As filed with the Securities and Exchange Commission on November 21, 1997
Registration No. 333-36787
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
SANDBOX ENTERTAINMENT CORPORATION
(Exact name of Registrant as specified in its charter)
---------------
<TABLE>
<S> <C> <C>
Delaware 7372 86-0699474
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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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................................. 725,000 Shares $6,086,400 $1,844.37
Common Stock, $.001 par value (3) 725,000 Shares
</TABLE>
(1) Includes 70,820 shares of Series B Convertible Preferred Stock (assuming an
offering price of $7.63 per share) to be issued upon conversion of certain
convertible promissory notes in the aggregate principal amount of $540,000,
which automatically convert effective upon consummation of this offering,
provided that if the Registration Statement is not declared effective by
the Commission on or before November 21, 1997, certain of such notes in the
aggregate principal amount of $270,000 shall not be automatically converted
and shall become convertible, at the option of the holder, into shares of
Series A Preferred Stock at a conversion price of $4.80 per share. 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 Series B Preferred Stock upon conversion of the Series B 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.
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2
<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 NOVEMBER 21, 1997
725,000 Shares
[SANDBOX ENTERTAINMENT LOGO]
Series B Convertible Preferred Stock
(par value $.001 per share)
Of the 725,000 shares of Series B Convertible Preferred Stock ("Series B
Preferred Stock") offered hereby, 654,180 are being sold by Sandbox
Entertainment Corporation ("Sandbox" or the "Company") and 70,820 shares are
being issued upon conversion of certain convertible promissory notes in the
aggregate amount of $540,000 effective upon consummation of this offering,
provided that if the Registration Statement of which this Prospectus is a part
is not declared effective by the Securities and Exchange Commission on or before
November 21, 1997, certain of such notes in the aggregate principal amount of
$270,000 shall not be automatically converted and shall become convertible, at
the option of the holder, into shares of Series A Preferred Stock at a
conversion price of $4.80 per share. The Series B Preferred Stock will be
subject to substantial restrictions on transfer and conversion under the
Company's Certificate of Incorporation for up to two years following completion
of the offering, and are mandatorily convertible into Common Stock on the date
180 days following the consummation of a Qualifying Public Offering. See
"Description of Capital Stock". There has been no public market for any class or
series of capital stock of the Company and it is unlikely that a public market
in the Series B Preferred Stock will develop for at least as long as such stock
is subject to restrictions on transfer. In addition, there is no assurance that
a public market will ever develop for Series B Preferred Stock, for Common Stock
into which it is convertible, or for any other class or series of capital stock
of the Company. 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 $6.75 and $8.50
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.
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 TO RESIDENTS OF
THE STATE OF NEW HAMPSHIRE OR ANY OTHER STATE IN WHICH SUCH OFFER, SOLICITATION
OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
---------------
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 Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended, and to issue warrants to the Underwriters, exercisable commencing
one year after the date of consummation of this offering and with a
five-year term, 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 Underwriters as specified
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the Series
B Convertible Preferred Stock will be made against payment therefor at the
offices of Wit Capital Corporation in New York, New York or through the
facilities of the Depository Trust Corporation, on or about _____________, 1997.
WIT CAPITAL CORPORATION
---------------
The date of this Prospectus is ___________, 1997
<PAGE>
- --------------------------------------------------------------------------------
[Inside Cover]
Sandbox - The Interactive Entertainment Network
Nonfunctional, pictorial representation of www.sandbox.net, the Company's home
Web page, showing text, links to the Company's other Web sites - CNNfn FINAL
BELL and CNN/SI SPORTSIM, 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 functional 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.
Nonfunctional, pictorial representation of www.finalbell.com, the Company's
Final Bell Web home page, showing text, banner advertisement, 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 functional 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.
[Pull Out Right]
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
SportSim - The Ultimate Sports Fantasy Site for Any Fan
Nonfunctional, pictorial representation of www.sportsim.com, the Company's
SportSim Web home page, showing text, 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 functional 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 Underwriters.
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
Recent Developments............................................................8
The Offering..................................................................10
Risk Factors..................................................................14
Venture Capital Investing.....................................................29
Use of Proceeds...............................................................31
Dividend Policy...............................................................32
Capitalization................................................................32
Dilution......................................................................34
Selected Financial Data.......................................................35
Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................36
Business......................................................................42
Management....................................................................59
Certain Transactions..........................................................64
Principal Stockholders........................................................67
Description of Capital Stock..................................................71
Shares Eligible For Future Sale...............................................75
Underwriting..................................................................77
Legal Matters.................................................................79
Experts.......................................................................79
Available Information.........................................................79
Index to Financial Statements................................................F-1
Appendix A...................................................................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 may revocably consent 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 BellSM and
SportSimSM 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 headings "Risk Factors" and "Venture Capital Investing".
Except as otherwise specified, all information in this Prospectus reflects a
six-for-one 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 "Special Note on Forward-Looking Statements".
This offering is intended as a public venture capital offering to be
distributed primarily over the Internet. However, this offering lacks certain of
the contractual features that commonly benefit investors in traditional venture
capital offerings. See "Venture Capital Investing". The Company seeks to raise
capital by offering small investors who desire to make an investment in an early
stage developing company the opportunity to do so without the substantial
capital commitment typical in a private placement of securities. The Company
requires additional financial resources to offset its operating losses and net
capital deficiency as it moves from early stage toward fuller scale deployment
of its technology. 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 approximately the next 15
months.
The Company
Sandbox 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.
From its formation in 1992 until mid 1995 the Company's principal business
was traditional and interactive marketing on a fee-for-service basis for client
companies. The Company introduced its first Internet game, Cyberhunt, in May
1995 in a joint venture with On Word Information Incorporated. The Company
believes that Cyberhunt was one of the first games available on the Internet.
Based on the favorable response to Cyberhunt, the Company decided to change its
business focus to the production of interactive games and simulations for the
Internet. Accordingly, the Company hired key members of its engineering staff,
including engineers who had worked on developing the core technology used in
Cyberhunt for several years while at Motorola and acquired a license to the
technology from Motorola. The Company also began acquiring equipment to support
its new business strategy, and commenced a phase-out of its fee-for-service
business.
The Company has produced six games and simulations for the Internet through
October 31, 1997. The Company's first product, Cyberhunt, required participants
to solve puzzles and riddles. The Company introduced the game in May 1995
principally as a proof of concept, but sold a commercial version that first
generated revenues in March 1996
6
<PAGE>
and ran until February 1997. Certain important features of the software
developed for Cyberhunt have been used in the Company's subsequent games and
simulations, including dynamic page creation, header and footer technology that
provides dynamic navigation, registration mechanisms, and the ability to display
dynamic advertising. The Company produced Road Trip to the Super Bowl XXX from
October 1995 through January 1996, however it did not produce cash revenues.
This simulation introduced the Company's "integrated advertising" concept, which
offers advertisers the opportunity to integrate their promotions within a
specific game or simulation on a Web site. Road Trip to the Super Bowl XXX
allowed participants to click out of the game site and into an advertiser's site
in search for clues that eventually led participants back to the game site. The
Company next introduced Road Trip to the College World Series, which ran from
March 1996 until May 1996. Players accumulated points by solving timed puzzles
and trivia questions, and responding appropriately to certain random events.
Based on points accumulated, participants could select prizes. The Road Trip
simulations took Web participants on cross-country excursions, and allowed them
to compete for prizes while they watched actual travelers encounter famous
landmarks and fascinating cities across the United States. The Court of Last
Resort was a Web-based simulation for the resolution of disputes between
ordinary people. Participants were solicited to offer real disputes, and
"jurors" could listen to RealAudio "testimonies", review evidence and cast their
vote. The Court of Last Resort did not feature a competitive element and was
designed primarily for entertainment. The Court of Last Resort ran from the
Spring of 1996 to February 1997, but did not produce cash revenues.
The Company's current games and simulations consist of Final Bell and
SportSim. Final Bell, which was first commercially introduced in November 1996,
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. In a July 1997 ranking, Final Bell was
ranked third among the most active investment sites on the Web by Lycos, Inc.,
an Internet navigation service that also furnishes Web site reviews, and at
October 31, 1997, there were 18,149 active portfolios in game number 6 of Final
Bell. Final Bell was the Company's first simulation to incorporate significant
input from a development partner (Charles Schwab & Co., Inc.) and use of
informal surveys to establish that participants interested in the stock market
and investing represented an attractive target market to advertisers and their
agencies. SportSim, which first generated revenues in September 1997, gives
participants the ability to play sports fantasy leagues on-line by building and
competing with their own fantasy teams. Participants draft teams of real world
professional athletes and compete against each other to earn points based upon
the actual performances of these athletes in actual games. SportSim fully
automates the drafting and trading process to simplify league management and
provides for more sophisticated gaming. Fantasy Football, the initial SportSim
game was launched on July 15, 1997, and 108,736 teams were participating as of
November 10, 1997, making it, in the Company's estimation, the largest fantasy
football game on the Internet.
The Company generates advertising revenues from the sale of sponsorships or
"integrated advertising." By involving advertisers in the creation of a message,
Sandbox seeks to differentiate itself from the many Internet companies competing
through banner sales for limited advertising dollars. The Company also generates
advertising revenues from the sale of banners, a form of Internet advertising
similar to billboards on which users can click to visit an advertiser's Web site
to get further information about the advertiser or its products. 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. One key element in this strategy is the Company's ability to manage
its costs in creating new games and simulations by building on technology
developed in prior games and simulations. As an example, the Company developed
Fantasy Basketball, the second SportSim game, using many of the techniques
developed in Fantasy Football with no additions to its creative staff, although
the Company made substantial equipment acquisitions in connection with these
products. Fantasy Basketball was launched on October 21, 1997, and 48,040 teams
were participating as of November 6, 1997. In response to the popularity of
Mid-Season Football, which the Company offered to permit persons who missed
drafting a team at the beginning of the season to participate, the Company
intends to offer a Second-Season Basketball game in February 1998. 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 and traffic among
Internet users. In June and July 1997, Sandbox entered into Co-
7
<PAGE>
Branding and Marketing Agreements with CNNfn and CNN/SI, affiliates of the Cable
News Network, Inc. ("CNN") and of the Turner Broadcasting System. 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. 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. With respect to the CNNfn Agreement, any other merchandising or
licensing net revenues are divided on a 70/30 basis, with Sandbox entitled to
70%, and with respect to the CNN/SI Agreement, such revenues are divided evenly.
Generally, the CNN Agreements provide that where extraordinary costs are
required to integrate advertisements or sponsorships, and the parties agree to
such costs, the parties split such costs evenly. Under these agreements, Sandbox
retains all rights to its proprietary simulations as well as ownership of the
related participant databases. See "Business - Advertising and Sales -
Co-Branding and Marketing Agreements with CNN/SI and CNNfn". The Company spent
substantial time, effort and money during the first six months of 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
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 28,500,000 in October 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 seeks to use its proprietary technology embodied in its games
and simulations 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 309,467 at November 10, 1997.
At October 31, 1997, Sandbox had 25 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 was originally incorporated in Arizona as Tracer Design, Inc. on
February 25, 1992 and 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.
RECENT DEVELOPMENTS
$558,000 of written commitments from IBM, Saturn, MetLife and Quicken
Financial Network have been executed with the Company for "integrated
advertising" on its Web site since the execution of the CNN agreements in June
and July 1997. Of this amount, $514,000 relates to periods after October 1,
1997. These agreements include an agreement with IBM providing for $180,000 in
cash to the Company to sponsor the Trade Center and other simulatings 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 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, and an agreement with Quicken Financial Network providing for $60,000 in
cash to the Company to sponsor a promotional contest in Final Bell. Except
within a given sponsor's product or service category, co-branding and
sponsorships do not reduce the Company's available inventory of banner
advertising. During the four-month period ending October 31, 1997, the Company
also invoiced approximately $35,850, $18,000, and $4,250 to iVillage, MetLife
and American Express, respectively, for banner advertising.
8
<PAGE>
The Company continues to explore other opportunities to increase revenues by
leveraging its existing technology, game platforms and co-branding
relationships. The Company is currently in negotiations with a development
partner with expertise in CD-ROM content, production and distribution to create
a new sports and entertainment related game for the Internet. This partner would
provide capital and its substantial brand name, which would in turn assist the
Company in maintaining what it believes to be a leading position in the sports
market on the Web.
In addition, the following four concepts are currently being developed for
1998 by Sandbox and Turner Interactive Sales, the marketing group for CNN: (i) a
private label version of CNNfn Final Bell to be used as a training service for
account holders of a leading online brokerage and mutual fund firm, (ii) a
European edition of Final Bell, (iii) a new licensed game to support the
marketing goals of a major satellite programming distributor and (iv) an
arrangement with a leading consumer products company to provide banner
advertising and sponsorship opportunities on Final Bell in exchange for prizes.
These concepts are in various stages of development and there can be no
assurance that any or all of these concepts will be completed.
9
<PAGE>
The Offering
<TABLE>
<S> <C>
Issue............................................... 654,180 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). The Company has never declared or paid cash
dividends on its capital stock and does not anticipate
doing so in the foreseeable future. The Company's current
bank financing 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 the bank's prior written consent, and the
Company anticipates that any future bank or other
institutional financing will contain a substantially
similar restriction.
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 certain
antidilution adjustments. Automatically converts into
Common Stock at the then applicable conversion rate 180
days following consummation of a Qualifying Public
Offering. The Restricted Period begins on the date of the
closing of this offering and ends on the earlier of (i) 24
months following the date of the closing of this offering,
(ii) 180 days after the consummation of a Qualifying Public
Offering, or (iii) the occurrence of certain events which
result in a change in control of the Company. A Qualifying
Public Offering means a firm commitment underwritten public
offering immediately 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), but does not include another "public venture
capital transaction" in which the securities issued are not
freely transferable following issuance. See "Description of
Capital Stock - Series B Preferred Stock - Conversion;
Restrictions on Transfer".
Liquidation Preference.............................. The offering price per share, subject to certain
antidilution adjustments. See "Description of Capital
Stock - Series B Preferred Stock".
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).
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
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
a manner consistent with the best interests of the Company,
in its sole and absolute discretion, or (5) by the
Underwriters in connection with the initial distribution of
the Series B Preferred Stock.
Capital Stock to be outstanding after the offering.. 526,397 shares of Common Stock (1)
330,211 shares of Series A Preferred Stock (2)
725,000 shares of Series B Preferred Stock (3)
2,210,767 shares of Common Stock on a fully diluted basis
(4)
</TABLE>
<TABLE>
<CAPTION>
Percentage of
Use of Proceeds.................................... Purpose Amount(5) Net Proceeds
------- --------- ------------
<S> <C> <C>
Staffing Costs $1,466,000 34%
Product and
Services Marketing
and Development 1,291,000(6) 30%
Reduction of Debt 1,212,423(7) 28%
Working Capital 372,659(6) 8%
------------- -----
$4,342,082 100%
See "Use of Proceeds".
</TABLE>
(1) Based on 526,397 shares outstanding as of September 30, 1997 and excludes
(a) 100,506 shares of Common Stock Tissuable upon exercise of outstanding stock
options, (b) 166,268 shares of Common Stock issuable upon exercise of
outstanding warrants, (c) 187,129 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 330,211 shares outstanding as of September 30, 1997 and excludes
122,921 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 52,335 shares issuable upon exercise of warrants granted
to the Underwriters effective upon the commencement of this offering at 110% of
the public offering price and includes 70,820 shares issuable upon conversion of
certain convertible promissory notes effective upon consummation of this
offering, provided that if the Registration Statement of which this Prospectus
is a part is not declared effective by the Securities and Exchange Commission on
or before November 21, 1997, certain of such notes in the aggregate principal
amount of $270,000 shall not be automatically converted and shall become
convertible, at the option of the holder, into shares of Series A Preferred
Stock at a conversion price of $4.80 per share. 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) Assumes an offering price of $7.63 per share.
(6) The Company has acquired an additional $678,000 of equipment in anticipation
of the commencement of its SportSim basketball season and mid-season football.
This additional equipment was financed by the vendor in October 1997, on net
45-day credit terms. The Company intends to finance the $678,000 under an
equipment lease financing line of credit of $1,000,000 which the Company is
currently negotiating. If such lease financing is not available on terms
acceptable to the Company, the Company may need to use proceeds from this
offering to pay for
11
<PAGE>
some or all of such equipment, which would reduce the funds otherwise available
for working capital and marketing or development. See "Risk Factors - Need for
Additional Financing". In addition, the Company has reached an agreement in
principle to settle certain potential claims for, among other things,
contributory copyright infringement. The agreement requires the Company to issue
a term promissory note in the principal amount of $30,000 due 90 days after its
issuance. If a formal settlement agreement is consummated, the Company would use
proceeds from this offering to pay such note. See "Risk Factors - Potential
Liability for Internet Content; Kolbe/Humanagement Litigation".
(7) Includes $500,000 to repay a revolving bank line of credit due March 5,
1998, bearing interest at a prime rate of 1.5%, which may be reborrowed through
the term of the agreement.
12
<PAGE>
Summary Consolidated Financial Data
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30
--------------------------------------------------------
Statement of Operations Data: 1995 1996 1996 1997
<S> <C> <C> <C> <C>
Internet revenues ............ $ -- $ 241,322 $ 80,512 $ 171,319
Non-Internet revenues (1) .... 462,417 154,845 150,751 --
----------- ----------- ----------- -----------
Total revenues .......... 462,417 396,167 231,263 171,319
Production and engineering
Expenses ................... 594,219 986,593 760,908 786,017
Sales and marketing expenses . 130,760 505,954 347,438 502,655
General and administrative
Expenses ................... 223,676 304,897 222,882 358,025
----------- ----------- ----------- -----------
Total operating expenses 948,655 1,797,444 1,331,228 1,646,697
----------- ----------- ----------- -----------
Operating loss ............... (486,238) (1,401,277) (1,099,965) (1,475,378)
Other expense, net ........... 20,852 76,232 43,289 145,987
----------- ----------- ----------- -----------
Net loss ..................... $ (507,090) $(1,477,509) $(1,143,254) $(1,621,365)
=========== =========== =========== ===========
Net loss per common share (2) $ (0.69) $ (1.84) $ (1.44) $ (1.94)
Shares used in computation (2) 739,311 801,652 794,199 834,460
</TABLE>
September 30, 1997
-------------------------------
Actual As Adjusted (3)
Balance Sheet Data:
Cash and cash equivalents ............... $ 311,981 $ 3,441,640
Working capital (deficit) ............... (1,315,082) 2,886,992
Total assets ............................ 1,457,440 4,465,172
Notes payable ........................... 500,000 --
Long term debt, including current portion 2,077,131 878,125
Total stockholders' equity (deficit) .... (1,599,258) 3,237,824
(1) Non-Internet revenues are revenues generated from the production of
traditional and interactive marketing programs and materials for client
companies.
(2) 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).
(3) Adjusted to give effect to the sale of 654,180 shares of Series B Preferred
Stock offered by the Company hereby at an assumed public offering price of $7.63
per share, and the application of the proceeds thereof, and 70,820 shares of
Series B Preferred Stock issuable upon the conversion of certain convertible
promissory notes effective upon consummation of this offering, provided that if
the Registration Statement of which this Prospectus is a part is not declared
effective by the Securities and Exchange Commission on or before November 21,
1997, certain of such notes in the aggregate principal amount of $270,000 shall
not be automatically converted and shall become convertible, at the option of
the holder, into shares of Series A Preferred Stock at a conversion price of
$4.80 per share. See "Use of Proceeds" and "Capitalization".
13
<PAGE>
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 Company
believes that the "Risk Factors" discussed below addresses all material
uncertainties known to the Company as of the date of 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; Continuation as a Going Concern
There is no public market for the shares of Series B Preferred Stock or the
Common Stock into which they are 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, it is unlikely that a purchaser of
Series B Preferred Stock offered hereby will 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.
The Company is incurring operating losses as it moves from early stage
toward more full scale deployment of its technologies. The operating losses have
created a net capital deficiency of $1,599,258 at September 30, 1997, 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".
Need for Additional Financing
The Company believes that the net proceeds from this offering, together with
available funds, including the Company's bank and existing and proposed
equipment lease lines of credit and revenues from contracts currently in place,
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for approximately 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 has acquired an additional $678,000
of equipment to accommodate of the commencement of its SportSim basketball
season and mid season football. This additional equipment was financed by the
vendor in October 1997 on net 45-day credit terms. The Company intends to
finance the $678,000 under an equipment lease financing line of credit of
$1,000,000 which the Company is currently negotiating. If such lease financing
is not available on terms acceptable to the Company, the Company may need to use
proceeds from this offering to pay for such equipment, which could have a
material adverse effect on the Company's business prospects, financial condition
or operating results.
14
<PAGE>
Limited Venture Capital Rights
The Company is engaging in a public offering of its Series B Preferred Stock
as an alternative to another round of venture capital financing. Venture capital
investing generally requires the assumption of significantly greater investment
risks than those incurred when investing in the securities of established public
companies, including the risk of complete loss of investment. Contractual
protections often obtained by venture capital investors include, among other
things, the right to representation on the Board of Directors, veto rights over
certain corporate actions and preemptive rights to purchase a pro rata share of
new issuances of securities. As more particularly described under "Description
of Capital Stock - Series B Preferred Stock", the holders of Series B Preferred
Stock will have certain anti-dilution rights and the right to vote separately as
a class to approve any material or adverse change in the rights, preferences or
privileges of the holders of Series B Preferred Stock, any increase in the
number of shares of Series B Preferred Stock, 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, any merger, consolidation, or
corporate reorganization, and certain business transactions resulting in a
change in control. However, purchasers of Series B Preferred Stock in this
public offering will not have many of the rights typically granted to venture
capital investors in a private offering. See "Venture Capital Investing".
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. 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
pay-for-play opportunities (i.e., 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.
Anticipation of Continuing Losses and Cash Flow Deficits; 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 September 30,
1997, the Company had a working capital deficiency of $1,315,082 and a negative
net worth of approximately $1,599,000, and during the nine months ended
September 30, 1997 experienced average monthly operating cash requirements (net
loss plus principal repayments under capital lease obligations and term notes)
of approximately $192,000, which requirements are projected to significantly
increase in the immediate future as the Company implements certain planned
increases in capital and 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
15
<PAGE>
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".
Unpredictability of Future Revenues and Profitability; Potential Fluctuations in
Quarterly Operating Results; Seasonality
To be successful, the Company believes it will be required 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. To date,
much of the advertising delivered by the Company has been in the form of barter,
in which the Company has exchanged advertising on its Web sites for advertising,
editorial and software content and prizes. The Company began marketing the
CD-ROM version of CNN Final Bell in September 1997 and less than 300 copies have
been sold to date. The Company has 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 simulations, and fees from licenses of its gaming
engines, 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
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 games and simulations, 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.
16
<PAGE>
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 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 growth in such revenues 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, has 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
17
<PAGE>
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. Since the execution of the CNN agreements, the
Company has entered into agreements with IBM, MetLife, Saturn Corporation and
Quicken Financial Network to act as sponsors. See "Business - Strategy".
However, there can be no assurance that advertisers in significant volume will
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".
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 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 and implement its business plan to generate
revenues through product sales. The Company began marketing the CD-ROM version
of CNNfn Final Bell in September 1997 and less than 300 copies have been sold to
date. At November 10, 1997, 108,726 teams were participating in the fantasy
football game in SportSim and there were 18,149 active portfolios in game number
6 of CNNfn Final Bell. Fantasy Basketball, the second SportSim game, was
launched on October 21, 1997, and 48,040 teams were participating as of November
6, 1997. However, there are no assurances that these games or the related CD-ROM
offerings will be successful.
18
<PAGE>
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 required to operate new games or simulations, or that
the parameters to be set by the players themselves in future simulations will
generate interest in such 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 recently entered into Co-Branding and Marketing Agreements with
CNN/SI and CNNfn. The CNN/SI agreement was entered into on June 20, 1997 and is
in effect through October 31, 1998, with an option at CNN's discretion to renew
for up to two subsequent one-year terms. The CNNfn agreement was entered into on
July 11, 1997 and is in effect through July 15, 1999. The agreements generally
provide that the Company will develop, maintain, host, update and support a
CNNfn Final Bell Web site based on Sandbox's Final Bell stock market simulation
game and a CNN/SI SportSim Web site 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. Before implementing new games, CNN will advise the Company
of its required input for the design of such games and the Company 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 of the
agreements. The commercial launch of new games will be determined by mutual
agreement of the parties. CNNfn and CNN/SI have the right to use the games to
advertise the CNNfn Final Bell and CNN/SI SportSim Web sites (the "Sites"),
respectively, and the availability of the games. CNN/SI and CNNfn have agreed to
use reasonable efforts to promote the games and the Sites, and to build traffic
for the games and Sites in accordance with a promotional plan.
The CNN agreements provide that both parties will cooperate regarding the
sale of banner advertising (a form of Internet advertising similar to
billboards) and sponsorships (integration of an advertiser's name and promotion
into the game or simulation itself) for the Sites, but CNN retains primary
control over the sale of banner advertising and the Company retains primary
control over the sale of sponsorships. Each party is responsible for billing,
invoicing, and collection activities related to its sales activities. The
Company is responsible for all development, maintenance, hosting, updating and
support costs, as well as the costs of obtaining all third-party rights and
compliance with all sweepstakes and gaming rules and regulations and any prize
fulfillment activities. The Company is also required to implement a tracking
system to monitor traffic on the sites, page views and other relevant data, and
is required to deliver monthly reports to CNN. In addition, the Company is
responsible for proper insertion and rotation of all
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advertising and sponsorships and is required to maintain accurate logs. Where
extraordinary costs are required to integrate an advertiser, 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 create a CD-ROM enhancement for each game, as
agreed by the parties, that includes CNN/SI and CNNfn elements and features
heavier use of graphics and animation and an enhanced non-cash prize structure.
The Company retains ownership of such CD-ROM products (except to the CNN
elements therein), while net revenues from the sale of CD-ROM products through
mutually agreed channels are generally divided evenly among the parties. During
the term of the agreements, the parties may discuss merchandising and/or
licensing opportunities, which may be exploited only pursuant to mutual
agreement of the parties. Any other merchandising or licensing net revenues
relating to the games, Sites or the CD-ROM products are divided evenly among the
parties with respect to the CNN/SI Agreement and on a 70/30 basis with respect
to the CNNfn Agreement, with the Company entitled to 70%. The Company retains
all rights to its games and simulations as well as ownership of participant
databases.
The Company's strategy contemplates that the CNN agreements, and the
Company's relationship with CNN, will result, over time, in the generation of
significant cash revenues for the Company, although there can be no assurance
that such revenues will be realized. Although the Company believes that the
production and marketing costs associated with CD-ROM game enhancements are
relatively low, the Company's initial marketing of the CNNfn Final Bell CD-ROM
has not been successful in producing significant revenues. The costs to the
Company of complying with its obligations under the agreements are substantial,
and there are no assurances that the costs to develop, maintain, host, update
and support the Sites and games will be offset by additional revenues. The
failure to produce significant revenues pursuant to the CNN agreements 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 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. Furthermore, CNN/SI and
CNNfn have substantial discretion in the substance and quantity of 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 avenues to generate
profits for the Company. The termination or expiration without renewal of either
of these agreements and/or the deterioration of the Company's relationship with
CNN could have a material adverse effect on the Company's business, prospects,
financial condition or operating results. See "Business - Advertising and
Sales".
In addition to the CNN Co-Branding and Marketing Agreements, the Company has
used barter arrangements to significantly increase brand recognition and traffic
to its Web sites 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 expired on
November 13, 1997 but continues on a month to month basis, 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
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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 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. The Company has reached an agreement in principal
with plaintiffs to settle this matter, the terms of which provide that the
Company will issue a promissory note to plaintiffs in the principal amount of
$30,000 due 90 days after its issuance, and that each party will agree to
release any and all claims it may have against the other upon payment of the
note in full by the Company. The preliminary injunction granted against the
defendants has not had any material adverse effect on the Company. In the event
that a formal settlement agreement is not consummated, there can be no assurance
that the Company 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 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
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sponsorship 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 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 significantly in the
future.
Management believes that the Company's most significant competitors for its
fantasy football game and future sports-related games and simulations are ESPNet
SportsZone and CBS 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, 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, substantially larger
participant or membership bases and broader product and service offerings than
the Company. Therefore, such competitors 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 could 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 and
generate sufficient revenues to achieve profitability. 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 years it will hire
approximately 58 full time employees: 23 in production, 17 in engineering; 16 in
sales and marketing and 2 in general and administrative. Although the resulting
increase in staffing costs will be substantial, the Company intends to manage,
to the extent possible, its personnel costs by filling projected positions only
when 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,
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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, Mark Gorchoff 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. Except for Messrs. Layne and Whittington, the
Company has entered into employment agreements or engagement letter agreements
with the individuals named above that 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. A
state court may not enforce or may only partially enforce such covenants, and
the costs to the Company of seeking to enforce such covenants may be
substantial. The Company has applied for a "key person" life insurance policy on
Chad M. Little, the Company's Chief Executive Officer, in the amount of $5
million, but there can be no assurance that such a policy can be obtained on
terms satisfactory to the Company. 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 58 full time employees over the next two 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".
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
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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, or
lack of 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; Dependence on Third-Party Providers
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 $443,000,
more than doubled the Company's capacity to handle traffic to its Web sites. In
addition, the Company has acquired an additional $678,000 of equipment in
anticipation of the commencement of its SportSim basketball season and
mid-season football. Furthermore, as additional games and simulations are
brought on-line, 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 have been effective, there can be no assurance 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 can be no assurance
that it will accurately foresee traffic levels, system requirements or other
factors 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 or operating results.
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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 can be
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 might 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, or as to 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.
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
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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. See "Risk Factors - Potential Liability for Internet Content;
Kolbe/Humanagement Litigation".
During the year ending December 31, 1996, the Company paid out approximately
$6,953 in cash prizes, and during the nine-month period ending September 30,
1997, the Company paid out approximately $16,325 in cash prizes. In addition to
cash prizes, the Company also awards non-cash prizes to participants. Non-cash
prizes are provided by sponsors or purchased by the Company in exchange for cash
or advertising. The cost to the Company for non-cash prizes during the year
ending December 31, 1996 and the nine-month period ending September 30, 1997 was
$46,694 and $37,053, respectively. 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".
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 in this "Risk
Factors" section, 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 in these "Risk Factors", the business and operations of the Company
are subject to substantial risks which increase the uncertainties inherent in
the forward-looking statements
26
<PAGE>
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. See "Special Note on Forward-Looking Statements".
Allocation of Proceeds to Debt Reduction; Management's Discretion as to Use of
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.
Specifically, the Company intends to allocate $712,423 of the proceeds for
repayment of debt that will benefit officers, directors and other affiliated
parties. In addition, the Company intends to finance $678,000 of equipment under
an equipment lease line of credit of $1,000,000, which the Company is currently
negotiating. If such lease financing is not available on terms acceptable to the
Company, the Company may need to use a portion of the proceeds from this
offering to pay for such equipment. See "Use of Proceeds". Pending such uses,
the Company intends to invest the net proceeds from this offering in short-term,
investment-grade, interest-bearing securities. The Board of Directors and
management of the Company will have significant flexibility in applying the net
proceeds of this offering allocated to working capital. The failure of
management to apply such funds effectively could have a material adverse effect
on the Company's business, prospects, financial condition or operating results.
See "Use of Proceeds".
Determination of the Offering Price
The offering price for the Series B Preferred Stock has been determined by
the Underwriters 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 were considered in determining the
offering price were 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, holders of Series A Preferred Stock and
members of the Company's senior management will have the ability to vote in the
aggregate 46% 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,
may be able to control all matters requiring shareholder approval, including the
election of directors and approval of significant corporate transactions, except
for certain limited matters as to which the holders of Series B Preferred Stock
vote as a separate class. Such control, if exercised, 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
Excluding shares of Series B Preferred Stock issuable upon exercise of
warrants granted to the Underwriters effective upon commencement of this
offering at 110% of the public offering price, under the Certificate of
Incorporation there will be as of the closing of this offering 8,554,574
unissued and unreserved shares of Common Stock, 34,368 unissued and unreserved
shares of Series A Preferred Stock, 275,000 unissued and unreserved shares of
Series B Preferred Stock, and 1,400,000 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, including voting rights,
as may be determined by the Board of Directors without any further vote or
action by the holders. Stockholder approval is required to increase the amounts
of authorized shares of capital stock. 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 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
27
<PAGE>
and in connection with the conversion of certain convertible promissory notes,
effective upon consummation of this offering. See "Certain Transactions".
Limitation on Directors' Liability
The Company's Certificate of Incorporation, as amended in connection with
this offering, provides that no director of the Corporation shall be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director. The Certificate of Incorporation does not,
however, eliminate or limit the liability of a director of the Company to the
extent provided by applicable laws (i) for any breach of the director's duty of
loyalty to the Company 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 unlawful
repurchase of stock, or (iv) for any transaction from which the director derived
an improper personal benefit. The limitation of liability provided therein 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.
Dividends
Holders of shares of Series B Preferred Stock will have no dividend
preference over the Common Stock and will only 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. The
Company's current bank financing 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 the bank's prior written consent.
The Company does not anticipate paying any cash dividends in the foreseeable
future, and the Company anticipates that any future bank financing will contain
a substantially similar restriction. See "Dividend Policy".
Limited Experience of the Underwriters
To date, Wit Capital Corporation has been a syndicate member in three public
equity offerings. Wit Capital Corporation has never served as a managing
underwriter in a public equity offering. The limited experience of Wit Capital
Corporation may adversely affect the proposed offering of the Series B Preferred
Stock offered hereby.
Dilution
Investors participating in this offering will incur an immediate and
substantial dilution of $5.58 in the net tangible book value per share of the
Series B Preferred Stock from the offering price. To the extent that outstanding
options and warrants to purchase the Company's capital stock are exercised,
there will be further dilution. See "Dilution".
28
<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
Underwriters 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. Following the offering, the Company intends to add two independent
directors to its Board of Directors.
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 Underwriters 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 Stock or the Common
29
<PAGE>
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".
30
<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 654,180 shares of
Series B Preferred Stock offered by the Company hereby are estimated to be
approximately $4,342,082, based on an assumed offering price of $7.63 per share,
after deducting estimated underwriting discounts and offering expenses. The
following table, which does not take into account the receipt of revenues from
operations, sets forth the anticipated use of proceeds:
<TABLE>
<CAPTION>
Percentage
Purpose Amount of Net Proceeds
------- ------ ---------------
<S> <C> <C>
Staffing Costs (1) $1,466,000 34%
Product and Services Marketing and Development (2)(4) 1,291,000 30%
Reduction of Debt (3) 1,212,423 28%
Working Capital(4) 372,659 8%
---------- -------------
$4,342,082 100%
</TABLE>
(1) Through December 1998, the Company estimates it will hire 32 additional
employees, 12 in production, 10 in engineering, 9 in sales and marketing and 1
in general and administrative.
(2) Consists of estimated allocation of $560,000 for prizes and $700,000 for
advertising and promotional costs through December 1998.
(3) Consists of: (i) $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%,
which may be reborrowed through the term of the agreement; (ii) $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; (iii)
$40,000 outstanding pursuant to notes payable to certain investors, including
Douglas and Susan Greenwood and the Pickwick Group, LLP which is controlled by
them, due October 28, 1997 bearing interest at 10%; (iv) $490,000 outstanding
pursuant to bridge loans payable to various investors payable on the
consummation of this offering bearing interest at 10% and (v) $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%.
(4) The Company has acquired an additional $678,000 of equipment in
anticipation of the commencement of its SportSim basketball season and
mid-season football. This additional equipment was financed by the vendor in
October 1997, on net 45-day credit terms. The Company intends to finance the
$678,000 under an equipment lease financing line of credit of $1,000,000 which
the Company is currently negotiating. If such lease financing is not available
on terms acceptable to the Company, the Company may need to use proceeds from
this offering to pay for some or all of such equipment, which would reduce the
funds otherwise available for working capital and marketing or development. See
"Risk Factors - Need for Additional Financing". In addition, the Company has
reached an agreement in principle to settle certain potential claims for, among
other things, contributory copyright infringement. The agreement requires the
Company to issue a term promissory note in the principal amount of $30,000 due
90 days
31
<PAGE>
after its issuance. If a formal settlement agreement is consummated, the Company
would use proceeds from this offering to pay such note. See "Risk Factors -
Potential Liability for Internet Content; Kolbe/Humanagement Litigation".
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. 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". 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.
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, and the
Company anticipates that any future bank financing will contain a substantially
similar restriction. 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. The Certificate of Incorporation prohibits the payment of any such
dividends until the second anniversary of the date of the consummation of this
offering.
CAPITALIZATION
The following table sets forth, as of September 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 70,820 shares of Series B Preferred Stock effective upon consummation of
this offering(1); and (c) on a pro forma as-adjusted basis to reflect the sale
of the 654,180 shares of Series B Preferred Stock offered by the Company hereby
(at an assumed offering price of $7.63 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>
September 30, 1997
-----------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- -----------
<S> <C> <C> <C>
Notes payable ........................................................... $ 500,000 $ 500,000 $ --
=========== =========== ===========
Long-Term Debt, including current portion ............................... $ 2,077,131 $ 1,582,131 $ 878,125
Stockholders' Equity (Deficit):
Common Stock, 10,000,000 authorized, 526,397 issued and outstanding
actual, pro forma and pro forma as adjusted (2) ......................... 526 526 526
Series A Preferred Stock, 600,000 authorized, 330,211 shares issued and
outstanding actual, pro forma and pro forma as adjusted (3) ............. 1,585,000 1,585,000 1,585,000
Series B Preferred Stock, 1,000,000 authorized, no shares issued and
outstanding actual, 70,820 shares issued and outstanding pro forma and
725,000 shares issued and outstanding pro forma as adjusted (4) ......... -- 540,000 4,882,082
Paid-in capital ....................................................... 381,108 336,108 336,108
Accumulated deficit ................................................... (3,565,892) (3,565,892) (3,565,892)
----------- ----------- -----------
Total stockholders' equity ......................................... (1,599,258) (1,104,258) 3,237,824
----------- ----------- -----------
Total capitalization ............................................... $ 477,873 $ 477,873 $ 4,115,949
=========================================
</TABLE>
32
<PAGE>
- -----------
(1) If the Registration Statement of which this Prospectus is a part is not
declared effective by the Securities and Exchange Commission on or before
November 21, 1997, certain of such notes in the aggregate principal amount of
$270,000 shall not be automatically converted and shall become convertible, at
the option of the holder, into shares of Series A Preferred Stock at a
conversion price of $4.80 per share.
(2) Based on 526,397 shares outstanding as of September 30, 1997 and excludes
(a) 100,506 shares of Common Stock issuable upon exercise of outstanding stock
options, (b) 166,268 shares of Common Stock issuable upon exercise of
outstanding warrants, (c) 187,129 shares of Common Stock reserved for future
issuance under the 1995 Equity Incentive Plan, and (d) Common Stock issuable
upon conversion of Series A Preferred Stock and Series B Preferred Stock.
(3) Based on 330,211 shares outstanding as of September 1, 1997 and excludes
122,921 shares of Series A Preferred Stock issuable upon exercise of outstanding
warrants.
(4) 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
Underwriters effective upon commencement of this offering at 110% of the public
offering price and includes 70,820 shares issuable upon conversion of certain
convertible promissory notes effective upon consummation of this offering,
provided that if the Registration Statement of which this Prospectus is a part
is not declared effective by the Securities and Exchange Commission on or before
November 21, 1997, certain of such notes in the aggregate principal amount of
$270,000 shall not be automatically converted and shall become convertible, at
the option of the holder, into shares of Series A Preferred Stock at a
conversion price of $4.80 per share.
33
<PAGE>
DILUTION
Pro forma net tangible book value (deficit) per share represents the amount
of the Company's tangible assets less 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 September 30, 1997 into one share of Common
Stock, (iii) the conversion of $540,000 aggregate principal amount of
convertible promissory notes into 70,820 shares of Series B Preferred Stock at a
conversion price equal to an assumed offering price of $7.63 per share, and (iv)
the conversion of the 70,820 shares of Series B Preferred Stock into Common
Stock. The pro forma net tangible book value (deficit) of the Company as of
September 30, 1997, was approximately $(1,104,258) or $(1.19) per share. Pro
forma net tangible book value per share as adjusted represents the amount of the
Company's tangible assets less liabilities divided by the number of shares of
Common Stock outstanding on a pro forma basis after giving effect to (i) the
sale of 654,180 shares of Series B Preferred Stock offered hereby by the Company
at an assumed offering price of $7.63 per share after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company and (ii) the conversion of each of the 654,180 shares of Series B
Preferred Stock into one share of Common Stock. On this basis, the Company's pro
forma net tangible book value as adjusted at September 30, 1997 would have been
$3,237,824 or $2.05 per share. This represents an immediate dilution of $5.58
per share to new investors purchasing shares of Series B Preferred Stock in this
offering. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed offering price per share ............................................... $7.63
Pro forma net tangible book value (deficit) per share at September 30, 1997 (1.19)
Pro forma increase per share attributable to new investors ................ 3.24
----
Pro forma net tangible book value per share as adjusted ........................ 2.05
----
Pro forma net tangible book value dilution per share to new investors .......... $5.58
====
</TABLE>
The following table summarizes, on a pro forma basis as of September 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
September 30, 1997 into one share of Common Stock, (iii) the sale of 654,180
shares of Series B Preferred Stock offered hereby by the Company at an assumed
offering price of $7.63 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 70,820 shares of Series B Preferred at a
conversion price equal to an assumed offering price of $7.63 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 927,428 59% $1,921,551 28% $ 2.07
New Investors ....... 654,180 41% 4,991,393 72% 7.63
--------- ---- ---------- ----
1,581,608 100% $6,912,944 100%
========= ==== ========== ====
</TABLE>
The foregoing information assumes no exercise of outstanding options or
warrants. As of September 30, 1997 there were 100,506 shares of Common Stock
reserved for issuance upon exercise of outstanding options, of which 26,799
shares were then exercisable, 166,268 shares of Common Stock reserved for
issuance upon exercise of outstanding warrants, all of which are currently
exercisable, 122,921 shares of Series A Preferred Stock reserved for issuance
upon exercise of outstanding warrants all of which are currently exercisable,
and 330,211 shares of Common Stock reserved for issuance upon conversion of the
Series A Preferred Stock. See "Management - Stock Plans", "Certain Transactions"
and Note 7 and 8 to Financial Statements.
34
<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 nine months ended September 30, 1996 and 1997, and the Balance
Sheet Data at September 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 Nine Months Ended
December 31, September 30,
1995 1996 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Internet revenues ......................... $ -- $ 241,322 $ 80,512 $ 171,319
Non-Internet revenues ..................... 462,417 154,845 150,751 --
----------- ----------- ----------- -----------
Total revenues ................... 462,417 396,167 231,263 171,319
Costs and operating expenses:
Production and engineering ............. 594,219 986,593 760,908 786,017
Sales and marketing .................... 130,760 505,954 347,438 502,655
General and administrative ............. 223,676 304,897 222,882 358,025
----------- ----------- ----------- -----------
Total costs and operating expenses 948,655 1,797,444 1,331,228 1,646,697
----------- ----------- ----------- -----------
Operating loss ............................ (486,238) (1,401,277) (1,099,965) (1,475,378)
Other income (expense):
Interest expense ....................... (25,759) (76,760) (43,383) (147,621)
Other .................................. 4,907 528 94 1,634
----------- ----------- ----------- -----------
Total other income (expense) ..... (20,852) (76,232) (43,289) (145,987)
----------- ----------- ----------- -----------
Net loss .................................. $ (507,090) $(1,477,509) $(1,143,254) $(1,621,365)
=========== =========== =========== ===========
Net loss per common share (1) ............. $ (0.69) $ (1.84) $ (1.44) $ (1.94)
Shares used in computation (1) ............ 739,311 801,652 794,199 834,460
</TABLE>
December 31, September 30,
1996 1997
------------- -------------
Balance Sheet Data:
Cash and cash equivalents ............... $ 20,519 $ 311,981
Working capital (deficit) ............... 200,150 (1,315,082)
Total assets ............................ 750,155 1,457,440
Notes payable ........................... -- 500,000
Long term debt, including current portion 648,645 2,077,131
Total stockholders' equity (deficit) .... (63,734) (1,599,258)
(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).
35
<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 from other sources, such as
pay-for-play opportunities (i.e., CD-ROM variations of its games and
simulations), and through licensing its proprietary gaming engines for use on
non-competing third party Web sites. To date, the marketing and sale of CNNfn
Final Bell CD-ROMS have only been via the Internet, to registered Final Bell
participants, and less than 300 copies have been sold. The Company is still
evaluating the value of this product and may elect to market CD-ROM products
through a third party. 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's 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. 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 has been able
to limit its operating expenses.
36
<PAGE>
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 September 30, 1997 the Company had a
working capital deficiency of $1,315,082 and a negative net worth of
approximately $1,599,000, and during the nine months ended September 30, 1997
experienced operating cash requirements (net loss plus principal repayments
under capital lease obligations and term notes) of approximately $192,000, 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 nine months ended September 30, 1996
were $231,263 and for the year ended December 31, 1996 were $396,167. Total
revenues for the first nine months of 1997 were $171,319.
Internet Revenues. Revenues attributable to the Company's Internet
operations, which commenced in March 1996, were $80,512 for the nine months
ended September 30, 1996, $241,322 for the year ended December 31, 1996, and
$171,319 for the nine months ended September 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 for the most recent four quarters are as set
forth below:
4th Quarter 1996 1st Quarter 1997 2nd Quarter 1997 3rd Quarter 1997
- ---------------- ---------------- ---------------- ----------------
$160,810 $46,440 $31,317 $93,562
The Company's Internet revenues of $171,319 for the nine months ended
September 30, 1997 represented an increase from the $80,512 recorded for the
comparable period in 1996. However, revenues for each of the first three
quarters of 1997 remained below that recorded in the fourth quarter of 1996,
when the Company sold advertising tied to the initial launch of Final Bell to
several clients. The Company believes that the decline in revenues in 1997 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 three 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
37
<PAGE>
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 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, an agreement with MetLife providing for $138,000 in
cash to the Company to sponsor planned simulations in Final Bell from November
10, 1997 to May 4, 1998, and an agreement with Quicken Financial Network
providing for $60,000 in cash to the Company to sponsor a promotional contest in
Final Bell designed to promote Quicken's financial products. During the four
month period ending October 31, 1997, the Company invoiced approximately
$35,850, $18,000, and $4,250 in cash for banner advertising to iVillage, MetLife
and American Express respectively.
Costs and Expenses
Total Costs and Expenses. The Company's total costs and expenses for the
nine month period ended September 30, 1996 and for the year ended December 31,
1996, were $1,331,228 and $1,797,444, respectively. Total costs and expenses for
the nine month period ended September 30, 1997 were $1,646,697. 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 for the most recent four quarters is as follows:
<TABLE>
<CAPTION>
For the quarter ended
December 31, 1996 March 31, 1997 June 30, 1997 September 30, 1997
----------------- -------------- ------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and
marketing $ 158,516 99% $ 134,319 289% $ 152,107 486% $ 216,229 231%
Production and
engineering 225,685 140% 211,438 455% 240,416 768% 334,163 357%
General and
administrative 82,015 51% 101,463 218% 110,634 353% 145,928 156%
Operating
loss (301,312) (187%) (400,780) (863%) (471,840) (1,507%) (602,758) (644%)
Net loss $(334,255) (208%) $(419,055) (902%) $(516,568) (1,649%) $(685,742) (733%)
</TABLE>
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 $158,516, $134,319,
$152,107 and $216,229 for the quarters ended December 31, 1996, March 31, 1997,
June 30, 1997 and September 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; Competition for
Advertisers".
38
<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's 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 five 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 expired in November 1997
but continues on a month to month basis, 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 nine months ended September 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
7,800,000 impressions through Motley Fool's Web site between March 15 and
September 30, 1997. Under the Company's contract with TheStreet.com, which ended
in July 1997, the Company received impressions and The Street'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 Investors Edge 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
$225,685, $211,438, $240,416 and $334,163 for the quarters ending December 31,
1996, March 31, 1997, June 30, 1997, and September 30, 1997 respectively. The
Company anticipates that production and engineering expenses will continue to
increase for the immediately foreseeable future. Anticipated increases relate 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 the next two 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 quarters ending December 31, 1996, March 31, 1997, June 30,
1997 and, September 30, 1997 these expenses were $82,015, $101,463, $110,634 and
$145,928, respectively. The increase in these costs in 1997 is primarily
attributable 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
39
<PAGE>
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 quarters ending
December 31, 1996, March 31, 1997, June 30, 1997 and September 30, 1997 was
$33,377, $19,911 and $44,726 and $82,984 respectively. The increase in these
expenses relates to the costs of leases obtained to finance equipment
acquisitions and to interest associated with the Company's revolving bank line
of credit and its subordinated debt financings. 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 September 30, 1997 primarily through private sales of Common Stock
and Series A Preferred Stock, which through September 30, 1997 totaled
approximately $1,879,515 in net proceeds, $500,000 of bank financing, borrowings
from stockholders and others of approximately $1,180,323, and capital lease
financings of approximately $978,538.
Net cash used by operating activities was $348,603, $1,495,500 and
$1,222,478 for 1995, 1996 and the first nine 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
September 1997 net loss adjusted for non-cash expenditures and debt service)
approximated $220,000 and is expected to increase to approximately $300,000 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 $723,555 for 1995, 1996 and the first nine
months of 1997, respectively.
Net cash provided by financing activities was $405,870, $1,442,697 and
$1,513,940 for 1995, 1996 and the first nine 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 30,
1997 the Company was indebted to certain stockholders, warrant holders, their
affiliates and others in the principal amount of $1,179,058 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, provided that if the Registration Statement of which this
Prospectus is a part is not declared effective on or before November 21, 1997,
certain of such notes in the aggregate principal amount of $270,000 shall not be
automatically converted and shall become convertible, at the option of the
holder, into shares of Series A Preferred Stock at a conversion price of $4.80
per share. The Company intends to repay the remaining amount in full from the
proceeds of this offering. At September 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 September 30, 1997, the Company had borrowed $500,000 under a $500,000
revolving bank line of credit due March 5, 1998. 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
40
<PAGE>
this offering (subject to the right to reborrow). As of September 30, 1997, the
Company was also indebted under a separate equipment lease line of credit in the
principal amount of $604,396. The lease line provides for advances up to
$650,000 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 September
30, 1997 was approximately 12%. The Company was also indebted at September 30,
1997 under 23 other equipment leases totaling approximately $239,000. These
leases had original terms ranging from 24 to 60 months.
Generally, as new games and simulations are brought on-line, additional
equipment upgrades will be required to handle the increased traffic. The Company
acquired $678,000 of equipment to support the commencement of its SportSim
basketball season and mid-season football under 45-day terms. The capital
expenditures of the Company are substantially dependent on traffic volume and
the rate of introduction of new games and simulations, and are therefore
difficult to forecast. The Company intends to provide for its capital equipment
needs, including the financing of this newly purchased equipment, by arranging
for equipment lease or loan financing following the completion of this offering,
but there can be no assurances that such financing will be available on terms
acceptable to the Company.
As of September 30, 1997 the Company's principal source of liquidity was
approximately $312,000 in cash. At September 30, 1997, the Company had a working
capital deficiency of $1,315,082, and was continuing to sustain cash operating
losses. The Company is incurring operating losses as it moves from early stage
to the fuller 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
$3,130,000 after commissions, expenses and debt repayment, together with
available funds, including the Company's revolving bank line of credit and
equipment lease lines of credit being negotiated, will be sufficient to meet its
anticipated cash needs for working capital and capital expenditure requirements
for approximately the next 15 months.
The Company has no material commitments to any employees pursuant to its
employment agreements.
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.
41
<PAGE>
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 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.
From its formation in 1992 until mid 1995 the Company's principal business
was traditional and interactive marketing on a fee-for-service basis for client
companies. The Company introduced its first Internet game, Cyberhunt, in May
1995 in a joint venture with On Word Information Incorporated. The Company
believes that Cyberhunt was one of the first games available on the Internet.
Based on the favorable response to Cyberhunt, the Company decided to change its
business focus to the production of interactive games and simulations for the
Internet. Accordingly, the Company hired key members of its engineering staff,
including engineers who had worked on developing the core technology used in
Cyberhunt for several years while at Motorola and acquired a license to the
technology from Motorola. The Company also began acquiring equipment to support
its new business strategy, and commenced a phase-out of its fee-for-service
business.
Product History
The Company has produced six games and simulations for the Internet through
October 31, 1997. The Company's first product, Cyberhunt, required participants
to solve puzzles and riddles. The Company introduced the game in May 1995
principally as a proof of concept, but sold a commercial version that first
generated revenues in March 1996 and ran until February 1997. Certain important
features of the software developed for Cyberhunt have been used in the Company's
subsequent games and simulations, including dynamic page creation, header and
footer technology that provides dynamic navigation, registration mechanisms, and
the ability to display dynamic advertising. The Company produced Road Trip to
the Super Bowl XXX from October 1995 through January 1996, however it did not
produce cash revenues. This simulation introduced the Company's "integrated
advertising" concept, which offers advertisers the opportunity to integrate
their promotions within a specific game or simulation on a Web site. Road Trip
to the Super Bowl XXX allowed participants to click out of the game site and
into an advertiser's Web site in search for clues that eventually led
participants back to the game site. The Company next introduced Road Trip to the
College World Series, ran from March 1996 until May 1996. Players accumulated
points by solving timed puzzles and trivia questions, and responding
appropriately to certain random events. Based on points accumulated,
participants could select prizes. The Road Trips simulations took Web
participants on cross-country excursions, and allowed them to compete for prizes
while they watched actual travelers encounter famous landmarks and fascinating
cities across the United States. The Court of Last Resort was a Web-based
simulation for the resolution of disputes between ordinary people. Participants
were solicited to offer real disputes, and "jurors" could listen to RealAudio
"testimonies", review evidence and cast their vote. The Court of Last Resort did
not feature a competitive element and was designed primarily for entertainment.
The Court of Last Resort ran from the Spring of 1996 to February 1997, but did
not produce cash revenues.
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The Company's current games and simulations consist of Final Bell and
SportSim. Final Bell, which was first commercially introduced in November 1996,
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. In a July 1997 ranking, Final Bell was
ranked third among the most active investment sites on the Web by Lycos, Inc.,
an Internet navigation service that also furnishes Web site reviews, and at
October 31, 1997, there were 18,149 active portfolios in game number 6 of Final
Bell. Final Bell was the Company's first simulation to incorporate significant
input from a development partner (Charles Schwab & Co., Inc.) and use of
informal surveys to establish that participants interested in the stock market
and investing represented an attractive target market to advertisers and their
agencies. SportSim, which first generated revenues in September 1997, gives
participants the ability to play sports fantasy leagues on-line by building and
competing with their own fantasy teams. Participants draft teams of real world
professional athletes and compete against each other to earn points based upon
the actual performances of these athletes in actual games. SportSim fully
automates the drafting and trading process to simplify league management and all
for more sophisticated gaming. Fantasy Football, the initial SportSim game was
launched on July 15, 1997, and 108,736 teams were participating as of November
10, 1997, making it, in the Company's estimation, the largest fantasy football
game on the Internet.
The Company generates advertising revenues from the sale of sponsorships or
"integrated advertising." By involving advertisers in the creation of a message,
Sandbox seeks to differentiate itself from the many Internet companies competing
through banner sales for limited advertising dollars. The Company also generates
advertising revenues from the sale of banners, a form of Internet advertising
similar to billboards on which users can click to visit an advertiser's Web site
to get further information about the advertiser or its products. 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. One key element in this strategy is the Company's ability to manage
its costs in creating new games and simulations by building on technology
developed in prior games and simulations. As an example, the Company developed
Fantasy Basketball, the second SportSim game, using many of the techniques
developed in Fantasy Football, and with no additions to its creative staff,
although the Company made substantial equipment acquisitions in connection with
these products. Fantasy Basketball was launched on October 21, 1997, and 48,040
teams were participating as of November 6, 1997. Given the popularity of Mid
Season Football, which the Company offered to permit persons who missed drafting
a team at the beginning of the season to participate, the Company intends to
offer a Second Season Basketball game in February 1998. 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.
The Company typically 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 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. The
Company also utilizes its Sand Dollar technology to incentivize participants to
take certain actions, such as answering marketing questionnaires, providing
psychographic data (the psychology of why people buy), clicking on certain
advertisements, or visiting a sponsor's Web site, by awarding Sand Dollars
totaling approximately $3,000 every four months.
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.
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The Company's programs generally permit 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 and 108,736 teams were participating as of November 10,
1997. Fantasy Basketball, the second SportSim game, was launched on October 21,
1997, and 48,040 teams were participating as of November 6, 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 and Fantasy Basketball provide
a variety of games requiring a different level of time commitment from the
participant. Fantasy Football games include:
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
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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.
Fantasy Basketball games include Full Court Press and three additional games
that are in various stages of development.:
Full Court Press - Designed for dedicated basketball fans. The participant
drafts a team of professional basketball stars and manages them through the
course of a five-month season. The participant can trade with other
participants, or change his team by choosing from a list of undrafted pros. This
game demands a high level of participant involvement and knowledge. The
participant's fantasy lineup could change on a daily basis, and the participant
must stay abreast of the latest injuries and real-world trades. This game
enhances the Company's ability to use its "integrated advertising" approach
because of the almost daily interaction the participant has with the site.
Starting Five - This game targets the moderate fan and is based on weekly
participation. Participants assemble a five-man starting lineup from a list of
available professional basketball players. The participant's roster is limited
by a fictional "salary cap" and the value of the pre-selected pros, which
fluctuates from week to week. Prizes are awarded on both a season-long and
weekly basis, so participants may choose whether they want to play.
Double Team - Designed for the more casual fan primarily interested in
watching basketball on television. This game concentrates on team match-ups. The
participant attempts to pick which team will outperform the other in seven key
statistics for three pre-selected games. Prizes will be awarded on a weekly and
end-of-season basis.
Fifth Quarter Quiz - A basketball trivia game that can be enjoyed by both
the veteran fan and the novice interested in learning more. Each week four
trivia questions are asked, and the participant has until the end of the week to
correctly answer all four. Prizes are awarded weekly and at the end of the
season. Participants have the option of playing on any given week or playing
every week to compete for a Grand Prize.
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
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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
candidates. 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.
The Company continues to explore other opportunities to increase revenues by
leveraging its existing technology, game platforms and co-branding
relationships. The Company is currently in negotiations with a development
partner with expertise in CD-ROM content, production and distribution to create
a new sports and entertainment related game for the Internet. This partner would
provide capital and its substantial brand name, which would in turn assist the
Company in maintaining what it believes to be a leading position in the sports
market on the Web.
In addition, the following four concepts are currently being developed for
1998 by Sandbox and Turner Interactive Sales, the marketing group for CNN: (i) a
private label version of CNNfn Final Bell to be used as a training service for
account holders of a leading online brokerage and mutual fund firm, (ii) a
European edition of Final Bell, (iii) a new licensed game to support the
marketing goals of a major satellite programming distributor and (iv) an
arrangement with a leading consumer products company to provide banner
advertising and sponsorship opportunities on Final Bell in exchange for prizes.
These concepts are in various stages of development and there can be no
assurance that any or all of these concepts will be completed.
In September 1997, the Company began marketing the CD-ROM version of CNNfn
Final Bell. The CD version of the game, which was produced in conjunction with
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. To date, the marketing and sale
of the CNNfn Final Bell CD-ROMs have been via the Internet, to registered Final
Bell participants, and less than 300 copies have been sold. The Company is still
evaluating the value of this product and may elect to market CD-ROM products
through third parties.
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.
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.
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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 securities 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 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
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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 typically 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 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,
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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 28,500,000 in October 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
four-month period ending October 31, 1997, the Company entered into strategic
relationships with IBM, MetLife and Quicken Financial Network 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.
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 five
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.
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PC Quote
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Under the PC Quote contract, which expired in November, 1997 but continues
on a month-to-month basis, 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 nine months ended September 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
7,800,000 impressions between March 15 and September 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 83,000,000 impressions it received
under these barter relationships during the first nine 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.
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.
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Development and Production Process
Since the inception of its Internet business, the Company has 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.
* 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.
Advertising and Sales
Advertising
The Company basically offers two forms of advertising services: (1)
traditional banner advertising, a form of advertising similar to billboards
where users can click on graphic elements to visit an advertiser's Web site to
get further information about the advertiser or its products and (2) "integrated
advertising", which involves establishing a game or simulation Web site with a
co-branding or development partner and then offering advertisers the opportunity
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to integrate their promotions within a specific game or simulation on such Web
site through sponsorships. The Company's "integrated advertising" concept allows
it 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, unlike
traditional advertising which separates the marketing message from the program,
the Company can integrate messages directly 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. An example
of placement and integration techniques is 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,
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,
and an agreement with Quicken Financial Network providing for $60,000 in cash to
the Company to sponsor a promotional contest in Final Bell. The IBM and Saturn
agreements require the Company to customize a specific game or simulation on its
Web site and integrate the advertiser's promotion into that game or simulation.
The MetLife agreement is similar, except that MetLife provides all content
elements to the customized simulation and Sandbox provides contributes its
technology so that the game can run on the CNN Final Bell Web site. The Quicken
agreement requires the Company to develop a game and create two customized
contests, each to run for 28 day periods, and to promote the contests on its
home page. Quicken provides all prizes and prize fulfillment and is responsible
for the contest's legal compliance.
Except within a sponsor's product or service category, 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 four months ending
October 31, 1997, the Company invoiced $35,850, $18,000 and $4,250 for banner
advertising to iVillage, MetLife and American Express, respectively. 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
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
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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 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 reported in an Alex.Brown
research study dated August 5, 1997. Standard banner rates for CNNfn Final Bell
and CNN/SI SportSim, which were launched in the third quarter of 1997, ranged
from $25 to $33 during the four month period ending October 31, 1997.
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 and CNNfn ("CNNfn"). 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 agreements generally provide that the Company will develop,
maintain, host, update and support a CNNfn Final Bell Web site based on
Sandbox's Final Bell stock market simulation game and a CNN/SI SportSim Web site
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. Before implementing
new games, CNN will advise the Company of its required input for the design of
such games and the Company 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 of the agreements. The commercial launch of
new games shall be determined by mutual agreement of the parties.
CNNfn and CNN/SI have the right to use the games and advertise the CNNfn
Final Bell and CNN/SI SportSim Web sites (the "Sites"), respectively, and the
availability of the games. CNNfn and CNN/SI have agreed to use reasonable
efforts to promote the games and the Sites, and to build traffic for the games
and Sites 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"
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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 CNN agreements provide that both parties will cooperate regarding the
sale of banner advertising (a form of Internet advertising similar to
billboards) and sponsorships (integration of an advertiser's name and promotion
into the game or simulation itself) for the Sites, but CNN retains primary
control over the sale of banner advertising and the Company retains primary
control over the sale of sponsorships. Each party is responsible for billing,
invoicing, and collection activities related to its sales activities. The
Company is responsible for all development, maintenance, hosting, updating and
support costs, as well as the costs of obtaining all third-party rights and
compliance with all sweepstakes and gaming rules and regulations and any prize
fulfillment activities. The Company is also required to implement a tracking
system to monitor traffic on the sites, page views and other relevant data, and
is required to deliver monthly reports to CNN. In addition, the Company is
responsible for proper insertion and rotation of all advertising and
sponsorships and is required to maintain accurate logs. Where extraordinary
costs are required to integrate an advertiser, 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 create a CD-ROM enhancement for each game, as
agreed by the parties, that includes CNN/SI and CNNfn elements and features
heavier use of graphics and animation and an enhanced non-cash prize structure.
The Company retains ownership of such CD-ROM products (except to the CNN
elements therein), while net revenues from the sale of CD-ROM products through
mutually agreed channels are generally divided evenly among the parties. The
CNNfn agreement provides for the appearance of Lou Dobbs on certain CD-ROM
products, in which case CNN's share increases to 52% for the initial 15,000
units sold of such products and further increases to 54% thereafter. During the
term of the agreements, the parties may discuss merchandising and/or licensing
opportunities, which may be exploited only pursuant to mutual agreement of the
parties. Any other merchandising or licensing net revenues relating to the
games, Sites or the CD-ROM products are divided evenly among the parties with
respect to the CNN/SI agreement and on a 70/30 basis with respect to the CNNfn
Agreement, with the Company entitled to 70%. The Company retains all rights to
its games and simulations as well as ownership of participant databases.
The Company anticipates that the CNN 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. Although the Company believes that the production and
marketing costs associated with CD-ROM game enhancements are relatively low, the
Company's initial marketing of the CNNfn Final Bell CD-ROM has not been
successful in producing significant revenues. The costs to the Company of
complying with its obligations under the agreements are substantial, and there
are no assurances that the costs to develop, maintain, host, update and support
the Sites and games will be offset by additional revenues. The failure to
produce significant revenues pursuant to the CNN agreements 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 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. Furthermore, CNNfn and
CNN/SI have substantial discretion in the substance and quantity of promotional
services it provides in connection with the Sites and games, and there can be no
assurance that the promotional services they provide will enable the Sites and
games to attract sufficient advertising and sponsorship revenues to generate
profits for the Company. 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. See "Risk Factors - Dependence on CNN
and other Third Parties for Internet Operations".
Pursuant to the CNN Agreements, the Company has issued warrants to purchase
its Common Stock to CNNfn for 21,667 shares and to CNN/SI for 3,334 shares, as
adjusted to reflect the Reverse Stock Split. CNNfn's warrant is subject to a
vesting schedule whereby 4,999 shares generally vest upon signing of the CNNfn
Agreement (with certain forfeiture provisions), and the balance of 16,668 shares
vest over the course of the initial year of the CNNfn
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Agreement at the rate of 4,167 each quarter provided CNNfn has provided certain
cable television advertising to the Company.
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 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 MSNBC's
Investment Challenge Fantasy Game, 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 most significant competitors for its fantasy
football game and future sports-related games and simulations are ESPNet
SportsZone and CBS 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 MSNBC's Investment Challenge Fantasy Game, 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,
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.
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:
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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 SportsZone, 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 USA, Inc. was
founded in 1994 and went public in November 1997. 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 SportsZone.
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.
MSNBC Investment Challenge Game (http://www.stockplay.msnbc.com) - MSNBC's
Investment Challenge Game is an on-line stock trading game based on the Nasdaq
Stock Market, where users are charged a fee to participate in the game.
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
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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".
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 October 31, 1997, the Company had a total of 25 full time employees, 17
in engineering and product development, 5 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, Mark Gorchoff 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
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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".
Facilities
The Company's corporate headquarters are located in Phoenix, Arizona in an
6,184 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
November 16, 2000. 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 $443,000, more than doubled the Company's
capacity to handle traffic to its Web sites. In addition, the Company has
acquired an additional $678,000 of equipment in anticipation of 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 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 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,
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prospects, financial condition or operating results. See "Risk Factors -
Capacity Constraints and System Disruptions".
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 in connection with products
marketed by Humanagement, a start-up company in the personality testing
business. The Company has reached an agreement in principle with plaintiffs to
settle this matter, the terms of which provide that the Company will issue a
promissory note to plaintiffs in the principal amount of $30,000 due 90 days
after its issuance, and that each party will agree to release any and all claims
it may have against the other upon payment of the note in full by the Company.
The preliminary injunction granted against the defendants has not had any
material adverse effect on the Company. In the event that a formal settlement
agreement is not consummated, there can be no assurance that the Company 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. 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.
MANAGEMENT
Directors and Executive Officers
The Company's directors and executive officers and their ages as of
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Chad M. Little(1) 29 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 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
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
</TABLE>
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.
From May 1989 to June 1991, 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
(in May 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
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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. From November 1991 to July 1996, Mr. Gorchoff
served as the Chief Financial and Administrative Officer of Peerless Office
Supply. Prior to that, Mr. Gorchoff served as the Vice President of Finance at
Inertia Dynamics Corporation, a lawn and garden products manufacturing company,
as an Assistant Vice President with First Interstate Bank of Arizona, and as
Credit Department Manager for Bank One of Columbus, N.A. 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.
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.S.
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, from April 1989 to June 1993. 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.
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Designation of Independent Directors; Committees of the Board Of Directors
Following consummation of this offering, the Company intends to add two
independent directors to 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. Upon consummation of this
offering, the Audit Committee will include three individuals none of whom are
management and the Compensation Committee will include four individuals one of
whom is management.
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 $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards(1)
Name and Principal Year Salary ($) Bonus ($) Securities All Other
Position (a) (b) (c) (d) Underlying Compensation ($)
Options/SARS (i)
(#)(2)
(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
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No stock option grants were made to Mr. Little during the fiscal year ended
December 31, 1996. Mr. Little did not exercise any stock options during 1996.
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, Turico and Gorchoff, which generally
provide such officer's title, starting salary, bonus and benefits, moving
allowance (if applicable) and initial stock option awards (if any). The starting
and current annual salary, respectively, for Mr. Little is $50,000 and $80,000,
for Mr. Stanton is $85,000 and $110,000, for Mr. Turico is $90,000 and $91,800,
and for Mr. Gorchoff is $75,000 and $75,000. The current salary for Messrs.
Layne and Whittington is $80,000. The Company does not have a bonus plan. The
Company provides access to a health insurance plan for its employees. 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 covenants for 24 months after such officers cease to be a
shareholder and non-solicitation covenants for so long as such officers continue
to be a shareholder.
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 originally available for awards under the Incentive Plan, as
amended, was 215,834, subject to certain adjustments described in the Incentive
Plan. During the year ended December 31, 1996, the Company granted options to
purchase 32,257 shares pursuant to the Incentive Plan at an exercise price of
$.60 per share. From January 1, 1997 through September 30, 1997, the Company
granted options to purchase 38,975 shares (net of cancellations) pursuant to the
Incentive Plan at exercise prices ranging from $.60 to $2.10 per share. During
the month ended October 31, 1997, the Company granted options to purchase 4,584
shares at an exercise price of $2.40 per share, and canceled options to purchase
250 shares pursuant to the Incentive Plan at an exercise price of $1.80 per
share.
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 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
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<PAGE>
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 14,496 shares of
Common Stock at an exercise price of $.006 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 2,899
shares of Common Stock, and (c) Company granted to him a new incentive stock
option to purchase 13,264 shares of Common Stock of the Company at an exercise
price of $.60 per share vesting over 4 years.
In May 1996, the Company granted a nonqualified stock option to Newtek to
purchase 21,923 shares of Common Stock of the Company at an exercise price of
$.60 per share. 10,962 shares vested immediately and were exercised on July 15,
1996, 5,481 shares vested during the period ending September 1, 1997, 1,827 of
which were exercised on December 12, 1996, and 3,654 of which were exercised on
September 16, 1997. The remaining 5,480 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 7,500 shares of
Common Stock of the Company at an exercise price of $.60 per share vesting over
five years.
In February 1997, the Company granted an incentive stock option to Matthew
Stanton, an executive officer of the Company, to purchase 8,334 shares of Common
Stock of the Company at an exercise price of $.60 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
8,334 shares of Common Stock of the Company at an exercise price of $1.80 per
share, 4,167 shares of which vested immediately with the remaining 4,167 shares
vesting over five years.
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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 38,265 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 51,000 shares of Common Stock at an exercise price of $4.80 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 19,125 shares of
Common Stock at $4.80 per share. In connection with this financing, an
additional ten year warrant was issued to Pickwick to purchase 38,250 shares of
Common Stock at $4.80 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
purchase an aggregate of 837 shares of Common Stock at $4.80 per share, of which
Pickwick and the Greenwoods received warrants to purchase 314 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 year warrants to purchase an aggregate of 837 shares of
Common Stock at $4.80 per share, of which Pickwick and the Greenwoods received
warrants to purchase 314 shares. In October 1997, in exchange for the payment of
all accrued and unpaid interest under the term notes, the noteholders agreed to
extend the maturity date of the term notes to December 31, 1997.
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) 58,334 shares of Series A Preferred Stock and warrants to
purchase 14,583 shares of Series A Preferred Stock to Wasatch Venture
Corporation ("Wasatch") for a purchase price of $350,000 and (b) 16,667 shares
of Series A Preferred Stock and warrants to purchase 4,167 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
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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 X.
Helstab, as a consultant, $15,750 in cash and issued him a warrant to purchase
21,923 shares of Common Stock at an exercise price of $.012 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 62,500
additional shares of Series A Preferred Stock in the Company for a price of
$300,000 and Newtek purchased 41,666 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 10,417, 10,417,
93,750, and 10,417 shares of Series A Preferred Stock, respectively, at $4.80
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 not automatically converted and
shall become convertible, at the option of the holder, into shares of Series A
Preferred Stock at a conversion price of $4.80 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 $4.80 per share: Wasatch - 20,834 shares; Newtek - 10,417
shares; Sundance - 20,834 shares; and Sorensen - 4,167 shares. The exercise
price of these warrants will increase from $4.80 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.
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 not automatically converted and shall become
convertible, at the option of the holder, into shares of Series A Preferred
Stock at a conversion price of $4.80 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
$4.80 per share: Wasatch - 20,834 shares; Newtek - 12,500 shares; Sundance -
20,834 shares; and Sorensen - 2,084 shares. These warrants are exercisable at
any time during the term of the warrants. The exercise price of these
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warrants will increase from $4.80 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 in a private
offering under Rule 506 of Regulation D as promulgated by the SEC under the Act
from various "accredited investors" (as defined in Rule 501 of Regulation D).
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 $12.00 per share plus warrants issued as broker's commission for an
aggregate of 43,050 shares of Common Stock. The exercise price of the warrants
is $12.00 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 $2.00 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 10,417 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 8,334 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 11,690 shares of Common Stock which warrants have an exercise price of
$12.00 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 $2.00 per share. This placement was completed on September
25, 1997.
Registration Rights
Upon the completion of this offering, Wasatch, Newtek, Sundance and
Sorensen, holders of Series A Preferred Stock (the "Rightsholders"), will be
entitled to require the Company to register under the Securities Act up to a
total of 513,535 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 (other than relating solely to employee
benefit plans or a transaction under Rule 145 promulgated under the Securities
Act), the Rightsholders shall be entitled to include Registrable Shares in such
registration but only to the extent such inclusion does not diminish the number
of securities included by the Company or by holders who have demanded such
registration. However, the managing underwriter of any such offering may exclude
for marketing reasons some of such Registrable Shares from such registration, in
which case such Registrable Shares will be cut back on a pro rata basis. In
addition, the holders of not less than 20% of the Registrable Securities have
the right to require the Company to prepare and file a registration statement
under the Securities Act with respect to their Registrable Shares, except that
the Company is not required to do so (i) prior to the earlier of one year
following an initial public offering and February 13, 2002, (ii) after effecting
two such demand registrations, and (iii) if the request applies to less than 20%
of the securities held by the holders demanding registration.
Any Rightsholder has the right to require the Company to file a registration
statement on Form S-3 for an aggregate amount (net of underwriting discounts and
commissions) that exceeds $500,000, provided that (i) the Company is entitled to
use Form S-3, (ii) the Company shall not be required to effect more than two
such registrations in any twelve-month period and (iii) the Company shall not be
required to take any action during the period starting sixty days prior to the
filing of any registration statement (other than with respect to a Rule 145
transaction, an offering solely to employees, or any other registration which is
not appropriate for the registration of Registrable Securities), and ending on
the earlier of one year from such starting date and six months following the
effective date of such registration statement. All registration rights under the
Investors' Rights Agreement terminate on the earlier of the date when such
securities may be sold during a one-year period pursuant to Rule 144 (but not
Rule 144A) and the date seven years after the effective date of an initial
public offering. 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 Pickwick, the Greenwoods,
Thomas Lescault, Terrance Morris and Geoffrey Herter, M.D. to include up to an
aggregate of 90,924 shares of Common Stock issuable upon
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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.
General
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.
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. All future
affiliated transactions and loans will be made or entered into on terms that are
no less favorable to the Company than those obtainable from unaffiliated third
parties on an arm's-length basis. In addition, all future affiliated
transactions and loans, and any forgiveness of loans, must be approved by a
majority of the Company's directors, including a majority of the Company's
independent directors who do not have an interest in the transactions and who
had access, at the Company's expense, to the Company's or independent legal
counsel.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the voting securities as of September 30, 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>
Number of Shares Percentage of Class
---------------- -------------------
Beneficially Owned (1) Beneficially Owned (1)
---------------------- ----------------------
Name and Address of Beneficial Before the After the Before the After the
------------------------------------ ---------- --------- ---------- ---------
Title of Class Owner Offering Offering Offering Offering
- -------------- ----- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Series A Wasatch Venture Corporation (2) 187,502 187,502 50.4% 50.4%
Preferred One South Main, Suite 1340
Stock Salt Lake City, UT 84111
Newtek Ventures II, L.P. (3) 95,834 95,834 27.1% 27.1%
500 Washington Street,
Suite 720
San Francisco, CA 94111
Sundance Venture Partners, L.P.(4) 135,418 135,418 36.4% 36.4%
c/o Anderson & Wells
400 East Van Buren, Suite 750
Phoenix, AZ 85004
Wayne Sorensen (5) 16,668 16,668 5.0% 5.0%
1925 E. Michigan Avenue
Salt Lake City, UT 85108
All executive officers and 418,754 418,754 95.9% 95.9%
directors as a group(6)
Series B Wasatch Venture Corporation (7) - 26,230 - 3.6%
Preferred One South Main, Suite 1340
Stock Salt Lake City, UT 84111
Newtek Ventures II, L.P. (8) - 14,426 - 2.0%
500 Washington Street,
Suite 720
San Francisco, CA 94111
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
Sundance Venture Partners, L.P. (9) - 26,230 - 3.6%
c/o Anderson & Wells
400 East Van Buren, Suite 750
Phoenix, AZ 85004
Wayne Sorensen (10) - 3,934 - .5%
1925 E. Michigan Avenue
Salt Lake City, UT 85108
All executive officers and directors - 66,886 - 9.2%
as a group (11)
</TABLE>
<TABLE>
<CAPTION>
Fully Diluted
-------------
Common
Number of Shares Percentage of Class ------
---------------- ------------------- Stock
Beneficially Owned (1) Beneficially Owned (1) -----
---------------------- ---------------------- Ownership
---------
Name and Address of Beneficial Before the After the Before the After the After the
------------------------------------ ---------- --------- ---------- --------- ---------
Title of Class Owner Offering Offering Offering Offering Offering(12)
- -------------- ----- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Common Chad M. Little (13) 264,585 264,585 42.7% 19.7% 8.4%
Stock 2231 E. Camelback, Suite 324
Phoenix, AZ 85016
James A. Layne (14) 122,917 122,917 23.4% 9.8% 6.0%
2231 E. Camelback, Suite 324
Phoenix, AZ 85016
Lonnie A. Whittington (15) 122,917 122,917 23.4% 9.8% 6.0%
2231 E. Camelback, Suite 324
Phoenix, AZ 85016
Wasatch Venture Corporation (16) 213,732 213,732 28.9% 14.9% 9.2%
One South Main, Suite 1340
Salt Lake City, UT 84111
Newtek Ventures II, L.P. (17) 132,183 132,183 20.6% 9.8% 5.8%
500 Washington Street,
Suite 720
San Francisco, CA 94111
Sundance Venture Partners, L.P.(18) 161,648 161,648 23.5% 11.7% 6.6%
c/o Anderson & Wells
400 East Van Buren, Suite 750
Phoenix, AZ 85004
Pickwick Group LLC (19) 58,003 58,003 9.9% 4.4% 2.8%
172 Dan's Highway
New Canaan, Conn. 06840
Glenn Gomez (20) 46,599 46,599 8.7% 3.7% 2.3%
1950 Stemmons Freeway
Suite 3054
Dallas, TX 75207
All executive officers and directors 974,979 974,979 74.0% 49.5% 43.8%
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 30, 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.
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<PAGE>
(2) Includes 41,668 shares of Series A Preferred Stock issuable upon conversion
of warrants.
(3) Includes 22,917 shares of Series A Preferred Stock issuable upon conversion
of warrants.
(4) Includes 41,668 shares of Series A Preferred Stock issuable upon conversion
of warrants.
(5) Includes 6,251 shares of Series A Preferred Stock issuable upon conversion
of warrants.
(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 26,230 shares of Series B Preferred Stock issuable upon conversion
of certain convertible notes, which notes are convertible upon the consummation
of this offering assuming an offering price of 7.625.
(8) Includes 14,426 shares of Series B Preferred Stock issuable upon conversion
of certain convertible notes, which notes are convertible upon the consummation
of this offering assuming an offering price of 7.625.
(9) Includes 26,230 shares of Series B Preferred Stock issuable upon conversion
of certain convertible notes, which notes are convertible upon the consummation
of this offering assuming an offering price of 7.625.
(10) Includes 3,934 shares of Series B Preferred Stock issuable upon conversion
of certain convertible notes, which notes are convertible upon the consummation
of this offering assuming an offering price of 7.625.
(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 10,417 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 41,667 shares owned by Mr. Layne and 41,667 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 122,917 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 41,667 shares that
continue to be owned by Mr. Layne or Mr. Whittington after such transfer(s).
(14) Includes 41,667 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 41,667 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 213,732 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.
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<PAGE>
(17) Includes 132,183 shares of Common Stock, 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.
(18) Includes 161,648 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 44,835 shares of Common Stock issuable upon exercise of warrants
held by Pickwick Group, LLC and 13,168 shares issuable upon exercise of warrants
held by Douglas and Susan Greenwood; Mr. Greenwood is a principal member of
Pickwick Group, LLC.
(20) Includes 8,334 shares of Common Stock that will be issuable upon exercise
of a warrant that the Company issued to Mr. Gomez on September 23, 1997.
(21) Includes the shares described above in Footnote 13 for Mr. Little (but
excluding the 83,334 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; vested options to purchase
5,834 shares of Common Stock held by Matthew Stanton; and 2,899 shares owned by
Mike Turico and vested options to purchase 3,566 shares held by Mr. Turico.
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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, 3,000,000 shares of Preferred Stock, $0.001
par value, of which 600,000 shares have been designated Series A Preferred Stock
and 1,000,000 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 30, 1997, the Company had issued and outstanding 526,397
shares of Common Stock held of record by 11 stockholders, warrants to purchase
an aggregate of 166,268 shares of Common Stock, options to purchase an aggregate
of 100,506 shares of Common Stock and 453,132 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 to purchase preferred
stock.
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 30, 1997, the Company had issued and outstanding 330,211
shares of Series A Preferred Stock held of record by 6 stockholders and warrants
to purchase an aggregate of 122,921 shares of Series A Preferred Stock. If the
Registration Statement of which this Prospectus is a part is not declared
effective by the Securities and Exchange Commission on or before November 21,
1997, certain notes in the aggregate principal amount of $270,000 shall become
convertible, at the option of the holder, into shares of Series A Preferred
Stock at a conversion price of $4.80 per share. 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.
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
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<PAGE>
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 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), each share of Series A Preferred Stock shall be
converted, without further action, into one share of Common Stock, subject to
anti-dilution adjustments.
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
(subject to an appropriate adjustment in the event of any stock dividend, stock
split, combination or other similar recapitalization affecting such shares) 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 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.
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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 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
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$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.
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 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 Underwriters 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 the offering price per share of the Series B
Preferred Stock (subject to an appropriate adjustment in the event of any stock
dividend, stock split, combination or other similar recapitalization affecting
such shares) 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.
Options, Warrants and Convertible Notes
Upon completion of this offering, an aggregate of 105,090 shares of Common
Stock will be reserved for issuance upon exercise of outstanding options, of
which 26,799 shares were then exercisable, at exercise prices ranging from $.60
to $2.40 per share, 90,924 shares of Common Stock will be issuable upon exercise
of outstanding warrants at an exercise price of $4.80 per share, 26,043 shares
of Common Stock will be issuable upon exercise of outstanding warrants at an
exercise price of $12.00 per share, 43,050 will be issuable upon exercise of
outstanding warrants at an exercise price of $12.00 per share until 30 days
after the consummation of this offering at which point the exercise price will
be the offering price of the Series B Preferred Stock if that price is greater
than $2.00 per share, 6,251 shares of Common Stock will be issuable upon
exercise of outstanding warrants at an exercise price of $4.00 per share,
112,504 shares of Series A Preferred Stock will be issuable upon exercise of
outstanding warrants at an exercise price of $2.00 per share, provided that the
exercise price for such shares shall increase to the price per share in this
offering on the thirty-first day following the consummation of this offering,
10,417 shares of Series A will be
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issuable upon exercise of outstanding warrants at $4.80 per share, and 70,820
shares of Series B Preferred Stock will be issuable upon automatic conversion of
convertible promissory notes upon consummation of this offering at a conversion
price of $7.63 per share, provided that if the Registration Statement of which
this Prospectus is a part is not declared effective by the Securities and
Exchange Commission on or before November 21, 1997, certain of such notes in the
aggregate principal amount of $270,000 shall not be automatically converted and
shall become convertible, at the option of the holder, into shares of Series A
Preferred Stock at a conversion price of $4.80 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
options and warrants 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". Upon consummation of this
offering, the Company will not grant options and warrants with an exercise price
of less than 85% of the fair market value of the underlying Common Stock on the
date of grant. In addition, the Company will not grant options and warrants in
excess of 15% of the number of outstanding shares of each class of its capital
stock to officers, directors, employees, principal stockholders and affiliates
for the one-year period following the consummation of this offering.
Delaware Law and Certain Charter Provisions
Excluding shares of Series B Preferred Stock issuable upon exercise of
warrants granted to the Underwriters effective upon commencement of this
offering at 110% of the public offering price, under the Certificate of
Incorporation there will be as of the closing of this offering 8,554,574
unissued and unreserved shares of Common Stock, 34,368 unissued and unreserved
shares of Series A Preferred Stock, 275,000 unissued and unreserved shares of
Series B Preferred Stock, and 1,400,000 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 acquirer 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 526,397
shares of Common Stock and 330,211 shares of Series A Preferred Stock and
725,000 shares of Series B Preferred Stock that are convertible into Common
Stock, provided that if the Registration Statement of which this Prospectus is a
part is not declared effective by the Securities and Exchange Commission on or
before November 21, 1997, certain convertible notes will not automatically
convert into Series B Preferred Stock upon consummation of this offering and
only 689,590 shares of Series B Preferred Stock will be outstanding. 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
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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 - No Public Market; No
Liquidity". The remaining 526,397 shares of Common Stock and 330,211 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 8,503 of the Restricted Securities are eligible for sale in the
public market in reliance on Rule 144(k) under the Securities Act; however, all
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 71,464
additional Restricted Securities will become eligible for sale in the public
market, pursuant to Rule 144 and Rule 701 of the Securities Act; all 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 776,641 additional shares will become
eligible for sale in the public market, subject in some cases to the provision
of Rule 144, but 769,348 of these shares will remain subject to the Contractual
Restrictions. In addition, holders of approximately 513,535 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 474,275 shares of Common Stock and 322,918 shares of Series A
Preferred Stock convertible into Common Stock, options to purchase 32,008 shares
of Common Stock, and warrants to purchase 58,003 shares of Common Stock and
112,504 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, 797,193 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 5,264 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.
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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
Subject to the terms and conditions of the Underwriting Agreement, each of
the Underwriters named below has severally agreed to purchase from the Company,
and the Company has agreed to sell to such Underwriters, the respective number
of shares of Series B Preferred Stock set forth opposite the name of such
Underwriters.
Number of
Underwriters Shares
------------ -------------
Wit Capital Corporation
Total
-------------
=============
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Series B Preferred
Stock offered hereby are subject to approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all shares of Series B Preferred Stock offered hereby if any such
shares are purchased.
The Underwriters propose 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 Underwriters in
connection with its initial distribution of the Series B Preferred Stock. 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 Underwriters primarily intend to contact prospective investors by
publicizing the offering through a posting on the Underwriters' 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. The Underwriters will also contact prospective
investors through traditional selling efforts.
All directors, officers and 5% stockholders of the Company who hold in
aggregate 474,275 shares of Common Stock and 322,918 shares of Series A
Preferred Stock convertible into Common Stock, options to purchase 32,008 shares
of Common Stock, and warrants to purchase 58,003 shares of Common Stock and
112,504 shares of Series A Preferred Stock have agreed, pursuant to agreements
with the Underwriters, that they will not, without the prior written consent of
the Underwriters, 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
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933 or contribute to payments the Underwriters may be
required to make in respect thereof. The Company has granted the Underwriters
warrants to purchase the number of
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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 effective date of this
offering at an exercise price equal to 110% of the per share price in this
offering, provided that the warrants may not be exercised for a period of one
year following the consummation of this offering, and provided further that the
warrants may not be transferred except to officers of the Underwriters who are
also shareholders of the Underwriters.
To date, Wit Capital Corporation has been a syndicate member in three public
equity offerings. Wit Capital Corporation has never served as a managing
underwriter in a public equity offering. The limited experience of the
Underwriters 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 Underwriters, 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 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.
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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
which contains an explanatory paragraph describing conditions that raise
substantial doubt about the Company's ability to continue as a going concern as
described in Note 12 to the financial statements 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 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 Underwriters' Web site at
http://www.witcapital.com. Information contained in the Company's Web sites
shall not be deemed a part of this Prospectus.
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Index to Financial Statements
Page
----
Report of Ernst & Young LLP, Independent Auditors............................F-2
Audited Financial Statements
Balance Sheets as of December 31, 1996 and September 30, 1997 (unaudited)....F-3
Statements of Operations for the years ended December 31, 1995 and 1996 and
the nine-month periods ended September 30, 1996 and 1997 (unaudited).......F-4
Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1995 and 1996 and the nine-month period ended
September 30, 1997 (unaudited).............................................F-5
Statements of Cash Flows for the years ended December 31, 1995 and
1996 and the nine-month periods ended September 30, 1996 and
1997 (unaudited)...........................................................F-6
Notes to Financial Statements................................................F-7
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 fuller 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
November 17, 1997 /s/ Ernst & Young LLP
F-2
<PAGE>
Sandbox Entertainment Corporation
Balance Sheets
<TABLE>
<CAPTION>
September 30
December 31 1997
1996 (unaudited)
---------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 20,519 $ 311,981
Accounts receivable, less allowance for doubtful accounts of $1,355
at December 31, 1996 and $0 at September 30, 1997 215,025 172,743
Receivables from stockholders 251,095 --
Prepaid expenses and other current assets 11,539 --
--------------------------
Total current assets 498,178 484,724
Property and equipment, net 222,099 820,708
Other assets 29,878 152,008
--------------------------
Total assets $ 750,155 $ 1,457,440
==========================
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Note payable to a bank $ -- $ 500,000
Accounts payable and accrued expenses 165,244 389,723
Unearned income -- 89,844
Current portion of long-term debt and capital lease obligations 132,784 820,239
--------------------------
Total current liabilities 298,028 1,799,806
Note payable to a bank 175,000 --
Long-term debt, including related parties, less current portion 152,221 620,410
Capital lease obligations, less current portion 188,640 636,482
Commitments and Contingencies -- --
Stockholders' equity (deficit):
Series A Convertible Preferred Stock, par value $.001 per share; 600,000
shares authorized, 328,127 and 330,211 shares issued and
outstanding at December 31, 1996 and September 30, 1997, 1,575,000 1,585,000
respectively, at liquidation value
Common Stock, par value $.001 per share; 10,000,000 shares authorized,
510,481 and 526,397 shares issued and outstanding at
December 31, 1996 and September 30, 1997, respectively 510 526
Paid-in capital 305,283 381,108
Accumulated deficit (1,944,527) (3,565,892)
--------------------------
Total stockholders' equity (deficit) (63,734) (1,599,258)
--------------------------
Total liabilities and stockholders' equity (deficit) $ 750,155 $ 1,457,440
==========================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Sandbox Entertainment Corporation
Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended September 30
Year Ended December 31 1996 1997
1995 1996 (unaudited) (unaudited)
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Internet revenues $ -- $ 241,322 $ 80,512 $ 171,319
Non-Internet revenues 462,417 154,845 150,751 --
----------------------------------------------------------------
Total revenues 462,417 396,167 231,263 171,319
Costs and expenses:
Production and engineering 594,219 986,593 760,908 786,017
Sales and marketing 130,760 505,954 347,438 502,655
General and administrative 223,676 304,897 222,882 358,025
----------------------------------------------------------------
Total costs and expenses 948,655 1,797,444 1,331,228 1,646,697
----------------------------------------------------------------
Operating loss (486,238) (1,401,277) (1,099,965) (1,475,378)
Other income (expense):
Interest expense (25,759) (76,760) (43,383) (147,621)
Other 4,907 528 94 1,634
----------------------------------------------------------------
Net loss $ (507,090) $(1,477,509) $(1,143,254) $(1,621,365)
================================================================
Loss per common share $ (0.69) $ (1.84) $ (1.44) $ (1.94)
================================================================
Shares used in computation 739,311 801,652 794,199 834,460
================================================================
</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 -- $ -- 416,668 $ 416 $ 11,849 $ 40,072 $ 52,337
Issuance of common stock -- -- 8,504 8 183,664 -- 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 -- -- 425,172 424 295,997 (467,018) (170,597)
Issuance of Series A
Preferred Stock 328,127 1,575,000 -- -- -- -- 1,575,000
Exercise of stock options -- -- 12,789 13 7,659 -- 7,672
Paid-in capital-warrants issued -- -- -- -- 500 -- 500
Equity based compensation -- -- -- -- 1,200 -- 1,200
Other (See Note 7) -- -- 72,520 73 (73) -- --
Net loss -- -- -- -- -- (1,477,509) (1,477,509)
---------------------------------------------------------------------------------------
Balance at December 31, 1996 328,127 1,575,000 510,481 510 305,283 (1,944,527) (63,734)
Issuance of Series A
Preferred Stock (unaudited) 2,084 10,000 -- -- -- -- 10,000
Exercise of stock options -- -- 15,916 16 2,645 -- 2,661
(unaudited)
Paid-in-capital-warrants issued
(unaudited) -- -- -- -- 72,700 -- 72,700
Equity-based compensation -- -- -- -- 480 -- 480
Net loss (unaudited) -- -- -- -- -- (1,621,365) (1,621,365)
---------------------------------------------------------------------------------------
Balance at September 30, 1997
(unaudited) 330,211 $ 1,585,000 526,397 $ 526 $ 381,108 $(3,565,892) $(1,599,258)
=======================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Sandbox Entertainment Corporation
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended September 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) $(1,143,254) $(1,621,365)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 58,321 96,046 73,230 125,142
Loss on disposal of property and equipment 4,322 15,657 -- --
Provision (benefit) for doubtful accounts 5,130 1,355 -- (1,355)
Equity-based expenses 476 1,700 272 25,130
Changes in operating assets and liabilities:
Accounts receivable 54,465 (197,430) (25,999) 43,637
Prepaid expenses and other assets 6,877 5,835 12,627 (107,990)
Unearned income -- -- -- 89,844
Accounts payable and accrued expenses 28,896 58,846 (1,459) 224,479
----------------------------------------------------------------
Net cash used by operating activities (348,603) (1,495,500) (1,084,583) (1,222,478)
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 -- 175,000 400,000 325,000
Borrowings from others, including stockholders,
net 150,323 -- -- 1,030,000
Principal payments under capital lease obligations
and notes (28,133) (63,880) (43,783) (105,318)
Cash proceeds from issuance of stock 183,672 1,331,577 981,577 264,258
Cash proceeds from stock subscriptions 100,008 -- -- --
----------------------------------------------------------------
Net cash provided by financing activities 405,870 1,442,697 1,337,794 1,513,940
----------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 48,139 (53,230) 252,784 291,462
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 $ 326,533 $ 311,981
================================================================
Supplemental cash flow information
Assets acquired under capital lease obligations $ 139,618 $ 115,365 $ 115,365 $ 723,555
================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of September 30, 1997 and for the periods
ended September 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 September 30, 1997 and for the nine month
periods ended September 30, and September 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 nine months ended September 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 52,084 shares
of Series A Preferred Stock and a $1,095 subscription for 1,827 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 ("reciprocal
advertising") or for access to editorial or software content or other goods and
services ("exchanges") utilized in its games and simulations. While management
believes such arrangements are of substantial value to the Company, no revenue
or expense is recorded with respect to reciprocal advertising arrangements.
Revenue and expense is, or may be, recorded for exchanges only to the extent
that the fair value of
F-7
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of September 30, 1997 and for the periods
ended September 30, 1996 and 1997 is unaudited.)
such transactions are objectively measurable. No revenue or expense has been
recorded with respect to exchange 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 $113,000 and $45,000 for the
nine months ended September 30, 1996 and September 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.
2. Like Kind Exchanges
The Company has entered into several strategic relationships including
Co-Branding and Marketing Agreements with CNN in which it has exchanged
advertising space on a Company Web site for reciprocal advertising in other
online and traditional 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. Due to the difficulty in objectively measuring the value
F-8
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of September 30, 1997 and for the periods
ended September 30, 1996 and 1997 is unaudited.)
of such relationships, no accounting recognition is given in the financial
statements for such arrangements. (See Note 1).
3. Property and Equipment
Property and equipment consists of the following:
September 30
December 31 1997
1996 (unaudited)
----------------------------
Computer equipment $ 349,929 $1,073,483
Furniture and fixtures 30,891 30,891
Leasehold improvements 8,803 8,803
-------------------------
389,623 1,113,177
Less accumulated depreciation and amortization 167,524 292,469
-------------------------
$ 222,099 $ 820,708
=========================
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 September 30, 1997, the Company has borrowed $175,000
and $500,000, respectively, from a bank on a $500,000 revolving line of credit
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
September 30, 1997). The revolving line of credit is subject to renewal on March
5, 1998. The Company had $225,000 and $-0- available under the line of credit at
December 31, 1996 and September 30, 1997, respectively. The Company's borrowing
agreement prohibits payment of cash dividends.
5. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30
December 31 1997
1996 (unaudited)
---------------------------
<S> <C> <C>
Subordinated Notes, $1,030,000 principal, net (See below) $ -- $ 984,999
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 116,328 109,058
Notes payable to various individuals, interest at 10.00 percent, due October 28,
1997 39,667 39,917
Stockholder loans, interest at 8.00 percent through 10.00 percent, unspecified
repayment terms not sooner than September 30, 1998 50,434 50,434
-------------------------
206,429 1,184,408
Less current portion 54,208 563,998
-------------------------
$ 152,221 $ 620,410
=========================
</TABLE>
F-9
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of September 30, 1997 and for the periods
ended September 30, 1996 and 1997 is unaudited.)
The Convertible Subordinated Notes will automatically convert into Series B
Preferred Stock upon completion of the proposed offering. The pro forma effect
of this conversion, had it occurred on the first day of the year ended December
31, 1996 or the nine-month period ended September 30, 1997, is not material to
the Company's operating results.
Future maturities of long-term debt consist of the following:
Year Ending Period Ending
December 31 September 30
------------------------- -------------------------
1997 $ 54,208 1998 $563,998
1998 29,082 1999 519,082
1999 29,082 2000 29,082
2000 29,082 2001 21,812
2001 14,541 2002 --
Thereafter 50,434 Thereafter 50,434
----------- ------------
$ 206,429 $ 1,184,408
=========== ============
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 12,501 shares of Series A
Preferred Stock at $4.80 per share. 2,084 of the warrants were subsequently
exercised. On September 27, 1997, the Company received an increase in this
commitment to $650,000 and issued 6,251 warrants at an exercise price of $4.00
per share, provided that on or after the 30th day following the offering
described in Note 13, the exercise price will increase to the offering price of
the Series B Preferred Stock in this offering if such offering price is greater
than $12.00.
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 56,252 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 September 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 56,252 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. The fair value of the warrants
have been recorded as a debt discount in the September 30, 1997 Financial
Statements.
F-10
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of September 30, 1997 and for the periods
ended September 30, 1996 and 1997 is unaudited.)
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
43,050 shares of Common Stock at an exercise price of $12.00 per share,
provided, however, that the warrants may be exercised on or after 30 days
following the consummation of the public offering at the price of the Series B
Preferred Stock. The warrants expire in August 2000 and are exercisable
immediately.
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:
<TABLE>
<CAPTION>
Capital Leases Operating 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 $73,000 and $81,000 for the nine months ended September 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 72,520 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 and executed unilaterally by
the Company, on a one-time basis.
F-11
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of September 30, 1997 and for the periods
ended September 30, 1996 and 1997 is unaudited.)
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.
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 187,129 shares for future issuance under
the plan as of September 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 nine months ended September 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:
Weighted
Average
Shares Exercise Price
-----------------------------
Outstanding at January 1, 1995 -- $ --
Granted 57,979 .01
-----------------------------
Outstanding at December 31, 1995 57,979 .01
Granted 32,257 .60
Exercised (12,789) .60
-----------------------------
Outstanding at December 31,1996 77,447 .16
Granted 85,360 .93
Canceled (46,385) .01
Exercised (15,916) .17
-----------------------------
Outstanding at September 30, 1997 100,506 $ .88
=============================
Exercisable at December 31, 1996 13,596 $ .01
=============================
Exercisable at September 30, 1997 26,799 $1.03
=============================
At December 31, 1996 and September 30, 1997, respectively, warrants for the
purchase of 90,087 and 166,268 shares of Common Stock are outstanding. The
warrants are exercisable at prices ranging from $4.00 to $12.00 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
F-12
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of September 30, 1997 and for the periods
ended September 30, 1996 and 1997 is unaudited.)
its Series A and Series B Preferred Stock (See Note 5). 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 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
has reached an agreement in principal with plaintiffs to settle this matter, the
terms of which provide that the Company will issue a term promissory note to
plaintiffs in the
F-13
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of September 30, 1997 and for the periods
ended September 30, 1996 and 1997 is unaudited.)
principal amount of $30,000 due 90 days after its issuance, and that each party
will agree to release any and all claims it may have against the other upon
payment of the note in full by the Company.
12. Going Concern
The Company is incurring operating losses as it moves from early stage to the
fuller 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 5, 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 September 1997, the Company's Board of Directors authorized the Company to
register up to 725,000 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-six reverse split of the Company's Common
Stock and Series A Convertible Preferred Stock to be effective upon the
effective date of the offering on November __, 1997. All share and per share
amounts in the accompanying financial statements have been adjusted to reflect
the split.
Certain of the Company's Series A Preferred Stock warrants contain a provision
whereby the exercise price is at a fixed dollar amount for the 30 day period
following a qualifying public offering (See Note 5). The reverse stock split
effected by the Company on November __, 1997 will create a new measurement date
for valuing such warrants. Upon consummation of the reverse stock split, the
Company will revalue any outstanding warrants and amortize the resulting amount
over the remaining period of benefit.
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APPENDIX A
SCRIPT OF ROAD SHOW AUDIO VIDEO PRESENTATION OF THE COMPANY TO BE DISPLAYED
ON-LINE BY HTML LINK TO THE UNDERWRITERS' WEB SITE
Visual:
Text on screen: This audio video presentation is part of the Company's
Prospectus dated November , 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. This presentation is neither an
offer to sell nor a solicitation of an offer to buy securities of the Company
and such offers may only be made by means of the Prospectus. Prospective
investors should carefully consider the information set forth under the heading
"Risk Factors" in the body of this 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 game 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.
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We recognize that our success depends on our accomplishing four 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, 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:
* Creating unique content where the users are an integral part of an
entertaining and educational experience.
* Offering a platform from which the advertiser can direct their message
so that it is entertaining and rewarding for the viewer.
* 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 CNN in order to get the sort of promotion needed to sustain an audience
that is attractive to our advertising community.
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 900,000 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 680,000 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.
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.
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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 joined Sandbox because I felt their unique blend of creativity,
technical capacity and marketing expertise could offer the interactive
advertisers a great marketing opportunity.
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.
Selling in the Sandbox model requires a strong understanding of marketing.
Before Katz, my foundation in marketing was developed while working for 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 manner 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 Turner, 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 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 Turner chose us as a
partner.
The relationship with Turner 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. Turner 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 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
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that our clients find attractive. 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.
At the bottom of the Road Show Presentation, there will be a box labeled
"Sandbox Road Show Q&A". Viewers will click through this box to a separate page
with the following heading:
At the top of the screen the following text will be presented:
Chad Little's Response to E-Mail Questions
While the initial filing of the Registration Statement was being reviewed by
the Securities and Exchange Commission, certain questions were received via
e-mail by the Company and/or Wit Capital Corporation, the Company's lead
underwriter. The following represents some of those frequently asked e-mail
questions concerning the offering and the Company's responses. To get the
response, click on the question.
What will Sandbox's stock symbol be?
When will Sandbox start trading?
What exchange will Sandbox be traded on?
Sandbox's Series B Preferred Stock, Series A Preferred Stock and Common
Stock will not trade on any stock market nor will any of the securities carry a
ticker symbol.
As page 1 of the Prospectus says, "The Company has no intention to list any
of its securities...on any stock exchange or for trading in the NASDAQ stock
market or over the counter." There is no assurance that a liquid market for the
Series B Preferred Stock will develop in the future.
The Series B Preferred Stock is a venture capital investment. As discussed
in the prospectus in the Venture Capital Investing section, venture capital
investors buy illiquid shares of less-established companies in the hope of
achieving superior returns. One of the risks that prospective investors should
consider in determining whether to invest in Sandbox is the lack of liquidity of
the Sandbox Series B Preferred Stock.
Venture capital investing has not historically been open to individuals
because most of us can't make large, illiquid investments. In the Sandbox
offering, however, Wit Capital intends to establish a relatively low investment
minimum.
Please read the complete Prospectus to best understand the risks of
investing in Sandbox Entertainment.
What % of the Company is being offered to the public?
The shares of Series B Preferred Stock being offered to the public represent
approximately 31% of the fully diluted Common Stock of the Company that would be
outstanding after giving effect to the conversion of all Series B Preferred
Stock, all Series A Preferred Stock, and the exercise of outstanding stock
options and warrants. As described in the Risk Factors, it is likely that the
Company will require additional equity financing after approximately 15 months.
The holders of Series B Preferred Stock will have certain antidilution
protection in the event of additional issuances at a price less than the issue
price of the Preferred Stock, of additional shares of Common stock or of
securities exercisable for or convertible into Common Stock. Whether or not this
antidilution protection applies in a particular issuance, investors in Series B
Preferred Stock should anticipate that their percentage interest in the Company
will decline as the Company issues additional equity.
Please read the complete Prospectus to best understand the risks of
investing in Sandbox Entertainment.
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Who are the Company's competitors?
The Company believes that its most significant competitors for its fantasy
football and future sports-related games and simulations are ESPNet SportsZone
and CBS 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 MSNBC's Investment Challenge Fantasy Game, E-TRADE Group,
Inc., an on-line investment services provider that operates a similar on-line
stock market trading game, SMG2000, and an electronic educational simulation
program sponsored by the Securities Industry Foundation for Economic Education,
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.
Please read the complete Prospectus to best understand the risks of
investing in Sandbox Entertainment.
How was the Company valued?
How was the offering price range determined?
The offering price for the Series B Preferred Stock will be determined by
Wit Capital after negotiations with Sandbox, 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
Sandbox and its industry in general, the valuation of its competitors, its
current operations and earnings potential, its management, the lack of liquidity
for the Series B Preferred Stock and risks associated with an investment in
Sandbox.
Please read the complete Prospectus to best understand the risks of
investing in Sandbox Entertainment.
If I become a shareholder, what information will I regularly get from the
Company? How will I know how Sandbox is doing?
As discussed on the Table of Contents page of the Prospectus, shareholders
will receive annual reports containing audited financial statements and
quarterly reports containing interim unaudited information. Shareholders will
also receive traditional 8-K reports.
Shareholders can revocably elect to receive all reports electronically.
Please read the complete Prospectus to best understand the risks of
investing in Sandbox Entertainment.
What is the difference between an IPO and Public Venture Capital Offerings?
They are similar in that both are securities that are registered with the
Securities and Exchange Commission and can be sold through a general
solicitation.
However, Public Venture Capital Offerings differ from traditional Initial
Public Offerings in two ways: the issuing company is generally at an earlier
stage of development than in a traditional IPO, and the shares sold to the
public are subject to substantial restrictions on transfer that make them
illiquid.
Unlike IPOs, which usually trade freely in the stock market after they are
issued, shares in Sandbox's Public Venture Capital Offering will not trade at
least until the earlier of two years or six months after a qualified IPO. There
is no assurance that an active trading market will develop after that date or of
the price at which the Series B Preferred Stock or Common Stock to into which it
is convertible will trade.
Please read the complete Prospectus to best understand the risks of
investing in Sandbox Entertainment.
Text on screen: Thank you for your interest in Sandbox Entertainment
Corporation and for taking the time to review this Q&A presentation. This
presentation is a part of, and not a substitute for, the Company's complete
Prospectus.
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================================================================================
Shares
SANDBOX ENTERTAINMENT CORPORATION
Series B Preferred Stock
(par value $.001 per share)
---------------
[SANDBOX ENTERTAINMENT LOGO]
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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.
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
II-1
<PAGE>
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) 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) Reverse Stock Split.
1. As of September 30, 1997, the Company has granted 112,768 shares of
Common Stock to employees and consultants at prices ranging from $.60 to $2.10
per share upon their exercise of options under the 1995 Stock Incentive Plan, as
amended. As of September 30, 1997, these employees and consultants have
exercised options to purchase 17,111 shares of Common Stock, the exercise prices
of which were paid in cash. These Sales were made in reliance upon Rule 701
promulgated under the Securities Act ("Rule 701").
2. In February 1992, the Company issued 416,668 shares of Common Stock to
the Company's founder in exchange for an aggregate payment of $12,265 in cash.
These issuances were made in reliance on Section 4(2) of the Securities Act
and/or Regulation D promulgated thereunder. The securities were issued with no
general solicitation or advertising and the purchaser had adequate access to
information about the Company.
3. In July 1995, the Company issued 38,265 shares of Common Stock in a
private placement to an individual investor in exchange for a payment of
$183,672 in cash. This issuance was made in reliance on Section 4(2) of the
Securities Act and/or Regulation D promulgated thereunder. The securities were
issued with no general solicitation or advertising and the purchaser had
adequate access to information about the Company.
4. In October 1995, in connection with term notes evidencing loans to the
Company in an aggregate amount of $40,000, the Company issued warrants to
investors to purchase an aggregate of 51,000 shares of Common Stock at an
exercise price of $4.80 per share. The Company also issued warrants to purchase
38,250 shares of Common Stock at an exercise price of $4.80 per share to an
individual for assistance in arranging the loans. These issuances were made in
reliance on Section 4(2) of the Securities Act and/or Regulation D promulgated
thereunder. The securities were issued with no general solicitation or
advertising and the purchasers had adequate access to information about the
Company
5. In December 1995, the Company issued 20,836 shares of Common Stock in a
private placement to an individual investor and his spouse in exchange for a
payment of $100,008 in cash. This issuance was made in reliance on Section 4(2)
of the Securities Act and/or Regulation D promulgated thereunder. The securities
were issued with no general solicitation or advertising and the purchasers had
adequate access to information about the Company.
6. In February 1996, the Company issued 75,000 shares of Series A Preferred
Stock and issued warrants to purchase an aggregate of 18,750 shares of Series A
Preferred Stock at an exercise price of $.01 per share, which were subsequently
exercised in May 1996. The Company also issued warrants to purchase 21,923
shares of Common Stock at an exercise price of $.12 per share to a consultant in
connection with this private offering, which were subsequently exercised in
April 1996. These issuances were made in reliance on Section 4(2) of the
Securities Act and/or Regulation D promulgated thereunder. The securities were
issued with no general solicitation or advertising and the purchasers had
adequate access to information about the Company.
7. In May 1996, the Company's founder transferred 122,917 shares to each of
two executive officers of the Company for no consideration.
8. In May 1996, the Company issued 104,166 shares of Series A Preferred
Stock in exchange for an aggregate payment of $500,000 in cash. These issuances
were made in reliance on Section 4(2) of the Securities Act and/or
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<PAGE>
Regulation D promulgated thereunder. The securities were issued with no general
solicitation or advertising and the purchasers had adequate access to
information about the Company.
9. In October 1996, in connection with amendments made to the October 1995
term notes, the Company issued warrants to investors to purchase an aggregate of
837 shares of Common Stock at an exercise price of $4.80 per shares. These
issuances were made in reliance on Section 4(2) of the Securities Act and/or
Regulation D promulgated thereunder. The securities were issued with no general
solicitation or advertising and the purchasers had adequate access to
information about the Company.
10. In November 1996, the Company issued 125,001 shares of Series A
Preferred Stock in exchange for an aggregate payment of $600,000 in cash. These
issuances were made in reliance on Section 4(2) of the Securities Act and/or
Regulation D promulgated thereunder. The securities were issued with no general
solicitation or advertising and the purchasers had adequate access to
information about the Company.
11. In May 1997, in connection with convertible notes evidencing loans to
the Company in an aggregate amount of $270,000, the Company issued warrants to
investors to purchase an aggregate of 56,252 shares of Series A Preferred Stock
at an exercise price of $4.80 per share; provided that such exercise price
increases to the offering price in this offering if this offering is effective
on or before November 21, 1997; provided, further, that the warrants may be
exercised within the 30 days following the consummation of this offering at
$2.00 per share. These issuances were made in reliance on Section 4(2) of the
Securities Act and/or Regulation D promulgated thereunder. The securities were
issued with no general solicitation or advertising and the purchasers had
adequate access to information about the Company.
12. In July 1997, in connection with convertible notes evidencing loans to
the Company in an aggregate amount of $270,000, the Company issued warrants to
investors to purchase an aggregate of 56,252 shares of Series A Preferred Stock
at an exercise price of $4.80 per share; provided that such exercise price
increases to the offering price in this offering is effective on or before
January 20, 1998; provided, further, that the warrants may be exercised within
the 30 days following the consummation of this offering at $2.00 per share.
These issuances were made in reliance on Section 4(2) of the Securities Act
and/or Regulation D promulgated thereunder. The securities were issued with no
general solicitation or advertising and the purchasers had adequate access to
information about the Company.
13. In August and September 1997, in connection with term notes evidencing
loans to the Company in an aggregate amount of $490,000, the Company issued
warrants to investors to purchase an aggregate of 43,050 shares of Common Stock
at an exercise price of $12.00 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 $2.00 per share. The
Company also issued warrants to purchase an aggregate of 11,690 shares of Common
Stock at an exercise price of $12.00 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
$2.00 per share. These issuances were made in reliance on Section 4(2) of the
Securities Act and/or Regulation D promulgated thereunder. The securities were
issued with no general solicitation or advertising and the purchasers had
adequate access to information about the Company.
14. In June and July 1997, the Company issued warrants to purchase an
aggregate of 25,001 shares of Common Stock at an exercise price of $12.00 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.
15. In September 1997, 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 6,251 shares of Common Stock at an exercise price of
$4.00 per share. No separate consideration was paid to the Company for issuance
of the warrants.
16. In September 1997, in connection with an extension of the Company's bank
line of credit, the Company issued to its bank warrants to purchase 1,042 shares
of Common Stock at an exercise price of $12.00 per share. No separate
consideration was paid to the Company for issuance of the warrants.
II-3
<PAGE>
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.
II-4
<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. The dates of each agreement are
listed on Schedule 4(t).
4(u)* Form of Subordinated Promissory Note with the Company as
Maker. A list of the Holders is attached thereto as
Schedule 4(u). The dates of each Note are listed on
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. The dates of issuance
for each warrant are listed on Schedule 4(v).
4(w)* Form of Lock-Up Agreement executed by each of the
investors listed on Schedule 4(w) attached thereto on the
dates set forth thereon.
4(x)* Intellectual Property Security Agreement dated September
17, 1997 between the Company and Silicon Valley Bank.
4(y)* Common Stock Purchase Warrant dated September 17, 1997,
held by Silicon Valley Bank.
4(z)* Form of October 1997 Amendment to Loan and Warrant
Purchase Agreement and Term Note dated October 25, 1997,
executed by the Investors listed on Schedule 4(z) attached
thereto.
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<PAGE>
4(aa)* September 16, 1997 Amendment to Bridge Note and Warrant
Purchase Agreement dated May 9, 1997 between the Company
and Wasatch Venture Corporation, Newtek Ventures II, L.P.,
Sundance Venture Partners II, L.P. and Wayne Sorensen
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 shares of Common Stock.
9(b) Proxy dated May 7, 1996 of James Layne granting Chad
Little the right to vote 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.
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.
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.
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<PAGE>
10(m) Stock Subscription Warrant dated July 11, 1997 issued to
CNNfn to purchase shares of Common Stock of the Company.
10(n)* Co-Branding and Marketing Agreement dated as of June 20,
1997, between the Company and CNN/SI.
10(o)* Stock Subscription Warrant dated June 20, 1997 issued to
CNN/SI to purchase shares of Common Stock of the Company.
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.
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.
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<PAGE>
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.
10(jj)* Warrant Purchase Agreement dated September 27, 1997
between the Company and Third Coast Venture Lease Partners
I, L.P.
10(kk)* Common Stock Subscription Warrant dated September 29, 1997
held by Third Coast Venture Lease Partners I, L.P.
10(ll)* Common Stock Subscription Warrant dated September 29, 1997
held by Third Coast Venture Lease Partners I, L.P.
10(mm)** Warrant Agreement dated November __, 1997 between the
Company and the Underwriters.
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.
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.
* Filed herewith.
** To be filed by amendment.
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<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-9
<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 21st day of November, 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 November 21st, 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.
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<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.
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<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. The dates of each agreement are
listed on Schedule 4(t).
4(u)* Form of Subordinated Promissory Note with the Company as
Maker. A list of the Holders is attached thereto as
Schedule 4(u). The dates of each Note are listed on
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. The dates of issuance
for each warrant are listed on Schedule 4(v).
4(w)* Form of Lock-Up Agreement executed by each of the
investors listed on Schedule 4(w) attached thereto on the
dates set forth thereon.
4(x)* Intellectual Property Security Agreement dated September
17, 1997 between the Company and Silicon Valley Bank.
4(y)* Common Stock Purchase Warrant dated September 17, 1997,
held by Silicon Valley Bank.
4(z)* Form of October 1997 Amendment to Loan and Warrant
Purchase Agreement and Term Note dated October 25, 1997,
executed by the Investors listed on Schedule 4(z) attached
thereto.
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<PAGE>
4(aa)* September 16, 1997 Amendment to Bridge Note and Warrant
Purchase Agreement dated May 9, 1997 between the Company
and Wasatch Venture Corporation, Newtek Ventures II, L.P.,
Sundance Venture Partners II, L.P. and Wayne Sorensen
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 shares of Common Stock.
9(b) Proxy dated May 7, 1996 of James Layne granting Chad
Little the right to vote 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.
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.
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.
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<PAGE>
10(m) Stock Subscription Warrant dated July 11, 1997 issued to
CNNfn to purchase shares of Common Stock of the Company.
10(n)* Co-Branding and Marketing Agreement dated as of June 20,
1997, between the Company and CNN/SI.
10(o)* Stock Subscription Warrant dated June 20, 1997 issued to
CNN/SI to purchase shares of Common Stock of the Company.
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.
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.
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<PAGE>
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.
10(jj)* Warrant Purchase Agreement dated September 27, 1997
between the Company and Third Coast Venture Lease Partners
I, L.P.
10(kk)* Common Stock Subscription Warrant dated September 29, 1997
held by Third Coast Venture Lease Partners I, L.P.
10(ll)* Common Stock Subscription Warrant dated September 29, 1997
held by Third Coast Venture Lease Partners I, L.P.
10(mm)** Warrant Agreement dated November __, 1997 between the
Company and the Underwriters.
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.
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.
* Filed herewith.
** To be filed by amendment.
II-15
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 Sections 242 and 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 Thirteen Million (13,000,000) divided into Ten Million (10,000,000)
shares of Common Stock, each with par value of $.001 ("Common Stock"), and
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Three Million (3,000,000) 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
Six Hundred Thousand (600,000) 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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<PAGE>
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 (subject to appropriate adjustment in
the event of any stock dividend, stock split, combination or other similar
recapitalization affecting such shares) 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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<PAGE>
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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<PAGE>
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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<PAGE>
(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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<PAGE>
(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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<PAGE>
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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(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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(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 1,000,000 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 and 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 one million
(1,000,000) 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 1,000,000 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 (subject to appropriate adjustment in
the event of any stock dividend, stock split, combination or other similar
recapitalization affecting such shares) 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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(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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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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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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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
-8-
<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.
-9-
<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
-10-
<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
-11-
<PAGE>
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:
-12-
<PAGE>
(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.
-13-
<PAGE>
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
--------------------------------------
ATTEST:
- --------------------------------------
-14-
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.
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: ___________________________________
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
<TABLE>
<CAPTION>
Amount Shares Under the
------ ----------------
Purchaser Address of Purchaser Borrowed Warrant
- --------- -------------------- -------- -------
<S> <C> <C> <C>
Thomas Lescault 6708 East Ocotillo Rd. $10,000 1,700
Paradise Valley, AZ 85253
Terrance Morris 200 Putnam, Suite 600 $5,000 850
Marietta, OH 45750
Douglas and Susan 172 Dan's Highway $10,000 1,700
Greenwood New Canaan, CT 06840
Pickwick Group LLC 172 Dan's Highway $5,000 850
New Canaan, CT 06840
Geoffrey Herter 85 Church Street $10,000 1,700
Middletown, CT 06457
</TABLE>
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.
October 25, 1995 Loan and Warrant Purchase Agreement, Term Note and Warrants
<TABLE>
<CAPTION>
Purchaser Address of Purchaser Shares Under
- --------- -------------------- ------------
Warrant
-------
<S> <C> <C>
Thomas Lescault 6708 East Ocotillo Rd. 1,700
Paradise Valley, AZ 85253
Terrance Morris 200 Putnam, Suite 600 850
Marietta, OH 45750
Douglas and Susan Greenwood 172 Dan's Highway 1,700
New Canaan, CT 06840
Pickwick Group, L.L.C. 172 Dan's Highway 850
New Canaan, CT 06840
Geoffrey Herter 85 Church Street 1,700
Middletown, CT 06457
</TABLE>
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, Principal Amounts of Term Notes and Shares Under each Warrant:
October 25, 1995 Loan and Warrant Purchase Agreement, Term Note and Warrants
<TABLE>
<CAPTION>
Holders Principal of Loan Under Shares Under the Warrant
- ------- ----------------------- ------------------------
Term Note
---------
<S> <C> <C>
Thomas Lescault $10,000 1,700
Terrance Morris $5,000 850
Douglas and Susan $10,000 1,700
Greenwood
Pickwick Group LLC $5,000 850
Geoffrey Herter $10,000 1,700
</TABLE>
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
<TABLE>
<CAPTION>
Shares Under Shares Under Tracer
------------ -------------------
Holder and Address Sandbox Warrant Warrants
- ------------------ --------------- --------
<S> <C> <C>
Terrance Morris 38,250 850
200 Putnam, Suite 600
Marietta, OH 45750
Thomas Lescault 76,500 1,700
6708 East Ocotillo Rd.
Paradise Valley, AZ 85253
Pickwick Group, L.L.C. 229,500 5,100
172 Dan's Highway
New Canaan, CT 06840
Douglas and Susan Greenwood 76,500 1,700
172 Dan's Highway
New Canaan, CT 06840
Geoffrey Herter 76,500 1,700
85 Church Street
Middletown, CT 06457
Pickwick Group, L.L.C. 38,250 850
172 Dan's Highway
New Canaan, CT 06840
</TABLE>
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.
<TABLE>
<CAPTION>
Shares Under
------------
Purchaser and Address Amount Shares Under the Sandbox Warrant -
- --------------------- ------ ---------------- ------------------
of Purchaser Borrowed Tracer Warrant Postsplit and Post
- ------------ -------- -------------- ------------------
Dilution
--------
<S> <C> <C> <C>
Thomas Lescault $10,000 1,700 76,500
6708 East Ocotillo Rd.
Paradise Valley, AZ
85253
Terrance Morris $5,000 850 38,250
200 Putnam, Suite 600
Marietta, OH 45750
Douglas and Susan $10,000 1,700 76,500
Greenwood
172 Dan's Highway
New Canaan, CT 06840
Pickwick Group LLC $5,000 850 38,250
172 Dan's Highway
New Canaan, CT 06840
Geoffrey Herter $10,000 1,700 76,500
85 Church Street
Middletown, CT 06457
</TABLE>
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 and Number of Shares:
October 25, 1996 Sandbox Warrants
Holder and Address Additional Sandbox
- ------------------ ------------------
Warrants
--------
Terrance Morris 625
200 Putnam, Suite 600
Marietta, OH 45750
Thomas Lescault 1,250
6708 East Ocotillo Rd.
Paradise Valley, AZ 85253
Pickwick Group, L.L.C. 625
172 Dan's Highway
New Canaan, CT 06840
Douglas and Susan Greenwood 1,250
172 Dan's Highway
New Canaan, CT 06840
Geoffrey Herter 1,250
85 Church Street
Middletown, CT 06457
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
2
<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
3
<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:
_____________________________________
4
<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.
2
<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
3
<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.
4
<PAGE>
Schedule to Exhibit 4(l) - Form of April 1997 Amendment to Loan and Warrant
Purchase Agreement.
<TABLE>
<CAPTION>
Shares Under
------------
Shares Under Sandbox
------------ -------
the Tracer Warrant - Additional
---------- ---------- ----------
Warrant Postsplit and Shares Issued
------- ------------- -------------
Amount 10/25/95 - Post Dilution; Under
------ ----------- -------------- -----
Borrowed $36 per share $0.80 per share Amended
-------- ------------- --------------- -------
Purchaser and Address 10/25/95 Exercise Price Exercise Price Warrant
- ---------------------- -------- -------------- -------------- -------
<S> <C> <C> <C> <C>
Thomas Lescault $10,000 1,700 76,500 1,250
6708 East Ocotillo Rd.
Paradise Valley, AZ
85253
Terrance Morris $5,000 850 38,250 625
200 Putnam, Suite 600
Marietta, OH 45750
Douglas and Susan $10,000 1,700 76,500 1,250
Greenwood
172 Dan's Highway
New Canaan, CT 06840
Pickwick Group LLC $5,000 850 38,250 625
172 Dan's Highway
New Canaan, CT 06840
Geoffrey Herter $10,000 1,700 76,500 1,250
85 Church Street
Middletown, CT 06457
</TABLE>
5
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
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 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 and Address Additional Sandbox Warrants
- ------------------ ---------------------------
Terrance Morris 625
200 Putnam, Suite 600
Marietta, OH 45750
Thomas Lescault 1,250
6708 East Ocotillo Rd.
Paradise Valley, AZ 85253
Pickwick Group, L.L.C. 625
172 Dan's Highway
New Canaan, CT 06840
Douglas and Susan Greenwood 1,250
172 Dan's Highway
New Canaan, CT 06840
Geoffrey Herter 1,250
85 Church Street
Middletown, CT 06457
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, Amounts Borrowed and Shares Under the Warrants:
<TABLE>
<CAPTION>
Purchaser Address of Purchaser Amount Shares Under the
- --------- -------------------- ------ ----------------
Borrowed Warrant
-------- -------
<S> <C> <C> <C>
Wasatch Venture One South Main, Suite 1340 $100,000 125,000
Corporation Salt Lake City, UT 84111
Newtek Ventures 500 Washington Street $50,000 62,500
II, L.P. Suite 720
San Francisco, CA 94111
Sundance Venture c/o Anderson & Wells $100,000 125,000
Partners, L.P. 400 East Van Buren
Suite 750
Phoenix, AZ 85004
Wayne Sorensen 1925 East Michigan Avenue $20,000 25,000
Salt Lake City, UT 85108
</TABLE>
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:
<TABLE>
<CAPTION>
Holder Address of Holder Shares Under the Warrant
- ------ ----------------- ------------------------
<S> <C> <C>
Wasatch Venture One South Main, Suite 1340 125,000
Corporation Salt Lake City, UT 84111
Newtek Ventures 500 Washington Street, Suite 720 62,500
II, L.P. San Francisco, CA 94111
Sundance Venture c/o Anderson & Wells 125,000
Partners, L.P. 400 East Van Buren, Suite 750
Phoenix, AZ 85004
Wayne Sorensen 1925 East Michigan Avenue 25,000
Salt Lake City, UT 85108
</TABLE>
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:
<TABLE>
<CAPTION>
Holder Address of Holder Amount
- ------ ----------------- ------
Borrowed
--------
<S> <C> <C>
Wasatch Venture One South Main, Suite 1340 $100,000
Corporation Salt Lake City, UT 84111
Newtek Ventures 500 Washington Street, Suite 720 $50,000
II, L.P. San Francisco, CA 94111
Sundance Venture c/o Anderson & Wells $100,000
Partners, L.P. 400 East Van Buren, Suite 750
Phoenix, AZ 85004
Wayne Sorensen 1925 East Michigan Avenue $20,000
Salt Lake City, UT 85108
</TABLE>
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, Amounts Borrowed and Shares Under the Warrants:
<TABLE>
<CAPTION>
Purchaser Address of Purchaser Amount Shares Under the
- --------- -------------------- ------ ----------------
Borrowed Warrant
-------- -------
<S> <C> <C> <C>
Wasatch Venture One South Main, Suite 1340 $100,000 125,000
Corporation Salt Lake City, UT 84111
Newtek Ventures 500 Washington Street $60,000 75,000
II, L.P. Suite 720
San Francisco, CA 94111
Sundance Venture c/o Anderson & Wells $100,000 125,000
Partners, L.P. 400 East Van Buren
Suite 750
Phoenix, AZ 85004
Wayne Sorensen 1925 East Michigan Avenue $10,000 12,500
Salt Lake City, UT 85108
</TABLE>
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:
<TABLE>
<CAPTION>
Purchaser Address of Purchaser Shares Under
- --------- -------------------- ------------
the Warrant
-----------
<S> <C> <C>
Wasatch Venture One South Main, Suite 1340 125,000
Corporation Salt Lake City, UT 84111
Newtek Ventures 500 Washington Street, Suite 720 75,000
II, L.P. San Francisco, CA 94111
Sundance Venture c/o Anderson & Wells 125,000
Partners, L.P. 400 East Van Buren, Suite 750
Phoenix, AZ 85004
Wayne Sorensen 1925 East Michigan Avenue 12,500
Salt Lake City, UT 85108
</TABLE>
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 Purchasers and Amounts Borrowed:
Purchaser Address of Purchaser Amount
- --------- -------------------- ------
Borrowed
--------
Wasatch Venture One South Main, Suite 1340 $100,000
Corporation Salt Lake City, UT 84111
Newtek Ventures 500 Washington Street $60,000
II, L.P. Suite 720
San Francisco, CA 94111
Sundance Venture c/o Anderson & Wells $100,000
Partners, L.P. 400 East Van Buren
Suite 750
Phoenix, AZ 85004
Wayne Sorensen 1925 East Michigan Avenue $10,000
Salt Lake City, UT 85108
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.
List of Purchasers and Number of Shares of Common Stock:
<TABLE>
<CAPTION>
Purchaser Date Agreement Number of Shares
- --------- -------------- ----------------
<S> <C> <C>
The Little Family Trust August 5, 1997 25,000
Glenn Gomez August 12, 1997 20,000
Albert P. Pepka, M.D., FAAP, PC Defined September 25, 1997 5,500
Benefits Pension
David and Kinta Heath, CPWROS September 25, 1997 2,750
Robert A. and Geralding R. Warwick, September 25, 1997 5,500
JTWROS
Gary A. Stanton, D.D.S., P.C. September 25, 1997 2,750
Gary L. Hornbrook September 25, 1997 5,500
John & Irene Cifelli Crandchildren's Trust September 25, 1997 5,500
UAD 1/15/90
Lawrence Underwood September 25, 1997 11,000
Richard Janicki September 25, 1997 2,750
Scott and Shari Kendrick, JTWROS September 25, 1997 5,500
Maxim Corporation, Ltd. September 25, 1997 20,625
Art Beroff September 25, 1997 8,250
</TABLE>
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:
<TABLE>
<CAPTION>
Holder Date Principal
- ------ ---- ---------
<S> <C> <C>
The Little Family Trust August 5, 1997 $125,000
Glenn Gomez August 12, 1997 $100,000
Albert P. Pepka, M.D., FAAP, PC Defined September 25, 1997 $20,000
Benefits Pension
David and Kinta Heath, CPWROS September 25, 1997 $10,000
Robert A. and Geralding R. Warwick, JTWROS September 25, 1997 $20,000
Gary A. Stanton, D.D.S., P.C. September 25, 1997 $10,000
Gary L. Hornbrook September 25, 1997 $20,000
John & Irene Cifelli Grandchildren's Trust UAD September 25, 1997 $20,000
1/15/90
Lawrence Underwood September 25, 1997 $40,000
Richard Janicki September 25, 1997 $10,000
Scott and Shari Kendrick, JTWROS September 25, 1997 $20,000
Maxim Corporation, Ltd. September 25, 1997 $75,000
Art Beroff September 25, 1997 $18,400
</TABLE>
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.
List of Purchasers and Number of Common Shares:
<TABLE>
<CAPTION>
Purchaser Date Number of Shares
- --------- ---- ----------------
<S> <C> <C>
The Little Family August 5, 1997 25,000
Trust
Glenn Gomez August 12, 1997 20,000
Albert P. Pepka, September 25, 1997 5,500
M.D., FAAP, PC
Defined Benefits
Pension
David and Kinta September 25, 1997 2,750
Heath, CPWROS
Robert A. and September 25, 1997 5,500
Geralding R.
Warwick, JTWROS
Gary A. Stanton, September 25, 1997 2,750
D.D.S., P.C.
Gary L. Hornbrook September 25, 1997 5,500
John & Irene Cifelli September 25, 1997 5,500
Crandchildren's Trust
UAD 1/15/90
Lawrence Underwood September 25, 1997 11,000
Richard Janicki September 25, 1997 2,750
Scott and Shari September 25, 1997 5,500
Kendrick, JTWROS
Maxim Corporation, September 25, 1997 20,625
Ltd.
Art Beroff September 25, 1997 8,250
</TABLE>
8
Exhibit 4(w)
SANDBOX ENTERTAINMENT CORPORATION
2231 East Camelback Road, Suite 324
Phoenix, AZ 85016
WIT CAPITAL CORPORATION
826 Broadway, 6th Floor
New York, NY 10003
Dear Sirs:
The undersigned understands that Wit Capital Corporation (the
"Underwriter"), proposes to enter into an Underwriting Agreement with Sandbox
Entertainment Corporation (the "Company"), providing for the public offering
(the "Offering") of Series B Convertible Preferred stock, par value $0.001 per
share (the "Series B Preferred Stock"), of the Company.
To induce the Underwriter that may participate in the Offering to
continue its efforts in connection with the Offering, the undersigned, during
the period commencing on the date hereof and ending on the earlier of (a) 30
days following the expiration or early termination of the Restricted Period (as
defined in the Certificate of Designation for the Series B Preferred Stock) or
(b) 180 days after the consummation of a Qualifying Public Offering (as defined
in the Certificate of Designation for the Series B Preferred Stock):
(i) agrees not to (x) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of Series B Preferred Stock,
Series A Convertible Preferred Stock, par value $.001 per share ("Series A
Preferred Stock") or Common Stock, par value $.001 per share (the "Common
Stock"), or any securities convertible into or exercisable or exchangeable for
Series B Preferred Stock, Series A Preferred Stock or Common Stock which may be
deemed to be beneficially owned by the undersigned in accordance with the rules
and regulations of the Securities and Exchange Commission) or (y) enter into any
swap or other arrangement that transfers all or a portion of the economic
consequences associated with the ownership of any Series B Preferred Stock,
Series A Preferred Stock or Common Stock (regardless of whether any of the
transactions described in clause (x) or (y) is to be settled by the delivery of
Series B Preferred Stock, Series A Preferred Stock or Common Stock, or such
other securities, in cash or otherwise), without the prior written consent of
the Underwriter;
(ii) agrees not to make any demand for, or exercise any right
with respect to, the registration of any shares of Series B Preferred Stock,
Series A Preferred Stock or Common Stock or any securities convertible into or
exercisable or exchangeable for Series B Preferred Stock, Series A Preferred
Stock or Common Stock without the prior written consent of the Underwriter; and
(iii) authorizes the Company to cause the transfer agent to
decline to transfer and/or to note stop transfer restrictions on the transfer
books and records of the Company with respect to any shares of Series B
Preferred Stock, Series A Preferred Stock or Common Stock and any securities
convertible into or exercisable or exchangeable for Series B Preferred Stock,
Series A Preferred Stock or Common Stock for which the undersigned is the record
holder and, in the case of any such shares or securities for which the
undersigned is the beneficial but not the record holder, agrees to cause the
record holder to cause the transfer agent to decline to transfer and/or to note
stop transfer restrictions on such books and records with respect to such shares
or securities.
<PAGE>
The undersigned hereby represents and warrants that the undersigned has
full power and authority to enter into the agreements set forth herein, and
that, upon request, the undersigned will execute any additional documents
necessary or desirable in connection with the enforcement hereof. All authority
herein conferred or agreed to be conferred shall survive the death or incapacity
of the undersigned and any obligation of the undersigned shall be binding upon
the heirs, personal representatives, successors, and assigns of the undersigned.
Very truly yours,
By
----------------------------------
Its
-------------------------------
- --------------------------
- --------------------------
- --------------------------
(Address)
- --------------------------
(Social Security or Taxpayer
Identification No.)
<PAGE>
SCHEDULE 4(W) - List of Investors who are party to Exhibit 4(w) - Lock Up
Agreement
<TABLE>
<CAPTION>
Social Security No. or
----------------------
Investor Address Date of Agreement Federal Tax ID
- -------- ------- ----------------- --------------
<S> <C> <C> <C>
Newtek Venture II, L.P. 500 Washington Street September 24, 1997
Suite 720
San Francisco, CA 94111
Wasatch Venture One South Main September 26, 1997
Corporation Suite 1400
Salt Lake City, UT 84133
Sundance Venture c/o Anderson & Wells September 23, 1997
Partners, L.P. 400 East Van Bure
Suite 750
Phoenix, AZ 85004
John M. Holliman, III 4812 East Rovey Ave. September__, 1997 ###-##-####
Paradise Valley, AZ 85253
Wayne Sorensen 1925 East Michigan Ave. September 26, 1997 ###-##-####
Salt Lake City, UT 84108
Chad M. Little 1931 Linger Lane September 22, 1997 ###-##-####
Phoenix AZ 85020
Lonnie Whittington 6842 N. 4th Place September 22, 1997 ###-##-####
Phoenix, AZ 85012
James A. Layne 2231 East Camelback September 22, 1997 ###-##-####
Suite 324
Phoenix, AZ 85016
Michael S. Turico 2231 East Camelback September 22, 1997 ###-##-####
Suite 324
Phoenix, AZ 85016
Glenn E. Gomez 1950 Stemmons Fwy. September 19, 1997 ###-##-####
Suite 3054
Dallas, TX 75207
Pickwick Group LLC 172 Dan's Highway September 19, 1997 06-1424115
New Canaan, CT 06840
Douglas and Susan 172 Dan's Highway September 18, 1997 ###-##-#### (D.G.)
Greenwood New Canaan, CT 06840 ###-##-#### (S.G.)
</TABLE>
Exhibit 4(x)
INTELLECTUAL PROPERTY SECURITY AGREEMENT
This Intellectual Property Security Agreement (this "IP Agreement" ) is
made as of September 17, 1997 by and between Sandbox Entertainment Corp.
("Grantor"), and Silicon Valley Bank, a California banking corporation
("Lender").
RECITALS
A. Lender has agreed to make advances of money and to extend certain
financial accommodations to Grantor (the "Loans. ), pursuant to a Quickstart
Loan and Security Agreement dated September 5, 1996 (the "Loan Agreement") and
Grantor desired to borrow such funds from Lender. Repayment of the Loan
Agreement is or will be secured in part pursuant to the Collateral as described
in the Loan Agreement. Lender is willing to make such Loans to Grantor, but only
upon the condition, among others, that Grantor shall grant to Lender a security
interest in certain Copyrights Trademarks, Patents, and Mask Works to secure the
obligations of Grantor under the Loan Agreement. Defined terms used but not
defined herein shall have the same meanings as in the Loan Agreement.
B. Pursuant to the terms of the Loan Agreement, Grantor has granted to
Lender a security interest in all of Grantor's right title and interest, whether
presently existing or hereafter acquired in, to and under all of the Collateral.
NOW, THEREFORE, for good and valuable consideration, receipt of which
is hereby acknowledged and intending to be legally bound, as collateral security
for the prompt and complete payment when due of Grantor s Indebtedness under the
Loan Agreement, Grantor hereby represents, warrants, covenants and agrees as
follows:
1. Grant of Security Interest. As collateral security for the prompt
and complete payment and performance of all of Grantor's present or future
Indebtedness, obligations and liabilities to Lender, Grantor hereby grants a
security interest in all of Grantor s right, title and interest in, to and under
its Intellectual Property Collateral (all of which shall collectively be called
the "Intellectual Property Collateral"), including, without limitation, the
following:
(a) Any and all copyright rights, copyright applications,
copyright registrations and like protections in each work or authorship and
derivative work thereof, whether published or unpublished and whether or not the
same also constitutes a trade secret, now or hereafter existing, created,
acquired or held, including without limitation those set forth on Exhibit A
attached hereto (collectively, the "Copyrights");
(b) Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products now or
hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available to
Grantor now or hereafter existing, created, acquired or held;
(d) All patents, patent applications and like protections
including, without limitation, improvements, divisions, continuations, renewals,
reissues, extensions and continuations-in-part of the same, including without
limitation the patents and patent applications set forth on Exhibit B attached
hereto (collectively, the "Patents");
(e) Any trademark and servicemark rights, whether registered
or not, applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Grantor connected with
and symbolized by such trademarks, including without limitation those set forth
on Exhibit C attached hereto (collectively, the "Trademarks");
1
<PAGE>
(f) All mask works or similar rights available for the
protection of semiconductor chips, now owned or hereafter acquired, including,
without limitation those set forth on Exhibit D attached hereto (collectively,
the "Mask Works");
(g) Any and all claims for damages by way of past, present and
future infringements of any of the rights included above, with the right, but
not the obligation, to sue for and collect such damages for said use or
infringement of the intellectual property rights identified above;
(h) All licenses or other rights to use any of the Copyrights,
Patents, Trademarks, or Mask Works and all license fees and royalties arising
from such use to the extent permitted by such license or rights; and
(i) All amendments, extensions, renewals and extensions of any
of the Copyrights, Trademarks, Patents, or Mask Works; and
(j) All proceeds and products of the foregoing, including
without limitation all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.
2. Authorization and Request. Grantor authorizes and requests that the
Register of Copyrights and the Commissioner of Patents and Trademarks record
this IP Agreement.
3. Covenants and Warranties. Grantor represents, warrants, covenants
and agrees as follows:
(a) Grantor is now the sole owner of the Intellectual Property
Collateral, except for non-exclusive licenses granted by Grantor to its
customers in the ordinary course of business.
(b) Performance of this IP Agreement does not conflict with or
result in a breach of any IP Agreement to which Grantor is bound, except to the
extent that certain intellectual property agreements prohibit the assignment of
the rights thereunder to a third party without the licensor's or other party's
consent and this IP Agreement constitutes a security interest.
(c) During the term of this IP Agreement, Grantor will not
transfer or otherwise encumber any interest in the Intellectual Property
Collateral, except for non-exclusive licenses granted by Grantor In the ordinary
course of business or as set forth in this IP Agreement;
(d) To its knowledge, each of the Patents is valid and
enforceable, and no part of the Intellectual Property Collateral has been judged
invalid or unenforceable, in whole or in part, and no claim has been made that
any part of the Intellectual Property Collateral violates the rights of any
third party;
(e) Grantor shall promptly advise Lender of any material
adverse change in the composition of the Collateral, including but not limited
to any subsequent ownership right of the Grantor in or to any Trademark, Patent,
Copyright, or Mask Work specified in this IP Agreement;
(f) Grantor shall (i) protect, defend and maintain the
validity and enforceability of the Trademarks, Patents, Copyrights, and Mask
Works. (ii) use its best efforts to detect infringements of the Trademarks,
Patents, Copyrights. and Mask Works and promptly advise Lender in writing of
material infringements detected and (iii) not allow any Trademarks, Patents.
Copyrights. or Mask Works to be abandoned. forfeited or dedicated to the public
without the written consent of Lender, which shall not be unreasonably withheld,
unless Grantor determines that reasonable business practices suggest that
abandonment is appropriate.
(g) Grantor shall promptly apply to obtain copyright
registration for each of its major games or simulations as well as any major
revisions thereto, and shall, from time to time. execute and file such other
instruments, and take such further actions as Lender may reasonably request from
time to time to perfect or
2
<PAGE>
continue the perfection of Lender's interest in the Intellectual Property
Collateral. Notwithstanding the foregoing, Grantor shall notify Lender of any
major updates to its titles not less than every six months;
(h) This IP Agreement creates. and in the case of after
acquired Intellectual Property Collateral, this IP Agreement will create at the
time Grantor first has rights in such after acquired Intellectual Property
Collateral, in favor of Lender a valid and perfected first priority security
interest in the Intellectual Property Collateral in the United States securing
the payment and performance of the obligations evidenced by the Note and the
Loan Agreement upon making the filings referred to in clause (i) below;
(i) To its knowledge, except for, and upon, the filing with
the United States Patent and Trademark office with respect to the Patents and
Trademarks and the Register of Copyrights with respect to the Copyrights and
Mask Works necessary to perfect the security interests created hereunder and
except as has been already made or obtained, no authorization, approval or other
action by, and no notice to or filing with, any U.S. governmental authority of
U.S. regulatory body is required either (i) for the grant by Grantor of the
security interest granted hereby or for the execution, delivery or performance
of this IP Agreement by Grantor in the U.S. or (ii) for the perfection in the
United States or the exercise by Lender of its rights and remedies thereunder;
(j) All information heretofore, herein or hereafter supplied
to Lender by or on behalf of Grantor with respect to the Intellectual Property
Collateral is accurate and complete in all material respects;
(k) Grantor shall not enter into any agreement that would
materially impair or conflict with Grantor's obligations hereunder without
Lender's prior written consent, which consent shall not be unreasonably
withheld. Grantor shall not permit the inclusion in any material contract to
which it becomes a party of any provisions that could or might in any way
prevent the creation of a security interest in Grantor's rights and interest in
any property included within the definition of the Intellectual property
Collateral acquired under such contracts, except that certain contracts may
contain anti-assignment provisions that could in effect prohibit the creation of
a security interest in such contracts.
(1) Upon any executive officer of Grantor obtaining actual
knowledge thereof, Grantor will promptly notify Lender in writing of any event
that materially adversely affects the value of any material Intellectual
Property Collateral, the ability of Grantor to dispose of any material
Intellectual Property Collateral of the rights and remedies of Lender in
relation thereto, including the levy of any legal process against any of the
Intellectual Property Collateral.
4. Lender's Rights. Lender shall have the right, but not the
obligation, to take, at Grantor's sole expense, any atones that Grantor is
required under this IP Agreement to take but which Grantor fails to take, after
fifteen (15) days' notice to Grantor. Grantor shall reimburse and indemnify
Lender for all reasonable costs and reasonable expenses incurred in the
reasonable exercise of its rights under this section 4.
5. Inspection Rights. Grantor hereby grants to Lender and its
employees, representatives and agents the right to visit, during reasonable
hours upon prior reasonable written notice to Grantor, and any of Grantor's
plants and facilities that manufacture, install or store products (or that have
done so during the prior six-month period) that are sold utilizing any of the
Intellectual Property Collateral, and to inspect the products and quality
control records relating thereto upon reasonable written notice to Grantor and
as often as may be reasonably requested, but not more than one (1) in every six
(6) months; provided, however, nothing herein shall entitle Lender access to
Grantor's trade secrets and other proprietary information.
6. Further Assurances; Attorney in Fact.
(a) On a continuing basis, Grantor will, subject to any prior
licenses, encumbrances and restrictions and prospective licenses, make, execute,
acknowledge and deliver, and file and record in the proper filing and recording
places in the United States, all such instruments, including appropriate
financing and continuation statements and collateral agreements and filings with
the United States Patent and Trademarks Office and the Register of Copyrights,
and take all such action as may reasonably be deemed necessary or advisable, or
as
3
<PAGE>
requested by Lender, to perfect Lender's security interest in all Copyrights,
Patents, Trademarks, and Mask Works and otherwise to carry out the intent and
purposes of this IP Agreement, or for assuring and confirming to Lender the
grant or perfection of a security interest in all Intellectual Property
Collateral.
(b) Grantor hereby irrevocably appoints Lender as Grantor's
attorney-in-fact, with full authority in the place and stead of Grantor and in
the name of Grantor, Lender or otherwise, from time to time in Lender's
discretion, upon Grantor's failure or inability to do so, to take any action and
to execute any instrument which Lender may deem necessary or advisable to
accomplish the purposes of this IP Agreement, including:
(i) To modify, in its sole discretion, this IP
Agreement without first obtaining Grantor's approval of or signature to such
modification by amending Exhibit A, Exhibit B, Exhibit C, and Exhibit D hereof,
as appropriate, to include reference to any right, title or interest in any
Copyrights, Patents, Trademarks or Mask Works acquired by Grantor after the
execution hereof or to delete any reference to any right, title or interest in
any Copyrights, Patents, Trademarks, or Mask Works in which Grantor no longer
has or claims any right, title or interest; and
(ii) To file, in its sole discretion, one or more
financing or continuation statements and amendments thereto, relative to any of
the Intellectual Property Collateral without the signature of Grantor where
permitted by law.
7. Events of Default. The occurrence of any of the following shall
constitute an Event of Default under this IP Agreement:
(a) An Event of Default occurs under the Loan Agreement, the
Note; or any document from Grantor to lender; or
(b) Grantor breaches any warranty or agreement made by Grantor
in this IP Agreement.
8. Remedies. Upon the occurrence and continuance of an Event of
Default, Lender shall have the right to exercise all the remedies of a secured
party under the California Uniform Commercial Code, including without limitation
the right to require Grantor to assemble the Intellectual Property Collateral
and any tangible property in which Lender has a security interest and to make it
available to Lender at a place designated by Lender. Lender shall have a
nonexclusive, royalty free license to use the Copyrights, Patents, Trademarks,
and Mask Works to the extent reasonably necessary to permit Lender to exercise
its right and remedies upon the occurrence of an Event of Default. Grantor will
pay any expenses (including reasonable attorney's fees) incurred by lender in
connection with the exercise of any of Lender's rights hereunder, including
without limitation any expense incurred in disposing of the Intellectual
Property Collateral. All of Lender's rights and remedies with respect to the
Intellectual Property Collateral shall be cumulative.
9. Indemnity. Grantor agrees to defend, indemnify and hold harmless
Lender and its officers, employees, and agents against: (a) all obligations,
demands, claims, and liabilities claimed or asserted by any other party in
connection with the transactions contemplated by this IP Agreement, and (b) all
losses or expenses in any way suffered, incurred, or paid by Lender as a result
of or in any way arising out of, following or consequential to transactions
between Lender and Grantor, whether under this IP Agreement or otherwise
(including without limitation, reasonable attorneys fees and reasonable
expenses), except for losses arising from or out of Lender's gross negligence or
willful misconduct.
10. Reassignment. At such time as Grantor shall completely satisfy all
of the obligations secured hereunder, Lender shall execute and deliver to
Grantor all deed, assignments, and other instruments as may be necessary or
proper to reinvest in Grantor full title to the property assigned hereunder,
subject to any disposition thereof which may have been made by Lender pursuant
hereto.
11. Course of Dealing. No course of dealing, nor any failure to
exercise, nor any delay in exercising any right, power or privilege hereunder
shall operate as a waiver thereof.
4
<PAGE>
12. Attorneys' Fees. If any action relating to this IP Agreement is
brought by either party hereto against the other party, the prevailing party
shall be entitled to recover reasonable attorneys fees, costs and disbursements.
13. Amendments. This IP Agreement may be amended only by a written
instrument signed by both parties hereto.
14. Counterparts. This IP Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute the same instrument.
15. Law and Jurisdiction. This IP Agreement shall be governed by and
construed in accordance with the laws of the State of California, without regard
for choice of law provisions. Grantor and Lender consent to the nonexclusive
Jurisdiction of any state or federal court located in Santa Clara County,
California.
16. Confidentiality. In handling any confidential information, Lender
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this IP
Agreement except that the disclosure of this information may be made (i) to the
affiliates of the Lender, (ii) to prospective transferee or purchasers of an
interest in the obligations secured hereby, provided that they have entered into
comparable confidentiality agreement in favor of Grantor and have deliver a copy
to Grantor, (iii) as required by law, regulation, rule or order, subpoena
judicial order or similar order and (iv) as may be required in connection with
the examination, audit or similar investigation of Lender.
IN WITNESS WHEREOF, the parties hereto have executed this IP Agreement
on the day and year first above written.
Address of Grantor: GRANTOR:
2231 Camelback Rd. SANDBOX ENTERTAINMENT CORP.
Phoenix, AZ
By: s/ Mark Gorchoff
-------------------------------
Name: Mark Gorchoff
-----------------------------
Title: CFO
-----------------------------
5
<PAGE>
Exhibit "A" attached to that certain Intellectual Property Security Agreement
dated September 17, 1997.
------------
EXHIBIT "A"
COPYRIGHTS
SCHEDULE A- ISSUED COPYRIGHTS - none
- -----------------------------
COPYRIGHT REGISTRATION DATE OF
DESCRIPTION NUMBER ISSUANCE
- ----------- ------ --------
SCHEDULE B - PENDING COPYRIGHT APPLICATIONS
- -------------------------------------------
FIRST DATE
COPYRIGHT APPLICATION DATE OF DATE OF OF PUBLIC
DESCRIPTION NUMBER FILING CREATION DISTRIBUTION
- ----------- ------ ------ -------- ------------
Fantasy Football n/a 10/97 1997 7/21/97
Final Bell n/a 10/97 1995 11/15/95
SCHEDULE C - UNREGISTERED COPYRIGHTS (Where No Copyright Application is Pending)
- -------------------------------------------------------------------------------
- n/a
DATE AND
RECORDATION
NUMBER OF
IP AGREEMENT TO
OWNER OF
ORIGINAL GRANTOR (IF
AUTHOR OR ORIGINAL AUTHOR
OWNER OF OR OWNER OF
FIRST DATE COPYRIGHT COPYRIGHT IS
COPYRIGHT DATE OF OF (IF DIFFERENT DIFFERENT ROM
DESCRIPTION CREATION DISTRIBUTION FROM GRANTOR GRANTOR
- ----------- -------- ------------ ------------ ---------------
6
<PAGE>
Exhibit "B" attached to that certain Intellectual Property Security Agreement
dated September 17, 1997.
------------
EXHIBIT "B"
PATENTS
PATENT
DESCRIPTION DOCKET NO. COUNTRY SERIAL NO. FILING DATE STATUS
- ----------- ---------- ------- ---------- ----------- ------
Dynamic
Advertising USA 60/016,674 5/2/96 Pending
Dynamic Page
Creation USA 60/016,661 5/1/96 Pending
7
<PAGE>
Exhibit "C" attached to that certain Intellectual Property Security Agreement
dated September 17, 1997
------------
EXHIBIT "C"
TRADEMARKS
TRADEMARK
DESCRIPTION COUNTRY SERIAL NO. REG. NO STATUS
- ----------- ------- ---------- ------- ------
Sandbox USA 2,054,500 Issued
8
<PAGE>
Exhibit "D" attached to that certain Intellectual Property Security Agreement
dated September 17, 1997.
------------
EXHIBIT "D"
MASK WORKS
MASK WORK
DESCRIPTION COUNTRY SERIAL NO. REG. NO STATUS
- ----------- ------- ---------- ------- ------
none
9
Exhibit 4(y)
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
QUICKSTART
WARRANT TO PURCHASE STOCK
Corporation: Sandbox Entertainment Corporation, a Delaware corporation
Number of Shares: 6,250
Class of Stock: Common
Initial Exercise Price: $2.00 per share
Issue Date: September 17, 1997
Expiration Date: September 16, 2000
THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for
other good and valuable consideration, SILICON VALLEY BANK ("Holder") is
entitled to purchase the number of fully paid and nonassessable shares of the
class of securities (the "Shares") of the corporation (the "Company") at the
initial exercise price per Share (the "Warrant Price") all as set forth above
and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions
and upon the terms and conditions set forth in this Warrant.
ARTICLE 1: EXERCISE.
---------
1.1. Method of Exercise. Holder may exercise this Warrant by delivering
a duly executed Notice of Exercise in substantially the form attached as
Appendix 1 to the principal office of the Company. Unless Holder is exercising
the conversion right set forth in Section 1.2, Holder shall also deliver to the
Company a check for the aggregate Warrant Price for the Shares being purchased.
1.2. Conversion Right. In lieu of exercising this Warrant as specified
in Section 1.1, Holder may from time to time convert this Warrant, in whole or
in part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares or other securities otherwise issuable upon exercise
of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair
market value of one Share. The fair market value of the Shares shall be
determined pursuant to Section 1.4.
1.3. Intentionally Omitted
1.4. Fair Market Value. If the Shares are traded in a public market,
the fair market value of the Shares shall be the closing price of the Shares (or
the closing price of the Company's
<PAGE>
stock into which the Shares are convertible) reported for the business day
immediately before Holder delivers its Notice of Exercise to the Company. If the
Shares are not traded in a public market, the Board of Directors of the Company
shall determine fair market value in its reasonable good faith judgment.
1.5. Delivery of Certificate and New Warrant. Promptly after Holder
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.6. Replacement of Warrants. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, on surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.7. Repurchase on Sale, Merger, or Consolidation of the Company.
1.7.1. "Acquisition". For the purpose of this Warrant, "Acquisition"
means any sale, license, or other disposition of all or substantially all of the
assets of the Company, or any reorganization, consolidation, or merger of the
Company where the holders of the Company's securities before the transaction
beneficially own less than 50% of the outstanding voting securities of the
surviving entity after the transaction.
1.7.2. Assumption of Warrant. Upon the closing of any Acquisition the
successor entity may, at its option, assume the obligations of this Warrant, and
this Warrant shall be exercisable for the same securities, cash, and property as
would be payable for the Shares issuable upon exercise of the unexercised
portion of this Warrant as if such Shares were outstanding on the record date
for the Acquisition and subsequent closing. The Warrant Price shall be adjusted
accordingly. If the successor entity does not assume the obligations of the
Company under this Warrant, then this Warrant shall be deemed to have been
automatically converted pursuant to Section 1.2 and thereafter Holder shall
participate in the Acquisition as a holder of the Shares (or other securities
issuable upon exercise of this Warrant) on the same terms as other holders of
the same class of securities of the Company.
ARTICLE 2: ADJUSTMENTS TO THE SHARES.
--------------------------
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
dividend on its common stock (or the Shares if the Shares are securities other
than common stock) payable in common stock, or other securities, subdivides the
outstanding common stock into a greater amount of common stock, or, if the
Shares are securities other than common stock, subdivides the Shares in a
transaction that increases the amount of common stock into which the Shares are
convertible, then upon exercise of this Warrant, for each Share acquired, Holder
shall receive, without cost to Holder, the total number and kind of securities
to which Holder would have been
2
<PAGE>
entitled had Holder owned the Shares of record as of the date the dividend or
subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon any
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that Holder would have received for the Shares if this Warrant had been
exercised immediately before such reclassification, exchange, substitution, or
other event. Such an event shall include any automatic conversion of the
outstanding or issuable securities of the Company of the same class or series as
the Shares to common stock pursuant to the terms of the Company's Certificate of
Incorporation upon the closing of a registered public offering of the Company's
common stock. The Company or its successor shall promptly issue to Holder a new
Warrant for such new securities or other property. The new Warrant shall provide
for adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Article 2 including, without limitation,
adjustments to the Warrant Price and to the number of securities or property
issuable upon exercise of the new Warrant. The provisions of this Section 2.2
shall similarly apply to successive reclassifications, exchanges, substitutions,
or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding Shares are
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased.
2.4 Adjustments for Diluting Issuances. The Shares shall be afforded
the protections (if any) against diluting issuances of stock as are prescribed
for the class of stock of the Shares under the Company's Certificate of
Incorporation, as amended from time to time.
2.5 No Impairment. The Company shall not, by amendment of its
Certificate of I incorporation or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issue, or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed under this Warrant by the Company, but
shall at all times in good faith assist in carrying out of all the provisions of
this Article 2 and in taking all such action as may be necessary or appropriate
to protect Holder's rights under this Article against impairment. If the Company
takes any action affecting the Shares or its common stock other than as
described above that adversely affects Holder's rights under this Warrant, the
Warrant Price shall be adjusted downward and the number of Shares issuable upon
exercise of this Warrant shall be adjusted upward in such a manner that the
aggregate Warrant Price of this Warrant is unchanged.
2.6 Fractional Shares. No fractional Shares shall be issuable upon
exercise or conversion of the Warrant and the number of Shares to be issued
shall be rounded down to the nearest whole Share. If a fractional share interest
arises upon any exercise or conversion of the Warrant, the Company shall
eliminate such fractional share interest by paying Holder amount computed by
multiplying the fractional interest by the fair market value of a full Share.
3
<PAGE>
2.7 Certificate as to Adjustments. Upon each adjustment of the Warrant
Price, the Company at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief Financial Officer setting forth
such adjustment and the facts upon which such adjustment is based. The Company
shall, upon written request, furnish Holder a certificate setting forth the
Warrant Price in effect upon the date thereof and the series of adjustments
leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
---------------------------------------------
3.1 Representations and Warranties. The Company hereby represents and
warrants to the Holder as follows:
(a) The initial Warrant Price referenced on the first page of
this Warrant is not greater than the price given at the last round of equity
financing in August 1997.
(b) All Shares which may be issued upon the exercise of the
purchase right represented by this Warrant, and all securities, if any, issuable
upon conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens and encumbrances
created by the Company except for restrictions on transfer provided for herein
or under applicable federal and state securities laws.
3.2 Notice of Certain Events. If the Company proposes at any time (a)
to declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
(b) to offer for subscription pro rata to the holders of common stock; (c) to
effect any reclassification or recapitalization of common stock; (d) to merge or
consolidate with or into any other corporation, or sell, lease, license, or
convey all or substantially all of its assets, or to liquidate, dissolve or wind
up; in each such event, the Company shall give Holder (1) at least 10 days prior
written notice of the date on which a record will be taken for such dividend,
distribution, or subscription rights (and specifying the date on which the
holders of common stock will be entitled thereto) or for determining rights to
vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in
the case of the matters referred to in (c) and (d) above at least 10 days prior
written notice of the date when the same will take place (and specifying the
date on which the holders of common stock will be entitled to exchange their
common stock for securities or other property deliverable upon the occurrence of
such event).
3.3 Information Rights. So long as the Holder holds this Warrant and/or
any of the Shares, the Company shall deliver to the Holder promptly upon
Holder's reasonable request, copies of all notices or other written
communications to the shareholders of the Company, the annual audited financial
statements of the Company certified by independent public accountants of
recognized standing and the Company's quarterly, unaudited financial statements.
4
<PAGE>
ARTICLE 4. MISCELLANEOUS.
--------------
4.1 Term: Notice of Expiration. This Warrant is exercisable, in whole
or in part, at any time and from time to time on or before the Expiration Date
set forth above.
4.2 Legends. This Warrant and the Shares (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) shall be
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED OR QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS, AND MAY
NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE
REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION AND QUALIFICATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This Warrant and the
Shares issuable upon exercise this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company, as reasonably
requested by the Company). The Company shall not require Holder to provide an
opinion of counsel if the transfer is to an affiliate of Holder or if there is
no material question as to the availability of current information as referenced
in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e)
in reasonable detail, the selling broker represents that it has complied with
Rule 144(f), and the Company is provided with a copy of Holder s notice of
proposed sale.
4.4 Transfer Procedure. Subject to the provisions of Section 4.3 Holder
may transfer all or part of this Warrant or the Shares issuable upon exercise of
this Warrant (or the securities issuable, directly or indirectly, upon
conversion of the Shares, if any) by giving the Company notice of the portion of
the Warrant being transferred setting forth the name, address and taxpayer
identification number of the transferee and surrendering this Warrant to the
Company for reissuance to the transferee(s) (and Holder if applicable);
provided, however, that Holder may transfer all or part of this Warrant to
Silicon Valley Bancshares and The Silicon Valley Bank Foundation, at any time
without notice to the Company. The terms and conditions of this Warrant shall
inure to the benefit of, and be binding upon, the Company and the holders hereof
and their respective permitted successors and assigns. Unless the Company is
filing financial information with the SEC pursuant to the Securities Exchange
Act of 1934, the Company shall have the right to refuse to transfer any portion
of this Warrant to any party who directly competes with the Company.
4.5 Notices. All notices and other communications from the Company to
the Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-
5
<PAGE>
class registered or certified mail, postage prepaid, at such address as may have
been furnished to the Company or the Holder, as the case may be, in writing by
the Company or the Holder from time to time.
4.6 Waiver. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.7 Attorneys' Fees. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.8 Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
"COMPANY"
SANDBOX ENTERTAINMENT
CORPORATION
By: /s/ Chad M. Little
-----------------------------
Name: Chad M. Little, President
-----------------------------
(Print)
Title: Chairman of the Board, President
or Vice President
By: /s/ Mark Gorchoff
-----------------------------
Name: Mark Gorchoff, CFO
-----------------------------
(Print)
Title: Chief Financial Officer,
Secretary, Assistant Treasurer
or Assistant Secretary
6
<PAGE>
APPENDIX 1
NOTICE OF EXERCISE
------------------
1. The undersigned hereby elects to purchase ______ shares of the
Common/Series ____________ Preferred [strike one] Stock of ___________________
pursuant to the terms of the attached Warrant, and tenders herewith payment of
the purchase price of such shares in full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares/cash [strike one] in the manner specified in the Warrant. This conversion
is exercised with respect to of the Shares covered by the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares
in the name of the undersigned or in such other name as is specified below:
--------------------------------
(Name)
--------------------------------
--------------------------------
(Address)
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
-------------------------
(Signature)
- --------------------
(Date)
Exhibit 4(z)
[Letterhead of Investor]
October __, 1997
Sandbox Entertainment Corporation
Successor to Tracer Design, Inc.
2231 East Camelback Road, Suite 324
Phoenix, Arizona 85016
Attention: Mr. Chad M. Little, President
Amendment to Loan and Warrant Purchase Agreement and
to Term Note
Dear Mr. Little:
Pursuant to a loan and warrant purchase agreement dated as of October
25, 1995 (the "Loan and Warrant Purchase Agreement"), Tracer Design, Inc.
("Tracer"), an Arizona corporation, borrowed $5,000 from Pickwick Group LLC
("Pickwick") in consideration of Tracer's issuing Pickwick a warrant (the
"Initial Warrant") to purchase ____ shares of the Class A Common Stock, $.001
par value, of Tracer (the "Initial Warrant Shares") at an exercise price of $36
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
Entertainment Corporation ("Sandbox"), a Delaware corporation that is the
successor by merger to Tracer, at an exercise price of $.80 per share of common
stock of Sandbox (the "Common Stock"). In connection with the Loan and Warrant
Purchase Agreement, Tracer also delivered Pickwick a term note dated as of
October 25, 1995 in the initial principal amount of $_______ (the "Term Note").
The Term Note was due and payable on October 25, 1996; but pursuant to
amendments made effective October 25, 1996 and April 25, 1997, respectively,
Sandbox and Pickwick amended the Term Note to, among other things, extend the
maturity date for an additional 6 months and lower the interest rate for the
extension period. Pickwick agreed to such amendments to the Term Note in
consideration of Sandbox' issuing to Pickwick a new warrant to purchase ______
shares of Common Stock at an exercise price of $.80 per share, in the case of
each extension. The Term Note, as amended by the amendments made effective
October 25, 1996 and April 25, 1997, is referred to herein as the "Amended Term
Note".
<PAGE>
By its execution and delivery of this letter, Pickwick agrees that,
subject to the condition precedent of Sandbox' payment to Pickwick of all
accrued and unpaid interest under the Amended Term Note through October 25, 1997
on or before October 31, 1997, Pickwick hereby amends the Term Note to extend
the maturity date as follows: (i) the Term Note is no longer due and payable
upon October 25, 1997, and (ii) the date upon which the entire indebtedness
(principal and interest) evidenced by the Amended Term Note shall be due and
payable in full is extended from October 25, 1997 to December 31, 1997.
Except as otherwise expressly set forth in this letter, no other
amendments, changes or modifications whatsoever are made to the Amended Term
Note, or the terms of the Loan and Warrant Purchase Agreement, as previously
amended, and the terms and provisions of the Amended Term Note and the Loan and
Warrant Purchase Agreement, as amended by the October 25, 1996 amendment and the
April 25, 1997 amendment, remain in full force and effect as so amended.
Sincerely,
[Signature of Investor]
<PAGE>
Schedule 4(z) to Amendment to Loan and Warrant Purchase Agreement and Term Note
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Additional
Shares
Principal Under
Amount Initial Shares Under Number of Post Split Amended
Investor of Note 10/25/95 Warrant and Diluted Shares Warrants
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pickwick Group LLC $5,000 850 Tracer Class A 38,250 Sandbox Common, 625
Common, $.001 par value $.001 par value
$36 per share exercise price $0.80 per share exercise
price
- -----------------------------------------------------------------------------------------------------------------------------
Terrance Morris $5,000 850 Tracer Class A 38,250 Sandbox Common, 625
Common, $.001 par value $.001 par value
$36 per share exercise price $0.80 per share exercise
price
- -----------------------------------------------------------------------------------------------------------------------------
Douglas and Susan $10,000 1,700 Tracer Class A 76,500 Sandbox Common, 1,250
Greenwood Common, $.001 par value $.001 par value
$36 per share exercise price $0.80 per share exercise
price
- -----------------------------------------------------------------------------------------------------------------------------
Thomas Lescault $10,000 1,700 Tracer Class A 76,500 Sandbox Common, 1,250
Common, $.001 par value $.001 par value
$36 per share exercise price $0.80 per share exercise
price
- -----------------------------------------------------------------------------------------------------------------------------
Geoffrey Herter, M.D. $10,000 1,700 Tracer Class A 76,500 Sandbox Common, 1,250
Common, $.001 par value $.001 par value
$36 per share exercise price $0.80 per share exercise
price
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Exhibit 4(aa)
AMENDMENT TO BRIDGE NOTE AND
----------------------------
WARRANT PURCHASE AGREEMENTS
---------------------------
This AMENDMENT TO BRIDGE NOTE AND WARRANT PURCHASE AGREEMENTS (the
"Amendment") is made by and among SANDBOX ENTERTAINMENT CORPORATION (the
"Company") and each of undersigned investors (the "Bridge Lenders") as of
September 16, 1997.
A. WHEREAS, the Company and each of the Bridge Lenders are parties to
certain Bridge Note and Warrant Purchase Agreements (the "May Bridge Note and
Warrant Purchase Agreements"), each dated May 9, 1997 pursuant to which the
Bridge Lenders loaned the Company the total aggregate principal amount of
$270,000 (collectively, the "May Bridge Loans") in exchange for Convertible
Subordinated Promissory Notes (collectively, the "May Bridge Notes"), each dated
as of May 9, 1997, and Stock Subscription Warrants (collectively, the "May
Bridge Warrants") to purchase a total of 337,500 shares of Series A Preferred
Stock of the Company, each dated as of May 9, 1997. Each of the May Bridge
Warrants were previously amended by certain Amendments to Stock Subscription
Warrants, each dated as of July 25, 1997 (the "Amendments to May Warrants");
B. WHEREAS, the Company and each of the Bridge Lenders are also parties
to certain July Bridge Note and Warrant Purchase Agreements (the "July Bridge
Note and Warrant Purchase Agreements"), each dated July 25, 1997 pursuant to
which the Bridge Lenders loaned the Company the total aggregate principal amount
of $270,000 (collectively, the "July Bridge Loans") in exchange for Convertible
Subordinated Promissory Notes (collectively, the "July Bridge Notes"), each
dated as of July 25, 1997, and Stock Subscription Warrants (collectively, the
"July Bridge Warrants") to purchase a total of 337,500 shares of Series A
Preferred Stock of the Company, each dated as of July 25, 1997;
C. WHEREAS, the Company and each of the Bridge Lenders wish to amend
certain of the documents executed in connection with the May Bridge Loans and
the July Bridge Loans to clarify the effect of a proposed reverse 1-for-2.5
stock split (the "Stock Split") and to make certain other amendments;
NOW, THEREFORE, in consideration of the terms and conditions set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. May Bridge Warrants and July Bridge Warrants. The parties hereby
agree that the definition of New Series Conversion Price in the May Bridge
Warrants (as amended by the Amendments to the May Warrants) and in the July
Bridge Warrants provides that the Bridge Lenders will have the right to exercise
the May Bridge Warrants and the July Bridge Warrants at a post Stock Split
exercise price of $2.00 per share for a thirty (30) day period beginning on the
date an IPO (as that term is defined therein) is consummated.
1
<PAGE>
2. May Bridge Warrants. Paragraph 9 of the May Bridge Warrants is
deleted and replaced with the following:
9. Conversion upon an Equity Financing. If an Equity Financing
has closed (or, in the case of a registration statement filed on form
SB-2, such registration statement shall have become effective) on or
before November 21, 1997, the following definition shall automatically
change as follows:
a. Warrant Price shall mean the New Series Conversion Price.
3. May Bridge Notes. Section 2 of the May Bridge Notes is deleted and
replaced with the following:
2. Conversion.
2.1 Upon an Equity Financing. If prior to (a) the
closing of an Equity Financing on or before November 4, 1997
or (b) the effectiveness of an Equity Financing pursuant to a
registration statement filed on form SB-2 (which shall be the
effective date of such registration statement) on or before
November 21, 1997: (y) the Company has not paid the entire
unpaid principal amount of this Note and all interest accrued
thereon and (z) 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 (provided,
however that the Holder waives notice of an Equity Financing
if such financing shall be made pursuant to a registration
statement on form SB-2). 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
November 22, 1997. From and after November 22, 1997,
immediately upon a Sale of the Company, or in the event Maker
2
<PAGE>
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.
4. May Bridge Notes and July Bridge Notes. The following new Section 19
is added to each of the May Bridge Notes and the July Bridge Notes:
19. Adjustment of Conversion Price. The Conversion Price shall
be subject to adjustment from time to time as follows:
19.1 If, at any time during the term of this Note,
the number of shares of Series A Preferred Stock (or New
Series Conversion Stock) outstanding is increased by a stock
dividend payable in shares of Series A Preferred Stock (or New
Series Conversion Stock) or by a subdivision or split-up of
shares of Series A Preferred Stock (or New Series Conversion
Stock), then, following the record date fixed for the
determination of Holders of Series A Preferred Stock (or New
Series Conversion Stock) entitled to receive such stock
dividend, subdivision or split-up, the Series A Conversion
Price (or New Series Conversion Price) shall be appropriately
decreased so that the number of shares of Series A Preferred
Stock (or New Series Conversion Stock) issuable upon the
conversion of this Note shall be increased in proportion to
such increase in outstanding shares.
19.2 If, at any time during the term of this Note,
the number of shares of Series A Preferred Stock (or New
Series Conversion Stock) outstanding is decreased by a
combination, or reverse split, of the outstanding shares of
Series A Preferred Stock (or New Series Conversion Stock),
then, following the record date for such combination or
reverse split, the Series A Conversion Price (or New Series
Conversion Price) shall appropriately increase so that the
number of shares of Series A Preferred Stock (or New Series
Conversion Stock) issuable upon the conversion hereof shall be
decreased in proportion to such decrease in outstanding
shares.
5. Reissuance of July Bridge Notes and July Bridge Warrants. The
parties hereby agree that the definition of Series A Conversion Price and
Warrant Price in Section A of Exhibit IV to the July Bridge Note and Warrant
Purchase Agreements shall be read to take into account any stock splits or stock
dividends, including the Stock Split. Therefore, after the Stock Split each of
the prices in Section A of Exhibit IV will increase from $.20 per share to $.50
per share.
3
<PAGE>
6. Law. This Amendment shall be governed by the law of the State of
Arizona.
7. Counterparts; Effectiveness. This Amendment may be executed in
counterparts, each of which shall be enforceable against the party executing the
counterpart, and all of which shall constitute one instrument. This Amendment
shall be effective against each Bridge Lender upon execution of this Agreement
by such Bridge Lender, regardless of whether any or all of the other Bridge
Lenders shall have executed this Amendment.
IN WITNESS WHEREOF, the parties have executed this Consent and Waiver
as of the 16th day of September, 1997.
[SIGNATURES APPEAR ON FOLLOWING PAGES]
4
<PAGE>
[SIGNATURE PAGE TO AMENDMENT TO BRIDGE
NOTE AND WARRANT PURCHASE AGREEMENTS]
SANDBOX ENTERTAINMENT CORPORATION
By: /s/ Chad M. Little
---------------------------------
Title: President
---------------------------------
WASATCH VENTURE CORPORATION
By: /s/ Todd J. Stevens
---------------------------------
Title: Secretary and Treasurer
---------------------------------
NEWTEK VENTURES II, L.P.
By: /s/ John Hall
---------------------------------
Title: G.P.
---------------------------------
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
/s/ Wayne Sorensen
----------------------------------------
Wayne Sorensen
5
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
-2-
<PAGE>
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
-3-
<PAGE>
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
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<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,
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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/
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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-
<PAGE>
SCHEDULE No. 01 to MASTER LEASE AGREEMENT No. 101-19001-001
LESSOR: Third Coast Venture Lease Partners I.L.P.
- ------ 900 N. Franklin St., Suite 700 Lessor # 101
Chicago, Illinois 60610 ----------------
Phone: 312-337-3303
Lessor # 1901
----------------
LESSEE: Sandbox Entertainment Corporation MLA # 001
- ------ 2231 East Camelback, Suite 324 -------------------
Phoenix, AZ 85016
Phone: 602-468-6409 Sched # 01
-----------------
EQUIPMENT:
- ---------
Equipment Description: as set forth on Rider B hereto
----------------------------------------------------------
Equipment Cost: $ 111,240.25
-----------------------------------------------------------------
Equipment Location: same as above
-------------------------------------------------------------
TERM & RENTAL:
- -------------
Initial Lease Term: 36 months
Expected Acceptance Date: July 1, 1997
Commencement Date: July 1, 1997
Monthly Rent Factor: 3.30% of Equipment Cost
Monthly Rental Payments:* $3,670.93 per rental payment (in advance)
for the next 35 months.
Initial Payment: $3,670.93 for first monthly rental payment.
* plus, if applicable, freight, taxes, insurance and maintenance which will be
paid by Lessee in accordance with the terms of the Lease and this Schedule.
Other Provisions:
---------------------------------------------------------------
Lessor hereby agrees to lease to Lessee and Lessee hereby agrees to lease and
rent from Lessor the Equipment listed above for the term and at the rental
payments specified herein, all subject to the terms and conditions set forth
herein and on any Rider hereto and in the above referenced Master Lease
Agreement.
ACCEPTED AT CHICAGO, ILLINOIS
SANDBOX ENTERTAINMENT CORPORATION THIRD COAST VENTURE LEASE PARTNERS I,L.P.
By its General partner,
Third Coast GP-1, L.L.C.
Lessee Lessor
By: /s/ Mark Gorchoff By: /s/ Miroslav M. Anic
------------------------------ -----------------------------------
Title: CFO Title: Manager
--------------------------- --------------------------------
Date: 10/2/97 Date: 10/6/97
---------------------------- ---------------------------------
<PAGE>
RIDER A
TO SCHEDULE No. 01
TO MASTER LEASE AGREEMENT No. 101-19001-001
BY AND BETWEEN
THIRD COAST VENTURE LEASE PARTNERS I.L.P.
AND
SANDBOX ENTERTAINMENT CORPORATION
1. Errors in Estimated Cost and Adjustments in Rental. As used herein, "actual
cost" means the total cost to Lessor of purchasing and delivering the Equipment
to Lessee including, subject to Lessor's consent, taxes, transportation charges
and other charges which may be applicable. The amount of each payment set forth
in the Schedule are based on an estimate of actual cost, which estimate may, but
need not, be set forth in the Schedule, and such amounts shall be adjusted
proportionately (increased or decreased) if the actual cost of the Equipment
differs from said estimate. Lessee hereby authorizes Lessor to adjust, if
necessary, the amounts set forth in the Schedule to reflect actual cost when the
actual cost is known and to add to the amount of each rental payment any sales,
use or leasing tax that may be imposed on or measured by the rental payments.
Lessor will inform Lessee of the adjustments in rent and/or security deposit
necessary to reflect actual cost. If the actual cost of the Equipment exceeds
the estimated cost by more than 10%, such increase, for purposes of lease
hereunder, shall be subject to approval by Lessor. If any item of Equipment is
for any reason not delivered to, installed, and unconditionally accepted by
Lessee within 60 days after the date of Lessee's execution hereof, but is
delivered and accepted within 360 days after the date of execution on this
Schedule, and if there shall be an increase in the rate of interest ("Term
Rate") charged Lessor for such debt as is available to Lessor for financing the
purchase and lease of the Equipment, this Schedule and the Lease shall be
amended to provide for an increase in rental satisfactory to Lessor which shall
not exceed an increase which takes account of said increase in the Term Rate.
2. Estimate of Remaining Lease Line Amount:
Lease Line Amount: $500,000.00*
Aggregate Prior Fundings: (0.00)
Equipment Cost Pursuant to this Schedule: (111,240.25)
Remaining Lease Line Amount: $388,759.75*
Funding Period Expiration: April, 1, 1988*
*Subject to the provisions of the above-referenced Master Lease
Agreement, any Addenda thereto and this Schedule.
/s/ /s/
--------------- ---------------
Lessee Initials Lessor Initials
-13-
<PAGE>
RIDER B
TO SCHEDULE No. 01
TO MASTER LEASE AGREEMENT No. 101-19001-001
BY AND BETWEEN
THIRD COAST VENTURE LEASE PARTNERS I.L.P.
AND
SANDBOX ENTERTAINMENT CORPORATION
Description Model No. Quantity Serial No.
- ----------- --------- -------- ----------
3000 Server SUN A0717 (1) 708V0011
X2600 CPU Board SUN A0705 (2) 53559
26356
X2510A Processor SUN G0051 (2)
X2610A I/O Board SUN G0039 (1)
256 MG Memory SUN B0017 (2)
Power/Cooling Module SUN H0020 (2)
2.1 GB Internal Drive SUN 0058 (2)
X1018A Sunswift SUN G0041 (1)
Solaris Server Media SUN K0160 (1)
Power Cord SUN R0003 (1)
2200 Server SUN A3066 (2) 718FOFDA
718FOF37
Solaris Server Media SUN K0160 (1)
Power Cord SUN R0003 (2)
/s/ /s/
--------------- ---------------
Lessee Initials Lessor Initials
-14-
<PAGE>
SCHEDULE No. 02 to MASTER LEASE AGREEMENT No. 101-19001-001
LESSOR: Third Coast Venture Lease Partners I, L.P. Lessor # 101
- ------ -----------------
900 N. Franklin St. Suite 700
Chicago, Illinois 60610 Lessee # 1901
Phone: 312-337-3303 -----------------
LESSEE: Sandbox Entertainment Corporation MLA # 001
- ------ 2231 East Camelback, Suite 324 --------------------
Phoenix, AZ 85016
Phone: 602-468-6409 Sched # 02
------------------
EQUIPMENT:
- ---------
Equipment Description: as set forth on Rider B hereto
----------------------------------------------------------
Equipment Cost: $ 379,696.00
-----------------------------------------------------------------
Equipment Location: same as above
-------------------------------------------------------------
TERM & RENTAL:
- -------------
Initial Lease Term: 36 months
Expected Acceptance Date: October 1, 1997
Commencement Date: October 1, 1997
Monthly Rent Factor: 3.30% of Equipment Cost
Monthly Rental Payments:* $ 12,529.97 per rental payment (in advance)
for the next 35 months.
Initial Payment: $ 12,529.97 for first monthly rental payment.
*plus, if applicable, freight, taxes, insurance and maintenance which will be
paid by Lessee in accordance with the terms of the Lease and this Schedule.
Other Provisions:
---------------------------------------------------------------
Lessor hereby agrees to lease to Lessee and Lessee hereby agrees to lease and
rent from Lessor the Equipment listed above for the term and at the rental
payments specified herein, all subject to the terms and conditions set forth
herein and on any Rider hereto and in the above referenced Master Lease
Agreement.
ACCEPTED AT CHICAGO, ILLINOIS
SANDBOX ENTERTAINMENT CORPORATION THIRD COAST VENTURE LEASE PARTNERS I, L.P.
By its General Partner,
Third Coast GP-1, L.L.C.
Lessee Lessor
By: /s/ Mark Gorchoff By: /s/ Miroslav M. Anic
------------------------------ ---------------------------------
Title: CFO Title: Manager
--------------------------- ------------------------------
Date: 10/8/97 Date: 10/14/97
---------------------------- -------------------------------
-15-
<PAGE>
RIDER A
TO SCHEDULE No. 02
TO MASTER LEASE AGREEMENT No. 101-19001-001
BY AND BETWEEN
THIRD COAST VENTURE LEASE PARTNERS I, L.P.
AND
SANDBOX ENTERTAINMENT CORPORATION
1. Errors in estimated Cost and Adjustments in Rental. As used herein, "actual
cost" means the total cost to lessor of purchasing and delivering the Equipment
to Lessee including, subject to Lessor's consent, taxes, transportation charges
and other charges which may be applicable. The amount of each payment set forth
in the Schedule are based on an estimate of actual costs, which estimate may,
but need not, be set forth in the Schedule, and such amounts shall be adjusted
proportionately (increased or decreased) if the actual costs of the Equipment
differs from said estimate. Lessee hereby authorizes Lessor to adjust, if
necessary, the amounts set forth in the Schedule to reflect actual costs when
the actual costs is known and to add to the amount of each rental payment any
sales, use or leasing tax that may be imposed on or measured by the rental
payments. Lessor will inform Lessee of the adjustments in rent and/or security
deposit necessary to reflect actual costs. If the actual costs of the Equipment
exceeds the estimated cost by more than 10%, such increase, for purposes of
lease hereunder, shall be subject to approval by Lessor. If any item of
Equipment is for any reason not delivered to, installed, and unconditionally
accepted by Lessee within 60 days after the date of Lessee's execution hereof,
but is delivered and accepted within 360 days after the date of execution on
this Schedule, and if there shall be an increase in the rate of interest ("Term
Rate") charged Lessor for such debt as is available to lessor for financing the
purchase and lease of the Equipment, this Schedule and the Lease shall be
amended to provide for an increase in rental satisfactory to lessor which shall
not exceed an increase which takes account of said increase in the Term Rate.
2. Estimate of Remaining Lease Line Amount:
Lease Line Amount: $500,000.00*
Aggregate Prior Fundings: ($111,240.25)
Equipment Cost Pursuant to this Schedule: ($379,696.00)
Remaining Lease Line Amount: $9,063.75*
Funding Period Expiration: April 1, 1998*
*subject to the provisions of the above-referenced Master Lease
Agreement, any Addenda thereto and this Schedule.
/s/ /s/
--------------- ---------------
Lessee Initials Lessor Initials
-16-
<PAGE>
RIDER B
TO SCHEDULE No. 2
TO MASTER LEASE AGREEMENT No. 101-19001-001
BY AND BETWEEN
THIRD COAST VENTURE LEASE PARTNERS I, L.P.
AND
SANDBOX ENTERTAINMENT CORPORATION
Description Model No. Quantity Serial No.
- ----------- --------- -------- ----------
Dell Minitower XPS H266Mhz (2) 9KDQ3
9KDQB
Intellimouse PS2 (2)
Altec 115V Speakers ACS90 (2)
Dell Color Monitor D1028L (2)
Dell Latitude Notebook LM M166MMX (1) 8WDNH
Sun Workstation A3520 (8) 725F1594
725F1592
732F0620
723F0636
732F0630
732F0638
731F09D7
731F0CA9
Power Cord (8)
Sun Processor X2510A (2)
2.1 GB Internal Hard Drive X5153A (4)
ECC Memory 8x32MB X7022A (6)
F/W Unipack 4.2 GB X5209A (7)
F/W Unipack 2.1 GB X5151A (15)
F/W SCSI X1018A Sunswift (8)
Enterprise 3000 (1) 731FOC54
CPU Memory Board X2601A (1)
250 MHZ Processor X2530A (2)
I/O Board F/X000 Series (1)
Power/Cooling Module F/X000 Series (2)
Rack 1000 VA UPS (4)
Powerchute Plus F/Unix (7)
DES 535MB Memory Array (1)
Des Model 800 Chassis (1)
Smart UPS 1400 RM-NET (3)
268MB RAM F/DES (1)
Catalyst 1900 2 x 100 BT SW (2)
6 Port Ethernet Module NP - 6E (1)
/s/ /s/
--------------- ---------------
Lessee Initials Lessor Initials
-17-
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:
Holder and Address Number of Shares
- ------------------ ----------------
Wasatch Venture Corporation 17,500 shares
One South Main, Suite 1400
Salt Lake City, UT 84133
Newtek Ventures II, L.P. 5,000 shares
500 Washington Street, Suite 720
San Francisco, CA 94111
7
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
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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
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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
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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
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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.
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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
---------------------------- -----------------------------
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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.
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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.
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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.
<PAGE>
EXHIBIT C
STANDARD TERMS AND CONDITIONS
C-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 CNNfn Page or in any CNNfn Elements, the
CNNfn Site or service or any part thereof (including but not limited to all
rights of copyright). CNNfn acknowledges and agrees that the services rendered
and rights granted pursuant to the terms of this Agreement shall not confer in
CNNfn any rights of ownership in the Game, any technology or proprietary rights
utilized by Sandbox in offering the Game, 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.
C-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 CNNfn; (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 Game as presented
on the Game Site and any CD-ROM Product, and CNNfn's use of the same in
accordance with this Agreement and any applicable third party license agreements
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.
C-3 INDEMNIFICATION. Sandbox shall indemnify, defend and hold harmless CNNfn,
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 Game, any CD-ROM Product or operation of the Game Site. Sandbox
shall promptly inform CNNfn in writing of any such claim, demand or suit and
CNNfn shall fully cooperate in the defense thereof. CNNfn 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 CNNfn's breach of any of its representations, warranties or
covenants to Sandbox hereunder, CNNfn's operation of the CNNfn Site and/or
inclusion of any CNNfn Elements in any Game, Game Site or CD-ROM Product. CNNfn
shall promptly inform Sandbox in writing of any such claim, demand, suit and
Sandbox shall fully cooperate in the defense thereof.
C-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.
CD-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 CNNfn (which CNNfn may give or withhold in its sole discretion), provided
that CNNfn'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 to be a competitor to
CNNfn. Any such purported assignment or deletion without such prior written
consent shall be null and void and have no force and effect. This Agreement
shall be
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fully and freely assignable by CNNfn in whole or in part. Sandbox shall have no
rights whatsoever to subcontract any portion of the Services required hereunder.
C-6 RELATIONSHIP. Sandbox's relationship to CNNfn shall be that of an
independent contractor. Nothing herein shall create any association,
partnership, joint venture or agency relationship between Sandbox and CNNfn.
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 CNNfn.
C-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 CNNfn 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 CNNfn, 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, CNNfn will remain solely
responsible, and Sandbox shall have no responsibility for, taxes on CNNfn's net
income.
C-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, 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).
C-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.
C-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.
C-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.
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C-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 certified mail,
return receipt requested, 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 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 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
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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 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 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
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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 50/50. 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
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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 50/50. 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
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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/ [Illegible] By:/s/ Chad M. Little
--------------------------- --------------------------
Its: General Manager Its: President
------------------------- ------------------------
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EXHIBIT A
FORM OF WARRANT
[To be provided by Sandbox]
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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
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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, 50/50, 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.
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/ [Illegible]
-----------------------------
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/ Chad M. Little
------------------------------ ----------------------------
(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/ [Illegible] 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/ [Illegible]
---------------------------------
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/ [Illegible] 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/ [Illegible] Name: /s/ Mark Gorchoff
--------------------------- ----------------------------------
STATS, Inc. Sandbox
Dated: 4/2/97 Date: 3/27/97
--------------------------- ----------------------------------
Exhibit 10(jj)
WARRANT PURCHASE AGREEMENT
THIS WARRANT PURCHASE AGREEMENT (this "Agreement") is made effective as
of September 27, 1997 by and between Sandbox Entertainment Corporation, a
Delaware corporation ("Sandbox"), and Third Coast Venture Lease Partners I,
L.P., 900 N. Franklin Street, Suite 700, Chicago, Illinois 60610 ("Purchaser").
PREMISES: In connection with the increase in Sandbox's equipment line
of credit with Purchaser from $500,000 to $650,000 pursuant to that certain
Addendum No. 2 to Master Lease Agreement No. 101-19001-001 (the "Addendum")
between Purchaser and Sandbox, Sandbox has agreed to issue a warrant to purchase
25,000 shares of the Common Stock, $.001 par value, of Sandbox (the "First
Warrant Shares"), a form of which is attached to this Agreement as Exhibit I
(the "First Warrant") against payment of One Hundred Sixty Seven Dollars ($167),
and a warrant to purchase 12,500 shares of the Common Stock, $.001 par value, of
Sandbox (the "Second Warrant Shares" and together with the First Warrant Shares,
the "Warrant Shares") against payment of Eighty Three Dollars ($83), a form of
which is attached to this Agreement as Exhibit II (the "Second Warrant" and
together with the First Warrant, the "Warrants").
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 Warrants in consideration of
Purchaser increasing the line of credit pursuant to the Addendum.
2. Closing. The issuance and delivery of the Note and the Warrant shall
take place at the offices of Sandbox on September 29, 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 Warrants registered in the name of Purchaser. In exchange for
such delivery, Purchaser shall execute and deliver the Addendum.
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 Warrants 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 as
of August 1, 1997 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.
(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 Warrants and the Warrant Shares, shall have been taken prior to
the Closing.
(d) Corporate Law Status. When the Warrants and the Warrant
Shares have been issued, delivered and paid for in accordance with this
Agreement the Warrants, 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 Warrants 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
Warrants 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
<PAGE>
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. 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 Warrants.
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.
<PAGE>
5. Conditions to the Obligations of Purchaser. The obligation of
Purchaser to execute and deliver the Addendum and receive the Warrants 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 Warrants, 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
Warrants.
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
<PAGE>
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.
[SIGNATURES APPEAR ON THE FOLLOWING PAGES]
<PAGE>
[SIGNATURE PAGE FOR WARRANT PURCHASE AGREEMENT]
SANDBOX:
SANDBOX ENTERTAINMENT CORPORATION
By: /s/ Mark Gorchoff
------------------------------
Title: CFO
------------------------------
PURCHASER:
THIRD COAST VENTURE LEASE
PARTNERS I, L.P.
By: Its General Partner, Third Coast
GP-I, L.L.C.
By: /s/ Miroslav M. Anic
--------------------------
Title: Manager
--------------------------
<PAGE>
EXHIBIT I
FIRST WARRANT
<PAGE>
EXHIBIT II
SECOND WARRANT
<PAGE>
EXHIBIT III
SANDBOX ENTERTAINMENT CORPORATION
Capitalization Schedule
As of August 1, 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
<TABLE>
<S> <C> <C>
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.
Exhibit 10(kk)
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 25,000 Shares of the
Common Stock, $.001 Par Value, of
SANDBOX ENTERTAINMENT CORPORATION,
a Delaware corporation (the "Company")
DATE OF INITIAL ISSUANCE: As of September 29, 1997
THIS CERTIFIES THAT for value received, Third Coast Venture Lease
Partners I, L.P., 900 N. Franklin Street, Suite 700, Chicago, Illinois 60610, or
his/her/its registered assigns (hereinafter called the "Holder"), whose address
is set forth on the signature page to that certain Two Year Note and Warrant
Purchase Agreement between Holder and the Company, is entitled to purchase from
the Company, at any time during the Term of this Warrant, Twenty Five Thousand
(25,000) 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 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 (a) such price shall not exceed $4.00
per share and (b) 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, subject to adjustment in accordance with
Section 5.
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
<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 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 (ii) 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,
<PAGE>
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 or reverse stock split, then, following
the record date for such combination or reverse stock split, 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
<PAGE>
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. Warrant Price Adjustment. If an IPO has not closed on or before the
date that is one hundred and eighty days (180) days after the date of this
Warrant, then 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 in the
first paragraph 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
<PAGE>
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.
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.
[SIGNATURES APPEAR ON THE FOLLOWING PAGES]
<PAGE>
[SIGNATURE PAGE FOR STOCK SUBSCRIPTION WARRANT]
THE COMPANY:
ATTEST: SANDBOX ENTERTAINMENT CORPORATION
By: /s/ James A. Layne By: /s/ Chad M. Little
---------------------------- ----------------------------
Its Secretary Its President
ACCEPTED:
HOLDER:
THIRD COAST VENTURE LEASE
PARTNERS I, L.P.
By: Its General Partner, Third Coast GP-I, L.L.C.
By: /s/ Miroslav M. Anic
------------------------------------
Title: Manager
--------------------------------
<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: _______________________
Exhibit 10(ll)
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 12,500 Shares of the
Common Stock, $.001 Par Value, of
SANDBOX ENTERTAINMENT CORPORATION,
a Delaware corporation (the "Company")
DATE OF INITIAL ISSUANCE: As of September 29, 1997
THIS CERTIFIES THAT for value received, Third Coast Venture Lease
Partners I, L.P., 900 N. Franklin Street, Suite 700, Chicago, Illinois 60610, or
his/her/its registered assigns (hereinafter called the "Holder"), whose address
is set forth on the signature page to that certain Two Year Note and Warrant
Purchase Agreement between Holder and the Company, is entitled to purchase from
the Company, at any time during the Term of this Warrant, Twelve Thousand Five
Hundred (12,500) 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.
1
<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 (a) such price shall not exceed $4.00
per share and (b) 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, subject to adjustment in accordance with
Section 5.
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. Subject to Section 9 hereof, 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
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 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 (ii) 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,
3
<PAGE>
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 or reverse stock split, then, following
the record date for such combination or reverse stock split, 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
4
<PAGE>
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. Warrant Price Adjustment. If an IPO has not closed on or before the
date that is one hundred and eighty days (180) days after the date of this
Warrant, then 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. Automatic Cancellation of Warrant; Limitation on Exercise. If a
registration statement filed in connection with an IPO becomes effective on or
before November 21, 1997, then this warrant shall be automatically canceled and
shall be void as of the date such registration statement becomes effective. This
Warrant may not be exercised prior to November 22, 1997.
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 in the
first paragraph 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.
5
<PAGE>
(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.
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.
[SIGNATURES APPEAR ON THE FOLLOWING PAGES]
6
<PAGE>
[SIGNATURE PAGE FOR STOCK SUBSCRIPTION WARRANT]
THE COMPANY:
ATTEST: SANDBOX ENTERTAINMENT CORPORATION
By:/s/ James A. Layne By:/s/ Chad M. Little
---------------------------- ----------------------------
Its Secretary Its President
ACCEPTED:
HOLDER:
THIRD COAST VENTURE LEASE
PARTNERS I, L.P.
By: Its General Partner, Third Coast GP-I, L.L.C.
By: /s/ Miroslav M. Anic
-----------------------------
Title: Manager
---------------------------
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: ________________________
Exhibit 11
SANDBOX ENTERTAINMENT CORPORATION
STATEMENT OF COMPUTATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31 September 30
-------------------------- --------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Net loss ........................................ ($ 507,090) ($1,477,059) ($1,143,254) ($1,621,365)
=========== =========== =========== ===========
Weighted average common shares outstanding: ..... 425,170 487,511 480,058 520,746
Common stock equivalents pursuant to SAB 83;
Stock, options, warrants, and other
potentially dilutive instruments issued within
one year of initial filing ................... 314,141 314,141 314,141 314,141
Less: SAB 83 common stock equivalents included in
weighted average shares outstanding -- -- -- (427)
----------- ----------- ----------- -----------
Weighted average common shares outstanding during
the period ................................... 739,311 801,652 794,199 834,460
=========== =========== =========== ===========
Net loss per share .............................. ($ 0.69) ($ 1.84) ($ 1.44) ($ 1.94)
=========== =========== =========== ===========
</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. 333-36787) and related Prospectus of Sandbox Entertainment
Corporation for the registration of 725,000 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
November 17, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLAR
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-01-1996 SEP-30-1997
<EXCHANGE-RATE> 1 1
<CASH> 20,519 311,981
<SECURITIES> 0 0
<RECEIVABLES> 467,475 172,743
<ALLOWANCES> (1,355) 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 498,178 484,724
<PP&E> 389,623 1,113,177
<DEPRECIATION> (167,524) (292,469)
<TOTAL-ASSETS> 750,155 1,457,440
<CURRENT-LIABILITIES> 298,028 1,799,806
<BONDS> 0 0
0 0
1,575,000 1,585,000
<COMMON> 305,793 381,634
<OTHER-SE> (1,944,527) (3,565,892)
<TOTAL-LIABILITY-AND-EQUITY> 750,155 1,457,440
<SALES> 396,167 171,319
<TOTAL-REVENUES> 396,167 171,319
<CGS> 0 0
<TOTAL-COSTS> 1,797,444 1,646,697
<OTHER-EXPENSES> 528 (1,634)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 76,760 147,621
<INCOME-PRETAX> (1,477,509) (1,621,365)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,477,509) (1,621,365)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,477,509) (1,621,365)
<EPS-PRIMARY> (1.84) (1.94)
<EPS-DILUTED> (1.84) (1.94)
</TABLE>
