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: March 31, 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 March 31, 1999, there were 19,951,279 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 23 pages, the Exhibit Index is located at page 23.
<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 March 31, 1999 and the results of its operations and changes in
its financial position from inception through March 31, 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 .................................. 8
Notes to the Consolidated Financial Statements ......................... 9
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 of 23
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Synthonics Technologies, Inc. and Subsidiaries
Westlake Village, California
The accompanying consolidated financial statements as of March 31, 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
April 12, 1999
Page 3 of 23
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 959 $ 271,665
Accounts receivable, net (Note 1) 36,594 15,117
Accounts receivable, related (Note 1) 31,620 31,620
-------------- --------------
Total Current Assets 69,173 318,402
-------------- --------------
PROPERTY AND EQUIPMENT (Net) (Note 2) 67,408 79,855
-------------- --------------
OTHER ASSETS
Deposits 11,867 13,947
Intangibles, net (Note 3) 190,471 188,348
-------------- --------------
Total Other Assets 202,338 202,295
-------------- --------------
TOTAL ASSETS $ 338,919 $ 600,552
============== ==============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
Page 4 of 23
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
March 31, December 31,
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 257,586 $ 302,796
Accounts payable, related (Note 5) 5,610 47,366
Accrued expenses 40,687 14,187
Notes payable (Note 6) 850,000 850,000
-------------- --------------
Total Current Liabilities 1,153,883 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, 19,961,679 and 19,951,279
shares issued and outstanding, respectively 199,617 199,513
Additional paid-in capital 5,083,287 5,083,791
Accumulated deficit (6,197,868) (5,997,101)
-------------- --------------
Total Stockholders' Equity (Deficit) (814,964) (613,797)
-------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 338,919 $ 600,552
============== ==============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
Page 5 of 23
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
REVENUE
Sales $ 62,492 $ 26,127
Cost of goods sold 41,980 70,726
-------------- --------------
Gross Profit (Loss) 20,512 (44,599)
-------------- --------------
EXPENSES
Research and development 43,574 124,631
Production costs 21,370 115,225
General and administrative 111,842 221,796
Depreciation and amortization 21,899 21,028
-------------- --------------
Total Expenses 198,685 482,680
-------------- --------------
Loss From Operations (178,173) (527,279)
-------------- --------------
OTHER INCOME (EXPENSE)
Interest expense (23,545) (4,920)
Interest income 951 1,645
-------------- --------------
Total Other Income (Expense) (22,594) (3,275)
-------------- --------------
NET LOSS $ (200,767) $ (530,554)
============== ==============
BASIC LOSS PER SHARE $ (0.01) $ (0.03)
============== ==============
FULLY DILUTED LOSS PER SHARE $ (0.01) $ (0.02)
============== ==============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
Page 6 of 23
<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 -
Additional 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)
Common stock issued in lieu
of debt at $0.25 per share
(unaudited) - - 10,400 104 2,496 -
Dividends declared (unaudited) - - - - (3,000) -
Net loss for the three months
ended March 31, 1999
(Unaudited) - - - - - (200,767)
---------------------------------------------------------------------------------------
Balance, March 31, 1999 10,000 $ 100,000 19,961,679 $ 199,617 $ 5,083,287 $ (6,197,868)
(Unaudited) =======================================================================================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
Page 7 of 23
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (200,767) $ (530,554)
Adjustments to reconcile net loss to net
cash (used) by operating activities:
Depreciation and amortization 21,899 21,028
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (21,477) (18,992)
(Increase) decrease in deposits 2,080 (2,274)
Increase (decrease) in accounts payable
and accounts payable - related (84,366) 120,304
Increase (decrease) in accrued expenses 26,500 7,790
-------------- --------------
Net Cash (Used) by Operating Activities (256,131) (402,698)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Patent costs (11,786) -
Sale of fixed assets 211 -
Purchase of fixed assets - (5,512)
-------------- --------------
Net Cash (Used) by Investing Activities (11,575) (5,512)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (3,000) (15,000)
Principal payments on notes payable - (15,000)
Common stock issued for cash - 327,324
-------------- --------------
Net Cash Provided (Used) by Financing Activities (3,000) 297,324
-------------- --------------
INCREASE (DECREASE) IN CASH (270,706) (110,886)
CASH, BEGINNING OF PERIOD 271,665 311,610
-------------- --------------
CASH, END OF PERIOD $ 959 $ 200,724
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR:
Interest $ 45 $ 4,920
Income taxes $ - $ -
NON-CASH FINANCING ACTIVITIES
Common stock issued in lieu of debt $ 2,600 $ 50,000
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
Page 8 of 23
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 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 9 of 23
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999 and December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d. Basic 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 December 31, 1998, the Company has net operating loss carryforwards
of approximately $6,000,000 that may be offset against future taxable
income through 2013. 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 10 of 23
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 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 $-0-
and $171,665 at March 31, 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 three months ended March 31, 1999 and
1998 was $-0- and $12,023, 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 11 of 23
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999 and December 31, 1998
NOTE 2 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
March 31, 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 (177,306) (165,070)
-------------- --------------
Net property and equipment $ 67,408 $ 79,855
============== ==============
</TABLE>
Depreciation expense for the three months ended March 31, 1999 and
1998 was $12,236 and $8,936, respectively.
NOTE 3 - INTANGIBLES
<TABLE>
<CAPTION>
March 31, December 31,
Intangible costs incurred are as follows: 1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
Trademarks $ 1,484 $ 1,484
Patents 280,870 269,084
-------------- --------------
282,354 270,568
Less accumulated amortization (91,883) (82,220)
-------------- --------------
Total $ 190,471 $ 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 three months ended March 31, 1999 and
1998 was $9,663 and $69, 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, 1999. The monthly
rental payment is $2,497.
Page 12 of 23
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 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 $ 50,429
2000 13,382
2001 2,260
2002 -
2003 -
2004 and thereafter -
-------------------
Total $ 66,071
===================
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. The Company has also agreed to pay its Vice-President of
Marketing and Sales a base annual salary of $60,000 plus commissions.
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
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
March 31, 1999 and December 31, 1998, respectively, for costs incurred
on the Company's behalf.
Page 13 of 23
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999 and December 31, 1998
NOTE 6 - NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
March 31, 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 $ 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. 550,000 550,000
-------------- --------------
Total Notes Payable 850,000 850,000
Less: Current Portion (850,000) (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 14 of 23
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 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 expire 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.
As of March 31, 1999, there were 296,000 additional outstanding
warrants at prices ranging from $0.20 to $2.00 per share. These
warrants are to be exercised from May 2000 through March 2002.
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 three months
ended March 31, 1999, additional stock options to purchase 40,906
shares of restricted stock were granted exercisable at $0.66 per
share.
The total amount of outstanding stock options of the Company at March
31, 1999 is summarized as follows:
Shares Exercise Price Exercised By
----------------------------------------------------------------
2,034,855 $ 0.22 May 1999
1,200,000 $ 0.50 July 2006
2,121,290 $ 1.00 December 1999 - December 2002
825,000 $ 0.75 October 2002
1,212,979 $ 0.53 December 2003
40,906 $ 0.66 June 30, 2002
Page 15 of 23
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999 and December 31, 1998
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 March 31, 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 March 31, 1999 and December
31, 1998 were $3,000 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.
Page 16 of 23
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere herein.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998.
NET SALES increased $36,365 over the comparable period a year earlier. For
such three-month periods the increase was from $26,127 to $62,492. The sale of
the Smithsonian Institution CD-ROM accounted for approximately 46% of the total
sales during the 1st quarter of 1999. Other major sales categories for the
quarter just ended included a $20,000 advanced royalty payment from Evans &
Sutherland as part of its license agreement with the Company, and $12,500 in
progress payments for a project with the Smithsonian's National Air & Space
Museum. The balance of revenue during the 1st quarter was from Lamar University
for a development license to use the Company's technology in a non-commercial
capacity.
GROSS PROFIT increased $65,111 in the three months ended March 31, 1999 to
$20,512 from ($44,599). The increase in gross profit is due to both the increase
in sales and the reduction in cost of goods sold for the period.
OPERATING EXPENSES decreased to $198,685 for the three months ended March
31, 1999 from $482,680 for the three months ended March 31, 1998. Although all
categories of expenses have been reduced, much of the overall reduction can be
attributed to the completion of the CD-ROM for the Smithsonian prior to the
quarter ending March 31, 1999. The Company has also transferred its Christopher
Raphael staff into its main headquarters in Westlake Village eliminating the
costs associated with the maintenance of two facilities. A minor increase in
depreciation and amortization along with an increase in interest expense during
the period ending March 31, 1999 as compared to the period ending March 31, 1998
served to offset some of the reduction in OPERATING EXPENSE during the same time
period. The overall increase in depreciation, amortization, and interest expense
equaled $19,496 with 96% of this increase attributed to interest associated with
the two convertible notes issued by the Company after the period ending March
31, 1998.
As a result of the foregoing factors, the Company had a NET LOSS of
$200,767 for the three months ended March 31, 1999 as compared to a NET LOSS of
$527,279 for the three months ended March 31, 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 promote the Smithsonian CD-ROM and to complete the programming
effort yet required for the Acuscape and Evans & Sutherland products as well as
specific application utility products the Company will be introducing over the
next several quarters. Additionally, funds are required to promote future
business development by creating customer specific pilot projects that
demonstrate the benefits derived by utilizing Synthonics' technology with that
of the potential customer. It is also anticipated that key strategic
acquisitions will enable the Company to accelerate the overall execution of its
business plan. Working capital for the three months ended March 31, 1999 was
funded primarily through the collection of accounts receivable.
Net cash provided by financing activities for the three months ended March
31, 1999 was ($3,000) compared to $297,324 during the three months ended March
31, 1998. The first three months of fiscal 1999 included no capital raised and a
dividend paid of $3,000 to the Company's Class A Preferred Stock shareholders.
For the first three months of 1998, $327,324 in funds was provided by the sale
of equity that was offset by $30,000 in funds paid out both to service debt and
as dividends on the Class A Preferred Stock.
The Company has borrowed $550,000 from six shareholders. The convertible
note agreement requires the Company to repay the principal amount by May 1999.
The Company has the option of paying off the loan in cash or with restricted
shares of its Common Stock valued at $0.20 per share. The Company has also
borrowed $300,000 from four shareholders. This convertible note agreement
requires the Company to repay the principal amount by May 1999. The Company has
the option of paying off the loan in cash or with restricted shares of its
Common Stock valued at $0.15 per share.
Page 17 of 23
<PAGE>
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.
Page 18 of 23
<PAGE>
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.
Item 2. Changes in Securities.
There were no changes in the rights of securities holders during the period
covered by this report. However, 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. A copy of the Restated Articles
of Incorporation are attached hereto as Exhibit 10.20 and incorporated herein by
reference.
Item 3. Defaults Upon Senior Securities.
Not required.
Item 4. Submission of Matters to a Vote of Security Holders.
Not required
Item 5. Other Information.
Repricing of Stock Options
During 1998, stock prices of many small publicly traded companies,
including the Company, declined substantially. As a result, by December 1998
almost half of the Company's outstanding stock options were "out-of-the-money"
(i.e., the exercise prices of the options were higher than the current market
price of the Common Stock), in many cases by a large amount. At the same time,
due to the competitive nature of the industry in which the Company operates,
competition for management, other key employees and consultants has intensified.
In light of these factors, in order to continue to adequately encourage,
motivate and retain the Company's key employees and consultants, on April 5,
1999, the Board of Directors authorized the modification of all outstanding
options and warrants to reflect a reduced exercise price of $0.20 per share and
change of the expiration date of all issued and outstanding stock options and
warrants to April 30, 2004. The change in the expiration date extended the term
of the option underlying option in some instances and reduced the term of the
option in other instances. Other than the change to the exercise price and date
of expiration, the terms of the options were not changed.
Executive Officer and Director Option Repricing.
-----------------------------------------------
The following table sets forth certain information concerning the effect of
the April 5, 1999 repricing on options held by executive officers and directors
of the Company.
<TABLE>
<CAPTION>
Number of
Securities Bid Price Original
Underlying of Stock at Exercise Price New Expiration Date Expiration Date
Options/SARs Time of at Time of Exercise as of Date of after
Repriced or Repricing or Repricing or Price Repricing or Repricing or
Name Amended(#) Amendment($) Amendment($) ($) Amendment Amendment
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
F. Michael Budd 450,000 $0.14 $0.50 $0.20 7/1/06 4/30/04
378,860 $0.14 $1.00 $0.20 12/31/02 4/30/04
720,465 $0.14 $0.53 $0.20 12/31/03 4/30/04
Charles S. Palm 1,125,000 $0.14 $0.22 $0.20 5/31/99 4/30/04
750,000 $0.14 $0.50 $0.20 7/1/06 4/30/04
412,260 $0.14 $1.00 $0.20 12/31/01 4/30/04
189,430 $0.14 $1.00 $0.20 12/31/02 4/30/04
385,142 $0.14 $0.53 $0.20 12/31/03 4/30/04
LeRoy K. Speirs 200,000 $0.14 $0.75 $0.20 10/31/02 4/30/04
Ronald S. Speirs 200,000 $0.14 $0.75 $0.20 10/31/02 4/30/04
Thomas K. Carpenter 180,000 $0.14 $0.75 $0.20 10/31/02 4/30/04
29,177 $0.14 $0.53 $0.20 12/31/03 4/30/04
Timothy Paulson 90,000 $0.14 $0.75 $0.20 10/31/02 4/30/04
David L. Stewart 100,000 $0.14 $0.75 $0.20 10/31/02 4/30/04
</TABLE>
Page 19 of 23
<PAGE>
Non-Executive Officers and Non-Director Option Repricing.
---------------------------------------------------------
The following table sets forth certain information concerning the effect of
the April 5, 1999 repricing on all other options held by non-executive officers
and non-directors.
<TABLE>
<CAPTION>
Number of
Securities Bid Price Original
Underlying of Stock at Exercise Price New Expiration Date Expiration Date
Options/SARs Time of at Time of Exercise as of Date of after
Repriced or Repricing or Repricing or Price Repricing or Repricing or
Name Amended(#) Amendment($) Amendment($) ($) Amendment Amendment
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Joseph R. Maher 30,000 $0.14 $1.00 $0.20 12/31/03 4/30/04
250,000 $0.14 $1.00 $0.20 9/30/03 4/30/04
78,195 $0.14 $0.53 $0.20 12/31/03 4/30/04
Tim Andrews 55,000 $0.14 $0.75 $0.20 10/31/02 4/30/04
Janet Jones 187,740 $0.14 $1.00 $0.20 12/31/01 4/30/04
909,855 $0.14 $0.22 $0.20 5/31/99 4/30/04
20,000 $0.14 $1.00 $0.20 12/31/02 4/30/04
Diane Rose 40,906 $0.14 $0.66 $0.20 6/30/02 4/30/04
David Berkus 153,000 $0.14 $1.00 $0.20 12/1/99 4/30/04
</TABLE>
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.
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).
Page 20 of 23
<PAGE>
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, attached hereto.
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).
(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).
Page 21 of 23
<PAGE>
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).
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.
(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.
Page 22 of 23
<PAGE>
The following Exhibit Index sets forth the Exhibit attached hereto.
EXHIBIT INDEX
-------------
Exhibit Description
------- -----------
3.6(a) Restated Articles of Incorporation dated effective as of
April 22, 1999.
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: May 11, 1999 /s/ F. Michael Budd
----------------------------------
By: F. Michael Budd
Its: President,
Chief Executive Officer and
Principal Financial and
Accounting Officer
Page 23 of 23
<PAGE>
Exhibit 10.20
RESTATED
ARTICLES OF INCORPORATION
OF
SYNTHONICS TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
F. Michael Budd and Charles S. Palm hereby certify that:
They are the President and Secretary, respectively, of Synthonics
Technologies, Inc., a Utah corporation (the "Corporation").
The Articles of Incorporation of this Corporation are amended and
restated in their entirety to read as follows and supersede and take
the place of the existing Articles of Incorporation and all prior
amendments thereto and restatements thereof:
ARTICLE 1.
---------
Name
----
1.1 The name of this corporation is Synthonics Technologies, Inc.
ARTICLE 2.
---------
Duration
---------
2.1 The corporation shall continue in existence perpetually unless sooner
dissolved according to law.
ARTICLE 3.
---------
Purpose
-------
3.1 The Corporation is organized to engage in any and all lawful acts
and/or activities for which corporations may be organized under the Utah Revised
Business Corporation Act ("URBCA").
ARTICLE 4.
----------
Board of Directors
-------------------
4.1. Number. The board of directors of the Corporation shall consist of
such number of persons, not less than three, as shall be determined in
accordance with the bylaws from time to time. As of the effective date of this
article the number of directors is nine.
4.2. Staggered Board; Tenure. The directors shall be divided into three
classes: Class I, Class II, and Class III. The term of office of directors shall
be three years, staggered by class so that one class is elected each year. Such
classes shall be as nearly equal in number as possible. Directors chosen to
succeed those who have been removed or whose terms have expired shall be
identified as being of the same class as the directors they succeed and shall be
elected for a term expiring at the expiration date of such class or thereafter
when their respective successors are elected and have been qualified. If the
number of directors is changed, any increase or decrease in directors shall be
apportioned among the classes so as to maintain all classes as nearly equal in
number as possible, and any individual director elected to any class shall hold
office for a term which shall coincide with the term of such class. In no case,
will a decrease in the number of directors shorten the term of any incumbent
director.
Page 1 of 5
<PAGE>
ARTICLE 5.
----------
Capitalization
--------------
5.1 The total number of shares that may be issued by the Corporation and
that the Corporation will be authorized to have is One Hundred Twenty Million
Five Hundred Fifty Thousand (120,550,000) of the par value per share hereinafter
set forth. A description of the classes of shares and a statement of the number
of shares in each class and the relative rights, voting power, and preferences
granted to the and restrictions imposed upon the shares of each class are as
follows:
5.2 Common Stock. The total number of shares of Common Stock this
Corporation shall have the authority to issue is One Hundred Million
(100,000,000). The Common Stock shall have a stated par value of $0.01 per
share. Each share of Common Stock shall have, for all purposes one (1) vote per
share. Subject to the cumulative dividend preference to holders of Class A and
Class B Preferred Shares as provided in herein, the shares of Common Stock are
entitled to participate in any dividends available therefor in equal amounts per
share on all outstanding Preferred Shares and Common Stock. Subject to the
provisions for the payment of the liquidation preference to the holders of Class
A and Class B Preferred Shares as provided herein, the Common Stock is entitled
to participate in all distributions to shareholders made upon liquidation,
dissolution, or winding up of the corporation in equal amounts per share as all
outstanding Class A and Class B Preferred Shares and Common Stock. The holders
of Common Stock issued and outstanding have and possess the right to receive
notice of shareholders' meetings and to vote upon the election of directors or
upon any other matter as to which approval of the outstanding shares of Common
Stock or approval of the common shareholders is required or requested.
Shareholders will not have a right to cumulate their votes for the election of
directors.
5.3 Class A Preferred Shares. The total number of shares of Class A
Preferred Shares this Corporation is authorized to issue is Five Hundred fifty
Thousand (550,000), with a stated par value of $10.00 per share. The
designations, powers, preferences, rights and restrictions granted or imposed
upon the Class A Preferred Shares and holders thereof are as follows:
5.3.1 Dividend Preference. The Class A Preferred Shareholders are
entitled to receive dividends on a cumulative basis at the rate of
twelve percent (12%) of its stated par value per annum (the "Dividend
Preference"), payable on a quarterly basis on the fifteenth (15th) day
of the next month following the end of each fiscal quarter. Such
dividends shall accrue from the date of issuance whether or not
earned. Dividends on the Class A Preferred Shares shall be cumulative
so that if dividends required to be paid on said shares are not paid
or set apart for payment by the Board of Directors on or before
fifteenth day of the month following the end of each fiscal quarter,
in which the same are due, the rights thereof shall cumulate and
remain due and payable by the Corporation. No dividends or other
distributions may be made to the Common Stock during any fiscal year
of the Corporation until dividends on the Preferred Shares in the
amount of the Dividend Preference have been paid or set apart for
payment.
5.3.2 Liquidation Preference.
----------------------
(a) In the event of a voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of Class A
Preferred Shares shall be entitled to receive out of the assets of the
Corporation, whether such assets are capital or surplus of any nature,
an amount equal to the stated par value less the aggregate amount of
all prior distributions to its Preferred Shareholders made to holders
of all classes of Preferred Shares, plus any accrued previously
declared but unpaid dividends (the amount so determined being
hereinafter referred to as the "liquidation Preference"). No
distribution shall be made to the holders of the Common Shares upon
liquidation, dissolution, or winding up until after the full amount of
the Liquidation Preference has been distributed or provided to the
holders of the Preferred Shares.
(b) If, upon such liquidation, dissolution or winding up the
assets thus distributed among the Preferred Shareholders shall be
insufficient to permit payment to such shareholders of the full amount
of the Liquidation Preference, the entire assets of the Corporation
shall be distributed ratably among the holders of all classes of
Preferred Shares.
Page 2 of 5
<PAGE>
(c) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, when the Corporation has
completed distribution of the full Liquidating Preference to the
holders of the Class A Preferred Shares, the Class A Preferred Shares
shall be considered to have been redeemed, and thereafter, the
remaining assets of the Corporation shall be paid in equal amounts on
all outstanding shares of Common Stock.
(d) A consolidation or merger of the Corporation with or into any
other corporation or corporations, or a sale of all or substantially
all of the assets of the Corporation shall not be deemed a
liquidation, dissolution or winding up within the meaning of this
5.3.2.
5.3.3 Redemption Rights. The Corporation, at the option of the
Board of Directors, may at any time redeem after December 31, 1998,
all of the outstanding Class A Preferred Shares by paying, in cash, a
sum equal to the $10.50 per share for each Class A Preferred Share so
redeemed, hereinafter referred to as the "redemption price" by giving
to each Class A Preferred Shareholder of record at his or her last
known address, as shown on the records of the Corporation at least
thirty (30) days prior notice in writing, by first-class mail, postage
prepaid stating the date and plan of redemption, hereinafter called he
"redemption notice." On or after the date fixed for redemption, each
holder of shares called for redemption shall surrender his or her
certificate(s) for such shares to the Corporation at the place
designated in the redemption notice and shall thereupon be entitled to
receive payment of the redemption price. If the redemption notice is
duly given, and if sufficient funds are available therefore on the
date fixed for redemption, then, whether or not the certificates
evidencing the shares to be redeemed are surrendered, all rights with
respect to such shares shall terminate on the date fixed for
redemption, except the right of the holders to receive the redemption
price, without interest, on surrender of their certificates therefor.
Shares redeemed by the Corporation shall be restored to the status of
authorized but unissued shares of the Corporation.
5.3.4 Conversion Rights. At any time up to and including two (2)
days before the date fixed for redemption of redeemable shares in a
notice of redemption (as provided above), holders of the Class A
Preferred Shares being redeemed who endorse the share certificates and
deliver them together with a written notice of their intent to convert
to the corporation at its principal office, shall be entitled to
convert and receive five (5) shares of Common Stock for each share
being converted at the rate of $2.00 per share of Common Stock being
converted into. Such redemption is subject to the following
adjustments, terms, and conditions:
(a) If the number of outstanding shares of common Stock has been
increased or decreased since the initial issuance of the Class A
Preferred Shares (or series having conversion rights (by reason of any
split, stock dividend, merger, consolidation or other capital change
or reorganization affecting the number of outstanding shares of Common
Stock), the number of shares of common Stock to be issued on
conversion to the holders or Class A Preferred Shares shall equitably
be adjusted by appropriate amendment of this article. The purpose of
such adjustment is to preserve fairly and equitably (as far as
reasonably possible) the original conversion rights of the Class A
Preferred shares being converted. No redemption notice pursuant to
this article shall be given until an amendment to the articles
required to effect this adjustment has been made.
(b) Shares converted under this article shall not be reissued.
The corporation shall at all times reserve and keep available a
sufficient number of authorized but unissued common shares, and shall
obtain and keep in effect any required permits to enable it to issue
and deliver all common shares required to implement the conversion
rights granted herein.
(c) No fractional shares shall be issued upon conversion, but the
corporation shall pay cash for any fractional shares of Common Stock
to which shareholders may be entitled at the fair value of such shares
at the time of conversion. The board of directors shall determine such
fair value.
Page 3 of 5
<PAGE>
5.3.5 Default Conversion Rights. If the Corporation is in default
in the payment of any dividend to be paid to the holders of the Class
A Preferred Shares, at any time up to and including two (2) days
before the date fixed for redemption of redeemable shares in a notice
of redemption (as provided above), who endorse the share certificates
and deliver them together with a written notice of their intent to
convert to the corporation at its principal office, shall be entitled
to convert and receive seven (7) shares of Common Stock for each share
being converted at the rate of $1.43 per share of Common Stock being
converted into. Such conversion and redemption is subject to the
adjustments, terms and conditions set forth in paragraph 5.3.4 above.
5.3.6 Voting Rights. The Class A Preferred Shares shall be
non-voting and the holders of Class A Preferred Shares shall not be
entitled to vote upon the election of directors or upon any other
matters.
5.4. Issuance and Terms of Class B Preferred Shares. The total number of
shares of Class B Preferred Shares this Corporation is authorized to issue is
Twenty Million (20,000,000), with a stated par value of $0.01. The Board of
Directors is hereby authorized from time to time, without shareholder action, to
provide for the issuance of Class B Preferred Shares in one or more series not
exceeding in the aggregate the number of Class B Preferred Shares authorized by
these Articles of Incorporation, as amended from time to time; and to determine
with respect to each such series the voting powers, if any (which voting powers,
if granted, may be full or limited), designations, preferences, and relative,
participating, option, or other special rights, and the qualifications,
limitations, or restrictions relating thereto, including without limiting the
generality of the foregoing, the voting rights relating to Class B Preferred
Shares of any series (which may be one or more votes per share or a fraction of
a vote per share, which may vary over time, and which may be applicable
generally or only upon the happening and continuance of stated events or
conditions), the rate of dividend to which holders of Class B Preferred Shares
of any series may be entitled (which may be cumulative or non-cumulative), the
rights of holders of Class B Preferred Shares of any series in the event of
liquidation, dissolution, or winding up of the affairs of the Corporation, the
rights, if any, of holders of Class B Preferred Shares of any series to convert
or exchange such Class B Preferred Shares of such series for shares of any other
class or series of capital stock or for any other securities, property, or
assets of the Corporation or any subsidiary (including the determination of the
price or prices or the rate or rates applicable to such rights to convert or
exchange and the adjustment thereof, the time or times during which the right to
convert or exchange shall be applicable, and the time or times during which a
particular price or rate shall be applicable), whether or not the shares of that
series shall be redeemable, and if so, the terms and conditions of such
redemption, including the date or dates upon or after which they shall be
redeemable, and the amount per share payable in case of redemption, which amount
may vary under different conditions and at different redemption dates, and
whether any shares of that series shall be redeemed pursuant to a retirement or
sinking fund or otherwise and the terms and conditions of such obligation.
5.5 Before the Corporation shall issue any Class B Preferred Shares of
any series, Articles of Amendment or Restated Articles of Incorporation, fixing
the voting powers, designations, preferences, the relative, participating,
option, or other rights, if any, and the qualifications, limitations, and
restrictions, if any, relating to the Class B Preferred Shares of such series,
and the number of Class B Preferred Shares of such series authorized by the
Board of Directors to be issued shall be filed with the Division of Corporations
of state in accordance with the Utah Revised Business Corporation Act ("URBCA")
and shall become effective without any shareholder action. The Board of
Directors is further authorized to increase or decrease (but not below the
number of such shares of such series then outstanding) the number of shares of
any series subsequent to the issuance of shares of that series.
ARTICLE 6.
---------
Preemptive Rights
-----------------
6.1 No holder of any stock of the Corporation shall be entitled, as of
right, to purchase or subscribe for any part of any unissued shares of stock of
the Corporation or for any additional shares of stock, of any class or series,
which may at any time be issued, whether now or hereafter authorized, or for any
rights, options, or warrants to purchase or receive shares of stock or for any
bonds, certificates of indebtedness, debentures, or other securities convertible
into shares of stock, or any class or series thereof, but any such unissued or
additional shares, rights, options, or warrants or convertible securities of the
Corporation may, from time to time, be issued and disposed of by the Board of
Directors to such persons, firms, corporations, or associations, and upon such
terms, as the Board of Directors may, in its discretion, determine, without
offering; any part thereof to any shareholders of any class, or series then of
record; and any shares, rights, options or warrants or convertible securities
which the Board of Directors may at any time determine to offer to shareholders
for subscription, may be offered to holders of shares of any class or series at
the time existing, to the exclusion of holders of shares of any or all other or
classes or series at the time existing, in each case as the Board of Directors
may, in its discretion, determine.
Page 4of 5
<PAGE>
ARTICLE 7.
----------
Action by Written Consent of Shareholders
-----------------------------------------
7.1 The corporation may take action by the written consent of fewer than
all of the shareholders entitled to vote with respect to the subject matter of
an action in question; provided, however, that in order to be valid any and all
such written consents shall be made and provided in accordance with all
applicable requirements of ss.16-10a-704 of the Utah Revised Business
Corporation Act and signed by the holders of not less than a majority of the
corporation's outstanding shares (calculated as of the record date provided for
by ss.16-10a-704(6)) of that Act.
ARTICLE 8.
----------
Indemnification
---------------
8.1 The Corporation shall indemnify its directors, officers, employee,
fiduciaries and agents as those terms are defined in, and to the fullest extent
permitted by, Part 9 of the Utah Revised Business Corporation Act.
The foregoing Restated Articles of Incorporation have been duly
approved by the board of directors.
The foregoing Restated Articles of Incorporation have been duly approved by
the required vote of shareholders in accordance with the Utah Revised Business
Corporation Act. The total number of outstanding shares of the corporation is
19,951,279. The number of votes entitled to be cast on the amended and restated
articles of incorporation is 19,951,279 and the number of votes indisputably
represented at the meeting at which the foregoing amended and restated articles
of incorporation was approved was 15,139,047. The total number of undisputed
votes cast for the amended and restated articles of incorporation was
14,941,582, which was sufficient for approval of the same.
IN WITNESS WHEREOF, We certify that the matters set forth in this
certificate are true and correct of our own knowledge.
Dated: April 22, 1999 /s/ F. Michael Budd
----------------------------------
By: F. Michael Budd
Its: President,
Dated: April 22, 1999 /s/ Charles S. Palm
----------------------------------
By: Charles S. Palm
Its: Secretary
Page 5 of 5
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