedule
hereto, Lessee hereby assumes and shall bear the entire risk of any Equipment
Loss. Without limitation of the foregoing, no Equipment Loss shall relieve
Lessee in any way from its obligations hereunder. Lessee shall promptly notify
Lessor in writing of any Equipment Loss. In the event of any such Equipment
Loss, Lessee shall: (a) in the event Lessor determines such Equipment to be
repairable, promptly place, at Lessee's expense, the Equipment in good repair,
condition and working order in accordance with Supplier's specifications and to
the satisfaction of Lessor; or (b) in the event of an actual or constructive
total loss of any item of Equipment, at Lessor's option: (i) promptly replace,
at Lessee's expense, the Equipment with like equipment of the same or a later
model with the same Additions as the Equipment, and in good repair, condition
and working order in accordance with the Supplier's specifications and to the
satisfaction of Lessor; or (ii) immediately pay to Lessor the amount obtained by
multiplying the Equipment Cost as specified in the applicable Schedule by the
percentage contained in any casualty schedule for the date of such Equipment
Loss plus, any unpaid rentals or any amounts due hereunder or, if no casualty
schedule has been made a part of any applicable Schedule, an amount equal to the
present value of the total amount of unpaid rentals and all other amounts due
and to become due under any applicable Schedule during the term thereof as of
the date of any payment plus an additional amount equal to the present value of
the estimated residual value of the Equipment at the expiration of the Lease,
all discounted at a rate equal to the Discount Rate in effect as of the
Commencement Date of the Lease with respect to each applicable Schedule, but in
no event shall the amount of such Fair Market Value be less than twenty percent
(20%) of the Equipment Cost as specified in the applicable Schedule. In the
event Lessee is required to repair or replace any such item of Equipment
pursuant to Subsections (a) or (b)(i) of the preceding sentence, the insurance
proceeds received by Lessor and its assignees, if any, pursuant to Section 9,
after the use of such funds to pay any unpaid amounts then due hereunder, shall
be paid to Lessee or, if applicable, to a third party repairing or replacing the
Equipment upon Lessee's furnishing proof satisfactory to Lessor and its assignee
that such repair or replacement has been completed in a satisfactory manner. In
the event Lessor elects the option set forth in Subsection (b)(u), Lessee shall
be entitled to a credit against the payment required by said Subsection in an
amount equal to such insurance proceeds actually received by Lessor and its
assignee pursuant to Section 9 on account of such Equipment, and, upon payment
by Lessee to Lessor of all of the sums required pursuant to Subsection (b)(ii),
the applicable Schedule shall terminate with respect to such item of Equipment
and Lessee shall be entitled to whatever interest Lessor may have in such item
"as is, where is" and "with all faults" in its then condition and location
without warranties of any type whatsoever, express or implied.
11. Covenants of Lessee. Lessee agrees that its obligations under this Lease and
any Schedule hereto, including without limitation, the obligation to pay rental,
are irrevocable and absolute, shall not abate for any reason whatsoever
(including any claims against Lessor), and shall continue in full force and
effect regardless of any inability of Lessee to use the Equipment or any part
thereof for any reason whatsoever including without limitation, war, act of God,
storms, governmental regulations, strike or other labor troubles, loss, damage,
destruction, disrepair, obsolescence, failure of or delay in delivery of the
Equipment, or failure of the Equipment to properly operate for any cause. In the
event of any alleged claim (including a claim which would otherwise be in the
nature of a set-off) against Lessor, Lessee shall fully perform and pay its
obligations hereunder (including all rents, without set-off or defense of any
kind) and its only exclusive recourse against Lessor shall be by a separate
action. Lessee, if requested, shall provide at Lessee's expense opinions of its
counsel acceptable to Lessor affirming the covenants, representations and
warranties of Lessee under this Lease and any Schedule hereto and any other
documents related hereto or incorporated herein. Lessee shall provide Lessor
with not less than thirty (30) days prior written notice of any material change
in Lessee's financial structure or ownership (e.g., merger, consolidation, sale,
lease or other disposition of assets not in the ordinary course).
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12. Representations and Warranties. In order to induce Lessor in enter into this
Lease and any Schedule hereto and to lease the Equipment to Lessee hereunder,
Lessee represents and warrants that:
(a) Financial Statements. (i) applications, financial statements,
reports and operating plans which have been submitted by Lessee and any
Obligors to Lessor are, and all information hereafter furnished by
Lessee and Obligors to Lessor will be, true and correct in all material
respects as of the date submitted; (ii) as of the date hereof, the date
of any Schedule and any Acceptance Date, there has been no material
adverse change in any matter stated in such applications, financial
statements and reports; (iii) as of the date hereof, the date of any
Schedule and any Acceptance Date, Lessee has not failed to
substantially achieve operational and financial objectives as set forth
in Lessee's operating plan and financial projections furnished to
Lessor in connection with Lessor's approval of this transaction; and,
(iv) none of the foregoing omit or omitted to state any material fact.
(b) Organization. Lessee is an organizational entity described on the
signature page hereof and is duly organized, validly existing and is
duly qualified to do business and is in good standing in each State in
which the Equipment will be located.
(c) Authority. Lessee has full power, authority and right to own and/or
lease property and to execute, deliver and perform this Lease and any
Schedule hereto, and the execution, delivery and performance hereof has
been authorized by all necessary action of Lessee.
(d) Enforceability. This Lease and any Schedule or other document
executed in connection therewith has been duly executed and delivered
by Lessee and any Obligor and constitutes a legal, valid and binding
obligation of Lessee and any Obligor enforceable in accordance with its
terms.
(e) Consents. The execution, delivery and performance of this Lease and
any Schedule hereto does not require any approval or consent of any
stockholders, partners or proprietors or of any trustee or holders of
any indebtedness or obligations of Lessee, and will not contravene any
law, regulation, judgment or decree applicable to Lessee, or the
certificate of incorporation, partnership agreement, by-laws or other
governing documents of Lessee, or contravene the provisions of, or
constitute a default under, or result in the creation of any lien upon
any property of Lessee under any mortgage, instrument or other
agreement to which Lessee is a party or by which Lessee or its assets
may be bound or affected. Except as disclosed, no authorization,
approval, license, filing or registration with any court or
governmental agency or instrumentality is necessary in connection with
the execution, delivery, performance, validity and enforceability of
this Lease and any Schedule hereto.
(f) Title. On each Commencement Date, Lessor shall have good and
marketable title to the items of Equipment which are subject to this
Lease and any Schedule hereto on such date, free and clear of all
liens, except the lien of Supplier which will be released upon receipt
of payment. Lessee warrants that no party has a security interest in
the Equipment which will not be released on or before payment by Lessor
to Supplier of the Equipment and that the Equipment is and shall at all
times remain personal property regardless of how it may be affixed to
any real property.
(g) Litigation. There is no action, suit, investigation or proceeding
by or before any court, arbitrator, agency or governmental authority
pending or threatened against or affecting Lessee: (i) which involves
the Equipment or the transactions contemplated by this Lease and any
Schedule hereto; or (ii) which, if adversely determined, could have a
material adverse effect on the financial condition, business or
operation of Lessee.
13. Events of Default. An Event of Default shall occur hereunder if Lessee or
any Obligor: (a) fails to pay any installment of rent or other payment required
hereunder when due; or (b) attempts to or does remove from the Premises (except
a relocation with Lessor's written consent as provided in Section 6), sell,
transfer, encumber, part with possession of, or sublet any item of the
Equipment; or (c) shall suffer or have suffered, in the reasonable judgment of
Lessor, any event the result of which has caused the Lessor to deem itself to be
insecure including, but not limited to, any of the following (i) a material
adverse change in its financial condition or business prospects; (ii) a material
change in structure (e.g., merger, consolidation, sale, lease or other
disposition of assets not in the ordinary course); (iii) a material change in
ownership (e.g., sale of stock); (iv) failure of Lessee to substantially achieve
operational and financial objectives as set forth in Lessee's operating plan and
financial projections furnished to Lessor in connection with Lessor's approval
of this transaction; or (v) any of the statements or other documents or
information submitted at any time heretofore or hereafter by Lessee or Obligor
to Lessor has misstated or shall misstate or has failed or shall fail to state a
material fact; or (d) breaches or shall have breached
-7-
<PAGE>
any representation or warranty made or given by Lessee or Obligor in this Lease
or in any other document furnished to Lessor in connection herewith, or any such
representation or warranty shall be untrue or, by reason of failure to state a
material fact or otherwise, shall be misleading; or (e) fails to perform or
observe any other covenant, condition or agreement to be performed or observed
by it hereunder, and such failure or breach shall continue unremedied for a
period of ten (10) days after the earlier of (i) the date on which Lessee
obtains, or should have obtained knowledge of such failure or breach, or (ii)
the date on which notice thereof shall be given by Lessor to Lessee; or (f)
shall become insolvent or bankrupt or make an assignment for the benefit of
creditors or consent to the appointment of a trustee or receiver, or a trustee
or receiver shall be appointed for a substantial part of its property without
its consent, or bankruptcy or reorganization or insolvency proceeding shall be
instituted by or against Lessee or obligor; or (g) conveys, sells, refers,
subleases or assigns substantially all of Lessee's or Obligor's assets or ceases
doing business as a going concern, or, if a corporation, ceases to be in good
standing or files a statement of intent to dissolve, or abandons any or all of
the Equipment; or (h) shall be in breach of or default under any lease or other
agreement at any time executed with Lessor or any other lessor or with any
lender to Lessee or Obligor.
14. Remedies. From and after the Default Date, Lessor may, in its sole and
absolute discretion, do any one or more of the following: (a) upon notice to
Lessee, cancel all or any portion of this Lease and some or all Schedules
executed pursuant thereto; (b) enter Lessee's Premises and without removal of
the Equipment, render the Equipment unusable or, require Lessee to assemble the
Equipment and make it available to Lessor at a place designated by Lessor,
and/or dispose of the Equipment by sale or otherwise (all of which
determinations may be made by Lessor in its sole and absolute discretion)
without any duty to account for such action or inaction or for any proceeds or
profits with respect thereto; (c) declare immediately due and payable all sums
due and to become due hereunder for the full term of the Lease (including any
renewal or purchase obligations which Lessee has contracted to pay); (d) with or
without canceling this Lease, recover from Lessee damages, in an amount equal to
the sum of: (i) all unpaid rent and other amounts that became due and payable
on, or prior to, the Default Date; (ii) the present value of al1 future rentals
and other amounts described in the Lease and not included in (i) above
discounted to the Default Date at a rate equal to the Discount Rate as of the
Commencement Date of the Lease with respect to each Schedule (which Discount
Rate, Lessee agrees is a commercially reasonable rate which takes into account
the facts and circumstances at the time such Schedule commenced); (iii) all
commercially reasonable costs and expenses incurred by Lessor in enforcing
Lessor's rights under this Lease, including but not limited to, costs of
repossession, recovery, storage, repair, sale, re-lease and reasonable
attorneys' fees; (iv) the present value of the estimated residual value of the
Equipment as of the expiration of the Lease discounted at a rate equal to the
Discount Rate in effect as of the Commencement Date of the Lease with respect to
each applicable Schedule, but in no event shall the amount of such Fair Market
Value be less than twenty percent (20%) of the Equipment Cost as specified in
the applicable Schedule; (v) any indemnity amount payable to Lessor; and (vi)
interest on all of the foregoing from the Default Date until the date payment is
received by Lessor at 2-1/2% in excess of the Prime Rate in effect on the date
of such payment, or the highest rate permitted by law, whichever is less; (e)
exercise any other right or remedy which may be available to it under the
Uniform Commercial Code or any other applicable law. Lessor reserves the right,
in its sole and absolute discretion, to release or sell any or all of the
Equipment at a public auction or in a private sale, at such time, on such terms
and with such notice as Lessor shall in its sole and absolute discretion deem
reasonable. In such event, without any duty on Lessor's part to effect any such
re-lease or sale of the Equipment, Lessor will credit the present value of any
proceeds from such sale or re-lease actually received and retainable by it (net
of any and all costs or expenses) discounted from the date of Lessor's receipt
thereof to the Default Date at 2-1/2% in excess of the Prime Rate in effect on
the date of such payment, or the highest rate permitted by law, whichever is
less to the amounts due to Lessor from Lessee under the provisions of (c), (d)
and/or (e) above. A cancellation of this Lease shall occur only upon notice by
Lessor and only as to such items of Equipment as Lessor specifically elects to
cancel and this Lease shall continue in full force and effect as to the
remaining items of Equipment, if any. If this Lease and/or any Schedule is
deemed at any time to be one intended as security, Lessee agrees that the
Equipment shall secure, in addition to the indebtedness set forth herein, any
other indebtedness at any time owing by Lessee to Lessor. No remedy referred to
in this Section is intended to be exclusive, but shall be cumulative and in
addition to any other remedy referred to above or otherwise available to Lessor
at law or in equity. No express or implied waiver by Lessor of any default shall
constitute a waiver of any other default by Lessee or a waiver of any of
Lessor's rights.
15. Assignment by Lessor. LESSOR MAY (WITH OR WITHOUT NOTICE TO LESSEE) SELL,
TRANSFER, ASSIGN OR GRANT A SECURITY INTEREST IN ALL OR ANY PART OF ITS INTEREST
IN THIS LEASE, ANY SCHEDULE, ANY ITEMS OF EQUIPMENT OR ANY AMOUNT PAYABLE
HEREUNDER. In such an event, Lessee shall, upon receipt of notice, acknowledge
any such sale, transfer, assignment or grant of a security interest and shall
pay its obligations hereunder or amounts equal thereto to the respective
transferee, assignee or secured party in the manner specified in any
instructions received from Lessor. Notwithstanding any such sale, transfer,
assignment or grant of a security interest by Lessor and so long as no event of
default shall have occurred hereunder,
-8-
<PAGE>
neither Lessor nor any transferee, assignee or secured party shall interfere
with Lessee's right of use or quiet enjoyment of the Equipment. In the event of
such sale, transfer, assignment or grant of security interest in all or any part
of this Lease and any Schedule hereto, or in the Equipment or in sums payable
hereunder, as aforesaid, Lessee agrees to execute such documents as may be
reasonably necessary to evidence, secure and complete such sale, transfer,
assignment or grant of a security interest and to perfect the transferee's,
assignee's or secured Party's interest therein and Lessee further agrees that
the rights of any transferee, assignee or secured party shall not be subject to
any defense, set-off or counterclaim that Lessee may have against Lessor or any
other party, including the Supplier, which defenses, set-offs and counterclaims
shall be asserted only against such party, and that any such transferee,
assignee or secured party shall have all of Lessor's rights hereunder, but shall
assume none of Lessor's obligations hereunder. Lessee acknowledges that any
assignment or transfer by Lessor shall not materially change Lessee' duties or
obligations under this Lease nor materially increase the burdens and risks
imposed on Lessee. Lessee agrees that Lessor may assign or transfer this Lease
or Lessor's interest in the Equipment even if said assignment or transfer could
be deemed to materially affect the interests of Lessee. Nothing in the preceding
sentence shall affect or impair the provisions of Section 4, Section 10 or any
other provision of this Lease.
16. Amendments. This Lease and any Schedules hereto contain the entire agreement
between the parties with respect to the Equipment, this Lease and any Schedules
hereto and there is no agreement or understanding, oral or written, which is not
set forth herein. This Lease and any Schedules hereto may not be altered,
modified, terminated or discharged except by a writing signed by the party
against whom such alteration, modification, termination or discharge is sought.
Lessee's Initials /s/
-----------
17. Law. This Lease and any Schedules hereto shall be binding only when accepted
by Lessor at its principle place of business in Illinois and shall in all
respects be governed and construed, and the rights and the liabilities of the
parties hereto determined, except for local filing requirements, in accordance
with the laws of the State of Illinois. LESSEE WAIVES TRIAL BY JURY AND SUBMITS
TO THE JURISDICTION OF THE FEDERAL DISTRICT COURTS OF COMPETENT JURISDICTION OR
ANY STATE COURT WITHIN THE STATE OF ILLINOIS AND WAIVES ANY RIGHT TO ASSERT THAT
ANY ACTION INSTITUTED BY LESSOR IN ANY SUCH COURT IS IN THE IMPROPER VENUE OR
SHOULD BE TRANSFERRED TO A MORE CONVENIENT FORUM.
18. Invalidity. In the event that any provision of this Lease and any Schedule
hereto shall be unenforceable in whole or in part, such provision shall be
limited to the extent necessary to render the same valid, or shall be excised
from this Lease or any Schedule hereto, as circumstances may require, and this
Lease and the applicable Schedule shall be construed as if said provision had
been incorporated herein as so limited, or as if said provision had not been
included herein, as the case may be without invalidating any of the remaining
provisions hereof.
19. Miscellaneous. All notices and demands relating hereto shall be in writing
and mailed by certified mail, return receipt requested, to Lessor or Lessee at
their respective addresses above or shown in the Schedule, or at any other
address designated by notice served in accordance herewith Notice shall become
effective when deposited in the United States mail, with proper postage prepaid,
addressed to the party intended to be served at the address designated herein.
All obligations of Lessee shall survive the termination or expiration of this
Lease and any Schedule hereto. Should Lessor permit use by Lessee of any
Equipment beyond the Initial Lease Term, or, if applicable, any exercised
extension or renewal term, the lease obligations of Lessee shall continue and
such permissive use shall not be construed as a renewal of the term thereof, or
as a waiver of any right or continuation of any obligation of Lessor hereunder,
and Lessor may take possession of any such Equipment at any time upon demand. If
more than one Lessee is named in this Lease, the liability of each shall be
joint and several. Lessee shall, upon request of Lessor from time to time,
perform all acts and execute and deliver to Lessor all documents which Lessor
deems reasonably necessary to implement this Lease and any Schedule hereto,
including, without limitation, certificates addressed to such persons as Lessor
may direct stating that this Lease and the Schedule hereto is in full force and
effect, that there are no amendments or modifications thereto, that Lessor is
not in default hereof or breach hereunder, setting forth the date to which
rentals due hereunder have been paid, and stating such other matters as Lessor
may request. This Lease and any Schedule hereto shall be binding upon the
parties and their successors, legal representatives and assigns. Lessee's
successors and assigns shall include, without limitation, a receiver,
debtor-in-possession, or trustee of or for Lessee. If any person, firm,
corporation or other entity shall guarantee this Lease and the performance by
Lessee of its obligations hereunder, all of the terms and provisions hereof
shall be duly applicable to such Obligor.
-9-
<PAGE>
20. Lessee's Waivers. To the extent permitted by applicable law, Lessee hereby
waives any and all rights and remedies conferred upon a Lessee by Article 2A of
the Uniform Commercial Code as adopted in any jurisdiction, including but not
limited to Lessee's rights to: (a) cancel this Lease; (b) repudiate this Lease;
(c) reject the Equipment; (d) revoke acceptance of the Equipment; (e) recover
damages from Lessor for any breaches of warranty or for any other reason; (f)
claim a security interest in the Equipment in Lessee's possession or control for
any reason (g) deduct all or any part of any claimed damages resulting from
Lessor's default, if any, under this Lease; (h) accept partial delivery of the
Equipment; (i) "cover" by making any purchase or lease of or contract to
purchase or lease Equipment in substitution for those due from Lessor; (j)
recover any general, special, incidental, or consequential damages for any
reason whatsoever; and (k) specific performance, replevin, detinue,
sequestration, claim, and delivery of the like for any Equipment identified to
this Lease. To the extent permitted by applicable law, Lessee also hereby waives
any rights now or hereafter conferred by statute or otherwise which may require
Lessor to sell, lease or otherwise use any Equipment in mitigation of Lessor's
damages as set forth in Paragraph 14 or which may otherwise limit or modify any
of Lessor's rights or remedies under Paragraph 14. Any action by Lessee against
Lessor for any default by Lessor under this Lease, including breach of warranty
or indemnity, shall be commenced within one (1) year after any such cause of
action accrues.
21. Reports. So long as this Lease is in effect or Lessor holds any unexpired
and unexercised warrants, Lessee shall provide Lessor with the following: (a)
annual financial statements of Lessee (and of any Obligors), prepared in
accordance with generally accepted accounting principles and certified by
independent certified public accountants within ninety (90) days after Lessee's
(and any Obligor's) fiscal year end, (b) monthly financial and operating
performance data as and when provided to members of Lessee's Board of Directors,
investors and, if applicable, the S.E.C.; and (3) prompt written notice of any
material adverse change in Lessee's financial condition, operating plan or
business prospects.
22. Tax Benefits. All Equipment shall be tangible personal property eligible for
MACRS depreciation under the Internal Revenue Code of 1986, as amended. The
depreciation benefits arising from the Equipment will be for the account of
Lessor.
23. Counterparts. This Lease may be executed in any number of counterparts, each
of which shall be deemed an original. Each Schedule shall be executed in three
(3) counterparts each of which shall be deemed an original but only counterpart
number 1 shall constitute "chattel paper" or "collateral" within the meaning of
the Uniform Commercial Code in any jurisdiction.
24. Addendum. ("X" if applicable) [ X ] See Addenda attached hereto and made a
part of this Lease. In the event of a conflict between the terms and conditions
of this Lease and the terms and conditions of an Addendum, the terms and
conditions of the Addendum shall govern and control.
-10-
<PAGE>
The person executing this Lease for and on behalf of Lessee represents and
warrants, which representation and warranty shall survive the expiration or
termination of this Lease, that this Lease and the execution hereof has been
duly and validly authorized by Lessee, constitutes a valid and binding
obligation of Lessee and that he has authority to make such execution for and on
behalf of Lessee.
IN WITNESS WHEREOF, this Lease has been executed by Lessee this 6th day of May,
1997.
SANDBOX ENTERTAINMENT CORPORATION, Lessee
2231 East Camelback, Suite 324
Phoenix, AZ 85016
(a Delaware corporation)
By: /s/Mark Gorchoff
-----------------------------
Name: Mark Gorchoff
-----------------------------
Title: Chief Financial Officer
-----------------------------
ACCEPTED AT CHICAGO, ILLINOIS
THIRD COAST VENTURE LEASE PARTNERS I, L.P., Lessor
900 North Franklin Street, Suite 700
Chicago, Illinois 60610
By its General Partner, Third Coast GP-I, L.L.C.
By: /s/ Miroslav Anic
------------------------------
Name: Miroslav Anic
------------------------------
Title: Manager
------------------------------
-11-
Exhibit 10(b)
ADDENDUM NO. 1 TO
MASTER LEASE AGREEMENT NO. 101-19001-001
DATED AS OF MARCH 31,1997
BETWEEN
THIRD COAST VENTURE LEASE PARTNERS I, L.P.
AND
SANDBOX ENTERTAINMENT CORPORATION, AS LESSEE
This Addendum is attached to and forms part of that certain Master Lease
Agreement No. 101-19001-001 dated as of March 31,1997, between THIRD COAST
VENTURE LEASE PARTNERS I, L.P. ("Lessor") and SANDBOX ENTERTAINMENT CORPORATION
("Lessee"), ("Lease") agreeing as follows:
A. Terms defined in the Lease shall have the same meanings herein unless
otherwise expressly set forth herein or otherwise required by context hereof.
B. The following shall be added to the terms of the Lease and are hereby
incorporated therein by reference.
C. To the extent any terms or conditions contained in this Addendum may be
inconsistent or conflict with any terms or conditions contained in the Lease,
the terms and conditions contained in this Addendum shall govern and control.
25. Definitions.
"Base Implicit Rate" shall mean as set forth in Section 28(b) herein.
"Base Monthly Rent Factor" shall mean as set forth in Section 28(b)
herein.
"Base Treasury Rate" shall mean as set forth in Section 28(b) herein.
"Equipment Cost" shall mean the lowest of: (a) manufacturer's net
invoice price; (b) net book value (determined in accordance with
generally accepted accounting principles); and (c) fair market value.
Equipment Cost shall exclude sales tax, delivery costs, installation
costs, leasehold improvements and software in excess of five percent
(5%) of total findings hereunder.
"Funding Period" shall mean from the date hereof to April 1,1998.
<PAGE>
"Implicit Rate" shall mean the annual implicit rate set forth in
Section 28(c) herein.
"Index Instrument" shall mean the U.S. Treasury Notes maturing closest
to the date thirty-six (36) months from the Commencement Date of each
Schedule.
"Lease Line" shall mean the equipment lease line of credit as set forth
in Section 26 herein.
"Lease Line Amount" shall be the amount of the Lease Line to be
provided hereunder as set forth in Section 26(b) herein.
"Monthly Rent Factor" shall mean as set forth in Section 28(c) herein.
"Treasury Rate" shall mean the yield of the Index Instrument as
reported, from time to time, in the Wall Street Journal, Midwest
Edition.
26. Lease Line.
(a) Subject to the terms and conditions of the Lease, this Addendum and
any applicable Schedules, and provided no Event of Default shall have occurred
and be then continuing, Lessor agrees to purchase and lease new Equipment to
Lessee.
(b) The aggregate Equipment Cost of such Equipment shall not exceed
$500,000.
(c) All Equipment to be purchased by Lessor and leased to Lessee under
this Lease Line shall be delivered, accepted, fully operational and funded by no
later than April 1,1998.
(d) The Equipment shall be located at Lessee's location at 2231 East
Camelback, Suite 324, Phoenix, Arizona, 85016 or at such other locations as
Lessor may approve prior to funding all as set forth in the applicable
Schedules.
(e) No unit of Equipment with an aggregate Equipment Cost of less than
$1,000 shall be included in the Equipment.
(f) Each piece of Equipment, its Supplier and all purchase orders,
invoices & related documents will be subject to review and approval by Lessor.
27. Fundings.
(a) Lessor, upon Lessee's request, may make progress payments for any
unit of Equipment with a unit cost over $1,000 to the Supplier in accordance
with Lessor's standard procedures. Lessee shall pay Lessor interim rent from the
Acceptance Date to the Commencement Date as set forth in Section 2 of the Lease.
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<PAGE>
(b) In the event Lessee shall not deliver to Lessor its Equipment
Acceptance in respect of the Equipment on or before three (3) months from the
date of the first progress payment made hereunder, Lessee shall pay Lessor, upon
demand, an amount equal to the sum of all progress payments made by Lessor
together with all accrued and unpaid interim rent.
(c) Alternatively, Lessor may purchase Equipment from Lessee for which
Lessee may have purchased and paid the Supplier. In such event, Lessee shall
submit to Lessor evidence satisfactory to Lessor of payment to the Supplier
within 90 days of such payment by Lessee to Supplier.
(d) Lessor shall in its sole discretion accumulate Lessee's paid
invoices and progress payment made by Lessor into Schedules of no less than
$100,000 (except a final Schedule in a lesser amount as required to utilize the
remaining Lease Line) which Schedules shall commence on the Commencement Date.
28. Lease Economics.
(a) The Initial Lease Term shall be thirty-six (36) months.
(b) The Base Monthly Rent Factor shall be 3.29% of Equipment Cost,
payable monthly in advance, and reflects a Base Implicit Rate of 12.00%, which
corresponds to a Base Treasury Rate of 5.94%.
(c) For each Schedule, the Monthly Rent Factor shall be calculated
based on the Implicit Rate in effect on the Commencement Date of such Schedule.
Such Implicit Rate shall be equal to the Base Implicit Rate plus or minus (as
appropriate) the number of basis points by which the Treasury Rate on such
Commencement Date differs from the Base Treasury Rate. Notwithstanding anything
to the contrary contained herein _______ minimum Implicit Rate shall be 10.00%
at the maximum Implicit Rate shall be 14.00%. Upon the commencement of each
Schedule, the Monthly Rent Factor for such Schedule shall be fixed for the
Initial Lease Term of such Schedule.
(d) ("X" if applicable) [_____] See casualty loss schedule attached
hereto to establish value pursuant to Section 10 of the Lease in the event of an
Equipment Loss.
29. Fees.
(a) Lessor acknowledges the receipt of an application fee of $5,000.
The application fee shall be applied to defray Lessor's due diligence costs and
legal costs which shall not exceed $5,000. Any remaining balance will be
returned to Lessee.
(b) A commitment fee equal to 0.25% of the unused Lease Line Amount
shall be paid by Lessee to Lessor on July 1,1997, October 1, 1997, January 1,
1998, and April 1,1998.
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<PAGE>
(c) Subject to Paragraph 29 (a) above, Lessee shall reimburse Lessor
for all reasonable costs related to this transaction including due diligence
costs, legal costs and on-site document preparation costs (if such service is
requested by Lessee).
30. End of Term Options. Provided that this Lease has not been canceled and that
no Event of Default or event which, with notice or lapse of time or both, would
become an Event of Default shall have occurred and be continuing, Lessee shall
elect one of the following options in clauses (a), (b), or (c) below:
(a) Lessee's Option to Renew: At the expiration of the Initial Lease
Term of the first Schedule hereto, Lessee may elect to renew the Lease with
respect to all, and not less than all, of the Equipment under all Schedules at
their respective expiration dates for not less than twelve (12) months nor more
than twenty four (24) months at the Equipment's Fair Rental Value, but not less
than 1.65% of Equipment Cost per month, which rent shall be paid monthly in
advance plus any applicable taxes. Upon the expiration of such extended lease
term, Lessee shall purchase the Equipment as provided in Section 30(b) unless
Lessee shall have returned the Equipment as provided in Section 30(c).
(b) Lessee's Option to Purchase: At the expiration of the Initial Lease
Term of the first Schedule hereto, Lessee may elect to purchase all, but not
less than all, of the Equipment under all Schedules at their respective
expiration dates for a purchase price equal to the then Fair Market Value, but
not less than 10% of Equipment Cost thereof as of the end of the Initial Lease
Term applicable to each Schedule, plus any applicable sales or other transfer
taxes payable as a result of such sale plus any amounts that remain unpaid to
Lessor under the Lease.
(c) Lessee's Option to Return At the expiration date of Initial Lease
Term of the first Schedule hereto, Lessee may elect to return all, but not less
than all, of the Equipment under all Schedules at their respective expiration
dates in accordance with the return provisions of Section 4 of the Lease.
The foregoing options in clauses (a), (b), or (c) shall be exercised by written
notice delivered to Lessor not more than 180 days and not less than 90 days
prior to the expiration of the Initial Lease Term of the first Schedule hereto.
If none of the foregoing options in clauses (a), (b), or (c) of this section is
duly exercised by Lessee, this Lease shall be automatically extended at the
Monthly Rent Factor in effect immediately prior to the expiration date of the
Initial Lease Term applicable to the first Schedule hereunder with respect to
all Equipment covered by any Schedule from the expiration date of the Initial
Lease Term of each Schedule on a month-to-month basis.
Lessee may terminate any _____ extended term on ninety (90) days' prior written
notice to Lessor and so long as with such notice Lessee elect one of the options
described in clauses (a), (b), or (c) above.
4
<PAGE>
The purchase of the Equipment by Lessee pursuant to any options herein granted
shall be "AS IS, WHERE IS," without recourse to or any warranty by Lessor, other
than a warranty that the Equipment is free and clear of liens and encumbrances
resulting by or through acts of Lessor.
31. Warrants. Lessee shall issue and deliver to Lessor a warrant to purchase
75,000 shares of Series A Preferred Stock at an exercise price of $0.80 per
share. The warrants shall be issued and delivered to Lessor upon the execution
of the Lease, but in no event later than the execution of this Addendum. The
warrant expiration dates shall be (a) with respect to 12,500 shares, May 31,
1997, and (b) with respect to the remaining 62,500 shares seven (7) years from
the Commencement Date of the last Schedule. The terms of the warrant shall
include piggyback registration rights on a pro rata basis with the shares of
other shareholders, acceptable anti-dilution rights and shall provide for a
"cashless" exercise provision in the event of exercise by Lessor.
32. Conditions Precedent. Lessee shall cause the following documents to be
delivered to Lessor in form and substance acceptable to Lessor:
(a) Condition to closing and Lessor's performance:
1. Master Lease Agreement;
2. Addendum;
3. Warrant and related documents;
4. Certified copy of Lessee's Articles of Incorporation
and By-Laws;
5. Certificate of Good Standing from Lessee's State of
Incorporation;
6. Certified Copy of Corporate Resolution;
7. Certificate of Incumbency and Authority;
8. Legal Opinion;
9. UCC Search, Tax Lien Search, and Judgement Lien
Search results satisfactory to Lessor;
10. Release or subordination of any prior security
interests in the Equipment including "after acquired"
clauses;
11. Current financial statements prepared by Lessee;
5
<PAGE>
12. Most recent audited financial statements of Lessee
prepared by Independent Auditor;
13. Lessee's most current operating plan (including five
year financial and operating projections);
14. Insurance Letter, Loss Payable Clause Endorsement,
Additional Insured Endorsement and related
Certificates of Insurance;
15. Release, Disclaimer or Subordination Agreements by
each Owner and Mortgagee of the Premises of the
Equipment;
16. Such other items or documents as Lessor may request.
(b) Condition to any purchase of or payment on account of the purchase
of Equipment:
1. UCC-1 financing statements and protective fixture
filings signed by Lessee (to be filed prior to the
earlier of funding or, for Equipment delivered after
the date of the Lease, delivery of Equipment to
Lessee) together with any UCC amendments relating
thereto for any prior, present or subsequent
Schedule;
2. Equipment Acceptance Certificate;
3. Schedule;
4. Software License Assignment Agreement (if
applicable);
5. User Agreement (if applicable);
6. For new Equipment, Copies of Purchase Order(s),
Purchase Agreement Assignment(s), Progress Payment
Authorization (if applicable) and Original Invoices
issued to Lessor;
7. For used Equipment, Certified Copies of Original
Invoices, Copies of Cancelled Checks (front and
back), Bill of Sale and UCC-3 Release(s);
8. Such other items or documents as Lessor may request.
33. Reports. The following shall supersede and replace paragraph 21 of the
Master Lease in its entirety: "So long as this Lease is in effect or Lessor
holds shares and unexpired and unexercised warrants with an aggregate fair
market value in excess of $50,000, Lessee shall
6
<PAGE>
provide Lessor with the following: (a) annual financial statements of Lessee
(and of any Obligers), prepared in accordance with generally accepted accounting
principles and certified by independent certified public accountants within
ninety (90) days after Lessee's (and any Obligor's) fiscal year end, (b) monthly
financial and operating performance data as and when provided to members of
Lessee's Board of Directors, investors and, if applicable, the S.E.C.; and (3)
prompt written notice of any material adverse change in Lessee's financial
condition, operating plan or business prospects."
34. Additional Event of Default. In addition to the events set forth in
paragraph 13 of the Master Lease Agreement, an Event of Default shall occur if
Chad M. Little's full-time employment with Lessee is terminated for any reason.
IN WITNESS WHEREOF, this Addendum has been executed by a duly authorized officer
of Lessee as of the 6th day of May, 1997.
SANDBOX ENTERTAINMENT CORPORATION
2231 East Camelback, Suite 324
Phoenix, AZ 85016
By: /s/ Mark Gorchoff
----------------------------
Name: Mark Gorchoff
----------------------------
Title: Chief Financial Officer
----------------------------
THIRD COAST VENTURE LEASE PARTNERS I, L.P., Lessor
900 North Franklin Street, Suite 700
Chicago, Illinois 60610
By its General Partner, Third Coast GP-I,
L.L.C.
By: /s/ Miroslav Anic
----------------------------
Name: Miroslav Anic
Title: Manager
7
Exhibit 10(c)
SUBORDINATION AGREEMENT
-----------------------
This agreement (the Agreement") is entered into this 6th day of May,
1997, by and between THIRD COAST CAPITAL, LLC and its assigns, as Lessor, and
SILICON VALLEY BANK, as Creditor, in connection with a lease of equipment by
Lessor to SANDBOX ENTERTAINMENT CORPORATION, as Lessee.
WHEREAS, Lessor and Lessee intend to enter into one or more Lease
Rental Agreements (hereinafter the 'Leases"), wherein Lessee Will lease certain
equipment from Lessor;
WHEREAS, Creditor acknowledges that it is the intent of the parties to
the Leases and this Agreement that Lessor is the owner of and holds clear title
to the equipment under the Leases; and
WHEREAS, Lessor will not enter into the Lease with Lessee without
Creditor's agreement to subordinate its interest in the Equipment to the
interest of Lessor;
NOW, THEREFORE, the parties hereby agree as follows:
(1) The above recitals are incorporated into this Agreement.
(2)(a) For so long as Lessor is the owner of or holds an interest in the
equipment under the Leases, any equipment described in the attached
Schedule 'A' (the "Equipment"), wherever located, shall not to be
subject to Creditor's security interest.
(2)(b) Notwithstanding the terms of Paragraph (2)(a), to the extent that the
Leases are ever determined by judicial action to be security interests
in favor of Lessor, then Creditor hereby subordinates its interest in
the Equipment to the interest of Lessor, and Lessor's security interest
in the Equipment shall be senior to Creditor's security interest in the
Equipment. While Creditor has a subordinate security interest in the
Equipment, Creditor shall not take any action in relation to or
affecting the Equipment, until such time as all of Lessee's obligations
to Lessor with respect to such Equipment, whether existing now or
hereafter, are satisfied in full.
(3) Creditor authorizes Lessor, from time to time, without notice or demand
and without diminishing Creditor's subordination and obligations under
this Agreement, to compromise, renew, alter, extend, accelerate or
otherwise change the terms of the Leases, including time, method and
application of payment.
(4)(a) The priorities specified in this Agreement shall be applicable
irrespective of the time or order of attachment or perfection of any
security interest or the time or order of filing of any financing
statements or other documents, or the giving of any notices of purchase
<PAGE>
money security interests or other notices or possession of any
collateral or any statutes, rules or law, or court decisions to the
contraryNotwithstanding the foregoing, in the event the Leases are
determined by judicial action to be security interests in favor of
Lessor, the subordinations and priorities specified in this Agreement
are expressly conditioned upon the nonavoidability and perfection of
Lessor's security interest in the Equipment, and if the Lessor's
security interest in the Equipment is not perfected or is avoidable,
for any reason, then the subordinations and relative priority provided
for in this Agreement shall not be effective as to the particular
equipment which is the subject of the unperfected or avoidable security
interest.
(b) This Agreement is solely for the benefit of Lessor and Creditor (and
their respective successors and assigns), and specifically, is not
entered into for the benefit of Lessee or any third party. In the event
of any litigation between the Lessor and Creditor based upon or arising
out of this Agreement, the prevailing party shall be entitled to
recover all of its costs and expenses, including, without limitation,
reasonable attorneys fees, from the non-prevailing party. LESSOR AND
CREDITOR EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO THIS
AGREEMENT. This Agreement shall be construed in accordance with, and
governed by, the laws of the State of California.
(5) This Agreement may be executed in one or more counterparts which
together shall constitute one document. Each such counterpart shall be
deemed to be an original when so executed and delivered to the other
party to this Agreement.
This Agreement shall remain in force as long as Lessee has any
remaining obligations to Lessor under any Leases.
LESSOR CREDITOR
THIRD COAST CAPITAL, LLC SILICON VALLEY BANK
By: /s/ Miroslav Anic By: /s/ Laurita J. Hernandez
---------------------------- -----------------------------
Title: Miroslan Anic Title: Vice President
---------------------------- ----------------------------
Date: 5/6/97 Date: 5/6/97
---------------------------- -------------------
Above is acknowledged and agreed:
LESSEE
SANDBOX ENTERTAINMENT CORPORATION
By: /s/ Mark Gorchoff
----------------------------
Title: Chief Financial Officer
----------------------------
Date: 5/6/97
-------------
2
Exhibit 10(d)
ADDENDUM NO. 2 TO
MASTER LEASE AGREEMENT NO. 101-19001-001
DATED AS OF MARCH 31, 1997
BETWEEN
THIRD COAST VENTURE LEASE PARTNERS I, L.P.
AND
SANDBOX ENTERTAINMENT CORPORATION, AS LESSEE
This Addendum is attached to and forms part of that certain Master Lease
Agreement No. 101-19001-001 dated as of March 31, 1997 and all addenda thereto,
between THIRD COAST VENTURE LEASE PARTNERS I, L.P. ("Lessor") and SANDBOX
ENTERTAINMENT CORPORATION ("Lessee"), ("Lease") agreeing as follows:
A. Terms defined in the Lease shall have the same meanings herein unless
otherwise expressly set forth herein or otherwise required by context hereof.
B. The following shall be added to the terms of the Lease and are hereby
incorporated therein by reference.
C. To the extent any terms or conditions contained in this Addendum may be
inconsistent or conflict with any terms or conditions contained in the Lease,
the terms and conditions contained in this Addendum shall govern and control.
26. Lease Line.
(b) The aggregate Equipment Cost of such Equipment shall not
exceed $650,000.
(c) The Equipment shall be located at Lessee's headquarters
location at 2231 East Camelback Road, Suite 324, Phoenix,
Arizona, 85016 ("Location A") and such other locations as
Lessor may approve prior to funding, all as set forth in the
applicable Schedules. Lessor hereby grants approval for the
Equipment to be located at 2720 East Camelback Road, Suite
205, Phoenix, Arizona, 85016 ("Location B"); provided however
that such approval shall be null and void if, prior to January
1, 1998, Lessee does not:
(i) deliver to Lessor a User Agreement, Release,
Disclaimer or Subordination Agreements by each owner
and mortgagee of Location B (all in a form
satisfactory to Lessor); or
(ii) prepay, in accordance with the Lease, the pro rata
portion of the Lease relating to the Equipment at
Location B; or
(iii) substitute, in accordance with the Lease, other
equipment acceptable to Lessor for Equipment at
Location B; or
(iv) move the Equipment at Location B to another location
acceptable to Lessor ("Location C") and deliver to
Lessor a User Agreement, Release, Disclaimer or
Subordination Agreements by each owner and mortgagee
of Location C (all in a form satisfactory to Lessor).
<PAGE>
31. Warrants. In addition to the Stock Subscription Warrant to Purchase 12,500
Shares of Series A Preferred Stock dated May 6, 1997 and the Stock Subscription
Warrant to Purchase 62,500 Shares of Series A Preferred Stock dated May 6, 1997,
Lessee shall issue and deliver to Lessor two additional warrants:
"Additional Warrant A" shall permit Lessor to purchase 25,000 shares of
common stock at an exercise price and on terms satisfactory to Lessor; and
"Additional Warrant B" shall permit Lessor to purchase 12,500 shares of
common stock at an exercise price and on terms satisfactory to Lessor.
The Additional Warrant A and Additional Warrant B shall be issued and
delivered to Lessor upon the execution of this Addendum. In the event Lessee
raises in excess of $3,000,000 in cash via the planned public venture capital
round managed by Wit Capital prior to November 21, 1997, Lessor will surrender
Additional Warrant B to Lessee unexercised.
32. Conditions Precedent. Lessee shall cause the following documents to be
delivered to Lessor in form and substance acceptable to Lessor:
(a) Condition to closing and Lessor's performance:
1. Release or subordination of any prior security
interests in the Equipment including "after acquired"
clauses;
2. Such other items or documents as Lessor may request.
33. Right of First Refusal. Lessor hereby grants Lessor the right of first
refusal to match the terms of any bona fide equipment financing commitment
received by Lessee prior to March 31, 1998. Upon written notification by Lessee
to Lessor (which notification may be accomplished by fax transmission to
Lessor's regular fax number) of the specific terms of a proposed equipment
financing commitment (including the proposed closing schedule for such
commitment) as well as notification that Lessee has provided Lessor with all
documents and information that Lessor is entitled to receive pursuant to
paragraph 21 of the Master Lease (as amended by paragraph 33 of Addendum No. 1
to Master Lease), Lessor shall have 48 hours to give Lessee written notice
(which notification may be accomplished by fax transmission to Lessee's regular
fax number) of Lessor's exercise of its right of first refusal under this
paragraph. If Lessor fails to give such written notice within 48 hours, then
Lessee shall be free to proceed with the proposed equipment financing commitment
on substantially the terms set forth in Lessee's notice.
<PAGE>
IN WITNESS WHEREOF, this Addendum has been executed by a duly authorized officer
of Lessee as of the 27th day of September, 1997
SANDBOX ENTERTAIMENT CORPORATION, Lessee
2231 East Camelback
Suite 324
Phoenix, AZ 85016
By: /s/ Mark Gorchoff
-----------------------------
Name: Mark Gorchoff
-----------------------------
Title: Chief Financial Officer
-----------------------------
THIRD COAST VENTURE LEASE PARTNERS I, L.P., Lessor
900 North Franklin Street, Suite 700
Chicago, Illinois 60610
By its General Partner, Third Coast GP-I, L.L.C.
By: /s/ Miroslav Anic
-----------------------------
Name: Miroslav Anic
-----------------------------
Title: Manager
-----------------------------
Exhibit 10(e)
TRACER DESIGN, INC.
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
BY AND AMONG
TRACER DESIGN, INC.,
WASATCH VENTURE CORPORATION
and
NEWTEK VENTURES II, L.P.
FEBRUARY 13, 1996
<PAGE>
TABLE OF CONTENTS
Page
----
1. Purchase and Sale of Stock.................................................1
1.2 Closing..................................................1
2. Representations and Warranties of the Company .............................1
2.1 Organization, Good Standing and Qualification............1
2.2 Capitalization...........................................2
2.3 Subsidiaries.............................................2
2.4 Authorization............................................2
2.5 Valid Issuance of Preferred and Common Stock.............3
2.6 Governmental Consents....................................3
2.7 Litigation...............................................3
2.8 Employees; Employee Compensation.........................3
2.9 Patents and Trademarks...................................4
2.10 Compliance with Other Instruments........................4
2.11 Compliance with SBA/SBIC Requirements....................5
2.12 Permits..................................................5
2.13 Environmental and Safety Laws............................5
2.14 Disclosure...............................................6
2.15 Registration Rights......................................6
2.16 Title to Property and Assets.............................6
2.17 Financial Statements.....................................6
2.18 Agreements: Action.......................................7
2.19 Tax Returns and Audits...................................8
2.20 Insurance................................................8
2.21 Shareholder Agreements...................................8
2.22 Brokers or Finders.......................................8
2.23 Corporate Documents......................................8
2.24 Qualified Small Business.................................8
3. Representations and Warranties of the Investors............................8
3.1 Experience...............................................8
3.2 Investment...............................................9
3.3 Rule 144.................................................9
3.4 No Public Market.........................................9
3.5 Access to Data...........................................9
3.6 Authorization............................................9
3.7 Accredited Investor.....................................10
4. Conditions of Investors' Obligations at Closing...........................10
4.1 Representations and Warranties..........................10
4.2 Performance.............................................10
<PAGE>
4.3 Compliance Certificate..................................10
4.4 Bylaws..................................................10
4.5 Blue Sky................................................10
4.6 Investor Rights Agreement...............................10
4.7 Co-Sale Agreement.......................................10
5. Conditions of the Company's Obligations at Closing........................11
5.1 Representations and Warranties..........................11
5.2 Payment of Purchase Price...............................11
5.3 Securities Law Compliance...............................11
5.4 Investor Rights Agreement...............................11
5.5 Proceedings and Documents...............................11
6. Miscellaneous.............................................................11
6.1 Governing Law...........................................11
6.2 Survival................................................11
6.3 Successors and Assigns..................................11
6.4 Entire Agreement; Amendment.............................12
6.5 Notices, Etc............................................12
6.6 Delays or Omissions.....................................12
6.7 Expenses................................................12
6.8 Finder's Fee............................................12
6.9 Counterparts............................................13
6.10 Severability............................................13
6.11 Arbitration.............................................13
Exhibit A Amended and Restated Articles of Incorporation
Exhibit B Investors Schedule
Exhibit C Schedule of Exceptions
Exhibit D Investor Rights Agreement
Exhibit E Co-Sale Agreement
<PAGE>
STOCK PURCHASE AGREEMENT
------------------------
THIS STOCK PURCHASE AGREEMENT is made as of the 13th day of February,
1996, by and among TRACER DESIGN, INC., an Arizona corporation (the "Company"),
with its principal office at 2231 East Camelback Road, Suite 324, Phoenix,
Arizona 85016, and WASATCH VENTURE CORPORATION and NEWTEK VENTURES II, L.P.
(each of which is referred to herein as an "Investor" and collectively, the
"Investors").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
1.1 Sale and Issuance of Series A Preferred Stock.
(a) The Company has adopted and filed with the
Arizona Corporation Commission (the "Commission") the Amended and Restated
Articles of Incorporation in the form attached hereto as Exhibit A (the
"Restated Articles").
(b) Subject to the terms and conditions of this
Agreement, each Investor agrees to purchase at the Closing or pursuant to
Section 1.2 and the Company agrees to sell and issue to each Investor at the
Closing or pursuant to Section 1.2, the number of shares of the Company's Series
A Preferred Stock (the "Series A Preferred") set forth opposite such Investor's
name on Exhibit B attached hereto for the purchase price set forth thereon. The
shares of Series A Preferred to be sold pursuant to this Agreement are
collectively referred to herein as the "Shares."
1.2 Closing. The purchase and sale of the Shares shall take
place at the offices of the Company at 5:00 p.m., on February 13, 1996, or at
such other time and place as the Company and the Investors mutually agree upon
orally or in writing (which time and place are designated as the "Closing"). At
the Closing the Company shall deliver to each Investor a certificate
representing the Series A Preferred Stock that such Investor is purchasing
against payment of the purchase price therefor by check or wire transfer.
2. Representations and Warranties of the Company . Except as set forth
in the Schedule of Exceptions attached hereto as Exhibit C, the Company hereby
represents and warrants as follows:
2.1 Organization, Good Standing and Qualification. The company
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Arizona and has all requisite corporate power and authority
to carry on its business as currently conducted. The Company is duly qualified
to transact business and is in good standing in each
1
<PAGE>
jurisdiction in which the failure to so qualify would have a material adverse
effect on its business or properties. True and accurate copies of the Company's
Articles of Incorporation and Bylaws, each as amended and in effect at the
Closing, have been delivered to the Investors.
2.2 Capitalization. The authorized capital stock of the
Company consists of Five Million (5,000,000) shares of Class A Common Stock
("Common Stock"), of which Five Hundred Twenty One Thousand Three Hundred
Sixteen (521,316) shares are issued and outstanding on the date of this
Agreement and Two Million (2,000,000) shares of Preferred Stock ("Preferred
Stock"), all of which are designated as Series A Preferred Stock, and none of
which are issued and outstanding (prior to the Closing). All such issued and
outstanding shares have been duly authorized and validly issued and are fully
paid and nonassessable. The Company has reserved 90,000 shares of Series A
Preferred for issuance hereunder. The Company has reserved 90,000 shares of
Common Stock for issuance upon conversion of the Series A Preferred. The Company
has committed to issue or reserved for future grants stock options or stock
purchase rights in the aggregate amount of 107,482 shares of Common Stock to
employees, officers, directors and consultants of the Company, none of which
shares are presently outstanding. In addition, the Company has issued warrants
to purchase Common Stock, and reserved underlying shares of Common Stock against
exercise of such warrants, as described in the Schedule of Exceptions and,
subject to consummation of the Closing hereunder, the Company will issue
additional shares of Common Stock as described in the Schedule of Exceptions.
There are no other outstanding rights, options, warrants, preemptive rights,
rights of first refusal or similar rights for the purchase or acquisition from
the Company of any securities of the Company. All outstanding shares have been
issued in compliance with state and federal securities laws. The Company
covenants that, without the consent of the holders of a majority of the Shares,
from and after the date hereof it will not grant options or sell stock with
vesting provisions that allow Common Stock to be acquired by employees more
rapidly than 40% at the end of two years of employment, and after the third
year, an additional 20% per year until fully vested.
2.3 Subsidiaries. The Company does not presently own or
control, directly or indirectly, any interest in any other corporation,
association, or other business entity. The Company is not a participant in any
joint venture, partnership, or similar arrangement.
2.4 Authorization. All corporate action on the part of the
Company, its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement and the Investor Rights
Agreement, the performance of all obligations of the Company hereunder and
thereunder, and the authorization, issuance (or reservation for issuance), sale
and delivery of the Shares being sold hereunder and the Common Stock issuable
upon conversion of the Shares has been taken or will be taken prior to the
Closing, and this Agreement and the Investor Rights Agreement constitute valid
and legally binding obligations of the Company, enforceable in accordance with
their respective terms, subject to: (i) judicial principles limiting the
availability of specific performance, injunctive relief, and other equitable
remedies; (ii) bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect generally
2
<PAGE>
relating to or affecting creditors' fights; and (iii) limitations on the
enforceability of the contribution and indemnification provisions of the
Investor Rights Agreement.
2.5 Valid Issuance of Preferred and Common Stock. The shares
of Series A Preferred that are being purchased by the Investors hereunder, when
issued, sold and delivered in accordance with the terms of this Agreement for
the consideration expressed herein, will be duly and validly issued, fully paid,
and nonassessable, and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement and the Investor Rights Agreement
and under applicable state and federal securities laws. The Common Stock
issuable upon conversion of the Series A Preferred purchased under this
Agreement has been duly and validly reserved for issuance and, upon issuance in
accordance with the terms of the Restated Articles, will be duly and validly
issued, fully paid, and nonassessable and will be free of restrictions on
transfer other than restrictions on transfer under this Agreement and the
Investor Rights Agreement and under applicable state and federal securities
laws.
2.6 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the offer, sale or issuance of the
Shares (and the Common Stock issuable upon conversion of the Shares) or the
consummation of any other on contemplated hereby, except the filing of the
Restated Articles in the office of the Commission, which shall be filed by the
Company on or prior to the Closing. Based in part on the representations of the
Investors set forth in Section 3 below, the offer, sale and issuance of the
Shares in conformity with the terms of this Agreement are exempt from the
registration requirements of Section 5 of the Securities Act and from the
qualification requirements of the Arizona Securities Law and applicable Arizona
securities laws.
2.7 Litigation. There is no action, suit, proceeding or
investigation pending or, to the best of the Company's knowledge, currently
threatened before any court, administrative agency or other governmental body
against the Company which questions the validity of this Agreement or the
Investor Rights Agreement or the right of the Company to enter into either of
them, or to consummate the transactions contemplated hereby or thereby, or which
could result, either individually or in the aggregate, in any material adverse
change in the condition (financial or otherwise), business, property, assets or
liabilities of the Company. The foregoing includes, without limitation, actions,
suits, proceedings or investigations pending or threatened (or any basis
therefor known to the Company) involving the prior employment of any of the
Company's employees, their use in connection with the Company's business of any
information or techniques allegedly proprietary to any of their former
employers, or their obligations under any agreements with prior employers. The
Company is not a party or subject to, and none of its assets is bound by, the
provisions of any order, writ, injunction, judgment or decree of any court or
government agency or instrumentality.
2.8 Employees; Employee Compensation. Each founder of the
Company and each employee of the Company who has access to the Company's
confidential or proprietary
3
<PAGE>
information has executed a confidentiality and proprietary rights agreement, in
substantially the form previously delivered to the Investors. To the best
knowledge of the Company, no officer or key employee is in violation of any
prior employee contract or proprietary information agreement. The Company is not
a party to or bound by any currently effective employment contract, deferred
compensation agreement, bonus plan, incentive plan, profit sharing plan,
retirement agreement or other employee compensation agreement or arrangement
with any collective bargaining agent other than as described in Section 2.2
above. No employees of the Company are represented by any labor union or covered
by any collective bargaining agreement. There is no pending or, to the best of
the Company's knowledge, threatened labor dispute involving the Company and any
group of its employees. The Company covenants that, without the unanimous
consent of the Board of Directors of the Company it will not pay to any employee
hired after the date hereof total compensation in excess of $50,000 annually.
2.9 Patents and Trademarks. The Company has sufficient title
and ownership of all patents, trademarks, service marks, trade names,
copyrights, trade secrets, information, proprietary rights and processes
necessary for its business as now conducted and as proposed to be conducted.
There are no outstanding options, licenses, or agreements of any kind relating
to the foregoing, nor is the Company bound by or a party to any options,
licenses or agreements of any kind with respect to the patents, trademarks,
service marks, trade names, copyrights, trade secrets, licenses, information,
proprietary rights and processes of any other person or entity. The Company has
not received any communications alleging that the Company is violating or, by
conducting its business as proposed, would violate any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of any other person or entity. None of the Company's
employees are obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would interfere with
the use of his or her best efforts to promote the interests of the Company or
that would conflict with the Company's business as proposed to be conducted.
Neither the execution nor delivery of this Agreement or the Investor Rights
Agreement, nor the carrying on of the Company's business by the employees of the
Company, nor the conduct of the Company's business as proposed, will conflict
with or result in a material breach of the terms, conditions or provisions of,
or constitute a material default under, any contract, covenant or instrument
known to the Company under which any of such employees is now obligated. The
Company covenants that it will not, at any time, conduct its business in such a
way as to conflict with or result in a material breach of the terms, conditions
or provisions of, or constitute a material default under, any contract, covenant
or instrument under which any of such employees is known to be obligated as of
the date hereof. The Company does not believe it is or that it will be necessary
to utilize any inventions of any of its employees (or people it currently
intends to hire) made prior to their employment by the Company.
2.10 Compliance with Other Instruments. The Company is not in
violation or default of any provision of its Articles of Incorporation or
Bylaws, each as amended and in effect on and as of the Closing. The Company is
not in violation or default of any material provision of any instrument,
mortgage, deed of trust, loan, contract, commitment, judgment, decree, order or
4
<PAGE>
obligation to which it is a party or by which it or any of its properties or
assets are bound which would materially adversely affect the condition
(financial or otherwise), business, property, assets or liabilities of the
Company or, to the best of its knowledge, of any provision of any federal, state
or local statute, rule or governmental regulation which would materially
adversely affect the condition (financial or otherwise), business, property,
assets or liabilities of the Company. The execution, delivery and performance of
and compliance with this Agreement and the Investor Rights Agreement, and the
issuance and sale of the Shares, will not result in any such violation, be in
conflict with or constitute, with or without the passage of time or giving of
notice, a default under any such provision, require any consent or waiver under
any such provision (other than any consents or waivers that have been obtained),
or result in the creation of any mortgage, pledge, lien, encumbrance or charge
upon any of the properties or assets of the Company pursuant to any such
provision.
2.11 Compliance with SBA/SBIC Requirements. The Company shall
cooperate with the Investors to make timely filing of any reports required by
the U.S. Small Business Administration (the "SBA"), including such financial
statements, plans of operation (including intended use of financing proceeds),
cash flow analyses and projections as are necessary to support the Investors'
investment decisions, considering the size and type of the Company's business
and the amount of the financing; provided that the Investors shall take all
commercially reasonable actions as shall be permissible or available to maintain
the confidentiality of such information. The Company shall accommodate the
Investors in conducting a reasonable post Closing review to confirm the
Company's use of the proceeds of the transaction contemplated hereby within
ninety (90) days of the Closing. The Company covenants that the proceeds of the
transaction contemplated hereby will not be diverted from their reported uses in
any material way without the prior written consent of the Investors and that any
material diversion shall constitute a violation of a covenant under this
Agreement giving the Investors the right to demand immediate rescission of the
investment made hereby. The Company will deliver to the Investors, reasonably
promptly after the Closing, completed (as to information to be provided by the
Company) forms required by the SBA, including (a) a Portfolio Financing Report,
(b) a Size Status Declaration and (c) Assurance of Compliance for
Nondiscrimination.
2.12 Permits. The Company has all franchises, permits,
licenses, and any similar authority necessary for the conduct of its business as
now being conducted by it, the lack of which could materially and adversely
affect the business, properties, prospects or financial condition of the
Company, and the Company believes it can obtain, without undue burden or
expense, any similar authority for the conduct of its business as planned to be
conducted. The Company is not in default in any material respect under any of
such franchises, permits, licenses, or other similar authority.
2.13 Environmental and Safety Laws. To the best of its
knowledge, the Company is not in violation of any applicable statute, law or
regulation relating to the environment or occupational health and safety, and to
the best of its knowledge, no material
5
<PAGE>
expenditures are or will be required in order to comply with any such existing
statute, law or regulation.
2.14 Disclosure. No representation, warranty or statement by
the Company in this Agreement, or in any written statement or certificate
furnished to the Investors pursuant to this Agreement or the transactions
contemplated hereby, contains any untrue statement of a material fact or, when
taken together, omits to state a material fact necessary to make the statements
made herein or therein, in light of the circumstances under which they were
made, not misleading. However, as to any projections furnished to the Investors,
such projections were prepared in good faith by the Company, but the Company
makes no representation that it will be able to achieve such projections.
2.15 Registration Rights. Except as provided in the Investor
Rights Agreement attached hereto as Exhibit D, the Company has not granted or
agreed to grant any registration rights, including piggyback rights, to any
person or entity.
2.16 Title to Property and Assets. The Company has good and
marketable title to all of its properties and assets free and clear of all
mortgages, liens and encumbrances, except liens for current taxes and
assessments not yet due and possible minor liens and encumbrances which do not,
in any case, in the aggregate, materially detract from the value of the property
subject thereto or materially impair the operations of the Company. With respect
to the property and assets it leases, the Company is in compliance with such
leases in all material respects and, to the best of its knowledge, holds a valid
leasehold interest free of all liens, claims or encumbrances. The Company's
properties and assets are in good condition and repair in all material respects.
2.17 Financial Statements. The Company has previously provided
to the Investors copies of its unaudited financial statements for the fiscal
years ended December 31, 1995, 1994, 1993, and 1992 (the "Financial
Statements"). A copy of the internally prepared Financial Statements for the
fiscal year ended December 31, 1995, is attached to the Schedule of Exceptions.
The Financial Statements for the fiscal year ended December 31, 1994 were
compiled by Zolondek, Blumenthal, Greene, Freeds & Strassels, P.C., certified
public accountants. The Financial Statements are complete and correct in all
material respects and have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
indicated and with each other, except that the Financial Statements do not
contain all footnotes required by generally accepted accounting principles. The
Financial Statements accurately set out and describe the financial condition and
operating results of the Company as of the dates, and for the periods, indicated
therein, subject to normal year-end audit adjustments. Except as set forth in
the Financial Statements, the Company has no liabilities, contingent or
otherwise, other than (i) liabilities incurred in the ordinary course of
business subsequent to December 31, 1995, and (ii) obligations under contracts
and commitments incurred in the ordinary course of business and not required
under generally accepted accounting principles to be reflected in the Financial
Statements, which, in both cases, individually or in the aggregate, are not
material to the financial condition or operating results of the Company. The
Company
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maintains and will continue to maintain a standard system of accounting
established and administered in accordance with generally accepted accounting
principles.
2.18 Agreements: Action.
(a) Except for agreements explicitly contemplated
hereby and by the Investor Rights Agreement, there are no agreements,
understandings or proposed transactions between the Company and any of its
officers, directors, affiliates, or any affiliate thereof.
(b) There are no agreements, understandings,
instruments, contracts, proposed transactions, judgments, orders, writs or
decrees to which the Company is a party or by which it is bound that may involve
(i) obligations (contingent or otherwise) of, or payments to the Company in
excess of, $10,000, or (ii) the license of any patent, copyright, trade secret
or other proprietary right to or from the Company, or (iii) provisions
restricting or adversely affecting the development, manufacture or distribution
of the Company's products or services or (iv) indemnification by the Company
with respect to infringements of proprietary rights.
(c) The Company has not (i) declared or paid any
dividends or authorized or made any distribution upon or with respect to any
class or series of its capital stock, (ii) incurred any indebtedness for money
borrowed or any other liabilities individually in excess of $5,000 or, in the
case of indebtedness or liabilities individually less than $5,000, in excess of
$25,000 in the aggregate, (iii) made any loans or advances to any person, other
than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise
disposed of any of its assets or rights, other than the sale of its inventory in
the ordinary course of business.
(d) For the purposes of subsections (b) and (c)
above, all indebtedness, liabilities, agreements, understandings, instruments,
contracts and proposed transactions involving the same person or entity
(including persons or entities the Company has reason to believe are affiliated
therewith) shall be aggregated for the purpose of meeting the individual minimum
dollar amounts of such subsections.
(e) The Company is not a party to and is not bound by
any contract, agreement or instrument, or subject to any restriction under its
Restated Articles or Bylaws that adversely affects its business as now conducted
or as proposed to be conducted.
(f) The Company has not engaged in the past three (3)
months in any discussion (i) with any representative of any corporation or
corporations regarding the consolidation or merger of the Company with or into
any such corporation or corporations, (ii) with any corporation, partnership,
association or other business entity or any individual regarding the sale,
conveyance or disposition of all or substantially all of the assets of the
Company or transaction or series of related transactions in which more than
fifty percent (50%) of the voting power of the Company is disposed of, or (iii)
regarding any other form of acquisition, liquidation, dissolution or winding up
of the Company.
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2.19 Tax Returns and Audits. To the best of its knowledge, the
Company has accurately prepared and filed all United States income tax returns
and all state and municipal tax returns required to be filed by it, has paid all
taxes, assessments, fees and charges when and as due under such returns and has
made adequate provision for the payment of all other taxes, assessments, fees
and charges shown on such returns or on assessments received by the Company. To
the best of the Company's knowledge, no deficiency assessment or proposed
adjustment of the Company's United States income tax or state or municipal taxes
is pending.
2.20 Insurance. The Company has in full force and effect
insurance policies as set forth on Exhibit C to this Agreement.
2.21 Shareholder Agreements. Except as contemplated by this
Agreement and the Investor Rights Agreement, there are no agreements between the
Company and any of the Company's shareholders, or to the best knowledge of the
Company, among any of the Company's shareholders, which in any way affect any
shareholder's ability or right freely to alienate or vote such shares (except
restrictions designed to provide compliance with securities laws).
2.22 Brokers or Finders. The Company has not agreed to incur,
directly or indirectly, any liability for brokerage or finders' fees, agents'
commissions or other similar charges in connection with this Agreement or any of
the transactions contemplated hereby.
2.23 Corporate Documents. Except for amendments necessary to
satisfy representations and warranties or conditions contained herein (the form
of which amendments has been approved by the Investors), the Restated Articles
and Bylaws of the Company are in the form previously provided to the Investors.
2.24 Qualified Small Business. To its knowledge, the Company
currently is a "Qualified Small Business" as defined in Section 1202(d) of the
Internal Revenue Code of 1986, as amended.
2.25 Use of Proceeds. The Company plans to use the proceeds
from the sale of the Shares as described in the Schedule of Exceptions.
3. Representations and Warranties of the Investors. Each Investor
hereby represents and warrants that:
3.1 Experience. The Investor is experienced in evaluating
companies such as the Company, is able to fend for itself in transactions such
as the one contemplated by this Agreement, has such knowledge and experience in
financial and business matters that Investor is capable of evaluating the merits
and risks of Investor's prospective investment in the Company, and has the
ability to bear the economic risks of the investment.
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3.2 Investment. The Investor is acquiring the Shares (and the
Common Stock issuable upon conversion of the Shares) for investment for the
Investor's own account and not with the view to, or for resale in connection
with, any distribution thereof. The Investor under stands that the Shares (and
the Common Stock issuable upon conversion of the Shares) have not been
registered under the Securities Act by reason of a specific exemption from the
registration provisions of the Securities Act which depends upon, among other
things, the bona fide nature of the investment intent as expressed herein. The
Investor further represents that it does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participation to any third person with respect to any of the Shares (or any
Common Stock acquired upon conversion thereof). The Investor understands and
acknowledges that the offering of the Shares pursuant to this Agreement will
not, and any issuance of Common Stock on conversion may not, be registered under
the Securities Act on the ground that the sale provided for in this Agreement
and the issuance of securities hereunder is exempt from the registration
requirements of the Securities Act.
3.3 Rule 144. The Investor acknowledges that the Shares (and
the Common Stock issuable upon conversion of the Shares) must be held
indefinitely unless subsequently registered under the Securities Act or an
exemption from such registration is available. The Investor is aware of the
provisions of Rule 144 promulgated under the Securities Act which permit limited
resale of shares purchased in a private placement subject to the satisfaction of
certain conditions. The Investor covenants that, in the absence of an effective
registration statement covering the stock in question, the Investor will sell,
transfer, or otherwise dispose of the Shares (and any Common Stock issued on
conversion thereof) only in a manner consistent with the Investor's
representations and covenants set forth in this Section 3. In connection
therewith, the Investor acknowledges that the Company will make a notation on
its stock books regarding the restrictions on transfers set forth in this
Section 3 and will transfer securities on the books of the Company only to the
extent not inconsistent therewith.
3.4 No Public Market. The Investor understands that no public
market now exists for any of the securities issued by the Company, and that no
public market may ever exist for the Shares (or the Common Stock issuable upon
conversion of the Shares).
3.5 Access to Data. The Investor has received and reviewed
information about the Company and has had an opportunity to review and discuss
the Company's business, management and financial affairs with its management and
to tour the Company's facilities. The Investor understands that such
discussions, as well as any written information issued by the Company, were
intended to describe the aspects of the Company's business and prospects which
the Company believes to be material, but were not necessarily a thorough or
exhaustive description.
3.6 Authorization. This Agreement when executed and delivered
by the Investor will constitute a valid and legally binding obligation of the
Investor, enforceable in accordance with its terms, subject to: (i) judicial
principles respecting election of remedies or
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limiting the availability of specific performance, injunctive relief, and other
equitable remedies; (ii) bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect generally relating to or affecting
creditors' rights; and (iii) limitations on the enforceability of the
indemnification and contribution provisions of the Investor Rights Agreement.
3.7 Accredited Investor. The Investor acknowledges that it is
an "accredited investor" as defined in Rule 501 of Regulation D as promulgated
by the Securities and Exchange Commission under the Securities Act and shall
submit to the Company such further assurances of such status as may be
reasonably requested by the Company. For state securities law purposes, the
principal addresses of the Investors are: Wasatch Venture Corporation, c/o Zions
First National Bank, Investment Division, Venture Capital Department, 1 South
Main Street, Suite 1000, Salt Lake City, Utah 84133, Attn: Todd Stevens; and
Newtek Ventures II, L.P., 500 Washington Street, Suite 720, San Francisco,
California 94111, Attn: John Hall.
4. Conditions of Investors' Obligations at Closing. The obligations of
each Investor under subsection 1.1(b) of this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions, any of
which may be waived in writing by the Investor:
4.1 Representations and Warranties. The representations and
warranties of the Company contained in Section 2 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the date of such Closing.
4.2 Performance. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with by it on or before the Closing.
4.3 Compliance Certificate. The President of the Company shall
deliver to the Investor at the Closing a certificate stating that the conditions
specified in Sections 4.1 and 4.2 have been fulfilled.
4.4 Bylaws. The Bylaws of the Company shall provide that the
number of authorized directors at the time of the Closing will be seven (7).
4.5 Blue Sky. The Company shall have obtained all necessary
permits and qualifications, if any, or secured an exemption therefrom, required
by any state or country prior to the offer and sale of the Shares.
4.6 Investor Rights Agreement. The Company and the Investor
shall have entered into the Investor Rights Agreement in the form attached
hereto as Exhibit D..
4.7 Co-Sale Agreement. The Company, the Investor and Chad M.
Little, Lonnie A. Whittington and James A. Layne shall have entered into a
Co-Sale Agreement in the form attached hereto as Exhibit E.
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5. Conditions of the Company's Obligations at Closing. The obligations
of the Company to the Investors under this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions by each
Investor:
5.1 Representations and Warranties. The representations and
warranties of the Investor contained in Section 3 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the Closing.
5.2 Payment of Purchase Price. The Investor shall have
delivered the purchase price specified in Section 1 against delivery of the
Shares by the Company to the Investor.
5.3 Securities Law Compliance. The Company shall have obtained
all necessary permits and qualifications, if any, or secured an exemption
therefrom, required by any state or country for the offer and sale of the
Shares.
5.4 Investor Rights Agreement. The Investor shall have
executed the Investor Rights Agreement on or prior to the date of the Closing.
5.5 Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated at the Closing
hereby, and all documents and instruments incident to these transactions, shall
be reasonably satisfactory in substance to the Company and its counsel.
6. Miscellaneous.
6.1 Governing Law. This Agreement shall be governed in all
respects by the laws of the State of Arizona as applied to agreements entered
into and performed entirely in the State of Arizona by residents thereof.
6.2 Survival. The representations, warranties, covenants and
agreements made herein shall survive any investigation made by the Investors and
the closing of the transactions contemplated hereby. All statements as to
factual matters contained in any certificate or exhibit delivered by or on
behalf of the Company pursuant hereto shall be deemed to be the representations
and warranties of the Company hereunder as of the date of such certificate or
exhibit.
6.3 Successors and Assigns. Except as otherwise provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto; provided, however, that the rights of the Investors to purchase
Shares shall not be assignable without the consent of the Company.
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6.4 Entire Agreement; Amendment. This Agreement and the other
documents delivered pursuant hereto constitute the full and entire understanding
and agreement among the parties with regard to the subjects hereof and thereof.
Neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought;
provided, however, that the Investors may waive or amend any provisions hereof
benefitting the Investors.
6.5 Notices, Etc. All notices and other communications
required or permitted hereunder shall be in writing and shall be mailed by
registered or certified mail, postage prepaid, return receipt requested, or
otherwise delivered by hand or by messenger, addressed (a) if to the Investors,
at the Investors' addresses set forth in Section 3.7, or at such other addresses
as the Investors shall have furnished to the Company in writing, or (b) if to
any other holder of any Shares, at such address as such holder shall have
furnished the Company in writing, or, until any such holder so furnishes an
address to the Company, then to and at the address of the last holder of such
Shares who has so furnished an address to the Company, or (c) if to the Company,
at its address set forth on the first page of this Agreement addressed to the
attention of the Corporate Secretary, or at such other address as the Company
shall have furnished to the Investors. If notice is provided by U.S. mail,
notice shall be deemed to be given four (4) days after proper deposit in a U.S.
mailbox, postage prepaid.
6.6 Delays or Omissions. No delay or omission to exercise any
right, power or remedy accruing to the Investors upon any breach or default of
the Company under this Agree ment shall impair any such right, power or remedy
of the Investors, nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of the Investors of any breach or default under this Agreement, or any
waiver on the part of the Investors of any provisions or conditions of this
Agreement, must be in writing and shall be effective only to the extent
specifically set forth in such writing or as provided in this Agreement. All
remedies, either under this Agreement or by law or otherwise afforded to the
Investors shall be cumulative and not alternative.
6.7 Expenses. The Company and the Investors shall bear their
own expenses and legal fees incurred on their behalf with respect to this
Agreement and the transactions contemplated hereby. The total legal fees and
expenses incurred by the Company with respect to this Agreement and the
transactions contemplated hereby shall not exceed $5,000.
6.8 Finder's Fee. The Company and the Investors shall each
indemnify and hold the other harmless from any liability for any commission or
compensation in the nature of a finder's fee (including the costs, expenses and
legal fees of defending against such liability) for which the Company or the
Investors, or any of their respective partners, employees, or representatives,
as the case may be, is responsible.
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6.9 Counterparts. This Agreement may be executed in
counterparts, each of which shall be enforceable against the party actually
executing the counterpart, and both of which together shall constitute one
instrument.
6.10 Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to any
party.
6.11 Arbitration. Any dispute or controversy arising out of or
relating to any interpretation, construction, performance or breach of this
Agreement shall be resolved exclusively by binding arbitration in Phoenix,
Arizona, in accordance with the rules then in effect of the American Arbitration
Association. The arbitrator may grant injunctions or other relief in such
dispute or controversy. The decision of the arbitrator shall be final,
conclusive and binding on the parties to the arbitration. Judgment may be
entered on the arbitrator's decision in any court having jurisdiction. The
Company and the Investors shall each pay one-half of the costs and expenses of
such arbitration, and each of them shall separately pay their counsel fees and
expenses.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
TRACER DESIGN, INC. WASATCH VENTURE CORPORATION
By: /s/ Chad M. Little By: /s/ Todd J. Stevens
--------------------------- ------------------------------
Title: President Title: Secretary and Treasurer
------------------------ ---------------------------
NEWTEK VENTURES II, L.P.
By: /s/ John Hall
--------------------------------
Title: General Partner
-----------------------------
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EXHIBIT B
INVESTORS SCHEDULE
Series A Preferred
Investors Shares Purchased Purchase Price (Aggregate)
Wasatch Venture Corporation 70,000 $350,000
Newtek Ventures II, L.P. 20,000 $100,000
------ --------
Total 90,000 $450,000
<PAGE>
EXHIBIT C
SCHEDULE OF EXCEPTIONS
This disclosure of exceptions is made and given pursuant to Section 2
of the Series A Preferred Stock Purchase Agreement dated as of February 13, 1996
(the "Agreement"), by and among Tracer Design, Inc. (the "Company") and the
Investor named therein. Unless the context otherwise requires, all capitalized
terms are used herein as defined in the Agreement. The numbers below correspond
to the section numbers of representations and warranties in the Agreement that
are most directly modified by the disclosures, but all disclosures are intended
to modify all of the Company's representations and warranties.
2.2 After giving effect to a two-for-one stock split prior to the Closing,
the outstanding shares of Common Stock prior to the Closing will be as
follows:
Little 255,000
Layne 122,500
Whittington 122,500
Gomez 10,204
Kailey 11,112
In addition, the Company has granted 69,574 stock options (post-split)
under its 1995 Equity Incentive Plan to current employees (engineers)
for the purchase of Common Stock at a nominal exercise price. The
Company also has issued an aggregate of 23,800 warrants (post-split) to
purchase Common Stock (the "Warrants") each with an exercise price of
$18.00 per share (post-split).
Upon consummation of the Closing, the Company will issue additional
shares, for no additional consideration, to Gomez and Kailey as set
forth below in order to adjust for the dilutive effects of the issuance
of the Shares, and the number of Shares subject to the Warrants will
also be adjusted as set forth below for the same reason.
Total Common Shares
Current Shares After Dilution Adjustment
-------------- -------------------------
Gomez 10,204 36,734
Kailey 11,112 20,002
Warrant holders 23,800 @ $18.00/sh. 85,680 @ $5.00/sh.
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The Company has reserved a total of 107,482 shares of Common Stock for
awards under the Company's 1995 Equity Incentive Plan, including the
69,574 existing stock options. The Company is party to a "Retainer /
Non - Circumvention Agreement dated May 16, 1995 with Mr. Frank Helstab
(the "Agreement") pursuant to which Mr. Helstab has provided certain
services to the Company. The term of the Agreement has been orally
extended by the parties, and the Company has agreed that the
compensation terms of such Agreement shall apply to the issuance of the
Shares to the Investor and to any transactions with John Hall/Newtek
Ventures, Tim Draper/Fisher/Wasatch, and any other transactions that
are part of the Company's current effort to raise a total round of
$1,000,000 in new financing (including the investments by Kailey and
the Investors) and with respect to which he is entitled to compensation
under the Agreement because of his role in the transactions.
Immediately after the Closing of the transaction with the Investors,
the Company will issue to Mr. Helstab warrants to purchase up to 26,307
shares of Common Stock of the Company at an exercise price of $0.01 per
share pursuant to the Agreement, and pay to him $15,750 (3.5% of the
proceeds of this transaction) in commission payments due him. The
Company intends to grant to Mr. John Hall or assigns a stock option,
exercisable at $.10 per share, to purchase up to 26,307 shares of
Common Stock of the Company, in consideration of consulting services to
be performed and subject to a three year vesting condition. The Company
is also party to a certain Engagement Letter dated October 10, 1995,
between the Company and Messrs. Helstab and Reynolds pursuant to which
they were entitled, under certain conditions, to receive warrants to
purchase Common Stock of the Company. The conditions were not met, and
the Company does not believe it has any obligations to issue any
warrants to Messrs. Helstab or Reynolds under that Agreement.
Messrs. Little, Layne and Whittington have certain agreements amongst
themselves pursuant to which the number of shares of Common Stock held
by them relative to each other may be adjusted and also providing
certain proxies for voting shares held by them. The agreements do not
include receiving any new shares of the Company.
The Company, and Messrs, Little, Layne, Whittington, Gomez and Kailey
are parties to a certain Stockholders' Agreement, as amended, which
among other things requires stock issued by the Company (with certain
exceptions) to be subject to such Stockholders' Agreement, restricts
transfer of shares of Common Stock held by the parties thereto and
grants certain rights of first refusal. Mr. Helstab has agreed to
become a party to such agreement. In addition, Messrs. Little, Layne
and Whittington are parties to a Cross Purchase Agreement amongst
themselves providing for the purchase of shares of Common Stock of a
party upon their death by the surviving parties to the agreement.
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The Company is also issuing, in connection with the closing of the
transactions contemplated by the Stock Purchase Agreement a warrant to
each of the Investors to purchase an aggregate of 22,500 shares of
Series A Preferred Stock, at an exercise price of $.01 per share, and
has reserved 22,5000 shares of Series A Preferred Stock and 22,500
shares of Common Stock in connection therewith.
2.3 Messrs. Little, Layne and Whittington are the sole shareholders of
Tracer 2 Design, Inc., an Arizona corporation, that has never conducted
business and does not own any material assets. Messers. Little, Layne
and Whittington have agreed to assign their stock in Tracer 2 Design,
Inc. to the Company for nominal consideration, after which it will be a
wholly owned subsidiary of the Company.
2.6 The Corporation intends to file Form D with the SEC and with the
Securities Division of the Arizona Corporation Commission in order to
perfect exemptions under Regulation D and the applicable Arizona
counterpart.
2.8 The Company has adopted its 1995 Equity Incentive Plan and has granted
nonqualified stock options to Messrs. Fairall, Wodarz, Turico and Hall
(the engineers) thereunder pursuant to written award agreements. The
confidentiality and proprietary rights agreements signed by the
engineers are contained in their employment agreements with the
Company. Those signed by Messrs. Little, Layne and Whittington are
separate agreements. Copies of all of the foregoing have been provided
to the Investor.
2.9 The Company holds certain software under license from Motorola, and has
a variety of licenses for off-the-shelf software used in its business.
2.10 Payables are generally running from 15 to 90 days.
2.15 Certain registration rights are set forth in the Warrants held by the
Warrant holders.
2.17 Internally prepared financial statements for 1995 are attached hereto.
2.18 For Section 2.18, the Company discloses the following agreements as
exceptions or potential exceptions (copies of all have been provided to
Investor):
Employment Agreements with the Engineers
Confidentiality and Proprietary Rights Agreements with the Founders
Engagement Letter with Reynolds and Helstab dated October 10, 1995
Retainer / Non - Circumvention Agreement dated May 16, 1995 with Mr.
Frank Helstab, as orally amended
Lease for current space
Letter Agreement dated January 5, 1996 with Katz Media for media sales
representation
License Agreement with Motorola
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Warrant Purchase Agreement and Warrant for Pickwick Group, LLC
Promissory Notes, Loan and Warrant Purchase Agreements, and Warrants
for Bridge Loans
Amended and Restated Stockholders Agreement, as amended
Subscription Agreements for Kailey and Gomez
Promissory Note in favor of Glenn Gomez
2.20 See attached memorandum describing insurance.
2.21 See paragraph 2.2 above.
2.22 See paragraph 2.2 above.
2.25 From the gross proceeds of this round of financing, the Company will
pay a finders fee to Frank Helstab as described above. The Company will
also use the first $5,000 of the net proceeds to pay for legal expenses
for the Offering, and will also pay other expenses related to the
offering (e.g., accounting). Management estimates that the net proceeds
to the Company from this round of financing (Series A Preferred), after
the foregoing deductions, will be approximately $433,000. The Company
intends to use the proceeds as set forth in the following table:
Purpose Estimated Total
Working capital (includes equipment,
additional rent, salaries, telecommunications,
payables, travel) $353,000
Advertising and Marketing $80,000
It should be noted that due to sponsorship, Sandbox should be able to
put more of the dollars to work in production of products as opposed to
advertising and marketing because sponsors will be paying for the
majority of those expenses.
Exhibit 10(f)
INVESTOR RIGHTS AGREEMENT
-------------------------
THIS INVESTOR RIGHTS AGREEMENT (the "Agreement") is entered into as of
the 13th day of February, 1996, by and among Tracer Design, Inc., an Arizona
corporation (the "Company") and Wasatch Venture Corporation and Newtek Ventures
II, L.P. (each of which is referred to herein as an "Investor").
RECITALS
The Company and the Investors are entering into a Series A Preferred
Stock Purchase Agreement of even date herewith, pursuant to which the Company
shall sell, and the Investors shall acquire, shares of the Company's Series A
Preferred Stock (the "Shares").
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the parties agree as follows:
SECTION 1
Restrictions on Transferability
-------------------------------
Registration Rights
-------------------
1.1 Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act.
"Conversion Shares" means the Common Stock issued or issuable
upon conversion of the Shares.
"Holder" shall mean the Investors and any person holding
Registrable Securities to whom the rights under this Agreement have been
transferred in accordance with Section 1. 14 hereof.
"Initiating Holders" shall mean the Investors or transferees
of the Investors under Section 1.14 hereof who in the aggregate are Holders of
not less than twenty percent (20 %) of the Registrable Securities.
<PAGE>
The terms "register," "registered" and "registration" refer to
a registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses incurred by
the Company in complying with Sections 1.5, 1.6 and 1.7 hereof, including,
without limitation, all registration, qualification and filing fees, printing
expenses, escrow fees, fees and disbursements of counsel for the Company, blue
sky fees and expenses, and the expense of any special audits incident to or
required by any such registration (but excluding the compensation of regular
employees of the Company which shall be paid in any event by the Company).
"Registrable Securities" means (a) the Shares; (b) the
Conversion Shares; and (c) any Common Stock of the Company issued or issuable in
respect of the Shares or Conversion Shares or other securities issued or
issuable with respect to the Shares or Conversion Shares upon any stock split,
stock dividend, recapitalization, or similar event, or any Common Stock
otherwise issued or issuable with respect to the Shams or Conversion Shares;
provided, however, that shares of Common Stock or other securities shall only be
treated as Registrable Securities if and so long as they have not been (x) sold
to or through a broker or dealer or underwriter in a public distribution or a
public securities transaction, or (y) sold in a transaction exempt from the
registration and prospectus delivery requirements of the Securities Act under
Section 4(l) thereof so that all transfer restrictions and restrictive legends
with respect thereto are removed upon the consummation of such sale.
"Restricted Securities" shall mean the securities of the
Company required to bear the legend set forth in Section 1.3 hereof.
"Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar or successor federal statute and the rules and
regulations of the Commission thereunder, all as the same shall be in effect at
the time.
"Selling Expenses" shall mean all underwriting discounts,
selling commissions and stock transfer taxes applicable to the securities
registered by the Holders and all fees and disbursements of counsel for the
Holders (as limited by Section 1.9).
1.2 Restrictions. The Shares and the Conversion Shares shall not be
sold, assigned, transferred or pledged except upon the conditions specified in
this Agreement, which conditions are intended to ensure compliance with the
provisions of the Securities Act. The Investors will cause any proposed
purchaser, assignee, transferee or pledgee of the Shares and the Conversion
Shares to agree to take and hold such securities subject to the provisions and
upon the conditions specified in this Agreement.
1.3 Restrictive Legend. Each certificate representing (a) the Shares,
(b) the Conversion Shares, and (c) any other securities issued in respect of the
securities referenced in
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clauses (a) and (b) upon any stock split, stock dividend, recapitalization,
merger, consolidation or similar event, shall (unless otherwise permitted by the
provisions of Section 1.4 below) be stamped or otherwise imprinted with a legend
in substantially the following form (in addition to any legend required under
applicable state securities laws):
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD, TRANSFERRED OR PLEDGED
IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES AN
OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE
OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF SAID ACT."
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN
ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE
ORIGINAL SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF
THE COMPANY."
Each Investor and Holder consents to the Company making a
notation on its records and giving instructions to any transfer agent of the
Restricted Securities in order to implement the restrictions on transfer
established in this Section 1.
1.4 Notice of Proposed Transfers. The holder of each certificate
representing Restricted Securities, by acceptance thereof, agrees to comply in
all respects with the provisions of this Section 1. Prior to any proposed sale,
assignment, transfer or pledge of any Restricted Securities, unless there is in
effect a registration statement under the Securities Act covering the proposed
transfer, the holder thereof shall give written notice to the Company of such
holder's intention to effect such transfer, sale, assignment or pledge. Each
such notice shall describe the manner and circumstances of the proposed
transfer, sale, assignment or pledge in sufficient detail, and shall be
accompanied at such holder's expense by either (a) an unqualified written
opinion of legal counsel who shall, and whose legal opinion shall be, reasonably
satisfactory to the Company, addressed to the Company, to the effect that the
proposed transfer of the Restricted Securities may be effected without
registration or qualification under the Securities Act and applicable state
"blue sky" statutes, rules and regulations ("Blue Sky Laws"), or (b) a "no
action" letter from the Commission and applicable state "blue sky" regulators
(the "Regulators") to the effect that the transfer of such securities without
registration will not result in a recommendation by the staff of the Commission
or the Regulators that action be taken with respect thereto, or (c) any other
evidence reasonably satisfactory to counsel to the Company, whereupon the holder
of such Restricted Securities shall be entitled to transfer such Restricted
Securities in accordance with the terms of the notice delivered by the holder to
the Company. The Company will not require such a legal opinion or "no action"
letter (x) in any transaction in compliance with Rule 144 and
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applicable state counterparts, (y) in any transaction in which an Investor which
is a corporation distributes Restricted Securities after six (6) months after
the purchase thereof solely to its majority owned subsidiaries or affiliates for
no consideration, or (z) in any transaction in which an Investor which is a
partnership distributes Restricted Securities after six (6) months after the
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purchase thereof solely to partners thereof for no consideration; provided that
each transferee agrees in writing to be subject to the terms of this Section 1,
and provided that with respect to (y) and (z) the Company is provided with a
legal opinion meeting the standards described above to the effect that such
proposed transfer may be effected without registration or qualification under
applicable Blue Sky Laws. Each certificate evidencing the Restricted Securities
transferred as above provided shall bear, except if such transfer is made
pursuant to Rule 144, the appropriate restrictive legends set forth in this
Section 1, except that such certificate shall not bear such restrictive legend
if, in the opinion of counsel for such holder and the Company, such legend is
not required in order to establish compliance with any provisions of the
Securities Act.
1.5 Requested Registration.
(a) Request for Registration. In case the Company shall
receive from Initiating Holders a written request that the Company effect any
registration, qualification or compliance with respect to the Registrable
Securities, the Company will:
(i) promptly give written notice of the proposed
registration, qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its best efforts to
effect such registration, qualification or compliance (including, without
limitation, the execution of an undertaking to file post-effective amendments,
appropriate qualification under applicable blue sky or other securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act and any other governmental requirements or regulations) as may be so
requested and would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by the Company within twenty (20) days after receipt of the written notice from
the Company;
provided, however, that the Company shall not be obligated to take any action to
effect any such registration, qualification or compliance pursuant to this
Section 1.5:
(A) In any particular jurisdiction in which
the Company would be required to execute a general consent to service of process
in effecting such registration, qualification or compliance unless the Company
is already subject to service in such jurisdiction and except as may be required
by the Securities Act;
(B) Prior to the earlier of (1) one (1) year
following the effective date of the first public offering of the Common Stock of
the Company to the general public which is effected pursuant to a registration
statement filed with, and declared effective by, the Commission under the
Securities Act (the "Initial Public Offering") and (2) six (6) years from the
date of this Agreement.
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(C) After the Company has effected two (2)
such registrations pursuant to this subparagraph 1.5(a), each such registration
has been declared or ordered effective and the securities offered pursuant to
each such registration have been sold; or
(D) If the request of the Initiating Holders
applies to less than 20% of the Registrable Securities held by such Holders
(unless the anticipated gross proceeds to be received by such Holders exceed
$500,000).
Subject to the foregoing clauses (A) through (D), the Company shall
file a registration statement covering the Registrable Securities so requested
to be registered as soon as practicable after receipt of the request or requests
of the Initiating Holders.
(b) Underwriting . In the event that a registration pursuant
to Section 1.5 is for a registered public offering involving an underwriting,
the Company shall so advise the Holders as part of the notice given pursuant to
Section 1.5(a)(i). The right of any Holder to registration pursuant to Section
1.5 shall be conditioned upon such Holder's participation in the underwriting
arrangements required by this Section 1.5 and the inclusion of such Holder's
Registrable Securities in the underwriting, to the extent requested and provided
herein.
The Company shall (together with all Holders proposing to distribute
their securities through such underwriting) enter into an underwriting agreement
in customary form with the managing underwriter selected for such underwriting
by a majority in interest of the Initiating Holders (which managing underwriter
shall be reasonably acceptable to the Company). Notwithstanding any other
provision of this Section 1.5, if the managing underwriter advises the
Initiating Holders in writing that marketing factors require a limitation of the
number of shares to be underwritten (including reducing the number of shares of
Registrable Securities to be underwritten to zero), then the Company shall so
advise all Holders of Registrable Securities and the number of shares of
Registrable Securities that may be included in the registration and underwriting
(if any) shall be allocated among all Holders thereof in proportion, as nearly
as practicable, to the respective amounts of Registrable Securities held by such
Holders at the time of filing the registration statement. No Registrable
Securities excluded from the underwriting by reason of the underwriter's
marketing limitation shall be included in such registration. To facilitate the
allocation of shares in accordance with the above provisions, the Company or the
underwriters may round the number of shares allocated to any Holder to the
nearest 100 shares.
If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the managing underwriter and the Initiating Holders. The
Registrable Securities or other securities so withdrawn shall also be withdrawn
from registration, and such Registrable Securities shall not be transferred in a
public distribution prior to ninety (90) days (one hundred eighty (180) days in
the case of the Company's Initial Public Offering) after the date of the final
prospectus used in such public offering.
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1.6 Company Registration.
(a) Notice of Registration. If at any time or from time to
time, the Company shall determine to register any of its securities, either for
its own account or the account of a security holder other than (i) a
registration relating solely to employee benefit plans, or (ii) a registration
relating solely to a Commission Rule 145 transaction, the Company will:
(i) promptly give to each Holder written notice
thereof, and
(ii) 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 a written request
or requests made within twenty (20) days after receipt of such written notice
from the Company by any Holder, but only to the extent that such inclusion will
not diminish the number of securities included by the Company or by holders of
the Company's securities who have demanded such registration.
(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 1.6(a)(i). In such event, the right of any Holder to
registration pursuant to Section 1.6 shall be conditioned upon such Holder's
participa tion in such underwriting and the inclusion of 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 the other holders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by the Company (or by the
holders who have demanded such registration, as the case may be).
Notwithstanding any other provision of this Section 1.6, if the managing
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the managing underwriter may limit the number of
Registrable Securities to be included in the registration and underwriting
(including a reduction to zero), on a pro rata basis based on the total number
of securities (including, without limitation, Registrable Securities) entitled
to registration pursuant to registration rights granted to the participating
holders by the Company; provided, however, no such reduction may reduce the
number of securities being sold by the Company for its own account. To
facilitate the allocation of shares in accordance with the above provisions, the
Company or the underwriters may round the number of shares allocated to any
Holder or other holder to the nearest 100 shares. If any Holder or other holder
disapproves of the terms of any such underwriting, he or she may elect to
withdraw therefrom by written notice to the Company and the managing
underwriter. Any securities excluded or withdrawn from such underwriting shall
be withdrawn from such registration, and shall not be transferred in a public
distribution prior to ninety (90) days (one hundred eighty (180) days in the
case of the Company's Initial Public Offering) after the date of the final
prospectus included in the registration statement relating thereto.
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(c) Right to Terminate Registration. The Company shall have
the right to terminate or withdraw any registration initiated by it under this
Section 1.6 prior to the effectiveness of such registration, whether or not any
Holder has elected to include securities in such registration.
1.7 Registration on Form S-3.
(a) If any Holder or Holders of Registrable Securities
requests that the Company file a registration statement on Form S-3 (or any
successor form to Form S-3) for a public offering of shares of the Registrable
Securities, the reasonably anticipated aggregate price to the public of which,
net of underwriting discounts and commissions, would exceed $500,000, and the
Company is a registrant entitled to use Form S-3 to register the Registrable
Securities for such an offering, the Company shall use its best efforts to cause
such Registrable Securities to be registered for the offering on such form;
provided, however, that the Company shall not be required to effect more than
two registrations pursuant to this Section 1.7 in any twelve (12) month period.
The Company will (i) promptly give written notice of the proposed registration
to all other Holders, and (ii) as soon as practicable, use its best efforts to
effect such registration (including, without limitation, the execution of an
undertaking to file post-effective amendments, appropriate qualification under
applicable blue sky or other state securities laws and appropriate compliance
with applicable regulations issued under the Securities Act and any other
governmental requirements or regulations) as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Registrable Securities as are specified in such request, together with all or
such portion of the Registrable Securities of any Holder or Holders joining in
such request as are specified in a written request received by the Company
within twenty (20) days after receipt of written notice from the Company. The
substantive provisions of Section 1.5(b) shall be applicable to each
registration initiated under this Section 1.7.
(b) Notwithstanding the foregoing, the Company shall not be
obligated to take any action pursuant to this Section 1.7: (i) in any particular
jurisdiction in which the Company would be required to execute a general consent
to service of process in effecting such registration, qualification or
compliance unless the Company is already subject to service in such jurisdiction
and except as may be required by the Securities Act; (ii) during the period
starting with the date sixty (60) days prior to the filing of, and ending on the
earlier of (x) one year from the date sixty (60) days prior to the Company's
date of filing of, or (y) a date six (6) months following the effective date of,
a registration statement (other than with respect to a registration statement
relating to a Rule 145 transaction, an offering solely to employees or any other
registration which is not appropriate for the registration of Registrable
Securities), provided that the Company is actively employing in good faith all
reasonable efforts to cause such registration statement to become effective; or
(iii) if the Company shall furnish to such Holder a certificate signed by the
President of the Company stating that, in the good faith judgment of the Board
of Directors, it would be seriously detrimental to the Company or its
shareholders for registration statements to
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be filed in the near future, then the Company's obligation to use its best
efforts to file a registration statement shall be deferred for a period not to
exceed one hundred twenty (120) days from the receipt of the request to file
such registration by such Holder or Holders.
1.8 Limitations on Subsequent "Piggyback" Registration Rights;
Acknowledgment of Previous Grants. From and after the date hereof, the Company
shall not, without the consent of the holders of at least 50 % of the Shares or
the Common Stock issued upon conversion thereof, enter into any agreement
granting any holder or prospective holder of any securities of the Company
registration rights with respect to such securities unless (a) such new
registration rights, including market standoff obligations, are on a pari passu
basis with those rights of the Holders hereunder or (b) such new registration
rights, including market standoff obligations, are subordinate to the
registration rights granted Holders in Section 1.6 hereof. Holder acknowledges
that the Company has previously granted to the holders of certain warrants to
purchase Common Stock of the Company "piggyback" registration rights. A copy of
the form of such grants is attached hereto as Exhibit A to this Agreement.
Holder acknowledges that the "piggyback" registration rights of Holder pursuant
to this Agreement are consistent with and subject to the rights and priorities
set forth in Section 8 of Exhibit A attached hereto.
1.9 Expenses of Registration. All Registration Expenses incurred in
connection with any registration pursuant to Sections 1.5, 1.6 and 1.7 in any
such registration (other than expenses in excess of $15,000 of any special audit
required in connection with a registration pursuant to Section 1.5, which shall
be borne by the Holders of Registrable Securities pro rata on the basis of the
number of shares to be registered) shall be borne by the Company, provided that
the Company shall not be required to pay the Registration Expenses of any
registration proceeding begun pursuant to Section 1.5, the request of which has
been subsequently withdrawn by the Initiating Holders. In such case, (i) the
Holders of Registrable Securities to have been registered shall bear all such
Registration Expenses pro rata on the basis of the number of shares to have been
registered, and (ii) the Company shall be deemed not to have effected a
registration pursuant to subparagraph 1.5(a) of this Agreement. Notwithstanding
the foregoing, however, if at the time of the withdrawal, the Holders have
learned of a material adverse change in the condition, business or prospects of
the Company from that known to the Holders at the time of their request, of
which the Company had knowledge at the time of the request, then the Holders
shall not be required to pay any of said Registration Expenses. In such case,
the Company shall be deemed not to have effected a registration pursuant to
subparagraph 1.5(a) of this Agreement. Unless otherwise stated, all other
Selling Expenses relating to securities registered on behalf of the Holders
shall be borne by the Holders of the registered securities included in such
registration pro rata on the basis of the number of shares so registered.
1.10 Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Section 1,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:
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(a) Prepare and file with the Commission a registration
statement with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for at least ninety (90)
days or until the distribution described in the registration statement has been
completed; and
(b) Furnish to the Holders participating in such registration
and to the underwriters of the securities being registered such reasonable
number of copies of the registration statement, preliminary prospectus, final
prospectus and such other documents as such underwriters may reasonably request
in order to facilitate the public offering of such securities.
1.11 Indemnification.
(a) The Company will indemnify each Holder, each of its
officers and directors and partners, and each person controlling such Holder
within the meaning of Section 15 of the Securities Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Section 1, and each underwriter, if any, and each person who controls any
underwriter within the meaning of Section 15 of the Securities Act, against all
expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, 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 document, or any
amendment or supplement thereto, 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, in light of the circumstances in which they were made,
not misleading, or any violation by the Company of any rule or regulation
promulgated under the Securities Act applicable to the Company in connection
with any such registration, qualification or compliance, and the Company will
reimburse each such Holder, each, of its officers and directors, and each person
controlling such Holder, each such underwriter and each person who controls any
such underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, as such expenses are incurred, provided that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with written information furnished to the Company by an
instrument duly executed by such Holder, controlling person or underwriter and
stated to be specifically for use therein.
(b) Each Holder will, if Registrable Securities held by such
Holder are included in the securities as 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 or such underwriter within the meaning of Section 15 of the
Securities Act, and each other such Holder, each of its officers and directors
and each person controlling such Holder within the meaning of Section 15 of the
Securities Act, against all claims, losses, damages and
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liabilities (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
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading, and will
reimburse the Company, such Holders, such directors, officers, persons,
underwriters or control persons for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability or action, as such expenses are incurred, 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 by an instrument
duly executed by such Holder and stated to be specifically for use therein.
(c) Each party entitled to indemnification under this Section
1.11 (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying 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 Indemni fied Party may participate in such
defense at such party's expense; provided, however, that an Indemnified Party
(together with all other Indemnified Parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the Indemnifying Party, if
representation of such Indemnified Party by the counsel retained by the
Indemnifying Party would be inappropriate due to actual or potential differing
interests between such Indemnified Party and any other party represented by such
counsel in such proceeding. The failure of any Indemnified Party to give notice
as provided herein shall not relieve the Indemnifying Party of its obligations
under this Section 1 unless the failure to give such notice is materially
prejudicial to an Indemnifying Party's ability to defend such action. 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 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 in respect to such claim or litigation.
1.12 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, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the Company may
request in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 1.
1.13 Rule 144 Reporting. With a view to making available the benefits
of certain rules and regulations of the Commission which may at any time permit
the sale of the Restricted
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Securities to the public without registration, after such time as a public
market exists for the Common Stock of the Company, the Company agrees to use its
best efforts to:
(a) Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all times
after the effective date that the Company becomes subject to the reporting
requirements of the Securities Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act");
(b) File with the Commission in a timely manner all reports
and other documents required of the Company under the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements); and
(c) So long as an Investor owns any Restricted Securities, to
furnish to the Investor forthwith upon request a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144
(at any time after ninety (90) days after the effective date of the first
registration statement filed by the Company for an offering of its securities to
the general public) and of the Securities Act and the Exchange Act (at any time
after it has become subject to such reporting requirements), a copy of the most
recent annual or quarterly report of the Company, and such other reports and
documents of the Company and other information in the possession of or
reasonably obtainable by the Company as an Investor may reasonably request in
availing itself of any rule or regulation of the Commission allowing an Investor
to sell any such securities without registration.
1.14 Transfer of Registration Rights. The rights to cause the Company
to register securities granted Investors under Sections 1.5, 1.6 and 1.7 may be
assigned to a transferee or assignee reasonably acceptable to the Company in
connection with any transfer or assignment of Registrable Securities by an
Investor (together with any affiliate); provided that (a) such transfer may
otherwise be effected in accordance with applicable securities laws, (b) written
notice of such assignment is given to the Company and (c) the Registrable
Securities to be assigned or transferred represent at least one percent (1%) of
the outstanding capital stock of the Company on the date of transfer.
1.15 Market Standoff Agreement. Each Holder agrees in connection with
any registration of the Company's securities (other than a registration of
securities in a Rule 145 transaction or with respect to an employee benefit
plan) that, upon request of the Company or the underwriters managing any
underwritten offering of the Company's securities, not to sell, make any short
sale of, loan, grant any option for the purchase of, pledge, hypothecate, or
otherwise dispose of any Registrable Securities (other than those included in
the registration) or other capital stock of the Company or securities
exchangeable or convertible into capital stock of the Company without the prior
written consent of the Company or such underwriters, as the case may be, for
such period of time (not to exceed one hundred eighty (180) days from the date
of the final prospectus used in such registration) as may be requested by the
Company or such managing underwriters, provided, that the officers and directors
of the Company who own stock of the
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Company also agree to such restrictions. The certificates for the Shares shall
contain, for so long as such market standoff provision remains in place, a
legend in substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER INCLUDING A MARKET STANDOFF AGREEMENT BETWEEN
THE COMPANY AND THE ORIGINAL SHAREHOLDER THAT PROHIBITS SALE OR
TRANSFER OF SUCH SHARES FOR A PERIOD OF UP TO 180 DAYS FOLLOWING THE
DATE OF THE FINAL PROSPECTUS FOR THE INITIAL PUBLIC OFFERING OF THE
ISSUER'S COMMON STOCK. A COPY OF THE AGREEMENT IS ON FILE WITH THE
SECRETARY OF THE ISSUER.
1.16 Termination of Rights. The rights of any particular Holder to
cause the Company to register securities under Sections 1.5, 1.6 and 1.7 shall
terminate with respect to such Holder on the earlier of (i) the date when such
securities may be sold during a one-year period pursuant to Rule 144 (but not
Rule 144A) or similar or successor Rule and (ii) the date seven (7) years after
the effective date of the Company's Initial Public Offering.
SECTION 2
Right of First Offer
--------------------
2.1 Investors' Right of First Offer.
(a) Right of First Offer. Subject to the terms and conditions
contained in this Section 2.1, the Company hereby grants to each Investor the
right of first offer to purchase its Pro Rata Portion (as defined below) of any
New Securities (as defined in subsection 2.1 (b)) which the Company may, from
time to time, propose to sell and issue. An Investor's "Pro Rata Portion" for
purposes of this Section 2.1 is the ratio that (x) the sum of the number of
shares of the Company's Common Stock then held by such Investor and the number
of shares of the Company's Common Stock issuable upon conversion of the
Preferred Stock then held by such Investor bears to (y) the sum of the total
number of shares of Company's Common Stock then outstanding and the number of
shares of the Company's Common Stock issuable upon conversion of the then
outstanding Preferred Stock.
(b) Definition of New Securities. Except as set forth below,
"New Securities" shall mean any shares of capital stock of the Company,
including Common Stock and Preferred Stock, whether authorized or not, and
rights, options or warrants to purchase said shares of Common Stock or Preferred
Stock, and securities of any type whatsoever that are, or may become,
convertible into shares of Common Stock or Preferred Stock. Notwithstanding the
foregoing, "New Securities" does not include (i) the Shares or the Conversion
Shares, (ii) securi-
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ties offered to the public generally pursuant to a registration statement under
the Securities Act, (iii) securities issued pursuant to the acquisition of
another corporation by the Company by merger, purchase of substantially all of
the assets or shares or other reorganization whereby the Company or its
shareholders own not less than a majority of the voting power of the surviving
or successor corporation, (iv) shares of the Company's Common Stock or related
options convertible into or exercisable for such Common Stock issued to
employees, officers and directors of, and consultants, customers, and vendors
to, the Company, pursuant to any arrangement approved by the Board of Directors
of the Company, (v) shares of the Company's Common Stock or related options
convertible into or exercisable for such Common Stock issued to any bank,
equipment lessor or other similar financial institution or corporate strategic
partner if and to the extent that the transaction in which such sale or grant is
to be made is approved by the Company's Board of Directors, (vi) stock issued
pursuant to any rights or agreements, including, without limitation, convertible
securities, options and warrants, provided that the Company shall have complied
with the right of first offer established by this Section 2.1 with respect to
the bona fide initial sale or grant by the Company of such rights or agreements,
or (vii) stock issued in connection with any stock split, stock dividend or
recapitalization by the Company.
(c) Notice of Right. In the event the Company proposes to
undertake an issuance of New Securities, it shall give each Investor written
notice of its intention, describing the type of New Securities and the price and
terms upon which the Company proposes to issue the same. The Investors shall
have fifteen (15) days from the date of any such notice to agree to purchase
shares of such New Securities (up to the amount referred to in subsection 2.1
(a)), for the price and upon the terms specified in the notice, by giving
written notice to the Company and stating therein the quantity of New Securities
to be purchased.
(d) Exercise of Right. If any Investor exercises its right of
first offer hereunder, the closing of the purchase of the New Securities with
respect to which such right has been exercised shall take place within thirty
(30) calendar days after the Investor gives notice of such exercise, which
period of time shall be extended in order to comply with applicable laws and
regulations. Upon exercise of such right of first offer, the Company and the
Investor shall be legally obligated to consummate the purchase contemplated
thereby and shall use their best efforts to secure any approvals required in
connection therewith.
(e) Lapse and Reinstatement of Right. In the event an Investor
fails to exercise the right of first offer provided in this Section 2.1 within
said fifteen (15) day period, the Company shall have ninety (90) days thereafter
to sell or enter into an agreement (pursuant to which the sale of New Securities
covered thereby shall be closed, if at all, within sixty (60) days from the date
of said agreement) to sell the New Securities not elected to be purchased by
such Investor at the price and upon the terms no more favorable to the
purchasers of such securities than specified in the Company's notice. In the
event the Company has not sold the New Securities or entered into an agreement
to sell the New Securities within said ninety (90) day period (or sold and
issued New Securities in accordance with the foregoing within sixty (60) days
14
<PAGE>
from the date of said agreement), the Company shall not thereafter issue or sell
any New Securities without first offering such securities to the Investors in
the manner provided above.
(f) Assignment. The right of the Investors to purchase any
part of the New Securities may be assigned in whole or in part to any partner,
subsidiary, affiliate or shareholder of the Investors, or other person or
organization who acquires at least one percent (1%) of the outstanding capital
stock of the Company.
2.2 Termination of Right of First Offer. The right of first offer
granted under Section 2.1 of this Agreement shall terminate on and be of no
further force or effect upon the closing of a firmly underwritten public
offering on Form S-1 (or successor form) and resulting in aggregate gross
proceeds to the Company of at least $5,000,000 (a "Qualifying Public Offering").
SECTION 3
Affirmative Covenants of the Company
------------------------------------
The Company hereby covenants and agrees as follows:
3.1 Financial Information. So long as an Investor is a holder of 50,000
Shares or shares of Common Stock issued upon the conversion thereof (as adjusted
for any stock splits, consolidations and the like), the Company will furnish to
such Investor the following reports:
As soon as practicable after the end of each fiscal year, and
in any event within one hundred twenty (120) days thereafter, consolidated
balance sheets of the Company and its subsidiaries, if any, as of the end of
such fiscal year, and consolidated statements of income and cash flows of the
Company and its subsidiaries, if any, for such year, prepared in accordance with
generally accepted accounting principles and setting forth in each case in
comparative form the figures for the previous fiscal year, all in reasonable
detail and compiled by independent public accountants selected by the Company;
and
As soon as practicable, but in any event within forty-five
(45) days after the end of each of the first three (3) quarters of each fiscal
year of the Company, an unaudited profit or loss statement, schedule as to the
sources and application of funds for such fiscal quarter and an unaudited
balance sheet and a statement of shareholder's equity as of the end of such
fiscal quarter and a statement showing the number of shares of each class and
series of capital stock and securities convertible into or exercisable for
shares of capital stock outstanding at the end of the period, the number of
common shares issuable upon conversion or exercise of any outstanding securities
convertible or exercisable for common shares and the exchange ratio or exercise
price applicable thereto, all in sufficient detail as to permit the Investor to
calculate its percentage equity ownership in the Company.
15
<PAGE>
3.2 Inspection. The Company shall permit each Investor, at such
Investor's expense, to visit and inspect the Company's properties, to examine
its books of account and records and to discuss the Company's affairs, finances
and accounts with its officers, all at such reasonable times as may be requested
by the Investor, provided, however, that the Company shall not be obligated
pursuant to this Section 3.2 to provide access to any information which it
reasonably considers to be a trade secret or similar confidential information.
3.3 Proprietary Information Agreement. The Company shall require each
person employed by the Company who shall, in the ordinary course of their
employment, have access to the Company's confidential and proprietary
information, to execute a proprietary information agreement in substantially the
form previously provided to the Investors.
3.4 Board of Directors. Effective as of the Closing (as such term is
defined in Section 1.2 of the Series A Preferred Stock Purchase Agreement of
even date herewith), the Board of Directors shall consist of Chad Little, Todd
Stevens, Lonnie Whittington, Jim Layne, John Hall and Mike Turico, with one
additional director seat to be filled as determined by the Board of Directors.
Each of the Investors and the Founder's signatory to this Agreement covenants to
vote all shares held by them in such a manner as to limit the size of the
Company's Board of Directors to no more than seven (7).
3.5 Termination of Covenants. The covenants set forth in this Section 3
shall terminate on, and be of no further force or effect after, the earlier of
the date the holders of a majority of the Shares so agree or the date on which
the Company is required to file reports with the SEC pursuant to Section 13 or
15(d) of the Exchange Act.
SECTION 4
Miscellaneous
-------------
4.1 Assignment. Except as otherwise provided herein, the terms and
conditions of this Agreement shall inure to the benefit of and be binding upon
the respective successors and assigns of the parties hereto.
4.2 Third Parties. Nothing in this Agreement, express or implied, is
intended to confer upon any party, other than the parties hereto, and their
respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
herein.
4.3 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of Arizona as applied to agreements entered into and
performed in the State of Arizona solely by residents thereof.
16
<PAGE>
4.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
4.5 Notices. Any notice required or permitted by this Agreement shall
be in writing shall be sent by prepaid registered or certified mail, return
receipt requested, addressed to the other party at the address shown below or at
such other address for which such party gives notice hereunder. Such notice
shall be deemed to have been given four (4) days after deposit in the mail,
postage prepaid.
4.6 Severability. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, portions of such provisions, or such
provisions in their entirety, to the extent necessary, shall be severed from
this Agreement, and the balance of this Agreement shall be enforceable in
accordance with its terms.
4.7 Amendment and Waiver. Any provision of this Agreement may be
amended with the written consent of the Company and the Holders of at least a
majority of the outstanding shares of the Registrable Securities. Any amendment
or waiver effected in accordance with this paragraph shall be binding upon each
Holder of Registrable Securities and the Company. In addition, the Company may
waive performance of any obligation owing to it, as to some or all of the
Holders of Registrable Securities, or agree to accept alternatives to such
performance, without obtaining the consent of any Holder of Registrable
Securities. In the event that an underwriting agreement is entered into between
the Company and any Holder, and such underwriting agreement contains terms
differing from this Agreement, as to any such Holder the terms of such
underwriting agreement shall govern.
4.8 Rights of Holders. Each holder of Registrable Securities shall have
the absolute right to exercise or refrain from exercising any right or rights
that such holder may have by reason of this Agreement, including, without
limitation, the right to consent to the waiver or modification of any obligation
under this Agreement, and such holder shall not incur any liability to any other
holder of any securities of the Company as a result of exercising or refraining
from exercising any such right or rights.
4.9 Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to any party to this Agreement, upon any breach or
default of the other party, shall impair any such right, power or remedy of such
non-breaching party nor shall it be construed to be a waiver of any such breach
or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, or any waiver on the part of any party of any provisions or
conditions of this Agreement, must be made in writing and shall be effective
only to the extent
17
<PAGE>
specifically set forth in such writing. All remedies, either under this
Agreement, or by law or otherwise afforded to any holder, shall be cumulative
and not alternative.
4.10 Arbitration. Any dispute or controversy arising out of or relating
to any interpretation, construction, performance or breach of this Agreement
shall be resolved exclusively by binding arbitration in Phoenix, Arizona, in
accordance with the rules then in effect of the American Arbitration
Association. The arbitrator may grant injunctions or other relief in such
dispute or controversy. The decision of the arbitrator shall be final,
conclusive and binding on the parties to the arbitration. Judgment may be
entered on the arbitrator's decision in any court having jurisdiction. The
Company and the Investors, as a group, shall each pay one-half of the costs and
expenses of such arbitration, and each of them shall separately pay their
counsel fees and expenses.
IN WITNESS WHEREOF, the parties have this Agreement as of the date
first above written.
TRACER DESIGN, INC. WASATCH VENTURE CORPORATION
By: /s/ Chad M. Little By: /s/ Todd J. Stevens
------------------------- -----------------------------
Title: President Title: Secretary and Treasurer
---------------------- --------------------------
NEWTEK VENTURES II, L.P.
By: /s/ John Hall
-------------------------
Title: General Partner
----------------------
As to Section 3.4 only
/s/ Chad M. Little
- -----------------------------
Chad M. Little
/s/ Lonnie A. Whittington
- -----------------------------
Lonnie A. Whittington
/s/ James A. Layne
- -----------------------------
James A. Layne
18
<PAGE>
EXHIBIT A
Section 8 from Warrants
8. Registration Rights; Lockup Letter. (a) If at any time prior to the
expiration date of this Warrant, the Company proposes to register any of its
securities under the Securities Act, whether or not for sale for its own
account, on a form and in a manner which would permit registration of shares of
common stock for sale to the public under the Securities Act, it will each such
time give prompt written notice to the Holder of its intention to do so,
describing such securities and specifying the form and manner and the other
relevant facts involved in such proposed registration, and upon the written
request of the Holder delivered to the Company within 30 days after the giving
of any such notice (which request shall specify the shares of Common Stock
intended to be disposed of by the Holder and the intended method of disposition
thereof), the Company will take every reasonable effort to effect the
registration under the Securities Act, subject to Sections 8(b) and (c) below,
of all shares of Common Stock which the Company has been so requested to
register by the Holder to the extent requisite to permit the disposition (in
accordance with the intended methods thereof as aforesaid) of the shares of
Common Stock so to be registered, provided that:
(i) if, at any time after giving such written notice of its
intention to register any of its securities and prior to the effective
date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to
register such securities, the Company may, at its election, give
written notice of such determination to the Holder and thereupon shall
be relieved of its obligation to register any shares of Common Stock in
connection with such registration;
(ii) the Company shall not be obligated to effect any
registration of shares of Common Stock under this Section incidental to
the registration of any of its securities in connection with mergers,
acquisitions, exchange offers, dividend reinvestment plans, employee
stock ownership plans or stock option plans, thrift plans, pension
plans or other employee benefit plans; and
(iii) the Company shall not be obligated to effect any
registration of shares of Common Stock to the extent such shares are
validly excluded from an underwritten distribution pursuant to Section
8(c) below.
(c) If the managing underwriter for a firm commitment underwritten
registration advises the Company and the Holder of Common Stock that, in the
underwriter's opinion, the total amount of securities proposed to be sold in
such registration exceeds the amount of securities that can be sold in such an
offering without negatively affecting the offering or its price, then the number
of outstanding shares of Common Stock proposed to be included in such offering
19
<PAGE>
by persons other than the Company and/or a stockholder exercising so-called
"demand" registration rights (but including Holder) shall be reduced pro rata
among the holders of all such Common Stock. Expenses of all registrations
(excluding underwriting discounts and fees, commissions and transfer taxes)
shall be paid by the Company, including the reasonable fees and disbursements
for one counsel for all non-Company sellers as a group.
(d) It shall be a condition precedent to the obligation of the Company
to take any action pursuant to this Section 8 in respect of the Warrant Shares
which are to be registered at the request of Holder that Holder shall furnish to
the Company such information regarding the Common Stock held by Holder and the
intended method of disposition thereof as the Company shall reasonably request
and as shall be required in connection with the action to be taken by the
Company.
(e) The Company shall not, without the Holder's written consent, and
the written consent of any Warrant Shares issued and outstanding, enter into any
agreement with any holder or prospective holder of any securities of the Company
that purports to grant "piggy back" registration rights unless such rights are
consistent with and expressly made subject to the rights and priorities set
forth in this Section 8.
(f) The Company will indemnify and hold harmless each Holder, each of
its managers, members, officers, directors, partners and agents, with respect to
each registration, qualification and compliance effected pursuant to this
Section 8 pursuant to an indemnity agreement or agreements in customary form.
Holder will indemnify and hold harmless the Company (and the underwriters if
requested) and their control persons with respect to any information provided by
Holder for inclusion in a registration statement, pursuant to an indemnity
agreement or agreements in customary form.
(g) Holder agrees to execute and deliver to the underwriters in
connection with any Company-initiated firm commitment underwritten offering and
registration a "lock-up" letter requested, if at all, by such underwriters,
regarding limitations on the transfer by Holder of Common Stock for a period
after effectiveness of such registration provided such "lock-up" letter is on
the same terms and conditions as are requested by the underwriters from all
other selling shareholders.
20
Exhibit 10(g)
TRACER DESIGN, INC.
CO-SALE AGREEMENT
This Co-Sale Agreement (the "Agreement") is made as of February 13,
1996, by and among Tracer Design, Inc., an Arizona corporation (the "Company"),
each purchaser of the Company's Series A Preferred Stock signatory to this
Agreement (each a "Purchaser" and collectively the "Purchasers") and Chad M.
Little, Lonnie A. Whittington and James A. Layne (individually, each a "Founder"
and collectively, the "Founders").
Whereas, the Company and the Purchasers are entering into a Series A
Preferred Stock Purchase Agreement of the same date as this Agreement (the
"Purchase Agreement");
Whereas, in order to induce the Company and the Purchasers to enter
into the Purchase Agreement, the Company, the Purchasers and the Founders desire
to enter into this Agreement,
Now, therefore, in consideration of the mutual promises and covenants
hereinafter set forth, the Company, the Purchasers and the Founders hereby agree
as follows:
SECTION 1
Right of Co-Sale
----------------
1.1 Sales by Founder. In the event that any Founder proposes to sell,
assign, transfer or otherwise convey shares of Common Stock or securities
convertible into, exchangeable for or exercisable for Common Stock ("Co-Sale
Securities"), then the Founder shall offer in writing to the Purchasers the
right to participate in such sale on the same terms and conditions available to
such Founder.
Upon written notice to the Founder within fifteen (15) business days of
notice to the Purchasers from a Founder of the proposed sale, each Purchaser may
sell that number of shares of Co-Sale Securities owned by it equal to the total
number of shares to be sold in the transaction multiplied by a fraction, the
numerator of which is the number of shares of Co-Sale Securities held by such
Purchaser and the denominator of which is the number of shares of Co-Sale
Securities held by the Purchasers plus the Founders.
1.2 Limitations on Right of Co-Sale. Section 1.1 of this Agreement
shall not apply where the sale, assignment, transfer or other conveyance of
Co-Sale Securities by a Founder:
(a) is to the Founder's spouse, parents, or children or other
members of the Founder's family (including relatives by marriage), or to a
custodian, trustee or other fiduciary for
<PAGE>
the account of the Founder or members of his family in connection with a bona
fide estate planning transaction; or
(b) when combined with all prior sales, assignments, transfers
or other conveyances of such Founder that occurred in the same calendar year,
amounts to less than 10,000 Co-Sale Securities; or
(c) is to another Founder;
provided, however, that any transferees pursuant to this Section 1.2 shall
receive and hold such shares subject in all respects to the provisions of this
Co-Sale Agreement, and that there shall be no further transfer of such shares
except in accordance herewith.
1.3 Termination of Co-Sale Right. The co-sale right set forth in this
Agreement shall terminate and be of no further force and effect immediately
prior to the closing of the initial public offering of the Company's Common
Stock pursuant to an effective registration statement on Form S-1 (or successor
form) under the Securities Act of 1933, as amended, covering the offer and sale
of Common Stock by the Company to the public that gives the Company a market
valuation of at least $25 million and results in proceeds to the Company in the
public offering of at least $5 million (net of underwriting discounts and
commissions and offering expenses).
SECTION 2
Prohibited Transfers
--------------------
2.1 Treatment of Prohibited Transfers. In the event any Founder sells
any Co-Sale Securities of the Company in contravention of the participation
rights of the Purchasers under this Agreement (a "Prohibited Transfer"), the
Purchasers, in addition to such other remedies as may be available at law, in
equity or hereunder, shall have the put option provided in Section 2.2 below,
and the Founder shall be bound by the applicable provisions of such put option.
2.2 Put Option. In the event of a Prohibited Transfer, the Purchasers
shall have the right to sell to the Founder who made such Prohibited Transfer,
and, if such right is exercised, such Founder shall have the obligation to
purchase from the Purchasers, a number of shares of Common Stock of the Company
(either directly or through delivery of convertible Preferred Stock) equal to
the number of shares the Purchasers would have been entitled to transfer to the
purchaser in the Prohibited Transfer pursuant to the terms hereof. Such sale
shall be made on the following terms and conditions:
(a) The price per share at which the shares are to be sold to
the Founder shall be equal to the price per share paid by the purchaser to the
Founder in the Prohibited Transfer. The Founder shall also reimburse the
Purchasers for any and all fees and expenses, including legal
2
<PAGE>
fees and expenses, promptly following demand therefor, incurred pursuant to the
exercise or the attempted exercise of the Purchasers' rights under this Section
2.
(b) Within 20 days after the later of the dates on which the
Purchasers (i) received notice from the Founder of the Prohibited Transfer or
(ii) otherwise become aware of the Prohibited Transfer, the Purchasers shall, if
exercising the put option created hereby, deliver to the Founder the certificate
or certificates representing shares to be sold, each certificate to be properly
endorsed for transfer.
(c) The Founder shall, upon receipt of the certificate or
certificates for the shares to be sold by each of the Purchasers, immediately
pay the aggregate purchase price thereof and the amount of reimbursable fees and
expense, as specified in Section 2.2(a), by certified check or bank draft made
payable to the order of the Purchasers, respectively.
(d) NOTWITHSTANDING THE FOREGOING, ANY ATTEMPT TO TRANSFER
SHARES OF THE COMPANY IN VIOLATION OF ARTICLE 1 HEREOF SHALL BE VOID AND THE
COMPANY AGREES IT WILL NOT EFFECT SUCH A TRANSFER NOR WILL IT TREAT ANY ALLEGED
TRANSFEREE AS THE HOLDER OF SUCH SHARES WITHOUT THE WRITTEN CONSENT OF THE
PURCHASERS. THE COMPANY AND THE FOUNDERS AGREE THAT ANY AND ALL CERTIFICATES
REPRESENTING ANY SHARES OR OTHER SECURITIES OF THE COMPANY HELD FROM TIME TO
TIME DURING THE TERM OF THIS AGREEMENT SHALL BEAR A LEGEND REFERRING TO THE
RESTRICTIONS IMPOSED BY THIS AGREEMENT.
SECTION 3
Miscellaneous
-------------
3.1 Governing Law. This Agreement shall be governed in all respects by
and construed in all respects in accordance with the laws of the State of
Arizona as applied to agreements entered into and performed entirely in the
State of Arizona by residents thereof.
3.2 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, transferees, executors and administrators
of the parties hereto. Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
3.3 Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to co-sale rights.
3.4 Amendment and Waiver. This Agreement, or any provision hereof, may
be
3
<PAGE>
amended or waived only in a writing signed by the Company, the Founder and the
holders of a majority of the Series A Preferred Shares originally issued to the
Purchasers, and any amendment
or
waiver so approved shall be binding upon the Purchasers (including the holders
of a majority of such Series A Preferred Shares originally issued to the
Purchasers).
3.5 Notices. etc. All notices and other communications required or
permitted under this Agreement shall be in writing and shall be mailed by
registered or certified mail, postage prepaid, or otherwise delivered by hand or
by messenger, addressed (a) if to the Purchasers, at the Purchasers' addresses
set forth on the Purchase Agreement, or (b) if to a Founder or to the Company,
at the address of the Company's principal executive offices.
3.6 Severability. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
prevision were to be excluded and shall be enforceable in accordance with its
terms.
3.7 Titles and Subtitles. The titles of the sections and subsections of
this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
3.8 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
3.9 Arbitration. Any dispute or controversy arising out of or relating
to any interpretation, construction, performance or breach of this Agreement
shall be resolved exclusively by binding arbitration in Phoenix, Arizona, in
accordance with the rules then in effect of the American Arbitration
Association. The arbitrator may grant injunctions or other relief in such
dispute or controversy. The decision of the arbitrator shall be final,
conclusive and binding on the parties to the arbitration. Judgment may be
entered on the arbitrator's decision in any court having jurisdiction. The
Company, the Purchasers and the Founders shall each pay one-third of the costs
and expenses of such arbitration, and each of them shall separately pay their
counsel fees and expenses.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year written above.
"COMPANY"
TRACER DESIGN, INC.
By: /s/ Chad M. Little
-----------------------
Title: President
4
<PAGE>
"FOUNDERS"
/s/ Chad M. Little
-----------------------------------
Chad M. Little
/s/ Lonnie A. Whittington
-----------------------------------
Lonnie A. Whittington
/s/ James A. Layne
-----------------------------------
James A. Layne
"PURCHASERS"
WASATCH VENTURE CORPORATION
By: /s/ Todd J. Stevens
-----------------------------------
Title: Secretary and Treasurer
-----------------------------
NEWTEK VENTURES II, L.P.
By: /s/ John Hall
-----------------------------------
Title: General Partner
-----------------------------
5
Exhibit 10(h)
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1993, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
STOCK SUBSCRIPTION WARRANT
to Purchase ______ Shares of the
Series A Preferred Stock, $.001 Par Value, of
TRACER Design, Inc., an Arizona corporation (the "Company")
DATE OF INITIAL ISSUANCE: As of February 13, 1996
THIS CERTIFIES THAT for value received, ___________________________ or
its registered assigns (hereinafter called the "Holder") is entitled to purchase
from the Company, at any time during the Term of this Warrant,
_______________________________ (______) shares of Series A Preferred Stock,
$.001 par value, of the Company (the "Common Stock"), at the Warrant Price,
payable in lawful money of the United States of America, to be paid upon the
exercise of this Warrant. The exercise of this Warrant shall be subject to the
provisions, limitations and restrictions herein contained and may be exercised
in whole or in part.
1. Definitions. For all purposes of this Warrant, the following terms
shall have the meanings indicated:
Preferred Stock shall mean and include the Company's authorized Series A
Preferred Stock, $.001 par value as constituted at the date of this Warrant.
Term of this Warrant shall mean the period beginning on the date of initial
issuance hereof and ending on February 13, 2006.
Warrant Price shall mean one cent ($.01) per share, subject to adjustment in
accordance with Section 5 and Section 10.
Warrant Shares shall mean the shares of Preferred Stock purchased or purchasable
by the Holder of this Warrant upon exercise hereof.
<PAGE>
2. Exercise of Warrant. The Warrant shall be exercised, if at all, only
as follows:
(a) To exercise this Warrant in whole or in part, the Holder shall
deliver to the Company at its principal office, at any time
and from time to time during the Term of this Warrant: (i) the
notice of exercise in the form attached hereto as Exhibit A,
(ii) cash, certified or official bank check payable to the
order of the Company, wire transfer of funds to the Company's
account, or the surrender of evidence of any indebtedness of
the Company to the Holder (or any combination of the
foregoing) in the amount of the Warrant Price for each share
being purchased, and (iii) this Warrant.
(b) Each certificate for Warrant Shares shall bear the following
legend (and any additional legend required by (i) any
applicable state securities laws, and (ii) any securities
exchange upon which such Warrant Shares may, at the time of
such exercise be listed) on the face thereof, unless at the
time of exercise, such Warrant Shares shall be registered
under the Securities Act of 1933, as amended (the "Securities
Act");
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR UNDER APPLICABLE STATE
SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION
THEREFROM UNDER SAID ACT AND APPLICABLE STATE
SECURITIES LAWS."
In addition, for so long as that certain Investor Rights
Agreement dated February 13, 1996, by and among the Company,
the initial Holder hereof, among others (the "Investor Rights
Agreement"), remains in effect, each certificate for Warrant
Shares shall bear the legends set forth therein.
3. Covenants As to Preferred Stock. The Company covenants and agrees
that: (i) all shares of Preferred Stock that may be issued upon the exercise of
this Warrant will, upon issuance, be validly issued, fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof; (ii) it will pay when due and payable any and all federal and
state taxes (other than federal or state income taxes, if any, which shall
remain Holder's responsibility) that may be payable in respect of the issue of
this Warrant or any Preferred Stock or the Warrant Shares; (iii) it will at all
times have authorized and reserved, free from preemptive rights, a sufficient
number shares of Preferred Stock (and underlying common stock) to provide for
the exercise of the rights represented by this Warrant; (iv) if any shares of
capital stock to be reserved for the purpose of the issuance of shares upon the
exercise of this Warrant require registration with or approval of any
governmental authority under any federal or state law before such shares
2
<PAGE>
may be validly issued or delivered upon exercise, then the Company shall in good
faith and as expeditiously as possible endeavor to secure such registration or
approval, as the case may be; and (v) if and so long as the Preferred Stock
issuable upon the exercise of this Warrant is listed on any national securities
exchange, the Company, will, if permitted by the rules of such exchange, list
and keep listed on such exchange, upon official notice of issuance, all shares
of such Preferred Stock issuable upon exercise of this Warrant.
4. Adjustment of Number of Shares. Upon each adjustment of the Warrant
Price as provided in Section 5 below, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest 1/10th of a share) obtained by multiplying the
Warrant Price in effect immediately before such adjustment by the number of
shares purchasable pursuant hereto immediately before such adjustment, and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
5. Adjustment of Warrant Price. The Warrant Price shall be subject to
adjustment from time to time as follows:
(a) If, at any time during the term of this Warrant, the
number of shares of Preferred Stock outstanding is
increased by a stock dividend payable in shares of
Preferred Stock or by a subdivision or split-up of
shares of Preferred Stock, then, following the record
date fixed for the determination of Holders of
Preferred Stock entitled to receive such stock
dividend, subdivision or split-up, the Warrant Price
shall be appropriately decreased so that the number
of shares of Preferred Stock issuable upon the
exercise of this Warrant shall be increased in
proportion to such increase in outstanding shares.
(b) If, at any time during the term of this Warrant, the
number of shares of Preferred Stock outstanding is
decreased by a combination of the outstanding shares
of Preferred Stock, then, following the record date
for such combination, the Warrant Price shall
appropriately increase so that the number of shares
of Preferred Stock issuable upon the exercise hereof
shall be decreased in proportion to such decrease in
outstanding shares.
(c) All calculations under this Section 5 shall be made
to the nearest cent or to the nearest 1/10th of a
share, as the case may be.
(d) If the Company proposes to take any action of the
types described in Section 5(a) or (b), the Company
shall forward at the same time and in the same
manner, to the Holder of this Warrant, such notice,
if any, that the Company shall give to the Holders of
capital stock of the Company.
3
<PAGE>
6. Transfers. The Company may deem and treat the person in whose name
this Warrant is registered as the Holder and owner hereof. Notwithstanding the
foregoing, the Warrant and all rights hereunder are not transferable in whole or
in part without the prior written consent of the Company, and any attempted
transfer without such consent and such compliance shall be void. Transferability
of the Warrant Shares is limited as set forth in this Warrant and in the
Investor Rights Agreement.
7. Mergers, Consolidations, Sales. In the case of any proposed
consolidation or merger of the Company with another entity, or the proposed sale
of all or substantially all of its assets to another person or entity, or any
proposed reorganization or reclassification of the capital stock of the Company,
then, as a condition of any such consolidation, merger, sale, reorganization or
reclassification, lawful and adequate provision shall be made pursuant to which
the Holder of this Warrant shall thereafter have the right to receive upon the
basis and upon the terms and conditions specified herein, in lieu of the shares
of Preferred Stock of the Company immediately purchasable hereunder, such shares
of stock, securities or assets as may, by virtue of such consolidation, merger,
sale, reorganization or reclassification, be issued or payable with respect to
or in exchange for the number of shares of such Preferred Stock purchasable
hereunder immediately before such consolidation, merger, sale reorganization or
reclassification. The Company shall forward at the same time and in the same
manner, to the Holder of this Warrant, such notice, if any, that the Company
shall give to the Holders of capital stock of the Company with respect to any
proposed transaction described above or any distribution of assets of the
Company in dissolution or liquidation, or any extraordinary dividend or other
distribution on its Preferred Stock except out of earned surplus or by way of a
stock dividend payable in shares of its Preferred Stock. This Warrant shall be
binding upon any corporation or other person or entity succeeding to the Company
by merger, consolidation or acquisition of all or substantially all of the
Company's assets.
8. Registration Rights. The Warrant Shares shall constitute
"Registrable Securities" under the Investor Rights Agreement, Holder agrees that
it and the Warrant Shares shall be bound by the Investor Rights Agreement.
9. Notices. Any notice or other document required or permitted to be
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at ______________________________________________
________________________________________________________________________________
_____________________, Attn: ____________, or to such other address as shall
have been furnished to the Company in writing by the Holder. Any notice or other
document required or permitted to be given or delivered to the Company shall be
delivered at or sent by registered or certified mail to, the Company at Tracer
Design, Inc., 2231 East Camelback Road, Suite 324, Phoenix, Arizona 85016, Attn:
Chad Little, or to such other address as shall have been furnished in writing to
the Holder by the Company. Any notice so addressed and mailed by registered or
certified mail shall be deemed to be given when so mailed. Any notice so
addressed and otherwise delivered shall be deemed to be given when actually
received by the addressee.
4
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly and authorized officer as of this 13th day of February , 1996.
THE COMPANY:
ATTEST: TRACER Design, Inc.
By: ________________________ By: ________________________________
Its Secretary Its President
5
<PAGE>
FORM OF NOTICE OF EXERCISE
[To be signed only upon exercise of the Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
1. The undersigned hereby exercises the right to purchase _______
shares of Preferred Stock that the undersigned is entitled to purchase by the
terms of the within Warrant according to the conditions thereof, and herewith
makes payment of the Warrant Price of such shares in full. All shares to be
issued pursuant hereto shall be issued in the name of and the initial address of
such person to be entered on the books of the Company shall be:
_______________________________________________________________________________.
The shares are to be issued in certificates of the following denominations:
_______________________________________________________________________________.
2. The undersigned hereby represents that the shares of the Company's
Preferred Stock to be delivered to it pursuant to the above-mentioned exercise
of the Warrant are being acquired by the undersigned as an investment and not
with a view to, or for sale in connection with, the distribution of any such
shares. The undersigned agrees to indemnify the Company and its subsidiaries,
together with their officers and directors, for any liabilities, losses, damages
and expenses (including reasonable attorney fees) arising from or in connection
with any disposition of the shares hereby being acquired, or any interest
therein, in violation of applicable securities laws or regulations. The
undersigned further represents that the undersigned has been given access to all
information requested by the undersigned to allow the undersigned to make a
decision as to the advisability of an investment in the Company's stock and the
value of such stock, and that undersigned has the skill and experience necessary
to make such decision.
_______________________________________
[Authorized Signature of Holder]
_______________________________________
[Type Name of Holder]
By: ________________________________
Title: ________________________________
Date: ________________________________
6
<PAGE>
Schedule to Exhibit 10(h) - Form of Stock Subscription Warrant dated February
13, 1996.
List of Holders and Series A Preferred Shares:
Wasatch Venture Corporation - 17,500 shares
Newtek Ventures II, L.P. - 5,000 shares
7
Exhibit 10(i)
HOLLIMAN STOCK PURCHASE AGREEMENT
---------------------------------
THIS HOLLIMAN STOCK PURCHASE AGREEMENT (the "Agreement") is made as of
the 28th day of February, 1996, by and among TRACER DESIGN, INC., an Arizona
corporation (the "Company"), with its principal office at 2231 East Camelback
Road, Suite 324, Phoenix, Arizona 85016; JOHN M. HOLLIMAN III ("Holliman"), an
Arizona resident whose address is 4812 E. Rovey Avenue, Paradise Valley, AZ
85253; and CHAD M. LITTLE, LONNIE A. WHITTINGTON AND JAMES A. LAYNE
(collectively, the "Founders").
RECITALS
--------
A. On February 13, 1996, the Company entered into that certain Series A
Stock Purchase Agreement (the "Series A Stock Purchase Agreement") with WASATCH
VENTURE CORPORATION and NEWTEK VENTURES II, L.P. (collectively, the "Investors")
pursuant to which the Investors agreed to and did purchase Ninety Thousand
(90,000) shares of Series A Preferred Stock of the Company, along with warrants
for the purchase of Twenty-Two Thousand Five Hundred (22,500) shares of Series A
Preferred Stock of the Company, for a total purchase price of Four Hundred Fifty
Thousand Dollars ($450,000).
B. On February 13, 1996, the Company also entered into that certain
Investor Rights Agreement (the "Investor Rights Agreement") with the Investors
in connection with the transactions contemplated by the Series A Stock Purchase
Agreement.
C. On February 13, 1996, the Company also entered into that certain
Co-Sale Agreement (the "Co-Sale Agreement") with the Founders and the Investors
(the Investors are denominated as the "Purchasers" in the Co-Sale Agreement) in
connection with the transactions contemplated by the Series A Stock Purchase
Agreement (the Series A Stock Purchase Agreement, the Co-Sale Agreement and the
Investor Rights Agreement are collectively referred to herein as the
"Agreements"). Capitalized terms used and not otherwise defined in this
Agreement shall have the meanings ascribed to them in the Agreements.
D. Holliman wishes to purchase, and the Company is willing to sell to
Holliman, Five Thousand (5,000) shares of Series A Preferred Stock of the
Company and a Warrant for the purchase of One Thousand Two Hundred Fifty (1,250)
shares of Series A Preferred Stock of the Company for a total purchase price of
Twenty-Five Thousand Dollars ($25,000) pursuant to the same terms and conditions
as the Investors under the Agreements.
ACCORDINGLY, for good and valuable consideration, the receipt of which
are acknowledged by the parties, the parties agree as follows:
1. The Company agrees to issue to Holliman Five Thousand (5,000) shares
of Series A Preferred Stock of the Company and a Warrant for the purchase of One
Thousand Two
<PAGE>
Hundred Fifty (1,250) shares of Series A Preferred Stock of the Company (in the
form attached as Exhibit A hereto) in exchange for a payment by Holliman to the
Company of Twenty-Five Thousand Dollars ($25,000) pursuant to the same terms and
conditions as the Investors under the Agreements.
2. The Company, the Founders and Holliman agree that Holliman is a
party to each of the Agreements. Holliman is entitled to all of the rights and
benefits as an Investor or Purchaser under each of the Agreements, and Holliman
assumes all of the obligations and responsibilities of an Investor or Purchaser
under each of the Agreements, all as though Holliman were an original party
thereto.
3. The Company represents and warrants that, except as set forth in the
Schedule of Exceptions, as of the date of this Agreement each of the
representations and warranties contained in Section 2 of the Series A Stock
Purchase Agreement are accurate and complete; however, the description of the
Company's capitalization contained in Section 2.2 of the Series A Stock Purchase
Agreement does not include the shares and warrants described above that have
been issued to the Investors pursuant to the Series A Stock Purchase Agreement.
4. Holliman represents and warrants that, as of the date of this
Agreement, each of the representations and warranties contained in Section 3 of
the Series A Stock Purchase Agreement are accurate and complete as to himself.
5. For purposes of the notice provisions in the Agreements, notices or
other communications made to Holliman shall be in writing and shall be mailed by
registered or certified mail, postage prepaid, return receipt requested, or
otherwise delivered by hand or by messenger, addressed to Holliman at his
address set forth on the first page of this Agreement, or at such other address
as Holliman shall have furnished to the Company.
6. This Agreement may be executed in counterparts, each of which shall
be enforceable against the party actually executing the counterpart, and all of
which shall constitute one instrument.
7. The closing for the transactions contemplated by this Agreement
shall take place at such time and place as is mutually agreeable to the Company
and Holliman. The Company's obligation to close is also conditioned upon its
receipt of a consent and waiver from the Investors to the transactions
contemplated hereby in form and substance acceptable to such Investors and the
Company.
2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
THE COMPANY:
TRACER DESIGN, INC.
By: /s/ Chad M. Little
-----------------------
Title: President
--------------------
HOLLIMAN:
/s/ John M. Holliman III
--------------------------
John M. Holliman III
THE FOUNDERS:
/s/ Chad M. Little
--------------------------
Chad M. Little
/s/ Lonnie A. Whittington
--------------------------
Lonnie A. Whittington
/s/ James A. Layne
--------------------------
James A. Layne
3
Exhibit 10(j)
WASATCH AND NEWTEK STOCK PURCHASE AGREEMENT
-------------------------------------------
THIS WASATCH AND NEWTEK STOCK PURCHASE AGREEMENT (the "Agreement") is
made as of the 6th day of May, 1996 by and among SANDBOX ENTERTAINMENT
CORPORATION, a Delaware corporation (the "Company"), which was formerly TRACER
DESIGN, INC., an Arizona corporation (the "Predecessor"); WASATCH VENTURE
CORPORATION ("Wasatch") and NEWTEK VENTURES II, L.P. ("Newtek"); and CHAD M.
LITTLE, LONNIE A. WHITTINGTON AND JAMES A. LAYNE (collectively, the "Founders").
RECITALS
A. On February 13, 1996, the Predecessor entered into that certain
Series A Stock Purchase Agreement (the "Series A Stock Purchase Agreement") with
Wasatch and Newtek (collectively, the "Investors" as that term is defined under
the Series A Stock Purchase Agreement") pursuant to which the Investors agreed
to and did purchase Ninety Thousand (90,000) shares of Series A Preferred Stock
of the Predecessor, along with warrants for the purchase of Twenty-Two Thousand
Five Hundred (22,500) shares of Series A Preferred Stock of the Predecessor, for
a total purchase price of Four Hundred Fifty Thousand Dollars ($450,000).
B. On February 13, 1996, the Predecessor also entered into that certain
Investor Rights Agreement (the "Investor Rights Agreement") with the Investors
in connection with the transactions contemplated by the Series A Stock Purchase
Agreement.
C. On February 13, 1996, the Predecessor also entered into that certain
Co-Sale Agreement (the "Co-Sale Agreement") with the Founders and the Investors
(the Investors are denominated as the "Purchasers" in the Co-Sale Agreement) in
connection with the transactions contemplated by the Series A Stock Purchase
Agreement (the Series A Stock Purchase Agreement, the Co-Sale Agreement and the
Investor Rights Agreement are collectively referred to herein as the
"Agreements"). Capitalized terms used and not otherwise defined in this
Agreement shall have the meanings ascribed to them in the Agreements.
D. As of February 28, 1996, John M. Holliman III ("Holliman") purchased
Five Thousand (5,000) shares of Series A Preferred Stock of the Predecessor and
a Warrant for the purchase of One Thousand Two Hundred Fifty (1,250) shares of
Series A Preferred Stock of the Predecessor for a total purchase price of
Twenty-Five Thousand Dollars ($25,000) pursuant to the same terms and conditions
as the Investors under the Agreements.
E. Pursuant to an Agreement and Plan of Merger dated as of April 18,
1996 the Company and the Predecessor agreed to merge, with the Company as the
surviving corporation (the "Merger"). The Merger became effective on April 25,
1996, and pursuant thereto, the Company assumed all assets, obligations, and
liabilities of the Predecessor and each share of
<PAGE>
Common and Preferred stock of the Predecessor was converted into five (5) shares
of Common or Preferred stock, $.001 par value, of the Company.
F. Wasatch wishes to purchase an additional Three Hundred Seventy Five
Thousand (375,000) shares of Series A Preferred Stock of the Company for a total
purchase price of Three Hundred Thousand Dollars ($300,000) pursuant to the same
terms and conditions as the Investors under the Agreements. Newtek wishes to
purchase Two Hundred Fifty Thousand (250,000) shares of Series A Preferred Stock
of the Company in exchange for a total purchase price of Two Hundred Thousand
Dollars ($200,000) pursuant to the same terms and conditions as the Investors
under the Agreements.
G. Pursuant to the Series A Preferred Stock Agreement, the Predecessor
issued a warrant dated as of February 13, 1996 to Wasatch to purchase Seventeen
Thousand Five Hundred (17,500) shares of the Predecessor's Series A Stock for a
total exercise price of One Hundred Seventy Five Dollars ($175) (the "Wasatch
Warrant"). After giving effect to the Merger, the Wasatch Warrant permits
Wasatch to purchase Eighty Seven Thousand Five Hundred (87,500) shares of the
Company's Series A Stock for a total exercise price of One Hundred Seventy Five
Dollars ($175).
H. Pursuant to the Series A Preferred Stock Agreement, the Predecessor
issued a warrant dated as of February 13, 1996 to Newtek to purchase Five
Thousand (5,000) shares of the Predecessor's Series A Stock for a total exercise
price of Fifty Dollars ($50) (the "Newtek Warrant"). After giving effect to the
Merger, the Newtek Warrant permits Newtek to purchase Twenty Five Thousand
(25,000) shares of the Company's Series A Stock for a total exercise price of
Fifty Dollars ($50).
ACCORDINGLY, for good and valuable consideration, the receipt of which
are acknowledged by the parties, the parties agree as follows:
1. The Company agrees to issue to Wasatch Three Hundred Seventy Five
Thousand (375,000) shares of Series A Preferred Stock of the Company in exchange
for a payment by Wasatch to the Company of Three Hundred Thousand Dollars
($300,000) pursuant to the same terms and conditions as the Investors under the
Agreements. Further, Wasatch agrees to exercise, at the closing of the stock
purchase hereunder, the Wasatch Warrant to purchase Eighty Seven Thousand Five
Hundred (87,500) shares of the Company's Series A Stock for a total exercise
price of One Hundred Seventy Five Dollars ($175).
2. The Company agrees to issue to Newtek Two Hundred Fifty Thousand
(250,000) shares of Series A Preferred Stock of the Company in exchange for a
payment by Newtek to the Company of Two Hundred Thousand Dollars ($200,000)
pursuant to the same terms and conditions as the Investors under the Agreements.
Further, Newtek agrees to exercise, at the closing of the stock purchase
hereunder, the Newtek Warrant to purchase Twenty Five Thousand (25,000) shares
of the Company's Series A Stock for a total exercise price of Fifty Dollars
($50).
2
<PAGE>
3. With respect to the securities issued under this Agreement (the "New
Securities"), the Company, the Founders, Wasatch and Newtek agree that Wasatch
and Newtek are parties to each of the Agreements, that Wasatch and Newtek are
entitled to all of the rights and benefits as an Investor or Purchaser under
each of the Agreements, and that Wasatch and Newtek assume all of the
obligations and responsibilities of an Investor or Purchaser under each of the
Agreements.
4. The Company represents and warrants that, except as set forth in the
Schedule of Exceptions and on the amendments thereto, which amendments are
attached to this Agreement as Exhibit A, as of the date of this Agreement each
of the representations and warranties contained in Section 2 of the Series A
Stock Purchase Agreement are not materially inaccurate or incomplete.
5. Wasatch and Newtek represent warrant, and agree that, as of the date
of this Agreement and the closing described below, each of the representations,
warranties, and agreements contained in Section 3 of the Series A Stock Purchase
Agreement are accurate and complete as to each of them and shall apply to the
purchase by them of the New Securities.
6. This Agreement may be executed in counterparts, each of which shall
be enforceable against the party actually executing the counterpart, and all of
which shall constitute one instrument.
7. The closing for the transactions contemplated by this Agreement
shall take place at such time and place as is mutually agreeable to the Company,
Wasatch and Newtek. The Company's obligation to close is also conditioned upon
its receipt of a consent and waiver from Holliman to the transactions
contemplated hereby in form and substance acceptable to such Holliman and the
Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
THE COMPANY:
SANDBOX ENTERTAINMENT CORPORATION
By: /s/ Chad M. Little
-----------------------------------
Title: President
--------------------------------
3
<PAGE>
WASATCH:
WASATCH VENTURE CORPORATION
By: /s/ Todd J. Stevens
-----------------------------------
Title: Secretary and Treasurer
-------------------------------
NEWTEK:
NEWTEK VENTURES II, L.P.
By: /s/ John Hall
-----------------------------------
Title: General Partner
-------------------------------
THE FOUNDERS:
/s/ Chad M. Little
-------------------------------------
Chad M. Little
/s/ Lonnie A. Whittington
-------------------------------------
Lonnie A. Whittington
/s/ James A. Layne
-------------------------------------
James A. Layne
<PAGE>
EXHIBIT A
AMENDMENT TO THE SCHEDULE OF EXCEPTIONS
2.1 The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all requisite
corporate power and authority to carry on its business as currently conducted.
True and accurate copies of the Company's Certificate of Incorporation and
Bylaws, each as amended and in effect at the Closing, have been delivered to
Wasatch and Newtek.
2.2 Revised Capitalization Table of the Company:
I. AUTHORIZED CAPITALIZATION
Total Common Stock, $.001 par value: 10,000,000
Total Series A Convertible Preferred Stock, $.001 par value: 2,000,000
----------
Total 12,000,000
II. OUTSTANDING
A. Common Stockholders
----------------------
Name Shares
---- ------
Chad M. Little(1) 1,275,000
James A. Layne(1) 612,500
Lonnie A. Whittington(1) 612,500
Glenn Gomez 229,590
R. Jon and Kristin Lavender Kailey 125,015
---------
Total Common: 2,854,605
- --------
(1) Little, Layne and Whittington have certain agreements amongst
themselves pursuant to which the number of shares held by them relative to each
other may be adjusted. The agreements do not include receiving any new shares
from the Company.
<PAGE>
B. Series A Preferred Stockholders
----------------------------------
Wasatch Venture Corporation 350,000
Newtek Ventures II, L.P. 100,000
John M. Holliman III 25,000
---------
Total Series A Preferred: 475,000
Total Common/Preferred Outstanding: 3,329,605
C. Common Stock Options(2)
--------------------------
<TABLE>
<CAPTION>
Shares Price
------ -----
Name Optioned Per Share Vesting Schedule
- ---- -------- --------- ----------------
<S> <C> <C> <C>
Donald Fairall 57,970 $.0002 11,590 shares on 8/1/96, 8/1/97 and 8/1/98;
11,600 shares on 8/1/99 and 8/1/00
Mike Turico 86,970 $.0002 17,390 shares on 8/1/96, 8/1/97 and 8/1/98;
17,400 shares on 8/1/99 and 8/1/00
Dennis Wodarz 115,960 $.0002 23,190 shares on 8/1/96, 8/1/97, 8/1/98 and
8/1/99; 23,200 shares on 8/1/00
Doug Hall 86,970 $.0002 17,390 shares on 8/1/96, 8/1/97 and 8/1/98;
17,400 shares on 8/1/99 and 8/1/00
John Hall 131,535 $.10 65,767 shares as of 3/1/96, 10,962 on 9/1/96,
------- 3/1/97, 9/1/97, 3/1/98, 9/1/98 and 10,958 on
3/1/99
</TABLE>
Total Common Options: 479,405
D. Common Warrants
------------------
Shares Price Expiration
Name Under Warrant Per Share of Warrant
- ---- ------------- --------- ----------
Pickwick Group L.L.C. 229,500 $.80 9/15/05
Thomas Lescault 76,500 $.80 10/25/05
Terrance Morris 38,250 $.80 10/25/05
Douglas and Susan
Greenwood 76,500 $.80 10/25/05
Pickwick Group L.L.C. 38,250 $.80 10/25/05
Geoffrey Herter, M.D. 76,500 $.80 10/25/05
- --------
(2) All of the options listed in this section are pursuant to the 1995
Equity Incentive Plan.
<PAGE>
Frank X. Helstab 131,535 $.002 2/13/06
-------
Total Common Warrants 667,035
TOTAL COMMON OPTIONS AND WARRANTS: 1,146,440
E. Series A Preferred Warrants
------------------------------
Shares Price Term
Name Under Warrant Per Share of Warrant
- ---- ------------- --------- ----------
Wasatch Venture Corporation 87,500 $.002 2/13/96 - 2/13/06
Newtek Ventures II, L.P. 25,000 $.002 2/13/96 - 2/13/06
John Holliman 6,250 $.002 2/28/96 - 2/28/06
-----
Total Series A Preferred Warrants: 118,750
III. RESERVED
Type Number of Shares For What Reserved
- ---- ---------------- -----------------
Common 668,945 1995 Equity Incentive Plan
Common 667,035 Common Warrants
Common 475,000 Series A Preferred Stock
Common 118,750 Series A Preferred Warrants
---------
Total Common Reserved: 1,929,730
Series A Preferred 118,750 Series A Preferred Warrants
Total Series A Preferred Reserved: 118,750
Total Common/Preferred Reserved: 2,048,480
<PAGE>
IV. SUMMARY
Total Common Outstanding 2,854,605
Total Preferred Outstanding 475,000
Total Outstanding 3,329,605
Total Warrants/Options Outstanding 1,265,190
Total Common Outstanding - Fully Diluted(3) 4,594,795
2.25 The Company intends to use the proceeds from the sale of the New
Securities as follows:
Purpose Estimated Total
Working Capital (includes equipment,
additional rent, salaries, telecommunications,
payables, travel) $350,000
Advertising and Marketing $150,000
- --------
(3) Assumes exercise of all outstanding warrants and options and
conversion of all outstanding preferred.
Exhibit 10(k)
SUNDANCE STOCK PURCHASE AGREEMENT
THIS SUNDANCE STOCK PURCHASE AGREEMENT (the "Agreement") is made as of
the 11th day of November, 1996, by and among SANDBOX ENTERTAINMENT CORPORATION,
a Delaware corporation (the "Company"), which was formerly TRACER DESIGN, INC.,
an Arizona corporation (the "Predecessor"); SUNDANCE VENTURE PARTNERS, L.P., a
Delaware limited partnership ("Sundance"); WASATCH VENTURE CORPORATION
("Wasatch"); NEWTEK VENTURES II, L.P. ("Newtek"); and WAYNE SORENSEN
("Sorensen"); and CHAD M. LITTLE, LONNIE A. WHITTINGTON AND JAMES A. LAYNE
(collectively, the "Founders").
RECITALS
A. On February 13, 1996, the Predecessor entered into that certain
Series A Stock Purchase Agreement (the "Series A Stock Purchase Agreement") with
Wasatch and Newtek (collectively, the "Investors" as that term is defined under
the Series A Stock Purchase Agreement") pursuant to which the Investors agreed
to and did purchase 90,000 shares of Series A Preferred Stock of the
Predecessor, along with warrants for the purchase of 22,500 shares of Series A
Preferred Stock of the Predecessor, for a total purchase price of $450,000.
B. On February 13, 1996, the Predecessor also entered into that certain
Investor Rights Agreement (the "Investor Rights Agreement") with the Investors
in connection with the transactions contemplated by the Series A Stock Purchase
Agreement.
C. On February 13, 1996, the Predecessor also entered into that certain
Co-Sale Agreement (the "Co-Sale Agreement") with the Founders and the Investors
(the Investors are denominated as the "Purchasers" in the Co-Sale Agreement) in
connection with the transactions contemplated by the Series A Stock Purchase
Agreement (the Series A Stock Purchase Agreement, the Co-Sale Agreement and the
Investor Rights Agreement are collectively referred to herein as the
"Agreements"). Capitalized terms used and not otherwise defined in this
Agreement shall have the meanings ascribed to them in the Agreements.
D. Pursuant to that certain Holliman Stock Purchase Agreement dated as
of February 28, 1996, John M. Holliman III ("Holliman") purchased 5,000 shares
of Series A Preferred Stock of the Predecessor and a Warrant for the purchase of
1,250 shares of Series A Preferred Stock of the Predecessor for a total purchase
price of $25,000 pursuant to the same terms and conditions as the Investors
under the Agreements.
E. Pursuant to an Agreement and Plan of Merger dated as of April 18,
1996 the Company and the Predecessor agreed to merge, with the Company as the
surviving corporation (the "Merger"). The Merger became effective on April 25,
1996, and pursuant thereto, the
<PAGE>
Company assumed all assets, obligations, and liabilities of the Predecessor and
each share of Common and Preferred stock of the Predecessor was converted into
five (5) shares of Common or Preferred stock, $.001 par value, of the Company.
F. Pursuant to that certain Wasatch and Newtek Stock Purchase Agreement
dated as of May 6, 1996 (the "Wasatch and Newtek Stock Purchase Agreement"),
Wasatch purchased an additional 375,000 shares of Series A Preferred Stock of
the Company for a total purchase price of $300,000 pursuant to the same terms
and conditions as the Investors under the Agreements. In connection with the
Wasatch and Newtek Stock Purchase Agreement, Wasatch also purchased 87,500
shares of the Company's Series A Stock for a total exercise price of $175
pursuant to Wasatch's warrant dated as of February 13, 1996.
G. Pursuant to the Wasatch and Newtek Stock Purchase Agreement, Newtek
also purchased an additional 250,000 shares of Series A Preferred Stock of the
Company in exchange for a total purchase price of $200,000 pursuant to the same
terms and conditions as the Investors under the Agreements. In connection with
the Wasatch and Newtek Stock Purchase Agreement, Newtek also purchased 5,000
shares of the Predecessor's Series A Stock for a total exercise price of $50
pursuant to Newtek's warrant dated as of February 13, 1996.
H. Sundance wishes to purchase, and the Company is willing to sell to
Sundance, 562,500 shares of the Series A Preferred Stock of the Corporation (the
"Sundance Shares") for a total purchase price of $450,000 ($200,000 to be paid
by Sundance at Closing for the purchase of 250,000 shares and the balance to be
paid by Sundance on or before January 31, 1997 in installments of not less than
$50,000 for the purchase of the balance of the Sundance Shares at a per share
price of $.80).
I. Wasatch wishes to purchase, and the Company is willing to sell to
Wasatch 62,500 shares of the Series A Preferred Stock of the Corporation (the
"Wasatch Shares") for a total purchase price of $50,000.
J. Newtek wishes to purchase, and the Company is willing to sell to
Newtek 62,500 shares of the Series A Preferred Stock of the Corporation (the
"Newtek Shares") for a total purchase price of $50,000.
K. Wayne Sorensen ("Sorensen") wishes to purchase, and the Company is
willing to sell to Sorensen 62,500 shares of the Series A Preferred Stock of the
Corporation (the "Sorensen Shares") for a total purchase price of $50,000.
ACCORDINGLY, for good and valuable consideration, the receipt of which
are acknowledged by the parties, the parties agree as follows:
1. The Company agrees to issue to Sundance 562,500 shares of Series A
Preferred Stock of the Company in exchange for a payment by Sundance to the
Company of $450,000 ($200,000 to be paid by Sundance at Closing for the purchase
of 250,000 shares and the balance to
2
<PAGE>
be paid by Sundance on or before January 31, 1997 in installments not less than
$50,000 for the purchase of the balance of the Sundance Shares at a per share
price of $.80) pursuant to the same terms and conditions as the Investors under
the Agreements. Further, as of the Closing, Brian N. Burns shall be elected to
serve as a member of the Board of Directors of the Company, to serve until the
next annual meeting of shareholders or until his successor is qualified.
2. The Company agrees to issue to Wasatch 62,500 shares of Series A
Preferred Stock of the Company in exchange for a payment by Wasatch to the
Company of $50,000 pursuant to the same terms and conditions as the Investors
under the Agreements.
3. The Company agrees to issue to Newtek 62,500 shares of Series A
Preferred Stock of the Company in exchange for a payment by Newtek to the
Company of $50,000 pursuant to the same terms and conditions as the Investors
under the Agreements.
4. The Company agrees to issue to Sorensen 62,500 shares of Series A
Preferred Stock of the Company in exchange for a payment by Sorensen to the
Company of $50,000 pursuant to the same terms and conditions as the Investors
under the Agreements.
5. With respect to the securities issued under this Agreement (the "New
Securities"), the Company, the Founders, Sundance, Wasatch, Newtek and Sorensen
agree that Sundance, Wasatch, Newtek and Sorensen are parties to each of the
Agreements, that Sundance, Wasatch, Newtek and Sorensen are entitled to all of
the rights and benefits as an Investor or Purchaser under each of the
Agreements, and that Sundance, Wasatch, Newtek and Sorensen assume all of the
obligations and responsibilities of an Investor or Purchaser under each of the
Agreements.
6. The Company represents and warrants that, except as set forth in the
Schedule of Exceptions and on the amendments thereto, which amendments are
attached to this Agreement as Exhibit A, as of the date of this Agreement each
of the representations and warranties contained in Section 2 of the Series A
Stock Purchase Agreement are not materially inaccurate nor incomplete.
7. Sundance, Wasatch, Newtek and Sorensen represent warrant, and agree
that, as of the date of this Agreement and the closing described below, each of
the representations, warranties, and agreements contained in Section 3 of the
Series A Stock Purchase Agreement are accurate and complete as to each of them
and shall apply to the purchase by them of the New Securities.
8. This Agreement may be executed in counterparts, each of which shall
be enforceable against the party actually executing the counterpart, and all of
which shall constitute one instrument.
9. The closing(s) for the transactions contemplated by this Agreement
shall take place at such times and places as are mutually agreeable to the
Company, Sundance, Wasatch, Newtek
3
<PAGE>
and Sorensen. The parties agree that the closing for each of Sundance, Wasatch,
Newtek and Sorensen may occur at separate times. The Company's obligation to
close is conditioned upon its receipt of a consent and waiver from Holliman to
the transactions contemplated hereby in form and substance acceptable to such
Holliman and the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
[SIGNATURES APPEAR ON FOLLOWING PAGES]
4
<PAGE>
[SIGNATURE PAGE TO THE SUNDANCE STOCK PURCHASE AGREEMENT]
THE COMPANY:
SANDBOX ENTERTAINMENT CORPORATION
By: /s/ Chad M. Little
------------------------------------
Title: President
------------------------------------
SUNDANCE:
SUNDANCE VENTURE PARTNERS, L.P., a
Delaware limited partnership
By: Anderson & Wells Company, a Delaware
corporation
By: /s/ Brian N. Burns
------------------------------------
Brian N. Burns, Vice-President
WASATCH:
WASATCH VENTURE CORPORATION
By: /s/ Todd J. Stevens
------------------------------------
Title: Secretary and Treasurer
------------------------------------
NEWTEK:
NEWTEK VENTURES II, L.P.
By: /s/ John Hall
------------------------------------
Title: General Partner
------------------------------------
5
<PAGE>
[SIGNATURE PAGE TO THE SUNDANCE STOCK PURCHASE AGREEMENT]
SORENSEN:
/s/ Wayne Sorensen
--------------------------------------
Wayne Sorensen
THE FOUNDERS:
/s/ Chad M. Little
--------------------------------------
Chad M. Little
/s/ Lonnie A. Whittington
--------------------------------------
Lonnie A. Whittington
/s/ James A. Layne
--------------------------------------
James A. Layne
6
<PAGE>
EXHIBIT A
AMENDMENT TO THE SCHEDULE OF EXCEPTIONS
2.1 The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all requisite
corporate power and authority to carry on its business as currently conducted.
True and accurate copies of the Company's Certificate of Incorporation and
Bylaws, each as amended and in effect at the Closing, have been delivered to
Sundance, Sorensen, Wasatch and Newtek.
-------------------------------------------------------
2.2 Upon Closing of the transactions contemplated by the Sundance Stock
Purchase Agreement, the following will be the outstanding capitalization of the
Company:
I. AUTHORIZED CAPITALIZATION
Total Common Stock, $.001 par value: 10,000,000
Total Series A Convertible Preferred Stock, $.001 par value: 2,000,000
----------
Total 12,000,000
II. OUTSTANDING
A. Common Stockholders
----------------------
Name Shares
---- ------
Chad M. Little(1) 1,025,000
James A. Layne(1) 737,500
Lonnie A. Whittington(1) 737,500
Glenn Gomez 229,590
R. Jon and Kristin Lavender Kailey 125,015
Frank X. Helstab 131,535
Newtek Ventures II, L.P. 65,767
---------
Total Common: 3,051,907
- -----------------
(1) Little has the right to vote 250,000 shares held by Layne and
250,000 shares held by Whittington.
<PAGE>
B. Series A Preferred Stockholders
----------------------------------
Wasatch Venture Corporation 812,500
Newtek Ventures II, L.P. 375,000
John M. Holliman III 31,250
---------
Total Series A Preferred: 1,218,750
Total Common/Preferred Outstanding: 4,270,657
C. Common Stock Options(2)
--------------------------
<TABLE>
<CAPTION>
Shares Price
------ -----
Name Optioned Per Share Vesting Schedule
- ---- -------- --------- ----------------
<S> <C> <C> <C>
Donald Fairall 57,970 $.10 11,590 shares on 8/1/96, 8/1/97 and 8/1/98;
11,600 shares on 8/1/99 and 8/1/00
10,000 $.10 2,000 shares on 10/22/97, 10/22/98,
10/22/99, 10/22/00, and 10/22/01
Mike Turico 86,970 $.10 17,390 shares on 8/1/96, 8/1/97 and 8/1/98;
17,400 shares on 8/1/99 and 8/1/00
10,000 $.10 2,000 shares on 10/22/97, 10/22/98,
10/22/99, 10/22/00, and 10/22/01
Dennis Wodarz 115,960 $.10 23,190 shares on 8/1/96, 8/1/97, 8/1/98 and
8/1/99; 23,200 shares on 8/1/00
10,000 $.10 2,000 shares on 10/22/97, 10/22/98,
10/22/99, 10/22/00, and 10/22/01
Doug Hall 86,970 $.10 17,390 shares on 8/1/96, 8/1/97 and 8/1/98;
17,400 shares on 8/1/99 and 8/1/00
10,000 $.10 2,000 shares on 10/22/97, 10/22/98,
10/22/99, 10/22/00, and 10/22/01
Newtek Ventures II, L.P. 65,768 $.10 10,962 on 9/1/96, 3/1/97, 9/1/97, 3/1/98,
------ 9/1/98 and 10,958 on 3/1/99
Total Common Options: 453,638
</TABLE>
D. Common Warrants
------------------
- ----------------
(2) All of the options listed in this section are pursuant to the 1995
Equity Incentive Plan.
<PAGE>
Shares Price Expiration
Name Under Warrant Per Share of Warrant
------------- --------- ----------
Pickwick Group L.L.C. 229,500 $.80 9/15/05
Thomas Lescault 76,500 $.80 10/25/05
Terrance Morris 38,250 $.80 10/25/05
Douglas and Susan
Greenwood 76,500 $.80 10/25/05
Pickwick Group L.L.C. 38,250 $.80 10/25/05
Geoffrey Herter, M.D. 76,500 $.80 10/25/05
--------
Total Common Warrants 535,500
TOTAL COMMON OPTIONS AND WARRANTS: 989,138
III. RESERVE
Type Number of Shares For What Reserved
- ---- ---------------- -----------------
Common 603,178 1995 Equity Incentive Plan
Common 535,500 Common Warrants
Common 1,218,750 Series A Preferred Stock
---------
Total Common Reserved: 2,357,428
IV. SUMMARY
Total Common Outstanding 3,051,907
Total Preferred Outstanding 1,218,750
Total Outstanding 4,270,657
Total Warrants/Options Outstanding 989,138
Total Common Outstanding - Fully Diluted(3) 5,259,795
2.25 The Company intends to use the proceeds from the sale of the New
Securities as follows:
- ----------------
(3) Assumes exercise of all outstanding warrants and options and
conversion of all outstanding preferred.
<PAGE>
Purpose Estimated Total
Working Capital (includes equipment,
additional rent, salaries, telecommunications,
payables, travel) $450,000
Advertising and Marketing $150,000
Exhibit 10(l)
CO-BRANDING AND MARKETING AGREEMENT
-----------------------------------
Date: as of July 11, 1997
CNNfn SANDBOX
- ----- -------
CNNfn, a division of Sandbox Entertainment Corporation
Cable News Network, Inc. 2231 East Camelback Road
Five Penn Plaza Suite 324
New York, NY 10001 Phoenix, AZ 85016
Contact: Ms. Helen Whelan Contact: Mr. Matt Stanton
Ph: (212) 714-3338 Ph: (602) 468-6400
Fax: (212) 714-7909 Fax: (602) 468-6401
This Agreement is made as of the date specified above between CNNfn
Interactive, a division of Cable News Network, Inc. ("CNNfn"), and Sandbox
Entertainment Corporation ("Sandbox"), whereby Sandbox and CNNfn agree to
conduct a co-branded marketing effort for Sandbox's Final Bell stock market
simulation (the "Game"), and in connection therewith, Sandbox agrees to utilize
certain of its proprietary technologies and rights and to provide certain
services and content to CNNfn for use in connection with CNNfn's online services
as more specifically described below on the following terms and conditions:
1. Co-Branded Offering. During the Term, Sandbox hereby agrees to provide
certain services in support of the Co-Branded offering described herein (the
"Services"), specifically to develop and host the Game, for distribution by the
parties, during the term of this Agreement, by any means or method now known or
hereafter developed to users of CNNfn's or Sandbox's web-based sites and
services (collectively, the "Sites"). Sandbox agrees that it will not provide
any advertising-supported or subscription-supported stock market simulation game
directly or indirectly in competition with the Game during the Term of this
Agreement. As more specifically described herein, Sandbox will "host" the Game
(the "Game Site") and provide all necessary support, including implementation of
a mutually agreeable advertising/page view tracking system for the Game Site as
further described herein. In addition, as between CNNfn and Sandbox, Sandbox
shall be responsible for all elements of the Game, including securing any and
all third party rights necessary for the final Game and compliance with all
applicable laws, rules and regulations. Without limiting the generality of the
foregoing, it is expressly understood and agreed that Sandbox shall be solely
responsible for compliance with all sweepstakes and gaming rules and regulations
and any prize fulfillment activities and shall indemnify and hold CNNfn harmless
from any claims related thereto. Sandbox hereby agrees that it shall
continuously update the Game on the Game Site in a manner to refresh the content
and provide gaming updates to users as agreed by the parties. CNNfn shall have
the right to use the Game, or portions thereof, to advertise, promote and/or
market its Site, the Game Site and the availability of the Game. Without
limiting the generality of the foregoing, such promotion may include text and/or
graphic references with or without a link on the CNNfn Site.
CNNfn and Sandbox will each retain approval rights over the design of
the Game Site, and all elements thereof, subject to the express understanding
that the design will include creative and navigational elements from the CNNfn
Site so as to provide a consistent CNNfn look and feel. CNNfn approval over any
element will not affect Sandbox's ultimate responsibility therefor in
1
<PAGE>
accordance with this Agreement. At all times, each party will retain ultimate
approval rights over use of its respective proprietary materials. Furthermore,
CNNfn understands that certain parameters have already been defined for the Game
and that its design must avoid creating obstacles for the user (i.e., excessive
graphic size and difficult navigation). As part of the design, CNNfn shall
determine appropriate links to and from its Site and the Game Site and Sandbox
shall implement such links as they involve the Game Site; CNNfn shall be solely
responsible for implementing any appropriate links on its Site. By way of
example only, CNNfn may elect, at its sole option and to the extent permissible
by its content providers, to provide gamers links to its Site that will open a
second window to permit the gamers to get current information relevant to the
Game from the CNNfn Site (e.g., news, information, etc.). Finally, Sandbox
hereby acknowledges CNNfn's full and complete performance of certain video
production services for the Game and Game Site. CNNfn shall have no obligation
hereunder to perform any additional video production services for the Games and
the performance of any such services shall be subject to a separate agreement
between the parties.
Each party expressly understands that it shall have no right to
negotiate and/or enter into any binding agreements on behalf of the other party
and hereby covenants, represents and warrants that it shall take no action or
represent any authority to the contrary. CNNfn acknowledges and agrees that
Sandbox owns and retains all proprietary right, title and interest in and to the
Game and the technology and materials provided by it for use in the Game, and
CNNfn hereby disclaims any right, title or interest therein. Notwithstanding
Sandbox's ownership of rights in and to the Game, Sandbox will not utilize the
"look and feel" or other unique elements of the Game Site created jointly by the
parties hereunder for any other project or offering. Furthermore, Sandbox
acknowledges and agrees that CNNfn owns and/or controls and retains all
proprietary right, title and interest in and to the creative and navigational
elements common to the CNNfn Site as well as all content (including without
limitation images, likenesses, voices and text) contributed by it to the Game or
Game Site ("CNNfn Elements") and Sandbox disclaims any right, title or interest
therein. Sandbox agrees to perform the Services in a competent, conscientious
and professional manner, in accordance with CNNfn's reasonable requests and
requirements, and in accordance with all of the terms and conditions of this
Agreement.
2. Implementation/Delivery. CNNfn will advise Sandbox of its required input for
design of the Game Site as soon as possible and Sandbox will host and update
each Game in accordance with mutually agreed upon specifications for such
design, as the same may be modified from time to time during the Term. Prior to
the commercial launch of each Game, Sandbox will demonstrate the Game to CNNfn
for its approval. The parties agree that the initial Game shall be fully
operational and ready for commercial launch on or before July 14, 1997 with a
prototype ready for testing and approval by CNNfn sufficiently in advance of
such date. Notwithstanding the foregoing, the commercial launch of the Game Site
and all Games thereafter shall be determined by mutual agreement of the parties.
3. CNNfn Promotional Support. CNNfn will provide Sandbox an outline of its plan
designed to promote its Site, including promotion of the Game and Game Site, and
build traffic for the Site and the Game. CNNfn agrees to use reasonable efforts
to perform the activities described in its plan and to include and perform
cross-promotional activities in this plan, using available resources and
promotional inventory time on products and services of its affiliated and
subsidiary entities. During the Term, CNNfn will provide, at a minimum, monthly
reports indicating the location, time, media vehicle and frequency of
promotional activities related to its Site, the Game and/or the Game Site.
4. Marketing/Publicity. The parties agree to cooperate with one another to
provide information for marketing, public relations, publicity and general
promotional purposes. CNNfn generally intends to provide promotional support for
the Games on the CNNfn site as set forth on Exhibit A. The parties shall have
joint control over the substance and timing over all such activities related to
the Game and Game Site, but agree to comply with reasonable requests of the
other party in this
2
<PAGE>
regard. Notwithstanding the foregoing, CNNfn shall have the absolute right to
determine the timing applicable to the initial press release announcing the
launch of the Game Site. Subject to each party's right to inspect all such
materials in advance and approve or disapprove the same as it relates to such
party, each party grants the other party the right to use its respective
trademarks and trade names in advertising and printed materials solely in
connection with the rights and obligations of the parties under, and during the
term of, this Agreement. Without limiting the generality of the foregoing, each
party shall retain control over its trademarks and trade names at all times
(including as the same may be used in a URL for the Game Site) and may approve
or disapprove any materials containing the same in its sole discretion.
Following execution of this Agreement, the parties will work together in good
faith to issue an initial joint press release. The parties will, as they deem
appropriate, participate in joint press activities and other public relation
activities with the other during the Term of this Agreement.
5. Advertising/Sponsorship Opportunities. The parties hereby agree to cooperate
with one another regarding the sale of advertising (e.g., banners) and/or
sponsorships on or for the Game Site, with CNN retaining primary control over
the sale of advertising and Sandbox retaining primary control over the sale of
sponsorships. Accordingly, while both parties will have the opportunity to sell
advertising and sponsorships for the Game Site, the party bearing primary
responsibility must approve any proposed sales of that type by the other party
in advance. In an effort to facilitate cooperation and avoid any duplication in
sales efforts, the parties agree to establish and set forth in writing a list of
target accounts that each sales force has first priority in selling as soon as
practical after the date hereof. Each party will assist the other in its
respective efforts. Without limiting the generality of the foregoing, this
cooperation and mutual approval will focus on acceptable contract terms and
conditions, credit standards, rate integrity and pre-approval for any deviation
from the mutually agreed upon rate structure. Additionally, the parties agree to
yield to whichever form of sale (i.e., advertising or sponsorship) is best
suited to the particular advertiser in an effort to maximize overall
opportunities, sales and revenues for the Game Site. Sandbox will implement an
advertising tracking system approved by CNNfn on the Game Site to track traffic,
page views and other relevant data. Sandbox will provide monthly reports from
the system and deliver the same to CNNfn within five (5) business days of the
close of each month as further described in Paragraph 6 below. In addition,
Sandbox shall be responsible for the proper insertion and rotation of all such
advertising and sponsorships and will maintain accurate logs.
Net advertising revenues, which shall be defined as gross advertising
revenues derived from the sale advertising on the Game Site, less agency
commissions, shall be split between the parties on a 60/40 basis, with the party
responsible for selling the advertising entitled to retain the higher
percentage. To the extent any extraordinary costs are required to integrate an
advertiser and the parties agree upon such costs up front, the parties will
absorb these costs on an equal basis, with such costs deducted from gross
revenues prior to determining either party's net payment on that sale.
Notwithstanding the foregoing, net advertising revenues will not include
revenues from those sales made by Sandbox or its representatives prior to the
execution of this Agreement by the parties and set forth on Schedule 1 attached
hereto, and Sandbox will have no obligation to split or share such revenues with
CNNfn within the limitations also included on the Schedule.
Regardless of which party is responsible for the sale of the
sponsorships, the parties hereby agree that all net sponsorship revenue, which
shall be defined as gross revenue derived from sponsorship sales on the Game
Site, less any commissions or other third party fees, shall be split 50/50.
Sandbox will incur and absorb the basic creative and production costs associated
with integrated sponsorships and shall not be entitled to any reimbursement
therefor absent the express prior written agreement of the parties to the
contrary.
Each party hereby agrees to maintain complete and accurate books and
records regarding its sale of advertising and/or sponsorships on the Game Site
during the Term of this Agreement and
3
<PAGE>
for a period of two (2) years thereafter. Each party shall be responsible for
billing, invoicing and collection activities related to its sales activities
hereunder. The parties will agree upon and comply with appropriate and
consistent billing, invoicing and collection procedures as soon as possible
after execution of this Agreement and each party will comply with such
procedures throughout the Term. Copies of invoices will be sent to the
non-selling party simultaneously with delivery to the third party and copies of
all advertising or sponsorship contracts must accompany insertion orders prior
to the start of a campaign. Within thirty (30) days of the close of each
calendar month, each party shall distribute amounts payable to the other party
for that month to such party along with a complete statement for selling
activities during such time.
6. Game Site Usage Reports. As discussed generally above, Sandbox will maintain
and provide, at a minimum, equally aggregated Game Site information/reports on
users, registered visitors and page impressions to the detail reasonably
specified by CNNfn. The parties shall also agree on an appropriate privacy
policy designed to protect users from unauthorized or otherwise offensive
disclosure of individual data, which policies shall be posted on the Game Site.
Information collected will include daily tracking of advertising banner
impressions and click-throughs, as well as sophisticated aggregate reporting of
advertising impressions and click-throughs. In this regard, Sandbox will provide
a mutually agreed upon audit system for its proprietary advertising server
software. Implementation must occur at the time of the launch, contingent upon
the third party audit provider's ability to comply with the schedule. CNNfn will
provide, at a minimum, weekly Site information/reports relevant to the
performance of graphic and text links to the Game Site contained thereon,
including impressions and click-throughs.
7. CD-ROM Product. In addition to the Services contemplated by Paragraph 1
above, Sandbox agrees to create a CD-ROM enhancement for each Game, as agreed by
the parties but owned exclusively by Sandbox subject to CNNfn's rights in and to
CNNfn Elements therein, featuring heavier use of graphics and animation and an
enhanced prize structure ("ACD-ROM Product"). All elements of the CD-ROM shall
be agreed upon by the parties in advance. This CD-ROM Product will be offered to
consumers during the Term and any Sell-Off Period (as hereinafter defined) for a
price and through outlets determined by mutual agreement of the parties. The
CD-ROM shall be subject to mutually agreed upon standards regarding both
substance and quality. Sandbox shall be solely responsible for the production of
any CD-ROM Game Product, including all creative and hard costs associated
therewith and all elements thereof, including securing any and all third party
rights and compliance with all applicable laws, rules and regulations. Without
limiting the generality of the foregoing, it is expressly understood and agreed
that Sandbox shall be solely responsible for compliance with all sweepstakes and
gaming rules and regulations and any prize fulfillment activities and shall
indemnify and hold CNNfn harmless from any claims related thereto.
It is anticipated that such CD-ROM will be offered to consumers through
purchase opportunities on the CNNfn and Sandbox Sites, as well as through other
mutually acceptable channels; notwithstanding the foregoing, it is expressly
understood and agreed that CNNfn shall have no obligation whatsoever to sell (as
opposed to promote) CD-ROM Game Products to users directly from its Site through
secure transaction technology. Sandbox shall be solely responsible for all
duplication and packaging of the CD-ROM and all fulfillment and mailing costs.
Net revenue derived from sales of any CD-ROM Game Product, which shall be
defined as gross revenues, less actual cost of goods actually incurred by
Sandbox (costs will be itemized and may include shipment, duplication, printing,
fulfillment, packaging and prizes to the extent incurred by Sandbox and not the
consumer), will be split between Sandbox and CNNfn 50/50. Nonetheless, CNNfn
agreement that Sandbox shall be permitted to recoup from gross revenues its
actual cost of providing additional non-cash prizes on the CD-ROM before any
payment of net revenues hereunder, shall be expressly conditioned on its prior
approval of the non-cash prizes. It is expressly understood that no cash prizes
will be available. Should CNNfn contribute any content (i.e., CNNfn Elements) or
services to the CD-ROM, an additional amount payable to CNNfn shall be
negotiated by the parties in good
4
<PAGE>
faith, whether in the form of a fee or an additional share of net revenue. In
this regard, Sandbox hereby acknowledges CNNfn's contributions to the initial
CD-ROM Game Product, including the appearance of Lou Dobbs thereon ("Initial
CD-ROM Game Product"). CNNfn also agrees to cause Mr. Lou Dobbs (or a substitute
acceptable to both parties) to be available for and to provide an estimated two
hours of time two additional times during the twelve month period from the date
hereof, at mutually acceptable times, to shoot video for the Final Bell CD
during which Mr. Dobbs will elaborate on his knowledge of the financial
marketplace and any other related material reasonably requested by Sandbox.
Subject to CNNfn's approval in each instance, CNNfn agrees that Sandbox shall
have the right to use CNNfn Elements, including approved images and voice of Mr.
Dobbs in its promotion and marketing of the Initial CD-ROM Game Product, as well
as in upgrades, updates or new versions thereof featuring Mr. Dobbs or the
agreed upon substitute, if applicable (collectively referred to as the "Dobb's
CD-Rom Game Products"). Notwithstanding any other provision in this Agreement to
the contrary, Sandbox agrees that it will cease distribution of each Dobb's
CD-ROM Game Product containing Mr. Dobb's images no later than one (1) year
after the commercial release of the same. With respect to each Dobbs= CD-ROM
Game Product, CNNfn's share of the net revenue shall be increased to 52% for the
initial 15,000 units and further increased to 54% thereafter. Any other services
provided by CNNfn shall be subject to a separate agreement mutually acceptable
to the parties. Upon expiration of this Agreement, the parties may continue to
sell existing inventory of the most current CD-ROM for a period not to exceed
the earlier of the date three (3) months (i) after expiration, or (ii) after the
completion of the regular season for the sport subject of the Game ("Sell-Off
Period"). There shall be no Sell-Off Period by a defaulting party in the event
of a termination absent the express agreement of the parties.
During the Term and for a period of two (2) years thereafter, each
party shall maintain complete and accurate books and record relating to the sale
of any CD-ROM Game Product hereunder. Each party shall be responsible for
invoicing, billing and collecting all amounts in connection with its sales
efforts and agrees to submit monthly payments to the other party within sixty
(60) days after the end of each calendar month, accompanied by an appropriate
and agreed upon statement.
8. Books and Records. As indicated in this Agreement, each party is responsible
for maintaining certain books and records in connection with its performance of
obligations hereunder. Such books and records shall be available to the other
party for inspection during reasonable business hours upon reasonable notice. In
addition, each party shall have a right to audit the other party's books and
records at its sole cost not more than one (1) time per twelve-month period.
Should such an audit reveal an underpayment to that party in the amount of ten
percent (10%) or more, such party shall be entitled to reimbursement for the
cost of its audit from the audited party.
9. Term. This Agreement shall be effective as of the date hereof and shall
continue through July 15, 1999, unless earlier terminated pursuant to the terms
hereof. Upon expiration or termination of this Agreement, the co-branding
offering will be disabled and removed from public availability and all
co-branding efforts related thereto shall cease subject only to permitted
Sell-Off activities as applicable.
10. Warrant. Simultaneous with the execution of this Agreement, Sandbox hereby
agrees to issue CNNfn a warrant (the "Warrant") in the form of Exhibit "B"
attached hereto entitling CNNfn to acquire up to 130,000 shares of common stock
in Sandbox subject to the terms and conditions set forth therein. A portion of
the warrant for up to 100,000 shares shall vest over the Term in accordance with
its terms in exchange for certain commercial promotional support outlined in
Exhibit A-1 to the Warrant. The remaining portion of the warrant for 30,000
shares shall be fully vested and immediately exercisable as of the parties'
execution of this Agreement.
5
<PAGE>
11. Costs. Except as expressly set forth herein to the contrary, each party will
bear its respective costs incurred in the performance of this Agreement and
shall not be entitled to any reimbursement therefor from the other party.
12. Merchandising/Licensing. During the Term, the parties may discuss
merchandising and/or licensing opportunities related to the Game and Game Site.
Such opportunities may be exploited only pursuant to mutual agreement of the
parties. To the extent that the parties elect to pursue any such opportunities
and extend the co-branding activities contemplated under this Agreement, the
parties agree to split any such net revenues 70/30, 70 to Sandbox and 30 to
CNNfn. All opportunities, approval rights, related economics (e.g., definition
of net revenue) and other terms and conditions applicable thereto, shall be set
forth in a written amendment to this Agreement and executed by both parties.
Absent such an amendment, no merchandising, licensing or other rights not
expressly contemplated and addressed in this Agreement may be exploited by
either party.
13. Notices. All notices to the parties shall be given in writing and sent to
the addresses set forth above. A copy of any notice to CNNfn shall be
simultaneously delivered to Cable News Network, Inc., One CNN Center, Box
105366, Atlanta, GA 30348-5366, Attention: Donna K. Lewis, Assistant General
Counsel, Legal Department. A copy of any notice to Sandbox shall be
simultaneously delivered to Osborn Maledon, P.A., 2929 N. Central Avenue, Suite
2100, Phoenix, Arizona 85012, Attention: Thomas H. Curzon, Esquire.
14. Standard Terms and Conditions. CNNfn and Sandbox agree that the Standard
Terms and Conditions attached hereto as Exhibit "C" shall constitute an integral
part of this Agreement and are hereby incorporated into this Agreement. If any
provision set forth above conflicts (or is construed to conflict) with any
provision of the Standard Terms and Conditions, the provisions hereinabove set
forth shall control.
CNNfn, a division of Cable News Network, SANDBOX ENTERTAINMENT
Inc. CORPORATION
By: /s/ Hal Uhl By: /s/ Chad M. Little
---------------------------- -----------------------------
Its: VP, Business Development Its: President
---------------------------- -----------------------------
6
<PAGE>
SCHEDULE 1
Pre-existing Sandbox Ad Sales
Excluded from Agreement
1. e.schwab contract, which expires June 30, 1998, as renewed or amended from
time to time by Sandbox, it being the intent of CNNfn and Sandbox that Sandbox's
relationship with e.schwab be totally excluded.
2. About Work contract, which expires December 31, 1997, and which provides for
approximately 2,825,000 impressions to be delivered by Sandbox during the period
July 7 through December 31, 1997; it being the parties intent that such contract
be excluded only to the extent of the current obligations to deliver such amount
of impressions; any amendments or renewals beyond the commitment described
herein will be subject to the revenue split with CNNfn.
7
<PAGE>
EXHIBIT A
CNNfn Promotional Site Support
* CNNfn.com will, for such time as the editorial staff deems appropriate,
include in its website a ticker headline promoting the launch of the Game.
* CNNfn.com will include heavy promotion of the Final Bell Game on its Site
on the day of the launch.
* CNNfn.com will, during the Game, use text links and ticker links to inform
website visitors about the Game. Placement and play of these links and
ticker headlines will be at the discretion of the editorial staff.
* CNNfn.com will provide navigation to the Game Site from the "Markets"
section, the "Your Money" section and from other sections or pages it deems
appropriate.
* CNNfn.com will provide website banner promotion to the CNNfn Final Bell
Game. We will provide reports on this promotion every other month.
1
Exhibit 10(m)
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1993, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
STOCK SUBSCRIPTION WARRANT
to Purchase Up To 130,000 Shares of the
Common Stock, $.001 Par Value, of
SANDBOX ENTERTAINMENT CORPORATION,
a Delaware corporation (the "Company")
DATE OF INITIAL ISSUANCE: As of July 11, 1997
THIS CERTIFIES THAT for value received, CNNfn, a division of Cable News
Network, Inc., or its registered assigns (hereinafter called the "Holder") is
entitled to purchase from the Company, at any time during the Term of this
Warrant, up to One Hundred Thirty Thousand (130,000) shares of common stock,
$.001 par value, of the Company (the "Common Stock"), at the Warrant Price,
payable in lawful money of the United States of America, to be paid upon the
exercise of this Warrant. The exercise of this Warrant shall be subject to the
provisions, limitations and restrictions herein contained and may be exercised
in whole or in part.
1. Definitions. For all purposes of this Warrant, the following terms
shall have the meanings indicated:
Common Stock shall mean the Company's authorized Common Stock, $.001 par value
as constituted at the date of this Warrant.
Term of this Warrant shall mean the period beginning on the date of initial
issuance hereof and ending thirty (30) days after termination of that certain
Co-Branding and Marketing Agreement dated July 11, 1997, by and between Holder
and Company, provided that if such Agreement is terminated by Holder due to an
uncured breach of such Agreement by the Company, then the term of this Warrant
shall end on the first anniversary of such termination.
Warrant Price shall mean Two Dollars ($2.00) per share for the Initial Shares
and the CPT Shares, and Ten Cents ($.10) per share for the CD Shares, subject to
adjustment in accordance with Section 5 and Section 10.
Warrant Shares shall mean the shares of Common Stock purchased or purchasable by
the Holder of this Warrant upon exercise hereof. Initially, the Warrant Shares
shall include 10,000 shares,
<PAGE>
described as the "Initial Shares" in Exhibit A hereto, 20,000 shares described
as the CD Shares, and so much of the "CPT Shares" as become vested in accordance
with such Exhibit A. Warrant Shares shall not include CPT Shares that have not
vested in accordance with Exhibit A hereto.
2. Exercise of Warrant. The Warrant shall be exercised, if at all, only
as follows:
(a) The purchase rights represented by this Warrant are
exercisable by the Holder at any time and from time to time at and after the
date of initial issuance hereof and prior to the expiration of the term of this
Warrant. To exercise this Warrant in whole or in part, the Holder shall deliver
to the Company at its principal office, at any time and from time to time during
the Term of this Warrant: (i) the notice of exercise in the form attached
hereto, (ii) cash, certified or official bank check payable to the order of the
Company, wire transfer of funds to the Company's account, or the surrender of
evidence of any indebtedness of the Company to the Holder (or any combination of
the foregoing) in the amount of the Warrant Price for each share being
purchased, and (iii) this Warrant. Each exercise of this Warrant shall be deemed
to have been effected immediately prior to the close of business on the day on
which this Warrant shall have been surrendered to the Company as provided above.
At such time, the person or persons in whose name or names any certificates for
Warrant Shares shall be issuable upon such exercise shall be deemed to have
become the holder or holders of record of the Warrant Shares represented by such
certificates.
(b) Notwithstanding any contrary provisions in this Warrant,
if the Current Market Price (as defined in Section 2(c) below) exceeds the
Warrant Price at the date immediately preceding the date of exercise of this
Warrant, instead of exercising this Warrant as described in Section 2(a) above,
the Holder may elect to receive Warrant Shares equal to the value of this
Warrant (or the portion thereof being exercised), by delivering to the Company
at its principal office, at any time and from time to time during the Term of
this Warrant: (i) the notice of exercise in the form attached hereto, and (ii)
this Warrant, in which event the Company shall issue to the Holder a number of
Warrant Shares calculated using the following formula:
WS = WCS x (CMP-WP)
-------------------
CMP,
where WS = the number of Warrant Shares to be issued to the Holder,
WCS = the number of Warrant Shares purchasable under the Warrant,
or if only a portion of the Warrant is being exercised, the
portion of the Warrant being exercised at the date of such
calculation,
CMP = the Current Market Price (as defined in Section 2(c) below)
at the date of such calculation, and
WP = the Warrant Price, as adjusted to the date of such
calculation.
2
<PAGE>
(c) For the purpose of any calculation made pursuant to this
Section 2, the "Current Market Price" at any date of one share of Common Stock
shall be deemed to be the average of the daily closing bid and asked prices for
the Common Stock quoted in the Over-The-Counter Market Summary or the last
reported sale price of the Common Stock or the closing price quoted on the
NASDAQ National Market System or on any exchange on which the Common Stock is
listed, whichever is applicable, as published in the appropriate edition of the
Wall Street Journal for the five (5) trading days immediately prior to the date
of exercise of this Warrant; provided, however, that if the Common Stock is not
traded in such manner that the quotations referred to in this Section 2(c) are
available for the period required hereunder, the Current Market Price shall be
the fair market value of the Common Stock, as agreed to by the Company and the
Holder. The parties hereto hereby agree that any dispute or controversy arising
out of, relating to, or concerning the Current Market Price, shall be settled by
arbitration to be held in Phoenix, Arizona. Either party may give written notice
of such dispute or controversy to the other party. Except as provided in this
Warrant, the arbitration shall be in accordance with the rules then in effect of
the American Arbitration Association. The arbitrator shall have the jurisdiction
to hear and rule on pre-hearing disputes and is authorized to hold pre-hearing
conferences by telephone or in person, as the arbitrator deems necessary. The
arbitrator may grant injunctions or other relief in such dispute or controversy.
The decision of the arbitrator shall be final, conclusive and binding on the
parties to the arbitration. Judgment may be entered on the arbitrator's
decisions in any court having jurisdiction. Each party shall pay one-half of the
costs and expenses of such arbitration, and each shall separately pay for
individual counsel fees and expenses. Notwithstanding the foregoing, in the
event the Warrant is exercised in connection with the Company's initial public
offering of Common Stock, the fair market value per share shall be the per share
offering price to the public of the Company's initial public offering.
(d) Each certificate for Warrant Shares shall bear the
following legend (and any additional legend required by (i) any applicable state
securities laws, (ii) any securities exchange upon which such Warrant Shares
may, at the time of such exercise be listed) on the face thereof, unless at the
time of exercise, such Warrant Shares shall be registered under the Securities
Act of 1933, as amended (the "Securities Act"), (iii) are sold to the public
pursuant to Securities and Exchange Commission ("SEC") Rule 144, or (iv) become
eligible for sale under SEC Rule 144(k);
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION THEREFROM UNDER SAID
ACT AND APPLICABLE STATE SECURITIES LAWS."
3. Covenants As to Common Stock. The Company covenants and agrees that:
(i) all shares of Common Stock that may be issued upon the exercise of this
Warrant will, upon issuance, be validly issued, fully paid and nonassessable,
and free from all taxes, liens and charges with respect to the issue thereof;
(ii) it will pay when due and payable any and all federal and state
3
<PAGE>
taxes (other than federal or state income taxes, if any, which shall remain
Holder's responsibility) that may be payable in respect of the issue of this
Warrant or any Common Stock or the Warrant Shares; (iii) it will at all times
have authorized and reserved, free from preemptive rights, a sufficient number
shares of Common Stock to provide for the exercise of the rights represented by
this Warrant; (iv) if any shares of capital stock to be reserved for the purpose
of the issuance of shares upon the exercise of this Warrant require registration
with or approval of any governmental authority under any federal or state law
before such shares may be validly issued or delivered upon exercise, then the
Company shall in good faith and as expeditiously as possible endeavor to secure
such registration or approval, as the case may be; and (v) if and so long as the
Common Stock issuable upon the exercise of this Warrant is listed on any
national securities exchange, the Company, will, if permitted by the rules of
such exchange, list and keep listed on such exchange, upon official notice of
issuance, all shares of such Common Stock issuable upon exercise of this
Warrant.
4. Adjustment of Number of Shares. Upon each adjustment of the Warrant
Price as provided in Section 5 below, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest 1/10th of a share) obtained by multiplying the
Warrant Price in effect immediately before such adjustment by the number of
shares purchasable pursuant hereto immediately before such adjustment, and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
5. Adjustment of Warrant Price. The Warrant Price shall be subject to
adjustment from time to time as follows:
(a) If, at any time during the term of this Warrant, the
number of shares of Common Stock outstanding is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split-up of shares of
Common Stock, then, following the record date fixed for the determination of
Holders of Common Stock entitled to receive such stock dividend, subdivision or
split-up, the Warrant Price shall be appropriately decreased in proportion to
such increase in outstanding shares.
(b) If, at any time during the term of this Warrant, the
number of shares of Common Stock outstanding is decreased by a combination of
the outstanding shares of Common Stock, then, following the record date for such
combination, the Warrant Price shall appropriately increase in proportion to
such decrease in outstanding shares.
(c) All calculations under this Section 5 shall be made to the
nearest cent or to the nearest 1/10th of a share, as the case may be.
(d) If the Company proposes to take any action of the types
described in Section 5(a) or (b), the Company shall forward at the same time and
in the same manner, to the Holder of this Warrant, such notice, if any, that the
Company shall give to the Holders of capital stock of the Company.
4
<PAGE>
6. Transfers. The Company may deem and treat the person in whose name
this Warrant is registered as the Holder and owner hereof. Subject to the
provisions of Section 11 hereof, this Warrant and all rights hereunder are
transferable, in whole or in part.
7. Mergers, Consolidations, Sales. In the case of any proposed
consolidation or merger of the Company with another entity, or the proposed sale
of all or substantially all of its assets to another person or entity, or any
proposed reorganization or reclassification of the capital stock of the Company,
then, as a condition of any such consolidation, merger, sale, reorganization or
reclassification, lawful and adequate provision shall be made pursuant to which
the Holder of this Warrant shall thereafter have the right to receive upon the
basis and upon the terms and conditions specified herein, in lieu of the shares
of Common Stock of the Company immediately purchasable hereunder, such shares of
stock, securities or assets as may, by virtue of such consolidation, merger,
sale, reorganization or reclassification, be issued or payable with respect to
or in exchange for the number of shares of such Common Stock purchasable
hereunder immediately before such consolidation, merger, sale reorganization or
reclassification. The Company shall forward at the same time and in the same
manner, to the Holder of this Warrant, such notice, if any, that the Company
shall give to the Holders of capital stock of the Company with respect to any
proposed transaction described above or any distribution of assets of the
Company in dissolution or liquidation, or any extraordinary dividend or other
distribution on its Common Stock except out of earned surplus or by way of a
stock dividend payable in shares of its Common Stock. This Warrant shall be
binding upon any corporation or other person or entity succeeding to the Company
by merger, consolidation or acquisition of all or substantially all of the
Company's assets.
8. Lockup Letter. Holder agrees to execute and deliver to the
underwriters in connection with any Company-initiated firm commitment
underwritten offering and registration a "lock-up" letter requested, if at all,
by such underwriters, regarding limitations on the transfer by Holder of Common
Stock for a period after effectiveness of such registration provided such
"lock-up" letter is on the same terms and conditions as are requested by the
underwriters from all other selling shareholders; and provided, further, that
any such limitations shall not exceed a period of 180 days from the date of the
effectiveness of such registration.
9. Notices. Any notice or other document required or permitted to be
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at Five Penn Plaza, New York, NY 10001,
Attention: Helen Whelan, with a copy to Donna Lewis, Esquire, at One CNN Center,
Box 105366, Atlanta, GA 30348-5366, or to such other address as shall have been
furnished to the Company in writing by the Holder. Any notice or other document
required or permitted to be given or delivered to the Company shall be delivered
at or sent by registered or certified mail to, the Company at 2231 East
Camelback Road, Suite 324, Phoenix, AZ 85016, or to such other address as shall
have been furnished in writing to the Holder by the Company. Any notice so
addressed and mailed by registered or certified mail shall be deemed to be given
when so mailed. Any notice so addressed and otherwise delivered shall be deemed
to be given when actually received by the addressee.
5
<PAGE>
10. Representations and Warranties of Company. Company represents and
warrants to Holder as follows:
(a) Organization and Standing; Charter and Bylaws. Company is
a corporation duly organized and existing under and by virtue of the laws of the
State of Delaware and is in good standing under such laws. Company has requisite
corporate power and authority to own its property and to carry on its business
as presently conducted or as proposed to be conducted.
(b) Corporate Power. Company has all requisite legal and
corporate power to sell and issue this Warrant to Holder and in all other
respects to carry out and perform its obligations under this Agreement.
(c) Authorization. All corporate action on the part of Company
necessary for the authorization, execution, and delivery of this Warrant, and
performance of all of Company's obligations hereunder, have been taken.
(d) Corporate Law Status. The Warrant is validly issued, fully
paid and non-assessable, and is free and clear of all liens, charges,
restrictions, claims and encumbrances imposed by or through any act or omission
on the part of Company. The issuance, sale or delivery of the Warrant and
Warrant Shares are not subject to any preemptive right of stockholders of
Company or to any right of first refusal or other right in favor of any person,
that has not been waived. The Warrant Shares, upon issuance in accordance
herewith, will be validly issued, fully paid and non-assessable, and will be
free and clear of all liens, charges, restrictions, claims and encumbrances
imposed by or through any act or omission on the part of Company.
(e) Validity. The Warrant has been duly executed and delivered
by Company and constitutes the legal, valid and binding obligation of Company,
enforceable in accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditor's rights generally, and
except as enforceability may be subject to general principles of equity, whether
applied in a court of equity or at law or by an arbitration panel.
(f) Capitalization. The authorized capital stock of the
Company is set forth on Exhibit B to this Warrant attached hereto. All issued
and outstanding shares of the Company listed therein have been duly authorized
and validly issued and are fully paid and nonassessable. The number of shares of
Series A Preferred Stock and Common Stock that are subject to options, warrants
or other rights to acquire the capital stock of the Company are as set forth on
such Exhibit.
11. Representations and Warranties of Holder. Holder represents and
warrants to Company, and where so stated, promises as follows:
6
<PAGE>
(a) Unregistered Securities. Holder understands that the
Warrant has not been registered under the Securities Act of 1933 or any state
securities laws (collectively, "Securities Laws") in reliance upon an exemption
from registration accorded for nonpublic offerings. Holder further recognizes
that the Warrant may not be sold unless it and the transaction in which it is to
be sold have been registered under the Securities Laws or an exemption from
registration is available for such sale. Holder accepts that the Warrant will
bear a legend to that effect. Further, Holder recognizes that Company has made
no representations as to registration of the Warrant under the Securities Laws
and that no registration is anticipated ever to occur.
(b) Investment Intent. Holder is acquiring the Warrant for its
own account for investment and not with a view to resale or distribution. The
Holder promises that it will not sell, hypothecate, transfer or otherwise
dispose of the Warrant, or attempt so to do, unless it has been registered under
the Securities Laws or, in the opinion of counsel reasonably acceptable to
Company and its counsel, an exemption from registration is available.
(c) Negotiation; Access to Information. The terms of Holder's
purchase of the Warrant were established by negotiations between Holder and
Company's representative, and in connection therewith, Holder was given access
to the relevant information it requested concerning Company's condition and
operations, and the opportunity to ask questions of and receive answers from
Company's representatives. Holder is knowledgeable and experienced in financial
and business matters and, on the basis of the information it received concerning
Company's condition and operations, Holder is in a position to make an informed
investment decision concerning its investment in the Warrant and the risks
attending such investment. Further, in light of its financial position, Holder
is able to bear the economic risks of investment in the Warrant.
(d) Legends; Stop Transfer Orders. Holder hereby consents and
agrees that Company may imprint on any certificate evidencing the Warrant or any
of the Warrant Shares an appropriate legend or notification to the effect that
such shares are not freely transferable and may be transferred only in
compliance with applicable securities laws. Holder further consents and agrees
that Company may give appropriate "stop order" instructions in this regard to
any transfer agent for the Warrant or the Warrant Shares.
(e) Compliance. Holder hereby expressly promises not to offer
for sale or sell the Warrant or any of the Warrant Shares, or any interest
therein, except in compliance with the Securities Act of 1933, as amended, and
other applicable securities laws and regulations, including those of the State
of Arizona, if applicable.
12. Delivery to Holder. As promptly as practicable after the exercise
of this Warrant in whole or in part, and in any event within 10 days thereafter,
the Company at its expense will cause to be issued in the name of, and delivered
to, the Holder, or as such Holder (upon payment by such Holder of any applicable
transfer taxes) may direct:
7
<PAGE>
(a) a certificate or certificates for the number of Warrant
Shares to which such Holder shall be entitled, and
(b) in case such exercise is in part only, a new warrant or
warrants (dated the date hereof) of like tenor, calling in the aggregate on the
face or faces thereof for the number of such shares called for on the face of
this Warrant minus the number of such shares purchased by the Holder upon such
exercise as provided in Section 2(a) above.
13. Exchange of Warrants. Upon the surrender by the Holder of any
Warrant or Warrants, properly endorsed, to the Company, the Company will,
subject to the provisions of Section 11(a) of this Warrant, issue and deliver to
or upon the order of such Holder, at the Company's expense, a new warrant or
warrants of like tenor, in the name of such Holder or as such Holder may direct,
calling in the aggregate on the face or faces thereof for the number of shares
of Common Stock called for on the face or faces of the Warrant or Warrants so
surrendered.
14. Replacement of Warrants. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and (in case of loss, theft or destruction) upon delivery of an
indemnity agreement (with surety if reasonably required) in an amount reasonably
satisfactory to the Company, or (in the case of mutilation) upon surrender and
cancellation of this Warrant, the Company will issue, in lieu thereof, a new
Warrant of like tenor.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer as of this 11th day of July, 1997.
THE COMPANY:
ATTEST: SANDBOX ENTERTAINMENT CORPORATION
By: /s/ James A. Layne By: /s/ Chad M. Little
-------------------------- -----------------------------
Its Secretary Its President
ACCEPTED AND AGREED:
CNNfn, a division of Cable News Network, Inc.
By: ---------------------------------------
Its: Vice President of Business Development
----------------------------------------
8
<PAGE>
FORM OF NOTICE OF EXERCISE
[To be signed only upon exercise of the Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
1. The undersigned hereby exercises the right to purchase _____ shares
of Common Stock that the undersigned is entitled to purchase by the terms of the
within Warrant according to the conditions thereof, and herewith makes payment
of the Warrant Price of such shares in full. All shares to be issued pursuant
hereto shall be issued in the name of and the initial address of such person to
be entered on the books of the Company shall be:
_______________________________________________________________________________.
The shares are to be issued in certificates of the following denominations:
_______________________________________________________________________________.
The shares being exercised are described as the _____ Shares for the Warrant
Price of $_______.
2. The undersigned hereby represents that the shares of the Company's
Common Stock to be delivered to it pursuant to the above-mentioned exercise of
the Warrant are being acquired by the undersigned as an investment and not with
a view to, or for sale in connection with, the distribution of any such shares.
[This paragraph 2 is not applicable if the Common Stock being acquired has been
registered under the Securities Act of 1933, as amended.]
___________________________________
[Type Name of Holder]
By: ____________________________
Title: ____________________________
Date: ____________________________
9
<PAGE>
EXHIBIT A
WARRANT SHARE DETERMINATION
10,000 shares subject to the Warrant shall be fully vested and immediately
exercisable upon execution of the Co-Branding and Marketing Agreement (the
"Initial Shares"). In addition, 20,000 shares subject to the Warrant shall be
fully vested and imediately exercisable upon execution of the Agreement (the "CD
Shares"); however, one-third of the CD Shares shall be subject to forfeiture and
(if purchased) return to Sandbox for the amount of the Warrant Price should
CNNfn fail to make Mr. Lou Dobbs, or a mutually agreed upon substitute,
available for each of the two additional video shoots for the CD-ROM Game
Product contemplated by Paragraph 7 of the Agreement. The remaining 100,000
shares subject to the Warrant (the "CPT Shares") shall vest over the course of
the initial year of the Term of the Co-Branding Agreement as follows:
25,000 CPT Shares on each quarterly anniversary date of the Co-Branding and
Marketing Agreement (4 vesting periods) provided that by the end of the fourth
quarterly period (i.e. the first anniversary of this Agreement) CNNfn has
provided to Sandbox the promotional services contemplated by Exhibit A-1
attached hereto (the "Promotional Services"). In addition, such vesting schedule
shall accelerate with CNNfn's actual delivery of all of the Promotional Services
such that the 100,000 shares subject to the vesting schedule shall be fully
vested and immediately exercisable upon completion of all such Promotional
Services, regardless of the actual date.
In the event that as of the first anniversary of the Co-Branding and Marketing
Agreement, CNNfn has not provided all of the Promotional Services, then the
number of CPT Shares that will be deemed to be vested at the first anniversary
shall be equal to the product obtained by multiplying 100,000 times the dollar
value of the Promotional Services that were actually performed (using the dollar
values set forth on Exhibit A-1) divided by $192,800, and, the Warrant Shares
shall be automatically reduced to be that number of CPT Shares which have vested
as provided herein plus the Initial Shares.
10
<PAGE>
EXHIBIT B
SANDBOX ENTERTAINMENT CORPORATION
Capitalization Schedule
As of July 7, 1997
I. AUTHORIZED CAPITALIZATION
Total Common Stock, $.001 par value: 10,000,000
Total Series A Convertible Preferred Stock, $.001 par value: 3,500,000
----------
Total 13,500,000
II. OUTSTANDING*
Total Common Outstanding 3,136,429
Total Preferred Outstanding 1,981,250
Total Outstanding 5,117,679
Total Warrants/Options Outstanding 1,431,616
---------
Total Common Outstanding-Fully Diluted 6,549,295
*Does not include warrants to be issued to CNNfn or CNNSI.
Exhibit 10(n)
CO-BRANDING AND MARKETING AGREEMENT
-----------------------------------
Date: as of June 20,1997
CNNSI SANDBOX
- ----- -------
CNNSI, a division of Sandbox Entertainment Corporation
Cable News Network, Inc. 2231 East Camelback Road
One CNN Center Suite 324
Box 105366 Phoenix, AZ 85016
Atlanta, Georgia 30348-5366 Contact: Mr. Matt Stanton
Contact: Mr. Steve Zales Ph: (602)468-6400
Ph: (404) 878-1758 Fax: (602)468-6401
Fax:(404) 827-4093
This Agreement is made as of the date specified above between CNNSI
Interactive, a division of Cable News Network, Inc. ("CNNSI"), and Sandbox
Entertainment Corporation ("Sandbox"), whereby Sandbox and CNNSI agree to
conduct a co-branded marketing effort for certain "Games" (as defined below),
and in connection therewith, Sandbox agrees to utilize certain of its
proprietary technologies and rights and to provide certain services and content
to CNNSI for use in connection with CNNSI's online services as more specifically
described below on the following terms and conditions:
1. Co-Branded Offering. During the Term, Sandbox hereby agrees to provide
certain services in support of the co-branded offering described herein (the
"Services"), specifically to develop and host, at a minimum, fantasy games for
professional football, basketball, baseball (subject to CNNSl's request), golf
and hockey, and, if permissible from a rights standpoint, the college basketball
tournament (the "Games") as further described on Schedule 1 attached hereto, for
distribution by the parties, during the term of this Agreement, by any means or
method now known or hereafter developed to users of CNNSl's or Sandbox's
web-based sites and services (collectively, the "Sites"). Sandbox agrees that it
will not provide any advertising supported or subscription-supported fantasy
sports games directly or indirectly in competition with the Games during the
Term of this Agreement. As more specifically described herein, Sandbox will
"host" the Games (the "Game Site") and provide all necessary support, including
implementation of a mutually agreeable advertising/page view tracking system for
the Game Site as further described herein. In addition, as between CNNSI and
Sandbox, Sandbox shall be responsible for all elements of the Games, including
securing any and all third party rights necessary for the final Games and
compliance with all applicable laws, rules and regulations. To the extent
certain rights are required for a proposed version of the Game but Sandbox is
unable
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to secure the same for any reason, Sandbox shall notify CNNSI and it is
understood that such element may be excluded from the final version. Without
limiting the generality of the foregoing, it is expressly understood and agreed
that Sandbox shall be solely responsible for compliance with all sweepstakes and
gaming rules and regulations and any prize fulfillment activities and shall
indemnify and hold CNNSI harmless from any claims related thereto. Sandbox
hereby agrees that it shall continuously update the Games on the Game Site in a
manner to refresh the content and provide gaming updates to users as agreed by
the parties. In addition, Sandbox agrees to designate one or more individuals to
act as "commissioner" for each Game and address user questions. Such
individual(s) shall be qualified to perform such task and be familiar with the
rules and regulations of the sport and the Game. CNNSI shall have the right to
use the Games, or portions thereof, to advertise, promote and/or market its
Site, the Game Site and the availability of the Games. Without limiting the
generality of the foregoing, such promotion may include text and/or graphic
references with or without a link on the CNNSI Site.
CNNSI and Sandbox will each retain approval rights over the design of
the Game Site, and all elements thereof, subject to the express understanding
that the design will include creative and navigational elements from the CNNSI
Site so as to provide a consistent CNNSI look and feel. At all times, each party
will retain ultimate approval rights over use of its respective proprietary
materials. Furthermore, CNNSI understands that certain parameters have already
been defined for the football Game and that its design must avoid creating
obstacles for the user (X, excessive graphic size and difficult navigation). As
part of the design, CNNSI shall determine appropriate links to and from its Site
and the Game Site and Sandbox shall implement such links as they involve the
Game Site; CNNSI shall be solely responsible for implementing any appropriate
links on its Site. By way of example only, CNNSI may elect, at its sole option
and to the extent permissible by its content providers, to provide gamers links
to its Site that will open a second window to permit the gamers to get current
information relevant to the Game from the CNNSI Site (X, news, scores, player
profiles, etc.).
Each party expressly understands that it shall have no right to
negotiate and/or enter into any binding agreements on behalf of the other party
and hereby covenants, represents and warrants that it shall take no action or
represent any authority to the contrary. CNNSI acknowledges and agrees that
Sandbox owns and retains all proprietary right, title and interest in and to the
Games and the technology and materials provided by it for use in the Games, and
CNNSI hereby disclaims any right, title or interest therein. Notwithstanding
Sandbox's ownership of rights in and to the Games, Sandbox will not utilize the
"look and feel" or other unique elements of the Game Site created jointly by the
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parties hereunder for any other project or offering. Furthermore, Sandbox
acknowledges and agrees that CNNSI owns and retains all proprietary right, title
and interest in and to the creative and navigational elements common to the
CNNSI Site as well as all content contributed by it to the Games or Game Site
("CNNSI Elements") and Sandbox disclaims any right, title or interest therein.
Sandbox agrees to perform the Services in a competent, conscientious and
professional manner, in accordance with CNNSl's reasonable requests and
requirements, and in accordance with all of the terms and conditions of this
Agreement.
2. Implementation/Delivery. CNNSI will advise Sandbox of its required input for
design for the Game Site as soon as possible and Sandbox will host and update
each Game in accordance with mutually agreed upon specifications for such
design, as the same may be modified from time to time during the Term. Prior to
the commercial launch of each Game, Sandbox will demonstrate the Game to CNNSI
for its approval. The parties agree that professional football will be the
initial Game launched on the Game Site and Sandbox agrees that the full contact
portion of such Game shall be fully operational and available to site users on
or before July 18, 1997 with a prototype ready for testing and approval by CNNSI
on or before July 7, 1997. Notwithstanding the foregoing, the commercial launch
of the Game Site and all Games shall be determined by mutual agreement of the
parties.
3. CNNSI Promotional Support. CNNSI has provided Sandbox an outline of its plan
designed to promote its Site, including promotion of the Games and Game Site,
and build traffic for the Site and the Games. CNNSI agrees to use reasonable
efforts to perform the activities described in its plan and to include and
perform cross-promotional activities in this plan, using available resources and
promotional inventory time on products and services of its affiliated and
subsidiary entities. During the Term, CNNSI will provide, at a minimum, monthly
reports indicating the location, time, media vehicle and frequency of
promotional activities related to its Site, the Games and/or the Game Site.
4. Marketing/Publicity. The parties agree to cooperate with one another to
provide information for marketing, public relations, publicity and general
promotional purposes. The parties shall have joint control over the substance
and timing over all such activities related to the Games and Game Site, but
agree to comply with reasonable requests of the other party in this regard.
Notwithstanding the foregoing, CNNSI shall have the absolute right to determine
the timing applicable to the initial press release announcing the launch of the
Game Site. Subject to each party's right to inspect all such materials in
advance and approve or disapprove the same as it relates to such party, each
party grants the other party the right to use its respective
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trademarks and trade names in advertising and printed materials solely in
connection with the rights and obligations of the parties under, and during the
term of, this Agreement. Without limiting the generality of the foregoing, each
party shall retain control over its trademarks and trade names at all times
(including as the same may be used in a URL for the Game Site) and may approve
or disapprove any materials containing the same in its sole discretion.
Following execution of this Agreement, the parties will work together in good
faith to issue an initial joint press release. The parties will, as they deem
appropriate, participate in joint press activities and other public relation
activities with the other during the Term of this Agreement.
5. Advertising/Sponsorship Opportunities. The parties hereby agree to cooperate
with one another regarding the sale of advertising (X, banners) and/or
sponsorships on or for the Game Site, with CNN retaining primary control over
the sale of advertising and Sandbox retaining primary control over the sale of
sponsorships. Accordingly, while both parties will have the opportunity to sell
advertising and sponsorships for the Game Site, the party bearing primary
responsibility must approve any proposed sales of that type by the other party
in advance. In an effort to facilitate cooperation and avoid any duplication in
sales efforts, the parties agree to establish and set forth in writing a list of
target accounts that each sales force has first priority in selling as soon as
practical after the date hereof. Each party will assist the other in its
respective efforts. Without limiting the generality of the foregoing, this
cooperation and mutual approval will focus on acceptable contract terms and
conditions, credit standards, rate integrity and pre-approval for any deviation
from the mutually agreed upon rate structure. Additionally, the parties agree to
yield to whichever form of sale (X, advertising or sponsorship) is best suited
to the particular advertiser in an effort to maximize overall opportunities,
sales and revenues for the Game Site. Sandbox will implement an advertising
tracking system approved by CNNSI on the Game Site to track traffic, page views
and other relevant data. Sandbox will provide monthly reports from the system
and deliver the same to CNNSI within five (5) business days of the close of each
month as further described in Paragraph 6 below. In addition, Sandbox shall be
responsible for the proper insertion and rotation of all such advertising and
sponsorships and will maintain accurate logs.
Net advertising revenues, which shall be defined as gross advertising
revenues derived from the sale advertising on the Game Site, less agency
commissions, shall be split between the parties *, with the party responsible
for selling the advertising entitled to retain the higher percentage. To the
extent any extraordinary costs are required to integrate an advertiser and the
parties agree upon such costs up front, the parties will absorb these costs on
an equal basis, with such
* Confidential information has been omitted and filed separately with the
Commission.
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costs deducted from gross revenues prior to determining either party's net
payment on that sale.
Regardless of which party is responsible for the sale of the
sponsorships, the parties hereby agree that all net sponsorship revenue, which
shall be defined as gross revenue derived from sponsorship sales on the Game
Site, less any commissions or other third party fees, shall be split *. Sandbox
will incur and absorb the basic creative and production costs associated with
integrated sponsorships and shall not be entitled to any reimbursement therefor
absent the express prior written agreement of the parties to the contrary.
Each party hereby agrees to maintain complete and accurate books and
records regarding its sale of advertising and/or sponsorships on the Game Site
during the Term of this Agreement and for a period of two (2) years thereafter.
Each party shall be responsible for billing, invoicing and collection activities
related to its sales activities hereunder. The parties will agree upon
appropriate and consistent billing, invoicing and collection procedures as soon
as possible after execution of this Agreement and each party will comply with
such procedures throughout the Term. Copies of invoices will be sent to the
non-selling party simultaneously with delivery to the third party and copies of
all advertising or sponsorship contracts must accompany insertion orders prior
to the start of a campaign. Within thirty (30) days of the close of each
calendar month, each party shall distribute amounts payable to the other party
for that month to such party along with a complete statement for selling
activities during such time.
6. Game Site Usage Reports. As discussed generally above, Sandbox will maintain
and provide, at a minimum, equally aggregated Game Site information/reports on
users, registered visitors and page impressions to the detail reasonably
specified by CNNSI. This will include daily tracking of advertising banner
impressions and click-throughs, as well as sophisticated aggregate reporting of
advertising impressions and click-throughs. In this regard, Sandbox will provide
a mutually agreed upon audit system for its proprietary advertising server
software. Implementation must occur at the time of the launch, contingent upon
the third party audit provider's ability to comply with the schedule. CNNSI will
provide, at a minimum, weekly Site information/reports relevant to the
performance of graphic and text links to the Game Site contained thereon,
including impressions and click-throughs.
7. CD-ROM Product. In addition to the Services contemplated by Paragraph 1 above
Sandbox agrees to create a CD-ROM enhancement for each Game, as agreed by the
parties but owned exclusively by Sandbox subject to CNNSl's rights in and to
CNNSI Elements therein, featuring heavier use of graphics and animation and an
* Confidential information has been omitted and filed separately with the
Commission.
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enhanced prize structure ("CD-ROM Product"). All elements of the CD-ROM shall be
agreed upon by the parties in advance. This CD-ROM Product will be offered to
consumers during the Term and any Sell-Off Period (as hereinafter defined) for a
price and through outlets determined by mutual agreement of the parties. The
CD-ROM shall be subject to mutually agreed upon standards regarding both
substance and quality. Sandbox shall be solely responsible for the production of
any CD-ROM Game Product, including all creative and hard costs associated
therewith and all elements thereof, including securing any and all third party
rights and compliance with all applicable laws, rules and regulations. Without
limiting the generality of the foregoing, it is expressly understood and agreed
that Sandbox shall be solely responsible for compliance with 4 all sweepstakes
and gaming rules and regulations and any prize fulfillment activities and shall
indemnify and hold CNNSI harmless from any claims related thereto.
It is anticipated that such CD-ROM will be offered to consumers through
purchase opportunities on the CNNSI and Sandbox Sites, as well as through other
mutually acceptable channels; notwithstanding the foregoing, it is expressly
understood and agreed that CNNSI shall have no obligation whatsoever to sell (as
opposed to promote) CD-ROM Game Products to users directly from its Site through
secure transaction technology. Sandbox shall be solely responsible for all
duplication and packaging of the CD-ROM and all fulfillment and mailing costs.
Net revenue derived from sales of any CD-ROM Game Product, which shall be
defined as gross revenues, less actual cost of goods incurred by Sandbox, will
be split between Sandbox and CNNSI *. In addition, CNNSI agrees that Sandbox
shall be permitted to recoup from gross revenues its actual cost of providing
additional non-cash prizes on the CD-ROM before any payment of net revenues
hereunder, provided that the decision to provide the additional non-cash prizes
was mutually agreed upon in advance. It is expressly understood that no cash
prizes will be available. Should CNNSI contribute any content (X, CNNSI
Elements) to the CD-ROM, an additional amount payable to CNNSI shall be
negotiated by the parties in good faith, whether in the form of a fee or an
additional share of net revenue. Upon expiration of this Agreement, the parties
may continue to sell existing inventory of the most current CD-ROM for a period
not to exceed the earlier of the data three (3) months (i) after expiration, or
(ii) after the completion of the regular season for the sport subject of the
Game ("Sell-Off Period"). The foregoing right shall also apply to the
non-breaching party in the event of a termination.
During the Term and for a period of two (2) years thereafter, each
party shall maintain complete and accurate books and record relating to the sale
of any CD-ROM Game Product hereunder. Each party shall be responsible for
invoicing, billing and collecting all amounts in connection with its sales
* Confidential information has been omitted and filed separately with the
Commission.
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efforts and agrees to submit monthly payments to the other party within sixty
(60) days after the end of each calendar month, accompanied by an appropriate
and agreed upon statement.
8. Books and Records. As indicated in this Agreement, each party is responsible
for maintaining certain books and records in connection with its performance of
obligations hereunder. Such books and records shall be available to the other
party for inspection during reasonable business hours upon reasonable notice. In
addition, each party shall have a right to audit the other party's books and
records at its sole cost not more than one (1) time per twelve-month period.
Should such an audit reveal an underpayment to that party in the amount of ten
percent (10%) or more, such party shall be entitled to reimbursement for the
cost of its audit from the audited party.
9. Term. This Agreement shall be effective as of the date hereof and shall
continue through October 31, 1998, unless earlier terminated pursuant to the
terms hereof. This Agreement may be renewed for two (2) separate terms of one
year each thereafter by CNNSI at its sole discretion by notifying Sandbox (in
each event) on or prior to July 1, 1998 and 1999, respectively. Upon expiration
or termination of this Agreement, the co-branded offering will be disabled or
removed from public availability and all co-branding efforts related thereto
shall cease, subject to permitted Sell-Off Period activities as applicable; the
foregoing will not impose any broader obligation on Sandbox to disable its
"SportsSim.com" URL.
10. Warrants. Simultaneous with the execution of this Agreement, Sandbox hereby
agrees to issue CNNSI a warrant in the form of Exhibit "A" attached hereto
entitling CNNSI to acquire 20,000 shares of common stock in Sandbox subject to
the terms and conditions set forth therein.
11. Costs. Except as expressly set forth herein to the contrary, each party will
bear its respective costs incurred in the performance of this Agreement and
shall not be entitled to any reimbursement therefor from the other party.
12. Merchandising/Licensing. During the Term, the parties may discuss
merchandising and/or licensing opportunities related to the Games and Game Site.
Such opportunities may be exploited only pursuant to mutual agreement of the
parties. To the extent that the parties elect to pursue any such opportunities
and extend the co-branding activities contemplated under this Agreement, the
parties agree to split any such net revenues *. All opportunities, approval
rights, related economics (e.g., definition of net revenue) and other terms and
conditions applicable thereto, shall be set forth in a written amendment to this
Agreement and executed by both parties. Absent such an amendment, no
merchandising, licensing or other rights not
* Confidential information has been omitted and filed separately with the
Commission.
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expressly contemplated and addressed in this Agreement may be exploited by
either party.
13. Notices. All notices to the parties shall be given in writing and sent to
the addresses set forth above. A copy of any notice to CNNSI shall be
simultaneously delivered to CNNSI Interactive, One CNN Center, Box 105366,
Atlanta, Georgia 30348- 5366, Attention: Steve Zales, with an additional copy to
Cable News Network, Inc., One CNN Center, Box 105366, Atlanta, GA 30348-5366,
Attention: Donna K. Lewis, Assistant General Counsel, Legal Department. A copy
of any notice to Sandbox shall be simultaneously delivered to Osborn Maledon,
P.A., 2929 N. Central Avenue, Suite 2100, Phoenix, Arizona 85012, Attention:
Thomas H. Curzon, Esquire.
14. Standard Terms and Conditions. CNNSI and Sandbox agree that the Standard
Terms and Conditions attached hereto as Exhibit "B" shall constitute an integral
part of this Agreement and are hereby incorporated into this Agreement. If any
provision set forth above conflicts (or is construed to conflict) with any
provision of the Standard Terms and Conditions, the provisions hereinabove set
forth shall control.
CNNSI, a division of Cable News SANDBOX ENTERTAINMENT
Network, Inc. CORPORATION
By:/s/ By:/s/ Chad M. Little
--------------------------- --------------------------
Its: General Manager Its: President
------------------------- ------------------------
8
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EXHIBIT A
FORM OF WARRANT
[To be provided by Sandbox]
9
<PAGE>
EXHIBIT B
STANDARD TERMS AND CONDITIONS
B-1 OWNERSHIP. Sandbox acknowledges and agrees that the services rendered and
rights granted pursuant to the terms of this Agreement shall not confer in
Sandbox any rights of ownership in the CNNSI Page or in any CNNSI Elements,
CNNSI site or service or any part thereof (including, but not limited to, all
rights of copyright) which shall remain exclusively in CNNSI. CNNSI acknowledges
and agrees that the services rendered and rights granted pursuant to the terms
of this Agreement shall not confer in CNNSI any rights of ownership in the
Games, any technology or proprietary rights utilized by Sandbox in offering the
Games, or any Sandbox site or service or any part thereof (including, but not
limited to, all rights of copyright) which shall remain exclusively in Sandbox.
B-2 WARRANTY. Sandbox represents and warrants that (a) it shall not make any
representations to any third party or take any actions inconsistent with the
terms of this Agreement; (b) Sandbox has full power to enter into this
Agreement, to carry out its obligations hereunder and to grant/assign the rights
herein granted/assigned to CNNSI; (c) the Services provided hereunder shall be
performed in a good and workmanlike manner; (d) Sandbox shall use commercially
reasonable efforts to ensure the accuracy and integrity of the Games as
presented on the Game Site and any CD-ROM Product, and CNNSI's use of the same
in accordance with this Agreement and any applicable third party license agree
ments shall not infringe upon or violate the intellectual property rights,
including without limitation rights or publicity, copyright, trademark, trade
secrets or patent rights, of any person, firm or entity; and (e) Sandbox is in
the process of raising capital in a second venture financing round and expects
to have sufficient financing and other resources to fully perform its
obligations under this Agreement.
B-3 INDEMNIFICATION. Sandbox shall indemnify, defend and hold harmless CNNSI,
its parent and affiliated companies, its and their licensees, successors and
assigns, and each of its and their officers, agents and employees from all
liabilities or losses, including, without limitation, reasonable attorneys'
fees, arising out of any claims, lawsuits or judgments, whether threatened or
actual, fixed or contingent, known or unknown, arising out of the breach by
Sandbox of any representation, warranty or covenant of Sandbox under this
Agreement, the Games, any CD-ROM Product or operation of the Game Site. Sandbox
shall promptly inform CNNSI in writing of any such claim, demand or suit and
CNNSI shall fully cooperate in the defense thereof. CNNSI shall indemnify,
defend and hold harmless Sandbox, its parent and affiliated companies, its and
their licensees, successors and assigns, and each of its and their officers,
agents and employees from all liabilities or losses, including, without
limitation, reasonable attorneys' fees, arising out of any claims, lawsuits or
judgments, whether threatened or actual, fixed or contingent, known or unknown,
arising out of CNNSI's breach of any of its representations, warranties or
covenants to Sandbox hereunder, CNNSI's operation of the CNNSI Site and/or
inclusion of any CNNSI Elements in any Game, Game Site or CD-ROM Product. CNNSI
shall promptly inform Sandbox in writing of any such claim, demand, suit and
Sandbox shall fully cooperate in the defense thereof.
B-4 TERMINATION. In the event a party is in breach under this Agreement, the
other party may terminate this Agreement immediately if the breaching party
fails to cure the breach within thirty (30) days of its receipt of notice of
such breach. Upon any termination, neither party shall have any further
obligation to the other party except as expressly set forth herein or as
required in accordance with applicable law.
B-5 ASSIGNMENTS/SUBCONTRACTORS. Sandbox shall not have the right to sell,
assign, transfer or hypothecate (all hereinafter referred to as "assign" or
"assignment") this Agreement, or delegate any of Sandbox's obligations
hereunder, voluntarily or by operation of law, without the prior written consent
of CNNSI (which CNNSI may give or withhold in its sole discretion), provided
that CNNSI's consent shall not be required with respect to a transfer after the
closing of which the owners of Sandbox as of the date of this Agreement continue
to have voting control of Sandbox or the resulting entity (e.g., a reverse
merger in which Sandbox shareholders have the controlling share) so long as such
transfer does not involve a party reasonably considered a competitor to CNNSI.
Any such purported assignment or deletion without such prior written consent
shall be null and void and have no force and
Exhibit "B" - Page 1
<PAGE>
effect. This Agreement shall be fully and freely assignable by CNNSI in whole or
in part. Sandbox shall have no rights whatsoever to subcontract any portion of
the Services required hereunder.
B-6 RELATIONSHIP. Sandbox's relationship to CNNSI shall be that of an
independent contractor. Nothing herein shall create any association,
partnership, joint venture or agency relationship between Sandbox and CNNSI.
Without limiting the generality of the foregoing, it is expressly understood and
agreed that Sandbox shall have no authority whatsoever to make any
representations or commitments to or enter into any agreements with any third
party on behalf of CNNSI.
B-7 TAXES. Except as otherwise expressly provided in this Agreement, Sandbox
agrees to pay the full amount of any and all taxes, levies or charges (including
without limitation, any penalties or interest thereon) howsoever denominated,
imposed or levied against Sandbox or CNNSI by any law, rule or regulation now in
effect or hereafter enacted including without limitation, sales, use, property
and excise or other similar taxes, licenses, import permits or fees, and customs
duties relating to or imposed upon the Services provided hereunder, the use or
possession of same by CNNSI, or the amounts payable to Sandbox under this
Agreement, it being the intent hereof that the amounts payable to Sandbox under
this Agreement, except as otherwise expressly provided herein, shall be
inclusive of any and all taxes, levies, or charges of whatsoever kind or nature
howsoever denominated. Notwithstanding the foregoing, CNNSI will remain solely
responsible, and Sandbox shall have no responsibility for, taxes on CNNSI's net
income.
B-8 CONFIDENTIALITY. Each party acknowledges that it may have access to certain
trade secrets and other non-public confidential information of the other during
and in connection with its performance of services and/or obligations hereunder
("Confidential Information"), and hereby agrees not to disclose any Confidential
Information to any third party and not to use any such Confidential Information
for any purpose other than performance pursuant to this Agreement. All such
Confidential Information and trade secrets are and shall remain the exclusive
property of the disclosing party and no license shall be granted or implied with
respect to such Confidential Information or trade secrets by reason of the other
party's access to the same in connection with its performance of services or
obligations hereunder. The parties' foregoing agreement of non-use and
nondisclosure shall survive any termination or expiration of this Agreement and
shall continue in full force and effect for a period of three (3) years from the
date of the Agreement. It is expressly understood and agreed that the terms and
conditions of this Agreement shall be deemed Confidential Information of the
parties and will not be disclosed to any third party (other than a party's
investors or bona fide potential investors, lenders, accountants, attorneys and
other advisors, provided that such disclosures are on a confidential basis)
without the prior written consent of both parties. Confidential Information
shall not include information in the public domain or information which a party
acquires from a third party who provides the same without violating any
obligation of confidentiality or nondisclosure. Furthermore, it shall not be
deemed to be a violation of this provision for a party to disclose any
Confidential Information to a judicial or governmental authority compelling such
disclosure by appropriate order provided that the party receiving any such order
shall provide the other party with notice at the earliest practicable moment to
permit the other party to seek appropriate protective orders, if it so elects.
B-9 NOTICES. All notices under this Agreement or with respect thereto shall be
in writing and deemed received when delivered personally, by express courier
service (i.e., Federal Express, DHL, etc.) or by telefaxing to the addresses set
forth herein, assuming the sender retains some confirmation of delivery. All
notices mailed through the U.S. mail, postage pre-paid, first class, to the
addresses set forth herein shall be deemed received the third business day after
deposit in the U.S. mail.
B-10 FURTHER DOCUMENTS. Each party agrees to execute, deliver and/or file any
and all further instruments which the other party may deem necessary to carry
out the purposes of this Agreement.
B-11 PUBLICITY. Each party shall have the right to reference this Agreement and
the relationship established hereby and use the other party's name in publicity
and press materials related to its Site; however, any use of the other party's
trademarks or logos in such materials will be subject to such other party's
prior written approval, not to be unreasonably withheld.
Exhibit "B" - Page 2
<PAGE>
B-12 MISCELLANEOUS PROVISIONS
a) Severability. In the event any provision of this Agreement shall be
found to be contrary to any law or regulation of any federal, state or municipal
administrative agency or body, the other provisions of this Agreement shall not
be affected thereby but shall notwithstanding continue in full force and effect.
b) Attorney's Fees. If any legal action or other proceeding is brought
with respect to the subject matter of this Agreement, its enforcement or as a
result of a breach, default or misrepresentation in connection with any of the
provisions of this Agreement, the successful or prevailing party shall be
entitled to recover reasonable attorneys' fees and other costs incurred in such
action or proceeding, in addition to any other relief to which such party may be
entitled.
c) Non-Waiver. No waiver by either party hereto of any breach or
default by the other party shall be construed to be a waiver of any other breach
or default by such other party. Resort to any remedies referred to herein shall
not be construed as a waiver of any other rights and remedies to which either
party is entitled under this Agreement or otherwise, nor shall an election to
terminate be deemed an election of remedies or a waiver of any claim for damages
or otherwise.
d) Entire Agreement. This Agreement constitutes the entire
understanding between the parties with respect to the subject matter hereof and
all prior understandings, whether oral or written, have been merged herein and
are superseded hereby. This Agreement may not be altered or modified except in
writing signed by both parties hereto. Without limiting the foregoing, it is
specifically agreed that no terms contained on any payment documentation
(regardless of origin) such as invoices, purchase orders, etc., shall in any way
effect the terms of this Agreement.
e) Governing Law. Regardless of the place of execution or performance,
this Agreement shall be governed, construed and enforced in accordance with the
laws of the State of Georgia applicable to agreements entered into and to be
wholly performed therein, and Sandbox hereby consents and agrees to the
nonexclusive jurisdiction of the courts of the State of Georgia and United
States courts located in the State of Georgia in connection with any suit,
action or proceeding brought by Sandbox arising out of or related in any manner
to this Agreement. Each party agrees that service of process by registered mail
return receipt shall be effective service of the same for purposes of enforcing
rights under this Agreement and that such service shall have the same effect as
personal service within the State and result in jurisdiction over the party in
the appropriate forum.
f) Third Party Beneficiaries. This Agreement is not for the benefit of
any third party and shall not be deemed to give any right or remedy to any third
party whether referred to herein or not.
g) Headings. Paragraph headings as used in this Agreement are for
convenience only and are not a part hereof, and shall not be used in any manner
to interpret or otherwise modify any provision of this Agreement.
h) Effectiveness. This Agreement shall not be effective until fully
executed and delivered by the duly authorized representatives of both parties
hereto.
i) Survival. All representations, warranties and indemnities shall
survive the execution, delivery, suspension, expiration and/or termination of
this Agreement or any provision hereof.
END OF STANDARD TERMS
---------------------
AND CONDITIONS
--------------
Exhibit "B" - Page 3
<PAGE>
SCHEDULE 1
CONTRACTOR GAMES/SERVICES
The parties agree that the functionality and quality for each Game
shall be determined by the mutual agreement of the parties; however, it is
expressly agreed that the football, basketball (professional and, as applicable,
college version) and baseball Games will have a minimum of 2 to 3 tiers of core
games, targeting the hard-core fantasy gamer as well as the interested but less
committed player. The number and complexity of hockey and golf tiers will be
determined by mutual agreement of the parties taking into account market
acceptance of those Games. Additional games, featuring advertiser site
integration may be developed by mutual agreement of the parties for distribution
to Site users; such additional games, if any, will be considered "Games" for
purposes of this Agreement.
Sandbox will provide all necessary functionality for each Game,
including without limitation, online team selection, team scoring summaries,
team rankings, league management, community management and rules and
regulations. Sandbox will guarantee continuous functionality of all elements of
each Game and will ensure the scalability of the infrastructure to handle
increased and significant traffic generated by the Site.
As between Sandbox and CNNSI, Sandbox shall be responsible for securing
any and all rights and making all payments necessary for the development and
distribution of the final Games as contemplated hereunder, including without
limitation, any rights required by the appropriate players' associations,
leagues, individuals and governing bodies. In addition, as and to the extent
approved by both parties, should any Game involve a contest, sweepstakes, prize,
fulfillment and/or similar elements, Sandbox shall assume sole responsibility
and liability therefor. Without limiting the generality of the foregoing, such
responsibility shall incur securing all prizes and performing all functions and
taking all actions necessary to ensure compliance with applicable laws, rules
and regulations (e.g., development and filing of applicable rules, payment of
fees, registrations, posting of any bonds, fulfillment, etc.).
By mutual agreement, the parties may elect to charge users of the Game
Site a fee for certain elements of the Game (e.g., a fee payable for teams
beyond the initial team selection generally available for each Game). If any
such fee is assessed on users, the parties shall split all net revenue derived
therefrom, *, with Sandbox responsible for establishing and operating a mutually
agreeable online payment and collection system. Should such a subscription model
result in additional fees payable to any third party content provider for the
Game Site, such fees shall be approved in advance by both parties and deducted
from gross subscription revenues before calculating and paying the net amount.
* Confidential information has been omitted and filed separately with the
Commission.
Exhibit 10(o)
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1993, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
STOCK SUBSCRIPTION WARRANT
to Purchase 20,000 Shares of the
Common Stock, $.001 Par Value, of
SANDBOX ENTERTAINMENT CORPORATION,
a Delaware corporation (the "Company")
DATE OF INITIAL ISSUANCE: As of June 20, 1997
THIS CERTIFIES THAT for value received, CNNSI, a division of Cable News
Network, Inc., or its registered assigns (hereinafter called the "Holder") is
entitled to purchase from the Company, at any time during the Term of this
Warrant, Twenty Thousand (20,000) shares of common stock, $.001 par value, of
the Company (the "Common Stock"), at the Warrant Price, payable in lawful money
of the United States of America, to be paid upon the exercise of this Warrant.
The exercise of this Warrant shall be subject to the provisions, limitations and
restrictions herein contained and may be exercised in whole or in part.
1. Definitions. For all purposes of this Warrant, the following terms
shall have the meanings indicated:
Common Stock shall mean the Company's authorized Common Stock, $.001 par value
as constituted at the date of this Warrant.
Term of this Warrant shall mean the period beginning on the date of initial
issuance hereof and ending thirty (30) days after termination of that certain
Co-Branding and Marketing Agreement dated June 20, 1997, by and between Holder
and Company, provided that if such Agreement is terminated by Holder due to an
uncured breach of such Agreement by the Company, then the term of this Warrant
shall end on the first anniversary of such termination.
Warrant Price shall mean Two Dollars ($2.00) per share, subject to adjustment in
accordance with Section 5 and Section 10.
Warrant Shares shall mean the shares of Common Stock purchased or purchasable by
the Holder of this Warrant upon exercise hereof.
<PAGE>
2. Exercise of Warrant. The Warrant shall be exercised, if at all, only
as follows:
(a) The purchase rights represented by this Warrant are
exercisable by the Holder at any time and from time to time at and after the
date of initial issuance hereof and prior to the expiration of the term of this
Warrant. To exercise this Warrant in whole or in part, the Holder shall deliver
to the Company at its principal office, at any time and from time to time during
the Term of this Warrant: (i) the notice of exercise in the form attached hereto
as Exhibit A, (ii) cash, certified or official bank check payable to the order
of the Company, wire transfer of funds to the Company's account, or the
surrender of evidence of any indebtedness of the Company to the Holder (or any
combination of the foregoing) in the amount of the Warrant Price for each share
being purchased, and (iii) this Warrant. Each exercise of this Warrant shall be
deemed to have been effected immediately prior to the close of business on the
day on which this Warrant shall have been surrendered to the Company as provided
above. At such time, the person or persons in whose name or names any
certificates for Warrant Shares shall be issuable upon such exercise shall be
deemed to have become the holder or holders of record of the Warrant Shares
represented by such certificates.
(b) Notwithstanding any contrary provisions in this Warrant,
if the Current Market Price (as defined in Section 2(c) below) exceeds the
Warrant Price at the date immediately preceding the date of exercise of this
Warrant, instead of exercising this Warrant as described in Section 2(a) above,
the Holder may elect to receive Warrant Shares equal to the value of this
Warrant (or the portion thereof being exercised), by delivering to the Company
at its principal office, at any time and from time to time during the Term of
this Warrant: (i) the notice of exercise in the form attached hereto as Exhibit
A, and (ii) this Warrant, in which event the Company shall issue to the Holder a
number of Warrant Shares calculated using the following formula:
WS = WCS x (CMP-WP)
-------------------
CMP,
where WS = the number of Warrant Shares to be issued to the Holder,
WCS = the number of Warrant Shares purchasable under the Warrant,
or if only a portion of the Warrant is being exercised, the
portion of the Warrant being exercised at the date of such
calculation,
CMP = the Current Market Price (as defined in Section 2(c) below)
at the date of such calculation, and
WP = the Warrant Price, as adjusted to the date of such
calculation.
(c) For the purpose of any calculation made pursuant to this
Section 2, the "Current Market Price" at any date of one share of Common Stock
shall be deemed to be the
2
<PAGE>
average of the daily closing bid and asked prices for the Common Stock quoted in
the Over-The-Counter Market Summary or the last reported sale price of the
Common Stock or the closing price quoted on the NASDAQ National Market System or
on any exchange on which the Common Stock is listed, whichever is applicable, as
published in the appropriate edition of the Wall Street Journal for the five (5)
trading days immediately prior to the date of exercise of this Warrant;
provided, however, that if the Common Stock is not traded in such manner that
the quotations referred to in this Section 2(c) are available for the period
required hereunder, the Current Market Price shall be the fair market value of
the Common Stock, as agreed to by the Company and the Holder. The parties hereto
hereby agree that any dispute or controversy arising out of, relating to, or
concerning the Current Market Price, shall be settled by arbitration to be held
in Phoenix, Arizona. Either party may give written notice of such dispute or
controversy to the other party. Except as provided in this Warrant, the
arbitration shall be in accordance with the rules then in effect of the American
Arbitration Association. The arbitrator shall have the jurisdiction to hear and
rule on pre-hearing disputes and is authorized to hold pre-hearing conferences
by telephone or in person, as the arbitrator deems necessary. The arbitrator may
grant injunctions or other relief in such dispute or controversy. The decision
of the arbitrator shall be final, conclusive and binding on the parties to the
arbitration. Judgment may be entered on the arbitrator's decisions in any court
having jurisdiction. Each party shall pay one-half of the costs and expenses of
such arbitration, and each shall separately pay for individual counsel fees and
expenses. Notwithstanding the foregoing, in the event the Warrant is exercised
in connection with the Company's initial public offering of Common Stock, the
fair market value per share shall be the per share offering price to the public
of the Company's initial public offering.
(d) Each certificate for Warrant Shares shall bear the
following legend (and any additional legend required by (i) any applicable state
securities laws, (ii) any securities exchange upon which such Warrant Shares
may, at the time of such exercise be listed) on the face thereof, unless at the
time of exercise, such Warrant Shares shall be registered under the Securities
Act of 1933, as amended (the "Securities Act"), (iii) are sold to the public
pursuant to Securities and Exchange Commission ("SEC") Rule 144, or (iv) become
eligible for sale under SEC Rule 144(k);
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION THEREFROM UNDER SAID
ACT AND APPLICABLE STATE SECURITIES LAWS."
3. Covenants As to Common Stock. The Company covenants and agrees that:
(i) all shares of Common Stock that may be issued upon the exercise of this
Warrant will, upon issuance, be validly issued, fully paid and nonassessable,
and free from all taxes, liens and charges with respect to the issue thereof;
(ii) it will pay when due and payable any and all federal and state taxes (other
than federal or state income taxes, if any, which shall remain Holder's
responsibility)
3
<PAGE>
that may be payable in respect of the issue of this Warrant or any Common Stock
or the Warrant Shares; (iii) it will at all times have authorized and reserved,
free from preemptive rights, a sufficient number shares of Common Stock to
provide for the exercise of the rights represented by this Warrant; (iv) if any
shares of capital stock to be reserved for the purpose of the issuance of shares
upon the exercise of this Warrant require registration with or approval of any
governmental authority under any federal or state law before such shares may be
validly issued or delivered upon exercise, then the Company shall in good faith
and as expeditiously as possible endeavor to secure such registration or
approval, as the case may be; and (v) if and so long as the Common Stock
issuable upon the exercise of this Warrant is listed on any national securities
exchange, the Company, will, if permitted by the rules of such exchange, list
and keep listed on such exchange, upon official notice of issuance, all shares
of such Common Stock issuable upon exercise of this Warrant.
4. Adjustment of Number of Shares. Upon each adjustment of the Warrant
Price as provided in Section 5 below, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest 1/10th of a share) obtained by multiplying the
Warrant Price in effect immediately before such adjustment by the number of
shares purchasable pursuant hereto immediately before such adjustment, and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
5. Adjustment of Warrant Price. The Warrant Price shall be subject to
adjustment from time to time as follows:
(a) If, at any time during the term of this Warrant, the
number of shares of Common Stock outstanding is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split-up of shares of
Common Stock, then, following the record date fixed for the determination of
Holders of Common Stock entitled to receive such stock dividend, subdivision or
split-up, the Warrant Price shall be appropriately decreased in proportion to
such increase in outstanding shares.
(b) If, at any time during the term of this Warrant, the
number of shares of Common Stock outstanding is decreased by a combination of
the outstanding shares of Common Stock, then, following the record date for such
combination, the Warrant Price shall appropriately increase in proportion to
such decrease in outstanding shares.
(c) All calculations under this Section 5 shall be made to the
nearest cent or to the nearest 1/10th of a share, as the case may be.
(d) If the Company proposes to take any action of the types
described in Section 5(a) or (b), the Company shall forward at the same time and
in the same manner, to the Holder of this Warrant, such notice, if any, that the
Company shall give to the Holders of capital stock of the Company.
4
<PAGE>
6. Transfers. The Company may deem and treat the person in whose name
this Warrant is registered as the Holder and owner hereof. Subject to the
provisions of Section 11 hereof, this Warrant and all rights hereunder are
transferable, in whole or in part.
7. Mergers, Consolidations, Sales. In the case of any proposed
consolidation or merger of the Company with another entity, or the proposed sale
of all or substantially all of its assets to another person or entity, or any
proposed reorganization or reclassification of the capital stock of the Company,
then, as a condition of any such consolidation, merger, sale, reorganization or
reclassification, lawful and adequate provision shall be made pursuant to which
the Holder of this Warrant shall thereafter have the right to receive upon the
basis and upon the terms and conditions specified herein, in lieu of the shares
of Common Stock of the Company immediately purchasable hereunder, such shares of
stock, securities or assets as may, by virtue of such consolidation, merger,
sale, reorganization or reclassification, be issued or payable with respect to
or in exchange for the number of shares of such Common Stock purchasable
hereunder immediately before such consolidation, merger, sale reorganization or
reclassification. The Company shall forward at the same time and in the same
manner, to the Holder of this Warrant, such notice, if any, that the Company
shall give to the Holders of capital stock of the Company with respect to any
proposed transaction described above or any distribution of assets of the
Company in dissolution or liquidation, or any extraordinary dividend or other
distribution on its Common Stock except out of earned surplus or by way of a
stock dividend payable in shares of its Common Stock. This Warrant shall be
binding upon any corporation or other person or entity succeeding to the Company
by merger, consolidation or acquisition of all or substantially all of the
Company's assets.
8. Lockup Letter. Holder agrees to execute and deliver to the
underwriters in connection with any Company-initiated firm commitment
underwritten offering and registration a "lock-up" letter requested, if at all,
by such underwriters, regarding limitations on the transfer by Holder of Common
Stock for a period after effectiveness of such registration provided such
"lock-up" letter is on the same terms and conditions as are requested by the
underwriters from all other selling shareholders; and provided, further, that
any such limitations shall not exceed a period of 180 days from the date of the
effectiveness of such registration.
9. Notices. Any notice or other document required or permitted to be
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at One CNN Center, Box 105366, Atlanta, GA
30348-5366, Attention: Steve Zales, with a copy to Donna Lewis, Esquire, at the
same address, or to such other address as shall have been furnished to the
Company in writing by the Holder. Any notice or other document required or
permitted to be given or delivered to the Company shall be delivered at or sent
by registered or certified mail to, the Company at 2231 East Camelback Road,
Suite 324, Phoenix, AZ 85016, or to such other address as shall have been
furnished in writing to the Holder by the Company. Any notice so addressed and
mailed by registered or certified mail shall be deemed to be given when so
mailed. Any notice so addressed and otherwise delivered shall be deemed to be
given when actually received by the addressee.
5
<PAGE>
10. Representations and Warranties of Company. Company represents and
warrants to Holder as follows:
(a) Organization and Standing; Charter and Bylaws. Company is
a corporation duly organized and existing under and by virtue of the laws of the
State of Delaware and is in good standing under such laws. Company has requisite
corporate power and authority to own its property and to carry on its business
as presently conducted or as proposed to be conducted.
(b) Corporate Power. Company has all requisite legal and
corporate power to sell and issue this Warrant to Holder and in all other
respects to carry out and perform its obligations under this Agreement.
(c) Authorization. All corporate action on the part of Company
necessary for the authorization, execution, and delivery of this Warrant, and
performance of all of Company's obligations hereunder, have been taken.
(d) Corporate Law Status. The Warrant is validly issued, fully
paid and non-assessable, and is free and clear of all liens, charges,
restrictions, claims and encumbrances imposed by or through any act or omission
on the part of Company. The issuance, sale or delivery of the Warrant and
Warrant Shares are not subject to any preemptive right of stockholders of
Company or to any right of first refusal or other right in favor of any person,
that has not been waived. The Warrant Shares, upon issuance in accordance
herewith, will be validly issued, fully paid and non-assessable, and will be
free and clear of all liens, charges, restrictions, claims and encumbrances
imposed by or through any act or omission on the part of Company.
(e) Validity. The Warrant has been duly executed and delivered
by Company and constitutes the legal, valid and binding obligation of Company,
enforceable in accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditor's rights generally, and
except as enforceability may be subject to general principles of equity, whether
applied in a court of equity or at law or by an arbitration panel.
(f) Capitalization. The authorized capital stock of the
Company is set forth on Exhibit A to this Warrant attached hereto. All issued
and outstanding shares of the Company listed therein have been duly authorized
and validly issued and are fully paid and nonassessable. The number of shares of
Series A Preferred Stock and Common Stock that are subject to options, warrants
or other rights to acquire the capital stock of the Company are as set forth on
such Exhibit.
11. Representations and Warranties of Holder. Holder represents and
warrants to Company, and where so stated, promises as follows:
6
<PAGE>
(a) Unregistered Securities. Holder understands that the
Warrant has not been registered under the Securities Act of 1933 or any state
securities laws (collectively, "Securities Laws") in reliance upon an exemption
from registration accorded for nonpublic offerings. Holder further recognizes
that the Warrant may not be sold unless it and the transaction in which it is to
be sold have been registered under the Securities Laws or an exemption from
registration is available for such sale. Holder accepts that the Warrant will
bear a legend to that effect. Further, Holder recognizes that Company has made
no representations as to registration of the Warrant under the Securities Laws
and that no registration is anticipated ever to occur.
(b) Investment Intent. Holder is acquiring the Warrant for its
own account for investment and not with a view to resale or distribution. The
Holder promises that it will not sell, hypothecate, transfer or otherwise
dispose of the Warrant, or attempt so to do, unless it has been registered under
the Securities Laws or, in the opinion of counsel reasonably acceptable to
Company and its counsel, an exemption from registration is available.
(c) Negotiation; Access to Information. The terms of Holder's
purchase of the Warrant were established by negotiations between Holder and
Company's representative, and in connection therewith, Holder was given access
to the relevant information it requested concerning Company's condition and
operations, and the opportunity to ask questions of and receive answers from
Company's representatives. Holder is knowledgeable and experienced in financial
and business matters and, on the basis of the information it received concerning
Company's condition and operations, Holder is in a position to make an informed
investment decision concerning its investment in the Warrant and the risks
attending such investment. Further, in light of its financial position, Holder
is able to bear the economic risks of investment in the Warrant.
(d) Legends; Stop Transfer Orders. Holder hereby consents and
agrees that Company may imprint on any certificate evidencing the Warrant or any
of the Warrant Shares an appropriate legend or notification to the effect that
such shares are not freely transferable and may be transferred only in
compliance with applicable securities laws. Holder further consents and agrees
that Company may give appropriate "stop order" instructions in this regard to
any transfer agent for the Warrant or the Warrant Shares.
(e) Compliance. Holder hereby expressly promises not to offer
for sale or sell the Warrant or any of the Warrant Shares, or any interest
therein, except in compliance with the Securities Act of 1933, as amended, and
other applicable securities laws and regulations, including those of the State
of Arizona, if applicable.
12. Delivery to Holder. As promptly as practicable after the exercise
of this Warrant in whole or in part, and in any event within 10 days thereafter,
the Company at its expense will
7
<PAGE>
cause to be issued in the name of, and delivered to, the Holder, or as such
Holder (upon payment by such Holder of any applicable transfer taxes) may
direct:
(a) a certificate or certificates for the number of Warrant
Shares to which such Holder shall be entitled, and
(b) in case such exercise is in part only, a new warrant or
warrants (dated the date hereof) of like tenor, calling in the aggregate on the
face or faces thereof for the number of such shares called for on the face of
this Warrant minus the number of such shares purchased by the Holder upon such
exercise as provided in Section 2(a) above.
13. Exchange of Warrants. Upon the surrender by the Holder of any
Warrant or Warrants, properly endorsed, to the Company, the Company will,
subject to the provisions of Section 11(a) of this Warrant, issue and deliver to
or upon the order of such Holder, at the Company's expense, a new warrant or
warrants of like tenor, in the name of such Holder or as such Holder may direct,
calling in the aggregate on the face or faces thereof for the number of shares
of Common Stock called for on the face or faces of the Warrant or Warrants so
surrendered.
14. Replacement of Warrants. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and (in case of loss, theft or destruction) upon delivery of an
indemnity agreement (with surety if reasonably required) in an amount reasonably
satisfactory to the Company, or (in the case of mutilation) upon surrender and
cancellation of this Warrant, the Company will issue, in lieu thereof, a new
Warrant of like tenor.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer as of this 20th day of June, 1997.
THE COMPANY:
ATTEST: SANDBOX ENTERTAINMENT CORPORATION
By: /s/ James A. Layne By: /s/ Chad M. Little
------------------------------ ------------------------
Its Secretary Its President
ACCEPTED AND AGREED:
CNNSI, a division of Cable News Network, Inc.
By: /s/
-----------------------------
Its: General Manager
------------------------
8
<PAGE>
FORM OF NOTICE OF EXERCISE
[To be signed only upon exercise of the Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
1. The undersigned hereby exercises the right to purchase shares of
Common Stock that the undersigned is entitled to purchase by the terms of the
within Warrant according to the conditions thereof, and herewith makes payment
of the Warrant Price of such shares in full. All shares to be issued pursuant
hereto shall be issued in the name of and the initial address of such person to
be entered on the books of the Company shall be:
_______________________________________________________________________________.
The shares are to be issued in certificates of the following denominations:
_______________________________________________________________________________.
2. The undersigned hereby represents that the shares of the Company's
Common Stock to be delivered to it pursuant to the above-mentioned exercise of
the Warrant are being acquired by the undersigned as an investment and not with
a view to, or for sale in connection with, the distribution of any such shares.
[This paragraph 2 is not applicable if the Common Stock being acquired has been
registered under the Securities Act of 1933, as amended.]
__________________________________
[Type Name of Holder]
By: ___________________________
Title: ___________________________
Date: ___________________________
<PAGE>
EXHIBIT A
SANDBOX ENTERTAINMENT CORPORATION
Capitalization Schedule
As of July 7, 1997
I. AUTHORIZED CAPITALIZATION
Total Common Stock, $.001 par value: 10,000,000
Total Series A Convertible Preferred Stock, $.001 par value: 3,500,000
----------
Total 13,500,000
II. OUTSTANDING*
Total Common Outstanding 3,136,429
Total Preferred Outstanding 1,981,250
Total Outstanding 5,117,679
Total Warrants/Options Outstanding 1,431,616
---------
Total Common Outstanding-Fully Diluted 6,549,295
*Does not include warrants to be issued to CNNfn or CNNSI.
Exhibit 10(p)
Source Code License Agreement
This Source Code License Agreement ("this Agreement") entered into by INFO
Enterprises, Inc., having its executive offices at 426 North 44th Street, Suite
250, Phoenix, Arizona 85008 ("INFO"), and TRACER Design, Inc. ("Licensee") and
effective as of the date of the latest signature hereto ("Effective Date").
WHEREAS, INFO agrees to license to Licensee and Licensee agrees to license from
INFO the Source Code identified on the Schedule of Programs.
NOW THEREFORE, the parties mutually agree as follows:
1. Definitions
"Software" means the computer program or programs in source code or
binary code form listed in the Schedule of Programs.
2. Grant of License
INFO grants to Licensee a non-exclusive and transferable license, with
the right to sublicense, the Software listed on the Schedule of Programs.
3. Payment
A. Fees. The license fee applicable to the Software is a one time
fee of $25,000.
B. Payment of License Fee. The License fee of $25,000 is due upon
execution and delivery hereof.
C. Taxes. Licensee agrees to pay all license fees, assessments,
sales, use, personal property, excise and other taxes,
together with any penalties or interest thereon on either INFO
or Licensee upon or with respect to the Software while the
Software are subject to this License (excluding those taxes on
the net income of INFO).
4. Software Remains INFO's Property
A. Ownership. Title to the Software, all copies thereof, and all
rights therein, including all rights, title, and interest in
patents, copyrights, trade secrets and any other intellectual
property, shall remain vested in INFO. INFO shall acquire no
rights or title of any kind to any modifications of the
Software made by or for Licensee or a Sub-Licensee, which
shall own all rights and title therein. INFO shall have no
obligation to provide to Licensee any updates or modifications
made by or for it.
B. Valuable Proprietary Information. Licensee acknowledges INFO's
representation that the Software contains valuable proprietary
information and that unauthorized dissemination of the
Software could cause irreparable harm. Therefore, Licensee and
INFO agree to hold the Software in confidence and will take
any appropriate action by instruction, agreement or
<PAGE>
Source Code License Agreement
02/23/96
Page 2
otherwise, with any person permitted access to the Software so
as to enable Licensee or INFO, as applicable, to hold the
Software in confidence using the same degree of care as
Licensee or INFO, as applicable, uses for the protection of
its own proprietary software, but in no event less than
reasonable care, and to otherwise satisfy its obligations
under this Agreement.
C. Proprietary Markings. Licensee agrees not to alter, remove, or
destroy, any patent, copyright, trademark, trade secret or
proprietary notices, legends, or markings placed upon or
contained in the Software.
5. Right to Copy
Licensee shall have the unrestricted right to modify and copy the
Software, subject to Section 4 ( C ) above.
6. Trademarks and Service Marks
7. Term and Termination
A. Term. The term of this Agreement shall be perpetual unless
terminated under the provisions in section 7B hereinafter.
B. Termination. This Agreement may be terminated by Licensee upon
thirty (30) days prior written notice. INFO may terminate this
Agreement if Licensee is in default of any of the terms and
conditions of this Agreement and fails to cure such default
within thirty (30) days prior written notice, or in the event
Licensee files or has filed against any bankruptcy,
insolvency, or receivership proceeding.
C. Termination Certificate. In the event a termination of this
Agreement:
a) Licensee shall promptly return to INFO or certify to
the destruction of the original and all copies, in
whole or in part, in any form, of the Software;
b) INFO and Licensee shall promptly return to each other
or certify to the destruction of confidential and
proprietary information of the other which is in
tangible form and to which neither has a right of
retention; and
c) Any sublicenses granted by Licensee prior to such
termination shall nevertheless remain in full force
and effect.
8. Maintenance
<PAGE>
Source Code License Agreement
02/23/96
Page 3
INFO shall not be responsible for maintenance or field service of the
Software or derivative versions under this Agreement.
9. Warranty and Disclaimer
A. INFO DOES NOT WARRANT THAT THE FUNCTIONS CONTAINED IN THE
SOFTWARE WILL MEET LICENSEE'S REQUIREMENTS OR THAT THE
OPERATION OF THE SOFTWARE WILL BE UNINTERRUPTED OR ERROR FREE.
B. NO OTHER WARRANTIES, WHETHER EXPRESS, IMPLIED, OR STATUTORY,
INCLUDING IMPLIED WARRANTIES OR MERCHANTABILITY OR FITNESS FOR
PARTICULAR PURPOSE, ARE GRANTED TO LICENSEE.
10. Patent and Copyright Indemnity
A. INFO agrees that it will defend any suit or proceeding brought
against Licensee and will pay all damages and costs finally
awarded in any such suit or proceeding, insofar as such suit
or proceeding is based on a claim that the Software infringes
any patent, copyright or trade secret of the United States,
provided that INFO is notified promptly by Licensee in writing
of any such claim and at its expense is given full and
complete authority (including settlement authority, provided
that INFO shall have no authority to obligate Licensee in any
way), information and assistance by Licensee for such defense.
B. In the event that the use of the Software is enjoined as a
result of such suit, or, if in the opinion of INFO, the
Software is likely to become the subject of a claim of
infringement of a patent, copyright, or trade secret of the
United States, INFO at its own election and expense shall (i)
procure for Licensee the right to continue to use the
Software; (ii) modify or replace the Software so that it
becomes non-infringing while giving equivalent performance; or
at INFO's sole election, (iii) receive back the Software and
refund to Licensee the license fee paid by Licensee.
C. INFO shall not indemnify Licensee if any infringement or claim
is based upon (i) Software developed at Licensee's request and
in accordance with Licensee's specifications; (u)
modifications by Licensee or Sub-Licensee of the Software if
the Software in nonmodified form is noninfringing; (iii) the
interconnection or use of the Software in combination with
equipment or software if the Software standing alone would not
be infringing.
11. Limitation of Liability
IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR INDIRECT,
INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS LICENSE
AGREEMENT, INCLUDING INFRINGEMENT CLAIMS, FOR THE EXISTENCE,
<PAGE>
Source Code License Agreement
02/23/96
Page 4
FURNISHING, FUNCTIONS, OR LICENSEE'S USE OF THE SOFTWARE EVEN IF THE
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
12. Miscellaneous
A. Force Majeure. A party shall not be liable for non-performance
of this Agreement, nor construed to be in default hereunder,
to the extent to which the non-performance or default is
caused by events or conditions beyond that party's control,
and provided that the party gives prompt notice of the event
or condition and makes all reasonable efforts to perform.
B. Assignment. This Agreement and the rights granted hereunder
may be assigned by either party without the prior written
consent of the other party.
C. Risk of Loss. If the Software is lost, damaged, or destroyed
by any cause during shipment from INFO to Licensee, INFO will
replace the Software and its storage media at no additional
charge or cost to the Licensee.
D. Export Restrictions. Licensee agrees that it will not, in any
form, export, reexport, resell, ship or divert, or cause to be
exported, reexported, resold, shipped or diverted, directly or
indirectly, the Software to any country for which the United
States Government or any agency thereof at the time of export
or reexport requires an export license or other governmental
approval without first obtaining such license or approval.
E. Severability. If any part of this Agreement is found to be
invalid or unenforceable, this Agreement shall be construed
and interpreted without reference to such part.
F. Choice of Law. This Agreement shall be governed in accordance
with the laws of the State of Arizona.
G. Mediation. Excluding any Intellectual Property Claims, the
parties agree that claims and disputes will be submitted to
non-binding mediation in Phoenix, Arizona, within ten (10)
days after a written request for mediation prior to initiation
of any formal legal process. Cost of mediation will be shared
equally.
H. Waiver. No term or provision hereof shall be deemed waived and
no breach excused unless such waiver or consent shall be in
writing and signed by the party claimed to have waived or
consented.
I. Notice. Whenever notice is required to be given in writing
hereunder, notice shall be deemed given when received by
express mail to the addresses set forth below. The parties
shall promptly notify each other in writing of any changes in
address.
<PAGE>
Source Code License Agreement
02/23/96
Page 5
TO INFO ENTERPRISES: TO LICENSEE:
INFO ENTERPRISES TRACER DESIGN, INC.
Attn: New Enterprises Attn: President
1303 E. Algonquin Rd. 2231 East Camelback, Suite 324
Schaumburg, IL 60196 Phoenix, AZ 85016
J. Headings. The headings used herein are intended solely for
ease of reference and are not intended to describe, construe,
or interpret this Agreement.
K. Relationship of the Parties. The relationship between the
parties to this Agreement is that of licensor and licensee.
This Agreement shall not be construed to create a relationship
of partners, brokers, employees, servants, or agents as
between the parties.
L. Confidentiality. If any information provided by one party is
considered confidential and proprietary, it shall require
execution of a separate Non-Disclosure Agreement.
13. Entire Agreement
This Agreement together with the Schedule of Programs, constitutes the
entire understanding of the parties hereto and supersedes any and all
prior or contemporaneous representations or agreements, whether written
or oral, between the parties, and cannot be changed or modified unless in
a writing signed by the parties hereto.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives as of the day and year of the last
signature below.
INFO ENTERPRISES, INC. LICENSEE
/s/ Chad M. Little
----------------------------
(Full Legal Name)
/s/ G. E. Korb /s/
------------------------------ ----------------------------
(Authorized Signature) (Authorized Signature)
Gregory E. Korb /s/Chad M. Little
------------------------------ ----------------------------
(Typed Name) (Typed Name)
Chief Operating Officer President
- ------------------------------------- ----------------------------------
(Title) (Title)
February 23,1996 February 23,1996
- ------------------------------------- ----------------------------------
(Date) (Date)
<PAGE>
Source Code License Agreement
02/23/96
Page 6
SCHEDULE OF PROGRAMS FOR SOURCE CODE LICENSE AGREEMENT
This Schedule of Programs for licensing the Software listed below is made and
entered into by INFO Enterprises, Inc. and the Licensee named below. The terms
and conditions of the Source Code License Agreement are incorporated into and
made a part of this Schedule of Programs. INFO agrees to license to Licensee and
Licensee agrees to license from INFO the Software listed below.
LICENSEE: TRACER Design. Inc.
------------------------------------
(Full Legal Name)
ADDRESS: 2231 East Camelback Road. Suite #324
------------------------------------
Phoenix. AZ 85016
------------------------------------
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION LICENSE FEE
- ------- ----------- -----------
<S> <C> <C>
1. Cyberhunt Intellectual Property Titles of Programs provided below: $25,000
club_clues. c chgpwd.create mklinks.sh
clue_updates get_form_info.create newsform
makeguess2db.c list_form_results.create newspost
makeguessform . c answers_it. create next
creatdb.sql forms_dt.create page
creatobjects.sh questions_dt.create page2
initializzedb.sh user_info_dt.create pagerform2
MakePrizeDisplay user_login_it.create prev
nextgame_form access.sql pwd2db.c
register_form accesslist.sh register.c
showprize.c comment.sql showebrc.c
showwinners.c dump.tables submitebrc.c
clubregister.c response.sh club_info.create
clubregister_form response.sql clues .create
cluepage response.sql.all prizes.create
clues.c usercomments.sh user_clues.create
confirm.c userresponse.sh activate_clue.create
found.c MakeNotice club_clues.create
mkclue.sh checklinks.sh clubregistration.create
showclue.c chgpwd clue_solved.create
list_forms.sql comment_form clue_status.create
answers.create cyberhunt_header clues_for_user.create
forms.create cyberhunt_footer enter_clue.create
question_type.create form getguess.create
questions.create hpage prize_report.create
services.create imagemap.c submitguess.create
user_info.create locate oicgi.c
adduseranswer.create mailform oicgi.h
adduserinfo.create mailto.c
adduserlogin.create mdy
</TABLE>
<PAGE>
Source Code License Agreement
02/23/96
Page 7
INFO ENTERPRISES, INC. LICENSEE
G. E. Korb /s/
------------------------------ ----------------------------
(Authorized Signature) (Authorized Signature)
Gregorv E. Korb Chad M. Little
------------------------------ ----------------------------
(Typed Name) (Typed Name)
Chief Operating Officer President
------------------------------ ----------------------------
(Title) (Title)
February 23, 1996 February 23, 1996
------------------------------ ----------------------------
(Date) (Date)
Exhibit 10(q)
LICENSE AGREEMENT
-----------------
This Agreement is made and entered into this 28th day of July, 1997, by
and between Sandbox Entertainment Corporation with offices at 2231 East
Camelback Road, Suite 324, Phoenix, AZ 85016 (hereinafter "Licensee"), and
NATIONAL FOOTBALL LEAGUE PLAYERS INCORPORATED, a corporation with offices at
2021 L Street, N.W., Washington, D.C. 20036 (hereinafter "Players Inc" or
"Licensor"). This Agreement shall be effective as of March 1, 1997.
1. REPRESENTATIONS.
(A) Players Inc represents that it is a licensing affiliate of the
National Football League Players Association ("NFLPA"); that the NFLPA has been
duly appointed and is acting on behalf of the football players of the National
Football League who have entered into a Group Licensing Authorization, either in
the form attached hereto as Attachment "A" or through the assignment contained
in Paragraph 4(b) of the NFL Player Contract, which have been assigned to
Players Inc; and that in such capacity Players Inc has the right to negotiate
this contract and the right to grant rights and licenses described herein.
Licensee acknowledges that Players Inc also on occasion secures authorization
for inclusion in Players Inc licensing programs from players who have not
entered into such Group Licensing Authorization, but who, nevertheless,
authorize Players Inc to represent such players for designated Players Inc
licensed programs.
(B) Players Inc makes no representation that it has the authority to
grant, nor does it grant herein, the right to utilize any symbols, insignias,
logos, or other identifying names or marks of the National Football League
(hereinafter "NFL") and/or any of its member clubs. Accordingly, it is
understood by the parties hereto that if likenesses of players are to be used by
Licensee in conjunction with any symbols, insignia, or logos of the NFL or any
of its member clubs, in the exercise of the License granted hereunder, it will
be the responsibility of Licensee to obtain such permission as may be necessary
for the use of such material from the NFL or the club(s) in question. Licensor
retains all rights not expressly and exclusively granted to Licensee hereunder.
2. GRANT OF LICENSE.
(A) Upon the terms and conditions hereinafter set forth, Players Inc
hereby grants to Licensee and Licensee hereby accepts the non-exclusive right,
license and privilege of utilizing the trademarks and names of Players Inc which
may be amended from time to time by Players Inc and the names, likenesses,
pictures, photographs, voices, facsimile signatures and/or biographical
information of the NFL players listed in Attachment "B", for product(s) in the
form of an on-line fantasy football game (hereinafter referred to as "the
licensed product(s)"). Provided, however, that the specific manner in which the
rights licensed hereunder are to be used on the licensed product(s) in question
shall require the prior written consent of Players Inc.
<PAGE>
(B) The rights, licenses and privileges granted by Players Inc
hereunder shall not constitute or be used by Licensee as a testimonial or an
endorsement of any product, service, or event by all or any of the players, or
by Players Inc. In the event Licensee is interested in securing an individual
player's personal endorsement, Licensee further agrees and acknowledges that
such endorsement will require the personal approval of the individual player and
approval of Players Inc and a separate payment to Players Inc. All contact with
such player or player's agent shall be made by Players Inc. Licensee further
agrees and acknowledges that any player who is committed individually by
contract for products or services competitive with those of Licensee may be
required to cease from further inclusion in this Agreement, provided, however,
that the use of such player for such products and services shall be on an
individual basis and shall not be combined with the use of five or more other
NFL players.
3. RETAIL LICENSE ONLY. The Grant of License set forth in Paragraph 2 of this
Agreement applies only to the manufacture and distribution of licensed
product(s) for retail sale, and shall not permit the use of licensed product(s)
as "premium items" to be included with non-licensed product(s), services or
events to promote the sale of such non-licensed product(s), services or events;
provided, however, that Licensee shall be permitted to promote the sale of
licensed product(s), subject to prior written approval by Players Inc and in a
manner consistent with the provisions of the Agreement. Any such promotion using
the licensed product(s) herein as premium items shall require a separate
agreement between Players Inc and Licensee or other sponsor of the promotion,
with separate terms and conditions, and nothing contained herein shall obligate
either Players Inc or Licensee to enter into such an agreement.
4. TERRITORY. Licensee shall have the right to utilize the rights granted
hereunder for distribution of the licensed product(s) in the following
territory: On-line.
5. TERM.
(A) The term of this Agreement shall extend from June 1, 1997 to
February 28, 1998 (hereinafter referred to as Original License Period) unless
terminated in accordance with the provisions hereof. Licensee may renew this
Agreement for a Second License Period from March 1, 1998 to February 28, 1999,
provided Licensee has faithfully fulfilled its obligations hereunder in the
Original License Period. Notice of desire to renew shall be given by Licensee no
later than January 1, 1998 in the Original License Period. Licensee may renew
this Agreement also for a Third-License Period from March 1, 1999 to February
29, 2000, provided Licensee has faithfully fulfilled its obligations hereunder
in the Second License Period. Notice of desire to renew shall be given by
Licensee no later than January 1, 1999 in the Second License Period.
(B) Licensee acknowledges and agrees that Licensee has and shall have
no right to extend or renew this Agreement beyond the term and renewal options,
if any, stated herein. No conduct by either Licensor or Licensee (including
without limitation, any approvals granted pursuant to Paragraph 12 hereof shall
create, imply or infer a new license agreement or an extension of the stated
term and renewal options, if any, of this
2
<PAGE>
Agreement, unless same is specifically set forth in a written agreement signed
by both Licensor and Licensee. Licensee's agreement that this Agreement is
subject to the term and renewal options, if any, stated herein, in all events
whatsoever, is a material inducement for Licensor to enter into this Agreement.
6. ROYALTY PAYMENT.
(A) Licensee agrees to pay Players Inc a guaranteed royalty of $5,000
for its use of the rights licensed hereunder for the Original License Period, a
guaranteed royalty of $5,000 for the Second License Period, if applicable, and a
guaranteed royalty of $5,000 for the Third License Period, if applicable. The
guaranteed royalty shall be paid as follows:
(i) For the Original License Period, $5,000 upon the execution
of this Agreement.
(ii) For the Second License Period, if applicable, $5,000 on
or before June 1, 1998.
(iii) For the Third License Period, if applicable, $5,000 on
or before June 1, 1999.
(B) Such guaranteed royalty payments shall be made by Licensee as
specified hereinabove whether or not Licensee uses the rights licensed
hereunder, and no part of such guaranteed payments shall be repayable to
Licensee.
(C) Licensee shall also pay to Players Inc an amount equal to Seven
Percent (7.0%) of the gross sales of the licensed product(s) covered by this
Agreement, less the guaranteed payments specified above for the applicable
License Period. Royalties shall be calculated on a quarterly basis and shall be
due as of the last day of each May, August, November, and February of this
Agreement and must be paid no later than fifteen (15) days following such due
dates. Gross sales shall be calculated based on the standard price(s) charged by
Licensee to the retailer directly or to the wholesaler in an arms length
transaction. Licensee shall transact no sale, the effect of which is to reduce
the royalty paid by Licensee to Players Inc. In addition to all other rights
contained in this Agreement, Players Inc shall be entitled to collect and
Licensee shall pay daily interest at the rate of one and one-half percent (1
1/2%) monthly, or the maximum interest permitted by law if less, on all
guarantee or royalty payments not timely made to Players Inc by Licensee.
7. PERIODIC STATEMENTS.
(A) Licensee shall furnish to Players Inc, no later than fifteen (15)
days following the last day of each May, August, November, and February of this
Agreement, a complete and accurate statement certified to be accurate by an
officer of Licensee, showing the number, description and gross purchase price,
of the licensed product(s) distributed by Licensee during the preceding
quarterly reporting period described in Paragraph 6(C)
3
<PAGE>
herein. Once in every twelvemonth period, Licensee shall furnish Players Inc
with a detailed statement certified by an officer of Licensee, showing the
number of gross sales of the licensed product(s) covered by this Agreement.
(B) Such statements shall be furnished to Players Inc whether or not
any of the licensed product(s) have been purchased during the reporting period
for which such statement is due. The receipt or acceptance by Players Inc of any
statement or of any royalty paid hereunder (or the cashing of any royalty check
paid hereunder) shall not preclude Players Inc from questioning the correctness
thereof at any time, and in the event any inconsistencies or mistakes are
discovered in connection therewith, they shall immediately be rectified and the
appropriate payment made by Licensee.
8. BOOKS AND RECORDS.
(A) For a period of two (2) years following the termination or
expiration of this Agreement, Licensee shall maintain accurate books and records
for itself and any subsidiary or affiliated entity with respect to its sale of
licensed product(s) under this Agreement. Said books and records shall be
subject to inspection and audit by Players Inc or its duly authorized
representative at reasonable times upon reasonable notice from Players Inc to
Licensee. In addition and similarly, Licensee shall cause any entity from which
it contracts for services or production of product to cause its books and
records to be available for audit and inspection by Players Inc to the extent
necessary to confirm the audit of Licensee. Licensee shall not interfere with
such inspections and audits in any way.
(B) The cost of such inspections and audits shall be paid by Licensee
if the result of such inspections and audits indicates a difference of 2% or
more, when compared to the statement certified to be accurate by an officer of
Licensee, as required by Paragraph 7 (A) of this Agreement, for the twelve month
period covered by such statement, or the cost of such inspections and audits as
the result of an inspection or audit performed by Players Inc as specified in
Paragraph 8(A) above shall be paid by Players Inc if such difference is less
than 2%.
(C) In the event any inconsistencies or mistakes are discovered as a
result of such inspections and audits, they shall immediately be rectified and
the appropriate payment made by Licensee.
9. PAYMENT AND NOTICES: All transactions under this Agreement, including without
limitation all payment of royalties and all notices, reports, statements,
approvals and other communications, shall be with or made payable in the name of
NATIONAL FOOTBALL LEAGUE PLAYERS INCORPORATED, 2021 L Street, N.W., Washington,
D.C. 20036, or its assignee where applicable. All correspondence, notices,
approvals and other communications to Licensee shall be with Sandbox
Entertainment Corporation, 2231 East Camelback Road, Suite 324, Phoenix, AZ
85016.
10. INDEMNIFICATION.
4
<PAGE>
(A) Licensee agrees that it will not during the term of this Agreement,
or thereafter, attack the rights of Players Inc in and to the trademarks or
names owned by or licensed to Players Inc or any of the rights licensed
hereunder as specified in Paragraph 2 of this Agreement, or in any way attack
the validity of this Agreement.
(B) Licensee further agrees to assist Players Inc. to the extent
necessary in the procurement of any protection or to protect any of the rights
conveyed hereunder, and Players Inc, if it so desires, may commence or prosecute
at its own expense any claims or suits in its own name or in the name of
Licensee or join Licensee as a party thereto. Licensee shall notify Players Inc
in writing of any infringement by others of the rights covered by this Agreement
which may come to Licensee's attention, and Players Inc shall have the sole
right to determine whether or not any action shall be taken on account of any
such infringement. Licensee shall not institute any suit or take any action on
account of any such infringement without first obtaining the written consent of
Players Inc to do so and Players Inc shall reasonably consider any such request.
(C) Licensee for its own acts hereby indemnifies Players Inc and
undertakes to defend Players Inc from and against any and all claims, suits,
losses, damages, and expenses (including reasonable attorney's fees and
expenses) arising out of the manufacture, marketing, sale, distribution, or use
of the licensed product(s) which are the subject of this Agreement. Licensee
agrees to obtain, at its own expense, general liability insurance, providing
adequate protection for Licensee and Players Inc against any such claims or
suits in amounts not less than Two Million Dollars ($2,000,000.00). Within
thirty (30) days from the date hereof, Licensee shall submit to Players Inc a
fully paid policy or certificate of insurance naming Players Inc as an insured
party, requiring that insurer will not terminate or materially modify such
without written notice to Players Inc at least twenty (20) days in advance
thereof.
(D) Players Inc hereby indemnifies Licensee and undertakes to defend
Licensee against, and hold Licensee harmless from any liabilities, losses,
damages, and expenses (including reasonable attorney's fees and expenses)
resulting from claims made or suits brought against Licensee based upon the use
by Licensee of the rights licensed in Paragraph 2 strictly as authorized in this
Agreement.
11. COPYRIGHT AND TRADEMARK NOTICES.
(A) Licensee shall prominently place or cause to be placed Licensor's
"PLAYERS INC (and design)" trademark (hereinafter "Licensor's Trademark") on the
licensed products and on packaging, wrapping, advertising (both print and
media), and any other material, including trade show booths and exhibits in
connection with such licensed product(s) that are publicly distributed or
relating to such licensed product(s).
(B) Licensor's Trademark appearing on the licensed product(s) and on
all materials in connection with the licensed product(s) distributed or relating
to such licensed product(s), shall appear precisely according to the
specifications set forth in Appendix B attached hereto, which may be amended
from time to time by Licensor, without variation,
5
<PAGE>
with the letters "TM", and upon notification by Players Inc, the letter R
enclosed within a circle. Further, Licensee shall provide to Licensor the date
of the first use of such licensed product(s) bearing Licensor's Trademark in
intrastate and interstate commerce.
(C) Additionally, Licensee shall imprint or cause to be imprinted the
following text on any such licensed product(s) and/or materials therefor:
"Officially Licensed Product of the
National Football League Players",
or
"Officially Licensed Product of
Players Inc"
The specific text imprinted shall be subject to Licensor's sole
discretion.
12. APPROVALS.
(A) Attachment "B" hereto shall be established and may be modified in
the following manner:
(i) Upon execution of this Agreement, and thereafter annually
by March 1 of each calendar year covered by this Agreement,
Licensee shall submit to Players Inc a proposed list of
players' names for inclusion in Attachment "B" for the
upcoming football season.
(ii) Players Inc shall respond to such submissions in writing
to Licensee, signifying approval or disapproval in the case of
each player's name so requested.
(iii) Licensee may submit requests in writing to Players Inc
for additions, deletions, or substitutions of players' names
contained in Attachment "B" and Players Inc shall respond to
such requests within a reasonable period of time.
(B) The Licensee agrees to furnish Players Inc free of cost for its
written approval as to quality and style, samples of artwork, plans, photographs
and any other representations of licensed product(s) produced by or for Licensee
(collectively hereinafter "artwork") and samples of each of the licensed
product(s), together with their packaging, hangtags, and wrapping material,
before their manufacture, sale or distribution, whichever occurs first, and no
licensed product(s) shall be manufactured, sold or distributed by the Licensee
without such prior written approval of such artwork and such sample licensed
product(s). Subsequent to final approval, a reasonable number of production
samples of licensed product(s) will periodically be sent to Players Inc to
insure quality control, and
6
<PAGE>
should Players Inc require additional samples for any reason, Players Inc may
purchase such at Licensee's cost.
Licensee shall also provide to Players Inc free of charge the
following:
(i) Prior to December 1 of each License Period for Players
Inc, one dozen complimentary copies of all licensed product(s)
produced for that License Period.
(C) Licensee may choose to use player names and/or likenesses to
promote licensed product(s) on or in any material pertaining to packaging,
hangtags, wrapping material, print ads, flyers, point-of-purchase displays,
press releases, catalogues, trade show booths and exhibits or any other written
material or medium, including but not limited to electronic or interactive use;
provided, however, that such use shall require the prior written approval of
Players Inc. The number of players included in any such use, if approved, shall
be a minimum of six, and shall be selected from Attachment "B". Player names
and/or likenesses so used shall be written or displayed with equal prominence.
(D) Licensee may choose to use player names and/or likenesses
(including, without limitation, action footage) in radio or television
commercials to promote licensed product(s); provided, however, that such use
shall require the prior written approval of Players Inc. The number of players
included in such commercials, if approved, shall be a minimum of six and shall
be selected from Attachment "B". The players used in such commercials shall be
shown with equal prominence. Licensee agrees to furnish Players Inc all scripts
and story boards for proposed radio and television commercials in connection
with the promotion of the licensed product(s), and the content of such scripts
and story boards shall require the prior written approval of Players Inc before
any commercials shall be made or shall be contracted for by Licensee.
(E) The use of player names and/or likenesses in accordance with this
Paragraph 12, in any radio or television commercials, print ads,
point-of-purchase displays, packaging, hangtags, wrapping material, press
releases, catalogues, flyers, trade show booths and exhibits or any other
written material or medium, including, but not limited to, electronic or
interactive use, to promote licensed product(s), shall require payment by
Licensee to Players Inc, separate from and in addition to any guarantees or
royalty payments contained in this Agreement. The amount of such payment shall
be subject to mutual agreement by Players Inc and Licensee. All contacts with
such players or their agents shall be made by Players Inc.
(F) In the event Licensee wishes to secure an individual player or
players to make appearances to promote licensed product(s) cr to autograph
licensed product(s), the selection of such player and the separate fee to
Players Inc for such player services shall be subject to mutual agreement
between Licensee and Players Inc. All contact with requested player or his
agents shall be made by Players Inc. Once the player has made the appearance or
performed the autograph service, payment shall be made immediately to Players
Inc. Any such payments shall be separate from and in addition to any royalties
7
<PAGE>
paid by Licensee under this Agreement. Once the selection of such player and
such separate fee have been agreed upon by Licensee and Players Inc, in the
event of cancellation of such appearance or autographing, Licensee shall
nevertheless be obligated to make such fee payment to Players Inc immediately
upon such cancellation.
13. NON-INTERFERENCE. Licensee agrees and acknowledges that it shall not secure
or seek to secure, directly from any player who is under contract or seeking to
become under contract to an NFL club, or from such player's agent, permission or
authorization for the use of such player's name, facsimile signature, image,
likeness, photograph or biography in conjunction with the licensed product(s)
herein.
14. GOODWILL.
(A) Licensee recognizes the great value of the goodwill associated with
the rights licensed in Paragraph 2 of this Agreement and acknowledges that such
goodwill belongs exclusively to Players Inc and that said trademarks, names and
rights licensed in Paragraph 2 of this Agreement have acquired secondary meaning
in the mind of the public.
(B) Licensee agrees that all elements (including all material of any
nature utilizing in any way the rights licensed hereunder, including but not by
way of limitation, all packages, cartons, point of sale material, newspaper and
magazine advertisements) of the licensed product(s) shall be of high standard
and of such style, appearance and quality as to be adequate and suited to the
best advantage and to the protection and enhancements of such rights; that the
marketing of the licensed product(s) will be conducted in accordance with all
applicable federal, state and local laws and any other governmental or
quasi-governmental laws or regulations of the United States, Canada or any other
country; and that the licensed product(s) and their exploitation shall be of
high standard and to the best advantage and that the same in no manner reflect
adversely upon the good name of Players Inc.
15. SPECIFIC UNDERTAKINGS OF LICENSEE.
(A) Licensee agrees that every use of the rights licensed hereunder by
Licensee shall inure to the benefit of Players Inc and that Licensee shall not
at any time acquire any title or interest in such rights by virtue of any use
Licensee may make of such rights hereunder.
(B) All rights relating to the rights licensed hereunder are
specifically reserved by Players Inc except for the License herein granted to
Licensee to use the rights as specifically and expressly provided in this
Agreement.
(C) Upon expiration or termination of this Agreement, all rights
granted hereunder shall immediately revert to Players Inc, and Licensee will
refrain from further use of such rights or any further reference thereto, direct
or indirect, except as provided in Paragraph 16(E) below. Licensee acknowledges
that its failure to cease the use of such
8
<PAGE>
rights at the termination or expiration of this Agreement will result in
immediate and irreparable damage to Licensor, and/or individual National
Football League player(s), and to the rights of any subsequent licensee(s).
(D) Licensee covenants that it will pay all awards to consumers
entitled to receive them according to the representations of Licensee and the
rules of the licensed product(s).
16. TERMINATION BY PLAYERS INC
(A) In the event Licensee does not commence in good faith to cause the
manufacture, distribution, and sale of the licensed product(s), in substantial
quantities on or before August 1, 1997, Players Inc, in addition to all other
remedies available to it shall have the option to terminate the License granted
hereunder upon written notice of such termination to Licensee.
(B) In the event Licensee files a petition in bankruptcy or is
adjudicated as bankrupt, or if a petition in bankruptcy is filed against
Licensee or if Licensee becomes insolvent, or makes an assignment for the
benefit of its creditors or an arrangement pursuant to any bankruptcy laws, or
if Licensee discontinues its business, or if a receiver is appointed for it or
its business, all rights granted hereunder, without notice, shall terminate
automatically upon the occurrence of any such event. In the event of such
termination, neither Licensee nor its receivers, representatives, trustees,
agents, administrators, successors, and/or assigns shall have any right to sell,
exploit or in any way deal with the rights granted hereunder or with any
licensed product(s), or any carton, container, packaging or wrapping material,
advertising, promotional or display material pertaining to any licensed
product(s).
(C) If Licensee shall violate any of its other obligations under the
terms of this Agreement, Players Inc shall have the right to terminate this
Agreement upon fifteen (15) days' notice in writing, and such notice of
termination shall become effective unless Licensee shall completely remedy the
violation within the fifteen (15) day period and shall provide reasonable proof
to Players Inc that such violation has been remedied. If this Agreement is
terminated under this paragraph, all royalties theretofore accrued shall become
due and payable immediately to Players Inc, and Players Inc shall not be
obligated to reimburse Licensee for any royalties paid by Licensee to Players
Inc.
(D) Failure to resort to any remedies referred to herein shall not be
construed as a waiver of any other rights and remedies to which Players Inc is
entitled under this Agreement or otherwise.
(E) Upon termination of this Agreement, Licensee shall have ninety (90)
days to dispose of and liquidate all inventory. This inventory shall not be
available to consumers after this ninety (90) day period expires. Such
disposition shall conform to this Agreement in all respects. Players Inc shall
have right to conduct a physical inventory at the time of termination if it so
elects.
9
<PAGE>
17. PARTNERSHIP. Nothing herein contained shall be construed to place Players
Inc and Licensee in the relationship of partners or joint venturers, and
Licensee shall have no power to obligate or bind Players Inc in any manner
whatsoever.
18. WAIVER AND/OR MODIFICATION. None of the terms of this Agreement shall be
waived or modified except by an express agreement in writing signed by both
parties. There are no representations, promises, warranties, covenants or
undertakings other than those contained in this Agreement, which represents the
entire understanding of the parties. No written waiver shall excuse the
performance of an act other than those specified therein. The failure of either
party hereto to enforce, or delay by either party in enforcing any of its rights
under this Agreement shall not be deemed a continuing waiver or modification
thereof and either party may, within the time provided by applicable law,
commence appropriate legal proceedings(s) to enforce any or all of such rights.
19. NON-ASSIGNABILITY. This Agreement and all rights and duties hereunder are
personal to Licensee and shall not, without written consent of Players Inc, be
assigned, mortgaged, sublicensed or otherwise encumbered by Licensee or by
operation of law to any other person, or entity. Upon any such attempted
unapproved assignment, mortgage, license, sublicense or other encumbrance this
Agreement shall terminate and all rights granted to Licensee hereunder shall
immediately revert to Players Inc. In addition, Players Inc may terminate this
Agreement, at its sole discretion, in the event that Licensee is merged,
consolidated, transfers all or substantially all of its assets, or implements or
suffers any material change in executive management or control, or upon any
transfer of more than twenty-five percent (25%) of its voting control. If, in
its sole discretion, Players Inc shall exercise such termination, all rights
granted to Licensee hereunder shall immediately revert to Players Inc.
20. CONSTRUCTION. This Agreement shall be governed by, and shall be construed in
accordance with the laws of the State of New York of the United States of
America. The parties consent to jurisdiction under the State of New York and
designate the courts of the State of New York as the venue for any dispute
arising out of, under or relating to this Agreement.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day
and date written first above.
The Foregoing is Acknowledged:
NATIONAL FOOTBALL LEAGUE SANDBOX ENTERTAINMENT
PLAYERS INCORPORATED CORPORATION
By: /s/ Douglas F. By: /s/ Mark Gorchoff
----------------------------- ----------------------------
Title: President Title: Chief Financial Officer
----------------------------- ----------------------------
11
<PAGE>
AMENDMENT TO LICENSE AGREEMENT
------------------------------
This Amendment is made and entered into as of this 28th day of July,
1997 by and between Sandbox Entertainment Corporation ("Licensee") and National
Football League
Players Incorporated ("Players Inc").
1. This Amendment shall serve as an amendment to the License
Agreement entered into by Licensee and Players Inc on July 28th,1997 (the
"License Agreement"). This Amendment shall be effective as of March 1, 1997 and
shall expire on February 28, 1998.
2. Licensee hereby reaffirms that Paragraph 13 of the License
Agreement, titled Non-lnterference, (hereinafter referenced as the
"Non-interference Clause") has been, and continues to be, a valid and binding
provision of the License Agreement. Nothing set forth in this Amendment shall be
construed in any way as a waiver, repudiation, or nullification of the
Non-lnterference Clause by Players Inc or Licensee.
3. In accordance with the settlement of an action brought by
the NFLPA against NFL Properties in Federal Court in The Southern District of
New York, styled National Football League Players Association v. National
Football League Properties, et al., 90 Civ. 4244 (MJL), Players Inc agrees that
Licensee may, pursuant to and without thereby violating the License Agreement,
manufacture, market, distribute, and sell the licensed product(s) for the
current license period utilizing the image, likeness, photograph, voice,
facsimile signature and/or biographical information of the members of the NFL
Quarterback Club listed in Exhibit A hereto in conjunction with the licensed
products; provided, however, that any licensed products produced by Licensee
which contain players listed on Exhibit A hereto are subject to the terms
contained in the License Agreement, including, but not limited to, Paragraph
12-- APPROVALS. All such licensed products must relate directly to the 1997
football season. NFL Properties has agreed, as part of the settlement of the
Properties action, to license the players listed on Exhibit A hereto to Licensee
on a royalty free basis.
4. Licensee shall pay the full royalties owed to Players Inc
in accordance with the License Agreement, including, without limitation,
royalties for any licensed products sold by Licensee that utilize the identities
of the players listed in Exhibit A hereto and, subject only to Paragraph 6 of
the License Agreement, shall make no deduction nor pro-ration, of those
royalties for any reason whatsoever.
5. Licensee expressly warrants and represents that prior to
inclusion in licensed products of the players listed on Exhibit A for the
current license period, it will obtain from NFL Properties, agent for the NFL
Quarterback Club, the nonexclusive right to utilize the image, likeness,
photograph, voices, facsimile signature and/or biographical information of the
players listed in Exhibit A hereto. To obtain such right Licensee must: (i) deal
directly with NFL Properties, on behalf of the NFL Quarterback Club; and (ii)
accept NFL Properties standard form licensing agreement for NFL Quarterback Club
<PAGE>
licenses; provided, however, that such form licensing agreement shall not
provide for or require Licensee to make any payment to any entity or person for
such right.
6. Licensee indemnifies Players Inc and undertakes to defend
Players Inc against, and hold Players Inc harmless from any liabilities, losses,
damages and expenses (including reasonable attorney's fees and cost of suit)
resulting from any and all claims, causes of action or suits brought against
Players Inc based upon the exercise by Licensee of the rights obtained by it to
manufacture, market and sell any licensed products utilizing the players listed
on Exhibit A hereto. Players Inc shall have the right to approve of counsel
selected pursuant to this Paragraph 6, which approval shall not unreasonably be
withheld.
7. Licensee agrees that it will continue to abide by all terms
of the License Agreement.
8. It is hereby agreed that to the extent that this Amendment
shall conflict with the License Agreement, the terms of this Amendment shall
govern. In all other respects, the parties hereto agree that the License
Agreement shall remain in full force and effect.
9. Each party hereto acknowledges: (i) that it is voluntarily
entering into this Amendment; (ii) that it has had the benefit of counsel of its
choice in connection with the negotiation and execution of this Amendment; and
(iii) that it has neither sought nor obtained any inducements or other
consideration beyond that which is contained herein.
10. This Amendment may not be amended, modified or altered
except by a writing executed by duly-authorized officers of each party.
11. This Amendment shall be governed by, and construed in
accordance with, the law of the District of Columbia. Any dispute or litigation
arising out of relating to this Amendment may be brought in the Superior Court
of the District of Columbia, which the parties hereby agree shall have
jurisdiction and venue over any such claim.
12. If any portion of this Amendment is deemed void or
unenforceable for any reason whatsoever, the remaining terms and conditions of
this Amendment shall remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day
and date written first above.
SANDBOX ENTERTAINMENT
CORPORATION
By: /s/ Mark Gorchoff
---------------------------------
Title: Chief Financial Officer
---------------------------------
NATIONAL FOOTBALL LEAGUE
PLAYERS INCORPORATED
By: /s/ Douglas F.
---------------------------------
Title: President
---------------------------------
<PAGE>
EXHIBIT A
NFL QUARTERBACK CLUB MEMBERS
BUFFALO BILLS INDIANAPOLIS COLTS NEW YORK JETS
- ------------- ------------------ -------------
Jim Kelly Jim Harbaugh Neil O'Donnell
CHICAGO BEARS JACKSONVILLE JAGUARS OAKLAND RAIDERS
- ------------- -------------------- ---------------
Erik Kramer Mark Brunell Jeff Hostetler
Rick Mirer Jeff George
CINCINNATI BENGALS MIAMI DOLPHINS PITTSBURGH STEELERS
- ------------------ -------------- -------------------
Jeff Blake Dan Marino Kordell Stewart
Boomer Esiason Bernie Kosar
DALLAS COWBOYS MINNESOTA VIKINGS SAN DIEGO CHARGERS
- -------------- ----------------- ------------------
Troy Aikman Randall Cunningham Junior Seau
Michael Irvin
Emmitt Smith
DENVER BRONCOS NEW ENGLAND PATRIOTS SAN FRANCISCO 49ERS
- -------------- -------------------- -------------------
Bubby Brister Drew Bledsoe Steve Young
John Elway Jerry Rice
DETROIT LIONS NEW ORLEANS SAINTS SEATTLE SEAHAWKS
- ------------- ------------------ ----------------
Barry Sanders Jim Everett Warren Moon
Heath Shuler
GREEN BAY PACKERS NEW YORK GIANTS
- ----------------- ---------------
Brett Favre Dave Brown
Phil Simms
6/10/97
July 9, 1997 Exhibit 10(r)
VIA FACSIMILE 602-468-6419
Mr. Mark Gorchoff
CFO
Sandbox
2231 E. Camelback
Suite 324
Phoenix, AZ 85016
Attention: Mark Gorchoff
RE: Sandbox/STATS, Inc. Agreement dated March 27, 1997
-------------------------------------------------------
This letter will confirm our mutual agreement to amend the
above-referenced Agreement as follows
1. The License granted will now allow for Sandbox to charge players to
"own" multiple teams in the fantasy football area of its World Wide Web site.
2. For this modified license granted the licensing fee payment
described in Section 5 of the above-referenced Agreement will now serve as an
advance against a 15% royalty on all gross revenue from any player charges
solicited from Sandbox's on-line fantasy game. Royalty payments and statements
will be due on the first business day of each month in which Sandbox receives
data from STATS, Inc.
3. All other terms and conditions of this Agreement shall remain in
full force and effect for the remainder of the Term.
If this letter accurately reflects our agreement, lease sign and return
a copy of this letter to my attention. I will countersign and return a complete
original to you.
Best Regards,
/s/ Kristen Beauregard
Kristen Beauregard
Senior Account Representative
KB:kb:th
ACCEPTED AND AGREED
/s/ 7/10/97 /s/ Mark Gorchoff 7/10/97
- ----------------------------------- ----------------------------------------
Name Date Name Date
STATS, Inc. Sandbox
<PAGE>
March 27, 1997
VIA FACSIMILE 602-468-6419
Mr. Mark Gorchoff
CFO
Sandbox
2231 E. Camelback
Suite 324
Phoenix, AZ 85016
Dear Mark:
Thank you for choosing STATS, Inc. as your source for statistical information.
We appreciate the opportunity to provide our services to your on-line fantasy
football game currently under development.
The following will serve as an Agreement between STATS, Inc. and Sandbox
regarding the provision of football statistics:
1) License: STATS, Inc. grants to Sandbox a non-exclusive license to incorporate
STATS, Inc. data into its non-commercial on-line fantasy games.
The term 'non-commercial' signifies that users access and participate in the
game areas of the site(s) at no charge; therefore, this non-commercial license
does not grant Sandbox the right to allow users to download the data or to use
the data in any other way than to display it on its site. If Sandbox plans to
charge users to access and participate in the game area of its site or to
download any data provided by STATS, Inc., both parties agree to renegotiate
this agreement to an increased monthly fee as an advance against a certain
percentage royalty of all net profits from any charges solicited. The term
'non-commercial' does not limit Sandbox's rights to sell advertising space on
any of these web pages.
2) Term: I propose a two year term. In addition, if either party fails to
perform any material obligation under this Agreement, the other party may
terminate this Agreement upon thirty (30) days written notice if the breach had
not been cured within such thirty (30) day period.
3) Definition of Date: STATS, Inc. will provide to Sandbox the following NFL
data. For each game - visiting team, home team, game starting time: individual
offensive statistics - touchdowns scored (passing, receiving and rushing), two
point conversions (passing, receiving, rushing), extra points made, field goals
made, length of field goal made, passing attempts, passing completions, total
passing yards, receptions, total receiving yards, rushing carries, total rushing
yards, fumbles, interceptions thrown; Individual defense statistics - punt
return touchdowns, kickoff return touchdowns, interception return touchdowns,
fumble recovery touchdowns, safeties, fumble recoveries, interceptions; sacks:
Team general statistics - total penalties (offensive and defensive combined),
total penalty yards: Team offensive statistics - touchdowns scored (passing,
receiving and rushing), two point conversions (passing, receiving, rushing),
extra points made, field goals made, field goals attempted, 50+ field goals
made, 50+ field goals attempted, passing attempts, passing completions, total
passing yards, receptions, total receiving yards, rushing carries, total rushing
yards, fumbles, interceptions thrown: Team defense statistics - punt return
touchdowns, kickoff return touchdowns, interception return touchdowns, fumble
recovery touchdowns, safeties, interceptions, fumble recoveries, sacks, total
rushing yards allowed, total receiving yards allowed, total yards allowed
(rushing and receiving combined), total points allowed. Sandbox will receive
three different types of files containing the above-mentioned data, a one-time
file for the 1994 season, a one-time file with season averages for the 1994,
1994 and 1996 seasons combined, and a gameday file to be received within two
hours after Sunday and Monday Night games throughout the regular post-season.
The data will be delivered through the Internet using File Transfer Protocol.
The data will be in a format to be mutually agreed upon by both parties.
4) Display of STATS Logo: Sandbox will agree to prominently display the STATS,
Inc. logo on all pages
<PAGE>
containing STATS, Inc. data with the following copyright notice: "Copyright 1997
by STATS, Inc. All rights reserved. Commercial distribution without expressed
written consent by STATS, Inc. is strictly prohibited." STATS, Inc. will furnish
Sandbox with its logo in a timely manner. Sandbox will agree to provide users
access to the STATS, Inc. Web site by clicking on the STATS, Inc. logo.
5) Payment: For the services outlined above, Sandbox will furnish to STATS, Inc.
a $5,250 licensing fee, half of which will be due upon final delivery of test
data and the remaining half of which will be due by October 1, 1997.
6) Development Fee: Sandbox will furnish STATS, Inc. with a non-refundable
developmental fee of $500 for the first 5 hours of programming and development
and $80 per hour for each hour in excess of the initial 5 hours STATS, Inc.
shall put forth to create, develop, test and otherwise provide service to
Sandbox. Any additional programming time in excess of the initial 5 hours shall
be subject to Sandbox's written approval. The initial development fee will be
due upon execution of a signed Agreement.
7) Miscellaneous: Sandbox will agree to destroy and/or return to STATS, Inc. all
data provided by STATS, Inc. within thirty days of the conclusion of the term.
This includes, but is not limited to, all historical data and cumulative data
compiled from daily files delivered to Sandbox throughout the term.
Mark, if the foregoing accurately reflects our Agreement please so indicate by
returning one copy of this Agreement with your signature below. I will
countersign and return a copy to you.
Best Regards,
/s/ Kristen Beauregard
Kristen Beauregard
Senior Account Representative
KB:kb:th
Agreed and Accepted. Agreed and Accepted.
Name: /s/ Name: /s/ Mark Gorchoff
--------------------------- ----------------------------------
STATS, Inc. Sandbox
Dated: 4/2/97 Date: 3/27/97
--------------------------- ----------------------------------
Exhibit 10(s)
LEASE
ANCHOR CENTRE PROPERTIES, INC.
a Delaware corporation
Landlord
TRACER DESIGN, INC.
an Arizona corporation
Tenant
<PAGE>
TABLE OF CONTENTS
1. USE AND RESTRICTIONS ON USE...........................................1
2. TERM..................................................................1
3. RENT..................................................................2
4. RENT ADJUSTMENTS......................................................3
5. SECURITY DEPOSIT......................................................4
6. ALTERATIONS...........................................................5
7. REPAIR................................................................5
8. LIENS.................................................................6
9. ASSIGNMENT AND SUBLETTING.............................................6
10. INDEMNIFICATION.......................................................7
11. INSURANCE.............................................................8
12. WAIVER OF SUBROGATION.................................................8
13. SERVICES AND UTILITIES................................................8
14. HOLDING OVER..........................................................9
15. SUBORDINATION.........................................................9
16. RULES AND REGULATIONS................................................10
17. REENTRY BY LANDLORD..................................................10
18. DEFAULT..............................................................10
19. REMEDIES.............................................................11
20. TENANT'S BANKRUPTCY OR INSOLVENCY....................................13
21. QUIET ENJOYMENT......................................................13
22. DAMAGE BY FIRE, ETC..................................................14
23. EMINENT DOMAIN.......................................................15
24. SALE BY LANDLORD.....................................................15
25. ESTOPPEL, CERTIFICATES...............................................15
26. SURRENDER OF PREMISES................................................15
27. NOTICES..............................................................16
28. TAXES PAYABLE BY TENANT..............................................16
29. RELOCATION OF TENANT.................................................16
30. DEFINED TERMS AND HEADINGS...........................................16
31. TENANT'S AUTHORITY...................................................17
32. COMMISSIONS..........................................................17
33. TIME AND APPLICABLE LAW..............................................17
34. SUCCESSORS AND ASSIGNS...............................................17
35. ENTIRE AGREEMENT.....................................................17
36. EXAMINATION NOT OPTION...............................................17
37. RECORDATION..........................................................17
38. SHARED TELEPHONE SYSTEM..............................................17
39. LIMITATION OF LANDLORD'S LIABILITY...................................18
40. PARKING..............................................................18
41. RENEWAL OPTION.......................................................18
42. RIGHT OF FIRST REFUSAL...............................................18
<PAGE>
43. TERMINATION OPTION...................................................19
44. MONUMENT SIGNAGE.....................................................19
EXHIBIT A - PREMISES
EXHIBIT B - INITIAL ALTERATIONS
EXHIBIT C - RULES AND REGULATIONS
<PAGE>
GROSS (BY) OFFICE LEASE
REFERENCE PAGE
BUILDING: ANCHOR CENTRE III
2231 East Camelback Road
LANDLORD: ANCHOR CENTRE PROPERTIES, INC.
a Delaware corporation
LANDLORD'S ADDRESS: 2201 E. Camelback Road, Suite 230B
Phoenix, AZ 85016
LEASE REFERENCE DATE August 22, 1995
TENANT: Tracer Design, Inc.
an Arizona corporation
TENANT'S ADDRESS: 2231 E. Camelback Road, Suite 324
Phoenix, AZ 85016
PREMISES IDENTIFICATION: Suite Number 234
(for outline of Premises see Exhibit A)
SCHEDULED COMMENCEMENT DATE: October 1, 1995
TERMINATION DATE: September 30, 2000
TERM OF LEASE: 5 years, beginning on the Commencement
Date and ending on the Termination Date
(unless sooner terminated pursuant to
the Lease)
INITIAL ANNUAL RENT (Article 3): $98,944.00
INITIAL MONTHLY INSTALLMENT OF
ANNUAL RENT (Article 3): $8,245.33
BASE YEAR (DIRECT EXPENSES): 1996
BASE YEAR (TAXES): 1996
TENANT'S PROPORTIONATE SHARE: 4.78%
SECURITY DEPOSIT: $8,863.73
ASSIGNMENT/SUBLETTING FEE $500
REAL ESTATE BROKER DUE COMMISSION: CB Commercial Real Estate Group
Lee & Associates
The Reference Page information is incorporated into and made a part of the
Lease. In the event of any conflict between any Reference Page information and
the Lease, the Lease shall control. This Lease includes Exhibits A through C,
all of which are made a part of this Lease.
<PAGE>
LANDLORD: TENANT:
ANCHOR CENTRE PROPERTIES, INC. TRACER DESIGN, INC.
a Delaware corporation an Arizona corporation
By: /s/ Robert M. Chapman, By /s/ Chad M. Littl
------------------------------------ --------------------------------
Robert M. Chapman, Vice President Title: President
Dated: 9/8/95 ----------------------
----------------------------- Dated: 9/6/95
-------------------------
<PAGE>
LEASE
By this Lease Landlord leases to Tenant and Tenant leases from Landlord
the Premises in the Building as set forth and described on the Reference Page.
The Reference Page, including all terms defined thereon, is incorporated as part
of this Lease.
1. USE AND RESTRICTIONS ON USE.
1.1 The Premises are to be used solely for general office purposes.
Tenant shall not do or permit anything to be done in or about the Premises which
will in any way obstruct or interfere with the rights of other tenants or
occupants of the Building or injure, annoy, or disturb them or allow the
Premises to be used for any improper, immoral, unlawful, or objectionable
purpose. Tenant shall not do, permit or suffer in, on, or about the Premises the
sale of any alcoholic liquor without the written consent of Landlord first
obtained, or the commission of any waste. Tenant shall comply with all
governmental laws, ordinances and regulations applicable to the use of the
Premises and its occupancy and shall promptly comply with all governmental
orders and directions for the correction, prevention and abatement of any
violations in or upon, or in connection with, the Premises, all at Tenant's sole
expense. Tenant shall not do or permit anything to be done on or about the
Premises or bring or keep anything into the Premises which will in any way
increase the rate of, invalidate or prevent the procuring of any insurance
protecting against loss or damage to the Building or any of its contents by fire
or other casualty or against liability for damage to property or injury to
persons in or about the Building or any part thereof.
1.2 Tenant shall not, and shall not direct, suffer or permit any of its
agents, contractors, employees, licensees or invitees to at any time handle,
use, manufacture, store or dispose of in or about the Premises or the Building
any (collectively "Hazardous Materials") flammables, explosives, radioactive
materials, hazardous wastes or materials, toxic wastes or materials, or other
similar substances, petroleum products or derivatives or any substance subject
to regulation by or under any federal, state and local laws and ordinances
relating to the protection of the environment or the keeping, use or disposition
of environmentally hazardous materials, substances, or wastes, presently in
effect or hereafter adopted, all amendments to any of them, and all rules and
regulations issued pursuant to any of such laws or ordinances (collectively
"Environmental Laws"), nor shall Tenant suffer or permit any Hazardous Materials
to be used in any manner not fully in compliance with all Environmental Laws, in
the Premises or the Building and appurtenant land or allow the environment to
become contaminated with any Hazardous Materials. Notwithstanding the foregoing,
and subject to Landlord's prior consent, Tenant may handle, store, use or
dispose of products containing small quantities of Hazardous Materials (such as
aerosol cans containing insecticides, toner for copiers, paints, paint remover
and the like) to the extent customary and necessary for the use of the Premises
for general office purposes; provided that Tenant shall always handle, store,
use, and dispose of any such Hazardous Materials in a safe
[__][__]
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<PAGE>
and lawful manner and never allow such Hazardous Materials to contaminate the
Premises, Building and appurtenant land or the environment. Tenant shall
protect, defend, indemnify and hold each and all of the Landlord Entities (as
defined in Article 30) harmless from and against any and all loss, claims,
liability or costs (including court costs and attorney's fees) incurred by
reason of any actual or asserted failure of Tenant to fully comply with all
applicable Environmental Laws, or the presence, handling, use or disposition in
or from the Premises of any Hazardous Materials (even though permissible under
all applicable Environmental Laws or the provisions of this Lease), or by reason
of any actual or asserted failure of Tenant to keep, observe, or perform any
provision of this Section 1.2.
2. TERM.
2.1 The Term of this Lease shall begin on the date ("Commencement
Date") which shall be the later of the Scheduled Commencement Date as shown on
the Reference Page and the date that Landlord shall tender possession of the
Premises to Tenant. Landlord shall tender possession of the Premises with all
the work, if any, to be performed by Landlord pursuant to Exhibit B to this
Lease substantially completed. Tenant shall deliver a punch list of items not
completed within 30 days after Landlord tenders possession of the Premises and
Landlord agrees to proceed with due diligence to perform its obligations
regarding such items. Landlord and Tenant shall execute a memorandum setting
forth the actual Commencement Date and Termination Date, if different from the
dates set forth in the Reference Page.
2.2 Tenant agrees that in the event of the inability of Landlord to
deliver possession of the Premises on the Scheduled Commencement Date, Landlord
shall not be liable for any damage resulting from such inability, but Tenant
shall not be liable for any rent until the time when Landlord, after notice to
Tenant, delivers possession of the Premises to Tenant. No such failure to give
possession on the Scheduled Commencement Date shall affect the other obligations
of Tenant under this Lease, except that if Landlord is unable to deliver
possession of the Premises within one hundred twenty (120) days of the Scheduled
Commencement Date (other than as a result of strikes, shortages of materials or
similar matters beyond the reasonable control of Landlord and Tenant is notified
by Landlord in writing as to such delay), Tenant shall have the option to
terminate this Lease unless said delay is as a result of: (a) Tenant's failure
to agree to plans and specifications; (b) Tenant's request for materials,
finishes or installations other than Landlord's standard except those, if any,
that Landlord shall have expressly agreed to furnish without extension of time
agreed by Landlord; (c) Tenant's change in any plans or specifications; or, (d)
performance or completion by a party employed by Tenant. If any delay is the
result of any of the foregoing, the Commencement Date and the payment of rent
under this Lease shall be accelerated by the number of days of such delay.
[__][__]
Initial
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<PAGE>
2.3 In the event Landlord shall permit Tenant to occupy the Premises
prior to the Commencement Date, such occupancy shall be subject to all the
provisions of this Lease. Said early possession shall not advance the
Termination Date.
3. RENT.
3.1 Tenant agrees to pay to Landlord the Annual Rent in effect from
time to time by paying the Monthly Installment of Rent then in effect on or
before the first day of each full calendar month during the Term, except that
the first month's rent shall be paid upon the execution of this Lease. The
amount of the Annual Rent shall be as follows:
Period Annual Rent Monthly Installment
Commencement Date through $98,944.00 $8,245.33
September 30, 1996
October 1, 1996 through $98,944.00 $8,245.33
September 30, 1997
October 1, 1997 through $105,128.00 $8,760.67
September 30, 1998
October 1, 1998 through $111,312.00 $9,276.00
September 30, 1999
October 1,1999 through $117,496.00 $9,791.33
Termination Date
If the Commencement Date occurs after October 1, 1995, then the dates for
adjustment to the amount of Base Rent set forth above shall be postponed
accordingly. The amount of the Annual Rent also shall be increased in connection
with any lease of space under Article 42. The Monthly Installment of Rent in
effect at any time shall be one-twelfth of the Annual Rent in effect at such
time. Rent for any period during the Term which is less than a full month shall
be a prorated portion of the Monthly Installment of Rent based upon a thirty
(30) day month. Said rent shall be paid to Landlord, without deduction or offset
and without notice or demand, at the Landlord's address, as set forth on the
Reference Page, or to such other person or at such other place as Landlord may
from time to time designate in writing.
3.2 Tenant recognizes that late payment of any rent or other sum due
under this Lease will result in administrative expense to Landlord, the extent
of which additional expense is extremely difficult and economically impractical
to ascertain. Tenant therefore agrees that if rent or any other sum is not paid
within five days after the date it is due and payable pursuant to this
[__][__]
Initial
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<PAGE>
Lease, a late charge shall be imposed in an amount equal to the greater of: (a)
Fifty Dollars ($50.00), or (b) a sum equal to five percent (5%) per month of the
unpaid rent or other payment. The amount of the late charge to be paid by Tenant
shall be reassessed and added to Tenant's obligation for each successive monthly
period until paid. The provisions of this Section 3.2 in no way relieve Tenant
of the obligation to pay rent or other payments on or before the date on which
they are due, nor do the terms of this Section 3.2 in any way affect Landlord's
remedies pursuant to Article 19 of this Lease in the event said rent or other
payment is unpaid after date due.
4. RENT ADJUSTMENTS.
4.1 For the purpose of this Article 4, the following terms are defined
as follows:
4.1.1 Lease Year: Each calendar year falling partly or wholly
within the Term.
4.1.2 Direct Expenses: All direct costs of operation,
maintenance, repair and management of the Building (including the amount of any
credits which Landlord may grant to particular tenants of the Building in lieu
of providing any standard services or paying any standard costs described in
this Section 4.1.2 for similar tenants), as determined in accordance with
generally accepted accounting principles, including the following costs by way
of illustration, but not limitation: water and sewer charges; insurance charges
of or relating to all insurance policies and endorsements deemed by Landlord to
be reasonably necessary or desirable and relating in any manner to the
protection, preservation, or operation of the Building or any part thereof;
utility costs, including, but not limited to, the cost of heat, light, power,
steam, gas, and waste disposal; the cost of janitorial services; the cost of
security and alarm services; window cleaning costs; labor costs; costs and
expenses of managing the Building including management fees; air conditioning
maintenance costs; elevator maintenance fees and supplies; material costs;
equipment costs including the cost of maintenance, repair and service agreements
and rental and leasing costs; purchase costs of equipment other than capital
items; current rental and leasing costs of items which would be amortizable
capital items if purchased; tool costs; licenses, permits and inspection fees;
wages and salaries; employee benefits and payroll taxes; accounting and legal
fees; any sales, use or service taxes incurred in connection therewith. Direct
Expenses shall not include depreciation or amortization of the Building or
equipment in the Building except as provided herein, loan principal payments,
costs of alterations of tenants' premises, leasing commissions, interest
expenses on long-term borrowings, advertising costs or management salaries for
executive personnel other than personnel located at the Building. In addition,
Landlord shall be entitled to amortize and include as an additional rental
adjustment: (i) an allocable portion of the cost of capital improvement items
which are reasonably calculated to reduce operating expenses; (ii) fire
sprinklers and suppression systems and other life safety systems; and (iii)
other capital expenses which are required under any governmental laws,
regulations or ordinances which were not applicable to the Building at the time
it was constructed. All such costs shall be amortized over the reasonable life
of such improvements in accordance with such reasonable life and
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amortization schedules as shall be determined by Landlord in accordance with
generally accepted accounting principles, with interest on the unamortized
amount at one percent (1 %) in excess of the prime lending rate announced from
time to time as such by The Northern Trust Company of Chicago, Illinois.
4.1.3 Taxes: Real estate taxes and any other taxes, charges
and assessments which are levied with respect to the Building or the land
appurtenant to the Building, or with respect to any improvements, fixtures and
equipment or other property of Landlord, real or personal, located in the
Building and used in connection with the operation of the Building and said
land, any payments to any ground lessor in reimbursement of tax payments made by
such lessor; and all fees, expenses and costs incurred by Landlord in
investigating, protesting, contesting or in any way seeking to reduce or avoid
increase in any assessments, levies or the tax rate pertaining to any Taxes to
be paid by Landlord in any Lease Year. Taxes shall not include any corporate
franchise, or estate, inheritance or net income tax, or tax imposed upon any
transfer by Landlord of its interest in this Lease or the Building.
4.1.4 Controllable Expenses: Notwithstanding anything to the
contrary in this Article, Direct Expenses shall not include Controllable
Expenses in excess of the Cost Cap. "Controllable Expenses" means Direct
Expenses, other than taxes, insurance premiums, and utility charges. The "Cost
Cap" for 1997 shall be 107% of the actual Controllable Expenses for 1996, and
the Cost Cap for each subsequent year shall be 107% of the Cost Cap for the
previous calendar year.
4.2 If in any Lease Year, (i) Direct Expenses paid or incurred shall
exceed Direct Expenses paid or incurred in the Base Year (Direct Expenses)
and/or (ii) Taxes paid or incurred by Landlord in any Lease Year - shall exceed
the amount of such Taxes which became due and payable in the Base Year (Taxes),
Tenant shall pay as additional rent for such Lease Year Tenant's Proportionate
Share of such excess.
4.3 The annual determination of Direct Expenses shall be made by
Landlord and if certified by a nationally recognized firm of public accountants
selected by Landlord shall be binding upon Landlord and Tenant. Tenant may
review the books and records supporting such determination in the office of
Landlord, or Landlord's agent, during normal business hours, upon giving
Landlord five (5) days advance written notice within sixty (60) days after
receipt of such determination, but in no event more often than once in any one
year period. In the event that during all or any portion of any Lease Year, the
Building is not rented and occupied to a level of 95%, Landlord may make any
appropriate adjustment in occupancy related Direct Expenses for such year for
the purpose of avoiding distortion of the amount of such Direct Expenses to be
attributed to Tenant by reason of variation in total occupancy of the Building,
by employing sound accounting and management principles to determine Direct
Expenses that would have been paid
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or incurred by Landlord had the Building been rented and occupied to a level of
95%, and the amount so determined shall be deemed to have been Direct Expenses
for such Lease Year.
4.4 Prior to the actual determination thereof for a Lease Year,
Landlord may from time to time estimate Tenant's liability for Direct Expenses
and/or Taxes under Section 4.2, Article 6 and Article 29 for the Lease Year or
portion thereof. Landlord will give Tenant written notification of the amount of
such estimate and Tenant agrees that it will pay, by increase of its Monthly
Installments of Rent due in such Lease Year, additional rent in the amount of
such estimate. Any such increased rate of Monthly Installments of Rent pursuant
to this Section 4.4 shall remain in effect until further written notification to
Tenant pursuant hereto.
4.5 When the above mentioned actual determination of Tenant's liability
for Direct Expenses and/or Taxes is made for any Lease Year and when Tenant is
so notified in writing, then:
4.5.1 If the total additional rent Tenant actually paid
pursuant to Section 4.3 on account of Direct Expenses and/or Taxes for the Lease
Year is less than Tenant's liability for Direct Expenses and/or Taxes, then
Tenant shall pay such deficiency to Landlord as additional rent in one lump sum
within thirty (30) days of receipt of Landlord's bill therefor; and
4.5.2 If the total additional rent Tenant actually paid
pursuant to Section 4.3 on account of Direct Expenses and/or Taxes for the Lease
Year is more than Tenant's liability for Direct Expenses and/or Taxes, then
Landlord shall credit the difference against the then next due payments to be
made by Tenant under this Article 4. Tenant shall not be entitled to a credit by
reason of actual Direct Expenses and/or Taxes in any Lease Year being less than
Direct Expenses and/or Taxes in the Base Year (Direct Expenses and/or Taxes).
4.6 If the Commencement Date is other than January 1 or if the
Termination Date is other than December 31, Tenant's liability for Direct
Expenses and Taxes for the Lease Year in which said Date occurs shall be
prorated based upon a three hundred sixty-five (365) day year.
5. SECURITY DEPOSIT. Tenant shall deposit the Security Deposit with Landlord
upon the execution of this Lease. Said sum shall be held by Landlord as security
for the faithful performance by Tenant of all the terms, covenants and
conditions of this Lease to be kept and performed by Tenant and not as an
advance rental deposit or as a measure of Landlord's damage in case of Tenant's
default. If Tenant defaults with respect to any provision of this Lease,
Landlord may use any part of the Security Deposit for the payment of any rent or
any other sum in default, or for the payment of any amount which Landlord may
spend or become obligated to spend by reason of Tenant's default, or to
compensate Landlord for any other loss or damage which Landlord may suffer by
reason of Tenant's default. If any portion is so used, Tenant shall within five
(5) days after written demand therefor, deposit with Landlord an amount
sufficient to
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restore the Security Deposit to its original amount and Tenant's failure to do
so shall be a material breach of this Lease. Except to such extent, if any, as
shall be required by law, Landlord shall not be required to keep the Security
Deposit separate from its general funds, and Tenant shall not be entitled to
interest on such deposit. If Tenant shall fully and faithfully perform every
provision of this Lease to be performed by it, the Security Deposit or any
balance thereof shall be returned to Tenant at such time after termination of
this Lease when Landlord shall have determined that all of Tenant's obligations
under this Lease have been fulfilled without material default, but not later
than sixty (60) days after such termination.
6. ALTERATIONS.
6.1 Except for those, if any, specifically provided for in Exhibit B to
this Lease, Tenant shall not make or suffer to be made any alterations,
additions, or improvements, including, but not limited to, the attachment of any
fixtures or equipment in, on, or to the Premises or any part thereof or the
making of any improvements as required by Article 7, without the prior written
consent of Landlord. When applying for such consent, Tenant shall, if requested
by Landlord, furnish complete plans and specifications for such alterations,
additions and improvements.
6.2 In the event Landlord consents to the making of any such
alteration, addition or improvement by, Tenant, the same shall be made using
Landlord's contractor (unless Landlord agrees otherwise) at Tenant's sole cost
and expense. If Tenant shall employ any Contractor other than Landlord's
Contractor and such other Contractor or any Subcontractor of such other
Contractor shall employ any non-union labor or supplier, Tenant shall be
responsible for and hold Landlord harmless from any and all delays, damages and
extra costs suffered by Landlord as a result of any dispute with any labor
unions concerning the wage, hours, terms or conditions of the employment of any
such labor. In any event Landlord may charge Tenant a reasonable charge to cover
its overhead as it relates to such proposed work.
6.3 All alterations, additions or improvements proposed by Tenant shall
be constructed in accordance with all government laws, ordinances, rules and
regulations and Tenant shall, prior to construction, provide the additional
insurance required under Article 11 in such case, and also all such assurances
to Landlord, including but not limited to, waivers of lien, surety company
performance bonds and personal guaranties cf individuals of substance as
Landlord shall require to assure payment of the costs thereof and to protect
Landlord and the Building and appurtenant land against any loss from any
mechanic's, materialmen's or other liens. Tenant shall pay in addition to any
sums due pursuant to Article 4, any increase in real estate taxes attributable
to any such alteration, addition or improvement for so long, during the Term, as
such increase is ascertainable at Landlord's election said sums shall be paid in
the same way as sums due under Article 4.
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6.4 All alterations, additions, and improvements in, on, or to the
Premises made or installed by Tenant including carpeting, shall be and remain
the property of Tenant during the Term but, excepting furniture, furnishings,
movable partitions of less than full height from floor to ceiling and other
trade fixtures, shall become a part of the realty and belong to Landlord without
compensation to Tenant upon the expiration or sooner termination of the Term, at
which time title shall pass to Landlord under this Lease as by a bill of sale,
unless Landlord elects otherwise. Upon such election by Landlord, Tenant shall
upon demand by Landlord at Tenant's sole cost and expense, forthwith and with
all due diligence remove any such alterations, additions or improvements which
are designated by Landlord to be removed, and Tenant shall forthwith and with
all due diligence, at its sole cost and expense, repair and restore the Premises
to their original condition, reasonable wear and tear and damage by fire or
other casualty excepted.
7. REPAIR.
7.1 Landlord shall have no obligation to alter, remodel, improve,
repair, decorate or paint the Premises, except as specified in Exhibit B if
attached to this Lease and except that Landlord shall repair and maintain the
structural portions of the Building, including the roof, basic plumbing, air
conditioning, heating and electrical systems installed or furnished by Landlord.
By taking possession of the Premises, Tenant accepts them as being in good
order, condition and repair and in the condition in which Landlord is obligated
to deliver them. It is hereby understood and agreed that no representations
respecting the condition of the Premises or the Building have been made by
Landlord to Tenant, except as specifically set forth in this Lease.
7.2 Tenant shall, at all times during the Term, keep the Premises in
good condition and repair excepting reasonable wear and tear and damage by fire,
or other casualty, and in compliance with all applicable governmental laws,
ordinances and regulations, promptly complying with all governmental orders and
directives for the correction, prevention and abatement of any violations or
nuisances in or upon, or connected with, the Premises, all at Tenant's sole
expense.
7.3 Landlord shall not be liable for any failure to make any repairs or
to perform any maintenance unless such failure shall persist for an unreasonable
time after written notice of the need of such repairs or maintenance is given to
Landlord by Tenant.
7.4 Except as provided in Article 22, there shall be no abatement of
rent and no liability of Landlord by reason of any injury to or interference
with Tenant's business arising from the making of any repairs, alterations or
improvements in or to any portion of the Building or the Premises or to
fixtures, appurtenances and equipment in the Building. Except to the extent, if
any, prohibited by law, Tenant waives the right to make repairs at Landlord's
expense under any law, statute or ordinance now or hereafter in effect.
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8. LIENS. Tenant shall keep the Premises, the Building and appurtenant land and
Tenant's leasehold interest in the Premises free from any liens arising out of
any services, work or materials performed, furnished, or contracted for by
Tenant, or obligations incurred by Tenant. In the event that Tenant shall not,
within ten (10) days following the imposition of any such lien, either cause the
same to be released of record or provide Landlord with insurance against the
same issued by a major title insurance company or such other protection against
the same as Landlord shall reasonably accept, Landlord shall have the right to
cause the same to be released by such means as it shall reasonably deem proper,
including payment of the claim giving rise to such lien after written notice to
Tenant. All such sums paid by Landlord and all expenses reasonably incurred by
it in connection therewith shall be considered additional rent and shall be
payable to it by Tenant on demand.
9. ASSIGNMENT AND SUBLETTING.
9.1 Tenant shall not have the right to assign or pledge this Lease or
to sublet the whole or any part of the Premises whether voluntarily or by
operation of law, or permit the use or occupancy of the Premises by anyone other
than Tenant or an Affiliate of Tenant, and shall not make, suffer or permit such
assignment, subleasing or occupancy without the prior written consent of
Landlord, which shall not be unreasonably withheld or delayed, and said
restrictions shall be binding upon any and all assignees of the Lease and
subtenants of the Premises. "Affiliate" means an entity that owns or controls,
is owned or controlled by, or is under common ownership and control with,
Tenant. In the event Tenant desires to sublet, or permit such occupancy of, the
Premises, or any portion thereof, or assign this Lease, Tenant shall give
written notice thereof to Landlord at least thirty (30) days but no more than
one hundred eighty (180) days prior to the proposed commencement date of such
subletting or assignment, which notice shall set forth the name of the proposed
subtenant or assignee, the relevant terms of any sublease or assignment and
copies of financial reports and other relevant financial reports and other
relevant financial information of the proposed subtenant or assignee.
9.2 Notwithstanding any assignment or subletting, permitted or
otherwise, Tenant shall at all times remain directly, primarily and fully
responsible and liable for the payment of the rent specified in this Lease and
for compliance with all of its other obligations under the terms, provisions and
covenants of this Lease. Upon the occurrence of an Event of Default, if the
Premises or any part of them are then assigned or sublet, Landlord, in addition
to any other remedies provided in this Lease or provided by law, may, at its
option, collect directly from such assignee or subtenant all rents due and
becoming due to Tenant under such assignment or sublease and apply such rent
against any sums due to Landlord from Tenant under this Lease, and no such
collection shall be construed to constitute a novation or release of Tenant from
the further performance of Tenant's obligations under this Lease.
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9.3 In addition to Landlord's right to approve of any subtenant or
assignee, Landlord shall have the option, in its sole discretion, in the event
of any proposed subletting or assignment, to terminate this Lease, or in the
case of a proposed subletting of less than the entire Premises, to recapture the
portion of the Premises to be sublet, as of the date the subletting or
assignment is to be effective. The option shall be exercised, if at all, by
Landlord giving Tenant written notice given by Landlord to Tenant within sixty
(60) days following Landlord's receipt of Tenant's written notice as required
above. If this Lease shall be terminated with respect to the entire Premises
pursuant to this Section, the Term of this Lease shall end on the date stated in
Tenant's notice as the effective date of the sublease or assignment as if that
date had been originally fixed in this Lease for the expiration of the Term. If
Landlord recaptures under this Section only a portion of the Premises, the rent
to be paid from time to time during the unexpired Term shall abate
proportionately based on the proportion by which the approximate square footage
of the remaining portion of the Premises shall be less than that of the Premises
as of the date immediately prior to such recapture. Tenant shall, at Tenant's
own cost and expense, discharge in full any outstanding commission obligation on
the part of Landlord with respect to this Lease, and any commissions which may
be due and owing as a result of any proposed assignment or subletting, whether
or not the Premises are recaptured pursuant to this Section 9.3 and rented by
Landlord to the proposed tenant or any other tenant.
9.4 In the event that Tenant sells, sublets, assigns or transfers this
Lease, Tenant shall pay to Landlord an additional rent an amount equal to fifty
percent (50%) of any Increased Rent (as defined below) when and as such
Increased Rent is received by Tenant. As used in this Section, "Increased Rent"
shall mean the excess of (i) all rent and other consideration which Tenant is
entitled to receive by reason of any sale, sublease, assignment or other
transfer of this Lease, over (ii) the rent otherwise payable by Tenant under
this Lease at such time. For purposes of the foregoing, any consideration
received by Tenant in form other than cash shall be valued at its fair market
value as determined by Landlord in good faith.
9.5 Notwithstanding any other provision hereof, Tenant shall have no
right to make (and Landlord shall have the absolute right to refuse consent to)
any assignment of this Lease or sublease of any portion of the Premises if at
the time of either Tenant's notice of the proposed assignment or sublease or the
proposed commencement date thereof, there shall exist any uncured material
default of Tenant or matter which will become a material default of Tenant with
passage of time unless cured, or if the proposed assignee or sublessee is an
entity: (a) with which Landlord is already in negotiation as evidenced by the
issuance of a written proposal; (b) is already an occupant of the Building
unless Landlord is unable to provide the amount of space required by such
occupant; (c) is a governmental agency; (d) is incompatible with the character
of occupancy of the Building; or (e) would subject the Premises to a use which
would: (i) involve increased personnel or wear upon the Building; (ii) violate
any exclusive right granted to another tenant of the Building, (iii) require any
addition to or modification of the Premises or the Building in order to comply
with building code or other governmental requirements; or, (iv) involve a
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violation of Section 1.2. Tenant expressly agrees that Landlord shall have the
absolute right to refuse consent to any such assignment or sublease and that for
the purposes of any statutory or other requirement of reasonableness on the part
of Landlord such refusal shall be reasonable.
9.6 Upon any request to assign or sublet, Tenant will pay to Landlord
the Assignment/Subletting plus, on demand, a sum equal to all of Landlord's
reasonable costs, including reasonable attorney's fees, incurred in
investigating and considering any proposed or purported assignment or pledge of
this Lease or sublease of any of the Premises, regardless of whether Landlord
shall consent to, refuse consent, or determine that Landlord's consent is not
required for, such assignment, pledge or sublease. Any purported sale,
assignment, mortgage, transfer of this Lease or subletting which does not comply
with the provisions of this Article 9 shall be void.
9.7 If Tenant is a corporation, partnership or trust, any transfer or
transfers of or change or changes within any twelve month period in the number
of the outstanding voting shares of the corporation, the general partnership
interests in the partnership or the identify of the persons or entities
controlling the activities of such partnership or trust resulting in a change of
ownership or control of 51% or more shall be regarded as equivalent to an
assignment of this Lease to the persons or entities acquiring such ownership or
control and shall be subject to all the provisions of this Article 9 to the same
extent and for all intents and purposes as though such an assignment.
10. INDEMNIFICATION. None of the Landlord entities shall be liable and Tenant
hereby waives all claims against them for any damage to any property or any
injury to any person in or about the Premises or the Building by or from any
cause whatsoever (including without limiting the foregoing, rain or water
leakage of any character from the roof, windows, walls, basement, pipes,
plumbing works or appliances, the Building not being in good condition or
repair, gas, fire, oil, electricity or theft), except to the extent caused by or
arising from the gross negligence or willful misconduct of Landlord or its
agents, employees or contractors. Tenant shall protect, indemnify and hold the
Landlord entities harmless from and against any and all loss, claims, liability
or costs (including court costs and attorney's fees) incurred by reason of (a)
any damage to any property (including but not limited to property of any
Landlord entity) or any injury (including but not limited to death) to any
person occurring in, on or about the Premises or the Building to the extent that
such injury or damage shall be caused by or arise from any actual or alleged
act, neglect, fault, or omission by or of Tenant, its agents, servants,
employees, invitees, or visitors to meet any standards imposed by any duty with
respect to the injury or damage; (b) the conduct or management of any work or
thing whatsoever done by the Tenant in or about the Premises or from
transactions of the Tenant concerning the Premises; (c) Tenant's failure to
comply with any and all governmental laws, ordinances and regulations applicable
to the condition or use of the Premises or its occupancy; or (d) any breach or
default on the part of Tenant in the performance of any covenant or agreement on
the part of the Tenant to be performed pursuant to
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this Lease. The provisions of this Article shall survive the termination of this
Lease with respect to any claims or liability accruing prior to such
termination.
11. INSURANCE.
11.1 Tenant shall keep in force throughout the Term: (a) a Commercial
General Liability insurance policy or policies to protect the Landlord Entities
against any liability to the public or to any invitee of Tenant or a Landlord
Entity incidental to the use of or resulting from any accident occurring in or
upon the Premises with a limit of not less than $1,000.000.00 per occurrence and
not loss than $2,000,000.00 in the annual aggregate, or such larger amount as
Landlord may prudently require from time to time, covering bodily injury and
property damage liability and $1,000,000 products/completed operations
aggregate; (b) Business Auto Liability covering owned, non-owned and hired
vehicles with a limit of not less than $1,000,000 per accident; (c) insurance
protecting against liability under Worker's Compensation Laws with limits at
least as required by statute; (d) Employers Liability with limits of $500,000
each accident, $500,000 disease policy limit, $500,000 disease--each employee;
(c) All Risk or Special Form coverage protecting Tenant against loss of or
damage to Tenant's alterations, additions, improvements, carpeting, floor
coverings, panelings, decorations, fixtures, inventory and other business
personal property situated in or about the Premises to the full replacement
value of the property so insured; and, (f) Business Interruption Insurance with
limit of liability representing loss of at least approximately six months of
income.
11.2 Each of the aforesaid policies shall (a) be provided at Tenant's
expense; (b) name the Landlord and the building management company, if any, (as
of the date of this Lease, Anchor Centre Properties, Inc., a Delaware
corporation, and RREEF Management Company, a California corporation) as
additional insureds; (c) be issued by an insurance company with a minimum Best's
rating of "A:VII" during the Term; and (d) provide that said insurance shall not
be cancelled unless thirty (30) days prior written notice (ten days for
non-payment of premium) shall have been given to Landlord; and said policy or
policies or certificates thereof shall be delivered to Landlord by Tenant upon
the Commencement Date and at least thirty (30) days prior to each renewal of
said insurance.
11.3 Whenever Tenant shall undertake any alterations, additions or
improvements in, to or about the Premises ("Work") the aforesaid insurance
protection must extend to and include injuries to persons and damage to property
arising in connection with such Work, without limitation including liability
under any applicable structural work act, and such other insurance as Landlord
shall require; and the policies of or certificates evidencing such insurance
must be delivered to Landlord prior to the commencement of any such Work.
12. WAIVER OF SUBROGATION. So long as their respective insurers so permit,
Tenant
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and Landlord hereby mutually waive their respective rights of recovery against
each other for any loss insured by fire, extended coverage, All Risks or other
insurance now or hereafter existing for the benefit of the respective party but
only to the extent of the net insurance proceeds payable under such policies.
Each party shall obtain any special endorsements required by their insurer to
evidence compliance with the aforementioned waiver.
13. SERVICES AND UTILITIES.
13.1 Provided Tenant shall not be in material default of its obligation
to pay rent under this Lease, and subject to the other provisions of this Lease,
Landlord agrees to furnish to the Premises during ordinary business hours
(Monday through Friday from 7:00 a.m. to 6:00 p.m. and Saturday from 8:00 a.m.
to noon) on generally recognized business days (but exclusive in any event of
Sundays and legal holidays), the following services and utilities subject to the
rules and regulations of the Building prescribed from time to time (a) water
suitable for normal office use of the Premises; (b) heat and air conditioning
required in Landlord's reasonable judgment for the use and occupation of the
Premises; (c) cleaning and janitorial service; (d) elevator service by
nonattended automatic elevators; (e) such window washing as may from time to
time in Landlord's judgment be reasonably required; and, (f) equipment to bring
to Tenant's meter, electricity for lighting, convenience outlets and other
normal office use. To the extent that Tenant is not billed directly by a public
utility, Tenant shall pay, upon demand, as additional rent, for all electricity
used by Tenant in the Premises. The charge shall be at the rate charged for such
services by the local public utility. Landlord shall not be liable for, and
Tenant shall not be entitled to, any abatement or reduction of rental by reason
of Landlord's failure to furnish any of the foregoing, unless such failure shall
persist for an unreasonable time after written notice of such failure is given
to Landlord by Tenant and provided further that Landlord shall not be liable
when such failure is caused by accident, breakage, repairs, labor disputes of
any character, energy usage restrictions or by any other cause, similar or
dissimilar, beyond the reasonable control of Landlord. Landlord shall use
reasonable efforts to remedy any interruption in the furnishing of services and
utilities.
13.2 Should Tenant require any additional work or service, as described
above, including services furnished outside ordinary business hours specified
above, Landlord may, on terms to be agreed, upon reasonable advance notice by
Tenant, furnish such additional service and Tenant agrees to pay Landlord such
charges as may be agreed upon, including any tax imposed thereon, but in no
event at a charge less than Landlord's actual cost plus overhead for such
additional service and, where appropriate, a reasonable allowance for
depreciation of any systems being used to provide such service. Tenant shall pay
for all usage of HVAC services after ordinary business hours at the rate of
$50.00 per hour, as increased in the proportion that the charge per kilowatt
hour of electricity furnished to the Building by the utility company increases
or decreases from the rate in effect as of the date of this Lease.
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13.3 Wherever heat-generating machines or equipment are used by Tenant
in the Premises which affect the temperature otherwise maintained by the air
conditioning system, Landlord reserves the right to install supplementary air
conditioning units in or for the benefit of the Premises and the cost thereof,
including the cost of installation and the cost of operations and maintenance,
shall be paid by Tenant to Landlord upon demand as such additional rent.
13.4 Tenant will not, without the written consent of Landlord, use any
apparatus or device in the Premises, which will in any way increase the amount
of electricity or water usually furnished or supplied for use of the Premises
for normal office use, nor connect with electric current, except through
existing electrical outlets in the Premises, or water pipes, any apparatus or
device for the purposes of using electrical current or water. If Tenant shall
require water or electric current in excess of that usually furnished or
supplied for use of the Premises as normal office use, Tenant shall procure the
prior written consent of Landlord for the use thereof, which Landlord may
refuse, and if Landlord does consent, Landlord may cause a water meter or
electric current meter to be installed so as to measure the amount of such
excess water and electric current. The cost of any such meters shall be paid for
by Tenant. Tenant agrees to pay as additional rent to Landlord promptly upon
demand therefor, the cost of all such excess water and electric current consumed
(as shown by said meters, if any, or, if none, as reasonably estimated by
Landlord) at the rates charged for such services by the local public utility or
agency, as the case may be, furnishing the same, plus any additional expense
incurred in keeping account of the water and electric current so consumed.
14. HOLDING OVER. Tenant shall pay Landlord for each day Tenant retains
possession of the Premises or part of them after termination of this Lease by
lapse of time or otherwise at the rate ("Holdover Rate") which shall be 150% of
the greater of: (a) the amount of the Annual Rent for the last period prior to
the date of such termination plus all Rent Adjustments under Article 4; and, (b)
the then market rental value of the Premises as determined by Landlord assuming
a new lease of the Premises of the then usual duration and other terms, in
either case prorated on a daily basis, and also pay all damages sustained by
Landlord by reason of such retention. If Landlord gives notice to Tenant of
Landlord's election to that effect, such holding over shall constitute renewal
of this Lease for a period from month to month or one year, whichever shall be
specified in such notice, in either case at the Holdover Rate, but if the
Landlord does not so elect, no such renewal shall result notwithstanding
acceptance by Landlord of any sums due hereunder after such termination; and
instead, a tenancy at sufferance at the Holdover Rate shall be deemed to have
been created. In any event, no provision of this Article 14 shall be deemed to
waive Landlord's right of reentry or any other right under this Lease or at law.
15. SUBORDINATION. Without the necessity of any additional document being
executed by Tenant for the purpose of effecting a subordination, this Lease
shall be subject and subordinate at all times to ground or underlying leases and
to the lien of any mortgages or deeds of trust now or hereafter placed on,
against or affecting the Building, Landlord's interest or estate in the
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Building, or any ground or underlying lease; provided, however, that if the
lessor, mortgagee, trustee, or holder of any such mortgage or deed of trust
elects to have Tenant's interest in this Lease be superior to any such
instrument, then, by notice to Tenant, this Lease shall be deemed superior,
whether this Lease was executed before or after said instrument. Notwithstanding
the foregoing, Tenant covenants and agrees to execute and deliver upon demand
such further instruments evidencing such subordination or superiority of this
Lease as may be required by Landlord.
16. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with all
the rules and regulations as set forth in Exhibit C to this Lease and all
reasonable modifications of and additions to them from time to time put into
effect by Landlord. Landlord shall not be responsible to Tenant for the
non-performance by any other tenant or occupant of the Building of any such
rules and regulations.
17. REENTRY BY LANDLORD.
17.1 Landlord reserves and shall at all times have the right to
re-enter the Premises to inspect the same, to supply janitor service and any
other service to be provided by Landlord to Tenant under this Lease, to show
said Premises to prospective purchasers, mortgagees or tenants, and to alter,
improve or repair the Premises and any portion of the Building, without
abatement of rent, and may for that purpose erect, use and maintain scaffolding,
pipes, conduits and other necessary structures and open any way, ceiling or
floor in and through the Building and Premises where reasonably required by the
character of the work to be performed, provided entrance to the Premises shall
not be blocked thereby, and further provided that the business of Tenant shall
not be interfered with unreasonably.
17.2 Landlord shall have the right at any time to change the
arrangement and/or locations of entrances, or passageways, doors and doorways,
and corridors, windows, elevators, stairs, toilets or other public parts of the
Building and to change the name, number or designation by which the Building is
commonly known. In the event that Landlord damages any portion of any wall or
wall covering, ceiling, or floor or floor covering within the Premises, Landlord
shall repair or replace the damaged portion to match the original as nearly as
commercially reasonable but shall not be required to repair or replace more than
the portion actually damaged.
17.3 Tenant hereby waives any claim for damages for any injury or
inconvenience to or interference with Tenant's business, any loss of occupancy
or quiet enjoyment of the Premises, and any other loss occasioned by any action
of Landlord authorized by this Article 17. Tenant agrees to reimburse Landlord,
on demand, as additional rent, for any expenses which Landlord may incur in
reasonably effecting compliance with Tenant's obligations under this Lease as
permitted hereunder.
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17.4 For each of the aforesaid purposes, Landlord shall at all times
have and retain a key with which to unlock all of the doors in the Premises,
excluding Tenant's vaults and safes or special security areas (designated in
advance), and Landlord shall have the right to use any and all means which
Landlord may deem proper to open said doors in an emergency to obtain entry to
any portion of the Premises. As to any portion to which access cannot be had by
means of a key or keys in Landlord's possession, Landlord is authorized to gain
access by such means as Landlord shall elect and the reasonable cost of
repairing any damage occurring in doing so shall be borne by Tenant and paid to
Landlord as additional rent upon demand.
18. DEFAULT.
18.1 Except as otherwise provided in Article 20, the following events
shall be deemed to be Events of Default under this Lease:
18.1.1 Tenant shall fail to pay when due any sum of money
becoming due to be paid to Landlord under this Lease, whether such sum be any
installment of the rent reserved by this Lease, any other amount treated as
additional rent under this Lease, or any other payment or reimbursement to
Landlord required by this Lease, whether or not treated as additional rent under
this Lease, and such failure shall continue for a period of five (5) days after
written notice that such payment was not made when due, but if any such notice
shall be given three times in any twelve month period, the fourth or further
failure to pay within five days after due any additiona1 sum of money becoming
due to be paid to Landlord under this Lease during such period shall be an Event
of Default, without notice.
18.1.2 Tenant shall fail to comply with any term, provision or
covenant of this Lease which is not provided for in another Section of this
Article and shall not cure such failure within thirty (30) days (forthwith, if
the failure involves a hazardous condition) after written notice of such failure
to Tenant.
18.1.3 Tenant shall fail to vacate the Premises immediately
upon termination of this Lease, by lapse of time or otherwise, or upon
termination of Tenant's right to possession only.
18.1.4 Tenant shall become insolvent, admit in writing its
inability to pay its debts generally as they become due, file a petition in
bankruptcy or a petition to take advantage of any insolvency statute, make an
assignment for the benefit of creditors, make a transfer in fraud of creditors,
apply for or consent to the appointment of a receiver of itself or of the whole
or any substantial part of its property, or file a petition or answer seeking
reorganization or arrangement under the federal bankruptcy laws, as now in
effect or hereafter amended, or any other applicable law or statute of the
United States or any state thereof.
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18.1.5 A court of competent jurisdiction shall enter an order,
judgment or decree adjudicating Tenant bankrupt, or appointing a receiver of
Tenant, or of the whole or any substantial part of its property, without the
consent of Tenant, or approving a petition filed against Tenant seeking
reorganization or arrangement of Tenant under the bankruptcy laws of the United
States, as now in effect or hereafter amended, or any state thereof, and such
order, judgment or decree shall not be vacated or set aside or stayed within
thirty (30) days from the date of entry thereof.
19. REMEDIES.
19.1 Except as otherwise provided in Article 20, upon the occurrence of
any of the Events of Default described or referred to in Article 18, Landlord
shall have the option to pursue any one or more of the following remedies
without any notice or demand whatsoever, concurrently or consecutively and not
alternatively:
19.1.1 Landlord may, at its election, terminate this Lease or
terminate Tenant's right to possession only, without terminating the Lease.
19.1.2 Upon any termination of this Lease, whether by lapse of
time or otherwise, or upon any termination of Tenant's right to possession
without termination of the Lease, Tenant shall surrender possession and vacate
the Premises immediately, and deliver possession thereof to Landlord, and Tenant
hereby grants to Landlord full and free license to enter into and upon the
Premises in such event and to repossess Landlord of the Premises as of
Landlord's former estate and to expel or remove Tenant and any others who may be
occupying or be within the Premises and to remove Tenant's signs and other
evidence of tenancy and all other property of Tenant therefrom without being
deemed in any manner guilty of trespass, eviction or forcible entry or detainer,
and without incurring any liability for any damage resulting therefrom, Tenant
waiving any right to claim damages for such re-entry and expulsion, and without
relinquishing Landlord's right to rent or any other right given to Landlord
under this Lease or by operation of law.
19.1.3 Upon any termination of this Lease, whether by lapse of
time or otherwise, Landlord shall be entitled to recover as damages, all rent,
including any amounts treated as additional rent under this Lease, and other
sums due and payable by Tenant on the date of termination, plus as liquidated
damages and not as a penalty, an amount equal to the sum of: (a) an amount equal
to the then present value of the rent reserved in this Lease for the residue of
the stated Term of this Lease including any amounts treated as additional rent
under this Lease and all other sums provided in this Lease to be paid by Tenant,
minus the fair rental value of the Premises for such residue; (b) the value of
the time and expense necessary to obtain a replacement tenant or tenants, and
the estimated expenses described in Section 19.1.4 relating to recovery of the
Premises, preparation for reletting and for reletting itself; and (c) the cost
of performing any other covenants which would have otherwise been performed by
Tenant.
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19.1.4 Upon any termination of Tenant's right to possession
only without termination of the Lease:
19.1.4.1 Neither such termination of Tenant's right
to possession nor Landlord's taking and holding possession thereof as provided
in Section 19.1.2 shall terminate the Lease or release Tenant, in whole or in
part, from any obligation, including Tenant's obligation to pay the rent,
including any amounts treated as additional rent, under this Lease for the full
Term, and if Landlord so elects Tenant shall pay forthwith to Landlord the sum
equal to the entire amount of the rent, including any amounts treated as
additional rent under this Lease, for the remainder of the Term plus any other
sums provided in this Lease to be paid by Tenant for the remainder of the Term.
19.1.4.2 Landlord shall use commercially reasonable
efforts to relet the Premises or any part thereof, by one or more leases, for
such rent and upon such terms as Landlord, in its sole discretion, shall
reasonably determine (including the right to relet the premises for a greater or
lesser term than that remaining under this Lease, the right to relet the
Premises as a part of a larger area, and the right to change the character or
use made of the Premises). In connection with or in preparation for any
reletting, Landlord may, but shall not be required to, make repairs, alterations
and additions in or to the Premises and redecorate the same to the extent
Landlord deems necessary or desirable, and Tenant shall, upon demand, pay the
cost thereof, together with Landlord's expenses of reletting, including, without
limitation, any commission incurred by Landlord. Landlord and Tenant agree that
nevertheless Landlord shall at most be required to use only the same efforts
Landlord then uses to lease premises in the Building generally, provided they
are commercially reasonable, and that in any case that Landlord shall not be
required to give any preference or priority to the showing or leasing of the
Premises over any other space that Landlord may be leasing or have available and
may place a suitable prospective tenant in any such other space regardless of
when such other space becomes available. Landlord shall not be required to
observe any instruction given by Tenant about any reletting or accept any tenant
offered by Tenant unless such offered tenant has a credit-worthiness acceptable
to Landlord and leases the entire Premises upon terms and conditions including a
rate of rent (after giving effect to all expenditures by Landlord for tenant
improvements, broker's commissions and other leasing costs) all no less
favorable to Landlord than as called for in this Lease, nor shall Landlord be
required to make or permit any assignment or sublease for more than the current
term or which Landlord would not be required to permit under the provisions of
Article 9.
19.1.4.3 Until such time as Landlord shall elect to
terminate the Lease and shall thereupon be entitled to recover the amounts
specified in such case in Section 19.1.3, Tenant shall pay to Landlord upon
demand the full amount of all rent, including any amounts treated as additional
rent under this Lease and other sums reserved in this Lease for the remaining
Term, together with the reasonable costs of repairs, alterations, additions,
redecorating
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and Landlord's expenses of reletting and the collection of the rent accruing
therefrom (including reasonable attorney's fees and broker's commissions), as
the same shall then be due or become due from time to time, less only such
consideration as Landlord may have received from any reletting of the Premises;
and Tenant agrees that Landlord may file suits from time to time to recover any
sums falling due under this Article 19 as they become due. Any proceeds of
reletting by Landlord in excess of the amount then owed by Tenant to Landlord
from time to time shall be credited against Tenant's future obligations under
this Lease but shall not otherwise be refunded to Tenant or inure to Tenant's
benefit.
19.2 Landlord may, at Landlord's option, enter into and upon the
Premises if Landlord determines in its sole discretion that Tenant is not acting
within a commercially reasonable time to maintain, repair or replace anything
for which Tenant is responsible under this Lease and correct the same, without
being deemed in any manner guilty of trespass, eviction or forcible entry and
detainer and without incurring any liability for any damage or interruption of
Tenant's business resulting therefrom. If Tenant shall have vacated the
Premises, Landlord may at Landlord's option re-enter the Premises at any time
during the last six months of the then current Term of this Lease and make any
and all such changes, alterations, revisions, additions and tenant and other
improvements in or about the Premises as Landlord shall elect, all without any
abatement of any of the rent otherwise to be paid by Tenant under this Lease.
19.3 If, on account of any breach or default by Tenant in Tenant's
obligations under the terms and conditions of this Lease, it shall become
necessary or appropriate for Landlord to employ or consult with an attorney
concerning or to enforce or defend any of Landlord's rights or remedies arising
under this Lease, Tenant agrees to pay all Landlord's reasonable attorney's fees
so incurred. Tenant expressly waives any right to: (a) trial by jury; and (b)
service of any notice required by any present or future law or ordinance
applicable to landlords or tenants but not required by the terms of this Lease.
19.4 Pursuit of any of the foregoing remedies shall not preclude
pursuit of any of the other remedies provided in this Lease or any other
remedies provided by law (all such remedies being cumulative), nor shall pursuit
of any remedy provided in this Lease constitute a forfeiture or waiver of any
rent due to Landlord under this Lease or of any damages accruing to Landlord by
reason of the violation of any of the terms, provisions and covenants contained
in this Lease.
19.5 No act or thing done by Landlord or its agents during the Term
shall be deemed a termination of this Lease or an acceptance of the surrender of
the Premises, and no agreement to terminate this Lease or accept a surrender of
said Premises shall be valid, unless in writing signed by Landlord. No waiver by
Landlord of any violation or breach of any of the terms, provisions and
covenants contained in this Lease shall be deemed or construed to constitute a
waiver of any other violation or breach of any of the terms, provisions and
covenants contained in this Lease. Landlord's acceptance of the payment of
rental or other payments after the occurrence of an
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Event of Default shall not be construed as a waiver of such Default, unless
Landlord so notifies Tenant in writing. Forbearance by Landlord in enforcing one
or more of the remedies provided in this Lease upon an Event of Default shall
not be deemed or construed to constitute a waiver of such Default or of
Landlord's right to enforce any such remedies with respect to such Default or
any subsequent Default.
19.6 INTENTIONALLY OMITTED.
19.7 Any and all property which may be removed from the Premises by
Landlord pursuant to the authority of this Lease or of law, to which Tenant is
or may be entitled, may be handled, removed and/or stored, as the case may be,
by or at the direction of Landlord but at the risk, cost and expense of Tenant,
and Landlord shall in no event be responsible for the value, preservation or
safekeeping thereof. Tenant shall pay to Landlord, upon demand, any and all
expenses incurred in such removal and all storage charges against such property
so long as the same shall be in Landlord's possession or under Landlord's
control. Any such property of Tenant not retaken by Tenant from storage within
thirty (30) days after removal from the Premises shall, at Landlord's option, be
deemed conveyed by Tenant to Landlord under this Lease as by a bill of sale
without further payment or credit by Landlord to Tenant.
20. TENANT'S BANKRUPTCY OR INSOLVENCY.
20.1 If at any time and for so long as Tenant shall be subjected to the
provisions of the United States Bankruptcy Code or other law of the United
States or any state thereof for the protection of debtors as in effect at such
time (each a Debtor's Law.):
20.1.1 Tenant, Tenant as debtor-in-possession, and any trustee
or receiver of Tenant's assets (each a "Tenant's Representative") shall have no
greater right to assume or assign this Lease or any interest in this Lease, or
to sublease any of the Premises than accorded to Tenant in Article 9, except to
the extent Landlord shall be required to permit such assumption, assignment or
sublease by the provisions of such Debtor's Law. Without limitation of the
generality of the foregoing, any right of any Tenant's Representative to assume
or assign this Lease or to sublease any of the Premises shall be subject to the
conditions that:
20.1.1.1 Such Debtor's Law shall provide to Tenant's
Representative a right of assumption of this Lease which Tenant's Representative
shall have timely exercised and Tenant's Representative shall have fully cured
any default of Tenant under this Lease.
20.1.1.2 Tenant's Representative or the proposed
assignee, as the case shall be, shall have deposited with Landlord as security
for the timely payment of rent an amount equal to the larger of: (a) three
months' rent and other monetary charges accruing under this Lease; and (b) any
sum specified in Article 5; and shall have provided Landlord with adequate
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other assurance of the future performance of the obligations of the Tenant under
this Lease. Without limitation, such assurances shall include, at least, in the
case of assumption of this Lease, demonstration to the satisfaction of the
Landlord that Tenant's Representative has and will continue to have sufficient
unencumbered assets after the payment of all secured obligations and
administrative expenses to assure Landlord that Tenant's Representative will
have sufficient funds to fulfill the obligations of Tenant under this Lease;
and, in the case of assignment, submission of current financial statements of
the proposed assignee, showing a net worth and working capital in amounts
reasonably determined by Landlord to be sufficient to assure the future
performance by such assignee of all of the Tenant's obligations under this
Lease.
20.1.1.3 The assumption or any contemplated
assignment of this Lease or subleasing any part of the Premises, as shall be the
case, will not breach any provision in any other lease, mortgage, financing
agreement or other agreement by which Landlord is bound.
20.1.1.4 Landlord shall have, or would have had
absent the Debtor's Law, no right under Article 9 to refuse consent to the
proposed assignment or sublease by reason of the identity or nature of the
proposed assignee or sublessee or the proposed use of the Premises concerned.
21. QUIET ENJOYMENT. Landlord represents and warrants that it has full right and
authority to enter into this Lease and that Tenant, while paying the rental and
performing its other covenants and agreements contained in this Lease, shall
peaceably and quietly have, hold and enjoy the Premises for the Term without
hindrance or molestation from or through Landlord, including without limitation
Landlord's lenders and others holding liens or leases on, against, or affecting
the Building, subject to the terms and provisions of this Lease. Landlord shall
not be liable for any interference or disturbance by other tenants or third
persons, nor shall Tenant be released from any of the obligations of this Lease
because of such interference or disturbance.
22. DAMAGE BY FIRE, ETC.
22.1 In the event the Premises or the Building are damaged by fire or
other cause and in Landlord's reasonable estimation such damage can bo
materially restored within ninety (90) days, Landlord shall forthwith repair the
same and this Lease shall remain in full force and effect, except that Tenant
shall be entitled to a proportionate abatement in rent from the date of such
damage. Such abatement of rent shall be made pro rata in accordance with the
extent to which the damage and the making of such repairs shall interfere with
the use and occupancy by Tenant of the Premises from time to time. Within
forty-five (45) days from the date of the damage, Landlord shall notify Tenant,
in writing, of Landlord's reasonable estimation of the length of time within
which material restoration can be made, and Landlord's determination shall be
binding on Tenant. For purposes of this Lease, the Building or Premises shall be
deemed "materially restored" if they
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are in such condition as would not prevent or materially interfere with Tenant's
use of the Premises for the purpose for which it was being used immediately
before such damage.
22.2 If such repairs cannot, in Landlord's reasonable estimation, be
made within ninety (90) days. Landlord and Tenant shall each have the option of
giving the other, at any time within sixty (60) days after such damage, notice
terminating this Lease as of the date of such damage. In the event of the giving
of such notice, this Lease shall expire and all interest of the Tenant in the
Premises shall terminate as of the date of such damage as if such date had been
originally fixed in this Lease for the expiration of the Term. In the event that
neither Landlord nor Tenant exercise its option to terminate this Lease, then
Landlord shall repair or restore such damage, this Lease continuing in full
force and effect, and the rent hereunder shall be proportionately abated as
provided in Section 22.1.
22.3 Landlord shall not be required to repair or replace any damage or
loss by or from fire or other cause to any panelings, decorations, partitions,
additions, railings, ceilings, floor coverings, office fixtures or any other
property or improvements installed on the Premises or belonging to Tenant. Any
insurance which may be carried by Landlord or Tenant against loss or damage to
the Building or Premises shall be for the sole benefit of the party carrying
such insurance and under its sole control.
22.4 In the event that Landlord should fail to complete such repair and
material restoration within sixty (60) days after the date estimated by Landlord
therefor as extended by this Section 22.4, Tenant may at its option and as its
sole remedy terminate this Lease by delivering written notice to Landlord,
within fifteen (15) days after the expiration of said period of time, whereupon
the Lease shall end on the date of such notice or such later date fixed in such
notice as if the date of such notice was the date originally fixed in this Lease
for the expiration of the Term; provided, however, that if construction is
delayed because of changes, deletions or additions in construction requested by
Tenant, strikes, lockouts, casualties, Acts of God, war, material or labor
shortages, government regulation or control or other causes beyond the
reasonable control of Landlord, the period for restoration, repair or rebuilding
shall be extended for the amount of time Landlord is so delayed.
22.5 Notwithstanding anything to the contrary contained in this
Article: (a) Landlord shall not have any obligation whatsoever to repair,
reconstruct, or restore the Promises when the damages resulting from any
casualty covered by the provisions of this Article 22 occur during the last
twelve (12) months of the Term or any extension thereof, but if Landlord
determines not to repair such damages Landlord shall notify Tenant and if such
damages shall render any material portion of the Premises untenantable Tenant
shall have the right to terminate this Lease by notice to Landlord within
fifteen (15) days after receipt of Landlord's notice; and (b) in the event the
holder of any indebtedness secured by a mortgage deed of trust covering the
Premises or Building requires that any insurance proceeds be applied to such
indebtedness, then Landlord shall have the
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right to terminate this Lease by delivering written notice of termination to
Tenant within fifteen (15) days after such requirement is made by any such
holder, whereupon this Lease shall end on the date of such damage as if the date
of such damage were the' date originally fixed in this Lease for the expiration
of the Term.
22.6 In the event of any damage or the destruction to the Building or
Premises by any peril covered by the provisions of this Article 22, it shall be
Tenant's responsibility to properly secure the Premises and upon notice from
Landlord to remove forthwith, at its sole cost and expense, such portion of all
of the property belonging to Tenant or its licensees from such portion or all of
the Building or Premises as Landlord shall request.
23. EMINENT DOMAIN. If all or any substantial part of the Premises shall be
taken or appropriated by any public or quasi-public authority under the power of
eminent domain, or conveyance in lieu of such appropriation, either party to
this Lease shall have the right, at its option, of giving the other, at any time
within thirty (30) days after such taking, notice terminating this Lease, except
that Tenant may only terminate this Lease by reason of taking or appropriation,
if such taking or appropriation shall be so substantial as to materially
interfere with Tenant's use and occupancy of the Premises. If neither party to
this Lease shall so elect to terminate this Lease, the rental thereafter to be
paid shall be adjusted on a fair and equitable basis under the circumstances. In
addition to the rights of Landlord above, if any substantial part of the
Building shall be taken or appropriated by any public or quasi-public authority
under the power of eminent domain or conveyance in lieu thereof, and regardless
of whether the Premises or any part thereof are so taken or appropriated,
Landlord shall have the right, at its sole option, to terminate this Lease.
Landlord shall be entitled to any and all income, rent, award, or any interest
whatsoever in or upon any such sum, which may be paid or made in connection with
any such public or quasi-public use or purpose, and Tenant hereby assigns to
Landlord any interest it may have in or claim to all or any part of such sums,
other than any separate award which may be made with respect to Tenant's trade
fixtures and moving expenses; Tenant shall make no claim for the value of any
unexpired Term.
24. SALE BY LANDLORD. In event of a sale or conveyance by Landlord of the
Building, the same shall operate to release Landlord from any future liability
upon any of the covenants or conditions, expressed or implied, contained in this
Lease in favor of Tenant, and in such event Tenant agrees to look solely to the
responsibility of the successor in interest of Landlord in and to this Lease.
Except as set forth in this Article 24, this Lease shall not be affected by any
such sale and Tenant agrees to attorn to the purchaser or assignee. If any
security has been given by Tenant to secure the faithful performance of any of
the covenants of this Lease, Landlord shall transfer or deliver said security,
as such, to Landlord's successor in interest and thereupon Landlord shall be
discharged from any further liability with regard to said security.
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25. ESTOPPEL CERTIFICATES. Within ten (10) days following any written request
which Landlord may make from time to time, Tenant shall execute and deliver to
Landlord or mortgagee or prospective mortgagee a sworn statement certifying: (a)
the date of commencement of this Lease; (b) the fact that this Lease is
unmodified and in full force and effect (or, if there have been modifications to
this Lease, that this lease is in full force and effect, as modified, and
stating the date and nature of such modifications); (c) the date to which the
rent and other sums payable under this Lease have been paid; (d) the fact that
there are no current defaults under this Lease by either Landlord or Tenant
except as specified in Tenant's statement; and (e) such other matters as may be
requested by Landlord. Landlord and Tenant intend that any statement delivered
pursuant to this Article 25 may be relied upon by any mortgagee, beneficiary or
purchaser and Tenant shall be liable for all loss, cost or expense resulting
from the failure of any sale or funding of any loan caused by any material
misstatement contained in such estoppel certificate. Tenant irrevocably agrees
that if Tenant fails to execute and deliver such certificate within such ten
(10) day period Landlord or Landlord's beneficiary or agent may execute and
deliver such certificate on Tenant's behalf, and that such certificate shall be
fully binding on Tenant.
26. SURRENDER OF PREMISES.
26.1 Tenant shall, at least thirty (30) days before the last day of the
Term, arrange to meet Landlord for a joint inspection of the Premises. In the
event of Tenant's failure to arrange such joint inspection to be held prior to
vacating the Premises, Landlord's inspection at or after Tenant's vacating the
Premises shall be conclusively deemed correct for purposes of determining
Tenant's responsibility for repairs and restoration.
26.2 At the end of the Term or any renewal of the Term or other sooner
termination of this Lease, Tenant will peaceably deliver up to Landlord
possession of the Premises, together with all improvements or additions upon or
belonging to the same, by whomsoever made, in the same conditions received or
first installed, broom clean and free of all debris, excepting only ordinary
wear and tear and damage by fire or other casualty. Tenant may, and at
Landlord's request sha11, at Tenant's sole cost, remove upon termination of this
Lease, any and all furniture, furnishings, movable partitions of less than full
height from floor to ceiling, trade fixtures and other property installed by
Tenant, title to which shall not be in or pass automatically to Landlord upon
such termination, repairing all damage caused by such removal. Property not so
removed shall, unless requested to be removed, be deemed abandoned by the Tenant
and title to the same shall thereupon pass to Landlord under this Lease as by a
bill of sale. All other alterations, additions and improvements in, on or to the
Premises shall be dealt with and disposed of as provided in Article 6 hereof.
26.3 All obligations of Tenant under this Lease not fully performed as
of the expiration or earlier termination of the Term shall survive the
expiration or earlier termination of the Term.
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In the event that Tenant's failure to perform prevents Landlord from releasing
the Premises, Tenant shall continue to pay rent pursuant to the provisions of
Article 14 until such performance is complete. Upon the expiration or earlier
termination of the Term, Tenant shall pay to Landlord the amount, as estimated
by Landlord, necessary to repair and restore the Premises as provided in this
Lease and/or to discharge Tenant's obligation for unpaid amounts due or to
become due to Landlord. All such amounts shall be used and held by Landlord for
payment of such obligations of Tenant, with Tenant being liable for any
additional costs upon demand by Landlord, or with any excess to be resumed to
Tenant after all such obligations have been determined and satisfied. Any
otherwise unused Security Deposit shall be credited against the amount payable
by Tenant under this Lease.
27. NOTICES. Any notice or document required or permitted to be delivered under
this Lease shall be addressed to the intended recipient, shall be transmitted
personally, by fully prepaid registered or certified United States Mail return
receipt requested, or by reputable independent contract delivery service
furnishing a written record of attempted or actual delivery, and shall be deemed
to be delivered when tendered for delivery to the addressee at its address set
forth on the Reference Page, or at such other address as it has then last
specified by written notice delivered in accordance with this Article 27, or if
to Tenant at either its aforesaid address or its last known registered office or
home of a general partner or individual owner, whether or not actually accepted
or received by the addressee.
28. TAXES PAYABLE BY TENANT. In addition to rent and other charges to be paid by
Tenant under this Lease, Tenant shall reimburse to Landlord, upon demand, any
and all taxes payable by Landlord (other than net income taxes) whether or not
now customary or within the contemplation of the panics to this Lease: (a) upon,
allocable to, or measured by or on the gross or net rent payable under this
Lease, including without limitation any gross income tax or excise tax levied by
the State, any political subdivision thereof, or the Federal Government with
respect to the receipt of such rent; (b) upon or with respect to the possession,
leasing, operation, management, maintenance, alteration, repair, use or
occupancy of the Premises or any portion thereof, including any sales, use or
service tax imposed as a result thereof; (c) upon or measured by the Tenant's
gross receipts or payroll or the value of Tenant's equipment, furniture,
fixtures and other personal property of Tenant or leasehold improvements,
alterations or additions located in the Premises; or (d) upon this transaction
or any document to which Tenant is a party creating or transferring any interest
of Tenant in this Lease or the Premises. In addition to the foregoing, Tenant
agrees to pay, before delinquency, any and all taxes levied or assessed against
Tenant and which become payable during the term hereof upon Tenant's equipment,
furniture, fixtures and other personal property of Tenant located in the
Premises.
29. RELOCATION OF TENANT. Not Applicable
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30. DEFINED TERMS AND HEADINGS. The Article headings shown in this Lease are for
convenience of reference and shall in no way define, increase, limit or describe
the scope or intent of any provision of this Lease. Any indemnification or
insurance of Landlord shall apply to and inure to the benefit of all the
following "Landlord Entities", being Landlord, Landlord's investment manager,
and the trustees, boards of directors, officers, general partners,
beneficiaries, stockholders, employees and agents of each of them. Any option
granted to Landlord shall also include or be exercisable by Landlord's trustee,
beneficiary, agents and employees, as the case may be. In any case where this
Lease is signed by more than one person, the obligations under this Lease shall
be joint and several. The terms "Tenant" and "Landlord" or any pronoun used in
place thereof shall indicate and include the masculine or feminine, the singular
or plural number, individuals, firms or corporations, and each of their
respective successors, executors, administrators and permitted assigns,
according to the context hereof. The term "rentable area" shall mean the
rentable area of the Premises or the Building as calculated by the Landlord on
the basis of the plans and specifications of the Building including a
proportionate share of any common areas. Tenant hereby accepts and agrees to be
bound by the figures for the rentable space footage of the Premises and Tenant's
Proportionate Share shown on the Reference Page.
31. TENANT'S AUTHORITY. If Tenant signs as a corporation each of the persons
executing this Lease on behalf of Tenant represents and warrants that Tenant has
been and is qualified to do business in the state which the Building is located,
that the corporation has full right and authority to enter into this Lease, and
the all persons signing on behalf of the corporation were authorized to do so by
appropriate corporate actions. I Tenant signs as a partnership, trust or other
legal entity, each of the persons executing this Lease on behalf of Tenant
represents and warrants that Tenant has complied with all applicable laws, rules
and government regulations relative to its right to do business in the state and
that such entity on behalf of the Tenant was authorized to do so by any and all
appropriate partnership, trust or other actions. Tenant agrees to furnish
promptly upon request a corporate resolution, proof of due authorization by
partners, or other appropriate documentation evidencing the due authorization of
Tenant to enter into this Lease.
32. COMMISSIONS. Each of the parties represents and warrants to the other that
it has not dealt with am broker or finder in connection with this Lease, except
as described on the Reference Page.
33. TIME AND APPLICABLE LAW. Time is of the essence of this Lease and all of its
provisions. This Lease shall in all respects be governed by the laws of the
state in which the Building is located.
34. SUCCESSORS AND ASSIGNS. Subject to the provisions of Article 9, the terms,
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covenants and conditions contained in this Lease shall be binding upon and inure
to the benefit of the heirs, successors, executors, administrators and assigns
of the parties to this Lease.
35. ENTIRE AGREEMENT. This Lease, together with its exhibits, contains all
agreements of the parties to this Lease and supersedes any previous
negotiations. There have been no representations made by the Landlord or
understandings made between the parties other than those set forth in this Lease
and its exhibits. This Lease may not be modified except by a written instrument
duly executed by the parties to this Lease.
36. EXAMINATION NOT OPINION. Submission of this Lease shall not be deemed to be
a reservation of the Premises. Landlord shall not be bound by this Lease until
it has received a copy of this Lease duly executed by Tenant and has delivered
to Tenant a copy of this Lease duly executed by Landlord, and until sue}
delivery Landlord reserves the right to exhibit and lease the Premises to other
prospective tenants. Notwithstanding anything contained in this Lease to the
contrary, Landlord may withhold delivery of possession of the Premises from
Tenant until such time as Tenant has paid to Landlord any security deposit
required by Article 5, the first month's rent as set forth in Article 3 and any
sum owed pursuant to this Lease.
37. RECORDATION. Tenant shall not record or register this Lease or a short form
memorandum hereof without the prior written consent of Landlord, and then shall
pay all charges and taxes incident such recording or registration.
38. SHARED TELEPHONE SYSTEM. Anchor Centre Three is a certified shared tenant
building in which all riser communications cable is owned and managed by Equity
Telecommunications, Inc. ("ETI"). Therefore, telecommunication facilities are
provided only by ETI Tenants occupying space in Anchor Centre Three have the
option to either participate in the shared tenant services provided by ETI or
operate their own telephone system. In the event an outside system is utilized,
Tenant shall be required to rent cable pairs from Equity Telecommunications,
Inc. at a monthly rate for the Term. Tenant shall be responsible for making all
arrangements with ETI for use of shared services or rental of cable pairs.
39. LIMITATION OF LANDLORD'S LIABILITY. Redress for any claim against Landlord
under this Lease shall be limited to and enforceable only against and to the
extent of Landlord's interest in the Building. The obligations of Landlord under
this Lease are not intended to and shall not be personally binding on, nor shall
any resort be had to the private properties of, any of its trustees or board of
directors and officers, as the case may be, its investment manager, the general
partners thereof, or any beneficiaries, stockholders, employees, or agents of
Landlord or the investment manager.
40. PARKING. Tenant shall be entitled to use, during the term of this Lease, six
(6)
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covered, reserved parking spaces. Such spaces shall be free of charge during the
first twelve (12) months of the Lease Term; thereafter parking charges shall be
$35.00 per month for each covered, reserved parking space. Tenant shall be
entitled to lease for its use, during the term of this Lease, up to eighteen
(18) covered, unreserved parking spaces to the extent they are available in
excess of current or anticipated needs of other tenants at the time Tenant
requests them. Charges for such spaces shall be $25.00 per month for each
covered, unreserved parking space.
41. RENEWAL OPTION. Provided that Tenant is not then in default under this Lease
beyond any applicable cure period, Tenant shall have the option to extend the
Term of this Lease by one (1) period of five (5) years (the "Renewal Term") by
written notice given to Landlord not less then six (6) months before the
expiration of the then-current Term. If the option is not exercised in a timely
manner, then it shall automatically expire. The amount of the Annual Base Rent
during the Renewal Term shall be the base rental rate being offered by Landlord
as of the beginning of the Renewal Term to prospective new tenants for
reasonably similar space in the Building.
42. RIGHT OF FIRST REFUSAL.
42.1 Obligation to Offer. Provided Tracer Design, Inc. is then Tenant
under this Lease and is not in default beyond any applicable cure period,
Landlord shall not enter into a lease with a third party for all or part of
Suite 326 (containing approximately 1975 rentable square feet) ("Expansion Space
I") or all or any part of Suite 319 (containing approximately 2006 rentable
square feet) (the "Expansion Space II"), without first offering to lease the
Expansion Space involved to Tenant. The notice to Tenant shall specify the
fundamental terms (applicable rental rate, base year, term, tenant improvement
allowance, and parking rights) on which Landlord proposes to lease or offer the
Expansion Space to a third party (the "Offer"). Landlord may give the Offer to
Tenant at any point in Landlord's discussions with a third party, and need not
have completed negotiations of a proposed lease to the third party.
42.2 Acceptance of Offer. Tenant may accept the Offer by written notice
given to Landlord within two (2) business days after receipt of the Offer.
42.3 Right to Market. If Tenant rejects or fails to accept an Offer
related to Expansion Space I within the two (2) business day period, then during
the following three month period, Landlord shall be free to enter into leases of
all or any part of Expansion Space I with third parties, provided that the
rental rate offered to the third parties shall not be less than ninety percent
(90%) of the rental rate specified in the Offer. Any portion of Expansion Space
I not leased within such three month period shall not be leased by Landlord to a
third party unless Landlord shall first have reoffered it to Tenant under the
terms and conditions of this Article. If Tenant rejects or fails to accept an
Offer related to Expansion Space II within the two (2)
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business day period, then from such time forward, Landlord shall be free to
enter into leases of all or any part of the Expansion Space X with third parties
free and clear of all rights of Tenant.
42.4 Execution of Amendment. If Tenant accepts an Offer for either
Expansion Space I or Expansion Space II, Landlord and Tenant shall enter into an
amendment of this Lease within twenty (20) days incorporating the space into the
Premises on the terms and conditions specified in the Offer and otherwise on the
terms and conditions of this Lease.
42.5 Subordinated Right. Tenant's rights to Expansion Space II are
expressly subordinate to the existing rights of other tenants in the Building,
and may be exercised only to the extent the right of those other tenants lapse
or are waived.
43. TERMINATION OPTION. Provided that Tenant is not then in default under this
Lease beyond any applicable cure period, and provided Landlord has failed to
make available for lease by Tenant additional space to accommodate Tenant's
expansion needs, Tenant shall have the option to terminate this Lease as of the
end of the third anniversary of the Commencement Date by written notice (the
"Notice") given to Landlord not later than six months prior to the third
anniversary of the Commencement Date. The Notice shall not be effective for any
purpose unless it: (a) sets forth in detail Tenant's unfulfilled expansion
needs, and (b) is accompanied by the Termination Fee in the form of a cashier's
or certified check payable to Landlord. The Termination Fee shall be an amount
equal to 40% of Landlord's Investment. "Landlord's Investment" means all costs
incurred by Landlord in connection with this Lease for design and construction
of tenant improvements and all brokerage commissions. Landlord shall provide to
Tenant a statement detailing Landlord's Investment within sixty days after the
Commencement Date. If, during the thirty day period following receipt of the
Notice, Landlord provides notice to Tenant that Landlord is willing to lease and
has or will have within the next 120 days available for lease space in Anchor
Centre One or III that will reasonably accommodate Tenant's expansion needs,
then the Notice shall automatically be deemed rescinded, Landlord shall return
the Termination Fee, and the parties shall, by amendment to this Lease or by a
new lease, enter into an agreement for Tenant to lease the additional space on
the then prevailing market terms and conditions.
44. MONUMENT SIGNAGE. Tenant shall be entitled to have its sign placed on the
sign monument for the Building provided Tenant so elects by notice given to
Landlord not later than March 31, 1996 and provided space on the monument for
Tenant's sign is still available at the time the notice is received. Space on
the monument shall not be deemed available if Landlord has entered into a lease
with another tenant giving it the right to use the sign monument for its sign or
if Landlord is then in substantive discussions or negotiations with a
prospective tenant pursuant to which Landlord has indicated its willingness to
include such monument signage rights in the proposed lease. Tenant shall bear
all costs of design, fabrication, installation and maintenance of
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its sign, which shall be subject to Landlord's prior approval and compliance
with all applicable municipal ordinances and permit requirements.
ANCHOR CENTRE PROPERTIES, INC. TRACER DESIGN, Inc.,
a Delaware corporation an Arizona corporation
By:/s/ Robert M. Chapman, By:/s/ Chad M. Little
---------------------------------- --------------------------------
Robert M. Chapman, Vice President Title: President
Dated: 9/8/95 -----------------------------------
---------------------------- Dated: 9/6/95
----------------------------
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<PAGE>
EXHIBIT A
attached to and made a part of Lease bearing the
Lease Reference Date of August 22, 1995 between
ANCHOR CENTRE PROPERTIES, INC., as
Landlord and TRACER DESIGN, INC., as Tenant
PREMISES
Exhibit A is intended only to show the general layout of the Premises as of the
beginning of the Term of this Lease. It does not in any way supersede any of
Landlord's rights set forth in Section 17.2 with respect to arrangements and/or
locations of public parts of the Building and changes in such arrangements
and/or locations. It is not to be scaled; any measurements or distances shown
should be taken as approximate.
SUITE #324 -- APPR0XIMATELY 6184 RENTABLE SQUARE FEET
2231 EAST CAMELBACK ROAD, PHOENIX, AZ 85016
<PAGE>
EXHIBIT B
attached to and made a part of Lease bearing the
Lease Reference Date of August 22, 1995 between
ANCHOR CENTRE: PROPERTIES, INC., as Landlord and
TRACER DESIGN, INC., as Tenant
INITIAL ALTERATIONS
Tenant hereby acknowledges and agrees that except as specifically provided
below, the Premises are being received by Tenant in as-is condition as
surrendered by the prior tenant and that Tenant will be responsible to return
the Premises to original broom clean condition at the expiration of this Lease
or any extension thereof, ordinary wear and tear expected.
Landlord agrees to furnish and install improvements in the Premises as set forth
in the floor plan prepared by Doerr Design Associates dated August 14, 1995,
revised August 16, 1995 and August 22, 1995 and as approved by Tenant on August
22, 1995 (the "Improvements"). Landlord also agrees to furnish and install a
supplemental A/C unit for the hub room which is not identified in the
aforementioned documents and shall be agreed upon by and between Landlord and
Tenant prior to commencement of the improvements. Except as specifically set
forth in the plan or in Jokake Construction Co.'s proposal dated August 30,
1995, building standard materials shall be used. Landlord agrees to provide an
allowance of $55,210 (the "Allowance") to pay for the cost of the improvements,
including any necessary architectural, mechanical plumbing and electrical
engineering plans. Any costs in excess of the Allowance shall be paid by Tenant
together with interest at the rate of 11% per annum, in equal blended
installments of principal and interest over the initial 60 month Term of the
Lease. Upon the occurrence of any Event of Default under the Lease, the entire
unpaid principal balance of Tenant's obligation shall be immediately due and
payable and Landlord shall be entitled to exercise all remedies pursuant to
paragraphs 18 and 19 of the Lease.
<PAGE>
EXHIBIT C
attached to and made a part of Lease bearing the
Lease Reference Date of August 22, 1995 between
ANCHOR CENTRE PROPERTIES, INC., as Landlord and
TRACER DESIGN, INC., as Tenant
RULES AND REGULATIONS
l. No sign, placard, picture, advertisement, name or notice shall be installed
or displayed on any part of the outside or inside of the Building without the
prior written consent of the Landlord. Landlord shall have the right to remove,
at Tenant's expense and without notice, any sign installed or displayed in
violation of this rule. All approved signs or lettering on doors and walls shall
be printed, painted, affixed or inscribed at the expense of Tenant by a person
or vendor chosen by Landlord. In addition, Landlord reserves the right to change
from time to time the format of the signs or lettering and to require previously
approved signs or lettering to be appropriately altered.
2. If Landlord objects in writing to any curtains, blinds, shades or screens
attached to or hung in or used in connection with any window or door of the
Premises, Tenant shall immediately discontinue such use. No awning shall be
permitted on any part of the Premises. Tenant shall not place anything or allow
anything to be placed against or near any glass partitions or doors or windows
which may appear unsightly, in the opinion of Landlord, from outside the
Premises.
3. Tenant shall not obstruct any sidewalks, halls, passages, exits, entrances,
elevators, escalators or stairways of the Building. The halls, passages, exits,
entrances, shopping malls, elevators, escalators and stairways are not for the
general public, and Landlord shall in all cases retain the right to control and
prevent access to the Building of all persons whose presence in the judgment of
Landlord would be prejudicial to the safety, character, reputation and interests
of the Building and its tenants provided that nothing contained in this rule
shall be construed to prevent such access to persons with whom any tenant
normally deals in the ordinary course of its business, unless such persons are
engaged in illegal activities. No tenant and no employee or invitee of any
tenant shall go upon the roof of the Building.
4. The directory of the Building will be provided exclusively for the display of
the name and location of tenants only and Landlord reserves the right to exclude
any other names therefrom.
5. All cleaning and janitorial services for the Building and the Premises shall
be provided exclusively through Landlord. Tenant shall not cause any unnecessary
labor by carelessness or indifference to the good order and cleanliness of the
Premises. Landlord shall not in any way be responsible to any Tenant for any
loss of property on the Premises, however occurring, or for any damage to any
Tenant's property by the janitor or any other employee or any other person.
6. Landlord will furnish Tenant free of charge with two keys to each door in
the Premises. Landlord may make a reasonable charge for any additional keys, and
Tenant shall not make or have made additional keys, and Tenant shall not alter
any lock or install a new or additional lock or bolt on any door of its
Premises. Tenant, upon the termination of its tenancy, shall deliver to Landlord
the keys of all doors which have been furnished to Tenant, and in the event of
loss of any keys so furnished, shall pay Landlord therefor.
7. If Tenant requires telegraphic, telephonic, burglar alarm or similar
services, it shall first obtain, and comply with, Landlord's instructions in
their installation.
<PAGE>
8. No equipment, materials, furniture, packages, supplies, merchandise or other
property will be received in the Building or carried in the elevators except
between such hours and in such elevators as may be designated by Landlord.
9. Tenant shall not place a load upon any floor which exceeds the load per
square foot which such floor was designed to carry and which is allowed by law.
Landlord shall have the right to prescribe the weight, size and position to all
equipment, materials, furniture or other property brought into the Building.
Heavy objects shall, stand on such platforms as determined by Landlord to be
necessary to properly distribute the weight. Business machines and mechanical
equipment belonging to Tenant which cause noise or vibration that may be
transmitted to the structure of the Building or to any space in the Building to
such a degree as to be objectionable to Landlord or to any tenants shall be
placed and maintained by Tenant, at Tenant's expense, on vibration eliminators
or other devices sufficient to eliminate noise or vibration. The persons
employed to move such equipment in or out of the Building must be acceptable to
Landlord. Landlord will not be responsible for loss of, or damage to, any such
equipment or other property from any cause, and all damage done to the Building
by maintaining or moving such equipment or other property shall be repaired at
the expense of Tenant.
10. Tenant shall not use any method of heating or air conditioning other than
that supplied by Landlord. Tenant shall not waste electricity, water or air
conditioning. Tenant shall keep corridor doors closed.
11. Landlord reserves the right to exclude from the Building between the hours
of 6 p.m. and 7 a.m. the following day, or such other hours as may be
established from time to time by Landlord, and on Sundays and legal holidays any
person unless that person is known to the person or employee in charge of the
Building and has a pass or is properly identified. Tenant shall be responsible
for all persons for whom it requests passes and shall be liable to Landlord for
all acts of such persons. Landlord shall not be liable for damages for any error
with regard to the admission to or exclusion from the Building of any person.
12. Tenant shall close and lock the doors of its Premises and entirely shut off
all water faucets or other water apparatus and electricity, gas or air outlets
before Tenant and its employees leave the Premises. Tenant shall be responsible
for any damage or injuries sustained by other tenants or occupants of the
Building or by Landlord for noncompliance with this rule.
13. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not
be used for any purpose other than that for which they were constructed, no
foreign substance of any kind whatsoever shall be thrown into any of them, and
the expense of any breakage, stoppage or damage resulting from the violation of
this rule shall be borne by the Tenant who, or whose employees or invitees,
shall have caused it.
14. Tenant shall not install any radio or television antenna, satellite dish,
loudspeaker or other device on the roof or exterior walls of the Building.
Tenant shall not interfere with radio or television broadcasting or reception
from or in the Building or elsewhere.
15. Except as approved by Landlord, Tenant shall not mark, drive nails, screw or
drill into the partitions, woodwork or plaster or in any way deface the
Premises. Tenant shall not cut or bore holes for wires. Tenant shall not affix
any floor covering to the floor of the Premises in any manner except as approved
by Landlord.
Tenant shall repair any damage resulting from noncompliance with this rule.
16. Tenant shall not install, maintain or operate upon the Premises any vending
machine.
17. Tenant shall store all its trash and garbage within its Premises. Tenant
shall not place in any trash box or receptacle any material which cannot be
disposed of in the ordinary and customary manner of trash and
<PAGE>
garbage disposal. All garbage and refuse disposal shall be made in accordance
with directions issued from time to time by Landlord.
18. No cooking shall be done or permitted by any Tenant on the Premises, except
by the Tenant of Underwriters' Laboratory approved microwave oven or equipment
for brewing coffee, tea, hot chocolate and similar beverages shall be permitted
provided that such equipment and use is in accordance with all applicable
federal, state and city laws, codes, ordinances, rules and regulations.
19. Tenant shall not use in any space or in the public halls of the Building any
hand trucks except those equipped with the rubber tires and side guards or such
other material-handling equipment as Landlord may approve. Tenant shall not
bring any other vehicles of any kind into the Building.
20. Tenant shall not use the name of the Building in connect on with or in
promoting or advertising the business of Tenant except as Tenant's address.
21. No pets of any kind shall be kept on the Premises or brought upon the Common
Areas of the Project.
22. The requirements of Tenant will be attended to only upon appropriate
application to the office of the Building by an authorized individual. Employees
of Landlord shall not perform any work or do anything outside of their regular
duties unless under special instruction form Landlord, and no employee of
Landlord will admit any person (Tenant or otherwise) to any office without
specific instructions from Landlord.
23. Landlord may waive any one or more of these Rules and Regulations for the
benefit of any particular tenant or tenants, but no such waiver by Landlord
shall be construed as a waiver of such Rules and Regulations in favor of any
other tenant or tenants, nor prevent Landlord from thereafter enforcing any such
Rules and Regulations against any or all of the tenants of the Building.
24. These Rules and Regulations are in addition to, and shall not be construed
to in any way modify or amend, in whole or in part, the terms, covenants,
agreements and conditions of any lease of premises in the Building.
25. Landlord reserves the right to make such other and reasonable rules and
regulations as in its judgment may from time to time be needed for safety and
security, for care and cleanliness of the Building and for the preservation of
good order in and about the Building. Tenant agrees to abide by all such rules
and regulations in this Exhibit C stated and any additional rules and
regulations which are adopted.
26. Tenant shall be responsible for the observance of all of the foregoing rules
by Tenant's employees, agents, clients, customers, invitees and guests.
CONTROL #_______
Exhibit 10(t)
COLLOCATION AGREEMENT
---------------------
This Collocation Agreement (the "Agreement") is made as of the 28th day
of August, 1997 by and between TCG, a New York General Partnership having an
office and place of business at 2720 East Camelback, Phoenix, Arizona, ("TCG"),
and Sandbox Entertainment, a Delaware Corporation having an office and place of
business at 2231 East Camelback, Phoenix, Arizona ("Customer").
WHEREAS, by Lease dated __________________, (the "Lease") by and
between Carr America, as Landlord (the "Landlord") and TCG, TCG is leasing from
the Landlord certain premises in 2720 East Camelback in the City of Phoenix,
County of Maricopa, and the State of Arizona (the "Premises"); and
WHEREAS, Customer and TCG desire to enter into an agreement so that
Customer may place certain equipment in a portion of the Premises (the "Space");
and
WHEREAS, Customer is familiar with the applicable provisions of the
Lease;
NOW, THEREFORE, in consideration of the mutual covenants herein, it is
agreed as follows:
1. SPACE.
(a) This Collocation Agreement consists of this Agreement together with
Exhibits A, B, C and D, which are attached hereto and incorporated herein by
reference.
(b) TCG agrees to allow Customer to place certain equipment (the
"Equipment") as defined in Exhibit A, attached hereto and made a part hereof, in
the Space subject and subordinate to the terms and provisions of the Lease and
to Paragraph 17 hereof. Such equipment shall be approved by TCG prior to
installation int he Space and shall not exceed the Standard Dimensions
identified on Exhibit A. The equipment to be placed in the Space shall be
limited to no more than requested or reserved.
(c) Upon sixty (60) days' prior written notice or, in the event of an
emergency, or at such time as may be reasonable, TCG may require Customer to
relocate the Equipment within the Premises; provided, however, the site of
relocation shall afford comparable environmental conditions for the Equipment
and comparable accessibility to the Equipment. All costs of relocating the
Equipment shall be borne by Customer; provided, however, Customer shall not be
required to pay for the cost of improving the Space to which the Equipment may
be relocated.
<PAGE>
CONTROL #________
2. TERM.
(a) The date on which the Customer's license to occupy the Space
commences and the term of the Customer's license to occupy the Space are set
forth in the Collocate Schedule(s) (the "Initial Term") and is subject to
earlier termination as may be provided herein and/or in the Lease.
(b) Subject to the conditions specified in Paragraphs (c) and (d)
below, Customer shall have the option, upon ninety (90) days' prior written
notice to TCG, to renew its license to occupy the Space for the period of time
(the "Renewal Periods") and on the terms and conditions which are set forth in
this Agreement and the Collocate Schedule relevant thereto. The Initial Term and
any Renewal Period(s) are sometimes collectively referred to as the "Term."
(c) Customer's option to renew its license to occupy the Space shall be
contingent on the election by TCG to continue to lease the Premises in which the
Space is located for the duration of the Renewal Period(s) and such election to
be exercised at the sole discretion of TCG.
(d) Following the expiration of the Initial Term or any Renewal Periods
stated in the Collocate Schedule(s), or failure of the parties to enter into any
Renewal Periods, Customer's license shall continue in effect on a month-to-month
basis upon the same terms and conditions specified herein. Thereafter, to
terminate the license a party shall give the other party thirty (30) days' prior
written notice.
(e) Notwithstanding the foregoing, TCG reserves the right in its sole
discretion to terminate this Agreement upon ten (10) days written notice to
Customer.
3. CONSIDERATION. Customer agrees to pay TCG at the address first stated above,
the amount described on Exhibit B, the Collocate Schedule, attached hereto and
incorporated herein.
This amount is payable on the first day of each month.
4. CONDITION OF PREMISES. Customer hereby accepts the Space in an "as is"
condition at the commencement of the term of this Agreement, and acknowledges
that TCG has no obligation to make alterations, improvements or additions,
decorations or changes within the Premises, Space or any part thereof.
5. ASSIGNMENT. Customer agrees that it will not be any way assign or encumber
this Agreement and that it will not permit the space to be used by others
without written consent of TCG.
6. TERMINATION OR EXPIRATION. Customer shall leave the Space in good condition
(except for normal wear and tear) as it was in the beginning of the term of this
Agreement, and shall remove any property which it is obligated or permitted to
remove pursuant to the terms of the Lease on or before the termination or
expiration thereof.
2
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CONTROL #________
7. SERVICES.
(a) Network Traffic: TCG shall serve as the Customer's supplier for all
telecommunications services (private line, switched access) originating from or
terminating in the Space.
(b) Services: TCG shall provide to customer:
i. One (1) 7' x 23" x 24" relay rack or footprint of
equivalent size.
ii. Access to 110 V AC power outlet for test equipment.
iii. Transmission cabling to the collocation Space
(non-terminated) -- TCG will wire to a common DSX cross connect. This will serve
as the demarcation point between the TCG network and the customer's network. TCG
will be responsible for providing this DSX equipment. Customer will be required
to wire from the demarcation point to its Equipment. All installation must meet
TCG installation Standards.
iv. Grounding for relay racks.
v. Labor required to anchor relay rack to floor.
vi. Labor required to run power feeds to relay rack
(non-terminated); and
vii. Environmental conditions of approximately 70 degrees
(___) and a 50% humidity level.
(c) Electricity: TCG shall supply Customer with two (2), ten (10) amp
power feeds (one for main; one for standby) at the rate of $6.00 per amp per
month. Power requirements in excess shall be ordered in ten (10) amp increments
and charged to Customer at the rate of $6.00 per amp per month. Customer shall
pay any electric or other utility charges attributable to the Equipment and
related use of the Space as described on Exhibit B. Upon thirty (30) days' prior
written notice, the monthly rate may be adjusted by TCG from time to time to
reflect increases in the rate charged for electricity by the utility provider.
Unless otherwise provided for in Exhibit B, if Customer requires 120 VAC power
for their Equipment, TCG will provide the -48 VDC power feeds as indicated above
and it will be the Customer's responsibility to invert.
8. DEFAULT. In the event of Customer's breach of any term or condition under any
new Agreement or any other agreement(s) between TCG and Customer, TCG shall have
the right in its sole discretion to immediately terminate upon notice this
Agreement and/or any of the other
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CONTROL #________
agreements between the parties in addition to any and all other remedies
afforded to TCG under the law or equity.
9. INDEMNIFICATION. Customer covenants and agrees to indemnify and hold TCG
harmless from and against any and all suits, actions, claims, damages, charges
and expenses, including reasonable attorney fees, for damages or injuries to the
Space or premises, and/or for any personal injury or loss of life occurring or
claimed to have occurred in, upon, or about the Space or Premises as a result of
Customer's negligence or willful misconduct in operating its equipment or use of
the Space, unless arising from the negligence or willful misconduct of TCG. TCG
shall not be liable to Customer for any damage or losses due to the failure or
malfunction of any Equipment or facilities located in the Space.
10. LIMITATIONS OF LIABILITY.
(a) Liability for Damages to Property. TCG shall not be liable for any
damages whatsoever to Customer's property resulting from the installation,
maintenance, repair or removal of equipment and associated wiring unless the
damage is caused by TCG's willful misconduct or gross negligence.
(b) Liability for Equipment not Provided by TCG. TCG shall not be
liable for any damages whatsoever associated with facilities, or equipment which
they do not furnish or for any act or omission of Customer or any other entity
furnishing facilities or equipment.
(c) Liability for Force Majeure Events. TCG shall not be liable for any
failure of performance due to causes beyond its control, including but not
limited to: acts of God, fire, flood or other catastrophes; any law, order
regulation, direction, action or request of the United States Government, or of
any other government, including state and local governments having or claiming
jurisdiction over TCG or of any department, agency, commission, bureau,
corporation, or other instrumentality of any federal, state, or local
government, or of any civil or military authority; national emergencies;
unavailability of materials or rights-of-way; insurrections; riots; wars; or
strikes, lock-outs, work stoppages, labor difficulties, or utilities/power
outages.
(d) No Special Damages. In no event shall TCG be liable for special,
consequential, lost profit, exemplary, or punitive damages as a result of its
performance or nonperformance of this Agreement.
11. CASUALTY OR EMINENT DOMAIN. In the event of any taking by eminent domain or
damage by fire or other casualty to the Premises and/or Space, Customer shall
acquiesce and be bound by any action taken by or agreement entered into between
TCG and Landlord with respect thereto.
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CONTROL #________
12. NO BROKER. Customer represents that it has not dealt with any broker in
connection with this Agreement and that Customer shall hold TCG harmless from
and against any and all claims for brokerage commissions in connection
therewith.
13. ENTIRE AGREEMENT. All prior agreements and understandings of the parties are
merged within this Agreement, which alone fully and completely sets forth the
understanding of the parties with respect to the subject matter of this
Agreement. This Agreement shall not be modified without the prior written
consent of the parties.
14. NOTICES. Any and all notices or communications which either party may desire
or be required to give to the other shall be in writing and shall be sent to the
other party by certified or registered mail at the address first written above,
except that notices from Customer to TCG shall also be addressed to the
attention of General Counsel, One Teleport Drive, Suite 301, Staten Island, NY
10311.
15. GOVERNING LAW. This Agreement shall be governed by the laws of the State of
Arizona.
16. INSURANCE. Customer covenants and agrees to provide, on or before the date
of the commencement of the terms of this Agreement, and to keep in force and
effect during the terms thereof for the benefit of Customer and TCG, a policy of
comprehensive liability insurance or a certificate evidencing the existence
thereof, conforming to the requirements of the applicable provisions of the
Lease, whichever is greater.
17. ACCESS. Whenever Customer requires access to the Space, Customer shall give
TCG twenty-four (24) hours prior notice by calling TCG at a phone number to be
provided by TCG and requesting TCG to arrange for access to the Space. Customer
shall reimburse TCG for all costs incurred by TCG in arranging access, including
salary costs of the employees of TCG providing access to the Space to Customer
and remaining at the Space during such time as Customer requires access. Access
requirements for the Premises are outlined in Exhibit B.
TCG, at its sole discretion, may grant Customer use of an access card. Customer
shall report the card lost or stolen to TCG as soon as discovered. A lost or
stolen access card is replaceable upon $100 payment to TCG. Sandbox will require
access card.
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CONTROL #________
IN WITNESS WHEREOF, Customer and TCG have respectively signed this
Agreement as of the day and year first above written.
TCG: Phoenix Customer: Sandbox Entertainment
Sign: /s/ Mike McHale Sign:/s/ Chad M. Little
------------------------------ ---------------------------------
Name: Mike McHale Name: Chad Little
Title: VP/GM Title: President
Date: 8/28/97 Date: 8/28/97
___________
Initials
TCG VP/Ops
6
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CONTROL #________
Exhibit A to Collocation Agreement between
Sandbox Entertainment and TCG Phoenix
Customer Equipment Collocation Request Form
Customer: Sandbox Entertainment, a Delaware corporation
Customer Address: 2231 East Camelback, Phoenix, Arizona 85016
TCG Location: 2720 East Camelback, Phoenix, Arizona 85016
Collocation Term: 12 Months
Description of Equipment to be Installed:Equipment list is attached as Exhibit C
Customer 24 Hour Maintenance Number:__________________________________
Estd. start date:_________________ Est. completion date:_____________________
<TABLE>
<CAPTION>
RACK / SPACE REQUIREMENTS POWER & MDF REQUIREMENTS
<S> <C>
Number of Racks requested: 4 Is -48 VDC required? |_| YES |X| NO
Does Customer wish to reserve rack space? (TCG provides two 10-amp power feeds per rack
|X| YES |_| NO (1=main; 1=standby) at $6.00 per amp per
Number of Racks reserved: 4 month / Additional amperage charge is $6.00 per amp
Dimensions of Equipment (Standard Dimensions) per month in increments of 10 amps)
Width: 23" (not to exceed 23")* Current: 20 amps
Height: 7' (not to exceed 7')* Does equipment require 120 VAC?
Depth: 24" (not to exceed 24")* |_| YES |_| NO
Weight: 125 lbs. (NTE 125 lbs/ft) [TCG will provide -48 VDC as above.
*Items in excess cost additional. It is the Customer's responsibility to invert]
*Cabinet requires TCG prior approval. Current:________________ amps
Cage Required? |X| YES |_| NO Number of Demarc Positions required: 4
(min: 5 racks / max: 9 racks)
(floor space charges apply)
</TABLE>
Installation and materials charges apply to equipment installed by TCG. All
installations must meet TCG Installation Standards.
NOTE: All customer specifications or drawings must be attached to this form.
Customer Sandbox Entertainment TCG Phoenix
By: /s/ Chad M. Little By: /s/ Mike McHale
------------------------------- -------------------------------------
Title: President VP/GM
Dated: 8/28/97 Dated: 8/28/97 ______
Initials
TCG VP/Ops
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CONTROL #________
Exhibit B to TCG COLLOCATION AGREEMENT
BETWEEN SANDBOX ENTERTAINMENT AND TCG PHOENIX
Collocate Schedule
1. Premises: 2720 East Camelback, Phoenix, Arizona (MAIN NODE)
2. Term: 12 months
Requested Service Date: 8/29/97
Date Collection Term Ends: 8/29/98
3. Renewal Period(s):
4. Occupancy, Service and Build-out Fees
Occupancy Fee: $2,000.00 ($500.00 per rack per month x 4 racks)
Service Fee: $480.00 ($6.00 per amp per month 80 amps)
Build-out Fee: $4,000.00 ($1,000 per rack one-time x 4 racks)
Reservation Fee: N/A ( per rack per month until used)
Floor Space Fee: N/A (100 square feet x CO Band per month)
5. Landlord Information, if applicable:
6. Delineation of Space: See floor plan, attached as Exhibit D.
7. Customer's forecast of capacity for DS1s, DS3s, etc. in year 1, and in
years 3 and 5 if applicable:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
_______________________________________________
Customer Sandbox Entertainment TCG Phoenix
By: /s/ Chad M. Little By: /s/ Mike McHale
------------------------------- ---------------------------------
Title: President VP/GM
Dated: 8/28/97 Dated: 8/28/97 _____
Initials
TCG VP/Ops
EXHIBIT C TO COLLOCATION AGREEMENT
8
Exhibit 10(u)
SANDBOX ENTERTAINMENT CORPORATION
1995 EQUITY INCENTIVE PLAN
ARTICLE 1: PURPOSE
1.1 General. The purpose of the Sandbox Entertainment Corporation 1995
Equity Incentive Plan (the "Plan") is to promote the interests of Sandbox
Entertainment Corporation (the "Company"), by enabling the Company to motivate,
attract, and retain the services of persons upon whose judgment, efforts, and
contributions the success of the Company's business depends. The plan is further
intended to align the personal interests of such persons with the interests of
shareholders of the Company through equity participation in the Company's growth
and success. Capitalized terms not otherwise defined in the text are defined in
Article 16.
ARTICLE 2: EFFECTIVE DATE; TERM
2.1 Effective Date. The effective date of the Plan is August 1, 1995
(the "Effective Date"), which is the date the Plan was approved by the Board of
Directors and stockholders of the Company.
2.2 Term. This Plan shall terminate on the tenth (10th) anniversary of
the Effective Date, subject to Article 14.
ARTICLE 3: SHARES SUBJECT TO THE PLAN
3.1 Number of Shares. The aggregate number of shares of Stock reserved
and available for Awards or which may be used to provide a basis of measurement
or valuation of an Award (such as an SAR or Performance Unit Award) shall be
1,295,000 shares (the "Shares").
3.2 Lapsed Awards. To the extent that an Award terminates, expires or
lapses for any reason, any shares of Stock subject to the Award will again be
available for the grant of an Award under the Plan and shares subject to SARs or
other Awards settled in cash will be available for the grant of an Award under
the Plan, in each case to the full extent available pursuant to the applicable
rules and interpretations of the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
3.3 Payments in Stock. Any shares of Stock tendered to or withheld by
the Company in connection with payment for Stock purchased pursuant to the Plan
or withholding taxes thereon shall be added back to the aggregate number of
shares reserved and available for Awards under the Plan, in each case to the
fullest extent permitted under the applicable rules and interpretations of the
Exchange Act.
<PAGE>
3.4 Stock Distributed. Any Stock distributed pursuant to an Award may
consist, in whole or in part, of authorized and unissued Stock, treasury Stock,
or Stock purchased on the open market.
ARTICLE 4: ELIGIBILITY
4.1 General. Awards may be granted only to an individual who is an
officer, director or other employee (including employees who also are directors
or officers), consultant, independent contractor, or adviser of the Company or a
Subsidiary, as determined by the Board; provided, however, that if the Board
shall appoint a Committee to administer the Plan as provided in Article 5,
non-employee directors shall no longer be eligible to receive Awards hereunder.
ARTICLE 5: ADMINISTRATION
5.1 Board. The Plan shall be administered by the Board or a Committee
appointed by the Board to administer the Plan at any time or from time to time.
If the Company has a class of equity securities registered under Section 12 of
the Exchange Act, the Plan shall be administered by the Board or a Committee of
the Board in accordance with Rule 16b-3, or successor legislation, under the
Exchange Act. Once appointed, the Committee shall continue to serve until
otherwise directed by the Board. From time to time, the Board may increase the
size of the Committee and appoint additional members thereof, remove members
(with or without cause), appoint new members in substitution therefor, and fill
vacancies however caused; provided, however, that at no time may any person
serve on the Committee if the Company has a class of equity securities
registered under Section 12 of the Exchange Act and that person's membership
would cause the Committee not to satisfy the "disinterested administration"
requirements of Rule 16b-3 or successor legislation.
5.2 Authority of Board. The Board has the exclusive power, authority,
and discretion to:
(a) Designate Participants;
(b) Determine the type or types of Awards to be granted to each
Participant;
(c) Determine the number of Awards to be granted and the number
of shares of Stock subject to an Award;
(d) Prescribe the form of each Award Agreement, which need not be
identical for each Participant;
(e) Determine the terms and conditions of any Award granted under
the Plan, including but not limited to, the exercise price, grant
price, or purchase price, any restrictions or limitations on the
Award, any schedule for lapse of forfeiture restrictions or
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restrictions on the exercisability of an Award and accelerations or
waivers thereof, and any modification or amendment of any Award
previously granted, based in each case on such considerations as the
Board in its sole discretion determines;
(f) Determine whether, to what extent, and under what
circumstances an Award may be settled in, or the exercise price of an
Award may be paid in, cash, Stock, other Awards, or other property, or
an Award may be canceled, forfeited, or surrendered;
(g) Decide all other matters that must be determined in
connection with an Award;
(h) Establish, adopt, or revise any rules and regulations as it
may deem necessary or advisable to administer the Plan;
(i) Interpret the Plan, any Award, and any Award Agreement in its
discretion; and
(j) Make all other decisions and determinations that may be
required under the Plan or as the Board deems necessary or advisable
to administer the Plan.
5.3 Decisions Binding. All decisions, interpretations, and
determinations by the Board with respect to the Plan, any Award, and any Award
Agreement are final, binding, and conclusive on all parties.
ARTICLE 6: STOCK OPTIONS
6.1 General. The Board is authorized to grant Options to Participants
on the following terms and conditions:
(a) Exercise Price. The exercise price per share of Stock under
an Option shall be determined by the Board.
(b) Payment. Payment for Stock issued upon exercise of an Option
shall be made in accordance with Article 11 of the Plan.
(c) Time and Conditions of Exercise. The Board shall determine
the time or times at which an Option may be exercised in whole or in
part, provided that no Option may be exercisable prior to six months
following the date of the grant of such Option if and to the extent
such limitation is necessary or required under Rule 16b-3 of the
Securities and Exchange Commission under the Securities Exchange Act
of 1934, as amended. The Board also shall determine the expiration
date of each Option and the performance or other conditions, if any,
that must be satisfied before all or part of an Option may be
exercised.
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<PAGE>
(d) Evidence of Option. All Options shall be evidenced by a
written Award Agreement between the Company and the Participant. The
Award Agreement shall include such provisions as may be specified by
the Board.
6.2 Incentive Stock Options. The terms of any Incentive Stock Options
granted under the Plan must comply with the following additional rules:
(a) Employees Only. Incentive Stock Options may only be granted
to employees (including officers and directors who are also employees)
of the Company or a Subsidiary.
(b) Exercise Price. The exercise price per share of Stock shall
be set by the Board, provided that the exercise price for any
Incentive Stock Option may not be less than the Fair Market Value as
of the date of the grant.
(c) Exercise. In no event may any Incentive Stock Option be
exercisable for more than ten years from the date of its grant.
(d) Individual Dollar Limitation. The aggregate Fair Market Value
(determined as of the time an Award is made) of all shares of Stock
with respect to which Incentive Stock Options are first exercisable by
a Participant in any calendar year may not exceed $100,000.00.
(e) Ten Percent Owners. An Incentive Stock Option may be granted
to a Ten Percent Owner, provided that at the time such option is
granted the exercise price per share of Stock shall not be less than
110% of the Fair Market Value and such option by its terms is not
exercisable after the expiration of five (5) years from the date of
its grant.
(f) Expiration of Incentive Stock Options. No Award of an
Incentive Stock Option may be made pursuant to this Plan after the
expiration of ten (10) years from the Effective Date.
(g) Right to Exercise. During a Participant's lifetime, an
Incentive Stock Option may be exercised only by the Participant.
6.3 Termination of Participant. Notwithstanding the exercise periods
set forth in any Award Agreement, Options shall be subject to the following:
(a) An Option shall lapse ten years after it is granted, unless
an earlier time is set in the Award Agreement.
(b) If a Participant's employment is terminated due to (i)
Disability, (ii) Retirement, or (iii) for any other reason, such
Participant may exercise his or her
4
<PAGE>
Options, only to the extent that such Options would have been
exercisable on the Termination Date; provided, that such exercise is
made prior to the earlier of (i) the expiration of three (3) months
(six (6) months in the case of Disability or with respect to a
Non-Qualified Stock Option) after the Termination Date or (ii) the
expiration date of the Option set forth in the Award Agreement.
(c) If a Participant dies before his or her Options lapse
pursuant to this Section, then the Participant's Options may be
exercised, only to the extent that such Options would have been
exercisable on the date of the Participant's death; provided that such
exercise is made prior to the earlier of (i) the first anniversary of
such Participant's death or (ii) the expiration date of the Option set
forth in the Award Agreement. Upon the Participant's death, any
exercisable Options may be exercised by the Participant's legal
representative or representatives.
ARTICLE 7: STOCK APPRECIATION RIGHTS
7.1 Grant of SARs. The Board is authorized to grant SARs to
Participants on the following terms and conditions:
(a) Right to Payment. Upon the exercise of a Stock Appreciation
Right, the Participant to whom it is granted has the right to receive
the excess, if any, of:
(1) The Fair Market Value of one share of Stock on the date
of exercise; over
(2) The grant price of the SAR as determined by the Board,
which shall not be less than the Fair Market Value of one share
of Stock on the date of grant in the case of any SAR.
(b) Other Terms. All awards of Stock Appreciation Rights shall be
evidenced by an Award Agreement. The terms, methods of exercise,
methods of settlement, form of consideration payable in settlement,
and any other terms and conditions of any Stock Appreciation Right
shall be determined by the Board at the time of the grant of the Award
and shall be reflected in the Award Agreement.
ARTICLE 8: PERFORMANCE UNITS
8.1 Grant of Performance Units. The Board is authorized to grant
Performance Units to Participants on such terms and conditions as may be
selected by the Board. The Board shall have the complete discretion to determine
the number of Performance Units granted to each Participant. All Awards of
Performance Units shall be evidenced by an Award Agreement.
5
<PAGE>
8.2 Right Under Performance Units. A grant of Performance Units gives
the Participant rights, valued as determined by the Board, and payable to, or
exercisable by, the Participant to whom the Performance Units are granted, in
whole or in part, as the Board shall establish at grant or thereafter. The Board
shall set performance goals and other terms or conditions to payment of the
Performance Units in its discretion which, depending on the extent to which they
are met, will determine the amount and value of cash, Stock, Awards, and/or
other property that will be paid to the Participant; provided, however, that if
the Company has a class of equity registered under Section 12 of the Exchange
Act, the time period during which the performance goals must be met shall, in
all cases, exceed six months.
8.3 Other Terms. Performance Units may be payable in cash, Stock, or
other Awards or property, or any combination thereof, and have such other terms
and conditions as determined by the Board and reflected in the Award Agreement.
ARTICLE 9: RESTRICTED STOCK AWARDS
9.1 Restricted Stock Awards. The Board is authorized to make Awards of
Restricted Stock to Participants either in the form of a grant of Stock or an
offer to sell Stock to a Participant, in such amounts and subject to such terms,
conditions and restrictions as may be selected by the Board. All Awards of
Restricted Stock shall be evidenced by an Award Agreement.
9.2 Issuance and Restrictions. Restricted Stock shall be subject to
such restrictions on transferability and other restrictions, including without
limitation "vesting" or forfeiture restrictions, as the Board may impose. These
restrictions may lapse separately or in combination at such times, under such
circumstances, in such installments, or otherwise, as the Board determines at
the time of the grant of the Award or thereafter.
9.3 Forfeiture. Except as otherwise determined by the Board at the
time of the grant of the Award or thereafter, upon termination of employment
during the applicable restriction period, Restricted Stock that is at that time
subject to restrictions shall be forfeited and reacquired by the Company;
provided, however, that the Board may provide in any Award Agreement that
restrictions or forfeiture conditions relating to Restricted Stock will be
waived in whole or in part in specified circumstances, and the Board may in
other cases waive in whole or in part restrictions or forfeiture conditions
relating to Restricted Stock.
9.4 Payment and Certificates for Restricted Stock. If a Restricted
Stock Award provides for the purchase of Stock by a Participant, payment shall
be made pursuant to Article 11 of the Plan. Restricted Stock granted under the
Plan may be evidenced in such manner as the Board shall determine. If
certificates representing shares of Restricted Stock are registered in the name
of the Participant, certificates must bear an appropriate legend referring to
the terms, conditions, and restrictions applicable to such Restricted Stock, and
the Company shall retain physical possession of the certificate until such time
as all applicable restrictions lapse.
6
<PAGE>
ARTICLE 10: STOCK-REFERENCE AWARDS
10.1 Grant of Stock-Reference Awards. The Board is authorized, subject
to limitations under applicable law, to grant to Participants such other Awards
that are payable in, valued in whole or in part by reference to, or otherwise
based on or related to shares of Stock, as deemed by the Board to be consistent
with the purposes of the Plan, including without limitation shares of Stock
awarded purely as a "bonus" and not subject to any restrictions or conditions,
other rights convertible or exchangeable into shares of Stock, and awards valued
by reference to book value of shares of Stock or the value of securities of or
the performance of specified divisions or Subsidiaries of the Company. The Board
shall determine the terms and conditions of such Awards.
ARTICLE 11: PAYMENT FOR STOCK PURCHASES;
WITHHOLDING TAXES; RELOAD OPTIONS
11.1 Payment. Payment for Stock purchased pursuant to the Plan may be
made in cash (by check) or, where expressly approved for the Participant by the
Board in an Award Agreement or otherwise in writing and where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
(b) by surrender of Stock that either: (1) has been owned by the
Participant for more than six (6) months and has been paid for within
the meaning of Rule 144 promulgated under the Securities Act; (2) was
obtained by the Participant in the public market; or (3) is otherwise
acceptable to the Board in its discretion;
(c) by waiver of compensation due or accrued to Participant for
services rendered;
(d) by tender of property acceptable to the Board;
(e) with respect only to purchases upon exercise of an Option,
and provided that a public market for the Company's stock then exists:
(1) through a "same day sale" commitment from Participant
and a broker-dealer that is a member of the National Association
of Securities Dealers (a "NASD Dealer") whereby Participant
irrevocably elects to exercise the Option and to sell a portion
of the Stock so purchased to pay for the exercise price, and
whereby the NASD Dealer irrevocably commits upon receipt of such
Stock to forward the exercise price directly to the Company;
(2) through a "margin" commitment from Participant and a
NASD Dealer whereby Participant irrevocably elects to exercise
the Option and to pledge the Stock so purchased to the NASD
Dealer in a margin account as security for
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<PAGE>
a loan from the NASD Dealer in the amount of the exercise price,
and whereby the NASD Dealer irrevocably commits upon receipt of
such Stock to forward the exercise price directly to the Company;
or
(3) through any other "cashless exercise" procedure approved
by the Board; or
(f) by any combination of the foregoing, or any other method of
payment acceptable to the Board in its sole discretion.
11.2 Loan Guarantees. The Board may, in its discretion, help the
Participant pay for Shares purchased under the Plan by authorizing a guarantee
by the Company of a third-party loan to the Participant.
11.3 Tax Withholding. The Company or any Subsidiary shall have the
authority and the right to deduct or withhold, or require a Participant to remit
to the Company, an amount sufficient to satisfy federal, state, and local taxes
(including the Participant's FICA obligation) required by law to be withheld
with respect to any taxable event arising as a result of this Plan. Whenever,
under the Plan, payments in satisfaction of Awards are to be made in cash, such
payment shall be net of an amount sufficient to satisfy federal, state, and
local withholding tax requirements. With respect to withholding required upon
any taxable event relating to the issuance of Stock under the Plan, Participants
may elect, subject to the Board's approval and any rules or policies adopted by
the Board from time to time, to satisfy the withholding requirement, in whole or
in part, by having the Company or any Subsidiary withhold shares of Stock having
a Fair Market Value on the date of withholding equal to the amount to be
withheld for tax purposes. The Board may, at the time any Award is granted,
require that any and all applicable tax withholding requirements be satisfied by
the withholding of shares of Stock as set forth above.
11.4 Reload Options. Award Agreements may contain a provision pursuant
to which a Participant who pays all or a portion of the exercise price of an
Option or the tax required to be withheld pursuant to an exercise of an Option
by surrendering shares of Stock pursuant to Sections 11.1 or 11.3, respectively,
shall be automatically granted an Option for the purchase of Stock equal to the
number of shares surrendered (a "Reload Option"). The grant of the Reload Option
shall be effective on the date the Participant surrenders the shares of Stock in
respect of which the Reload Option is granted (the "Reload Date"). The Reload
Option shall have an exercise price equal to the Fair Market Value of the Stock
on the Reload Date, and shall have a term which is no longer, and which shall
lapse no later, than the original term of the underlying option. If stock
otherwise available under an Incentive Stock Option is withheld pursuant to
Section 11.3, any Reload Option granted in connection with the withholding shall
be treated as a new Incentive Stock Option, subject to the rules set forth in
Section 6.2.
ARTICLE 12: PROVISIONS APPLICABLE TO AWARDS
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12.1 Stand-Alone, Tandem, and Substitute Awards. Awards granted under
the Plan may, in the discretion of the Board, be granted either alone or in
addition to, in tandem with, or in substitution for, any other Award granted
under the Plan. Awards granted in addition to or in tandem with other Awards may
be granted either at the same time as or at a different time from the grant of
such other Awards.
12.2 Exchange Provisions. The Board may at any time offer to exchange
or buy out any previously granted Award for a payment in cash, Stock, or another
Award, based on the terms and conditions the Board determines and communicates
to the Participant at the time the offer is made.
12.3 Term of Award. The term of each Award shall be for the period as
determined by the Board, provided that in no event shall the term of any
Incentive Stock Option or a Stock Appreciation Right exceed a period of ten
years from the date of its grant.
12.4 Form of Payment for Awards. Subject to the terms of the Plan and
any applicable law or Award Agreement, payments or transfers to be made by the
Company or a Subsidiary on the grant or exercise of an Award may be made in such
forms as the Board determines at or after the time of grant, including without
limitation, cash, Stock, other Awards, or other property, or any combination,
and may be made in a single payment or transfer, in installments, or on a
deferred basis, in each case determined in accordance with rules adopted by, and
at the discretion of, the Board.
12.5 Limits on Transfer. No right or interest of a Participant in any
Award may be pledged, encumbered, or hypothecated to or in favor of any party
other than the Company or a Subsidiary, or shall be subject to any lien,
obligation, or liability of such Participant to any other party other than the
Company or a Subsidiary. Except as otherwise provided below, no Award shall be
assignable or transferable by a Participant other than by will or the laws of
descent and distribution or, except in the case of an Incentive Stock Option,
pursuant to a qualified domestic relations order as defined in Section
414(p)(1)(A) of the Code or Title I of the Employee Retirement Income Security
Act, or the rules thereunder. In the Award Agreement for any Award other than an
Award that includes an Incentive Stock Option, the Board may allow a Participant
to assign or otherwise transfer all or a portion of the rights represented by
the Award to specified individuals or classes of individuals, or to a trust
benefitting such individuals or classes of individuals, subject to such
restrictions, limitations, or conditions as the Board deems appropriate.
12.6 Stock Certificates. All Stock certificates delivered under the
Plan are subject to any stop-transfer orders and other restrictions as the Board
deems necessary or advisable to comply with federal or state securities laws,
rules, and regulations and the rules of any national securities exchange or
automated quotation system on which the Stock is listed, quoted, or traded. The
Board may place legends on any Stock certificate to reference restrictions
applicable to the Stock.
ARTICLE 13: CHANGES IN CAPITAL STRUCTURE
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13.1 General. In the event a stock dividend, stock-split or reverse
stock split is declared after the Effective Date upon the Stock, the shares of
Stock then subject to each Award and the number of shares which have been
authorized for issuance under the Plan but for which no Awards have yet been
granted, shall be increased or decreased proportionately without any change in
the aggregate purchase price therefor. In the event that after the Effective
Date the Stock shall be changed into or exchanged for a different number or
class of shares of Stock, without receipt of material consideration, whether
through reorganization, recapitalization, stock split-up, combination of shares,
merger, consolidation, or any other increase or decrease in the number issued
shares of common stock effected without consideration (provided, that conversion
of any convertible securities shall not be deemed to have been "effected without
receipt of consideration") there shall be substituted for each such share of
Stock then subject to each Award and each share of Stock issuable under the Plan
the number and class of shares of Stock into which each outstanding share of
Stock shall be so exchanged, all without any change in the aggregate purchase
price for the shares then subject to each Award. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof, shall be made with respect to the number or price
of Awards hereunder.
ARTICLE 14: AMENDMENT, MODIFICATION, AND TERMINATION
14.1 Amendment, Modification, and Termination. With the approval of
the Board, at any time and from time to time, the Board may terminate, amend, or
modify the Plan. However, without approval of the shareholders of the Company
(if required in accordance with the Code, the Exchange Act, the rules and
regulations thereunder or other applicable law and rules), no such termination,
amendment, or modification may:
(a) Materially increase the total number of shares of Stock that
may be issued under the Plan, except as provided in Section 13.1;
(b) Materially modify the eligibility requirements for
participation in the Plan; or
(c) Materially increase the benefits accruing to Participants
under the Plan.
Any such termination, amendment, or modification shall comply with such other
requirements as may be required by the Code, by the rules under Section 16 of
the Exchange Act, by any national securities exchange or system on which the
Stock is listed or reported, or by a regulatory body having jurisdiction.
14.2 Awards Previously Granted. No termination, amendment, or
modification of the Plan shall adversely affect in any material way any Award
previously granted under the Plan, without the written consent of the
Participant.
ARTICLE 15: GENERAL PROVISIONS
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15.1 No Rights to Awards. No Participant or employee shall have any
claim to be granted any Award under the Plan, and neither the Company nor the
Board is obligated to treat Participants and employees uniformly.
15.2 No Stockholders Rights. No Award gives the Participant any of the
rights of a shareholder of the Company unless and until shares of Stock are in
fact issued to such person in connection with such Award.
15.3 No Right to Employment. Nothing in the Plan or any Award
Agreement shall interfere with or limit in any way the right of the Company or
any Subsidiary to terminate any Participant's employment or other relationship
with the Company at any time, nor confer upon any Participant any right to
continue in the employment or any other relationship of the Company or any
Subsidiary.
15.4 Unfunded Status of Awards. The Plan is intended to be an
"unfunded" plan for incentive and deferred compensation. With respect to any
payments not yet made to a Participant pursuant to an Award, nothing contained
in the Plan or any Award Agreement shall give the Participant any rights that
are greater than those of a general creditor of the Company or any Subsidiary.
15.5 Relationship to Other Benefits. No payment under the Plan shall
be taken into account in determining any benefits under any pension, retirement,
savings, profit sharing, group insurance, welfare or other benefit plan of the
Company or any Subsidiary.
15.6 Expenses. The expenses of administering the Plan shall be borne
by the Company and its Subsidiaries.
15.7 Titles and Headings. The titles and headings of the Articles and
Sections in the Plan are for convenience of reference only, and in the event of
any conflict, the text of the Plan, rather than such titles or headings, shall
control.
15.8 Fractional Shares. No fractional shares of stock shall be issued
and the Board shall determine, in its discretion, whether cash shall be given in
lieu of fractional shares or whether such fractional shares shall be eliminated
by rounding up.
15.9 Securities Law Compliance. With respect to any person who is, on
the relevant date, obligated to file reports under Section 16 of the Exchange
Act, transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent
any provision of the Plan or any Award Agreement or any action by the Board
fails to so comply, it shall be void to the extent permitted by law and voidable
as deemed advisable by the Board.
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15.10 Government and Other Regulations. The obligation of the Company
to make payment of awards in Stock or otherwise shall be subject to all
applicable laws, rules, and regulations, and to such approvals by government
agencies as may be required. The Company shall be under no obligation to
register under the Securities Act, any of the shares of Stock paid under the
Plan. If the shares of Stock paid under the Plan may in certain circumstances be
exempt from registration under the Securities Act, the Company may restrict the
transfer of such shares in such manner as it deems advisable to ensure the
availability of any such exemption.
15.11 Governing Law. The Plan and all Award Agreements shall be
construed in accordance with and governed by the laws of the State of Arizona.
ARTICLE 16: DEFINITIONS
16.1 Definitions. The following words and phrases shall have the
following meanings for purposes of this Plan:
(a) "Award" means any Option, Stock Appreciation Right,
Restricted Stock Award, Performance Unit, Stock-Reference Award or any
other right or interest relating to Stock, cash or property, granted
to a Participant under the Plan.
(b) "Award Agreement" means any written agreement, contract, or
other instrument or document evidencing an Award.
(c) "Board" means the Board of Directors of the Company or, if
the context so requires, a Committee thereof appointed pursuant to
Article 5.
(d) "Change of Control" means and includes each of the following:
(1) Any transaction or series of transactions, whereby any
person (as that term is used in Section 13 and 14(d)(2) of the
Exchange Act), excluding affiliates of the Company as of the
Effective Date, is or becomes the beneficial owner (as that term
is used in Section 13(d) of the Exchange Act) directly or
indirectly, of securities of the Company representing 40% or more
of the combined voting power of the Company's then outstanding
securities;
(2) Any merger, consolidation, or liquidation of the Company
in which the Company is not the continuing or surviving
corporation or pursuant to which Stock would be converted into
cash, securities, or other property, other than a merger or
consolidation with a wholly owned Subsidiary, a reincorporation
of the Company in a different jurisdiction, or other transaction
in which there is no substantial change in the shareholders of
the Company and all then outstanding Awards are assumed by the
successor corporation, which assumption shall be binding on all
Participants;
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(3) The sale, transfer, or other disposition of all or
substantially all of the assets of the Company.
(e) "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
(f) "Committee" means the committee of the Board described in
Article 5.
(g) "Disability" means the following: A Participant shall be
disabled if he or she is unable to engage in any substantial gainful
activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or which can be
expected to last for a continuous period of not less than 12 months.
The Board may require such medical or other evidence as it deems
necessary to judge the nature and permanency of the Participant's
condition.
(h) "Fair Market Value" means with respect to Stock or any other
property, the fair market value of such Stock or other property
determined by the Board in good faith using such methods or procedures
as may be established from time to time by the Board. Unless otherwise
determined by the Board, the Fair Market Value of Stock as of any date
shall be the mean between the bid and asked quotations for the Stock
on that date as reported by the National Association of Securities
Dealers Automated Quotation System (NASDAQ) or, if there are no bid or
asked quotations on such date, the mean between the bid and asked
quotations on the next preceding date for which quotations are
available. If the Stock is subsequently listed and traded upon a
recognized securities exchange or shall be quoted on a recognized
national market system, the Fair Market Value shall be the closing
price on such date or, if no closing price is so reported for that
date, the closing price on the next preceding date for which a closing
price was reported.
(i) "Incentive Stock Option" means an Option that is intended to
meet the requirements of Section 422 of the Code or any successor
provision thereto.
(j) "Non-Qualified Stock Option" means an Option that is not
intended to be an Incentive Stock Option.
(k) "Option" means a right granted to a Participant under Article
6 of the Plan to purchase Stock at a specified price during specified
time periods. An Option may be either an Incentive Stock Option or a
Non-Qualified Stock Option.
(l) "Participant" means a person who, as an officer, employee,
consultant, independent contractor, or adviser of the Company or any
Subsidiary, has been granted an Award under the Plan.
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(m) "Performance Unit" means a right granted to a Participant under
Article 8 to receive cash, Stock, or other Awards.
(n) "Plan" means the Sandbox Entertainment Corporation 1995 Equity
Incentive Plan, as amended from time to time.
(o) "Restricted Stock Award" means Stock granted to a Participant or
offered for sale to a Participant under Article 9.
(p) "Retirement" means a Participant's termination of employment with
the Company after attaining any normal or early retirement age specified in
any pension, profit sharing, or other retirement program sponsored by the
Company, if any.
(q) "Securities Act" means the Securities Act of 1933, as amended.
(r) "Stock" means the common stock of the Company and such other
securities of the Company that may be substituted for Stock pursuant to
Article 13.
(s) "Stock Appreciation Right" or "SAR" means a right granted to a
Participant under Article 7 to receive a payment equal to the difference
between the Fair Market Value of a share of Stock as of the date of
exercise of the SAR over the grant price of the SAR, all as determined
pursuant to Article 7.
(t) "Stock-Reference Award" means a right, granted to a Participant
under Article 10.
(u) "Subsidiary" means any corporation of which a majority of the
outstanding voting stock or voting power is beneficially owned directly or
indirectly by the Company.
(v) "Ten Percent Owner" means any individual who, at the date of grant
of an Incentive Stock Option, owns stock possessing more than ten percent
of the total combined voting power of all classes of Stock of the Company
or a Subsidiary. For purposes of determining such percentage, the following
rules shall apply:
(1) the individual with respect to whom such percentage is being
determined shall be considered as owning the Stock owned, directly or
indirectly, by or for his brothers and sisters (whether by the whole
or half blood), spouse, ancestors, and lineal descendants; and
(2) Stock owned, directly or indirectly, by or for a corporation,
partnership, estate, or trust, shall be considered as being owned
proportionately by or for its shareholders, partners, or
beneficiaries.
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(w) "Termination Date" means the date on which the employment (or
other service or relationship in the case of a Participant who is not an
employee of the Company) of a Participant terminates for any reason or no
reason.
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NOTICE OF EXERCISE OF OPTION
TO PURCHASE SHARES OF
SANDBOX ENTERTAINMENT CORPORATION
AND RECORD OF STOCK TRANSFER
I hereby exercise my Stock Option granted by Sandbox Entertainment
Corporation under its 1995 Equity Incentive Plan (the "Plan"") subject to all
the terms and provisions referred to in the Plan, and notify you of my desire to
purchase __________ shares of the Common Stock of Sandbox Entertainment
Corporation (the "Company"), which were offered to me pursuant to said Option.
Enclosed is my check in the sum of $_________________ in full payment for such
shares. I agree to hold these shares in accordance with and subject to the
provisions of the Option Letter dated as of _______________________, between the
Company and myself, pursuant to which I am acquiring such shares.
I hereby represent that the shares of the Company's Common Stock to
be delivered to me pursuant to the above-mentioned exercise of the Option are
being acquired by me as an investment and not with a view to, or for sale in
connection with, the distribution of any such shares. I also represent that I
have read and fully understand the Plan, including without limitation the
restrictions on transfer of the shares hereby being acquired. I agree to
indemnify the Company and its subsidiaries, together with their officers and
directors, for any liabilities, losses, damages and expenses (including
reasonable attorney fees) arising from or in connection with any disposition of
the shares hereby being acquired, or any interest therein, in violation of
applicable securities laws or regulations. I further represent that I have been
given access to all information necessary to allow me to make a decision as to
the advisability of an investment in the Company's stock and the value of such
stock, and that I have the skill and experience necessary to make such decision.
Dated:________________________________.
__________________________________
Signature of Employee
__________________________________
Print Name of Employee
__________________________________
Spouse of Employee
__________________________________
Print Name of Spouse of Employee
<PAGE>
Receipt is hereby acknowledged of the delivery to me by Sandbox
Entertainment Corporation, on ____________, of stock certificates for
________________ shares of Common Stock purchased by me pursuant to the terms
and conditions of the 1995 Equity Incentive Plan referred to above, which shares
were transferred to me on Sandbox Entertainment Corporation's stock record books
on _________________.
__________________________________
Employee
Exhibit 10(v)
SANDBOX ENTERTAINMENT CORPORATION
ISO AWARD AGREEMENT UNDER 1995 EQUITY INCENTIVE PLAN
[DATE]
______________________
______________________
______________________
Dear _____________:
I am happy to advise you that you have been selected by the Board of
Directors (the "Board") administering the 1995 Equity Incentive Plan of Sandbox
Entertainment Corporation (the "Company"), to receive an incentive stock option
and that on _______, 1996, you were granted an option to purchase
________________ (__________) shares of the Company's Class A Common Stock
($.001 par value) at a price of ___________ ($_____) per share (the "Stock").
The option granted to you is subject to the terms and conditions of the
Company's 1995 Equity Incentive Plan (the "Plan") and such additional terms and
conditions as are set forth in this Award Agreement (collectively the
"Agreement"). The terms of the Plan are incorporated by reference in this Award
Agreement and govern the granting, holding and exercise of your option as though
set forth in full in this letter. A copy of the Plan is attached as Exhibit A
for your review. All capitalized terms used in this Award Agreement and not
otherwise defined herein shall have the meanings expressly assigned thereto in
the Plan.
The Board has imposed the following additional terms and conditions
relating to your option and its exercise:
1. You may exercise your option, only in accordance with Paragraph 3
below, by delivery to the Company (in care of its Secretary) at the principal
offices of the Company, presently located at 2231 East Camelback Road, Suite
224, Phoenix, Arizona 85016, written, irrevocable notice of exercise in the form
attached to this letter as Exhibit B, specifying the number of shares with
respect to which the option is being exercised, together with payment of the
exercise price for those shares in cash or by check. Any other form of exercise
or tender may be refused by the Company, acting through the Board or otherwise,
in its discretion.
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2. Your option is not transferable other than by will or the laws of
descent and distribution and is exercisable, during your lifetime, only by you.
You may not assign or otherwise transfer or encumber your option or any interest
in your option to any person in any way.
3. (a) Provided you are then an employee of the Company and subject to
the further provisions of this Paragraph 3, your option shall first vest and
become exercisable, with respect to the shares subject to your option on the
dates set forth below (the "Vesting Dates"), and not before, with respect to the
designated number of shares as follows:
Number of Shares Vesting Vesting Dates
2,000 ___________, 1997
2,000 ___________, 1998
2,000 ___________, 1999
2,000 ___________, 2000
2,000 ___________, 2001
Notwithstanding any other provision of this Agreement (other than
Paragraph 3(f) below), your option, to the extent not previously exercised,
shall automatically terminate and be of no further force or effect on and as of
5:00 o'clock p.m., M.S.T., of the date which is the tenth (10th) anniversary of
the date of grant of this option.
(b) In the event you leave the Company for any reason whatsoever
(including your death or Disability, or termination by your voluntary
resignation or at the direction of the Company, with or without Cause) prior to
any Vesting Date, your unexpired option shall automatically terminate to the
extent it has not vested pursuant to Paragraph 3(a) above or Paragraph 3(f)
below, and your rights with respect to the option to the extent it has vested
shall be governed by Section 6.3 of the Plan and Paragraphs 3(c) and 3 (g)
below.
(c) In the event you leave the employment of the Company for any reason
whatsoever, including termination by your voluntary resignation or at the
direction of the Company, with or without Cause, or of your death or Disability,
the Company (or its nominee) shall have the right (but not the obligation) to
purchase any shares of Stock held by you (including shares acquired pursuant to
Section 6.3 of the Plan). If the termination of your employment is for Cause,
the purchase price for your Stock shall be the lower of the exercise price you
paid for such shares or the Fair Market Value per share of such Stock, as
defined in the Plan. If the termination is for any other reason, the purchase
price for your Stock shall be the Fair Market Value per share.
(i) The Company (or its nominee) shall exercise this right to
repurchase the shares of Stock, if at all, within six (6) months
following the date of
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the termination of your employment with the Company by delivering
written notice of exercise to you or your personal representative.
(ii) Payment on such exercise by the Company shall be made by
an initial payment on the Consummation Date (defined below) equal to
20% of the purchase price, and the balance shall be made in four (4)
equal annual installments of principal and accrued interest commencing
on the first anniversary of the Consummation Date, and on the next four
(4) anniversaries of the Commencement Date. Interest shall commence to
accrue from the Consummation Date at the prime rate of interest in
effect on the Consummation Date as announced in the Wall Street Journal
(or a reasonable substitute selected by the Board), and it shall be
adjusted annually thereafter to the then-existing Wall Street
Journal-announced prime rate (or a reasonable substitute selected by
the Board), which adjusted rate of interest shall remain in effect for
the entire year then beginning (interim changes in the prime rate
during the year being disregarded). The "Consummation Date" for
purposes of this Paragraph shall be the sixtieth (60th) day following
delivery of the Company's notice of exercise, provided that such date
may be extended by you or your personal representative by written
notice to a date not later than the earlier of ten (10) days after all
holding periods under Section 422 of the Internal Revenue Code expire
or consummation of a transaction (e.g., merger, consolidation, stock
sale) pursuant to which the holder of your shares would be entitled to
receive consideration of any kind. The Company may, at its election,
prepay amounts due under this Paragraph, without premium or penalty.
(d) In the event any shares of Stock acquired pursuant to exercise of
options hereunder, or any interest therein, are to be transferred, voluntarily
or involuntarily (including, without limitation, any sale, encumbrance,
foreclosure or transfer in lieu thereof, or by operation of law, any division of
marital property on account of divorce or legal separation being deemed a
"transfer" for purposes hereof, but excluding transfers to which Paragraph 3(c)
hereof applies), the Company (or its nominee) shall have a right of first
refusal as follows:
(i) You (or the holder of such shares if not you) shall give
the Company advance written notice detailing all the terms of the
proposed transfer. The Company (or its nominees) shall have the right
(but not the obligation), exercisable upon delivery to the transferring
shareholder of written notice of acceptance within thirty (30) days
following receipt of the notice of proposed transfer described in the
preceding sentence, to repurchase all or any of such shares on the
terms and conditions set forth in such notice;
provided that the per share purchase price shall be the lesser
of (X) the price, plus the Fair Market Value of any non-cash
consideration, stated in the notice or (Y) the Fair Market
Value of
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the shares (and shall be the Fair Market Value in the event of
a transfer not involving any consideration); and
provided further that the purchase price shall be payable, at
the election of the Company (or its nominees), either on the
terms set forth in the transferor's notice or in installments
with interest as set forth in Paragraph 3(c)(ii). The Company
may, at its election, prepay amounts due under this Paragraph,
without premium or penalty.
(ii) The date for consummating such purchase shall be the
sixtieth (60th) day following delivery of the Company's (or its
nominees') notice of exercise, provided that such date may be extended
by the transferring shareholder by written notice to a date not later
than the earlier of ten (10) days after all holding periods under
Section 422 of the Code expire. Failure by the Company (or its
nominees) (without default by the transferring shareholder) to close
such purchase within the above 60-day period shall give the
transferring shareholder the right to transfer such shares or interest
therein on the terms and to the person described in the notice during
the 60 days following expiration of the original 60-day period;
provided that the shares or interest therein to be transferred shall
for all purposes remain subject to this agreement. If the transferring
shareholder fails to close the proposed transfer on those terms within
such second 60-day period, the proposed transfer shall again be subject
to the terms of this Paragraph 3(d). Notwithstanding the foregoing,
such shares may be transferred or retransferred without invoking this
right of first refusal between you and trusts of which you and/or your
spouse are the sole beneficiaries by giving prior written notice
certifying such a transfer is to be made; provided that following any
such transfer, such shares shall remain subject to this right of first
refusal and all the other provisions of this Agreement.
(e) For so long as the Company's right to repurchase the Stock as set
forth in this Paragraph 3 remains effective, neither you, nor your personal
representative(s), devisee(s), heir(s), successor(s), or assignee(s) shall sell,
assign or otherwise transfer any shares of Stock or interest therein without
obtaining the written agreement of the purchaser, assignee or transferee that
the shares remain subject to this repurchase right, and you agree that
certificates evidencing the Stock may be legended to reflect the foregoing
restrictions.
(f) In its sole discretion, the Board may waive or accelerate vesting
of options, or waive or extend expiration dates (other than the final expiration
date set forth in Paragraph 3(a) above). In addition, vesting shall
automatically be deemed waived on the date which is thirty (30) days prior to a
"Change in Control". For purposes of this Agreement, "Change of Control" means
each of the following:
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(A) Any transaction, or series of transactions, whereby any
person (as that term is used in Section 13 and 14(d)(2) of the Exchange
Act), excluding affiliates of the Company as of the Effective Date, is
or becomes the beneficial owner (as that term is used in Section 13(d)
of the Exchange Act) directly or indirectly, of securities of the
Company representing fifty percent (50%) or more of the combined voting
power of the Company's then outstanding securities;
(B) Any merger, consolidation, or liquidation of the Company
in which the Company is not the continuing or surviving corporation or
pursuant to which Stock would be converted into cash, securities, or
other property, other than a merger or consolidation with a wholly
owned Subsidiary, a reincorporation of the Company in a different
jurisdiction, or other transaction in which there is no substantial
change in the shareholders of the Company and all then outstanding
Awards are assumed by the successor corporation, which assumption shall
be binding on all Participants; or
(C) The sale, transfer, or other disposition of all or
substantially all of the assets of the Company.
(g) Paragraph 3(d) shall terminate and be of no further force or effect
automatically upon the closing of an initial public stock offering of the
Company's common stock under the Securities Act the result of which is that the
Company's common stock is traded, or quoted, as applicable, on a national
securities exchange, over the counter on NASDAQ, or through the NASD's National
Market System (an "IPO").
4. The Company will reserve or keep available at all times sufficient
shares of its common stock to permit the exercise of your option and all other
options granted or to be granted under the Plan.
5. It is contemplated that the common stock in the Company to be issued
to you upon exercise of your option will not be registered under the Securities
Act of 1933, as amended (the "Act") or any applicable state securities laws, in
reliance on exemptions from registration thereunder. If in the opinion of
counsel satisfactory to the Company no exemption from registration is then
available, or if such issuance is otherwise in violation of applicable law at
the time purchase rights are exercised under this option, then the Company's
obligation to issue shares of its common stock upon exercise of your option
shall be suspended until such time as the Company's counsel determines that an
exemption from registration is available and such shares can be issued without
violation of law. If such an exemption is available in the opinion of such
counsel, and such issuance is not otherwise in violation of applicable law you
(or your personal representative(s), devisee(s), or heir(s)) will deliver to the
Company as a condition precedent to giving notice of each exercise, an
investment letter agreement in form and substance satisfactory to the Company to
enable the Company to comply with the Act or other applicable securities laws
and which may, among other things, limit or condition the right to dispose of
shares acquired
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under your option. Dispositions of the shares of Stock acquired by exercise of
your option will be permitted only if in the opinion of counsel satisfactory to
the Company such disposition is not in violation of the Act, any applicable
state securities laws, or any other applicable law, regulation or rule, and you
(or your personal representative(s), devisee(s), or heir(s)) deliver to the
Company a letter agreement in form and substance satisfactory to the Company
whereby your successor(s) or assign(s) agrees to be bound by the terms and
conditions of Paragraph 3 above and this Paragraph 5. You (and your personal
representative(s), devisee(s), or heir(s)) agree to pay all costs of obtaining
any legal opinions and all costs in connection with proposed exercise of your
option or dispositions of shares acquired pursuant to your option.
6. You agree to pay to the Company or to make arrangements satisfactory
to the Board to pay to the Company, at such time as any income is recognized by
you with respect to this option, any Federal, state, or local taxes of any kind
required by law to be withheld on such income by the Company. In the event of a
disposition or other transfer by you of common stock issued to you upon exercise
of your options, you agree to provide to the Company promptly written notice
describing in reasonable detail the disposition or transfer, including without
limitation the sale price, if any, and date of transfer or disposition.
7. The Board may effect certain amendments to the Plan (within the
limitations prescribed by the Plan) and the Board has the ultimate and
conclusive authority to interpret and administer the Plan and options (including
this option) granted under it.
8. The Plan and this option granted to you thereunder are governed by,
and shall be interpreted according to, the laws of the State of Arizona.
9. Each party hereto agrees to do all such things and take all such
actions, and to make, execute and deliver such other documents and instruments,
as shall be reasonably requested to carry out the provisions, intent and purpose
of this Agreement.
Section 422 of the Internal Revenue Code of 1986, as amended, provides
for advantageous tax treatment upon the disposition of shares acquired pursuant
to an incentive stock option such as you have been granted herein. However, in
order to qualify presently for such advantageous treatment, you must make no
disposition of Company shares acquired by you pursuant to this option within two
(2) years from the date of grant of the option nor within one (1) year after the
shares of the Stock are transferred to you. Although the foregoing holding
period requirements do not represent a term or condition of the option, you may
find that it is in your best interests to comply with them. Because the tax
effect may vary depending on your personal circumstances, and the tax laws may
change from time to time, it is strongly recommended that you consult with tax
counsel or a tax advisor in order to realize any available tax benefits
associated with this option.
This Award Agreement only grants the options described above and is not
an employment agreement or a promise or assurance of continued employment for
any period
6
<PAGE>
of time, including any period of time necessary to permit full exercise of the
options under Paragraph 1 above.
Please acknowledge your receipt of this Award Agreement, together with
the materials referred to herein and your agreement to the terms and conditions
of your option as set forth herein and in the Plan by signing the enclosed copy
of this letter and returning it promptly to the Secretary of the Company at the
address set forth in Section 1 of this letter. Any questions concerning any
matter relating to your incentive stock option or the Plan should also be
addressed to the Secretary.
Very truly yours,
Sandbox Entertainment Corporation
By _____________________________
Its Authorized Officer
ACCEPTED AND AGREED:
_________________________
Employee
The undersigned, as spouse of the grantee identified above, hereby confirms that
the community property of Employee and the undersigned is subject to and bound
by the agreement set forth above.
_________________________
Spouse of Employee
7
<PAGE>
EXHIBIT "A"
[Attach Plan]
-------------
<PAGE>
EXHIBIT "B"
NOTICE OF EXERCISE OF OPTION
TO PURCHASE SHARES OF
SANDBOX ENTERTAINMENT CORPORATION
AND RECORD OF STOCK TRANSFER
I hereby exercise my Incentive Stock Option granted by Sandbox
Entertainment Corporation under the 1995 Equity Incentive Plan (the "Plan")
subject to all the terms and provisions referred to in the Plan and my related
Award Agreement dated _______________, and notify you of my desire to purchase
_______ shares of Common Stock of Sandbox Entertainment Corporation (the
"Company") which were offered to me pursuant to said Option. Enclosed is my
check in the sum of $_______ in full payment for such shares.
I hereby represent that the _______ shares of the Company's Common
Stock to be delivered to me pursuant to the above-mentioned exercise of the
Option granted to me on _______ are being acquired by me as an investment and
not with a view to, or for sale in connection with, the distribution of any such
shares. I also represent that I have read and fully understand the Plan and the
Award Agreement, including without limitation the restrictions on transfer of
the shares hereby being acquired and the Company's repurchase rights with
respect to such shares. I agree to indemnify the Company and its subsidiaries,
together with their respective officers and directors, against any and all
liabilities, losses, damages and expenses (including reasonable attorney fees)
arising from or in connection with any disposition of the shares hereby being
acquired, or any interest therein, in violation of applicable securities laws or
regulations.
Dated: _______________, 19__.
_________________________________
Employee's Signature
_________________________________
Signature of Employee's Spouse
<PAGE>
Receipt is hereby acknowledged of the delivery to me by _______ on
_______ of stock certificates for _______ shares of Common Stock purchased by me
pursuant to the terms and conditions of the 1995 Equity Incentive Plan referred
to above, which shares were transferred to me on Sandbox Entertainment
Corporation's stock record books on _______, 19__.
_________________________________
Employee
Exhibit 10(w)
SANDBOX ENTERTAINMENT CORPORATION
NONQUALIFIED STOCK OPTION AWARD AGREEMENT
[DATE]
____________________________
____________________________
____________________________
____________________________
Dear___________________:
The Board of Directors (the "Board") administering the 1995 Equity
Incentive Plan for Sandbox Entertainment Corporation, a Delaware corporation
(the "Company"), has granted to _________________ ("Holder") an option to
purchase up to __________________ (______) shares of the Company's Common Stock,
$.001 par value (the "Stock") at a price of _____________ ($______) per share,
for an aggregate price of _________________________________ Dollars ($______).
This option is a so-called "nonqualified option". It is strongly recommended
that Holder consult with tax counsel or a tax advisor with respect to this
option prior to its exercise of the option.
The option granted to Holder is subject to the terms and conditions of
the Company's 1995 Equity Incentive Plan (the "Plan") and such additional terms
and conditions as are set forth in this Option Agreement. The terms of the Plan
are incorporated by reference in this Option Agreement and govern the granting,
holding and exercise of Holder's option as though set forth in full in this
letter. Capitalized terms used but not otherwise defined herein shall have the
same meanings as are assigned thereto in the Plan, unless the context herein
otherwise requires. A copy of the Plan is attached as Exhibit A for Holder's
review.
The Board has imposed the following additional terms and conditions
relating to Holder's option and its exercise:
1. Holder may exercise its option by delivery to the Company written,
irrevocable notice of exercise in the form attached hereto as Exhibit B
specifying the number of shares with respect to which the option is being
exercised (subject to any limitations below), together with payment in full of
the exercise price for those shares in cash, by check or by transferring to the
Company shares of the Company's Stock at their fair market value as determined
pursuant to the Plan. Any other form of exercise or tender may be refused by the
Company, acting through the Board or otherwise, in its
<PAGE>
- ---------------------------
Page 2
discretion. Except as provided in the Plan or in this Option Agreement, Holder's
option will terminate in its entirety on the tenth (10th) anniversary date of
this letter.
2. (a) Holder's option has vested as to all ____________ shares.
Holder may exercise its option, in whole or in part, subject to the terms and
conditions of this Option Agreement and of the Plan.
(b) In the event any shares of Stock acquired pursuant to
exercise of the option hereunder, or any interest therein, are to be
transferred, voluntarily or involuntarily (including, without limitation, any
sale, encumbrance, foreclosure or transfer in lieu thereof, or by operation of
law, any division of marital property on account of divorce or legal separation
being deemed a "transfer" for purposes hereof, the Company (or its nominees)
shall have a right of first refusal as follows: Holder (or the holder of such
shares if not Holder) shall give the Company advance written notice detailing
all the terms of the proposed transfer. The Company (or its nominees) shall have
the right (but not the obligation), exercisable upon delivery to the
transferring shareholder of written notice of acceptance within thirty (30) days
following receipt of the notice of proposed transfer described in the preceding
sentence or within ninety (90) days of receiving notification that a transfer
has occurred, to repurchase all or any of such shares on the terms and
conditions set forth in such notice; provided that the per share purchase price
shall be the lesser of (i) the price, plus the fair market value of any non-cash
consideration (determined by the Company in good faith) (or, if applicable, 110%
of the loan amount), stated in the notice or (ii) the Agreed Value of the
shares, determined in accordance with Paragraph 2(c) (and shall be the Agreed
Value, determined in accordance with Paragraph 2(c), in the event of a transfer
not involving any consideration); and provided further that the purchase price
shall be payable, at the election of the Company (or its nominees), either on
the terms set forth in the transferor's notice or in five equal annual
installments of principal and accrued interest (at an annual interest rate,
adjusted on a daily basis, equal to the prime rate of interest publicly
announced as such from time to time by Citibank, N.A. in New York City) due
commencing on the Company's (or its nominees') purchase and on the next four (4)
anniversaries of such purchase. The date for consummating such purchase shall be
the sixtieth (60th) day following delivery of the company's (or its nominees')
notice of exercise. Failure by the Company (or its nominees) (without default by
the transferring shareholder) to close such purchase within the above 60-day
period shall give the transferring shareholder the right to transfer such shares
or interest therein on the terms and to the person described in the notice
during the 60 days following expiration of the original 60-day period; provided
that the shares or interest therein to be transferred shall for all purposes
remain subject to this agreement. If the transferring shareholder fails to close
the proposed transfer on those terms within such second 60-day period, the
proposed transfer shall again be subject to the terms of this Paragraph 2(b).
Notwithstanding the foregoing, such shares may be transferred or retransferred
without invoking this right of first refusal between Holder and trusts of which
Holder is the sole beneficiary by giving prior written notice certifying such a
transfer is to be made; provided that following any such transfer, such shares
shall remain subject to this right of first
<PAGE>
- ---------------------------
Page 3
refusal and all the other provisions of this agreement. The restrictions set
forth in this Paragraph 2(b) shall expire upon the closing of a registered
"public offering" of the Company's common stock pursuant to the Securities Act
of 1933, as amended, and commencement of trading of Company common stock over
the counter on NASDAQ or on any national securities exchange.
(c) The "Agreed Value" of a share of the Stock shall mean that
value which is determined by the Board of Directors of the Company, by majority
vote, acting in good faith, as the then fair market value of the Stock. The
Board of Director's decision as to the Agreed Value shall be final and
conclusive.
(d) For so long as the Company's right to repurchase the Stock
as set forth in this Paragraph 2 remains effective, Holder shall not sell,
assign or otherwise transfer any shares of Stock or interest therein without
obtaining the written agreement of the purchaser, assignee or transferee that
the shares remain subject to this repurchase right, and Holder agrees that
certificates evidencing the Stock may be legended to reflect the foregoing
restrictions.
(e) In its sole discretion, the Board may waive or extend
expiration dates, subject to limitations set forth in the Plan.
3. Holder's option is not transferable and is exercisable only by
Holder.
4. The Company will reserve or keep available at all times sufficient
shares of its Stock to permit the exercise of Holder's option and other options
granted or to be granted under the Plan.
5. It is contemplated that the common stock in the Company to be issued
to Holder upon exercise of Holder's option will not be registered under the
Securities Act of 1933, as amended (the "Act") or any applicable state
securities laws, in reliance on counsel satisfactory to the Company, no
exemption from registration is then available, or if such issuance is otherwise
in violation of applicable law at the time purchase rights are exercised under
this option, then the Company's obligation to issue shares of its common stock
upon exercise of Holder's option shall be suspended until such time as the
Company's counsel determines that an exemption from registration is available
and such shares can be issued without violation of law. If such an exemption is
available in the opinion of such counsel, and such issuance is not otherwise in
violation of applicable law, Holder will deliver to the Company as a condition
precedent to giving notice of each exercise, an investment letter agreement in
form and substance satisfactory to the Company to enable the Company to comply
with the Act or other applicable securities laws and which may, among other
things, limit or condition the right to dispose of shares acquired under
Holder's option. Dispositions of the shares of Stock acquired by exercise of
Holder's option will be permitted only if in the opinion of counsel satisfactory
to the Company such disposition is not in violation of the Act, any applicable
state securities laws, or any other applicable
<PAGE>
- ---------------------------
Page 4
law, regulation or rule, and Holder delivers to the Company a letter agreement
in form and substance satisfactory to the Company whereby Holder's successor(s)
agrees to be bound by the terms and conditions of this Option Agreement. Holder
agrees to pay all costs of obtaining any legal opinions and all costs in
connection with proposed exercise of Holder's option or dispositions of shares
acquired pursuant to Holder's option. Holder agrees to indemnify the Company,
its officers and directors, against any and all liabilities, losses, damages and
expenses (including reasonable attorney fees) arising from or in connection with
any disposition of the Stock, or any interest therein, in violation of
applicable securities laws or regulations or this letter.
6. Holder agrees to pay to the Company or to make arrangements
satisfactory to the Board to pay to the Company, at such time as any income is
recognized by Holder with respect to this option, any Federal, state, or local
taxes of any kind required by law to be withheld on such income by the Company.
In the event of a disposition or other transfer by Holder of common stock issued
to Holder upon exercise of Holder's options, Holder agrees to provide to the
Company promptly written notice describing in reasonable detail the disposition
or transfer, including without limitation the sale price, if any, and date of
transfer or disposition.
7. The Board may effect certain amendments to the Plan (within the
limitations prescribed by the Plan) and has the ultimate and conclusive
authority to interpret and administer the Plan and options (including this
option) granted under it.
8. The Plan and this option granted to Holder thereunder are governed
by, and shall be interpreted according to, the laws of the State of Arizona.
Holder's acceptance of the option granted pursuant to this Option
Agreement shall signify that Holder represents, warrants and agrees that all
shares of Stock purchased pursuant to the exercise of the option will be
acquired for investment and not for resale or distribution.
Because the tax effect may vary depending on Holder's circumstances,
and the tax laws may change from time to time, it is strongly recommended that
upon receipt of this option and prior to any exercise of this option Holder
consult with tax counsel or Holder's tax advisor concerning this option and the
current tax treatment relating thereto.
Please acknowledge Holder's receipt of this Option Agreement, together
with the materials referred to herein and Holder's agreement to the terms and
conditions of Holder's option as set forth
<PAGE>
- ---------------------------
Page 5
herein and in the Plan by signing the enclosed copy of this Option Agreement and
returning it promptly to the Company.
Very truly yours,
Sandbox Entertainment Corporation
a Delaware corporation
By ___________________________________
Its President
ACCEPTED AND AGREED:
________________________
By ________________________
Its ____________________
Date: __________________
<PAGE>
- ---------------------------
Page 6
EXHIBIT A
Attach a copy of the Plan
<PAGE>
EXHIBIT B
NOTICE OF EXERCISE OF OPTION
TO PURCHASE SHARES OF
SANDBOX ENTERTAINMENT CORPORATION
AND RECORD OF STOCK TRANSFER
The undersigned hereby exercises its Stock Option granted by Sandbox
Entertainment Corporation under its 1995 Equity Incentive Plan (the "Plan")
subject to all the terms and provisions referred to in the Plan and that certain
option grant letter dated ___________________ (the "Option Letter "), and
notifies Sandbox Entertainment Corporation (the "Company") of its desire to
purchase __________ shares of the Common Stock of the Company, which were
offered to it pursuant to said Option Letter. Enclosed is a check in the sum of
$_________________ in full payment for such shares. The undersigned agrees to
hold these shares in accordance with and subject to the provisions of the Option
Letter.
The undersigned hereby represents that the shares of the Company's
Common Stock to be delivered to it pursuant to the above-mentioned exercise of
the Option are being acquired by the undersigned as an investment and not with a
view to, or for sale in connection with, the distribution of any such shares.
The undersigned also represents that it has read and fully understands the Plan,
including without limitation the restrictions on transfer of the shares hereby
being acquired. The undersigned agrees to indemnify the Company and its
subsidiaries, together with their officers and directors, for any liabilities,
losses, damages and expenses (including reasonable attorney fees) arising from
or in connection with any disposition of the shares hereby being acquired, or
any interest therein, in violation of applicable securities laws or regulations.
The undersigned further represents that it has been given access to all
information necessary to allow it to make a decision as to the advisability of
an investment in the Company's stock and the value of such stock, and that it
has the skill and experience necessary to make such decision.
Dated:____________________.
______________________________________
Signature of Option Holder
______________________________________
Print Name of Option Holder
<PAGE>
Receipt is hereby acknowledged of the delivery to the undersigned by
Sandbox Entertainment Corporation, on ____________, of stock certificates for
________________ shares of Common Stock purchased by the undersigned pursuant to
the terms and conditions of the 1995 Equity Incentive Plan referred to above,
which shares were transferred to the undersigned on such Company's stock record
books on _________________.
___________________________________
By____________________________________
Its___________________________________
Exhibit 10(x)
EMPLOYMENT AGREEMENT
Tracer Design, Inc., an Arizona corporation ("Employer"), hereby employs Chad M.
Little ("Employee") on the following terms and conditions:
Term of Employment: Employee is an "At Will" employee of Employer, and
termination is permitted at any time by either party on 30 days prior written
notice. Employee's employment commences March 1, 1992.
Scope of Services; Vacation; Leave: Employee shall perform such tasks as
reasonably assigned by Employer, given Employee's background and experience.
Employee's initial tasks shall include serving as President and Chief Executive
Officer of Employer.
Employee agrees to devote substantially all of his working time to the business
of employer. Employee agrees not to undertake any other work or activity which
would materially interfere or conflict with Employee's work for Employer or with
the business of Employer. Employee represents that he is under no obligations
which would adversely affect Employee's ability to perform Employee's duties as
an employee of Employer.
All vacation and leaves shall be agreed in good faith between Employee and
Employer.
Salary and Payment: Employer shall pay Employee a salary equal to $50,000 on an
annualized basis. Such salary shall accrue at such rate on a weekly basis but
shall be payable as follows:
During the first six months of employment, all salary shall accrue but
shall not be payable. Commencing September 1, 1992, Employee, if still
employed, will commence receiving regular weekly paychecks. The accrued
but unpaid salary for the first six months (or shorter period if
termination occurs earlier) shall be payable: (i) in 12 equal monthly
installments commencing September 1, 1992, or (ii) in a lump sum if
Employee's employment is involuntarily terminated at any time. No
interest shall be due on any accrued salary. In the event Employee
voluntarily terminates employment with Employer during the 12 months
from the start of employment under this Agreement, Employee shall have
no right to any accrued but unpaid compensation at the time of
termination.
Nothing in the foregoing gives Employee the right to remain as an employee of
Employer for any fixed term of employment.
Draft 1.30 Page 1
<PAGE>
Other Terms:
Employer shall provide reasonable work space and materials necessary for the
performance of Employee's tasks. Employer has no obligation to provide any
benefits to Employee but may provide such benefits as it deems appropriate from
time to time. No benefits are provided initially.
This Agreement shall be governed by the laws of the State of Arizona.
EXECUTED: February 19, 1992
/s/ Chad M. Little
-----------------------------------------
Chad M. Little
TRACER DESIGN, INC.
By: /s/ James A Layne
-------------------------------------
Authorized Officer
Draft 1.30 Page 2
Exhibit 10(y)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
this 1st day of August, 1995, by and between TRACER Design, Inc., an Arizona
corporation (the "Company"), and Mike Turico, an individual ("Employee").
WITNESSETH:
WHEREAS, the Company desires to retain the services of Employee, and
Employee desires to be employed by the Company, on the terms and conditions of
this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the Company and Employee, intending
to be legally bound, hereby agree as follows:
1. Employment. The Company hereby employs Employee as an Engineering Manager for
the Company, and Employee accepts such employment and agrees to perform services
for the Company, subject always to such resolutions as are established from time
to time by the Board of Directors of the Company, for the period and upon the
other terms and conditions set forth in this Agreement.
2. Term. The term of Employee's employment hereunder shall commence on
the date hereof, and shall continue until this Agreement is terminated by either
party, for any reason whatsoever, this being an "at will" employment agreement,
provided that Sections 5 and 10 of this Agreement shall govern the amount of any
compensation to be paid to Employee upon termination of this Agreement.
3. Position and Duties.
3.1 Service with the Company. During the term of this
Agreement, Employee agrees to perform such executive employment duties as the
Company's Board of Directors (the "Board") or the President or his designees
shall assign to him from time to time.
3.2 No Conflicting Duties. During the term hereof, Employee
shall not serve as an officer, director, employee, consultant or advisor to any
other business without the prior written consent of the Company's Board of
Directors. Employee hereby confirms that he is under no contractual commitments
inconsistent with his obligations set forth in this Agreement, and that during
the term of this Agreement, he will not render or perform
<PAGE>
services, or enter into any contract to do so, for any other corporation, firm,
entity or person which are inconsistent with the provisions of this Agreement.
4. Compensation.
4.1 Base Salary. As compensation for all services to be
rendered by Employee under this Agreement, the Company shall pay to Employee a
base annual salary of Ninety Thousand Dollars ($90,000) (the "Base Salary"),
which shall be paid on a regular basis in accordance with the Company's normal
payroll procedures and policies. The amount of the Base Salary shall be reviewed
annually by the Board of Directors.
4.2 Bonuses. Employee shall be eligible to participate in such
cash bonus programs as the Board establishes from time to time in its discretion
for employees of similar position in the Company.
4.3 Stock Options. The Board of Directors of the Company will
grant to Employee an stock option to purchase up to 11,596 shares of Company's
Class A Common Stock at an exercise price of $.01 per share. Such option shall
be granted pursuant to the Company's 1995 Equity Incentive Plan (the "Plan") and
a grant letter in the form attached as Exhibit A. The option shall be a
"nonqualified" option for tax purposes.
4.4 Participation in Benefit Plans. Employee shall be included
to the extent eligible thereunder in any and all plans of the Company providing
general benefits for the Company's employees, including but not limited to
insurance, 401(k) plan, vacation, sick days, and holidays. Employee's
participation in any such plan or program shall be subject to the provisions,
rules and regulations applicable thereto.
4.5 Business Expenses. In accordance with the Company's
policies established from time to time, the Company will pay or reimburse
Employee for all reasonable and necessary out-of-pocket expenses incurred by him
in the performance of his duties under this Agreement, subject to the
presentment of appropriate vouchers.
5. Compensation Upon the Termination of Employee's Employment by the
Company.
5.1 In the event that Employee's employment is terminated
pursuant to Section 10.1, 10.3, or 10.4, then Employee shall be entitled to
receive Employee's then current monthly Base Salary through the date his
employment is terminated, but no other compensation of any kind or amount.
5.2 In the event Employee's employment is terminated pursuant
to Section 10.2, Employee's beneficiary or a beneficiary designated by Employee
in writing to the Company, or in the absence of such beneficiary, Employee's
estate, shall be entitled to receive
2
<PAGE>
Employee's then current monthly Base Salary through the end of the month in
which his death occurs, but no other compensation of any kind or amount.
5.3 In the event Employee is terminated by the Company
pursuant to Section 10.5, the Company shall pay to Employee, as a severance
allowance, his then current monthly Base Salary for the four week period
following the date of termination, plus the pro rata portion of his monthly Base
Salary for accrued but unused vacation days.
All payments required to be made by the Company to Employee pursuant to
this Section 5 shall be paid in the manner and at the times specified in Section
4.1 hereof.
6. Confidential Information. Except as permitted or directed by the
Company's Board, Employee shall not during the term of his employment under this
Agreement or at any time thereafter divulge, furnish, disclose or make
accessible (other than in the ordinary course of the business of the Company) to
anyone for use in any way any confidential or secret knowledge or information of
the Company which Employee has acquired or become acquainted with or will
acquire or become acquainted with prior to the termination of the period of his
employment by the Company (including employment by the Company prior to the date
of this Agreement), whether developed by himself or by others, concerning any
trade secrets, confidential or secret designs, processes, formulae, software or
computer programs, plans, devices or material (whether or not patented or
patentable, copyrighted or copyrightable) directly or indirectly useful in any
aspect of the business of the Company, any confidential customer or supplier
lists of the Company, any strategic or financial plans, any confidential or
secret development or research work of the Company, or any other confidential,
secret or nonpublic aspects of the business of the Company. Employee
acknowledges that the above-described knowledge or information constitutes a
unique and valuable asset of the Company acquired at great time and expense by
the Company, and that any disclosure or other use of such knowledge or
information other than for the sole benefit of the Company would be wrongful and
would cause irreparable harm to the Company both during and after the term of
this Agreement, Employee will refrain from any acts or omissions that would
reduce the value of the use of such knowledge or information to the Company. The
foregoing obligations of confidentiality, however, shall not apply to any
knowledge or information which is now published or which subsequently becomes
generally publicly known, other than as a direct or indirect result of the
breach of this Agreement by Employee.
7. Patent and Related Matters.
7.1 Disclosure and Assignment. Employee will promptly disclose
in writing to the Company complete information concerning each and every
invention, discovery, improvement, device, design, apparatus, practice, process,
software or computer program, method or product, whether or not patentable or
copyrightable, made, developed, perfected, devised, conceived or first reduced
to practice by Employee, either solely or in collaboration with others, during
Employee's employment under this Agreement, or for the period in which
3
<PAGE>
a covenant not to compete is in effect hereunder as to Employee, whether or not
during regular working hours, relating either directly or indirectly to the
business, products or practices of the Company (hereinafter referred to as the
"Inventions"). Employee, to the extent that he has the legal right to do so,
hereby acknowledges that any and all of the Inventions are the property of the
Company and hereby assigns and agrees to assign to the property of the Company
any and all of Employee's right, title and interest in and to any and all of the
Inventions without further payment.
7.2 Future Inventions. As to any future Inventions made by
Employee which relate to the business, products or practices of the Company and
which are first conceived or reduced to practice during the term of this
Agreement, or for the period in which a covenant not to compete is in effect
hereunder as to Employee, but which are claimed for any reason to belong to an
entity or person other than the Company, Employee will promptly disclose the
same in writing to the Company and shall not disclose the same to others if the
Company, within twenty (20) days thereafter, shall claim ownership of such
Inventions under the terms of this Agreement.
7.3 Limitations of Sections 7.1 and 7.2. The provisions of
Sections 7.1 and 7.2 shall not apply to any Invention meeting the following
conditions (an "Excluded Invention"):
(a) such Invention was developed entirely on Employee's own
time; and
(b) such Invention was made without the use of any Company
equipment, supplies, facilities or trade secret information; and
(c) such Invention does not relate (i) directly to the
business of the Company, or (ii) to the Company's actual or demonstrably
anticipated research or development; and
(d) such Invention does not result from any work performed by
Employee for the Company; and
(e) Employee informs the Company in writing within one month
after commencing work on any Invention that is to be an Excluded Invention and
again informs the Company in writing that such Invention has been developed
within one (1) month of the date when development of such Invention is complete.
7.4 Assistance of Employee. Upon the request of the Company
and without further compensation therefor, but at no expense to Employee, and
whether during the term of this Agreement or thereafter, Employee will do all
lawful acts, including, but not limited to, the execution of papers and lawful
oaths and the giving of testimony, that in the opinion of the Company, its
successors and assigns, may be necessary or desirable in obtaining, sustaining,
4
<PAGE>
reissuing, extending and enforcing United States and foreign Letters Patents,
including, but not limited to, design patents, on any and all of the Inventions,
and for perfecting, affirming and recording the Company's complete ownership and
title thereto, and to cooperate otherwise in all proceedings and matters
relating thereto.
7.5 Records. Employee will keep complete, accurate and
authentic accounts, notes, data and records of all of the Inventions in the
manner and form requested by the Company. Such accounts, notes, data and records
shall be the property of the Company, and, upon its request, Employee will
promptly surrender the same to it or, if not previously surrendered upon its
request or otherwise, Employee will surrender the same, and all copies thereof,
to the Company upon the conclusion of his employment.
7.6 Obligations, Restrictions and Limitations. Employee
understands that the Company may enter into agreements or arrangements with
agencies of the United States Government, and that the Company may be subject to
laws and regulations which impose obligations, restrictions and limitations on
it with respect to inventions and patents which may be acquired by it or which
may be conceived or developed by employees, consultants or other agents
rendering services to it. Employee agrees that he shall be bound by all such
obligations, restrictions and limitations applicable to any said invention
conceived or developed by him during the term of this Agreement and shall take
any and all further action which may be required to discharge such obligations
and to comply with such restrictions and limitations.
8. Ventures. If, during the term of this Agreement, Employee is engaged
in or associated with the planning or implementing of any project, program or
venture involving the Company and a third party or parties, all rights in the
project, program or venture shall belong to the Company and shall constitute a
corporate opportunity belonging exclusively to the Company. Except as approved
by the Company's Board of Directors, Employee shall not be entitled to any
interest in such project, program or venture or to any commission, finder's fee
or other compensation in connection therewith other than the salary to be paid
to Employee as provided ln this Agreement.
9. Non-Competition; Solicitation of Customers and Solicitation of
Employees.
9.1 Non-Competition.
(a) Employee agrees that, during the period of his employment
hereunder and for a period of twelve (12) months following the termination of
his employment with the Company for any reason, he shall not, directly or
indirectly, engage in competition with the Company in the business of creating,
distributing or conducting games on the Internet within any state in the United
States, or any country, in which the Company is then conducting its business
(the "Territory") in any manner or capacity (e.g., as a management consultant,
principal, partner, officer, director, stockholder or management employee).
5
<PAGE>
(b) Ownership by Employee, as a passive investment, of less
than 2 1/2% of the outstanding shares of capital stock of any corporation listed
on a national securities exchange or publicly traded in the over-the-counter
market shall not constitute a breach of this Section 9.
(c) Employee further agrees that, during the term of this
Agreement and for eighteen (18) months after its termination, he will not,
directly or indirectly, assist or encourage any other person in carrying out,
directly or indirectly, any activity that would be prohibited by the above
provisions of this Section 9 if such activity were carried out by Employee,
either directly or indirectly, and in particular Employee agrees that he will
not, directly or indirectly, induce any employee of the Company to carry out,
directly or indirectly, any such activity.
9.2 Agreement Not to Solicit Customers. Employee agrees that
during his employment by the Company hereunder and for the period in which a
covenant not to compete is in effect hereunder as to Employee, he will not,
either directly or indirectly, on his own behalf or in the service or on behalf
of others, solicit, divert or appropriate, or attempt to solicit, divert or
appropriate, to any competing business (i) any person or entity whose account
with the Company was sold or serviced by or under the supervision of Employee
during the year preceding the termination of such employment, or (ii) any person
or entity whose account with the Company has been directly solicited at least
twice by the Company within the twelve (12) month period prior to the date of
termination of employment.
9.3 Agreement Not to Solicit Employees. Employee agrees that
during his employment by the Company hereunder and for the three (3) year period
following the termination of such employment for any reason, he will not, either
directly or indirectly, on his own behalf or in the service or on behalf of
others solicit, divert or hire away, or attempt to solicit, divert or hire away
any person then employed by the Company or then serving as a sales
representative of the Company.
10. Termination.
10.1 Disability. Employee's employment shall terminate upon
Employee's becoming totally or permanently disabled for a period of six (6)
months or more. For purposes of this Agreement, the term "totally or permanently
disabled" or "total or permanent disability" means Employee's inability on
account of sickness or accident, whether or not job-related, to engage in
regularly or to perform adequately his assigned duties under this Agreement. A
reasonable determination by the Board of Directors of the existence of a
disability shall be conclusive for all purposes hereunder. In making such
determination of disability, the Board of Directors may utilize such advice and
consultation as the Board of Directors deems appropriate, but there is no
requirement of procedure or formality associated with the making of a
determination of disability.
6
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10.2 Death of Employee. Employee's employment shall terminate
immediately upon the death of Employee.
10.3 Termination for Cause. The Company may terminate
Employee's employment at any time for "Cause" (as hereinafter defined)
immediately upon written notice to Employee. Such written notice shall set forth
with reasonable specificity the Company's basis for such termination. As used
herein, the term "Cause" shall mean that Employee shall have in the reasonable
judgment of the Board of Directors (i) committed a criminal act or an act of
fraud, embezzlement, breach of trust or other act of gross misconduct, (ii)
willfully violated written corporate policy or rules of the Company, or (iii)
wilfully or habitually refused to follow the written directions given by the
Board of Directors or Employee's supervisors from time to time or breached any
covenant or obligation under this Agreement or other agreement with the Company.
10.4 Resignation. Employee's employment shall be terminated on
the earlier of the date that is one (1) months following the written submission
of Employee's resignation to the Board or the earlier date such resignation is
accepted by the Board.
10.5 Termination Without Cause. The Company may terminate
Employee's employment without cause upon written notice to Employee. Termination
"without cause" shall mean termination of employment on any basis other than
termination of Employee's employment hereunder pursuant to Sections 10.1, 10.2,
10.3 or 10.4.
10.6 Surrender of Records and Property. Upon termination of
his employment with the Company, Employee shall deliver promptly to the Company
all records, manuals, books, blank forms, documents, letters, memoranda, notes,
notebooks, reports, data, tables, calculations or copies thereof, which are the
property of the Company and which relate in any way to the business, products,
practices or techniques of the Company, and all other property, trade secrets
and confidential information of the Company, including, but not limited to, all
documents which in whole or in part contain any trade secrets or confidential
information of the Company, which in any of these cases are in his possession or
under his control.
11. Assignment. This Agreement shall not be assignable, in whole or in
part, by either party without the written consent of the other party, except
that the Company may, without the consent of Employee, assign its rights and
obligations under this Agreement to any corporation, firm or other business
entity (i) with or into which the Company may merge or consolidate, or (ii) to
which the Company may sell or transfer all or substantially all of its assets or
of which 50% or more of the equity investment and of the voting control is
owned, directly or indirectly, by, or is under common ownership with, the
Company. Upon such assignment by the Company, the Company shall obtain the
assignees' written agreement enforceable by Employee to assume and perform, from
and after the date of such assignment, the terms, conditions, and provisions
imposed by this Agreement upon the Company. After
7
<PAGE>
any such assignment by the Company and such written agreement by the Assignee,
the Company shall be discharged from all further liability hereunder and such
assignee shall thereafter be deemed to be the Company for the purposes of all
provisions of this Agreement including this Section 11.
12. Injunctive Relief. Employee agrees that it would be difficult to
compensate the Company fully for damages for any violation of the provisions of
this Agreement, including without limitation the provisions of Sections 6, 7, 9
and 10.6. Accordingly, Employee specifically agrees that the Company shall be
entitled to temporary and permanent injunctive relief to enforce the provisions
of this Agreement. This provision with respect to injunctive relief shall not,
however, diminish the right of the Company to claim and recover damages in
addition to injunctive relief.
13. Miscellaneous.
13.1 Governing Law. This Agreement is made under and shall be
governed by and construed in accordance with the laws of the State of Arizona.
13.2 Prior Agreements. This Agreement contains the entire
agreement of the parties relating to the subject matter hereof and supersedes
all prior agreements and understanding with respect to such subject matter, and
the parties hereto have made no agreements, representations or warranties
relating to the subject matter of this Agreement which are not set forth herein.
13.3 Withholding Taxes. The Company may withhold from any
benefits payable under this Agreement all federal, state, city or other taxes as
shall be required pursuant to any law or governmental regulation or ruling.
13.4 Amendments. No amendment or modification of this
Agreement shall be deemed effective unless made in writing signed by the parties
hereto.
13.5 No Waiver. No term or condition of this Agreement shall
be deemed to have been waived nor shall there be any estoppel to enforce any
provisions of this Agreement, except by a statement in writing signed by the
party against whom enforcement of the waiver or estoppel is sought. Any written
waiver shall not be deemed a continuing waiver unless specifically stated, shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
13.6 Severability. To the extent any provision of this
Agreement shall be invalid or unenforceable, it shall be considered deleted here
from and the remainder of such provision and of this Agreement shall be
unaffected and shall continue in full force and effect. In furtherance and not
in limitation of the foregoing, should the duration or geographical
8
<PAGE>
extent of, or business activities covered by any provision of this Agreement be
in excess of that which is valid and enforceable under applicable law, then such
provision shall be construed to cover only that duration, extent or activities
which may validly and enforceably be covered. Employee acknowledges the
uncertainty of the law in this respect and expressly stipulates that this
Agreement shall be given the construction which renders its provisions valid and
enforceable to the maximum extent (not exceeding its express terms) possible
under applicable law.
13.7 Survival. Sections 6, 7, 8, 9 and 10.6 shall survive
termination of this Agreement.
IN WITNESS WHEREOF, the parties have executed and sealed this Agreement
as of the day and year set forth above.
TRACER Design, Inc.
By: /s/ Chad M. Little
--------------------------------
Its: President
--------------------------------
"THE COMPANY"
/s/ Michael Turico
-------------------------------
Mike Turico
"Employee"
9
<PAGE>
EXHIBIT A
[Attach form of Grant Letter with Plan]
10
Exhibit 10(z)
As of December 30, 1996
Mark Gorchoff
7009 E. Acoma Drive, # 2132
Scottsdale, Arizona 85254
Dear Mark:
Sandbox Entertainment Corporation, a Delaware corporation (the
"Company") is pleased to offer you a position with our company. Your initial
title will be Chief Financial Officer. You will report to me in my capacity as
President of the Company. Of course, we strive to continuously evaluate our
business and your capabilities, and your responsibilities and reporting
relationship may change over time at the sole discretion of the Company.
Your starting salary, which is subject to periodic review and
adjustment, will be $6,250 per month, before applicable withholding and taxes,
paid on the Company's regular, biweekly paydays. We currently have benefit plans
covering things such as vacation, medical insurance, disability, and 401(k).
Additional information concerning our benefits is available upon request, and,
if you accept this offer, I encourage you to review the actual Company policies
so that you fully understand them. Please understand that these policies are not
written in stone, and may be modified in the future.
You will receive an incentive stock option grant of 45,000 shares with
an exercise price of $.10 per share. The option will be on the terms and
conditions of the Company's 1995 Equity Incentive Plan and standard form award
agreement, with vesting over five years.
If you accept this offer of employment, you represent to the Company
that employment with the Company will not violate any contractual obligation or
other duty that you may owe to former employers or other parties, including
obligations not to compete and obligations not to disclose trade secrets or
other confidential business information. You further represent that you have not
disclosed and will not disclose to the Company any such restricted trade secret
or other confidential business information, and that you have not brought and
will not bring with you to your employment with the Company any documents,
records, or other confidential information belonging to your former employers or
other parties.
To protect the Company's assets and business interests, including its
trade secrets and confidential business information, you will be required to
sign the enclosed Employee Proprietary Rights Agreement. Your signature on this
document is a condition of your employment.
If you accept this offer, both you and the Company will have the right
to terminate your employment at any time, for no reason or for any reason, with
or without cause. This is known as employment "at will." Nothing in this letter
or in any Company policy or statement, including statements made to you during
negotiations about working at the Company, is intended to or does
<PAGE>
Mark Gorchoff
Page 2
create terms of an express or implied contract of employment, nor guarantees
employment for a specific term. Only the President and Board of Directors of the
Company may modify your at will employment status or guarantee that you will be
employed for a specific period of time, and any such modification must be in
writing, approved by the Board of Directors, and signed by an authorized Company
representative. This letter, and the attached Employee Proprietary Rights
Agreement, once executed by you and the Company, constitute the entire agreement
between you and the Company regarding the subject matter hereof, and this
agreement may be modified only in a written document approved by the Company's
Board of Directors and signed by you and an authorized Company representative.
To accept this offer, please carefully read the statement below, sign
where indicated, and return the letter, along with the Employee Proprietary
Rights Agreement, to me. Please let me know if you have any questions about the
matters discussed in this letter, or otherwise. We sincerely hope that you will
accept this offer and we look forward to working with you.
Sincerely,
/s/ Chad M. Little
Chad Little
I understand, acknowledge, and agree to the terms and conditions of employment
described in this letter, and I accept employment with the Company on these
terms and conditions.
/s/ Mark Gorchoff As of December 30, 1996
- --------------------------------------- ----------------------------------
Mark Gorchoff DATE
Exhibit 10(aa)
June 20, 1996
Mr. Matt Stanton
4519 Emerald Way
Culver City, CA 90230
Dear Matt:
Sandbox Entertainment Corporation (Sandbox or the Company) is pleased
to offer you a position with our Company. Your initial title will be Director of
Sales, and you will start off reporting to me. Of course, we strive to
continuously evaluate our business and the capabilities of our employees, and
your responsibilities and reporting relationship may, and likely will, change
over time at the sole discretion of Sandbox.
1. Salary. Your starting monthly salary, which is subject to
periodic review and adjustment, will be $7,083.33, before
applicable withholding and taxes, paid on the company's
regular paydays. If by the end of your first full year with
Sandbox your total gross compensation (salary, bonus, and
commissions) has not totaled $110,000.00 or more, Sandbox will
make up the difference so that you are paid at least
$110,000.00 total compensation in your first year of
employment.
2. Commission. You are eligible for commissions on sales you make
to the Company's clients. Your initial commission schedule,
which can be modified by the Company at any time in its sole
discretion, is as follows: 3.5% on net direct sales (after
Agency Commissions and Discounts) up to $1 Million Dollars
with no cap; 4.5% on net direct sales (after Agency
Commissions and Discounts) over $1 Million Dollars with no
cap; 1.0% on Rep Sales on net sales (after Agency Commissions
and Discounts) with no cap.
All commissions will be deemed earned, and will be paid, upon
receipt of final payment from the client, and not before. If
you resign or your employment with Sandbox is terminated for
any reason, you will receive commissions only for sales for
which Sandbox has received final and complete payment from the
client prior to your departure.
During your first four months of employment, you may draw
advances against your anticipated commissions, up to a monthly
maximum limit of $2,084.00. Any
<PAGE>
Mr. Matt Stanton
06/28/96
Page 2
advances you take must be repaid out of commissions you earn
before you will receive any commission payments. On
approximately your four-month anniversary date with the
Company, the Company will review and evaluate the timing of
payment of commission advances, although commissions will
continue to be earned only if and to the extent clients pay
the Company. If you resign or your employment is terminated
and you have received advances, you must repay the Company for
any advances not offset by earned commissions.
3. Bonus. If Katz, or any other rep firm designated by the
Company, individually achieves $3 Million Dollars in gross
sales booked during the first 12 months of your employment (or
within 12 months after a newly designated rep firm signs up
provided you remain with the Company during this entire
12-month period), you will receive a one-time $30,000.00 bonus
after Sandbox has received payment in full from the client.
4. Moving Allowance. The Company will reimburse you for up to
$2,000.00 in expenses to move your household possessions to
Phoenix, Arizona. Please retain and submit receipts as backup
for your expenses.
5. Incentive Stock Option Grant. You will receive an incentive
stock option grant of 50,000 shares with an exercise price of
$.10 per share. The option will be on the terms and conditions
of the Company's 1995 Equity Incentive Plan and standard form
award agreement, with vesting over five years. 50,000 shares
presently is approximately 1% of the total outstanding shares
of the Company, assuming the exercise of all options and
warrants, and would be diluted along with all other common
stock.
6. Employee Benefits. We currently have benefit plans covering
things such as vacation, medical insurance, life insurance,
and 401(k). You will be eligible for 3 weeks of vacation per
year, commencing in the first year of employment. Our
financial planner has informed us that you will be eligible to
participate in the Sandbox 401(k) plan on July 1, 1997. Our
medical insurance plan (Blue Cross Blue Shield PPO) currently
will require you to pay $59.50/month for individual coverage.
Family coverage costs an additional $143.00/month if you
choose that option. Our medical insurance company has informed
us that as a member of management, you will become immediately
eligible for medical insurance coverage, but we are waiting to
receive written confirmation of that fact. Please immediately
<PAGE>
Mr. Matt Stanton
06/28/96
Page 3
fill out the enrollment form for your medical insurance so
this process is not delayed. Sandbox currently pays $4.95 a
month for life insurance coverage.
Additional information concerning our benefits is available
upon request, and, if you accept this offer, I encourage you
to review the actual Company policies so that you fully
understand them. Please understand that these policies are not
written in stone, and may be modified or eliminated in the
future.
7. Prior Employment. If you accept this offer of employment, you
represent to Sandbox that employment with Sandbox will not
violate any contractual obligation or other duty that you may
owe to former employers or other parties, including
obligations not to compete and obligations not to disclose
trade secrets or other confidential business information. You
further represent that you have not disclosed and will not
disclose to Sandbox any such restricted trade secret or other
confidential business information, and that you have not
brought and will not bring with you to your employment with
Sandbox any documents, records, or other confidential
information belonging to your former employers or other
parties.
8. Proprietary Rights Agreement. To protect Sandbox's assets and
business interests, including its trade secrets and
confidential business information, you will be required to
sign the enclosed Employee Proprietary Rights Agreement. Your
signature on this document is a condition of your employment.
9. Employment At-Will. If you accept this offer, both you and
Sandbox will have the right to terminate your employment at
any time, for no reason or for any reason, with or without
cause. This is known as employment at -will. Nothing in this
letter or in any company policy or statement, including
statements made to you during negotiations about working at
Sandbox, is intended to or does create terms of an express or
implied contract of employment. Only the Board of Directors of
Sandbox may modify your at-will employment status or guarantee
that you will be employed for a specific period of time, and
any such modification must be in writing, approved by the
Board of Directors, and signed by an authorized Sandbox
representative. This letter, and the attached Employee
Proprietary Rights Agreement, once executed by you, constitute
the entire agreement between you and Sandbox regarding the
subject matter hereof, and this agreement may be modified only
in a written document approved by the Sandbox Board of
Directors and signed by you and an authorized Sandbox
representative.
<PAGE>
Mr. Matt Stanton
06/28/96
Page 4
To accept this offer, please carefully read the statement below, sign
where indicated, and return the letter, along with the signed Employee
Proprietary Rights Agreement, to me. Please let me know if you have any
questions about the matters discussed in this letter, or otherwise. We sincerely
hope that you will accept this offer and we look forward to working with you.
The employment offer reflected in this letter expires on July 1, 1996, unless
accepted by you or revoked by Sandbox prior to that time.
See you in the Sandbox,
James A. Layne
Vice President Sales and Marketing
I understand, acknowledge, and agree to the terms and conditions of employment
described in this letter, and I accept employment with Sandbox on these terms
and conditions.
/s/ Matt Stanton 6/28/96
- ----------------------------- ----------------------
Matt Stanton Date
Exhibit 10(bb)
PROPRIETARY RIGHTS AND NON-COMPETE AGREEMENT
For good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Tracer Design, Inc., an Arizona corporation ("TDI"), and
___________________________________ ("Covenantor"), hereby agree as follows:
1. Confidentiality: Covenantor acknowledges that Covenantor stands in a
relationship of confidence and trust with TDI regarding any information of a
confidential nature regarding TDI and its business, including, without
limitation, information regarding its finances, markets, customers, suppliers,
services, products, projects, plans, and information which may have been
disclosed by others to TDI in confidence ("Confidential Information").
Confidential Information shall not include information which Covenantor can
demonstrate: (i) is publicly available without the breach of this Agreement by
Covenantor, or (ii) was rightfully known to Covenantor without an obligation of
confidence prior to disclosure to Covenantor by TDI or its agents. Covenantor
agrees that he will at all times keep all Confidential Information strictly
confidential and will not use it for any purpose other than to perform
Covenantor's duties to TDI. Covenantor will immediately return all Confidential
Information upon request by TDI.
2. Proprietary Rights; Assignment: Covenantor hereby assigns to TDI all
Inventions created by Covenantor which are: (i) developed using TDI's equipment,
supplies, personnel, facilities, intellectual property or other property or
rights, (ii) result from work performed by Covenantor for TDI (as an independent
contractor consultant or otherwise), or (iii) related to the business, or
demonstrably anticipated business, of TDI and which are invented during such
time as Covenantor is a shareholder of TDI or during the 12 months after
Covenantor ceases to be a shareholder of TDI. Covenantor shall promptly disclose
all Inventions to TDI. Covenantor agrees to cooperate in all reasonable
respects, at the expense of TDI, in assisting TDI to obtain assignment, perfect,
maintain, protect and enforce TDI's rights in any Inventions assignable by
Covenantor under this provision. "Inventions" means any and all inventions or
discoveries, whether or not patentable, including, without limitation, original
works of authorship, designs, processes, methods of doing business, computer
programs, databases, improvements, and trade secrets and related proprietary
information and materials.
Covenantor claims only the Inventions shown below as Covenantor's Inventions
made prior to this Agreement:
________________________________________________________________________
________________________________________________________________________
Draft 2.14 Page 1
<PAGE>
3. No misuse. Covenantor agrees not to improperly use any intellectual property
or other property or rights (including, without limitation, patents, copyrights
or trade secrets) of any third party. Covenantor will only use the intellectual
property and other property or rights of TDI to further the interests of TDI in
the performance of Covenantor's duties to TDI.
4. Non-compete; Non-solicitation: Covenantor agrees that:
(a) for so long as Covenantor is a shareholder of TDI,
Covenantor will not, in any capacity, for himself or for others,
directly or through others: (i) solicit business from any customer of
TDI or induce any TDI customer to withdraw or reduce their business
with TDI, (ii) induce any employee, agent, contractor or supplier to
change or terminate its relationship with TDI, or (iii) induce any
person not to do business or enter into a relationship with TDI; and
(b) for 24 months after Covenantor ceases to be a shareholder
of TDI, Covenantor will not, in any capacity, for himself or for
others, directly or through others: (i) solicit business from any
customer of TDI or induce any TDI customer to withdraw or reduce their
business with TDI (provided that in either case to be considered a
customer for purposes of this subsection (b), the "customer" must have
paid TDI for products or services within the 12 months immediately
preceding Covenantor's ceasing to be a shareholder of TDI), (ii) induce
any employee, agent, contractor or supplier to change or terminate
their relationship with TDI, (iii) induce any person not to do business
or enter into a relationship with TDI.
TDI and Covenantor specifically acknowledge and agree that the foregoing
covenants of Covenantor are reasonable in content and scope, are given for
adequate consideration and form a material part of the overall relationship
between TDI and Covenantor. TDI shall have the option to reduce the scope and
extent of the covenants by notice to Covenantor either before or after any
adjudication of the legality of the covenants, whereupon the covenants, as so
reduced, shall be binding and enforceable against Covenantor. TDI and Covenantor
hereby further expressly agree that any court of competent jurisdiction shall
have full power and authority to reduce the scope or extent of any covenant to
the extent necessary to render the same enforceable and to enforce the covenant
as reduced against Covenantor.
5. No Constraints. Covenantor represents and warrants that he is not subject to,
and will not enter into, any agreement or other matter which would or may
interfere with or prohibit the
Draft 2.14 Page 2
<PAGE>
full and timely performance by Covenantor of his obligations and duties to TDI.
6. Enforcement. Covenantor recognizes and agrees that in the event of any breach
of this Agreement, TDI's remedy at law would necessarily be inadequate and
Covenantor agrees in the event of any such breach to the entry of an immediate
court order temporarily and permanently prohibiting and enjoining such breach.
7. General. This Agreement shall be governed by the laws of the State of
Arizona. In the event any provision of this Agreement is declared void or
unenforceable, such provision shall be enforced to the maximum extent possible
and shall otherwise be severed from this Agreement, which Agreement shall
otherwise remain in full force and effect. In such event, the parties shall
promptly negotiate and enter into such substitute provisions as may be necessary
to most closely attain the original intent of the parties as expressed in this
Agreement. The provisions of this Agreement shall survive the termination of any
employment, shareholder or other relationship between Covenantor and TDI.
Executed ________________________
___________________________________
Covenantor
Tracer Design, Inc.
By:________________________________
Authorized Officer
<PAGE>
Schedule to Exhibit 10(bb) - Form Proprietary Rights Agreement
List of Covenantors:
Chad M. Little - February 19, 1992
Lonnie A. Whittington - February 19, 1992
James A. Layne - February 19, 1992
Mark Gorchoff - December 30, 1996
Matt Stanton - June 28, 1996
Bruce Cota - June 13, 1997
Robert Connery - May 9, 1997
Exhibit 10(cc)
RETAINER / NON - CIRCUMVENTION AGREEMENT
This agreement is entered into this 16th day of May, 1995 between
Tracer Design, Inc., hereinafter referred to as "TDI" whose principal place of
business is 4206 N. Central Avenue, Phoenix, Arizona 85012 and Frank X. Helstab,
hereinafter referred to as "HELSTAB", whose principal business residence is 9300
North 58th Street, Paradise Valley, Arizona 85253.
Whereas, TDI desires to retain the services of HELSTAB acting as an
intermediary/consultant to facilitate the procurement of the following:
A.) To either directly or indirectly introduce TDI to a funding source for the
purpose of securing approximately One to Two Million dollars ( $1,000,000 to
$2,000,000 USD ) to accomplish TDI's expansion goals (the "Initial Funding").
Additionally, the scope of this contract may also include strategic
joint-venture alliances or Regulation "S" placements and is not limited to the
equity / debt or the public / private methods of financing.
B.) To either directly or indirectly introduce TDI to one or more prospective
clients whereby such introduction produces the successful signing of one or more
service contracts with TDI.
The determination of a direct or indirect introduction shall be
decided based upon the following interpretations,
1a.) "Direct" shall include all projects where HELSTAB introduces TDI
directly to the funding sources/client and participates in the
negotiations leading to the contractual signing of said project.
1b.) "Indirect" shall include any and all third party introductions
that HELSTAB introduces to TDL the result of which leads to the signing
of a contractual project with that specific third party within the term
of this Agreement or the "Noncircumvention Period" as hereafter
defined. "Indirect" shall also include any and all subsequent parties
introduced to TDI by HELSTAB's third party referral the result of which
leads to the signing of a contractual project with that specific
subsequent party within the term of this Agreement or the
"Noncircumvention Period", but "Indirect" does not include parties
introduced to TDI such by subsequent parties.
<PAGE>
1c.) "Noncircumvention Period" means the twenty four (24) month period
of time immediately following termination of this Agreement.
Whereas, TDI will cooperate with HELSTAB and furnish him with all pertinent
information and appropriate data concerning such financings.
Whereas, notwithstanding any provision of this agreement TDI acknowledges that
HELSTAB is not acting as a Broker-Dealer, but as a Finder/Consultant by
introducing TDI to prospective investors, sources of funding and a potential
user client base.
Whereas, it is agreed that neither one of the parties will contact in any manner
a third party introduced by the other party to this agreement, except with
expressed consent in writing.
In consideration of the mutual benefit, promises and covenants contained herein,
and for other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto agree as follows:
Article I. - Retainer
- ---------------------
TDI shall retain the services of HELSTAB for a retainer fee of $3,500.00 (
Three-thousand five hundred ) a month, payable at the signing of this agreement
by corporate check or wire transfer and due in like manner on the 15th day of
any subsequent month, during the term of this intermediary agreement. It is
further agreed to by the parties that any and all retainer fees due or to come
due during the term of this Agreement shall be directly deducted from HELSTAB'S
"SUCCESS FEE" at closing or other receipt of funds by TDI from a transaction or
contract described in A or B above, it being agreed that such retainer fees are
nonrefundable advances of the SUCCESS FEE.
Article II. - Success Fee
- -------------------------
The "SUCCESS FEE" to be paid to HELSTAB by TDI shall be paid at and
simultaneously with the closing of all said transactions. The "SUCCESS FEE"
amount for the Initial Funding shall be at a rate of 3.5% (Three and one half
percent) of the par amount of the equity financing packages received by TDI and
3.0% (Three percent) of the par amount of any debt financing. Should HELSTAB
successfully obtain for TDI the Initial Funding on or before August 31, 1995,
HELSTAB will be issued 3% (Three percent) of the fully diluted outstanding stock
of TDI (taking into account any shares to be issued with respect to the Initial
Funding), subject to HELSTAB executing and delivering to TDI a shareholder's
agreement
<PAGE>
containing rights of first refusal and other customary restrictions on the
transferability of stock in a privately held company prior to an initial public
stock offering, an investment letter relating to securities laws matters in form
and substance satisfactory to TDI, and agreement by TDI's current shareholders
(Little, Layne, Whittington) not to cause TDI to issue any stock to them at less
than fair market value.
With respect to transactions described in B. above, HELSTAB shall be entitled to
a Success Fee of 5.0% (Five percent) of the gross margin revenue generated by
any and all direct introductions, and Success Fee of 3.0% (Three percent) of the
gross margin revenue generated by any and all third party or indirect
introductions. (As previously stated in paragraph B., la.,lb.).
The Success Fees shall apply to transactions described above that are closed
during the term of this Agreement or during the Noncircumvention Period, but not
thereafter.
Article III. - Expenses
- -----------------------
TDI will be responsible for all reasonable, direct travel expenses incurred by
HELSTAB regarding the proposed financing. Such expenses shall be subject to
prior approval by TDI. When possible, such expenses are to be paid in advance.
Additional expenses such as meals, entertainment and rental cars are to be paid
when HELSTAB sends TDI the appropriate receipts for reimbursement.
Article IV. - Information Warranty
- ----------------------------------
TDI represents and warrants that all information made available to HELSTAB will,
at all times during the period of engagement of HELSTAB hereunder, be complete
and correct in all material fact or, upon TDI learning of material inaccuracies,
shall promptly be made to be materially complete and correct.
Article V. - Continuing Involvement
- -----------------------------------
This is to confirm that each of the named signatories, separately and
individually, hereby agree that he/they will not make any contact with, deal
with or otherwise be involved in any transaction(s) with any broker / dealer,
bank or lending institutions, trusts, pension funds, corporations, companies or
individuals, lenders or borrowers, buyers or sellers introduced by another of
the signatories, and/or third party or subsequent referrals by such third
parties separately and individually. Without specific and agreed to permission
of the introducing signatory or signatories. Further, the parties to this
contract hereby agree that if HELSTAB successfully and timely obtains the
<PAGE>
Initial Funding, TDI will give first good faith consideration, taking into
account the best interests of TDI, to using the services of HELSTAB in placing
subsequent financings desired by TDI during the term of this Agreement.
Article VI. - Term
- ------------------
The initial term of this Agreement shall be from the date hereof until July 31,
1995. If HELSTAB successfully obtains at least $400,000 in capital for TDI by
July 31, 1995, then the term of the Agreement shall automatically be extended
until August 31, 1995, otherwise the Agreement shall terminate at midnight on
July 31, 1995, unless the parties agree to extend it on a month to month basis.
If HELSTAB successfully obtains the Initial Funding for TDI by August 31, 1995,
then the Agreement shall be automatically extended for a two (2) year term,
commencing on September 1, 1995; otherwise the Agreement shall terminate
automatically at midnight on August 31, 1995, unless the parties agree to extend
it on a month to month basis. The signatories hereby confirm that the identities
of the broker / dealers, institutions, corporations, individuals, trusts,
pension funds, lenders or borrowers, buyers or sellers, or suppliers are
currently and in the future the property of the introducing signatory or
signatories and shall remain so for the duration of this agreement.
Article VII. - Confidentiality
- ------------------------------
The signatories hereby agree to keep completely confidential the names of any
institutions, corporations, pension funds. trusts, individuals or groups of
individuals, lenders or borrowers, buyers, sellers, or suppliers introduced by
any of the named signatories or their associates. Such identity shall remain
confidential during the applicable transaction(s) and for the duration of this
agreement and shall include any telephone numbers, addresses and Telex or TWX
numbers, or other pertinent information. Such information is considered the
property of the introducing signatory or signatories and I/we hereby agree to
discuss same and mutually agree on what procedure to use.
Article VIII. - Non-Disclosure
- ------------------------------
It is understood by the signatories to this agreement that the very terms.
conditions, and operation of this contract between the parties is of a
confidential nature in itself and stands alone as an intermediary agreement.
Neither party may disclose or disseminate the terms, conditions, or operations
of this agreement without the express written consent of the other party, except
to their professional advisors, investors, and others on a strictly need-to-know
basis.
<PAGE>
HELSTAB further acknowledges that he will be receiving and disseminating
confidential information of TDI in order to carry out the purposes of this
Agreement. In order to protect the same, he simultaneously herewith has executed
and delivered to TDI the Confidentiality Agreement attached hereto as Exhibit A,
and agrees to obtain from each person or entity to whom he intends to transmit
such confidential information, prior to transmittal of such information, their
execution and delivery to TDI of the attached Confidentiality Agreement.
Article IX. - Arbitration
- -------------------------
Any controversy or claim arising out of or relating to this document/contract,
or the breach thereof, and which is not settled between the signatories
themselves, shall be arbitrated in accordance with the rules of the American
Arbitration Association, with hearing to take place in Phoenix, Arizona, or
other mutually agreed location and judgement upon the award rendered by the
Arbitrator(s) may be entered in any court having jurisdiction thereof including
the award to the aggrieved signatory or signatories, such award being related to
the total remuneration, information, tangible or intangible property received as
a result of business conducted with the parties covered by this agreement plus
any and all costs, attorney fees and other costs or charges reasonably necessary
to adjudicate the controversy in addition to any and all damages deemed fair by
the Arbitrator(s).
Article X. - Intermediary
- -------------------------
All actual negotiations, due diligence, final agreements and guarantees shall
take place between the parties ( investor(s) and/or the person(s) holding their
power of attorney and officers of the prime bank and/or broker / dealers, etc.
HELSTAB shall be held harmless from any dispute or legal action arising from the
relationship between the parties and the prime bank and/or broker / dealer,
etc., Underwriter, etc. as HELSTAB is acting strictly in the capacity of an
intermediary. HELSTAB acknowledges that this Agreement is nonexclusive in the
sense that his entitlement to compensation hereunder is based upon his own
performance, and that TDI is free to use the services of others in connection
with locating capital and service agreements without any obligation to
compensate HELSTAB with respect to capital or service contracts resulting from
the efforts of such others, and that HELSTAB is free to act as intermediary for
other clients so long as there is no conflict of interest between TDI's
interests and those of HELSTAB or his other clients. HELSTAB also acknowledges
that in acting as an intermediary for TDI, he is serving as an independent
contractor assisting TDI, and agrees not to accept any compensation from any
party other than TDI in connection with his activities and efforts
<PAGE>
under this Agreement, provided that HELSTAB, with full prior disclosure to TDI,
may be an equity owner in an entity that TDI may choose to do business with
pursuant to a referral under this Agreement.
Article XI. - Reciprocity
- -------------------------
It is understood that this agreement is a reciprocal one between the signatories
concerning their privileged information and contacts.
Article XII. - Modification
- ---------------------------
This agreement may only be amended or modified by written instrument signed by
all of the parties hereto. Any waiver granted shall not be deemed effective
except for the instances and in the circumstances particularly specified therein
and unless in writing, executed by the party against whom enforcement of the
waiver is sought.
Article XIII. - Remedies
- ------------------------
In the event it becomes necessary for any party to employ legal counsel or to
bring an action at law or other proceeding to enforce any of the terms,
covenants or conditions of this Agreement (whether or not suit is instituted),
the prevailing party in any such action or proceeding shall be entitled to
recover its reasonable costs and expenses (including without limitation
attorney's fees) incurred in such action from the other party.
Article XIV. - Inurement
- ------------------------
This Agreement shall be binding upon and inure to the benefits of the heirs,
representatives, successors and permitted assigns of the parties hereto.
Article XV. - Applicable Law
- ----------------------------
This Agreement shall be construed and interpreted under. and governed and
enforced according to the laws of the State of Arizona.
Article XVI. - Descriptive Headings
- -----------------------------------
The descriptive headings of the paragraphs of this Agreement are inserted for
convenience only and shall not control or affect the meaning or construction of
any provision hereof.
Article XVII. - Authorization
- -----------------------------
<PAGE>
Each party represents and warrants to and covenants with, all other parties
hereto that the person(s) executing this Agreement on behalf of such party is
duly authorized to do so and to hereby bind such party to this Agreement.
Article XVIII. - Further Instruments
- ------------------------------------
Each party, promptly upon the request of any other party, shall execute and
deliver to the other party(ies) or escrow agent any and all further instruments
reasonably requested or appropriate to evidence or give effect to any of the
provisions of this Agreement and which are consistent with the provisions
hereof.
Article XIX. - Notices
- ----------------------
Notices hereunder shall be deemed to have been given and received upon personal
delivery or 72 hours after deposit in the United States mail, registered or
certified, postage prepaid, return receipt requested, addressed to the
appropriate party at the addresses set forth below their signatures or any such
other address(es) as the parties may from time to time specify in writing
delivered in a like manner.
Article XX. - Severability
- --------------------------
It is the intent of the parties that the provisions of this Agreement shall be
enforced to the fullest extent permissible under the laws and public policies of
Arizona. Accordingly, to the extent that any provision of this Agreement shall
be adjudicated to be invalid, illegal or unenforceable in Arizona, such
paragraph or provision shall be deemed to be amended to delete therefrom or
reform the portion thus adjudicated to be invalid, illegal or unenforceable, the
same shall not affect the validity or enforceability of any other provision of
this Agreement, but this Agreement shall be construed as if such invalid,
illegal or unenforceable provision has never been contained therein; provided,
however, that no provision shall be severed if it is clearly apparent under the
circumstances that the parties would not have entered into this Agreement
without such provision.
Article XXI. - Entire Agreement
- -------------------------------
This agreement contains the entire agreement, whether oral or written, of the
parties regarding the subject matter thereof, and no other agreement, statement
or promise made by either party which is not contained herein shall be binding,
valid or acceptable.
Article XXII. - Miscellaneous
- -----------------------------
<PAGE>
This Agreement shall in no way be construed as representing an agreement of
partnership in any way that any of the individual signatories of this Agreement
shall have any claim against any separate dealings, ventures or assets of any
other signatory nor shall any signatory be liable for any other signatory's
commitments of liabilities in business or personal dealings, transactions, or
situations. It is intended that this document be a legal and binding contract
between all parties. The effective date of this Agreement shall be the date the
last signatory has executed this document. A facsimile copy of this Agreement
shall be considered an original binding and enforceable document.
Accepted and Agreed this 15th day of May, 1995.
/S/ Frank X. Helstab
-------------------------------------
FRANK X. HELSTAB
TRACER DESIGN, INC.
By: /s/ Chad M. Little
---------------------------------
Its President
<PAGE>
EXHIBIT A
CONFIDENTIAL
TRACER DESIGN, INC.
4206 N. Central Avenue
Phoenix, Arizona 85012
Re: Confidentiality Agreement
Gentlemen:
In connection with our possible interest in arranging or participating
in a business transaction with TRACER DESIGN, INC. ("Company"), we desire to
receive from the Company information about the Company, including without
limitation its business, products, financial condition and prospects, which is
confidential, proprietary or otherwise not generally available to the public.
(All such information is hereafter referred to as "Confidential Information").
As a condition to being furnished Confidential Information and afforded access
to the facilities and management of the Company, we agree as follows:
1. We (which for purposes hereof shall include all of our affiliates)
will protect and hold in confidence all Confidential Information disclosed to
us. We will use such Confidential Information solely for the purpose of
evaluating the viability of a transaction with the Company and will not use the
same for any other purpose.
2. We will disclose Confidential Information only to those of our
directors, officers and/or employees, if any, who need access to such
Confidential Information to enable us to evaluate a proposed transaction and to
our outside professional advisors who assist us in such evaluation (such persons
are collectively referred to herein as "representatives"). We will disclose
Confidential Information only to those of our representatives who have been
informed of the confidentiality of Confidential Information and have been
instructed to keep the same confidential in accordance with the provisions of
this agreement unless the Company has given us prior written authorization to
deviate from this procedure.
3. Without the prior written consent of the Company, we will not, and
will direct our representatives not to, disclose to any
<PAGE>
person either the fact that any investigations, discussions or negotiations are
taking place concerning a possible transaction involving the Company and us, or
that we have requested or received any Confidential Information from the
Company, or any of the terms, conditions or other facts with respect to any such
possible transaction, including the status thereof or any of the terms of this
Agreement or the fact of its existence.
4. We will, upon the Company's request, return to the Company or
destroy all Confidential Information and any copies or extracts thereof. Any
analyses, compilations, studies or other documents which may be prepared for use
by us or our representatives in connection with our evaluation of the Company's
information or a possible transaction with the Company, and which contain
Confidential Information, will be kept confidential in accordance with the terms
hereof and will be destroyed upon the Company's request.
5. Our obligations of non-use and non-disclosure hereunder will not be
deemed to apply to Confidential Information which (i) is in the public domain at
the time of delivery, (ii) subsequently is published or otherwise becomes part
of the public domain through no fault of ours or of our representatives, (iii)
we can demonstrate was in our possession at the time of disclosure and was not
acquired by us directly or indirectly from the Company or its representatives on
a confidential basis, or (iv) becomes available to us on a non-confidential
basis from a source that, to the best of our knowledge, is not under an
obligation to the Company.
6. We agree that all (i) communications regarding the proposed
transaction, (ii) requests for information, (iii) requests for facility tours or
management meetings, and (iv) discussions or questions regarding procedures will
be submitted or directed to you, unless specifically instructed otherwise by
you.
7. We understand and acknowledge that the Company is not making any
representation or warranty, express or implied, as to the accuracy or
completeness of the Confidential Information, and none of the Company or any of
its respective officers, directors, employees, stockholders, owners, affiliates
or agents will have any liability to us or any other person resulting from our
use of the Confidential Information. Only those representations or warranties,
if any, that are made in a definitive transaction agreement when, as, and if any
is executed.
8. If we or our representatives are requested or required to disclose
any Confidential Information, we will promptly notify you of such request or
requirement so that you may seek an appropriate
<PAGE>
protective order or other appropriate relief and/or waive our compliance with
provisions of this agreement. If, in the absence of such relief or waiver
hereunder, we or our representatives are, in the opinion of our counsel,
compelled to disclose Confidential Information, then we may disclose such of the
Confidential Information to the person compelling disclosure as is, according to
such opinion, required without liability hereunder.
9. It is further agreed that no failure or delay by the Company in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise thereof preclude any other or
further exercise of any right, power or privilege hereunder.
10. In addition to any and all remedies available at law, we agree that
the Company shall also be entitled to equitable relief, including injunction and
specific performance, in the event of any breach of this agreement. This
agreement and any issues arising hereunder or related hereto shall be governed
by the internal laws of Arizona (without regard to choice of laws).
This letter agreement is effective on and as of the 16th day
of May, 1995.
__________________________________
By ______________________________
Its authorized representative
[Corporate signatory]
/s/ Frank X. Helstab
-----------------------------------
Signature
Frank X. Helstab
-----------------------------------
Print name
[Individual signatory]
Exhibit 10(dd)
May 30, 1996
Newtek Ventures II, L.P.
c/o John E. Hall
3000 Sandhill Road
Building 3, Suite 40
Menlo Park, California 94025
Dear John:
The purpose of this letter is to set forth the terms of the engagement
by Sandbox Entertainment Corporation of Newtek Ventures II, L.P. ("Newtek") as a
consultant. Subject to Newtek's acceptance of the terms and conditions of this
engagement letter where indicated below, the Corporation agrees with Newtek as
follows:
l. Newtek is hereby engaged as consultant to the Corporation for the
term set forth below. Newtek agrees to provide up to approximately thirty (30)
hours of consulting services to the Corporation per month above and beyond John
Hall's duties as a director of the Corporation. The consulting services will be
as requested by the President and agreed to by Newtek, and generally will
address financial, strategic planning, operational and other significant issues
of the Corporation.
2. The term of the engagement shall be three years, commencing as of
March 1, 1996, and the engagement letter may be terminated at any time by either
party for any reason, upon thirty (30) days' prior written notice.
3. Newtek's sole compensation for services rendered hereunder shall
consist of a "nonqualified" option to purchase 131,135 shares of common stock of
the Corporation (after giving effect to the recent 5 for 1 stock split in
connection with the redomestication in Delaware) at $.10 per share under the
Corporation's 1995 Equity Incentive Plan and on the terms and conditions set
forth in the Award Agreement attached hereto.
4. The Corporation will reimburse Newtek for reasonable travel, meal
and lodging expenses in connection with pre-approved travel for the Corporation,
and for other mutually agreed upon expenses.
<PAGE>
Newtek Ventures II, L.P.
May 30, 1996
Page 2
5. Newtek and its agent John Hall are independent contractors and not
employees of the Corporation. Newtek will be solely responsible for any and all
income and employment-related taxes relating to John Hall's service as a
consultant to the Corporation. Neither John Hall nor Newtek are authorized to
bind or obligate the Corporation in any way without the Corporation's prior
written authorization.
We look forward to Newtek's assistance. If this letter accurately sets
forth the terms and conditions of the engagement, please so indicate by signing
a counterpart of this letter where indicated below and returning it to me.
Sincerely,
SANDBOX ENTERTAINMENT CORPORATION
By /s/ Chad M. Little
------------------------------
Chad Little, President
Accepted and Agreed:
NEWTEK VENTURES II, L.P.
By /s/ John E. Hall
--------------------------------
John E. Hall
7/15/96
- ----------------------------------
Date
Exhibit 10(ee)
August 11, 1997
Thomas A. Cifelli, Director
FOX & Company Investments, Inc.
6232 N. 32nd. Street
Phoenix, Arizona 85018
Re: Engagement
Dear Tom:
The purpose of this letter is to set forth the agreement between
Sandbox Entertainment Corporation (the "Company") and FOX & Company Investments,
Inc. ("FOX") with respect to the matters described herein. Subject to execution
and delivery of this letter where indicated below by each party, our agreement
is as follows:
1. The Company hereby engages FOX as a consultant to assist the Company
in identifying and introducing potential investors in connection with the
"Financing" described hereafter, and facilitating negotiations with such
potential investors as reasonably requested by the Company, on the terms and
conditions set forth in this engagement letter. The services described in this
paragraph are referred to herein as the "Services". The "Financing" is defined
as follows:
(a) Each investor must be an "Accredited Investor" as that term is
defined in Rule 501 of Regulation D as promulgated by the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
(b) Each investor who is acceptable to the Company and who executes and
delivers definitive documentation acceptable to the Company shall receive a
fully subordinated (but not convertible) note (the "Notes") bearing interest at
10% payable in two years or out of the proceeds of a Qualifying IPO (as defined
in the Notes), and a three year warrant (the "Investor Warrants") to purchase
that number of shares of Common Stock determined by dividing the amount loaned
by $2.00 per share. The exercise price of the Investor Warrants will be $2.00
per share until 30 days after an IPO (as defined in the warrants) at which point
the exercise price will be the IPO price if greater than $2.00 per share. Forms
of the definitive documents will be provided to FOX by the Company for
disclosure to potential investors.
(c) The Company reserves the right in its sole and absolute discretion
to decide whether or not, and on what terms and conditions, it accepts any
investment in the Company.
<PAGE>
(d) The amount of the Financing shall not exceed $225,000 in proceeds
to the Company, except as otherwise agreed by the Company.
(e) The Financing will end immediately prior to the filing of a
registration statement by the Company with the SEC, which filing could occur as
early as August 29, 1997. Accordingly, all definitive documentation must have
been executed and delivered by investors prior to such date and their
obligations to purchase the Notes and Investor Warrants shall be subject to no
conditions within the control of such investors.
2. FOX shall be entitled to compensation for the Services as and to the
extent provided in this paragraph 2, and not otherwise. If the Company closes a
Financing with one or more investors introduced to the Company by FOX during the
term of this engagement letter, then FOX shall be entitled to receive the
following compensation:
(a) A cash fee in the amount of ten percent (10%) of the gross
amount of the loans made to the Company in the Financing from investors
introduced to the Company by FOX, which shall be paid upon closing of
such loans;
(b) If permitted under all applicable Blue Sky Laws, Investor
Warrant(s) to purchase that number of shares of Common Stock that is
determined by dividing 10% of the aggregate loan amount brought to the
Company by FOX by $2.00 per share, provided FOX executes and delivers
such investment letters regarding securities laws as the Company
reasonably requests; and
(c) FOX shall also have the ability to agree with each
potential investor to allocate some of the Investor Warrants amongst
Investors, selling broker compensation or retained as additional
compensation for Fox, all as mutually agreed by such investors and FOX.
3. The Company's engagement of FOX to provide the Services is
nonexclusive. The Company reserves the right to have discussions with, and enter
into transactions for a Financing with, potential investors that have not been
identified and introduced by FOX, and if the Company does close a Financing with
investors not identified and introduced by FOX, FOX shall not be entitled to
compensation from the Company with respect to such transaction(s) or its
Services under this engagement letter. Nothing in this engagement letter
obligates the Company to enter into or complete a Financing.
4. The term of this engagement letter is four (4) weeks at the end of
which it shall automatically expire unless it is extended by mutual agreement,
provided however that if the Company completes, within one year after
termination of this engagement letter a Financing with a party introduced to the
Company by FOX pursuant to this letter FOX will be entitled to receive
compensation in accordance with paragraph 2 above.
5. The Company acknowledges that FOX may seek assistance from third
parties, with the prior approval of the Company, in identifying potential
investors. FOX agrees that the
<PAGE>
FOX & Company Investments, Inc.
August 11, 1997
Page 3
Company shall have no obligation to any such third parties with respect to
compensation or otherwise, and that FOX shall be solely responsible for
compensating such third parties if at all. The Company agrees that FOX may
assign a portion of any options that become payable pursuant to paragraph 2
above to one or more of such approved third parties, provided that such third
parties execute and deliver to the Company such investment letters regarding
securities laws as the Company reasonably requests and provided that such
assignment does not jeopardize the Company's exemption of the Financing from
registration or qualification under applicable Blue Sky Laws.
6. FOX has executed and delivered to the Company a confidentiality
letter in the form attached hereto as Exhibit A. FOX shall not provide
Confidential Information (as defined in such confidentiality form) to any third
party without first obtaining from them an executed confidentiality letter in a
form approved by the Company.
7. The Company will reimburse FOX for reasonably incurred out of pocket
expenses, subject to the following: FOX shall obtain prior approval from the
Company for any single miscellaneous expense item in excess of $150.
8. The Company agrees to the indemnification provisions set forth in
Exhibit B attached hereto.
9. The validity and interpretation of this engagement letter shall be
governed by the laws of the State of Arizona applicable to agreements made and
to be fully performed therein.
10. For convenience of the parties, any number of counterparts of this
letter agreement may be executed by the parties hereto, and each such
counterpart shall be and shall be deemed to be, an original instrument, but all
such counterparts taken together shall constitute one and the same agreement.
11. This letter and exhibits attached hereto contains the entire
agreement of the parties and supersedes all prior discussions, agreements,
understandings or representations between the parties relating to the subject
matter hereof, and may not be amended except by written agreement executed by
both parties hereto.
If the foregoing correctly sets forth our agreement, please so indicate
by signing the
<PAGE>
FOX & Company Investments, Inc.
August 11, 1997
Page 4
enclosed copy in the space provided and return it to us, whereupon you and we
will be bound to the terms hereof.
Very truly yours,
SANDBOX ENTERTAINMENT CORPORATION
By: /s/ Mark Gorchoff
-----------------------------
Its: Chief Financial Officer
-----------------------------
ACCEPTED AND AGREED:
FOX & COMPANY INVESTMENTS, INC.
By: /s/ Thomas A. Cifelli
------------------------------
Its: Executive Vice President
------------------------------
<PAGE>
EXHIBIT A
CONFIDENTIAL
Sandbox Entertainment Corporation
2231 E. Camelback Road, Suite 324
Phoenix, AZ 85016
Re: Confidentiality Agreement
-------------------------
Gentlemen:
In connection with our possible interest in arranging or participating
in a business transaction with SANDBOX ENTERTAINMENT CORPORATION ("Company"), we
desire to receive from the Company information about the Company, including
without limitation its business, products, financial condition and prospects,
which is confidential, proprietary or otherwise not generally available to the
public. (All such information is hereafter referred to as "Confidential
Information"). As a condition to being furnished Confidential Information and
afforded access to the facilities and management of the Company, we agree as
follows:
1. We (which for purposes hereof shall include all of our affiliates)
will protect and hold in confidence all Confidential Information disclosed to
us. We will use such Confidential Information solely for the purpose of
evaluating the viability of a transaction with the Company and will not use the
same for any other purpose.
2. We will disclose Confidential Information only to those of our
directors, officers and/or employees, if any, who need access to such
Confidential Information to enable us to evaluate a proposed transaction and to
our outside professional advisors who assist us in such evaluation (such persons
are collectively referred to herein as "representatives"). We will disclose
Confidential Information only to those of our representatives who have been
informed of the confidentiality of Confidential Information and have been
instructed to keep the same confidential in accordance with the provisions of
this agreement unless the Company has given us prior written authorization to
deviate from this procedure.
3. Without the prior written consent of the Company, we will not, and
will direct our representatives not to, disclose to any person either the fact
that any investigations, discussions or negotiations are taking place concerning
a possible transaction involving the Company and us, or
<PAGE>
that we have requested or received any Confidential Information from the
Company, or any of the terms, conditions or other facts with respect to any such
possible transaction, including the status thereof or any of the terms of this
Agreement or the fact of its existence.
4. We will, upon the Company's request, return to the Company or
destroy all Confidential Information and any copies or extracts thereof. Any
analyses, compilations, studies or other documents which may be prepared for use
by us or our representatives in connection with our evaluation of the Company's
information or a possible transaction with the Company, and which contain
Confidential Information, will be kept confidential in accordance with the terms
hereof and will be destroyed upon the Company's request.
5. Our obligations of non-use and non-disclosure hereunder will not be
deemed to apply to Confidential Information which (i) is in the public domain at
the time of delivery, (ii) subsequently is published or otherwise becomes part
of the public domain through no fault of ours or of our representatives, (iii)
we can demonstrate was in our possession at the time of disclosure and was not
acquired by us directly or indirectly from the Company or its representatives on
a confidential basis, or (iv) becomes available to us on a non-confidential
basis from a source that, to the best of our knowledge, is not under an
obligation to the Company.
6. We agree that all (i) communications regarding the proposed
transaction, (ii) requests for information, (iii) requests for facility tours or
management meetings, and (iv) discussions or questions regarding procedures will
be submitted or directed to you, unless specifically instructed otherwise by
you.
7. We understand and acknowledge that the Company is not making any
representation or warranty, express or implied, as to the accuracy or
completeness of the Confidential Information, and none of the Company or any of
its respective officers, directors, employees, stockholders, owners, affiliates
or agents will have any liability to us or any other person resulting from our
use of the Confidential Information. Only those representations or warranties,
if any, that are made in a definitive transaction agreement when, as, and if any
is executed.
8. If we or our representatives are requested or required to disclose
any Confidential Information, we will promptly notify you of such request or
requirement so that you may seek an appropriate protective order or other
appropriate relief and/or waive our compliance with provisions of this
agreement. If, in the absence of such relief or waiver hereunder, we or our
representatives are, in the opinion of our counsel, compelled to disclose
Confidential Information, then we may disclose such of the Confidential
Information to the person compelling disclosure as is, according to such
opinion, required without liability hereunder.
<PAGE>
Sandbox Entertainment Corporation
August 11, 1997
Page 3
9. It is further agreed that no failure or delay by the Company in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise thereof preclude any other or
further exercise of any right, power or privilege hereunder.
10. In addition to any and all remedies available at law, we agree that
the Company shall also be entitled to equitable relief, including injunction and
specific performance, in the event of any breach of this agreement. This
agreement and any issues arising hereunder or related hereto shall be governed
by the internal laws of Arizona (without regard to choice of laws).
This letter agreement is effective on and as of August 11, 1997.
Thomas A. Cifelli, for Fox & Company Investments,
Inc.
By: /s/ Thomas A. Cifell
----------------------------------
Its Authorized Representative
[Corporate signatory]
--------------------------------------
Signature
--------------------------------------
Print name
[Individual signatory]
<PAGE>
EXHIBIT B
INDEMNIFICATION PROVISIONS
The Company agrees to defend, indemnify and hold harmless FOX, its
officers, directors, and employees (hereafter jointly referred to as FOX)
against any and losses, claims, demands, suits, actions, judgments, awards,
damages, liabilities, costs, reasonable attorneys' fees (and all actions in
respect thereof and any reasonable real or other expenses in giving testimony or
furnishing documents in response to a subpoena or otherwise), including the
costs of investigating, preparing or defending any such action or claim, whether
or not in connection with litigation In which FOX is a party, directly or
indirectly caused by, relating to, or asserted by a third party, based upon or
arising out of (a) the Company's breach of or the incorrectness of any
representation, warranty, or covenant of Company contained in this agreement;
and/or (b) the conduct or operation of the business of the Company; or (c)
failure of Company to perform any term condition, or obligation required by this
Agreement to be performed by Company; or (d) any services rendered by FOX as
defined in or contemplated by the letter agreement to which these Provisions are
attached, as it may be amended from time to time (the "Agreement") or (e) FOX
acting for the Company, including without limitation, any act or omission by FOX
in connection with its performance of its obligations the Agreement.
Notwithstanding the foregoing, the Company shall not have any liability to FOX
for or in connection with the engagement of FOX or with any of the foregoing,
for any such liability for losses, claims, demand, suits, actions, judgments,
awards, damages, liabilities, costs or expenses that is found in a final
judgment by a court of competent jurisdiction or mutually acceptable arbitrator
to have resulted primarily and directly from FOX's gross negligence or willful
misconduct or FOX's material breach of the Agreement.
As a condition to the foregoing indemnity, in the event of the
assertion of any claim or demand, or the institution of any suit or action with
respect to which Company is required by this paragraph to indemnify FOX, FOX
will give notice thereof to Company and will afford Company the opportunity to
defend, settle, or compromise the same. Unless Company agrees to duly, promptly
and diligently discharge or defend against such claim, demand, suit or action
such manner as will, in the Company's reasonable judgment, protect FOX from any
liability, loss, cost or damage as a result thereof, FOX may, at FOX's option,
for Company's account and risk, assume the defense of the same, may implead,
interplead or claim over against Company or may, compromise or settle the same
on such terms as FOX may reasonably determine and may thereafter hold Company
responsible for all sums paid and all costs, expenses and reasonable attorney's
fees incurred by FOX in so doing. FOX may, at FOX's option, participate in any
legal
<PAGE>
proceedings being conducted by Company hereunder with counsel of FOX's choosing,
but such participation shall be at FOX's sole expense, so long as Company is
diligently conducting the same in the Company's reasonable judgments and FOX's
counsel shall to the fullest extent consistent with its professional
responsibilities cooperate with the Company and any counsel designated by the
Company.
In the event that a court of competent jurisdiction, or an arbitrator
mutually acceptable to the parties, determines that Company has no indemnity
obligations to FOX hereunder, but that both Company and FOX are liable to a
third party asserting a claim against Company and FOX, then as between Company
and FOX, they each agree to contribute such amounts as may be necessary to
satisfy such liability, in amounts proportionate to their respective comparative
negligence/responsibility as determined by a court of competent jurisdiction or
a mutually acceptable arbitrator. If either Company or FOX pays such third party
more than its proportionate share as determined above, then it shall be entitled
to seek contribution from the other party to the extent of such excess.
No person or affiliated entity found liable for a fraudulent
misrepresentation shall be entitled to contribution from any person or
affiliated entity who is not also found liable for such fraudulent
misrepresentation.
These Indemnification Provisions shall be in addition to any liability
which the Company may otherwise have to FOX or the controlling persons of FOX
within the meaning of the federal securities laws.
The foregoing Indemnification Provisions are in addition to any rights
or remedies available under applicable law and are not to the exclusion of any
such nights or remedies.
Exhibit 10(ff)
TELEPHONE SERVICE AGREEMENT
---------------------------
THIS AGREEMENT is made and entered into this 17 day of November 1995 by
and between Equity Telecommunications (EQUITY), having its principal place of
business at 2201 East Camelback Road, Phoenix, Arizona and Tracer Design, Inc.
(the "Customer"), having its principal place of business at 2231 East Camelback
Road, Phoenix, Arizona ("Anchor Centre Three ").
WITNESSETH:
-----------
WHEREAS, Equity Telecommunication has access to an AT&T G3R SYSTEM
computerized telephone system, associated telephone equipment, all pool trunk
lines and WATS access lines (the "System") located at 2201 East Camelback Rd,
Phoenix, Arizona ("Anchor Centre One") and servicing Anchor Centre Three; and
WHEREAS, Customer is tenant of certain premises located in Anchor
Centre Three (the "Premises") pursuant to that certain office lease ("Lease") by
and between Customer and Anchor Centre Master Limited Partnership, an Arizona
limited partnership ("Landlord") dated November 17th, 1995 with an initial term
("Term") of Three ( 3 ) years commencing on November 17, 1995 and
WHEREAS, Customer desires to subscribe to certain services provided by
Equity and to lease certain equipment upon the terms and conditions hereinafter
set forth,
NOW, THEREFORE, in consideration of the mutual covenants herein
contained the parties hereby agree as follows:
1. Lease of Equipment. Equity hereby leases and agrees to provide to
Customer and Customer hereby leases and accepts from Equity the equipment and
other personal property (the "Equipment") set forth on Exhibit "A" attached
hereto and incorporated by reference herein upon the terms and conditions set
forth in this Agreement. For purposes hereof, the Equipment shall include any
replacement parts, replacements, additions, repairs and accessories incorporated
therein or affixed thereto.
2. Subscription to Services. Customer hereby subscribes to and Equity
hereby agrees to provide certain telecommunications service (the "Service") in
conjunction with the Equipment which services are set forth on Exhibit "A" upon
the terms and conditions set forth in this Agreement.
3. Term. The term of this Agreement shall commence upon the date of
execution hereof, and continue until the expiration of the Term of the lease on
the 17th day of November,
<PAGE>
1998 unless sooner terminated in accordance with the terms hereof. In addition,
Customer shall have the option to renew the term hereof to be coextensive with
any renewal options available to Customer under the Lease.
4. Delivery, Installation and Commencement of Service. Equity shall
deliver and install the Equipment and arrange for commencement of the Service at
the Premises. The parties shall attach within thirty (30) days hereof, as
Exhibit "C", drawings which set forth the exact location of where the various
Items of Equipment to be provided by Equity hereunder are to be installed.
Customer shall give Equity at least thirty (30) days prior written notice of the
date upon which they intend to take occupancy of the Premises. Customer's
obligation to pay rent hereunder shall commence upon the date that service
commences.
5. Payments. Base rent for each item of equipment and the Service (in
use form time to time) shall be as provided in Exhibit "A". Additional payments
for long distance usage shall be in accordance with the schedule set forth on
Exhibit "B" attached hereto and incorporated herein by reference. Customer shall
pay all base rent and other sums due hereunder to Equity at the address set
forth below, or to such other person or place as Equity may designate in
writing. Payments for Equipment (including initial installation charges) and for
Service (including long distance charges) shall be paid upon receipt of monthly
billings therefor. Payments shall be delinquent if not paid in full within
fifteen (15) days after receipt of the billing therefor. For purposes hereof,
billings shall be deemed received when personally delivered or three (3) days
after being placed in the United States Mail, postage prepaid. Interest on
delinquent payments may be assessed on a per diem basis at a rate equal at a
rate equal to the prime rate quoted from time to time by Morgan Guaranty Trust
plus five percent (5%). Payments shall be sent to the following address: Equity
Telecommunications, 2201 East Camelback Road, Suite 123B, Phoenix, Arizona
85016.
6. Taxes. Customer shall pay as and when due, and indemnify and hold
harmless Equity from and against all present and future taxes and other
governmental charges (including, without limitation, sales, use, leasing, stamp
and personal property taxes and license and registration fees), and all amounts
in lieu of such taxes and charges and any penalties and interest on any of the
foregoing, imposed, levied or based upon, in connection with or as a result of
the purchase, ownership, delivery, leasing, possession or use of the Equipment
or use of the Service (including, but not limited to, sales, use and federal
excise taxes as long distance charges), or based upon or measured by rentals or
receipts with respect to this Agreement, and Customer shall file all returns
required and furnish copies thereof to Equity upon its request; provided,
however, that the foregoing shall not apply to any federal or state income,
profits or franchise taxes of Equity.
7. Maintenance. Customer shall use the Equipment in the ordinary course
of business in a commercially reasonable manner and refrain from any abuse or
misuse of the equipment. Equity shall maintain the equipment and be responsible
for its proper operation except for malfunctions resulting from the misuse,
abuse or negligent acts of Customer, its employees, guests, customers, clients
and invitees. Equity shall maintain the Equipment in a manner at least
2
<PAGE>
equal to that recommended by the manufacturers of the equipment.
8. Liability, Disclaimer of Warranties: EQUITY IS NEITHER THE
MANUFACTURER NOR SELLER OF THE EQUIPMENT. EQUITY MAKES NO WARRANTY OR
REPRESENTATION, EITHER EXPRESS OR IMPLIED, OF ANY KIND WHATSOEVER WITH RESPECT
TO THE EQUIPMENT, EXCEPT THE FOLLOWING: THE EQUIPMENT IS FIT FOR THE PURPOSE OF
GENERAL OFFICE USE, THE EQUIPMENT IS NEW OR REFURBISHED TO AT&T STANDARDS, THE
EQUIPMENT SUFFERS FROM NO PATENT DEFECTS OF WHICH EQUITY IS AWARE, CUSTOMER
SHALL ENJOY THE QUIET ENJOYMENT OF THE EQUIPMENT AND THAT THE EQUIPMENT IS IN
CONFORMITY WITH APPLICABLE LAW. EQUITY EXPRESSLY MAKES NO WARRANTY OR
REPRESENTATION WITH RESPECT TO THE DESIGN OF THE EQUIPMENT OR ANY LATENT DEFECTS
EFFECTING THE EQUIPMENT.
(a) The foregoing is in lieu of all other warranties and of all other
obligations on the part of Equity for damages including, but not limited to
consequential damages.
(b) Neither Equity not its vendors, affiliates or subsidiaries shall
have any liability for any indirect, direct, incidental or consequential damages
sustained or incurred in connection with the installation, maintenance, repair,
operation or interruption of the products and service provided or sold under
this Agreement unless same shall be the result of their willful or negligent
acts or omissions.
9. Installation and Modification. Customer shall not make any
modifications to the Equipment. Equity expressly disclaims any obligation to
customer in the event that Customer modifies any of the Equipment set forth
herein or uses any equipment other than Equity's Equipment in connection with
the operation of the basic telecommunications system, or uses any peripheral or
supplemental equipment such as fax machines or modems which are not compatible
or appropriate for use with the basic telecommunications system.
10. Default by Customer. If Customer shall (a) be in default in the
payment of any sum of money due hereunder beyond the fifteenth (15th) day after
the due date thereof, or (b) be in default in the performance of any of the
other material obligations under this Agreement, and shall not cure such default
within thirty (30) days after written notice thereof, or in the event of a
default which cannot be cured within thirty (30) days, shall have begun to cure
same within such thirty (30) day period and shall diligently pursue same to
completion as expeditiously as possible, Equity may, with notice to customer,
have any one or more of the following remedies:
(a) terminate this Agreement;
(b) terminate telecommunications services under the terms of this
Agreement which shall require Customer to make separate arrangements with the
local telephone company for reconnection of telephone services;
(c) sell, dispose of, hold, use or lease any items of Equipment as
Equity, in its sole discretion, may decide without any responsibility to account
to Customer; declare, with or without repossessing the Equipment, the entire
unpaid rental due and payable immediately; and
3
<PAGE>
Equity may pursue any other remedy available at law or in equity; and
(d) pursue any other available remedy at law or in equity.
In addition to the foregoing, if for any reason the landlord under the
lease shall have the right to cancel the Lease, Equity shall have the right to
terminate this Agreement.
11. Expenses of Collection. Customer, in addition to its other
obligations under this Agreement, shall pay to Equity, all costs and expenses,
including reasonable attorney's fees, incurred by Equity in enforcing the terms,
conditions or provisions of this Agreement.
12. Remedies Cumulative. No right or remedy of Equity is exclusive of
any right or remedy at law or in equity provided or permitted, but each shall be
cumulative of every other right or remedy or given hereunder or now or hereafter
existing at law or in equity or by statute or otherwise and may be enforced
concurrently from time to time. No failure on the part of Equity to exercise and
no delay in exercising any right or remedy hereunder shall operate as a waiver,
nor shall any single or partial exercise by Equity of any right or remedy
preclude any other or further exercise of the same or any other right or remedy.
13. Assignment. Customer shall not assign, transfer or pledge this
Agreement or any of the leased Equipment or sublet or lend any of the Equipment
to any other party. Equity may assign this Agreement and mortgage, transfer or
otherwise dispose of the leased Equipment, either in whole or in part, without
notice to customer. Notwithstanding the foregoing, before Equity can mortgage
the Equipment or provide Customer with any Equipment subject to a mortgage
Equity shall provide Customer with a nondisturbance agreement in a form and
content reasonably satisfactory to Customer from the proposed or existing
mortgages. Subject to the foregoing, this Agreement shall be binding upon and
inure to the benefit of the parties hereto, their successors and assigns. In the
event either party assigns it interest hereunder, it shall get an estoppel
certificate from the assignee in form and content satisfactory to the other
party.
14. Title to the Equipment. All items of equipment shall remain the
property of Equity and may be removed by Equity at any time after termination of
or default under this Agreement. All items of Equipment are, and shall at all
times remain, separate items of personal property notwithstanding the attachment
of them to other items of equipment or to real property or buildings.
Notwithstanding the foregoing, it is understood that any elements of the system
which are built or installed as part of the tenant finish of the Premises
pursuant to the terms of the Lease, shall be and remain the property of the
Landlord and shall be controlled by the terms of the Lease.
15. Risk of Loss. Customer hereby assumes and shall bear all risk of
any loss, theft, damage to, or destruction of the Equipment from any cause
whatsoever ("Casualty Occurrence"). No Casualty Occurrence after installation of
the Equipment shall relieve Customer from its obligations under this Agreement;
however, the Customer's obligation to pay rent with respect to any Equipment
that has suffered a Casualty Occurrence may be discharged by compliance with the
terms of this paragraph pertaining to payment of the "Casualty Values" of the
Equipment to Equity. In the event of a Casualty Occurrence to any Equipment,
Customer shall give Equity reasonable notice thereof and thereafter that if
Equity reasonable determines the Equipment to be lost, stolen, destroyed or
damaged beyond repair, then customer, at Customer's option, shall
4
<PAGE>
either (a) replace the Equipment with like Equipment in the condition required
herein which has a market value at least equal to that of the replaced Equipment
immediately prior to the Casualty Occurrence and continue to pay rent hereunder,
or (b) pay to Equity not later than sixty (60) days after notification by Equity
the "Casualty Value" of the affected equipment as such term is defined herein.
The "Casualty Value" of any item of Equipment shall be equal to a total of (i)
al rent and other amounts, if any, due at the time of such payment, plus (ii)
the total of all unmatured rent and other payments with respect to such
Equipment discounted to present value at the rate of eight percent (8%) per
annum simple interest from the date of each such future payment would have been
made to the~ date of payment of the Casualty Value, plus (iii) the "Reversionary
Value" of said Equipment less the net amount of the recovery, if any, actually
received by Equity from insurance or otherwise for such loss, theft, damage or
destruction. For purposes of this paragraph, Reversionary Value shall be the
estimated fair market value of the Equipment as of the end of the initial lease
term, as though such Casualty Occurrence had not occurred. Upon such payment,
this Agreement shall terminate with, and only with, respect to the Equipment so
paid for and Customer shall become entitled to such paid for Equipment AS-IS,
WHERE-IS. If either party has the right to cancel the Lease pursuant to the
terms thereof pertaining to casualty loss and such party exercises its right to
cancel the Lease, then the party exercising such right shall also have the right
to cancel this Agreement.
16. Insurance. During the lease term of any Equipment, Customer shall,
at its expense, keep in effect all insurance required pursuant to the terms of
the Lease and shall cause Equity to be named as an additional insured under all
such policies of insurance. Each policy shall provide (i) for no less than
thirty (30) days prior written notice of cancellation or non-renewal to Equity;
(ii) that such policy shall not be invalidated as against Equity or its assigns
for any violation of any term of the policy of Customer's application therefor,
and (iii) that such insurance is primary insurance and any other insurance
covering Equity or its assigns shall be secondary and excess of such policy.
Evidence of each insurance policy satisfactory to Equity shall be provided to
Equity upon request. Customer shall promptly notify and appropriate insurer and
Equity of each and every occurrence which may become the basis of a claim or
cause of action against the insureds and provide Equity with all data pertinent
to such occurrence. The proceeds of casualty insurance, at the option of Equity,
shall be applied toward (a) the repair or replacement of the appropriate
Equipment, (b) payment of the Casualty Value thereof, or (c) the payment of any
other accrued obligation of customer hereunder. Any excess of such proceeds
remaining after all required payments shall belong to Customer. Customer hereby
appoints Equity as Customer's attorney-in-fact with full power and authority to
do all things, including, but not limited to, making claims, receiving payments
and endorsing documents, checks or drafts necessary or advisable to secure
payments due under any policy contemplated hereby on account of a Casualty
Occurrence to the Equipment.
17. Miscellaneous. This Agreement shall be governed by the laws of the
State of Arizona and constitutes the entire agreement between Equity and
Customer with respect to the subject matter hereof. The terms and provisions of
this Agreement may not be modified except by a writing signed by each of the
parties hereto.
18. Notices. All notices required hereunder shall be in writing and
shall be deemed to have been given when delivered personally or when mailed with
proper postage for ordinary mail, addressed to Equity or Customer, as the case
may be, at the following addresses or at such other
5
<PAGE>
address as either shall from time to time designate in writing.
If to Customer: Tracer Design, Incorporated
2231 East Camelback Rd., Suite 324
Phoenix, Arizona 85016
Attn: Mike Turico
(602) 468-6400
(601) 468-6401 (FAX)
If to Equity: Equity Telecommunications
7007 College Blvd., Suite 375
Overland Park, Kansas 66211
Attn: Eric Duck
(913) 338-3993
(913) 338-4664 (FAX)
19. Additional Documents: Further Assurances. Customer further agrees
to-execute or obtain and deliver to Equity, at Equity's request such additional
documents as Equity may reasonable deem necessary to protect Equity's interest
in the Equipment in this Agreement, including, without limitation, financing
statements, landlord's waivers and mortgagee's waivers. Customer shall pay to
Equity upon demand as supplemental rent any filing fees or expenses incurred in
connection with such additional documents. The execution of financing statements
or the filing of same shall be for information purposes only and shall not be
construed as an intention by the parties that the Equipment is being sold to
Customer under this agreement.
20. Individuals Executing Agreement. Customer and Equity both warrant
that the individuals executing this Agreement on their behalf have been fully
authorized by all appropriate corporate action to do so and that their execution
hereof shall create a valid and binding obligation of each respectively.
IN WITNESS WHEREOF, the undersigned have executed this Agreement the day and
year first above written.
EQUITY TELECOMMUNICATIONS
By: /s/ Lynda J. Sheperd
--------------------------------
Title: System Administrator
---------------------------
By: /s/ Chad M. Little
--------------------------------
Title: President
-----------------------------
6
<PAGE>
EXHIBIT "A"
SCHEDULE OF EQUIPMENT AND SERVICE
1. The initial Equipment to be installed is as follows:
a. 7434D/w Display (1)
8110 Analog Sets (16)
7101A Analog Set (1)
Analog Lines/Fax-Modem (4)
Audix (15)
House Pairs for TCG (2)
b. The initial charge for each item of Equipment shall be as follows:
$45.00 ($ 45.00)
$25.00 ($ 400.00)
$20.00 ($ 20.00)
$20.00 ($ 80.00)
$10.00 ($ 150.00)
$10.00 ($ 20.00)
c. Based on the foregoing, the monthly lease charge, which includes all local
U.S. West lines, Attendant Console, Station User Equipment, Maintenance and
Common Equipment is:
$715.00
2. The Services are as follows:
Abbreviated Dialing Line Feature Status Indication
Alerting - Distinctive Alerting Loudspeaker Paging
Attendant Call Waiting Loudspeaker Paging -
Attendant Direct Extension Selection Music Option
with Busy Lamp Field Message Waiting -Manual
Attendant Display PC/PBX Connection
Attendant Display - Priority Calling
Calling Extension Number Restriction -
Class of Service Attendant Control of Voice
Incoming Call Identification Terminals
Attendant Release Loop Operation Code Restriction
Bridged Call Inward
Busy Verification of Lines Manual Termination Line
Call Coverage Miscellaneous Trunk
Call Forwarding Restrictions
Call Park, Call Pickup, Call Waiting Outward
Centralized Attendant Service Terminal-to-Terminal
7
<PAGE>
Code Calling Access Only Calling
Conference - Attendant Six Party Termination
Conference - Three Party Toll Restriction
Dial Access to Attendant Voice Terminal Restrictions
Direct Inward Dialing Origination
Direct Outward Dialing Termination Busy Indication
Display - Voice Terminal Through Dialing
Power Failure Transfer Touch-Tone Calling Senderized
Four (4) Digit Dialing Operating
Hunting Transfer
Intercom Automatic Unattended Console Service
Intercom - Dial Alternate Console Position
Hold Call Answer From Any
Leave Word Calling Voice Terminal
Recurring Charges + 7% tax
Equipment and network charges (telephone lines and access to reach long distance
location)
3. The charge for the installation of the Equipment listed in paragraph 1 (a)
above is $8,803.43.
4. If additional Equipment is added, the charge therefor shall be computed on
the basis of market prices at the time. Nothing contained herein shall be deemed
to indicate the future availability of any specific item of equipment. To the
extent that Customer wishes to add a given piece of equipment in the future and
such item is no longer available, Equity shall use its best efforts to obtain a
comparable substitute.
5. If Customer should elect to extend the term of the Agreement pursuant to any
options contained herein, at the commencement of any such option period, the
base charges set forth in paragraph 1 of the Exhibit "A" and the Long Distance
Rate Schedule set forth in Exhibit "B" shall be adjusted as required to reflect
then market rates, which rates shall be in effect hereunder until the expiration
of the option period in question.
8
<PAGE>
EXHIBIT "B"
-----------
LONG DISTANCE RATE SCHEDULE
---------------------------
Cost Per Minute
---------------
$ .17
-----
9
Exhibit 10(gg)
<TABLE>
<S> <C>
MCI Standard Customer Premises Equipment (CPE)
- ------------------------------------------------------------------------------------------------------------------------------------
Customer Name
Tracer
- ------------------------------------------------------------------------------------------------------------------------------------
Customer Mailing Address
2231 E. Camelback, Suite 324
- ------------------------------------------------------------------------------------------------------------------------------------
City State Zip
Phoenix, AZ 85016
- ------------------------------------------------------------------------------------------------------------------------------------
Customer Contact Phone Number
Mike Turico 602 265-9030
- ------------------------------------------------------------------------------------------------------------------------------------
Requested Install Date
- ------------------------------------------------------------------------------------------------------------------------------------
The equipment to which this Order relates is shown below and on any continuation sheets, CPE Schedule A, attached hereto.
EQUIPMENT SCHEDULE
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL MONTHLY UNIT INSTALL
SITE MCI SERVICE MONTHLY CHARGE CHARGE
INSTALLATION SITE CODE EQUIPMENT TYPE QTY UNIT CHARGE (RECURRING) (NON RECURRING)
- ------------------------------------------------------------------------------------------------------------------------------------
2231 E. Camelback CSU/DSU Internet T-1 1 7721 $103.68 N/A
Suite 324 (IND 3)
- ------------------------------------------------------------------------------------------------------------------------------------
(For 3 year comdisco term lease)
- ------------------------------------------------------------------------------------------------------------------------------------
This CPE order form is subject to the Terms and Conditions attached hereto.
ACCEPTED AND AGREED TO:
- ------------------------------------------------------------------------------------------------------------------------------------
CUSTOMER'S COMPANY NAME MCI TELECOMMUNICATIONS CORPORATION
Traler
- ------------------------------------------------------------------------------------------------------------------------------------
ACCEPTED BY ACCEPTED BY
Mike Turico /s/ Mike Turico Linda Karban
- ------------------------------------------------------------------------------------------------------------------------------------
TITLE TITLE
V.P. OF ENGINEERING CAM 2
- ------------------------------------------------------------------------------------------------------------------------------------
DATE DATE
9-1-95 9-1-95
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
FOR INTERNAL USE BY CSC OR CPE COORDINATOR ONLY
- ------------------------------------------------------------------------------------------------------------------------------------
COMS ACTUAL INSTALL DATE
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATE ID T-CARRIER ID/CKT
- ------------------------------------------------------------------------------------------------------------------------------------
CSC/TSR NAME PHONE NUMBER
- ------------------------------------------------------------------------------------------------------------------------------------
NOTES
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
MCI MCI Fixed Term Plan and
Network Pricing Plan
Rate Plan Enrollment
COMPANY NAME
Tracer
COMPANY ADDRESS CITY STATE ZIP
2231 E. CAMELBACK SUITE 324 PHOENIX AZ 85016
Rate Plan (Please Check Applicable Plan and Option)
|X| Fixed Term Plan (Please Check Applicable Term) [_] One Year [_] Two Years |X| Three Years [_] Four Years [_] Five Years
[_] Network Pricing Plan (Please Check Application Option)
[_] Start New NPP [_] Renew/Charge Existing NPP
o NPP Term (Please Check Applicable Option) [_] One Year [_] Two Years [_] Three Years [_] Four Years [_] Five Years
o NPP Aggregate Minimum Monthly IOC Revenue (Please Check Desired Amount)
[_] $2,000 [_] $5,000 [_] $10,000 [_] $25,000 [_] $50,000 [_] $75,000
[_] $100,000 [_] $200,000 [_] $350,000 [_] $500,000 [_] $750,000
o Requested NPP effective date:________________
CONSIDERATIONS
Customer understands that Service(s) are provided pursuant to MCI Tariff FCC No. 1, or applicable intrastate tariffs. In the event
of any inconsistency between
________ Plan Enrollment and the terms and conditions set forth in the applicable MCI Tariff, as it may be amended from time to
time, the MCI Tariff shall be
________ to be controlling. All Service(s) are subject to the availability of facilities.
_________ATION REQUIREMENT
_________mer requests to commence or change any plan, including requests to shift any circuit between plans, must be made in
compliance with the fifteen (15) application requirement set forth in MCI's tariff to ensure that plan commencement or change may
occur on the desired date.
_________MENTS
Specific information, including Customer's Billing ID's, Customer's Locations, Requested Service Dates, existing Rate Plan and
Expiration Date, as _______, is attached hereto and incorporated herein by reference.
Circuit Information Attachments:_____________
- ------------------------------------------------------------------------------------------------------------------------------------
Requested By
- ------------------------------------------------------------------------------------------------------------------------------------
PLEASE PRINT CUSTOMER SIGNATURE DATE
- ------------------------------------------------------------------------------------------------------------------------------------
_______n Taken By
- ------------------------------------------------------------------------------------------------------------------------------------
REPRESENTATIVE (PLEASE PRINT) MCI SALES REPRESENTATIVE SIGNATURE DATE
- ------------------------------------------------------------------------------------------------------------------------------------
__________ Accepted for MCI By
- ------------------------------------------------------------------------------------------------------------------------------------
__________ REPRESENTATIVE (PLEASE PRINT) MCI DIVISION FINANCE REPRESENTATIVE SIGNATURE DATE
- ------------------------------------------------------------------------------------------------------------------------------------
Internal Use Only
(To be filed in by MCI Customer Service Executive, if applicable)
</TABLE>
<PAGE>
4. Price Charges. MCI reserves the right to change the above Internet
Connection rates on 30- days advance notice. If any such price change,
after all applicable discounts are applied results in a net increase
to Customer's monthly charges and a price increase establishes a
monthly rate that exceeds the rates paid by Customer as of the
Effective Date after all applicable discounts) provided in this
Attachment. Customer will be given sixty (60) days following such
notice to terminate without liability (except for usage charges
incurred through the date of termination) any term plan commitment
established under Section C to this Attachment.
5. Partial Billing. Customers will be billed a prorated share of the
above charges for connections installed, terminated, or reconfigured
during the course of a monthly billing cycle.
C. Fixed Term Discounts
--------------------
1. Options. Customer will receive discounts off MCI's month-to-month
rates by committing individual connections to 1,2,3,4, or 5 year
service terms. Fixed term discounts are applied on the effective
charges after applying all utilization and connection cost-based
discounts and surcharges. Fixed term discounts shall not apply to
Local Leased Access _____ charges.
Select O Term (in Years) Discount
---------- --------------- --------
[_] 0 0%
[_] 1 15%
[_] 2 17%
[_] 3 20%
[_] 4 22%
[_] 5
2. Early Termination. If Customer disconnects any connection prior
to the end of the committed Term Customer will pay an early
termination charge equal to fifty percent (50%) of their
subscribed monthly connection charges, including applicable
backhaul charges, multiplied by the number of months remaining in
the Term.
3. Upgrades/Downgrades. Customer may upgrade to a higher speed
connection at any time during the term of this Agreement.
Customer may also downgrade to the next available (lower) speed,
however. Customer may downgrade no more than one (1) time in any
twelve (12) month period. If Customer disconnects service within
six (6) months of downgrading the transmission rate of Customer's
connection any applicable termination charge will be based on the
transmission rate immediately prior to such downgrade. Customer
may also switch between direct and frame relay access without
incurring a penalty or surcharge.
MCI CONFIDENTIAL
2
<PAGE>
For a Direct Connection to Customer's Location identified above, Customer
selects the following Transmission Rate and Corresponding monthly recurring
charge:
Direct Connection
Transmission Rate Month-to-Month Rates
----------------- --------------------
[_] 64 kbps $ 1,000
[_] 128 kbps $ 1,500
[_] 256 kbps $ 1,700
[_] 512 kbps $ 2,000
[X] 1.5 Mbps $ 2,300
[_] 3.0 Mbps $ 6,000
[_] 4.5 Mbps ________
[_] 10 Mbps ________
[_] 45 Mbps ________
For Terrestrial Digital Service-45 (TDS-45), the Customer will receive the
monthly recurring rate that corresponds to the average monthly usage tier (as
measured in Megabits per second) at which the Customer's actual monthly usage
qualifies:
Average Monthly Usage Monthly Recurring Charge
--------------------- ------------------------
0- 1.5 Mbps $10,000
1.51- 3.0 Mbps $15,000
3.01- 4.5 Mbps $20,000
4.51- 6.0 Mbps $25,000
6.01- 10.0 Mbps $35,000
10.01- 15.0 Mbps $50,000
15.01- 45.0 Mbps $65,000
The TDS-45 connection charge is based upon the Customer's average monthly
utilization of the connection. Average Monthly Utilization is defined as the
greater of the average traffic into or out of the connection as expressed as a
percentage of the total capacity of the connection. Traffic is measured in five
minute intervals which are averaged monthly to arrive at the appropriate monthly
usage tier. The Customer will be provided with a monthly utilization report.
New MCI Customers will be billed for the first month of service at the pricing
associated with the first monthly usage tier. Existing MCI Customers will be
billed for the first month at the pricing associated with their Average Monthly
Utilization during the two months immediately preceding the commencement of the
Term of this Agreement. The Customer's inbound and outbound traffic will be
measured during the first month, and the Customer will be reassigned at the end
of the month to the to the usage tier commensurate with their Average Monthly
Utilization. At the end of any two month period in which the Customer's Average
Monthly Utilization. At the end of any two month period in which the Customer's
Average Monthly usage falls below or exceeds the usage associated with its
assigned tier, the Customer will be reassigned to a new tier commensurate with
their Average Monthly Utilization.
For TDS-45, Customer will be provisioned through MCI's ______ BIPP node. If
necessary, Customer will be charged for back-hauling their TDS-45 traffic from
its termination point in ________ to the Customer's location in _________, at
the per-mile rates set forth in MCI's Tariff FCC No. 8. Such back-hauling
charges are eligible for the Discount as set forth in Section II(C)(1) below.
MCI CONFIDENTIAL
2
<PAGE>
ATTACHMENT 2
INTERNET ACCESS RATES, CHARGES AND DISCOUNTS
I. CONNECTION ORDERED PER THIS ATTACHMENT
1. Customer Name Tracer Design, Inc.
------------------------------------------
2. Billing ID 01622403
---------------------------------------------
3. Circuit ID or PVC# ZAR5T520.1
-------------------------------------
4. Served Location (City, State): Phoenix, AZ
-------------------------
5. Served Location NPA-NXX 602-468
--------------------------------
6. Transmission Rate of Connection 5 Mbp
------------------------
7. Access Method (Direct Frame Relay): Direct
--------------------
II. RATES AND CHARGES
A. Local Leased Access Line Charges.
--------------------------------
Local Leased Access Lines. This Agreement incorporates by
reference the terms and conditions of MCI's filed and
effective tariffs as amended from time to time in accordance
with law, including all installation, reconfiguration and
monthly recurring rates for any applicable local channel,
central office connection and access coordination charges.
Customer will receive the discount associated with the Access
Pricing Plan (APP) having the same term as the Term of this
Agreement.
B. Network Connections Charges.
---------------------------
MCI provides two types of access into its Internet service:
Direct (Dedicated Channel) connections and Frame Relay
connections. Each frame relay connection ordered must
originate from an MCI HyperStream Frame relay port that equals
or exceeds the transmission speed of Customer's subscribed
Internet connection.
1. Installation Charges: $300 for all connection speeds
2. Reconfiguration Charges: $300 per occurrence
3. Monthly Recurring Charges. Select only one of the
following (If no selection is made, MCI will reject
this Agreement)
For a Frame Relay Connection to the Customer Location
identified above, Customer selects the following
Transmission Rate and corresponding monthly recurring
charge:
Frame Relay
Transmission Rate Month-to-Month Rates
----------------- --------------------
[_] 64 kbps $1,000
[_] 128 kbps $1,500
[_] 256 kbps $1,700
[_] 384 kbps $1,800
[_] 512 kbps $2,000
[_] 1024 kbps $
MCI CONFIDENTIAL
2
Exhibit 10(hh)
January 30, 1996
Jim Layne
Vice President
TRACER
2231 East Camelback
Phoenix, AZ 85106
Subject: Contract for Public Relations Services Provided By Technology
Solutions, Inc. to TRACER
Dear Chad:
This contract, when signed by an authorized representative of your organization,
will confirm that TRACER ("TRACER") have retained Technology Solutions, Inc.
("Technology Solutions" or "TSI") as public relations and marketing advisor
beginning date.
As advisor, TSI will:
a. Advise the management of TRACER on public relations and
marketing matters.
b. Develop for approval and implementation programs designed to
achieve public relations and marketing objectives for TRACER.
c. Provide quality professional staff services as may be required
to help TRACER carry out its programs.
Services/Fee: A total monthly program fee of $5,000 will be paid to TSI by
TRACER. Notwithstanding the foregoing, the monthly program fee for the month of
January 1996 shall be $2,500. This fee covers the basic consulting, supervisory
and implementation services provided by TSI's senior management and account
executives, as well as access to all of TSI's physical facilities. Billed on the
last day of each month, (first month fee due in advance) the fee is due and
payable in thirty days.
The following general services will be provided as needed under the monthly
retainer, with the assumption that these services will support the agreed upon
publicity objectives and require an average of 50 hours/month.
o Strategic Planning, Program Development, Administration (Off-site
meetings, public relations program development and project book,
ongoing client contact, reporting, editorial audits, arranging
reprints, etc.)
<PAGE>
Page 2/TRACER Contract
o Corporate Backgrounder and Press Kit (ongoing development)
o Database Development and Maintenance (trade and business publications,
analysts, trade shows, etc.)
o Press Releases (Editorial placement and follow-up of new product
announcements, personnel/organizational announcements, strategic
relationships, new applications/users, etc.)
o Ongoing Press Contact/Story Development (Arranging and implementing
press interviews and meetings with TRACER executives)
o Specialty Pitches (Development and placement of holiday story
opportunities, and writing of pitch letters, for example)
o Product Reviews (Development of comparative and individual product
reviews)
o Miscellaneous (As needed: Participation in sales meetings, dealer
training sessions, user site visits, scanning of key media for relevant
stories and providing them to TRACER, etc.)
Out-of-Pocket Expenditures: TRACER will reimburse TSI for all appropriate
out-of-pocket disbursements made in the performance of its duties under this
arrangement. TSI will maintain accurate records of all out-of-pocket
expenditures incurred on behalf of TRACER and will supply supporting detail. TSI
will provide TRACER with written estimates, and will obtain TRACER's express
authorization based on such estimates, before incurring any such expenses in
excess of $500.00.
These costs might include, but are not limited to:
o Telephone
o Facsimile
o Postage, Express Mail and Messenger
o Mailing Fulfillment and Materials (e.g.-- envelopes)
o Photocopying and Printing
o Travel, Hotel, Meals, etc. (to be approved in advance)
o Article and Photographic Reprints
o Media Distribution Services
Special Projects: The following services may be provided by TSI as "special
projects," requiring TSI to develop a proposal containing a description of
services to be provided, including timetable, budgets, subcontractors and other
related expenses. This proposal will then be submitted to TRACER, Inc. for
review; and work will commence upon written authorization.
<PAGE>
Page 3/TRACER Contract
Special projects might include, but are not limited to:
o Focus Groups and Opinion/Market Surveys
o Longer Tutorials and User Stories (Writing and editing of articles over
500 words)
o Press and Analyst Tours (Arranging and supporting press and analyst
visits, as well as assistance in developing presentation materials)
o Newsletters (Graphic design, writing, typesetting, production and/or
distribution, etc.)
o Technical Materials (Product manuals, user handbooks, white papers,
etc.)
o Presentations (Speech writing, computer-based presentations, slide
presentations, etc.)
o Photography (Shoots, reprints, chromes, etc.)
o Trade Shows (Arranging and supporting pre-, at- and post-show
interviews)
o Video (Scrip/writing and production supervision for VNRs, corporate
videos, video presentations, etc.)
TSI agrees that all materials created for TRACER shall become the sole property
of TRACER and may not be used on behalf of other clients without TRACER's
written consent.
TRACER shall investigate and defend any claim, suit, proceeding or action, and
pay any settlement amounts or damages, brought by or relating to third parties,
if and to the extent that the claim, suit, proceeding or action is directly
attributable to information, representations, reports, data or other materials
or works prepared or furnished by TRACER for use by TSI on TRACER's account. The
foregoing obligations are subject to (i) TSI promptly notifying TRACER in
writing of the claim, suit, proceeding or action (provided that any failure to
so notify shall not limit the obligation to investigate and defend except if and
to the extent such failure materially prejudiced TRACER's ability to defend
against the claim, suit, proceeding or action), and (ii) TRACER shall, at its
option, have sole control of the defense of any such claim, suit, proceeding or
action and all negotiations for any settlement or compromise, provided that TSI
shall have the right to provide for its own, separate defense at its own cost
and expense. TRACER shall also pay any and all fees, expenses and other costs
reasonably incurred by TSI in investigating, defending or settling any such
claim, suit, proceeding or action as a result of TRACER's failure to
investigate, defend or settle the claim, suit, proceeding or action, or prior to
TRACER's assumption of such responsibilities, as required herein.
TSI shall investigate and defend any claim, suit or proceeding, and pay any
settlement amounts or damages, brought by or relating to third parties, if and
to the extent that the claim, suit, proceeding or action is directly
attributable to information, representations, reports, data or other materials
or works prepared or furnished by TSI for use on TRACER's account. The foregoing
obligations are subject to (i) TRACER promptly notifying TSI in writing of the
claim, suit, proceeding or action (provided that any failure to so notify shall
not limit the obligation to investigate and defend except if and to the extent
such failure materially prejudiced TSI's ability to defend against the claim,
suit, proceeding or action), and (ii) TSI shall, at its option, have sole
control of the defense of any such claim, suit, proceeding or action and all
negotiations for any settlement or compromise, provided that TRACER shall have
the right to provide for its own, separate defense at its own cost and expense.
TSI shall also pay any and all fees, expenses and other costs reasonably
incurred by TRACER in investigating, defending or settling any such claim, suit,
proceeding or action as a result of TSI's
<PAGE>
Page 4/TRACER Contract
failure to investigate, defend or settle the claim, suit, proceeding or action,
or prior to TSI's assumption of such responsibilities, as required herein.
TRACER agrees that it will not solicit for employment any employees of
Technology Solutions, whether or not they service TRACER's account under the
terms of this agreement. TRACER agrees and acknowledges that any such actions to
recruit employees of Technology Solutions for employment with TRACER will cause
Technology Solutions irreparable harm for which no adequate remedy exists at
law.
This agreement will commence as of January 15, 1996, and will continue in force
until terminated by either party upon thirty (30) days' advanced written notice.
All notices to be sent under the terms of this agreement shall be sent postage
pre-paid, via certified mail, return receipt requested, or via overnight
courier.
This document constitutes the entire agreement between the parties, and cannot
be changed, modified or supplemented except by a written document signed by both
the parties.
In the event that any provision of this agreement is found to be unenforceable
by a court of competent jurisdiction, the remainder of the agreement shall
remain in full force and effect.
Sincerely yours,
Technology Solutions, Inc.
By________________________________________________________
Brian Cohen, CEO, Date
Agreed and Accepted:
TRACER
By /s/ Chad Little 4/8/96
--------------------------------------------------------
Chad Little, President Date
Exhibit 10(ii)
October 31, 1996
Mike Turico
Sand Box Entertainment Corporation
2231 East Camelback Road
Suite 324
Phoenix, AZ 85016
Dear Mike,
Pursuant to our discussions, I would like to present the following T-1 Internet
Access quote for your review:
One-Time Charges
Genuity Installation $2,500
Total One-Time Charges: $2,500
Monthly Charges
2Mbps Ethernet Internet Access $1,750
Total Monthly Charges: $1,750
o Quote prices valid for 30 days.
o Monthly charges include telephone company fees.
Service Term 3 yrs
We believe the reliability and flexibility of Genuity's personnel and network
makes us unique and we look forward to a mutually successful business
relationship. The Ethernet connection you have chosen allows Inficad to cost
effectively increase bandwidth up to 10Mbps. Please indicate your acceptance of
these services and of the terms and conditions of the Master Service Agreement
by signing below and also at the end of the Master Service Agreement, and
returning a copy of both documents to me for our files.
I realize Sandbox Entertainment has a choice when choosing a NSP therefore, I
would like to thank you for selecting Genuity.
Regards,
/s/ Jim O'Shaughnessy
Jim O'Shaughnessy /s/ Chad Little 12/9/96
Account Executive ----------------------------
Genuity Inc.
(602)207-6449 Chad Little Date:
[email protected] Accept quote as proposed
<PAGE>
GENUITY MASTER SERVICE AGREEMENT
This MASTER SERVICE AGREEMENT dated October 31, 1996 between the below-named
Customer and Genuity Inc. ("Provider" or "Genuity") (collectively referred to as
the "Parties") establishes the terms and conditions under which Provider will
provide communications services to Customer.
Customer: Sandbox Entertainment Corporation
State of Incorporation: Arizona
Principal Place of Business: Phoenix, Arizona
Address: 2231 East Camelback Road
Phoenix, Arizona 85016
Address for Notices:
Mike Turico
Sandbox Entertainment Corporation
2231 East Camelback Road
Phoenix, AZ 85016
Attn: Mike Turico
Provider:
Genuity Inc. Address for Notices:
4041 N. Central Genuity Inc.:
Phoenix, AZ 85012 4041 N. Central
Attn: Contract Administration Phoenix, AZ 85012
1. The Parties anticipate that Customer may, at Customer's sole discretion,
issue one or more Data Service Orders ("Service Orders") describing certain
services which Customer desires to purchase from Provider, and which set forth
the prices, minimum term of service and other service specific details. All
Service orders shall be subject tot he terms and conditions of this Master
Service Agreement for the duration of the Service Order. If a Service Order is
accepted in writing by an authorized representative of Provider, it shall
supersede any and all prior agreements or understandings with respect to the
service described therein, and shall, together with such terms and conditions,
comprise the full and final agreement of the Parties. No term or condition
hereof shall be modified except by written agreement of both Parties and any
preprinted terms and conditions which may appear on Customer's order form are
expressly rejected and are void. As used in the document, the work "Term" shall
mean the total duration of a Service Order and the phrase "Initial Term" shall
mean the minimum term of service as specified in a Service Order. The word
"Agreement" shall apply to all promises, terms and conditions of the Parties
contained in this Master Service Agreement or a Service Order.
2. The Initial Term of this Agreement shall be as set forth in the Service Order
placed hereunder and shall extend thereafter until terminated by either Party
upon no less than ninety (90) days' prior written notice. However, Provider may
terminate this Agreement or suspend service hereunder at any time upon: (a) any
failure of Customer to pay any undisputed amounts as provided in this Agreement;
(b) any breach by Customer of any material provision of this Agreement
continuing for thirty (30) days after receipt of notice thereof; (c) any
insolvency, bankruptcy, assignment for the benefit of creditors, appointment of
a trustee or receiver or similar event with respect to Customer; or (d) any
governmental prohibition or required alteration of services to be provided
hereunder or any violation of an applicable law, rule or regulation. Any
termination shall not relieve Customer of its obligation to pay any charges
incurred hereunder prior to such termination. The Parties' rights and
obligations which by their nature would extend beyond the termination,
cancellation or expiration of this Agreement shall survive such termination,
cancellation or expiration.
3. Customer is responsible for all Recurring and Non-Recurring Charges from and
after the Date of Acceptance. For purposes of this Agreement, the Date of
Acceptance is the earlier of 1) the date Customer signs a Customer Acceptance
Letter or 2) two (2) business days after Provider establishes a connection in
which the Provider-furnished service is functioning properly. Recurring Charges
will be prorated for the first and last month of the Agreement if services is
not provided for a complete month. Proration of a monthly charge will be based
on the number of days connection was available divided by total days in the
month. Provider's targeted service installation intervals are thirty (30) days
after order acceptance for on-net services and forty-five (45) days for off-net
services. In the event Customer requests Provider to attempt to accelerate the
order process to install services more quickly, Customer shall pay an Order
Expedite charge of $500. Order Expedite charges will apply to each site ordered
for which expedited installation is requested.
4. During the Term Customer shall pay Provider for services at the rates set
forth in the Service Order. Normal service charges shall be invoiced monthly in
advance. All amounts owed by Customer shall be paid within thirty (30) days
after the date of the invoice and Provider reserves the right to charge interest
on all delinquent payments at an annualized rate of 2 percentage points above
the prime rate as announced in the Wall Street Journal from time to time. In
addition, Provider shall have the right to interrupt or terminate its services
to Customer if any undisputed amount owed by Customer to Provider remains unpaid
for more than sixty (60) days after the date of such invoice.
5. Provider's bill shall separately identify any excise, sales, use, or other
taxes applicable to Provider's provision of service or equipment to Customer,
and all such taxes, however designated (excepting those based on Provider's net
income), shall be paid by Customer in addition to any other amount owing.
Provider will not collect any otherwise applicable tax if Customer first
provides Provider with a valid tax exemption certificate.
6. At Customer's request, Provider will respond to Customer's report of service
interruption and attempt to resolve all problems of connectivity. If it is
determined that all facilities, system and equipment furnished by Provider are
functioning properly, and that the connectivity problem arose from some other
cause, Provider will recover labor and materials cost for
<PAGE>
GENUITY MASTER SERVICE AGREEMENT
services actually performed at the following rates, which shall be the usual and
customary rates for similar services provided by Provider to all Customers in
the same locality.
Labor (4 hour Minimum Charge):
7 a.m. to 7 p.m. week days/$150 per hour per Technician
All other times: $225 per hour per Technician
Materials: Cost to Provider x 1.15
Provider reserves the right to modify the above rates upon ninety (90) days'
advance written notice to Customer. Provider shall also be entitled to recover
from Customer reasonable travel and related expenses of technicians required to
travel in connection with such services.
7. Provider may substitute, change or rearrange any equipment, facility or
system used in providing services at any time and from time to time, but shall
not thereby alter the technical parameters of the services provided thereunder.
8. Customer shall not cause or allow any facility or equipment of Provider to be
rearranged , moved, removed, disconnected, altered, or repaired without
Provider's prior written consent, which consent shall not be unreasonably
withheld. Customer shall not create or allow any liens or other encumbrances to
be placed on any Provider equipment, facility or system arising from any act,
transaction or circumstance relating to Customer. If Customer elects to relocate
or otherwise change the place of services after commencement of the installation
of facilities, Customer shall pay any disconnection, early cancellation or
termination charges reasonably incurred by Provider for the original location
and installation charges for the new location.
9. Provider will grant a credit allowance for service interruption calculated
and credited in fifteen (15) minute increments. A service interruption will be
deemed to have occurred only if service becomes unusable to Customer as a result
of failure of Provider's facility, equipment, or personnel used to provide the
service in question and only where the interruption is not the result of: (i)
the negligence or acts of Customer or its agents; (ii) the failure or
malfunction of non-Provider equipment or systems not provided by Provider; (iii)
circumstances or causes beyond the control of Provider; or (iv) a service
interruption caused by scheduled service maintenance, alternation, or
implementation. Such credits will be granted only if (a) Customer affords
Provider full and free access to Customer's premises to make appropriate
repairs, maintenance, testing, etc; and (b) Customer does not unreasonably
continue to use the service on an impaired basis.
For purposes of canceling or terminating a service provided under this Agreement
for a Provider service interruption, such service interruption order must equal
either twenty four (24) hours of cumulative service outages during any
continuous twelve (12) month period or a single outage of eight (8) hours or
more.
The foregoing states Customer's sole remedy for service interruption under the
Agreement, and in no event shall Provider be liable for harm to business, lost
revenues, lost savings, or lost profits suffered by Customer, regardless of the
form of action, whether in contract, warranty, strict liability, or tort,
including without limitation negligence of any kind, whether active or passive.
10. Provider's entire liability for any claim, loss, damage or expense from any
cause whatsoever shall in no event exceed sums actually paid to Provider by
Customer during the calendar year of occurrence for the specific service giving
rise to the claim. Notwithstanding the foregoing, Provider shall not be liable
for any indirect, incidental, consequential, punitive or special damages. No
action or proceeding against Provider shall be commenced more than one (1) year
after service is rendered.
11. There are no warranties, representations or agreements, express or implied
either in fact or by operation of law, statutory or otherwise, including
warrants of merchantability or fitness for a particular purpose or arising from
a particular course of dealing, except those expressly set forth herein.
Provider makes no representations as to results that will be obtained by the use
of the service hereunder. Provider shall not be liable to Customer for damages
or for alteration, theft, loss or destruction of data, programs or systems from
accident, fraud, third party intrusion or otherwise, for failure of
authentication or encryption, or for failure of firewall protection or other
security failures, unless the same shall have been caused by the intentional act
of Provider.
12. In the event that Customer cancels or terminates service at any time during
the Initial Term of this Agreement or any renewal thereof for any reason
whatsoever other than a service interruption (as described in Paragraph 9
above), Customer agrees to pay Provider as liquidated damages (which shall not
be deemed a penalty) the following sums which shall become due and owing as of
the effective date of cancellation or termination and be payable in accordance
with Paragraph 3 above: 1) all Non-Recurring charges specified in the Service
Order and reasonably expended by Provider to establish service to Customer; plus
2) if cancellation or termination results from a default by Customer, any
disconnection, early cancellation or termination charges reasonably incurred by
Provider; plus 3) all Recurring Charges specified in the Service Order for the
balance of the then current Term of this Agreement.
13. Customer shall allow Provider continuous access and right-of-way to
Customer's premises to the extent reasonably determined by Provider to be
appropriate to the provision and maintenance of services, equipment, facilities
and systems hereunder. Customer shall furnish Provider, at no charge, such
equipment space and electrical power as is reasonably determined by Provider to
be required and suitable to render services hereunder.
14. Customer shall be liable for any damage to Provider equipment, facility, and
system which is caused by: (a) negligent or willful acts or omissions of
Customer or its agents, employees or suppliers; or (b) malfunction or failure of
any equipment of facility provided by Customer or its agents, employees or
suppliers. Customer is responsible for identifying, monitoring, removing and
disposing of any existing hazardous materials (e.g., friable asbestos) prior to
any construction or installation work being performed by Provider and Customer
shall indemnify, defend, and hold Provider harmless from any claim, suit, loss,
cost, or expense, including fines, abatement charges, legal fees and court costs
incurred in connection with hazardous materials on Customer's premises.
15. Customer is solely responsible for the content of any transmissions using
Provider's services, or any other use of Provider's services, by
<PAGE>
GENUITY MASTER SERVICE AGREEMENT
Customer or by any person or entity Customer permits to access Provider's
services (a "User"). Customer agrees that is and any User will not use the
services for illegal purposes (including but not limited to infringement of
copyright or trademark, misappropriation of trade secrets, wire fraud, invasion
of privacy, obscenity and libel), or to interfere with or disrupt other network
users, network services or network equipment. Disruptions include, but are not
limited to, distribution of unsolicited advertising or chain letters,
propagation of computer worms and viruses, and using the network to make
unauthorized entry to any other machine accessible via the network. Customer
shall defend, indemnify, and hold harmless Provider from and against all
liabilities and costs (including reasonable attorneys' fees) arising from any
and all claims by any person based upon the content of any transmissions by
Customer or any User using Provider's services or any other use of Provider's
services by Customer or any User.
16. If so requested, Provider may assign on a temporary basis a reasonable
number of Internet Protocol ("IP") addresses from the address space assigned to
Provider by the InterNIC. The Customer acknowledges that these addresses are the
property of Provider and are assigned to Customer as a service by Provider.
Provider reserves the right to change these address assignments at any time
during the term of this Agreement if the architecture of Provider's network so
requires it; however, Provider shall use reasonable efforts to avoid any
disruption to Customer resulting from a renumbering requirement. Provider will
give Customer as much notice as possible of any requirement to renumber.
Customer agrees that the addresses provided by Provider shall be returned to
Provider promptly after termination of this Agreement, and that any renumbering
required of Customer thereafter shall be the sole responsibility of Customer.
17. Provider warrants that all traffic originating from Customer will be routed
to the destination address via Provider's network, provided that the IP
addresses in use by Customer are part of Provider's assigned address space. If
Customer has or acquires its own IP addresses, Customer shall confirm that all
other networks will accept and route traffic from Customer.
18. Neither Party may assign this Agreement without the written consent of the
other Party (which consent shall not be unreasonably withheld or unduly
delayed), except that Provider may assign its rights and obligations hereunder:
(a) to any subsidiary, parent company, or affiliate of Provider; (b) pursuant to
any sale or transfer of substantially all the business of Provider; or (c)
pursuant to any financing, merger, or reorganization of Provider. Customer
represents that it is purchasing Provider's services for use in Customer's
business and agrees that it will not assign, sell or make available all or any
part of such purchase or services to any competitor of Provider.
19. If any provision of this Agreement is held by a court to be invalid, void
unenforceable, the remainder of this Agreement shall nevertheless remain
unimpaired and in effect.
20. No license, joint venture or partnership, express or implied, is granted by
Provider pursuant to this Agreement.
21. Each Party agrees to maintain in strict confidence for a period of five (5)
years from disclosure all plans, designs, drawings, trade secrets, and other
proprietary information of the other Party which is disclosed in written or
electronic form pursuant to this Agreement. No obligation of confidentiality
shall apply to disclosed information which the recipient 1) already possessed
without obligation of confidentiality; 2) develops independently; or 3)
rightfully receives without obligation of confidentiality from a third party.
22. Except for payment of money, neither Party shall be liable for any delay or
failure in performance of any part of this Agreement to the extent such delay or
failure is caused by an event of Force Majeure, including but not limited to,
fire, flood, explosion, accident, war, strike, embargo, governmental
requirement, civil or military authority, Act of God, inability to secure
materials, labor or transportation, acts or omissions of common carrier or
warehouseman, failure of performance by third-party supplier, or any other
causes beyond its reasonable control. Any such delay or failure shall suspend
the Agreement until the Force Majeure condition ceases and the Term shall be
extended by the length of the suspension.
23. If this Agreement is entered into by more than one Customer, each is jointly
and severally liable for all agreements, covenants and obligations herein.
24. Provider may use Customer's name as a reference with third parties and as
part of Provider's general advertising materials.
25. This Agreement shall be governed by the laws of the State of California
without regard to its choice of law provisions. In any action between the
Parties to enforce any material provision of this Agreement, the prevailing
Party shall be entitled to recover its legal fees and court costs from the
non-prevailing Party in addition to whatever other relief a court may award.
26. Each person executing this Agreement on behalf of Provider or Customer
represents and warrants that such person has been fully empowered to do so, and
that all necessary corporate actions (if any) required for the execution of
agreements have been taken.
27. This Agreement may be executed in one or more counterparts, each of which
shall be an original and all of which together shall be constitute one and the
same instrument.
<PAGE>
GENUITY MASTER SERVICE AGREEMENT
- --------------------------------------------------------------------------------
Genuity Inc.: Customer: Sandbox Entertainment Corporation
Signature: Signature:
By: By: Chad M. Little
Title: Title: President
<PAGE>
ADDENDUM
This Addendum to the Master Service Agreement dated as of November 6th,
1996, between Genuity Inc. (the "Provider") and Sandbox Entertainment
Corporation (the "Customer") (the "Addendum") provides for the following:
1. At such time Customer upgrades from the current T-1 service to a higher
level of service provided by Genuity the full cost, as evidenced by
written receipt, of the Customer's CSU/DSU will be deducted from the
startup cost of the upgraded service provided by Genuity.
- --------------------------------------------------------------------------------
Genuity Inc.: Customer: Sandbox Entertainment Corporation
Signature: Signature: /s/ Chad M. Little
By: By: Chad M. Little
Title: Title: President
Exhibit 11
SANDBOX ENTERTAINMENT CORPORATION
STATEMENT OF COMPUTATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31 June 30
-------------------------- --------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Net loss ........................................ ($ 507,090) ($1,477,059) ($ 727,125) ($ 935,623)
=========== =========== =========== ===========
Weighted average common shares outstanding: ..... 1,020,408 1,170,026 1,119,619 1,246,634
Common stock equivalents pursuant to SAB 83;
Stock, options, warrants, and other
potentially dilutive instruments issued within
one year of initial filing ................... 784,365 784,365 784,365 784,365
Less: SAB 83 common stock equivalents included in
weighted average shares outstanding
-- -- -- (734)
=========== =========== =========== ===========
Weighted average common shares outstanding during
the period ................................... 1,804,773 1,954,391 1,903,984 2,030,265
=========== =========== =========== ===========
Net loss per share .............................. ($ 0.28) ($ 0.76) ($ 0.38) ($ 0.46)
=========== =========== =========== ===========
</TABLE>
Page 1
Exhibit 23(a)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm in "Selected Financial Data"
and "Experts" and to the use of our report dated March 14, 1997, except for Note
13, as to which the date is November __, 1997, in the Registration Statement
(Form SB-2 No. 333-______) and related Prospectus of Sandbox Entertainment
Corporation for the registration of ______ shares of its Series B Convertible
Preferred Stock.
Ernst & Young LLP
Phoenix, Arizona
November ___, 1997
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the
completion of the restatement of capital accounts described in Note 13 to the
financial statements.
/s/ Ernst & Young LLP
Phoenix, Arizona
September 29, 1997
Exhibit 24(a) POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Chad M. Little, James A. Layne, and Mark
Gorchoff, and each of them individually, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution for him and in
his name, place and stead, in any and all capacities to (1) sign a Registration
Statement on Form SB-2, under the Securities Act of 1933, as amended (the
"Securities Act"), which Sandbox Entertainment Corporation, a Delaware
corporation (the "Company"), intends to file with the Securities and Exchange
Commission (the "Commission") on or before October 15, 1997 in connection with a
public offering of up to 1,300,000 shares of Series B Preferred Stock of the
Company ("Preferred Stock") on behalf of the Company and to file the same with
the Commission; (2) sign and file any and all amendments thereto; (3) sign and
file any and all registration statements and amendments thereto for the same
offering that is to be effective upon a filing pursuant to Rule 462(b) under the
Securities Act; and (4) effect the registration or qualification of the
Preferred Stock for offer and sale under the securities or Blue Sky laws of any
of the states of the United States of America, and to effect the registration of
the Company as a dealer or broker in any such state or states wherein such
registration is required or advisable for the purpose of offering or selling
therein the Preferred Stock, and to execute and file such irrevocable written
consents on the part of the undersigned to be used in such state or states as
may be requisite under the securities laws thereof in connection with said
registration or qualification of the Preferred Stock or in connection with said
registration of the Company as dealer or broker, and to appoint the appropriate
state official agent of the undersigned for the purpose of receiving and
accepting process; granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his other substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
This Power of Attorney and all authority conferred hereby shall
terminate on December 31, 1997 unless revoked in writing prior to such date.
IN WITNESS WHEREOF, the undersigned has subscribed these presents in
the capacities indicated on the date set forth opposite his signature.
/s/ Michael L. Turico
---------------------------------
Signature
Michael L. Turico
---------------------------------
Print Name
Witnessed:
/s/ Matthew Stanton
---------------------------------
Signature
Matthew Stanton
---------------------------------
Print Name
Exhibit 24(b) POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Chad M. Little, James A. Layne, and Mark
Gorchoff, and each of them individually, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution for him and in
his name, place and stead, in any and all capacities to (1) sign a Registration
Statement on Form SB-2, under the Securities Act of 1933, as amended (the
"Securities Act"), which Sandbox Entertainment Corporation, a Delaware
corporation (the "Company"), intends to file with the Securities and Exchange
Commission (the "Commission") on or before October 15, 1997 in connection with a
public offering of up to 1,300,000 shares of Series B Preferred Stock of the
Company ("Preferred Stock") on behalf of the Company and to file the same with
the Commission; (2) sign and file any and all amendments thereto; (3) sign and
file any and all registration statements and amendments thereto for the same
offering that is to be effective upon a filing pursuant to Rule 462(b) under the
Securities Act; and (4) effect the registration or qualification of the
Preferred Stock for offer and sale under the securities or Blue Sky laws of any
of the states of the United States of America, and to effect the registration of
the Company as a dealer or broker in any such state or states wherein such
registration is required or advisable for the purpose of offering or selling
therein the Preferred Stock, and to execute and file such irrevocable written
consents on the part of the undersigned to be used in such state or states as
may be requisite under the securities laws thereof in connection with said
registration or qualification of the Preferred Stock or in connection with said
registration of the Company as dealer or broker, and to appoint the appropriate
state official agent of the undersigned for the purpose of receiving and
accepting process; granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his other substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
This Power of Attorney and all authority conferred hereby shall
terminate on December 31, 1997 unless revoked in writing prior to such date.
IN WITNESS WHEREOF, the undersigned has subscribed these presents in
the capacities indicated on the date set forth opposite his signature.
/s/ Todd J. Stevens
---------------------------------
Signature
Todd J. Stevens
---------------------------------
Print Name
Witnessed:
/s/ Brian N. Burns
---------------------------------
Signature
Brian N. Burns
---------------------------------
Print Name
Exhibit 24(c) POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Chad M. Little, James A. Layne, and Mark
Gorchoff, and each of them individually, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution for him and in
his name, place and stead, in any and all capacities to (1) sign a Registration
Statement on Form SB-2, under the Securities Act of 1933, as amended (the
"Securities Act"), which Sandbox Entertainment Corporation, a Delaware
corporation (the "Company"), intends to file with the Securities and Exchange
Commission (the "Commission") on or before October 15, 1997 in connection with a
public offering of up to 1,300,000 shares of Series B Preferred Stock of the
Company ("Preferred Stock") on behalf of the Company and to file the same with
the Commission; (2) sign and file any and all amendments thereto; (3) sign and
file any and all registration statements and amendments thereto for the same
offering that is to be effective upon a filing pursuant to Rule 462(b) under the
Securities Act; and (4) effect the registration or qualification of the
Preferred Stock for offer and sale under the securities or Blue Sky laws of any
of the states of the United States of America, and to effect the registration of
the Company as a dealer or broker in any such state or states wherein such
registration is required or advisable for the purpose of offering or selling
therein the Preferred Stock, and to execute and file such irrevocable written
consents on the part of the undersigned to be used in such state or states as
may be requisite under the securities laws thereof in connection with said
registration or qualification of the Preferred Stock or in connection with said
registration of the Company as dealer or broker, and to appoint the appropriate
state official agent of the undersigned for the purpose of receiving and
accepting process; granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his other substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
This Power of Attorney and all authority conferred hereby shall
terminate on December 31, 1997 unless revoked in writing prior to such date.
IN WITNESS WHEREOF, the undersigned has subscribed these presents in
the capacities indicated on the date set forth opposite his signature.
/s/ Brian N. Burns
--------------------------------
Signature
Brian N. Burns
--------------------------------
Print Name
Witnessed:
/s/ Lonnie A. Whittington
---------------------------------
Signature
Lonnie A. Whittington
---------------------------------
Print Name
Exhibit 24(d) POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Chad M. Little, James A. Layne, and Mark
Gorchoff, and each of them individually, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution for him and in
his name, place and stead, in any and all capacities to (1) sign a Registration
Statement on Form SB-2, under the Securities Act of 1933, as amended (the
"Securities Act"), which Sandbox Entertainment Corporation, a Delaware
corporation (the "Company"), intends to file with the Securities and Exchange
Commission (the "Commission") on or before October 15, 1997 in connection with a
public offering of up to 1,300,000 shares of Series B Preferred Stock of the
Company ("Preferred Stock") on behalf of the Company and to file the same with
the Commission; (2) sign and file any and all amendments thereto; (3) sign and
file any and all registration statements and amendments thereto for the same
offering that is to be effective upon a filing pursuant to Rule 462(b) under the
Securities Act; and (4) effect the registration or qualification of the
Preferred Stock for offer and sale under the securities or Blue Sky laws of any
of the states of the United States of America, and to effect the registration of
the Company as a dealer or broker in any such state or states wherein such
registration is required or advisable for the purpose of offering or selling
therein the Preferred Stock, and to execute and file such irrevocable written
consents on the part of the undersigned to be used in such state or states as
may be requisite under the securities laws thereof in connection with said
registration or qualification of the Preferred Stock or in connection with said
registration of the Company as dealer or broker, and to appoint the appropriate
state official agent of the undersigned for the purpose of receiving and
accepting process; granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his other substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
This Power of Attorney and all authority conferred hereby shall
terminate on December 31, 1997 unless revoked in writing prior to such date.
IN WITNESS WHEREOF, the undersigned has subscribed these presents in
the capacities indicated on the date set forth opposite his signature.
/s/ Lonnie A. Whittington
----------------------------------
Signature
Lonnie A. Whittington
----------------------------------
Print Name
Witnessed:
/s/ James A. Layne
----------------------------------
Signature
James A. Layne
----------------------------------
Print Name
Exhibit 24(e) POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Chad M. Little, James A. Layne, and Mark
Gorchoff, and each of them individually, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution for him and in
his name, place and stead, in any and all capacities to (1) sign a Registration
Statement on Form SB-2, under the Securities Act of 1933, as amended (the
"Securities Act"), which Sandbox Entertainment Corporation, a Delaware
corporation (the "Company"), intends to file with the Securities and Exchange
Commission (the "Commission") on or before October 15, 1997 in connection with a
public offering of up to 1,300,000 shares of Series B Preferred Stock of the
Company ("Preferred Stock") on behalf of the Company and to file the same with
the Commission; (2) sign and file any and all amendments thereto; (3) sign and
file any and all registration statements and amendments thereto for the same
offering that is to be effective upon a filing pursuant to Rule 462(b) under the
Securities Act; and (4) effect the registration or qualification of the
Preferred Stock for offer and sale under the securities or Blue Sky laws of any
of the states of the United States of America, and to effect the registration of
the Company as a dealer or broker in any such state or states wherein such
registration is required or advisable for the purpose of offering or selling
therein the Preferred Stock, and to execute and file such irrevocable written
consents on the part of the undersigned to be used in such state or states as
may be requisite under the securities laws thereof in connection with said
registration or qualification of the Preferred Stock or in connection with said
registration of the Company as dealer or broker, and to appoint the appropriate
state official agent of the undersigned for the purpose of receiving and
accepting process; granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his other substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
This Power of Attorney and all authority conferred hereby shall
terminate on December 31, 1997 unless revoked in writing prior to such date.
IN WITNESS WHEREOF, the undersigned has subscribed these presents in
the capacities indicated on the date set forth opposite his signature.
/s/ James A. Layne
---------------------------
Signature
James A. Layne
---------------------------
Print Name
Witnessed:
/s/ Michael S. Turico
---------------------------
Signature
Michael S. Turico
---------------------------
Print Name
Exhibit 24(f) POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Chad M. Little, James A. Layne, and Mark
Gorchoff, and each of them individually, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution for him and in
his name, place and stead, in any and all capacities to (1) sign a Registration
Statement on Form SB-2, under the Securities Act of 1933, as amended (the
"Securities Act"), which Sandbox Entertainment Corporation, a Delaware
corporation (the "Company"), intends to file with the Securities and Exchange
Commission (the "Commission") on or before October 15, 1997 in connection with a
public offering of up to 1,300,000 shares of Series B Preferred Stock of the
Company ("Preferred Stock") on behalf of the Company and to file the same with
the Commission; (2) sign and file any and all amendments thereto; (3) sign and
file any and all registration statements and amendments thereto for the same
offering that is to be effective upon a filing pursuant to Rule 462(b) under the
Securities Act; and (4) effect the registration or qualification of the
Preferred Stock for offer and sale under the securities or Blue Sky laws of any
of the states of the United States of America, and to effect the registration of
the Company as a dealer or broker in any such state or states wherein such
registration is required or advisable for the purpose of offering or selling
therein the Preferred Stock, and to execute and file such irrevocable written
consents on the part of the undersigned to be used in such state or states as
may be requisite under the securities laws thereof in connection with said
registration or qualification of the Preferred Stock or in connection with said
registration of the Company as dealer or broker, and to appoint the appropriate
state official agent of the undersigned for the purpose of receiving and
accepting process; granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his other substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
This Power of Attorney and all authority conferred hereby shall
terminate on December 31, 1997 unless revoked in writing prior to such date.
IN WITNESS WHEREOF, the undersigned has subscribed these presents in
the capacities indicated on the date set forth opposite his signature.
/s/ Matthew D. Stanton
---------------------------------
Signature
Matthew D. Stanton
---------------------------------
Print Name
Witnessed:
/s/ Thomas H. Curzon
---------------------------------
Signature
Thomas H. Curzon
---------------------------------
Print Name
Exhibit 24(g) POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Chad M. Little, James A. Layne, and Mark
Gorchoff, and each of them individually, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution for him and in
his name, place and stead, in any and all capacities to (1) sign a Registration
Statement on Form SB-2, under the Securities Act of 1933, as amended (the
"Securities Act"), which Sandbox Entertainment Corporation, a Delaware
corporation (the "Company"), intends to file with the Securities and Exchange
Commission (the "Commission") on or before October 15, 1997 in connection with a
public offering of up to 1,300,000 shares of Series B Preferred Stock of the
Company ("Preferred Stock") on behalf of the Company and to file the same with
the Commission; (2) sign and file any and all amendments thereto; (3) sign and
file any and all registration statements and amendments thereto for the same
offering that is to be effective upon a filing pursuant to Rule 462(b) under the
Securities Act; and (4) effect the registration or qualification of the
Preferred Stock for offer and sale under the securities or Blue Sky laws of any
of the states of the United States of America, and to effect the registration of
the Company as a dealer or broker in any such state or states wherein such
registration is required or advisable for the purpose of offering or selling
therein the Preferred Stock, and to execute and file such irrevocable written
consents on the part of the undersigned to be used in such state or states as
may be requisite under the securities laws thereof in connection with said
registration or qualification of the Preferred Stock or in connection with said
registration of the Company as dealer or broker, and to appoint the appropriate
state official agent of the undersigned for the purpose of receiving and
accepting process; granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his other substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
This Power of Attorney and all authority conferred hereby shall
terminate on December 31, 1997 unless revoked in writing prior to such date.
IN WITNESS WHEREOF, the undersigned has subscribed these presents in
the capacities indicated on the date set forth opposite his signature.
/s/ John E. Hall
-------------------------------
Signature
John E. Hall
-------------------------------
Print Name
Witnessed:
/s/ Paul Huleatt
-------------------------------
Signature
Paul Huleatt
-------------------------------
Print Name
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLAR
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-01-1996 JUN-30-1997
<EXCHANGE-RATE> 1 1
<CASH> 20,519 1,952
<SECURITIES> 0 0
<RECEIVABLES> 467,475 1,947
<ALLOWANCES> (1,355) 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 498,178 7,872
<PP&E> 389,623 600,594
<DEPRECIATION> (167,524) (229,299)
<TOTAL-ASSETS> 750,155 409,043
<CURRENT-LIABILITIES> 298,028 938,490
<BONDS> 0 0
0 0
1,575,000 1,585,000
<COMMON> 305,793 341,015
<OTHER-SE> (1,944,527) (2,880,150)
<TOTAL-LIABILITY-AND-EQUITY> 750,155 409,043
<SALES> 396,167 77,757
<TOTAL-REVENUES> 396,167 77,757
<CGS> 0 0
<TOTAL-COSTS> 1,797,444 950,377
<OTHER-EXPENSES> 528 (1,634)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 76,760 64,637
<INCOME-PRETAX> (1,477,509) (935,623)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,477,509) (935,623)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,477,509) (935,623)
<EPS-PRIMARY> (.76) (0.46)
<EPS-DILUTED> (.76) (0.46)
</TABLE>
