SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended: June 30, 1999; or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period _________ to __________
Commission File Number: 0-24109
SYNTHONICS TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
UTAH 87-0302620
- ------------------------------ -----------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
31324 Via Colinas, Suite 106, Westlake Village, CA 91362
- ---------------------------------------------------- ------------------------
(Address of principal executive offices) Zip Code)
(818) 707-6000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that a
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
On June 30, 1999 there were 27,586,679 shares of the registrant's Common
Stock, $0.01 par value, issued and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
This Form 10-QSB has 29 pages, the Exhibit Index is located at page 28.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The financial statements included herein have been prepared by the Company,
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosure normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading.
In the opinion of the Company, all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly the financial position of the
Company as of June 30, 1999 and the results of its operations and changes in its
financial position from inception through June 30, 1999 have been made. The
results of operations for such interim period is not necessarily indicative of
the results to be expected for the entire year.
Index to Financial Statements
Page
----
Independent Accountant's Report ........................................... 3
Consolidated Balance Sheets ............................................... 4
Consolidated Statements of Operations ..................................... 6
Consolidated Statements of Stockholders' Equity (Deficit) ................. 7
Consolidated Statements of Cash Flows ..................................... 9
Notes to the Consolidated Financial Statements ............................ 11
All other schedules are not submitted because they are not applicable or
not required or because the information is included in the financial statements
or notes thereto.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
Page 2
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Synthonics Technologies, Inc. and Subsidiaries
Westlake Village, California
The accompanying consolidated balance sheet of Synthonics Technologies, Inc. and
Subsidiaries as of June 30, 1999 and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the three and six
months ended June 30, 1999 and 1998 were not audited by us and, accordingly, we
do not express an opinion on them. The accompanying balance sheet as of December
31, 1998 was audited by us and we expressed an unqualified opinion thereon dated
January 25, 1999.
Jones, Jensen & Company
Salt Lake City, Utah
July 12, 1999
Page 3
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 177,665 $ 271,665
Accounts receivable, net (Note 1) 46,117 15,117
Accounts receivable, related (Note 1) 31,620 31,620
----------------------------------
Total Current Assets 255,402 318,402
----------------------------------
PROPERTY AND EQUIPMENT (Net) (Note 2) 55,172 79,855
----------------------------------
OTHER ASSETS
Deposits 11,867 13,947
Intangibles, net (Note 3) 189,233 188,348
----------------------------------
Total Other Assets 201,100 202,295
----------------------------------
TOTAL ASSETS $ 511,674 $ 600,552
==================================
</TABLE>
The accompanying notes are an integral part of
these consolidated financialstatement.
Page 4
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 276,953 $ 302,796
Accounts payable, related (Note 5) 5,610 47,366
Accrued expenses 10,978 14,187
Notes payable (Note 6) - 850,000
----------------------------------
Total Current Liabilities 293,541 1,214,349
----------------------------------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock; 550,000 shares authorized of
$10.00 par value, 10,000 and 10,000 shares
issued and outstanding, respectively 100,000 100,000
Common stock; 50,000,000 shares authorized
of $0.01 par value, 27,586,679 and 19,951,279
shares issued and outstanding, respectively 275,867 199,513
Additional paid-in capital 6,158,845 5,083,791
Accumulated deficit (6,316,579) (5,997,101)
----------------------------------
Total Stockholders' Equity (Deficit) 218,133 (613,797)
----------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 511,674 $ 600,552
==================================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statement.
Page 5
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------- --------------------------
1999 1998 1999 1998
-------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE
Net sales $ 62,474 $ 153,820 $ 124,966 $ 179,947
Cost of goods sold 30,058 35,014 72,038 105,740
-------------------------------------------------------
Gross Profit 32,416 118,806 52,928 74,207
-------------------------------------------------------
EXPENSES
Research and development 46,779 132,299 90,353 256,930
Production costs 12,312 117,742 33,682 232,967
General and administrative 57,732 179,482 169,574 401,278
Depreciation and amortization 22,320 31,218 44,219 52,246
-------------------------------------------------------
Total Expenses 139,143 460,741 337,828 943,421
-------------------------------------------------------
Loss From Operations (106,727) (341,935) (284,900) (869,214)
------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income 9 1,376 960 3,021
Interest expense (11,993) (10,071) (35,538) (14,991)
-------------------------------------------------------
Total Other Income (Expense) (11,984) (8,695) (34,578) (11,970)
-------------------------------------------------------
NET LOSS $(118,711) $(350,630) $(319,478) $(881,184)
=======================================================
BASIC LOSS PER SHARE $ (0.01) $ (0.02) $ (0.02) $ (0.05)
=======================================================
FULLY DILUTED LOSS PER SHARE $ (0.00) $ (0.01) $ (0.01) $ (0.03)
=======================================================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statement.
Page 6
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------------- ---------------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 50,000 $500,000 17,823,387 $178,234 $3,961,790 $(4,332,431)
Common stock issued for cash
at $0.65 per share - - 550,002 5,500 352,000 -
Common stock issued in lieu
of debt at $0.71 per share - - 70,000 700 49,300 -
Common stock issued for
services rendered at $0.66
per share - - 34,815 348 22,630 -
Conversion of preferred shares
to common shares (40,000) (400,000) 615,200 6,152 393,848 -
Common stock issued upon
exercise of warrants at
$0.20 per share - - 420,000 4,200 79,800 -
Common stock issued upon
exercise of warrants - - 167,000 1,670 (1,670) -
Dividends declared - - - - (24,000) -
Stock offering costs - - - - (30,176) -
Common stock issued upon
exercise of warrants at
$0.75 per share - - 250,000 2,500 185,000 -
Common stock issued in lieu
of debt at $0.25 per share - - 17,875 179 4,290 -
Common stock issued in lieu
of debt at $0.33 per share - - 3,000 30 970 -
Addi+tional capital contributed - - - - 90,009 -
Net loss for the year ended
December 31, 1998 - - - - - (1,664,670)
---------------------------------------------------------------------------------------
Balance, December 31, 1998 10,000 100,000 19,951,279 199,513 5,083,791 (5,997,101)
---------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statement.
Page 7
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)(Continued)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------------- ---------------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 10,000 100,000 19,951,279 199,513 5,083,791 (5,997,101)
Common stock issued in lieu
of debt at $0.25 per share
(unaudited) - - 10,400 104 2,496 -
Dividends declared (unaudited) - - - - (3,000) -
Common stock issued in lieu of
debt at $0.20 per share
(unaudited) - - 2,875,000 28,750 546,250 -
Common stock issued in lieu of
debt at $0.15 per share
(unaudited) - - 2,130,000 21,300 298,200 -
Common stock issued upon exercise
of warrants at $0.20 per share
(unaudited) - - 120,000 1,200 22,800 -
Common stock issued for cash at
$0.10 per share (unaudited) - - 2,500,000 25,000 225,000 -
Stock offering costs - - - - (13,692) -
Net loss for the six months ended
June 30, 1999 (unaudited) - - - - - (319,478)
---------------------------------------------------------------------------------------
Balance, June 30, 1999
(unaudited) 10,000 $100,000 27,586,679 $ 275,867 $ 6,158,845 $(6,316,579)
=======================================================================================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statement.
Page 8
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1999 1998 1999 1998
-------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(118,711) $(350,630) $(319,478) $(881,184)
Adjustments to reconcile net loss to
net cash used by operating activities:
Common stock issued for services - 22,978 - 22,978
Depreciation and amortization 22,320 31,218 44,219 52,246
(Increase) decrease in accounts
receivable (9,523) (130,144) (31,000) (149,136)
(Increase) decrease in deposits - - 2,080 -
Increase (decrease) in accounts
payable and accounts payable - related 19,367 (152,068) (64,999) (31,764)
Increase (decrease)in accrued
expenses 14,791 188,102 41,291 195,892
-------------------------------------------------------
Net Cash (Used) by Operating Activities (71,756) (390,544) 327,887) (790,968)
-------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of fixed assets - - 211 -
Patent costs (8,846) (21,112) (20,632) (23,386)
Purchase of fixed assets - - - (5,512)
-------------------------------------------------------
Net Cash (Used) by Investing Activities (8,846) (21,112) (20,421) (28,898)
-------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable - 550,000 - 550,000
Principal payments on notes payable - (15,000) - (30,000)
Dividends paid (3,000) (3,000) (6,000) (18,000)
Common stock issued for cash 260,308 60,000 260,308 387,324
-------------------------------------------------------
Net Cash Provided by
Financing Activities 257,308 592,000 254,308 889,324
-------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 176,706 180,344 (94,000) 69,458
CASH, BEGINNING OF PERIOD 959 200,724 271,665 311,610
-------------------------------------------------------
CASH, END OF PERIOD $ 177,665 $ 381,068 $ 177,665 $ 381,068
=======================================================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statement.
Page 9
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1999 1998 1999 1998
-------------------------------------------------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR:
Interest $ 156 $ 10,071 $ 201 $ 14,991
Income Taxes $ - $ - $ - $ -
NON-CASH FINANCING ACTIVITIES:
Common stock issued for services $ - $ 22,978 $ - $ 22,978
Common stock issued in lieu of debt $ 894,500 $ - $ 897,100 $ 50,000
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statement.
Page 10
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
The consolidated financial statements presented are those of
Synthonics Technologies, Inc.(STI) and its wholly-owned subsidiaries,
Synthonics Incorporated (Synthonics) and Christopher Raphael, Inc.
(CRI). Collectively, they are referred to herein as the "Company". STI
was incorporated on March 27, 1974 under the laws of the State of
Utah. Effective May 19, 1995, STI issued 9,983,301 shares of its
common stock in exchange for 98% of the issued and outstanding common
stock of Synthonics. During 1997, STI issued an additional 179,700
shares of its common stock for the remaining 2%. In 1996, STI changed
its name to Synthonics Technologies, Inc.
Synthonics was incorporated on August 26, 1993 under the state laws of
California. Synthonics was organized to engage in the design,
development and marketing of computer-interactive and
computer-automated image analysis software and hardware products. With
the acquisition of Synthonics, STI continued to engage in these
activities.
At the time of the acquisition of Synthonics, STI was essentially
inactive, with no operations and minimal assets. Additionally, the
exchange of STI's common stock for the common stock of Synthonics
resulted in the former stockholders of Synthonics obtaining control of
STI. Accordingly, Synthonics became the continuing entity for
accounting purposes, and the transaction was accounted for as a
recapitalization of Synthonics with no adjustment to the basis of
Synthonic's assets acquired or liabilities assumed. For legal
purposes, STI was the surviving entity.
On October 1, 1997, STI purchased CRI for $5,200 by issuing 10,000
shares of its common stock in exchange for 100% of the issued and
outstanding stock of CRI. The common stock issued was valued at its
trading price of $0.52 per share. The acquisition was accounted for as
a purchase. Initially, goodwill was recorded which consisted of the
excess of the purchase price over the fair value of the net tangible
assets of CRI. The goodwill was amortized over a two year period.
CRI was incorporated on June 17, 1997 under the state laws of
California. CRI was organized as a graphic design and print brokerage
firm.
b. Accounting Methods
The Company's consolidated financial statements are prepared using the
accrual method of accounting. The Company has elected a December 31,
year end.
c. Cash and Cash Equivalents
Cash equivalents include short-term, highly liquid investments with
maturities of three months or less at the time of acquisition.
Page 11
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d. Basic and Fully Diluted Loss Per Share
The computations of basic loss per share of common stock are based on
the weighted average number of common shares outstanding during the
period of the consolidated financial statements. Common stock
equivalents, consisting of warrants and employee stock options, have
not been included in the calculation as their effect is antidilutive
for the periods presented. Stock warrants and stock options have been
included in the fully diluted loss per share.
e. Change in Accounting Principle
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share" during the year ended December 31, 1998.
In accordance with SFAS No. 128, diluted earnings per share must be
calculated when an entity has convertible securities, warrants,
options, and other securities that represent potential common shares.
The purpose of calculating diluted earnings (loss) per share is to
show (on a pro forma basis) per share earnings or losses assuming the
exercise or conversion of all securities that are exercisable or
convertible into common stock and that would either dilute or not
affect basis EPS. As permitted by SFAS No. 128, the Company has
retroactively applied the provisions of this new standard by showing
the fully diluted loss per common share for all years presented.
f. Computer Software Development
The Company records all costs incurred to establish the technological
feasibility of its computer software products as research and
development expenses.
g. Property and Equipment
Property and equipment is recorded at cost. Major additions and
improvement are capitalized. The cost and related accumulated
depreciation of equipment retired or sold are removed from the
accounts and any differences between the undepreciated amount and the
proceeds from the sale are recorded as gain or loss on sale of
equipment. Depreciation is computed using the straight-line method
over a period of five years.
h. Accounts Receivable
Accounts receivable are shown net of the allowance for doubtful
accounts.
i. Provision For Taxes
At June 30, 1999, the Company has net operating loss carryforwards of
approximately $6,300,000 that may be offset against future taxable
income through 2014. No tax benefit has been reported in the
consolidated financial statements because the Company believes there
is a 50% or greater chance the net operating loss carryforwards will
not be used. Accordingly, the potential tax benefits of the net
operating loss carryforwards are offset by a valuation allowance of
the same amount.
Page 12
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
j. Principles of Consolidation
The consolidated financial statements include those of Synthonics
Technologies, Inc. and its wholly-owned subsidiaries, Synthonics
Incorporated and Christopher Raphael, Inc.
All material intercompany accounts and transactions have been
eliminated.
k. Uninsured Cash Balances
The Company maintains its corporate cash balances at various banks.
Corporate cash accounts at banks are insured by the FDIC for up to
$100,000. Amounts in excess of insured limits were approximately
$77,665 and $171,665 at June 30, 1999 and December 31, 1998,
respectively.
l. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
m. Goodwill
Goodwill consists of the excess of the purchase price over the fair
value of net tangible assets of the purchased subsidiary and is
amortized on the straight-line method over a two year period. The
Company periodically reviews goodwill for impairment. Amortization
expense on the goodwill for the six months ended June 30, 1999 and
1998 was $-0-and $24,046, respectively.
n. Advertising
The Company follows the policy of charging the costs of advertising to
expense as incurred.
o. Unaudited Consolidated Financial Statements
The accompanying unaudited consolidated financial statements include
all of the adjustments which, in the opinion of management, are
necessary for a fair presentation. Such adjustments are of a normal,
recurring nature.
Page 13
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 2 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
June 30, December 31,
Property and equipment consists of the following: 1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
Computer equipment $ 171,742 $ 171,742
Furniture and fixtures 17,850 18,061
Photographic equipment 55,122 55,122
----------------------------------
244,714 244,925
Accumulated depreciation (189,542) (165,070)
----------------------------------
Net property and equipment $ 55,172 $ 79,855
==================================
</TABLE>
Depreciation expense for the six months ended June 30, 1999 and 1998 was
$24,472 and $21,260, respectively.
NOTE 3 - INTANGIBLES
<TABLE>
<CAPTION>
June 30, December 31,
Intangible costs incurred are as follows: 1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
Trademarks $ 1,484 $ 1,484
Patents 289,716 269,084
----------------------------------
291,200 270,568
Less accumulated amortization (101,967) (82,220)
----------------------------------
Total $ 189,233 $ 188,348
==================================
</TABLE>
The patent costs that have been capitalized relate to legal fees
incurred to develop and secure the Company's patents on the 3-D
technology. The patents are recorded at cost and are amortized using
the straight-line method over a period of seven years.
Amortization expense for the six months ended June 30, 1999 and 1998
was $19,747 and $6,801, respectively.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
During 1998, the Company entered into two separate operating lease
agreements for various equipment. The lease terms expire beginning in
May 2001 and ending June 2001. The monthly rental payment for the two
leases combined is $443.
During 1997, the Company entered into three separate operating lease
agreements for various computer equipment. The lease terms expire
beginning in November 1999 and ending November 2000. The monthly
rental payment for all three leases combined is $2,668.
The Company entered into a lease agreement for its office facilities
effective September 1, 1996 and expiring August 31, 2000. The monthly
rental payment is $2,497 through August 31, 1999 and then increases to
$2,618 through August 31, 2000.
Page 14
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
Minimum future lease payments on all the leases as of December 31,
1998 are as follows:
Year Ended
December 31, Amount
------------ -------------------
1999 $ 60,901
2000 34,326
2001 2,260
2002 -
2003 -
2004 and thereafter -
-------------------
Total $ 97,487
===================
The Company also has entered into employment agreements with certain
officers of the Company. The Company has agreed to pay its Chief
Executive Officer and Chief Technical Officer a base annual salary of
$240,000, each, beginning on July 1, 1996 and ending on December 31,
2000. During 1998, the Company's Board of Directors approved a
reduction in these salaries for the entire 1998 year due to a cash
shortage. The Board of Directors also approved a reduction in the
salaries for the six months ended June 30, 1999 due to the cash
shortage. The Company's Board of Directors may also authorize bonuses
on an-ad hoc basis.
On January 8, 1998, a default judgment was granted in favor of the
Company for breach of a license agreement and misappropriation of
trade secrets. The Company was awarded damages from the defendant in
the amount of $300,000. It is unlikely, however, that the Company will
receive any amount from the judgment.
NOTE 5 - RELATED PARTY TRANSACTIONS
During 1998, $99,299 of debt was forgiven by an officer and was
recorded as contributed capital at December 31, 1998. In addition, a
previously forgiven debt of $9,290 was paid out during 1998 resulting
in a reduction of contributed capital at December 31, 1998. The
Company also owed certain related parties $5,610 and $47,366 as of
June 30, 1999 and December 31, 1998, respectively, for costs incurred
on the Company's behalf.
Page 15
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 6 - NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
Notes payable to various individuals,
interest at 13% per annum,
principle and interest due May 15,
1999 (payable in cash or stock at
$0.15 per share, at the option of
the Company), unsecured. $ - $ 300,000
Notes payable to various individuals,
interest at 10% due semi-annually,
principle due in May 1999 (payable
in cash or stock at $0.20 per share,
at the option of the Company),
unsecured. - 550,000
-------------- --------------
Total Notes Payable - 850,000
Less: Current Portion - (850,000)
-------------- --------------
Long-Term Notes Payable $ - $ -
============== ==============
</TABLE>
The aggregate principal maturities of notes payable are as follows:
Year Ended
December 31, Amount
------------ -------------
1999 .................. $ 850,000
2000 .................. -
2001 .................. -
2002 .................. -
2003 .................. -
2004 and thereafter ... -
-------------
Total $ 850,000
=============
Page 16
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 7 - STOCK OPTIONS, WARRANTS AND RIGHTS
a. Stock "Rights" and Warrants
In connection with its acquisition of Synthonics, the Company acquired
from Synthonics stockholders, warrants and "rights" to acquire
1,369,190 shares of Synthonics common stock. In exchange, the Company
granted the exchanging stockholders warrants and "rights" to purchase
6,161,355 shares of the Company's common stock. 1,950,500 of the
2,124,000 stock purchase warrants were exercised during 1996 at $0.27
per share and the remaining 173,500 warrants expired unexercised on
February 15, 1996. There were 2,597,355 uncertificated "rights" with
an exercise price of $0.11 per share outstanding at December 31, 1997.
562,500 expired January 1, 1998 and 2,034,855 expired May 31, 1999.
During 1996, 337,000 warrants were purchased at $1.00 per share for
$337,000. 168,500 of the warrants were "A" warrants and 168,500 were
"B" warrants. They were redeemable at 50% of the average price the
month before being exercised. The "A" warrants were exercised during
June 1997 and the "B" warrants were exercised during June 1998.
During the six months ended June 30, 1999, additional warrants to
purchase 380,785 shares were granted with an exercise price of $0.10
per share. These additional warrants expire in March 2004. In
addition, during the six months ended June 30, 1999, warrants to
purchase 120,000 shares were exercised at $0.20 per share.
As of June 30, 1999, there were 556,785 additional outstanding
warrants at prices ranging from $0.10 to $2.00 per share. These
warrants are to be exercised from May 2000 through March 2004.
b. Common Stock Options
During 1996, certain of the Company's officers were granted stock
options for a total of 600,000 restricted common shares of the Company
at $1.00 per share in return for their forgiveness of deferred
compensation debt in the amount of $236,500. During 1997, these
officers were granted additional stock options to purchase 588,290
shares of restricted common stock at $1.00 per share in return for
their forgiveness of deferred compensation debt in the amount of
$279,133. The Company also issued 501,000 shares of common stock
during 1997 in exchange for the forfeiture of 750,000 common stock
options. 450,000 of those stock options were valued at $0.22 per
option and the remaining 300,000 stock options were valued at $0.50
per option. The amounts are recorded as contributed capital at
December 31, 1996 and 1997. The options can be exercised in total or
in part prior to December 31, 2001 and 2002. During 1998, officers
were granted additional stock options to purchase 1,212,979 shares of
restricted common stock at $0.53 per share. During the six months
ended June 30, 1999, additional stock options to purchase 3,308,166
shares of restricted stock were granted exercisable at prices ranging
from $0.10 to $0.20 per share.
The total amount of outstanding stock options of the Company at June
30, 1999 is summarized as follows: Shares Exercise Price Exercised By
Shares Exercise Price Exercised By
----------------------------------------------------------------
7,409,164 $ 0.20 April 30, 2004
306,806 $ 0.13 June 30, 2004
1,115,000 $ 0.20 June 24, 2004
1,371,320 $ 0.10 March 2, 2000
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SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1999 and December 31, 1998
NOTE 7 - STOCK OPTIONS, WARRANTS AND RIGHTS (Continued)
c. Stock Option and Management Cash Incentive Plans
At the annual shareholders' meeting in April 1998, the shareholders
approved a Stock Option Plan and a Management Cash Incentive Plan.
Management believes that these plans will help increase the
productivity and efficiency of the officers and employees involved.
NOTE 8 - PREFERRED STOCK
At December 31, 1997, the Company had 50,000 outstanding shares of
cumulative convertible preferred stock. During 1998, 40,000 of the
shares were converted early into 615,200 shares of common stock. The
early conversion was at a 15.38 shares of common to 1 share of
preferred conversion rate, as an incentive for the preferred
shareholders to give up their future dividends from the preferred
stock. Thus, at June 30, 1999 and December 31, 1998, the Company has
10,000 outstanding shares of cumulative convertible preferred stock.
The remaining preferred stock is convertible at the option of the
holder into five shares of the Company's common stock for each share
of preferred stock, are non-voting, and feature a 12% annual dividend,
paid quarterly. Accrued dividends as of June 30, 1999 and December 31,
1998 were $6,000 and $-0-, respectively.
NOTE 9 - GOING CONCERN
The Company's consolidated financial statements are prepared using
generally accepted accounting principles applicable to a going concern
which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company has
historically incurred significant losses which have resulted in an
accumulated deficit of $5,997,101 at December 31, 1998 which raises
substantial doubt about the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not
include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and
classification of liabilities that might result from the outcome of
this uncertainty. It is the intent of management to create additional
revenues through the development and sales of its image analysis
software and to rely upon additional equity financing if required to
sustain operations until revenues are adequate to cover the costs.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read together with the
Annual Report of Synthonics, Consolidated Financial Statements of Synthonics and
the notes to the Consolidated Financial Statements included elsewhere in this
Form 10-QSB.
This discussion summarizes the significant factors affecting the
consolidated operating results, financial condition and liquidity and cash flows
of Synthonics for the six months ended June 30, 1999 and June 30, 1998. Except
for historical information, the matters discussed in this Management's
Discussion and Analysis of Financial Condition and Results of Operations are
forward looking statements that involve risks and uncertainties and are based
upon judgments concerning various factors that are beyond our control. Actual
results could differ materially from those projected in the forward-looking
statements as a result of, among other things, the factors described below under
the caption "Cautionary Statements and Risk Factors."
Overview
During the past two years, we have pursued a strategy of packaging our
patented 3D technology into software tools that can be licensed to other brand
name software distributors as enhancements to their own software products. To
date, this strategy has produced disappointing financial results; and we are now
in the process of re-focusing our market direction to one of providing Internet
3D electronic-commerce, or e-commerce, solutions. We believe that our 3D
technology provides attractive capabilities to consumers wanting to purchase
products on-line. In particular, we believe that product comparisons and
evaluations can be made simpler and more effectively by using our 3D technology.
We are in the process of overhauling our infrastructure, creating marketing
demos, pursuing strategic alliances, and pursuing capital funding to support
this new initiative.
On July 20, 1999, one of our customers introduced its new 3D visualization
product called RapidSITE(TM), which is currently in beta testing. We provided a
3D creation software module, called Picture Modeler, for this product. Under the
terms of our licensing agreement with this customer, we receive a royalty for
each product shipped. To date, we have received $40,000 in advance against
royalties from this customer.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998.
NET SALES decreased 30.6% for the six months ended June 30, 1999 to
$124,966 from $179,947 for the six months ended June 30, 1998. During the first
half of fiscal 1998, the Company received payments for services rendered from
two customers accounting for the majority of its sales in that time period. In
one case, the services involved 3D content creation while in the other case; the
services rendered were that of software development. The majority of sales
during the six months ended June 30, 1999 were from ongoing revenue contracts as
sales of the Smithsonian CD-ROM were $48,000 to the Smithsonian Institution and
$12,000 to other Educational distributors. In addition, $40,000 in sales was
generated from the Company's agreement to license its new software product
called Picture Modeler. The balance of sales during the first half of fiscal
1999 was for 3D content creation services for the Smithsonian Institution.
GROSS PROFIT decreased 28.7% in the six months ended June 30, 1999 to
$52,928 from $74,207 in the six months ended June 30, 1998. The decrease in the
gross profit for the first six months of fiscal 1999 can be attributed to the
reduction in sales for the same time period. Gross profit as a percentage of
sales increased to 42.4% for the first half of fiscal 1999 as compared to 41.2%
for the first half of fiscal 1998.
OPERATING EXPENSES decreased to $337,828 for the six months ended June 30,
1999 from $943,321 for the six months ended June 30, 1998. The decrease in
operating expense is primarily due to a decrease in staffing during the first
two quarters of fiscal 1999. Overall, the reduction in operating expense
reflects the Company's consolidation and cost cutting efforts being employed
while it redefines its overall strategy from that of a 3D software tools
provider to that of an Internet 3D e-commerce solution provider.
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Production costs for the six month period ended June 30, 1999 were $33,682
or 27% of sales as compared to $232,967 or 129.5% of sales for the six months
ended June 30, 1998. Production costs decreased as a percentage of sales as
production costs for the Smithsonian CD-ROM were incurred during the first half
of 1998 as the product was being prepared for release. During the first half of
1999, production costs have been primarily associated with the 3D content
creation services provided to the Smithsonian Institution.
General and administrative expenses totaled $169,574 and $401,278 for the
six-months ended June 30, 1999 and 1998, respectively. The decrease in expense
reflects the cost reduction efforts underway with the re-focusing of the Company
to that of an Internet e-commerce solution provider.
Research and development expenses totaled $90,353 and $256,930 for the
six-month periods ended June 30, 1999 and 1998, respectively. The decrease is
primarily the result of a reduction in development required for the products
being prepared for the Company's joint venture affiliate, Acuscape
International, Inc. Expenditures on research and development are expected to
increase in future periods, particularly in connection with the Company's shift
in strategy to electronic commerce solutions and the investigation and/or
development of additional product lines.
As a result of the foregoing factors, we had a net loss of $319,478 for the
six months ended June 30, 1999 as compared to a net loss of $881,184 for the six
months ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary needs for funds are to provide working capital
associated with forecasted growth in sales volume. Specifically, funds are
required to complete the products necessary for the Company's Internet
initiative. Additionally, funds are required to promote future business
development. Working capital for the six months ended June 30, 1999 was funded
primarily through the sale of equity and the collection of accounts receivable.
Net cash used in operating activities during the six months ended June 30,
1999 was primarily attributable to a net loss of $319,478. Net cash used in
investing activities in the six months ended June 30, 1999 was due primarily to
costs associated with patent filings. Net cash provided by financing activities
for the six months ended June 30, 1999 was $254,308 compared to $889,324 during
the six months ended June 30, 1998. In May 1999 a warrant was exercised for
120,000 shares of Common Stock at $0.20 per share providing $24,000 in cash, and
in June 1999, we closed a private placement of 2,500,000 shares of our Common
Stock, which were issued to two investors. The private placement raised
aggregate proceeds of $250,000, offset by $13,692 of selling expenses and $6,000
for dividends paid to Preferred Stock shareholders.
In May of 1999, we had notes payable in the amount of $850,000 come due. We
chose to exercise our option, per the terms of the notes, to issue Common Stock
in lieu of cash in order to pay-off the principal and the majority of
outstanding interest associated with these notes. In doing so, we issued a total
of 5,005,000 shares of our Common Stock to the holders of these notes.
At present, our anticipated capital commitments are primarily for the
expenditures associated with the overhauling of our infrastructure, creating of
marketing demonstrations, pursuing of strategic alliances, and pursuing of
capital funding. We estimate that our current cash balance is sufficient to meet
our needs through the third quarter of fiscal 1999. Based on our current
operating plan, we anticipate that further capital will be required during the
next twelve months to satisfy our expected increased working capital and
research and development requirements for the new products. We are currently
exploring alternatives to fulfill our financing requirements. No assurance can
be given that additional financing will be available when needed or that, if
available, it will be on terms favorable to our stockholders and us. If needed
funds are not available, we may be required to curtail our operations, which
could have a material adverse effect on our business, operating results and
financial condition. There can be no assurance that our working capital
requirements during this period will not exceed its available resources or that
these funds will be sufficient to meet the Company's longer-term cash
requirements for operations.
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CAUTIONARY FORWARD - LOOKING STATEMENT
- --------------------------------------
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, and in future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases and in oral statements made with the approval of an authorized
executive officer which are not historical or current facts are "forward-looking
statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The following
important factors, among others, in some cases have affected and in the future
could affect the Company's actual results and could cause the Company's actual
financial performance to differ materially from that expressed in any
forward-looking statement: (i) the extremely competitive conditions that
currently exist in the three dimensional software development marketplace are
expected to continue, placing further pressure on pricing which could adversely
impact sales and erode profit margins; (ii) many of the Company's major
competitors in its channels of distribution have significantly greater financial
resources than the Company; and (iii) the inability to carry out marketing and
sales plans would have a materially adverse impact on the Company's projections.
The foregoing list should not be construed as exhaustive and the Company
disclaims any obligation subsequently to revise any forward-looking statements
to reflect events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events.
YEAR 2000 ISSUES
- ----------------
The Year 2000 presents concerns for business and consumer computing. Aside
from the well-known problems with the use of certain 2-digit date formats as the
year changes from 1999 to 2000, the Year 2000 is a special case leap year, and
dates such as 9/9/99 were used by certain organizations for special functions.
The problem exists for many kinds of software and hardware, including
mainframes, mini-computers, PCs, and embedded systems. The consequences of the
Year 2000 issue may include systems failures and business process interruption.
Even though none of the Company's products use dates, and therefore there
are no Year 2000 issues over which the Company has direct control, the Company
is continuing to test its products and gather and produce information about the
Company impacted by the Year 2000 transition.
The Year 2000 issue also affects the Company's internal systems, such as
billing and word processing. The Company is assessing the readiness of its
systems for handling the Year 2000, and has started the remediation and
certification process. Although assessment, testing, and remediation is still
underway, management currently believes that all material systems will be
compliant by the Year 2000 and that the cost to address the issues is not
material. Nevertheless, the Company will be creating contigency plans for
critical processes that rely on internal systems.
Given that the Company's products operate on certain hardware platforms and
within certain software operating systems and environments, the Company must
rely upon the efforts of the hardware and software vendors and manufacturers to
be in the vanguard with respect to OS and Platform issues relating to the Year
2000 compliance. The Company is undertaking steps to identify and assess whether
hardware and software vendors and manufacturers have brought their products into
Year 2000 compliance, or if any of its customers, suppliers or service providers
will be so affected. The Company will with its key vendors, distributors, and
direct resellers to avoid any business interruptions in 2000. Failure of the
Company's software resulting from a hardware or software vendor to be Year 2000
compliant, or that of its customers, suppliers or service providers could have a
material adverse impact on the Company's business, financial condition and
result of operations.
RISK FACTORS
- ------------
Several of the matters discussed in this document contain forward-looking
statements that involve risks and uncertainties. Factors associated with the
forward-looking statements that could cause actual results to differ materially
from those projected or forecast appear in the statements below. In addition to
other information contained in this document, readers should carefully consider
the following cautionary statements and risk factors:
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IF WE ARE UNABLE TO RAISE SUFFICIENT CAPITAL. Our future success depends
largely on the ability to secure outside capital funding. Required product
concept demos, product development, technology advancement, employee recruitment
and hiring, and related essential operating expenses are all dependent on new
and substantial capital funding being secured. We cannot be certain that
additional financing will be available at the time we need additional funds or
that, if available, it can be obtained on terms that we deem favorable. If
adequate capital funding cannot be secured, we will have to curtail operations
and our business will be adversely affected. Additionally, the sale of stock to
raise additional funds may dilute our stockholders.
WE HAVE A LIMITED RELEVANT OPERATING HISTORY UPON WHICH TO EVALUATE THE
LIKELIHOOD OF OUR SUCCESS. Factors such as the risks, expenses and difficulties
frequently encountered in the operation and expansion of a relatively new
business and the development and marketing of new products must be considered in
evaluating the likelihood of success of our company.
WE HAVE A HISTORY OF LOSSES AND ACCUMULATED DEFICIT AND THIS TREND OF
LOSSES MAY CONTINUE IN THE FUTURE. For the period January 1, 1999 to June 30,
1999 we incurred a net loss of $319,478. For the fiscal year ended December 31,
1998 we had a net loss of $1,664,670. At June 30, 1999 our accumulated deficit
was $6,316,579. Our ability to obtain and sustain profitability will depend, in
part, upon the successful development and marketing of our existing products and
technologies and the successful and timely introduction of new products.
OUR PROPRIETARY TECHNOLOGY MAY NOT BE ADEQUATELY PROTECTED FROM COPYING BY
OTHERS. Our future success and ability to compete depends in part upon our
proprietary technology. We rely on trademark, trade secret, patent laws, and
copyright laws to protect our technology, and require all employees and
third-party developers to sign nondisclosure agreements. We cannot be certain,
however, that these precautions will provide meaningful protection from
competition or that competitors will not be able to develop similar or superior
technology independently. We do not copy-protect our software, so it may be
possible for unauthorized third parties to copy our products or to reverse
engineer or otherwise obtain and use information that we regard as proprietary.
Our customers may take inadequate precautions to protect our proprietary
information. If we must pursue litigation in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others, we may not prevail and
will likely make substantial expenditures and divert valuable resources. In
addition, many foreign countries' laws may not protect us from improper use of
our proprietary technologies overseas. We may not have adequate remedies if our
proprietary rights are breached or our trade secrets are disclosed.
IF WE DO NOT ACHIEVE COMMERICIAL ACCEPTANCE OF OUR INTERNET 3D E-COMMERCE
SOLUTION PRODUCTS. We are currently re-focusing the Company to provide 3D
e-commerce solutions for the Internet that take advantage of our patented 3D
technology. We believe both consumers and businesses, participating in
e-commerce on the Internet, will benefit substantially from the products that we
will develop therefore creating market demand for these products. In designing
our products for e-commerce on the Internet, we will have to make certain
assumptions about consumer preferences, retailers needs, and the availability of
anticipated Internet related technology advances. Inaccurate assumptions on our
behalf, for any of these categories, will likely downgrade market acceptance of
our Internet 3D e-commerce solution products. If market acceptance of these
products is less than we have forecasted, future results of the company will be
adversely affected.
IF EMERGING TECHNOLOGIES PROVIDE ALTERNATIVES WITH EQUAL OR BETTER BENEFITS
THATN OUR TECHNOLOGY. We believe that our current level of 3D technology for the
creation of 3D content provides businesses and consumers with benefits that are
unavailable from competitive technologies. We can only make this evaluation
against other products that have been released and available for public
consumption. Our competitive analysis cannot evaluate products that are
currently under development by other companies. The explosive growth of
e-commerce over the Internet is sufficient incentive for many companies to
invest in technologies that may provide products that offer similar or better
consumer and business benefits than will our products. It is essential that we
execute our Internet e-commerce solution strategy very quickly in order to stay
ahead of the competition's product offerings in this marketplace. Our time to
market with our future products is dependent on our ability to raise adequate
capital funding as described above.
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IF WE ARE UNABLE TO IDENTIFY AND SECURE REQUIRED RESOURCES. Our future
results depend largely on our ability to identify and secure resources
including:
* Technical staff
* Business development staff
* Strategic partners
* Outside contractors
We will have to rapidly expand our capabilities, once capital funding is
secured, in order to successfully pursue our Internet e-commerce solution market
strategy. Our capabilities will be expanded by combining internal staffing with
the formation of strategic partnerships and with the selection of outside
contractors such as software program developers. If we are either unable to
identify or to secure these resources in a timely fashion, our future results
will be adversely affected.
IF WE ARE UNABLE TO RETAIN AND UTILIZED KEY PERSONNEL. As an early stage
company, we are particularly dependent on a limited number of individuals to
execute our business plan. At present, all our officers and directors fall in to
the category of key individuals as each is counted upon for contributions to our
success. We have employment contracts with our Chief Executive Officer, F.
Michael Budd, and our Chief Technical Officer, Charles S. Palm, our only full
time officers. We have been unable to pay either of these employees the
compensation amounts called for in their employment contracts during the past
several fiscal quarters. Each employment contract can be terminated with thirty
days notice to the Company. If either of these individuals were to terminate
employment in the near future, it will have an adverse affect on our financial
performance. Our directors are all individuals who are employed full time by
other, non-competing, companies. As such, involvement of these directors in the
day-to-day running of the business is not practical due to conflicts of interest
for their time. At any given time, any of our directors may be unavailable to us
due to the demands of their employers and this may have an adverse affect on the
financial results of the business.
If we are unable to manage our expansion and growth. We are planning to
expand the business very rapidly in order to entrench ourselves in, what we
believe is a very lucrative e-commerce market. Effectively managing this
expansion will be very complex and require the addition of key management
personnel as well as the incorporation of management support systems. Either the
failure to identify and attract key managers or the delayed incorporation of
required management support systems will adversely affect our future financial
results. The successful recruitment of key managers and the timely installation
of management support systems are both largely dependent on our efforts to
secure adequate capital funding that is discussed above.
If we are unable to adequately address internet download issues. We will be
supplying 3D e-commerce solutions over the Internet. A major element of these
future product solutions will be to require downloads of several 3D data files
to consumers' sites. In order to be successful in this regard, we must be able
to offer download times that do not detract from the e-commerce experience. We
believe that our technology offers the best alternative available in terms of 3D
file sizes. However, we have no assurances that this advantage will be adequate
in the eyes of a consumer. We have no control over the modem type used by a
consumer, the time of day a consumer will be accessing the Internet, the
capacity of the consumer's Internet Service Provider (ISP), or the rate to which
expanded bandwidth solutions will be practically available to consumers. Each of
these can have a negative affect on the length of the download time. We are
attempting to consider all these issues in the design of our 3D e-commerce
solution products but we cannot assure that they will be adequately addressed.
If consumers conclude that the download times are not sufficiently offset by the
benefits provided, our future financial results will be adversely affected.
PART II - OTHER INFORMATION.
Item 1. Legal Proceedings.
During the period covered by this report there are no legal proceedings
against the Company and the Company is unaware of any unasserted claim or
assessment which will have a material effect on the financial position or future
operations of the Company.
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Item 2. Changes in Securities.
On April 22, 1999, subsequent to the period covered by this report, the
shareholders at the Company's Annual Meeting approved the restatement of the
Articles of Incorporation to (a) increase the number of common shares which the
company is authorized to issue to 100,000,000 shares of Common Stock, $0.01 par
value and (b) to authorize the issuance of up to 20,000,000 shares of Class B
Preferred Stock. See Exhibit list for a copy of the Restated Articles of
Incorporation incorporated herein by reference.
Item 3. Defaults Upon Senior Securities.
For the last two quarters ended March 31, 1999 and June 30, 1999 the
Company has failed to pay the quarterly dividends on the Preferred Stock in the
amount of total $3,000 per quarter.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) On April 22, 1999, we held our Annual Meeting of the Shareholders. Of
the Company's 19,951,279 shares of Common Stock entitled to vote at the meeting,
15,139,047 were represented, either in person or by proxy. The purpose of the
meeting was to consider and act upon the following proposals:
1. Elect 1 Director for a term of three (3) years,
2. Ratify the appointment of Jones, Jensen & Company as the
Company's independent accountants for the fiscal year 1999;
3. Approve a proposal to amend the company's articles of
incorporation to increase the number of common shares which the
company is authorized to issue to 100,000,000 shares of Common
Stock, $0.01 par value, and to authorize the issuance of up to
20,000,000 shares of Class B Preferred Stock.
4. Transact such other business as may properly come before the
meeting of any adjournment thereof.
(b) At this Annual Meeting, the following person was elected as a Director
of the Company:
David L. Stewart was elected as Director to serve for a term of three
(3) years.
Votes for .............. 14,941,582
Withhold Authority ..... 197,465
(c) At this Annual Meeting, the following other matters were voted on with
the number of votes cast for, against or withheld, and abstentions as to each
matter as follows:
Proposal No. 2 - Ratification of the appointment of Jones, Jensen &
Company as the Company's independent accountants for the fiscal year
1999.
Votes for .............. 14,485,549
Votes against .......... 12,873
Abstaining ............. 640,575
Proposal No. 3 - To amend and restate the Company's Articles of
Incorporation to increase the number of common shares which the
company is authorized to issue to 100,000,000 shares of Common Stock,
$0.01 par value and to authorize the issuance of up to 20,000,000
shares of Class B Preferred Stock.
Votes for .............. 11,825,857
Votes against .......... 1,361,587
Abstaining ............. 83,000
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Item 5. Other Information.
Resignation of Chairman of the Board.
-------------------------------------
On April 22, 1999, at the Annual Meeting of Shareholders, Mr. LeRoy K.
Speirs, a director and Chairman of the Board of the Company resigned
for medical reasons.
Appointment to Thomas Carpenter as Chairman of the Board.
----------------------------------------------------------
At the annual meeting of the Board of Directors of the Company
following its annual meeting of shareholders, Thomas Carpenter was
elected as the Chairman of the Board to replace LeRoy K. Speirs
following his resignation.
Engagement of Averil & Associates as Financial Advisor.
------------------------------------------------------
On April 1, 1999, the Company engaged Averil & Associates as its
financial advisor. A copy of the Agreement between the Company and
Averil & Associates is attached hereto and incorporated herein by this
reference. See Exhibit List Index.
Rescission of Re-pricing of Options and Warrants.
-------------------------------------------------
On July 28, 1999, the Board of Directors rescinded the previously
adopted resolution to re-price its outstanding stock options and
warrants as set forth in its quarterly report on Form 10-SB for the
quartered ended March 31, 1999.
Recent Sale of Securities.
-------------------------
(a) Conversion of Debentures by the Company. On May 15, 1999, the
Company exercised its rights to convert the principal and interest due
and owning by the Company to certain debenture holders. In exercising
its rights the Company issued 5,005,000 shares of its Common stock in
the conversion of $850,000 of principal and $44,500 in interest. There
remains $2,500 of interest due and owing.
(b) Investment by accredited Investors. The Company sold 2,500,000 of
its Common Stock to two accredited investors for total cash
consideration of $250,000. One accredited investor, Argoquest 7, LLC,
purchased 2,300,000 shares at a price of $0.10 per share. The other
accredited investor purchased 200,000 shares at a price of $0.10 per
share. In addition, pursuant to the terms of the Equity Agreement
dated June 2, 1999, Argoquest 7, LLC has an option to purchase
1,371,320 shares of Common Stock at a purchase price of $0.10 per
share. The option expires no later that 150 days from the date of the
Equity Agreement. Argoquest 7, LLC also has the right to purchase such
number of shares of the Company's Common Stock in its current round of
financing in order for Argoquest 7, LLC to maintain its 10.0%
ownership of the outstanding shares of the Company's Common Stock. The
Equity Agreement is attached hereto as Exhibit 10.21.
(c) Exercise of Warrant by F. Michael Budd. On May 5, 1999, F. Michael
Budd, the President and a Director or the Company exercised a warrant
to purchase 120,000 shares of Common Stock at a price of $0.20 per
share for total cash consideration received by the Company of $24,000.
Appointment of Additional Directors and Officers.
-------------------------------------------------
On June 18, 1999 the Board of Directors elected Vera Campbell and
Diana L. Maranon as Directors of the Company to fill the two positions
vacated by LeRoy K. Speirs and Timothy Andrews. The backgrounds of Ms.
Campbell and Maranon are set forth below.
Vera Campbell - Elected to the Board of Directors on June 18, 1999.
Also appointed as Executive Vice President of the Company to lead its
Internet Apparel Initiative. Ms. Campbell has been involved in the
apparel retail and manufacturing business for more than 30 years. She
currently owns and operates Design Zone, which she founded 15 years
ago. Design Zone, which sells under the Knitworks label, caters to the
junior and kids (Age 7 to 14) market and specializes in knit products.
Prior to this she owned and operated a chain of young, trendy unisex
stores in Columbus, Ohio, and was head merchandiser for Beeba's
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Creations. Ms. Campbell is an active member of the apparel industry.
She served as an executive board member of the California Fashion
Association and was instrumental in the creation of the California
Fashion Foundation. Ms. Campbell is active in the charitable community
including The Foundation for the Junior Blind and Inner City Arts. Ms.
Campbell graduated from Ohio State University.
Diana L. Maranon - Elected to the Board of Directors on June 18, 1999.
Ms. Maranon is the Managing Director of Averil Capital Markets Group,
Inc. Since founding Averil, she has raised capital or closed related
transactions totaling more than $100 million. At Averil, her clients
have included Virgin Interactive, Brilliant Digital Entertainment,
MicroNet Technology, Flour Corporation, Kemper Real Estate Management
Corporation, and Adflex Solutions, Inc. among others. Prior to forming
Averil, Ms. Maranon was a vice president with Wasserstein Perella &
Co., Inc. At WP&Co., she was responsible for the Western United States
and had substantial involvement in both European and Asian
cross-border assignments. In addition to her investment banking
experience, Ms. Maranon practiced law with Skadden Arps Slate Meagher
& Flom, where she specialized in mergers and acquisitions as well as
corporate finance. During her career, Ms. Maranon has been involved
with various types of financial transactions totaling more than $10
billion. Ms. Maranon received her JD and MBA degrees, with honors,
from the UCLA School of Law and the UCLA Anderson School of
Management, respectively. She is an active member of the American and
California Bar Associations.
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits attached or incorporated by referenced pursuant to
Item 601 of Regulation S-B.
(3) Articles of Incorporation and By-Laws.
3.1 Articles of Incorporation of the Registrant filed on March
27, 1994, (incorporated by reference to Exhibit 3.1 of the
Registrant's Registration Statement on Form 10-SB dated April 28,
1998; Commission File No. 0-24109).
3.2 Restated Articles of Incorporation of the Registrant dated
May 18, 1995, (incorporated by reference to Exhibit 3.2 of the
Registrant's Registration Statement on Form 10-SB dated April 28,
1998; Commission File No. 0-24109).
3.3 Articles of Amendment to Articles of Incorporation of the
Registrant, filed on September 16, 1996, (incorporated by
reference to Exhibit 3.3 of the Registrant's Registration
Statement on Form 10-SB dated April 28, 1998; Commission File No.
0-24109).
3.4 Statement of Designation of Foreign Corporation in California
filed November 4, 1996, (incorporated by reference to Exhibit 3.4
of the Registrant's Registration Statement on Form 10-SB dated
April 28, 1998; Commission File No. 0-24109).
3.5 Certificate of Amendment to Articles of Incorporation filed
September 6, 1997, (incorporated by reference to Exhibit 3.5 of
the Registrant's Registration Statement on Form 10-SB dated April
28, 1998; Commission File No. 0-24109).
3.6 Amended and Restated Articles of Incorporation filed April
23, 1998, (incorporated by reference to Exhibit 3.6 of the
Registrant's Registration Statement on Form 10-SB dated April 28,
1998; Commission File No. 0-24109).
3.6(a) Restated Articles of Incorporation dated effective as of
April 22, 1999, (incorporated by reference to Exhibit 3.6(a) of
the Quarterly Report on Form 10-QSB filed on May 13, 1999.
3.7 By-Laws of the Registrant (incorporated by reference to
Exhibit 3.7 of the Registrant's Registration Statement on Form
10-SB dated April 28, 1998; Commission File No. 0-24109).
(4) Instruments defining the rights of holders.
4.1 Statement of Rights, Preferences and Privileges of Common and
Preferred Stock of the Registrant as of September 6, 1997,
(incorporated by reference to Exhibit 4.1 of the Registrant's
Registration Statement on Form 10-SB dated April 28, 1998;
Commission File No. 0-24109).
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<PAGE>
(10) Material Contracts
10.1 Management Cash Incentive Plan (incorporated by reference to
Exhibit 10.1 of the Registrant's Registration Statement on Form
10-SB dated April 28, 1998; Commission File No. 0-24109).
10.2 1998 Stock Option Plan (incorporated by reference to Exhibit
10.2 of the Registrant's Registration Statement on Form 10-SB
dated April 28, 1998; Commission File No. 0-24109).
10.3 Acuscape License Agreement (incorporated by reference to
Exhibit 10.3 of the Registrant's Amendment No. 1 to the
Registration Statement on Form 10-SB filed on November 6, 1998;
Commission File No. 0-24109).
10.4 Smithsonian License Agreement dated October 2, 1997
(incorporated by reference to Exhibit 10.4 of the Registrant's
Amendment No. 1 to the Registration Statement on Form 10-SB filed
on November 6, 1998; Commission File No. 0-24109).
10.5 Amendment No. 1 to Smithsonian License Agreement
(incorporated by reference to Exhibit 10.5 of the Registrant's
Amendment No. 1 to the Registration Statement on Form 10-SB filed
on November 6, 1998; Commission File No. 0-24109).
10.6 Centro Alameda Inc. Contract Agreement dated December 19,
1997 (incorporated by reference to Exhibit 10.6 of the
Registrant's Amendment No. 1 to the Registration Statement on
Form 10-SB filed on November 6, 1998; Commission File No.
0-24109).
10.7 Knowledge LINK Strategic Alliance Agreement (incorporated by
reference to Exhibit 10.7 of the Registrant's Amendment No. 1 to
the Registration Statement on Form 10-SB filed on November 6,
1998; Commission File No. 0-24109).
10.8 Synthonics Technologies - Industrial Lease Agreement
(incorporated by reference to Exhibit 10.8 of the Registrant's
Amendment No. 1 to the Registration Statement on Form 10-SB filed
on November 6, 1998; Commission File No. 0-24109).
10.9 Joseph Maher - Industrial Lease Agreement (incorporated by
reference to Exhibit 10.9 of the Registrant's Amendment No. 1 to
the Registration Statement on Form 10-SB filed on November 6,
1998; Commission File No. 0-24109).
10.10 Dell Financial Lease No. 004591649-001 (incorporated by
reference to Exhibit 10.10 of the Registrant's Amendment No. 1 to
the Registration Statement on Form 10-SB filed on November 6,
1998; Commission File No. 0-24109).
10.11 Dell Financial Lease No. 004591649-002 (incorporated by
reference to Exhibit 10.11 of the Registrant's Amendment No. 1 to
the Registration Statement on Form 10-SB filed on November 6,
1998; Commission File No. 0-24109).
10.12 Americorp Financial Inc. - Lease 6976-2 (incorporated by
reference to Exhibit 10.12 of the Registrant's Amendment No. 1 to
the Registration Statement on Form 10-SB filed on November 6,
1998; Commission File No. 0-24109).
10.13 Sanwa Leasing Corporation - Lease Agreement (incorporated
by reference to Exhibit 10.13 of the Registrant's Amendment No. 1
to the Registration Statement on Form 10-SB filed on November 6,
1998; Commission File No. 0-24109).
10.14 AT & T Equipment Lease - 003866952 (incorporated by
reference to Exhibit 10.14 of the Registrant's Amendment No. 1 to
the Registration Statement on Form 10-SB filed on November 6,
1998; Commission File No. 0-24109).
10.15 AT & T Equipment Lease - 003871854 (incorporated by
reference to Exhibit 10.15 of the Registrant's Amendment No. 1 to
the Registration Statement on Form 10-SB filed on November 6,
1998; Commission File No. 0-24109).
Page 27
<PAGE>
10.16 F. Michael Budd Employment Agreement (incorporated by
reference to Exhibit 10.16 of the Registrant's Amendment No. 1 to
the Registration Statement on Form 10-SB filed on November 6,
1998; Commission File No. 0-24109).
10.17 Charles S. Palm Employment Agreement (incorporated by
reference to Exhibit 10.3 of the Registrant's Amendment No. 1 to
the Registration Statement on Form 10-SB filed on November 6,
1998; Commission File No. 0-24109).
10.18 First Colony Life Insurance Policy (incorporated by
reference to Exhibit 10.18 of the Registrant's Amendment No. 1 to
the Registration Statement on Form 10-SB filed on November 6,
1998; Commission File No. 0-24109).
10.19 Software Remarketing Agreement between Synhonics
Technologies, Inc. and Evans & Sutherland Computer Corporation
(incorporated by reference to Exhibit 10.19 of the Annual Report
on Form 10-KSB filed on March 11, 1999.
10.20 Engagement Letter between the Company and Averil &
Associates dated April 1, 1999, attached hereto.
10.21 Equity Agreement between the Company and Alex Sandel dated
June 2, 1999, attached hereto.
(27) Financial Data Schedule
27.1. Financial Data Schedule (submitted electronically for SEC
information only).
(b) There were no other reports on Form 8-K filed during the period covered
by this report.
The following Exhibit Index sets forth the Exhibit attached hereto.
EXHIBIT INDEX
-------------
Exhibit Description
------- -----------
10.20 Engagement Letter between the Company and Averil &
Associates dated April 1, 1999.
10.21 Equity Agreement between the Company and Alex Sandel dated
June 2, 1999, attached hereto.
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<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the Undersigned, thereunto duly authorized.
SYNTHONICS TECHNOLOGIES, INC.
A Utah Corporation
Dated: August 12, 1999 /s/ F. Michael Budd
----------------------------------
By: F. Michael Budd
Its: President,
Chief Executive Officer and
Principal Financial and
Accounting Officer
Page 29
<PAGE>
Exhibit 10.20
AVERIL ASSOCIATES INVESTMENT BANKING AGREEMENT
----------------------------------------------
AVERIL
Associates
Investment Banking
April 1, 1999
Synthonics Technologies
Attn: F. Michael Budd
31324 Via Colinas, Suite 106
Westlake Village, CA 91362
Dear Mr. Budd:
1. This letter confirms our understanding that Synthonics Technologies, Inc.
(the "Company"), has Engaged Averil Capital Markets Group, Inc. ("Averil"),
on an exclusive basis, as financial advisor to the Company regarding its
strategic and financing alternatives (the "Engagement"). It is anticipated
that the scope of this retention will take the following form:
(A) Averil will act as financial advisor to the Company with respect to
the consideration and implementation of its strategic alternatives. As
part of this assignment, Averil will (i) study and evaluate the
short-term and long-term projected financial performance and capital
needs of the Company, on a divisional basis and taken as a whole, (ii)
develop valuation perspectives regarding the Company, on a divisional
basis and taken as a whole, reflecting appropriate strategic, industry
and macroeconomic considerations, (iii) as a result of Averil's
diligence, and in conjunction with management analysis, work with
management in developing a strategic financing plan for the Company,
on a divisional basis and taken as a whole; (iv) work with management
in contacting potential strategic and/or financial investors/acquirors
in line with the strategic plan, (v) work with management in
contacting potential private and public institutional capital sources
in line with the strategic plan, (vi) work with management in
identifying and pursuing potential strategic partnerships, licensing
arrangements, and other opportunities, (vii) review various structural
and tax considerations applicable to a transaction(s) impacting the
Company, (viii) coordinate all financial and legal advisors involved
in the transactional process, and (ix) assist in the negotiation and
execution of any transaction including economic, structural and other
terms and conditions.
It is anticipated that following completion of the strategic operating
and financing plan, Averil will assist the Company in a first round of
financing (approximately $2.0 to $4.0 million) to be followed, at the
appropriate time, by a second round of financing (approximately $5.0
to $10.0 million).
(B) A transaction may include the Company or any of its affiliates,
including (without limitation) a new entity formed for such purpose
(collectively, the "Entities").
2. The Company shall pay to Averil, as compensation for services under this
engagement, as follows:
(A) Retainer: A non-refundable retainer fee of warrants equivalent to
324,564 common shares of the Company (or 1% of the fully diluted
outstanding shares), at an exercise price of $.10 per share, such
warrants to be issued upon execution of this letter agreement;
provided. Any additional shares issued as part of any of the
transactions below, and issued within twelve months within the date
hereof, shall be issued at an exercise price equivalent to $. 10 per
share. To the extent that Averil secures any gap financing for the
Company (up to $250,000 in proceeds), the Company shall issue
additional shares such that Averil maintains its 1.0% position;
provided, however, that this round of financing is not subject to any
additional transactions fees under paragraph (B) below.
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<PAGE>
(B) Transaction Fees.
(i) Private Placement:
In the case of a transaction, a transaction fee of (i) 2% of the
consideration raised or otherwise available for advance, in
connection with the placement or refinancing of bank debt
consisting of term, revolving, or other applicable debt; (ii) 5%
of the consideration raised or otherwise available for advance,
in connection with the placement of subordinated or mezzanine
debt, and (iii) 6% of the consideration raised or otherwise
available for commitment, in connection with the placement of
equity or convertible equity securities; each payable in cash, at
the closing (or, if more than one, at each closing) of a
transaction in line with the Company's business plan, by wire
transfer or certified bank check; provided, however, the minimum
transaction fee payable pursuant to this paragraph is $125,000.
In addition to the cash fees payable pursuant to the above
paragraph, and in consideration for the corporate services to be
rendered pursuant to paragraph 2(13)(i), the Company shall issue
to Averil, at no cost, equity securities, warrants or other
participating interests in the Company (or, if applicable,
another Entity) representing 5.0% of the outstanding common stock
of the Company on a fully-diluted basis (after crediting the
number of warrants issued as part of the retainer), to be issued
upon consummation of the private placement or other principal
transaction; provide , however, to the extent that the capital
raised on round one is less than $2.0 million, the 5% issuance
shall be proportionately adjusted with respect to the actual
amount raised.
Following placement of the bridge financing, the Company shall
pay Averil a monthly ongoing advisory fee of $6,250 per month; in
consideration of such payments, Averil shall assist the Company
in the following efforts, to the extent appropriate:
(a) Restructuring of the Company Board of Directors
(b) Hiring of additional key management
(c) Selection of legal counsel and auditors
(d) Repositioning the Company within the investment community
(e) Assisting the Company in launching its various strategic
objectives under its refocused business plan
(f) Continual monitoring of the Company's business plan, its
execution and ongoing liquidity alternatives
(g) Review and evaluate potential merger and/or acquisition
candidates
(ii) Public Offering:
In the case of a public offering on a US or other exchange, a
transaction fee of 1.5 to 2.0% of the consideration raised,
payable in cash, at the closing (or, if more than one, at each
closing) of a transaction in line with the Company's business
plan, by wire transfer or certified bank check; provided,
however, the minimum transaction fee payable pursuant to this
subsection is $275,000.
In addition to the cash fees payable pursuant to the above
paragraph, and in consideration for the corporate services to be
rendered pursuant to paragraph 2(13)(ii), the Company shall issue
to Averil, at no cost, equity securities, warrants or other
participating interests in the Company (or, if applicable,
another Entity) representing 5% of the outstanding common stock
of the Company on a fully-diluted basis (after crediting the
number of warrants issued as part of the retainer or any previous
transactions), to be issued upon consummation of the public
offering; provided, however, to the extent that the capital
raised on round two is less than $5.0 million, the 5% issuance
shall be proportionately adjusted with respect to the actual
amount raised.
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<PAGE>
(iii) Mergers & Acquisitions:
In the case of a merger or acquisition involving the Company,
transaction fees shall be negotiated on a case-by-case basis and
shall be in line with customary industry standards; any such fees
shall be payable in cash at closing; provided, however, in the
event that a transaction is concluded with MyTownNet,
Incorporated, the Company shall issue to Averil additional
warrants, under the terms set forth in paragraph 2(A) above, such
that Averil's fully diluted position following the transaction
shall be 1.0%.
In addition to the cash fees payable pursuant to the above
paragraph, and in consideration for the corporate services to be
rendered pursuant to paragraph 2(13)(iii), the Company shall
issue to Averil, at no cost, equity securities, warrants or other
participating interests in the Company (or, if applicable,
another Entity) representing 5.0% of the outstanding common stock
of the Company on a fully-diluted basis (after crediting the
number of warrants issued as part of the retainer or any previous
transactions), to be issued upon consummation of the private
placement or other principal transaction.
(iv) Other Transactions.
In the event of a separate transaction involving one of the
divisions of the Company, any transaction fees payable to Averil
in connection with such transaction will be separately negotiated
and in line with customary industry standards. It is understood
that Averil shall not be separately compensated for assistance in
any licensing, joint venture or other strategic arrangements
involving a division unless such transaction rises to a
substantial level. Any transactions involving AcuScape will be
negotiated under separate engagement letter.
(v) Registration Rights.
The Company will grant to Averil registration rights on Form S-3
for any warrants issued to Averil; such right may be exercised
twelve months following the issuance of such warrants or any set
of such warrants.
(C) Expenses. In addition to any fees payable hereunder, the Company
shall, whether or not a transaction shall be consummated, reimburse
Averil as billed for its business class travel and other reasonable
out-of-pocket expenses (including all fees and disbursements of
counsel and of other consultants and advisors retained by it,
messenger and. duplicating services, telephone and facsimile expenses,
document and database charges and other customary expenditures),
incurred in connection with, or arising out of, Averil's activities
under or contemplated by this engagement. Averil shall charge all of
its out-of-pocket expenses at its actual cost. Notwithstanding the
above, Averil shall notify the Company when total expenses reach
$5,000 and receive pre-approval for any substantial expenses in excess
of such amount.
(D) Definitions. As used herein, "transaction" shall mean any transaction
or series or combination of transactions whereby, directly or
indirectly, a party obtains control of or an interest in any of the
Entities or their respective affiliates or assets. Such transaction
may include, but shall not be limited to, a minority or majority
investment, a private or public financing transaction, an acquisition
or exchange of capital stock or assets, a lease of assets with or
without a purchase option, a merger or consolidation, the formation of
a joint venture or partnership or any similar transaction.
Page 3
<PAGE>
As, used herein, "consideration" shall mean all (i) cash, whether paid
or contributed immediately or to be paid or contributed in the future
(contingent, deferred or otherwise), (ii) the fair market value of all
debt, equity and other securities, other participating interests and
any other property paid or contributed, including, but not limited to,
research and development, technology, technology products, software,
hardware, any other proprietary products or materials and/or the
rights thereto, and fixed and/or other physical or personnel assets,
and (iii) the fair market value of all debt or other liabilities paid
or secured (or otherwise assumed) directly or indirectly on behalf of
the Company or any of its affiliates.
3. In connection with Averil's activities hereunder, the Company will furnish
Averil with all material information regarding the business and financial
condition of the Company (all such information so furnished being the
"Information"). The Company recognizes and confirms that Averil (i) will
use and rely primarily on the Information and on information available from
generally recognized public sources in performing the services contemplated
by this letter without having independently verified the same; (ii) does
not assume responsibility for the accuracy or completeness of the
Information and such other information, (iii) will not make an appraisal of
any assets of the Company, and (iv) retains the right to continue to
perform due diligence during the course of the engagement.
4. The Company agrees to indemnify Averil or any of its partners, affiliates,
employees or agents (collectively, "Indemnified Persons") and to hold each
of them harmless against any and all losses, claims, damages and
liabilities and expenses arising out of or in connection with any matter
referred to in this engagement letter or arising out of or in connection
with this engagement, unless it shall be finally judicially determined that
such losses, claims, damages or liabilities or expenses arise primarily out
of the gross negligence, willful misconduct or bad faith of Averil in
performing the services described in this engagement letter; provided,
however, in no event shall the Indemnified Persons' aggregate liability
exceed the fees actually received by Averil from the Company pursuant to
this engagement unless there is a final non-appealable judicial
determination of the negligence, willful misconduct or bad faith of Averil.
The Company acknowledges and agrees that the services rendered by Averil
under this engagement are financial advisory services only and do not
include the rendering of any legal representation by Averil or any of its
agents or employees. The Company represents that it either has legal
counsel, or will retain legal counsel, to render applicable legal services
in relation to the assignments contemplated by this engagement and will in
no way rely upon Averil to render such legal counsel.
5. Averil's engagement hereunder shall be terminable at will at any time prior
to the closing of the Transaction by either the Company or Averil upon
thirty days' prior written notice thereof to the other party. It is
understood, however, that notwithstanding any termination of Averil's
engagement hereunder by either the Company or Averil, Averil shall be
entitled, in any event, to receive any retainer fees and all out-of-pocket
expenses to be paid to it pursuant to clauses (A) and (C) of the second
paragraph of this letter agreement and, for a period of twelve months
subsequent to the termination of this engagement, any transaction fees
referred to in clause (B) of the second paragraph of this letter agreement
relating to assignments within the scope of this engagement and completed
with parties introduced to the Company by Averil; provide, however, if
Averil's termination is due to the negligence ------- of Averil, Averil
shall only be entitled to all out-of-pocket expenses to be paid to it
pursuant to clause (C) of the second paragraph of this letter. Otherwise,
the parties shall not have any continuing liability or obligation to the
other except for those related to the indemnification agreement referred to
in paragraph 4 hereof and the representations and warranties contained in
paragraph 7, the terms of which shall survive any termination of Averil's
engagement hereunder.
6. The advice (written or oral) rendered by Averil pursuant to this agreement
is intended solely for the benefit and use of the Company in considering
the matters to which this agreement relates, and the Company agrees that
such advice may not be disclosed publicly or made available to third
parties without the prior written consent of Averil. In this same
connection, Averil's retention may only be disclosed after the prior
written consent of Averil, which will not be unreasonably withheld, or as
otherwise required by law. At the time of execution of this agreement,
Averil will execute the nondisclosure agreement provided to it by the
Company.
Page 4
<PAGE>
7. The Company represents and warrants to Averil that (i) this Agreement has
been duly authorized, executed and delivered by the Company, and,
constitutes a legal, valid and binding agreement of the Company,
enforceable in accordance with its terms and (ii) any offering materials
will not, when delivered for distribution in connection with a transaction
and at the closing of a transaction, contain any untrue statements of a
material fact or omit to state any material fact necessary to make the
statements contained therein, in light of the circumstances under which
they were made, not misleading. The Company shall advise Averil promptly of
the occurrence of any event or any other change that results in the
Information or offering materials containing any untrue statement of a
material fact or omitting to state any material fact necessary to make the
statements contained therein, in light of the circumstances under which
they were made, not misleading.
8. The execution of this letter shall not be deemed or construed as obligating
Averil to make any investment in the Company or any other Entity, directly
or indirectly.
9. This Agreement may not be modified or amended except in a writing duly
executed by the parties hereto.
10. Any determination that any one or more of the provisions of this Agreement
may be, or is, invalid, illegal or unenforceable shall not affect the
validity, legality or enforceability of the remainder of this Agreement.
11. This agreement and all controversies arising from or relating to
performance under this agreement shall be governed by and construed in
accordance with the laws of the State of California, without giving effect
to such state's rules concerning conflicts of laws. The parties hereto
hereby irrevocably consent to personal jurisdiction and venue in any court
of the State of California or any Federal court sitting in the City of Los
Angeles for the purposes of any suit, action or other proceeding arising
out of this agreement or any of the agreements or transactions contemplated
hereby, which is brought by or against any party hereto, and hereby agree
that all claims in respect of any such suit, action or proceeding may be
heard and determined in any such court. The parties hereto hereby
irrevocably consent to the service of process of any of the aforementioned
courts in any such suit, action or proceeding by the mailing of copies
thereof by registered or certified mail, postage prepaid, to such parties
at their respective addresses set forth above, such service to become
effective ten (10) days after such mailing. ANY RIGHT TO TRIAL BY JURY WITH
RESPECT TO ANY CLAIM OR ACTION ARISING OUT OF THIS AGREEMENT OR CONDUCT IN
CONNECTION WITH THIS ENGAGEMENT IS HEREBY WAIVED. (initials)
12. This agreement may be executed in counterparts, each of which together
shall be considered a single document.
Please confirm that the foregoing is in accordance with your understanding by
signing and returning to Averil the enclosed duplicate of this letter, which
shall thereupon constitute a binding agreement.
AVERIL CAPITAL MARKETS GROUP, INC.
By: /S/ Anne E. Oliver, V.P. for Diana L. Maranon
---------------------------------------------
Diana L. Maranon
ACCEPTED AND AGREED TO:
SYNTHONICS TECHNOLOGIES, INC.
By: /s/ F. Michael Budd
---------------------------------------------
F. Michael Budd
Page 5
<PAGE>
Exhibit 10.21
SYNTHONICS - ALEX SANDEL AGREEMENT
----------------------------------
SYNTHONICS
EQUITY AGREEMENT - SUMMARY OF TERMS
PRICE
1/ Alex Sandel (the "Investor") to purchase 2,300,000 shares of
Synthonics ("the Company") Common stock at $ .10 per share, for a
total purchase price of $230,000, payable in cash at time of closing.
Prior to the issuance of this 2.3 million shares, the Company
represents there are 33,041,862 fully diluted shares outstanding.
2/ These shares are fully vested to Investor, and will be issued as
unregistered shares but will otherwise have all rights and privileges
associated with such common stock. The Investor will be restricted
from transferring these shares for a period of twelve months from the
date herein; provided, however, the Investor may transfer these shares
to his affiliates or affiliated companies provided such affiliates
adhere to the provisions of this term sheet; after twelve months from
the date hereof, the Investor shall have the right to sell its shares,
however, the Company will have the right of first refusal to purchase
such shares at the price and on the same terms and conditions obtained
by the Investor.
USE OF PROCEEDS
1/ The proceeds will be used primarily for the development of, and
infrastructure to support, the Digital Mannequin program, including
the hiring of certain programmers and the development of the digital
Mannequin marketing program. However, some funds will be used for the
purchasing of industry research and other working capital
requirements.
RELATED STRATEGIC AGREEMENTS
1/ As part of this relationship, the Company agrees that it will give
Future Media the exclusive right, based on prevailing market prices,
with respect to the Company's CD-ROM replication needs where the
Company controls the choice of such vendor. This includes any
replication business arising from its licensing, niche business
segments or Internet platform business. This business will be Future
Media's option and in line with customary competitive market pricing.
The Company will negotiate a separate agreement with Future Media
regarding this replication business, such agreement in the form
utilized by Future Media with its other customers.
2/ As part of this share purchase, Future Media and the Company will
collaborate on a joint marketing program and presentation targeted at
the direct mail apparel companies. This program will include
development and positioning of the Digital Mannequin, development and
positioning of a digital catalog program (to be distributed on CD-ROM)
and the development and positioning of a program that "links" the
digital mannequin and digital catalog programs for the direct mail
manufacturer.
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<PAGE>
SYNTHONICS
EQUITY AGREEMENT - SUMMARY OF TERMS
As part of this program, the Company and Future Media will develop a
joint calling effort targeting the direct mail industry. The aim will
be for the digital mannequin and marketing programs to be developed
within the next thirty days, for presentation to the industry
thereafter. The costs incurred directly associated with this marketing
program will be paid for by the Company; however, the Company will not
be responsible for covering expenses of Future Media or its personnel
with respect to the development, marketing or retention of the
replication business.
3/ Any proceeds from the Digital Mannequin/Digital Catalog program are
for the full benefit of the Company and not to be shared with Investor
or any affiliates of Investor, other than through participation of its
equity stake. Any proceeds from the replication associated with such
programs will be for the full benefit of Future Media.
OTHER AGREEMENTS
1/ Future Media will provide the services of its chief financial
officer, Lou Weiss, to act as the Company's principal financial
officer for the next twelve months; Mr. Weiss will devote up to two
days per week at or on behalf of the Company, in order to establish
the Company's internal financial operations, oversee the audit process
with the Company's outside auditors and provide general financial
advice when required. This service will be provided as part of the
equity investment with no additional charge to the Company until such
time as the Company completes its current round of private financing
in which the Company plans to raise an additional $3-5 million in
equity. Subsequent to the earlier of (1) raising of this equity or (2)
150 days from the date of this agreement, the Company will reimburse
Future Media on a monthly basis for Mr. Weiss' actual time spent at or
on behalf of the Company. These charges will not be retroactive and
will be billed at Future Media's actual cost.
2/ The Investor will have the option to purchase an additional
1,371,320 shares at a purchase price of $137,132 (per share purchase
price of $.10). This option is fully vested upon the signing of this
agreement and the purchase of the 2,300,000 common shares discussed
above. The option will be outstanding for the later of (1) 90 days
from the close of the current round of equity being raised or (2) 150
days from the date of this agreement. In addition the Investor will
have the right to purchase stock in the current round of financing
being raised sufficient to maintain the Investor's 10% share of
outstanding common stock in the Company. This purchase option will be
at the same price or average price per common share that is obtained
in that round of financing.
3/ The Company will have the right to disclose this term sheet and its
provisions to potential investors currently being contacted with
respect to the current round of financing, or as otherwise required by
law.
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<PAGE>
SYNTHONICS
EQUITY AGREEMENT - SUMMARY OF TERMS
4/ The Investor, or any person or entity controlled by the Investor,
agrees not to purchase any additional shares of common stock, without
the permission of the Board of Directors of the Company, in open
market or other transactions which would raise the Investor's share of
the common stock in excess of 10% of the outstanding shares, on a
fully diluted basis, at the time, provided, however, the Investor will
be allowed through open market or other private transactions to
acquire an additional 10% of the outstanding shares provided the
Investor (1) gives advance notice of such purchases to the Company's
Board of Directors and (2) executes an agreement stating such
purchases are for investment purposes only and the Investor will take
no action to acquire control of the Company.
5/ The Investor will have the right to nominate one member to the
Company's Board of Directors. However, such nominee must be approved
by the Company, such approval not being unreasonably withheld. The
Investor will have information rights equivalent to that of a board
member of the Company. All information must be kept confidential.
6/ The Company will provide the Investor with a complete list of
patents obtained and patents pending. The Company represents there are
no outside claims against the Company with regard to the patents
issued. The Company also represents there is no outstanding litigation
against the Company as of the date herein.
7/ The Investor will be granted "piggy-back" rights on shares issued
by the Company provided that such rights will be subject to any
underwriter cutbacks or holdbacks and will be granted pro rata along
with any other selling shareholders.
8/ The Company will provide the Investor with an opinion of counsel
that the shares of the Company are validly issued and what the
capitalization is as of the date of the last financial statements.
CLOSING
1/ The closing to be completed on or before Wednesday, June 2, 1999.
ACCEPTED AND AGREED TO: 6-2-99
/S/ Alex Sandel
- ----------------------------------------
Alex Sandel
/s/ F. Michael Budd
- ----------------------------------------
By: F. Michael Budd
Synthonics Technologies
6/2/99
- ------
Date
Page 3
<PAGE>
ASSIGNMENT
This ASSIGNMENT, dated as of June 2, 1999 (this "Assignment"), is entered
into by Alex Sandel ("Sandel") for the benefit of Argoquest 7, LLC, a Delaware
limited liability company ("LLC").
WHEREAS, pursuant to that certain equity agreement summary of terms, dated
as of June 2, 1999 (the "Term Sheet"), between Sandel and Synthonics
Technologies, Inc., a Utah corporation ("Synthonics"), Sandel has acquired the
right to obtain certain equity interests in Synthonics, together with certain
other rights as set forth therein.
WHEREAS, Sandel desires to assign all of his rights under the Term Sheet to
LLC;
NOW, THEREFORE, Sandel hereby assigns all rights, title and interest in and
to the Term Sheet to LLC.
IN WITNESS WHEREOF, Sandel has caused this Assignment to be executed as of
this 2nd day of June, 1999.
/S/ Alex Sandel
- ----------------------------------------
Alex Sandel
Acknowledged and Accepted:
ARGOQUEST 7, LLC
/s/ ALEX SANDEL
- ----------------------------------------
By: Alex Sandel
Title: Manager
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