UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ____ to ____
---------------------------------------------
Commission File Number: 0-24109
SYNTHONICS TECHNOLOGIES, INC.
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(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
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(Registrant's telephone number, including area code)
Securities Registrant pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
-----------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 12 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is contained in this form, and no disclosure will be
contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for the year ended December 31, 1998 were $512,217.
The aggregate market value of the voting stock held by non-affiliates as of
$6,750,582, computed based on the average of the bid and ask prices reported on
the OTC Bulletin Board, was $0.375.
The number of shares outstanding of the registrant's common stock as of
December 31, 1998 was 19,951,279.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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SYNTHONICS TECHNOLOGIES, INC.
FORM 10-KSB
For The Fiscal Year Ended December 31, 1998
INDEX
Page
PART I
Item 1. Description of Business ......................................... 1
Item 2. Description of Properties ....................................... 8
Item 3. Legal Proceedings ............................................... 8
Item 4. Submission of Matters to a Vote of Security Holders ............. 9
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters .............................................. 9
Item 6. Management Discussion and Analysis or Plan of Operation .......... 10
Item 7. Financial Statements ............................................. 12
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures ........................................ 30
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act ....... 30
Item 10. Executive Compensation .......................................... 33
Item 11. Security Ownership of Certain Beneficial Owners and Management .. 35
Item 12. Certain Relationships and Related Transactions .................. 36
Item 13. Exhibits and Reports on Form 8-K ................................ 36
Signatures .............................................................. 40
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
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Synthonics Technologies, Inc. (the "Company") provides both software tools
and services that enable the creation of photo-realistic, affordable 3D
graphical content that is comprised of very small computer file sizes. Ideally
suited for any application requiring Internet transfer of 3D content, there are
no other solutions available that provide a comparable cost/benefit ratio in
meeting 3D content requirements for markets such as E-Commerce, Distance
Learning, and Patient Medical Consultation.
Virtually all efforts to date by the Company have been focused on market
research, technology concept definition, technology design, and technology
validation. The Company embarked on the commercialization of its proprietary
technology during mid-1998.
Synthonics Technologies, Inc., was organized under the laws of the State of
Utah on March 27, 1974, under the name "Columbine Financial Corporation." The
Company was incorporated for the purpose of engaging in the real estate
development business in the State of Utah. No business activities were engaged
in and the company became inactive and remained so until 1978 when it was
reactivated and commenced business in the State of California for the purpose of
originating loans on swimming pools construction, primarily in Southern
California. The loan origination business operations ceased in 1991. The Company
was reclassified as a development stage company and began seeking new business
opportunities believed to hold a potential profit.
In May, 1995 Synthonics Incorporated, a California Corporation, was
acquired by the Company, then known as Columbine Financial Corporation by way of
a stock exchange providing 4.5 shares of Columbine stock for every one share of
Synthonics Incorporated stock. The acquisition was completed in August 1995.
Columbine Financial Corporation was dormant, but still fully registered as a
public corporation at the time of the merger. Synthonics Incorporated pursued
this merger as a method of guaranteeing a means to enter into public trading of
its stock as soon as it was determined to be strategically desirable. At this
time, public trading has resumed. A Form 211 pursuant to Rule 15c-211 was
prepared and submitted by its market maker in order to resume trading.
On September 16, 1996, the Company changed its name to "Synthonics
Technologies, Inc. On November 4, 1996, the Company qualified itself as a
foreign corporation in the State of California.
Synthonics Incorporated, a California Corporation (now a wholly owned
subsidiary of the Company) was founded in August 1993. Its primary focus since
its founding has been to develop technology that will have an extremely positive
impact on any industry where success can be enhanced by improving measurement
accuracy, eliminating dangerous environments, extending human vision
capabilities, or replacing animation with realism.
Strategy
--------
The operating strategy being employed by Synthonics was chosen to
facilitate rapid growth while optimizing the use of resources within the
Company. This strategic approach is also designed to result in maximum growth of
shareholder value. Simply stated, Synthonics' operating objective is to rapidly
deploy its technological advantage into many diverse markets in order to
entrench itself as the standard for accurate and affordable 3D graphical
content. The Company has identified E-Commerce, Architectural, Distance
Learning, and Accident/Crime Scene Recreation as the primary target markets as
these will benefit most from affordable, accurate, and Internet friendly 3D
graphical content.
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In order to accomplish this mission, Synthonics has embarked on a strategy
that provides the marketplace with the option of acquiring either the content
generation tools through strategic partner affiliations or the content itself
directly from Synthonics. Although preferring to be a software tool provider,
the Company discovered, while doing its market research, that a very large
market exists for completed, but customized, 3D graphical content. It also
determined that by providing content directly it could reach several markets
sooner, thereby validating the utility of the technology in a shorter
time-frame. The Company believes that it will attract strategic partners in a
quicker fashion by virtue of its ability to demonstrate market demand for its
patented technology.
Synthonics expects to receive most of its revenues from the licensing of
its software tools and by the creation of 3D graphical content for direct sale
to end-users. The Company's primary goal is to provide 3D content generation
tools through strategic alliances with brand name software tool providers
currently supplying the markets listed above. These include companies that
provide Animation, Multimedia Authoring, CAD, 3D Visualization, Configuration,
and 3D Clip-Art software. By entering the market in this fashion, Synthonics
takes advantage of the distribution channel access already established by its
strategic partner and it can remain focused on its core strengths --- technology
and business development. In some cases, it may be advantageous for Synthonics
to form a joint venture with its strategic partners. This approach was taken by
the Company as it positioned itself to service the Medical Market. Synthonics
could not find a suitable product to align itself with, so it chose to partner
with medical professionals to form Acuscape International, Inc. Synthonics
supplies this venture with technology (via a license agreement) while its
partners provide the management expertise and capital required to develop the
business.
The secondary focus of the business model is to create and provide actual
3D graphical content. Synthonics determined that its ability to secure strategic
partners quickly was directly related to an established credibility in the
marketplace. A decision to supply 3D content was selected as the most effective
approach to accomplish this objective. The museum market was selected as the
target of this direct approach due to the vast market size and the outspoken
need on behalf of the museum industry to extend the benefits of their
collections to audiences around the world. Further, the Company decided to
target the prestigious Smithsonian Institution as its initial customer in order
to leverage this relationship both inside and outside the museum industry. To
implement this capability, Synthonics formed a wholly owned subsidiary called
Christopher Raphael, Inc.
Products and Services
---------------------
Licensable Software -- Thus far, Synthonics has developed a portfolio of
software tools that can be used separately or collectively to dramatically
reduce the cost of generating photo-realistic 3D graphical content. Overall,
Synthonics refers to this portfolio as Rapid Virtual Reality(TM). These tools
are available via a custom license with Synthonics. Each license will provide
revenues to the Company in the form of royalties, maintenance support, and
unique capability development (if applicable). Current customers who have signed
license agreements include Evans & Sutherland, Acuscape International, American
Digital Imaging and KnowledgeLINK. A brief description of each tool available
for licensing is included below:
3D Model Generator -- A tool that enables the construction of a
wireframe and the photo-rendering of same starting with as few as two
photographs of an object or environment. The output files can be
exported to different formats including DXF, 3DS, and VRML 97.
Single Object Viewer -- A tool that enables real time examination of a
3D digital model constructed by the 3D Model Generator tool (above).
The object can be viewed from any perspective, sized to fit viewing
need, measured, and converted to an anaglyph for stereoscopic viewing.
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Multi-Object Viewer -- A tool that enables several objects to be
present in the viewer at the same time. Thus, entire environments can
be altered or examined. Scenes can be rearranged, objects can be added
or subtracted from a scene, or objects can be altered within a scene.
Camera Parameter Tracking -- A tool that precisely determines the
position, in free space, of the image capture device (camera or
camcorder) in six degrees of freedom (x-axis, y-axis, z-axis, tilt,
rotation, & azimuth) with only the focal length and a three point
calibration target as input. Knowing this information is essential to
the accurate projection of the third dimension from a 2D flat image
such as a photograph.
Morphing Editor -- A tool that enables very rapid wireframe generation
by morphing a "standard" wireframe of similar shape by introducing
several landmark data points to the editor. Thus difficult shapes can
be altered instantaneously from the standard to create custom 3D
digital models containing all the "one-of-a-kind" traits of the object
of concern.
Optical Tape Measure -- A tool that enables extremely accurate
measurements of complex shapes in very little time by using
photogrammetry. Overcomes the problems of access to an object,
mobility of an object, complexity of shape, and firmness of the
surface of the object which are inherent to all sophisticated
measurement devices, including laser scanners, optical comparators,
mechanical digitizers, and survey range finding equipment.
Anaglyph Generation -- A tool that enables a pair of stereo
photographs to be quickly converted to an anaglyph which allows full
depth perception viewing with the assist of red and blue glasses worn
by the viewer. The images can be output to devices as simple as
red/blue glasses or as sophisticated as total immersion headsets.
3D Stereo Movie Maker -- A tool that enables stereo video capture to
be quickly converted to a series of anaglyphs that play as a full
depth movie with the assist of red and blue glasses worn by the
viewer. The images can be output to devices as simple as red/blue
glasses or as sophisticated as total immersion headsets.
File Converter -- A tool that provides file format conversion between
Synthonics' tools and popular software tool formats.
M-PEG Converter -- A tool that enables an efficient means of reducing
movie film file sizes.
3D Content Creation - Synthonics has installed the in-house capability to
create custom 3D digital models of objects and environments for those customers
that need this type content but have no intent on incorporating a model building
capability. Synthonics uses its own proprietary software to produce the custom
3D graphical content. DVDs, CD-ROMs, websites, interactive kiosks, or individual
3D models are all within the capability of Synthonics as it has established a
network of sub-contractors to provide much of these services. These services are
quoted on a contract basis and the terms vary depending on the customer's needs.
To date, customers of this service include the Smithsonian Institution and
Centro Alameda, Inc.
Packaged Software - Synthonics also has packaged software products
available as products. These are products that consumers can purchase directly
from the Company or through authorized distributors. Each of these products and
their current status are described below:
The Smithsonian Museum Collection - Synthonics produced this CD-ROM
for the Smithsonian and now receives a percentage of revenue from each
CD-ROM sold. The CD contains over one hundred hours of interactive
viewing enjoyment and is categorized as "family edutainment". The CD
is currently available through all Smithsonian Institution
distribution channels and the Company is now negotiating with a
national distributor to take the CD into traditional consumer
channels.
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Webmaster's 3D Link - This product enables easy inclusion of 3D
interactive content on any existing website. The package includes a 3D
viewer, a virtual showroom or gallery, and custom 3D digital models.
This product is available directly from the Company.
3D Maker - This product enables the easy creation of anaglyphs from
two photographs. This product will be available for purchase during
the second quarter of 1999.
Optical Architect - This product enables the creation of a 3D digital
replication of any type building from simple photographs. This product
will be available for purchase during the third quarter of 1999.
The competitive advantage provided by all Synthonics' products and services
is the ability to produce photo-realistic 3D content at a cost far below that
required for traditional process creation. In addition, the file sizes are so
small that the 3D content can easily be transferred over the Internet making it
ideal for E-Commerce and Distance Learning applications as well as many others.
Patents
-------
Synthonics believes its technology to be unique in its approach and
application. The Company is dedicated to the protection of its trade secrets and
source code through tight security, the advancement of the technology, and the
establishment of strong patent protection. Therefore, the Company has retained a
prominent legal firm to develop and submit patent applications for several
technologies that the Company views as patentable. To date the Company has been
granted six U.S. Patents. A brief description is included below:
<TABLE>
<CAPTION>
U.S. Patent # Title Issue Date Description
- ------------- ------------------------ ---------- -----------
<S> <C> <C> <C>
#5,661,518 Methods and apparatus August 26, 1997 Anaglyph generating technique that
for the creation and minimizes eye strain and color loss.
transmission of 3D images Technique for aligning two images for
stereo viewing.
#5,699,444 Methods and apparatus for using December 16, 1997 Able to precisely locate camera
image data to determine camera within six degrees of freedom
location and orientation (x-axis, y-axis, z-axis, tilt,
rotation, and azimuth) in free
space with only a 3 point calibration
target and knowledge of the camera
focal length. Greatly reduces the
cost of 3D content generation.
#5,742,291 Method and apparatus for April 21, 1998 Technique for morphing a baseline 3D
creation of three-dimensional wireframe into a new shape. Greatly
images speeds up the process of generating
unique 3D wire frames.
#5,742,330 Methods and apparatus for the April 21, 1998 Technique for minimizing disturbances
creation and transmission of and to compensate for underexposure
3-dimensional images when transmitting 3D color television
images. Will benefit high definition
transmissions.
#5,748,199 Method and apparatus for May 5, 1998 Technique for constructing wire
converting a two-dimensional frames of object from frames of 2D
motion picture into a movie film and then
three-dimensional motion picture photo-realistically rendering.
Enables original blockbuster
2D movies to be converted to 3D
virtual reality experiences without
re-shooting movie.
#5,793,372 Methods and apparatus for August 11, 1998 Technique that accurately and rapidly
rapidly rendering aligns the photo-texture on the 3D
photo-realistic surfaces on wire frame. Enables inexpensive,
3-dimensional wire frames realistic appearing 3D graphical
automatically using user defined content to be generated.
points
</TABLE>
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Several additional patent applications are currently pending both
internationally and in the United States. Although the Company believes its
patent position to be strong, the extent, to which patents provide a commercial
advantage or inhibit the development of competing products varies.
Employees
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At February 28, 1999, the Company had six full time employees, none of whom
are covered by a collective bargaining agreement. The Company considers its
relationship with its employees to be good.
Research and Development
------------------------
The Company invests significantly in the development of products for new
applications. Only patent related costs are capitalized. All other costs,
including salaries and wages of employees included in research and development,
are expensed as incurred. Most of the Company's research and development efforts
are in connection with the advancement of its Rapid Virtual Reality(TM)
technology.
Raw Materials
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As a software development company, Synthonics has no significant dependence
on raw materials. For the Smithsonian CD-ROM, the product does include package
materials comprised of paper goods, red/blue glasses and a plastic disk. All are
standard materials readily available from multiple sources.
Risk Factors
------------
Forward Looking Statements. When used in this Registration Statement, the
words or phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "projected", "intends to" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties, including but not limited to market conditions,
competition, factors affecting the Company's ability to implement its growth
strategy, the Company's dependence on future financing, fluctuations in
operating results, the Company's ability to sustain levels of growth,
diversification of the Company's business, contingent risks, state and federal
regulation and licensing requirements, and environmental concerns that could
cause the Company's actual results to differ materially from those presently
anticipated or projected. Such factors, which are discussed in "Risk Factors,"
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the notes to consolidated financial statements, could
affect the Company's financial performance and could cause the Company's actual
results for future periods to differ materially from any opinions or statements
expressed with respect to future periods in this Registration Statement. As a
result all parties are cautioned not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company's
independent accountants have not examined or compiled the accompanying
forward-looking statements and accordingly do not provide any assurance with
respect to such statements.
The Company's present and proposed business operations will be highly
speculative and subject to the same types of risks inherent in any new or
unproven venture, as well as risk factors particular to the industries in which
it will operate, and will include, among other things, those types of risk
factors outlined below.
Developmental Stage Company. The Company was only recently organized and
has only a limited operating history. Although the Company and the Company's
operating subsidiaries do have limited operating experience, they too must be
deemed to be developmental stage companies. Taken together, the Company and its
subsidiaries must be considered to be in an early formative stage. There can be
no assurance that the Company's business plans will prove successful, or that
the Company or its wholly-owned subsidiaries will be able to operate profitably.
Competition. There are numerous corporations, firms and individuals which
are engaged in the type of business activities in which the Company is presently
engaged. Many of those entities are more experienced and possess substantially
greater financial, technical and personnel resources than the Company or its
subsidiaries. While the Company hopes to be competitive with other similar
companies, there can be no assurance that such will be the case.
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Limited and Volatile Market for Common Stock. The Company's common stock is
quoted on the OTC Bulletin Board of the National Association of Securities
Dealers, Inc. (the "NASD") under the symbol "SNNT", however, there is a limited
and thinly traded trading market for the common stock and there can be no
assurance that an active market will ever develop or be maintained. Any market
price for shares of common stock of the Company is likely to be very volatile,
and numerous factors beyond the control of the Company may have a significant
effect. In addition, the stock markets generally have experienced, and continue
to experience, extreme price and volume fluctuations which have affected the
market price of many small capital companies and which have often been unrelated
to the operating performance of these companies. These broad market
fluctuations, as well as general economic and political conditions, may
adversely affect the market price of the Company's common stock in any market
that may develop.
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.
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Risks of "Penny Stock." The Company's common stock may be deemed to be
"penny stock" as that term is defined in Reg. Section 240.3a51-1 of the
Securities and Exchange Commission. Penny stocks are stocks (i) with a price of
less than five dollars per share; (ii) that are not traded on a "recognized"
national exchange; (iii) whose prices are not quoted on the NASDAQ automated
quotation system (NASDAQ-listed stocks must still meet requirement (i) above);
or (iv) of an issuer with net tangible assets less than US$2,000,000 (if the
issuer has been in continuous operation for at least three years) or
US$5,000,000 (if in continuous operation for less than three years), or with
average annual revenues of less than US$6,000,000 for the last three years.
Section 15(g) of the 1934 Act and Reg. Section 240.15g-2 of the Commission
require broker-dealers dealing in penny stocks to provide potential investors
with a document disclosing the risks of penny stocks and to obtain a manually
signed and dated written receipt of the document before effecting any
transaction in a penny stock for the investor's account. Potential investors in
the Company's common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be "penny stock."
Moreover, Reg. Section 240.15g-9 of the Commission requires broker-dealers
in penny stocks to approve the account of any investor for transactions in such
stocks before selling any penny stock to that investor. This procedure requires
the broker-dealer to (i) obtain from the investor information concerning his or
her financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor's financial
situation, investment experience and investment objectives. Compliance with
these requirements may make it more difficult for investors in the Company's
common stock to resell their shares to third parties or to otherwise dispose of
them.
Dependence on Key Employees. Historically, the Company has been heavily
dependent on the ability of its founder, Dr. Charles S. Palm as well as its
President, F. Michael Budd, to contribute essential technical and management
experience. In the event of future growth in administration, marketing,
manufacturing and customer support functions, the Company may have to increase
the depth and experience of its management team by adding new members. The
Company's success will depend to a large degree upon the active participation of
its key officers and employees. Loss of services of any of the current officers
and directors could have a significant adverse effect on the operations and
prospects of the Company. There can be no assurance that it will be able to
employ qualified persons on acceptable terms to replace officers that become
unavailable.
Future Capital Requirements; Uncertainty of Future Funding. The Company's
plan of operation calls for additional capital to facilitate growth and support
its long-term development and marketing programs. It is likely that the Company
would need to seek additional financing through subsequent future public or
private sales of its securities, including equity securities. The Company may
also seek funding for the development and marketing of its products through
strategic partnerships and other arrangements with investment partners. There
can be no assurance, however, that such collaborative arrangements or additional
funds will be available when needed, or on terms acceptable to the Company, if
at all. Any such additional financing may result in significant dilution to
existing stockholders. If adequate funds are not available, the Company may be
required to curtail one or more of its future programs.
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Intense Competition and Rapid Technological Change. The industry in which
the Company operates is highly competitive, rapidly growing and the Company will
have to compete with a multitude of similar companies, possessing substantially
greater financial, personnel, technological and marketing resources. It is
particularly difficult for small independent companies to compete with such
major companies for recording artists, radio air time and floor space for their
releases in retail outlets. The Company is not a significant factor in the
industry. There is no assurance that the Company will be able to compete in such
an environment.
ITEM 2. DESCRIPTION OF PROPERTY
The Company does not own any real property. The Company currently occupies
approximately 2,430 square feet of space where it maintains its administrative
and development offices which are located at 31324 Via Colinas, Suite 106,
Westlake Village, California 91362. The Company leases this space from Westlake
Village Industrial Park. Westlake Village Industrial Park is not affiliated in
any way with the Company and the terms of the lease were negotiated at
arms-length. The current lease expires on August 31, 1999. Synthonics has an
option to renew the lease for one year.
ITEM 3. LEGAL PROCEEDINGS
The company was involved in litigation in the calendar year 1997. The
company was a party Plaintiff in the matter of Synthonics, Inc. v. 3rd Dimension
Technologies, Inc. and Affiliated Defendants, Los Angeles Superior Court Case
no. LC-041882. This matter was concluded favorably to the company. All time
frames for appeal or new trial have exhausted. The judgment has become final.
This matter involved the company prosecuting an action against 3rd Dimension
Technologies, Inc. to protect the company's patent, trademark and trade secret
interests in its three dimensional computer software. The relevant facts and
procedural history is as follows.
The action grew out of a license agreement between Synthonics and 3rd
Dimension Technologies wherein 3rd Dimension was granted the right to distribute
Synthonics three-dimensional software known as 3D Expres and Express Mapper. The
software programs perform three dimensional model creations and are used in a
number of industries, including medical and dental practices, aerial surveying
and mapping and the motion picture industry for animation purposes. Synthonics
maintains patents and copyright protection on all of their technologies.
In February of 1997, during a routine check of the Internet, Synthonics
discovered numerous consumers were registering complaints against 3rd Dimension
Technologies for various business practices. Also, consumers registered
technical complaints regarding the software obtained from the distributor that
were unique to the programs being distributed by 3rd Dimension Technologies.
Further investigation by Synthonics found 3rd Dimension Technologies attempted
to fabricate the programs creating unauthorized duplications of the computer
software. Synthonics immediately terminated the license agreement and conducted
an audit of the distributor.
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To protect its property rights in the technologies being violated by 3rd
Dimension Technologies, Synthonics filed a four count civil action in the
Superior Court for the County of Los Angeles on July 23, 1997; alleging Breach
of Contract, Accounting for misappropriated gains in the unlawful duplication of
computer software, Violations of California Business & Professions Code Section
17200, fraudulent and unfair business practices and Misappropriation of Trade
Secrets. On July 28, 1997 a temporary Restraining Order was issued against 3rd
Dimension Technologies and all of their individual officers, directors, agents
and employees enjoining the same from copying, duplicating and distributing
Synthonics 3D Expres and Express Mapper computer software, or copying or
duplicating any technology contained in the software. The Restraining Orders
were confirmed into a Preliminary Injunction with identical prohibitions on
September 5, 1997. On January 8, 1998 a final judgment was entered in favor of
Synthonics and against 3rd Dimension Technologies in the amount of $300,000.
Additionally, the trial court granted a permanent injunction against 3rd
Dimension and all of its agents, servants, officers, shareholders, affiliates,
employees and all those individuals or entities acting in concert with 3rd
Dimension from copying, duplicating and distributing Synthonics, Inc. computer
software or the technology contained in the software. The injunction is
enforceable with the contempt powers of the Superior Court. As stated above, the
judgment has become final. All illegal competition and violations of Synthonics
rights in its computer software have been halted. The entities illegally
competing have been closed down. Finally, and most important to Synthonics, the
integrity of the software was preserved.
With the exception of the legal proceedings set forth above, the Company is
not presently a party to any litigation, claim, or assessment. Further, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies, or otherwise.
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's Common Stock is listed and traded on the OTC Bulletin Board
under the symbol "SNNT". There has been relatively limited trading activity in
the Company's stock since inception. The following table represents the high and
low closing prices for the Company's Common Stock for each quarter of the fiscal
year ended December 31, 1998.
<TABLE>
<CAPTION>
Fiscal 1999 High Low
-----------------------------------------------------------
<S> <C> <C>
First Quarter $0.969 $0.469
Second Quarter $0.875 $0.531
Third Quarter $0.938 $0.375
Fourth Quarter $0.689 $0.313
</TABLE>
There were approximately 603 holders of record of the Company's Common
Stock and one holder of record of the Company's Preferred Stock as of December
31, 1998.
The Company has never declared or paid any cash dividend on its shares of
Common Stock.
Recent Sales of Unregistered Securities
---------------------------------------
During the fiscal year ended December 31, 1998, Synthonics sold 1,742,892
shares of Common Stock to approximately 36 purchasers, with gross proceeds of
$652,271. The Company believes all such sales were exempt from registration
under the Securities Act of 1933 by reason of Section 4 (2) and Regulation D
thereunder. In addition, holders of 40,000 shares of the Company's Preferred
Stock chose to exercise their conversion option for a total of 615,200 shares of
the Company's Common Stock.
Page 9
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATION RESULTS
General
-------
As of December 31, 1998, the Company had an accumulated deficit of
$5,997,101. It can be expected that the future operating results will continue
to be subject to many of the problems, expenses, delays and risks inherent in
the establishment of a new business enterprise, many of which the Company cannot
control.
The Company has formulated its business plans and strategies based on
certain assumptions of the Company's management regarding the size of the market
for the products which the Company will be able to offer, the Company's
anticipated share of the market, and the estimated prices for and acceptance of
the Company's products. The Company continues to believe its business plans and
the assumptions upon which they are based are valid. Although these plans and
assumptions are based on the best estimates of management, there can be no
assurance that these assessments will prove to be correct. No independent
marketing studies have been conducted on behalf of or otherwise obtained by the
Company, nor are any such studies planned. Any future success that the Company
might enjoy will depend upon many factors, including factors which may be beyond
the control of the Company or which cannot be predicted at this time. These
factors may include product obsolescence, increased levels of competition,
including the entry of additional competitors and increased success by existing
competitors, changes in general economic conditions, increases in operating
costs including cost of supplies, personnel and equipment, reduced margins
caused by competitive pressures and other factors, and changes in governmental
regulation imposed under federal, state or local laws.
The Company's operating results may vary significantly due to a variety of
factors including changing customers profiles, the introduction of new products
by the Company or its competitors, the timing of the Company's advertising and
promotional campaigns, pricing pressures, general economic and industry
conditions that affect customer demand, and other factors.
Operation Results
-----------------
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
NET SALES increased 18.5% for the year ended December 31, 1998 to $512,217
from $417,574 for the year ended December 31,1997. The increase in sales is
mainly attributed to the sale of the Smithsonian CD-ROM released during the
fourth quarter. Synthonics benefited from significant "pipeline fill" of the
distribution channel during the end of 1998. Due primarily to the launch of this
CD-ROM, sales during the fourth quarter amounted to $332,270. Other sales during
the year are a result of a 3D content generation contract with Centro Alameda,
Inc. and License Agreements with both KnowledgeLINK and American Digital
Imaging.
GROSS PROFIT decreased 20.3% in the year ended December 31, 1998 to
$121,662 from $152,724 in the twelve months ended December 31, 1997. Gross
profit as a percentage of sales also decreased to 23.8% for the year just ended
as compared to 36.6% for the prior year. The decrease in percentage gross profit
is due to the terms of the Company's contract to produce a CD-ROM for the
Smithsonian Institution. This contract required Synthonics to initially fund all
costs to develop and produce the CD-ROM. In return for funding the CD-ROM,
Synthonics receives 100% of the initial sales revenues until its development and
production costs are recovered. After recovery, Synthonics and the Smithsonian
share the revenues on a 50/50 basis on sales through Smithsonian channels and
75/25 on sales through all other channels. Due to these terms, the Company has
expensed all the development and production costs during 1998 while only
generating a portion of the off-setting sales during the same time period. This
condition is the major contributor to the decrease in gross profit for the year
ended December 31, 1998 as compared to the year ended December 31, 1997.
Page 10
<PAGE>
OPERATING EXPENSE increased to $1,731,859 for the year ended December 31,
1998 from $1,694,408 for the year ended December 31, 1997. The increase in
expenses is all attributed to the inclusion of Christopher Raphael, Inc. for an
entire year in Synthonics' consolidated results for 1998 versus only one quarter
in 1997. The Company's acquisition of Christopher Raphael, Inc. was effective
October 1, 1997. Due to expense reductions in both G&A ($114,050) and R&D
($320,156), the increase in expenses during 1998 was only 2.2%, despite the
addition of $447,073 in expense associated with Christopher Raphael, Inc.
As a result of the foregoing factors, the Company recorded a NET LOSS of
$1,662,270 or $0.09 per share for the year ended December 31, 1998 as compared
to a NET LOSS of $1,541,684 or $0.10 per share for the year ended December 31,
1997.
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 both 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. Working capital for the year ended December 31, 1998
was funded primarily through the sale of equity, private borrowing and the
collection of accounts receivable.
Net cash provided by financing activities for the year ended December 31,
1998 was $1,464,833 compared to $1,175,260 for the year ended December 31, 1997.
During 1998, $850,000 was provided through the issuance of convertible notes and
$688,833 was provided through the sale of equity and other capital
contributions. The convertible notes are all due in May, 1999 and may be
converted to the Company's Common Stock at a conversion price of $0.20 per
share. These amounts were offset in 1998 by the repayment of an outstanding note
($50,000) and the issuance of Preferred Stock dividends ($24,000). For the year
ended December 31, 1997, $50,000 was provided through the issuance of a
convertible note and $1,125,260 was provided through the sale of equity.
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.
Page 11
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
SYNTHONICS TECHNOLOGIES, INC.
AND SUBSIDIARIES
Audited Financial Statements
December 31, 1998 and December 31, 1997
<TABLE>
<S> <C>
Independent Auditors' Report ...................................... 13
Consolidated Balance Sheet ........................................ 14
Consolidated Statements of Operations ............................. 16
Consolidated Statements of Stockholders' Equity ................... 17
Consolidated Statements of Cash Flows ............................. 20
Notes to the Financial Statement .................................. 22
</TABLE>
Page 12
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Synthonics Technologies, Inc. and Subsidiaries
Westlake Village, California
We have audited the accompanying consolidated balance sheets of Synthonics
Technologies, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the years ended December 31, 1998, 1997 and 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Synthonics Technologies, Inc. and Subsidiaries as of December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows for the
years ended December 31, 1998, 1997 and 1996, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 10 to the
consolidated financial statements, the Company has incurred significant losses
which have resulted in an accumulated deficit and a deficit in stockholders=
equity, raising substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 10. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Jones, Jensen & Company
Salt Lake City, Utah
January 25, 1999
Page 13
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
<TABLE>
<CAPTION>
ASSETS
December 31,
-----------------------------
1998 1997
------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 271,665 $ 311,610
Accounts receivable, net (Note 1) 15,117 8,332
Accounts receivable, related (Note 1) 31,620 -
Prepaid expenses - 2,667
------------- --------------
Total Current Assets 318,402 322,609
------------- --------------
PROPERTY AND EQUIPMENT (Net) (Notes 1 and 2) 79,855 124,534
------------- --------------
OTHER ASSETS
Organization costs, net of accumulated
amortization of $1,378 and $1,195 (Note 1) - 183
Goodwill (Note 1) - 48,092
Intangibles (Note 3) 188,348 144,591
Deposits 13,947 15,083
------------- --------------
Total Other Assets 202,295 207,949
------------- --------------
TOTAL ASSETS $ 600,552 $ 655,092
============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
Page 14
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Continued)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
December 31,
-----------------------------
1998 1997
------------- --------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 302,796 $ 126,034
Accounts payable, related (Note 5) 47,366 -
Accrued salaries (Note 5) - 99,299
Other accrued expenses 14,187 22,166
Notes payable (Note 6) 850,000 100,000
------------- --------------
Total Current Liabilities 1,214,349 347,499
------------- --------------
LONG TERMS DEBT
Notes payable (Note 6) - -
------------- --------------
Total Long-Term Debt - -
------------- --------------
Total Liabilities 1,214,349 347,449
------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY
Preferred stock; 550,000 shares authorized
of $10.00 par value, 10,000 and 50,000 shares
issued and outstanding, respectively 100,000 500,000
Common stock; 50,000,000 shares authorized
of $0.01 par value, 19,951,279 and 17,823,387
shares issued and outstanding, respectively 199,513 178,234
Additional paid-in capital 5,083,791 3,961,790
Accumulated deficit (5,997,101) (4,332,431)
------------- --------------
Total Stockholders' Equity (Deficit) (613,797) 307,593
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' $ 600,552 $ 655,092
EQUITY (DEFICIT) ============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
Page 15
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
REVENUE
Net sales $ 512,217 $ 417,574 $ 208,224
Cost of goods sold 390,555 264,850 53,816
------------- ------------- -------------
Gross Profit 121,662 152,724 154,408
------------- ------------- -------------
EXPENSES
Research and development 432,858 753,014 368,593
Production Costs 447,073 - -
General and administrative 716,365 830,415 690,779
Depreciation and amortization 135,563 110,979 32,918
------------- ------------- -------------
Total Expenses 1,731,859 1,694,408 1,092,290
------------- ------------- -------------
Loss From Operations (1,610,197) (1,541,684) ( 937,882)
------------- ------------- -------------
OTHER INCOME (EXPENSE)
Other income - 2,104 971
Interest income 9,446 6,603 2,304
Interest expense (59,459) (9,142) (7,229)
Bad debt expense ( 2,060) (34,780) (8,376)
------------- ------------- -------------
Total Other Income (Expense) (52,073) (35,215) (12,330)
------------- ------------- -------------
Loss before provision for income taxes (1,662,270) (1,576,899) (950,212)
Provision for income taxes (Note 8) 2,400 1,700 800
------------- ------------- -------------
NET LOSS $(1,664,670) $(1,578,599) $ (951,012)
============= ============= =============
BASIC LOSS PER SHARE $ (0.09) $ (0.10) $ (0.07)
============= ============= =============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 19,135,167 16,398,006 13,614,080
============= ============= =============
FULLY DILUTED LOSS PER SHARE $ (0.06) $ (0.07) $ (0.05)
============= ============= =============
FULLY DILUTED WEIGHTED AVERAGE
NUMBER OF SHARES OUTSTANDING 25,890,159 22,814,006 18,296,290
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
Page 16
<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, 1995 - $ - 13,332,942 $133,329 $1,392,822 $(1,802,820)
Common stock issued
for cash at prices
ranging from $0.22
to $1.00 per share - - 2,515,500 25,155 1,027,523 -
Common stock issued
for services rendered
at $0.18 per share - - 275,000 2,750 45,830 -
Common stock issued in
lieu of debt and
equipment at $0.50 per share - - 105,000 1,050 51,450 -
Cancellation of common stock - - (326,409) (3,264) 3,264 -
Contribution to capital for the
purchase of stock warrants
and options - - - - 570,500 -
Net loss for the year ended
December 31, 1996 - - - - - (951,012)
---------------------------------------------------------------------------------------
Balance, December 31, 1996 - $ - 15,902,033 $159,020 $3,091,389 $(2,753,832)
Common stock issued upon
exercise of warrants - - 167,000 1,670 (1,670) -
Common stock issued upon
exercise of warrants at
$0.70 per share - - 350,000 3,500 241,500 -
Common stock issued upon
exercise of options at
$0.22 per share - - 688,500 6,885 144,862 -
Common stock issued to
acquire Christopher Raphael,
Inc. at $0.52 per share - - 10,000 100 5,100 -
Common stock issued to
replace original shares of
Synthonics, Inc. recorded at
predecessor cost - - 179,700 1,797 (1,797) -
Common stock issued for
services rendered at
$1.00 per share - - 25,154 252 24,903 -
---------------------------------------------------------------------------------------
Balance Forward - $ - 17,322,387 $173,224 $3,504,287 $(2,753,832)
---------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
Page 17
<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 Forward - $ - 17,322,387 $173,224 $3,504,287 $(2,753,832)
Common stock issued in
exchange for the forfeiture
of 750,000 stock options - - 501,000 5,010 243,990 -
Preferred stock issued for
cash at 10.00 per share 50,000 500,000 - - - -
Stock offering costs - - - - (50,620) -
Additional capital contributed - - - - 279,133 -
Dividends declared - - - - (15,000) -
Net loss for the year ended
December 31, 1997 - - - - - (1,578,599)
---------------------------------------------------------------------------------------
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 -
---------------------------------------------------------------------------------------
Balance Forward 10,000 $100,000 19,948,279 $199,483 $4,992,812 $(4,332,431)
---------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
Page 18
<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 Forward 10,000 $100,000 19,948,279 $199,483 $4,992,812 $(4,332,431)
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)
=======================================================================================
</TABLE>
Page 19
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,664,670) $(1,578,599) $(951,012)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Depreciation and amortization 135,563 110,979 32,918
Stock issued for services 22,978 274,155 48,580
Changes in assets and liabilities:
(Increase) decrease in accounts receivable
and accounts receivable-related (38,405) (7,244) 24,922
(Increase) decrease in prepaid expenses
and deposits 3,803 1,505 (2,797)
(Increase) decrease in inventory - 4,296 (4,296)
Increase (decrease) in accounts payable 182,231 (39,327) 8,434
Increase (decrease) in accounts
payable - related 47,366 - (62,500)
Increase (decrease) in accrued expenses (107,278) (10,157) 4,680
------------- ------------- -------------
Net Cash Used by Operating Activities (1,418,412) (1,244,392) (901,071)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of fixed assets 3,605 - -
Purchase of fixed assets (7,562) (18,530) (77,893)
Patent costs (82,409) (126,459) -
------------- ------------- -------------
Net Cash Used by Investing Activities (86,366) (144,989) (77,893)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principle payments on notes payable (50,000) - (127,500)
Cash received from notes payable 850,000 50,000 -
Capital contributions 90,009 279,133 570,500
Dividends paid (24,000) - -
Issuance of common and preferred stock 598,824 846,127 1,052,678
------------- ------------- -------------
Net Cash Provided by Financing
Activities 1,464,833 1,175,260 1,495,678
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH (39,945) (214,121) 516,714
CASH AT BEGINNING OF YEAR 311,610 525,731 9,017
------------- ------------- -------------
CASH AT END OF YEAR $ 271,665 311,610 $ 525,731
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
Page 20
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR:
Interest $ 47,709 $ 9,142 $ 7,229
Income Taxes $ 2,400 $ 900 $ 800
NON CASH FINANCING ACTIVITIES
Stock issued for services $ 22,978 $ 274,155 $ 48,580
Stock issued in conversion of debt
to common stock $ 55,469 $ - $ 45,000
Stock issued for equipment $ - $ - $ 7,500
Stock issued for acquisition of subsidiary $ - $ 5,200 $ -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
Page 21
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
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 is 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 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.
The accompanying notes are an integral part of these consolidated financial
statements
Page 22
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d. Basic Loss Per Share
The computations of 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. Organization Costs
Organization costs are recorded at cost and are amortized using the
straight-line method over a period of five years. Amortization expense
for the years ended December 31, 1998, 1997 and 1996 was $183, $275
and $0, respectively.
The accompanying notes are an integral part of these consolidated financial
statements
Page 23
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued))
i. Accounts Receivable
Accounts receivable are shown net of the allowance for doubtful
accounts.
j. 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.
k. 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.
l. 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
$171,665 and $142,377 at December 31, 1998 and 1997, respectively.
m. 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.
n. 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 years ended December 31, 1998, 1997
and 1996 was $48,092, $48,092 and $-0-, respectively.
o. Advertising
The Company follows the policy of charging the costs of advertising to
expense as incurred.
The accompanying notes are an integral part of these consolidated financial
statements
Page 24
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
------------- --------------
<S> <C> <C>
Computer equipment $ 171,742 $ 168,057
Furniture and fixtures 18,061 17,789
Photographic equipment 55,122 55,122
------------- --------------
244,925 240,968
Accumulated depreciation (165,070) (116,434)
------------- --------------
Net property and equipment $ 79,855 $ 124,534
============= ==============
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997 and
1996 was $48,636, $35,746 and $23,842, respectively.
NOTE 3 - INTANGIBLES
Intangible costs incurred are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
------------- --------------
<S> <C> <C>
Trademarks $ 1,484 $ 1,484
Patents 269,084 186,675
------------- --------------
270,568 188,159
Less accumulated amortization (82,220) (43,568)
------------- --------------
Total $ 188,348 $ 144,591
============= ==============
</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 years ended December 31, 1998, 1997 and
1996 was $38,652, $26,866 and $9,076, 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 25
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
Minimum future lease payments on all the leases as of December 31,
1998 are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, Amount
----------------------------------------------
<S> <C>
1999 $50,429
2000 13,382
2001 2,260
2002 -
2003 -
2004 and thereafter -
-----------------------------------------------
Total $66,071
============
</TABLE>
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 judgement 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 judgement.
NOTE 5 - RELATED PARTY TRANSACTIONS
As of December 31, 1998 and 1997, the Company owed $-0- and $99,299,
respectively, to certain of its officers and shareholders. These
amounts represent accrued wages. During 1998, the $99,299 debt was
forgiven by the 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 $47,366 and $-0- as of December 31, 1998 and 1997,
respectively, for costs incurred on the Company's behalf.
Page 26
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 6 - NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
------------- --------------
<S> <C> <C>
Note payable to a corporation,
principal and 7.50% interest
originally due April 1, 1997.
Secured by 70,000 shares of common
stock and 70,000 warrants to
purchase common stock. $ - $ 50,000
Notes payable to various individuals,
interest at 13% per annum,
principle and interest due May 15,
1999 (payable in cash or stock at
$0.20 per share, at the option of
the lender), 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 -
Unsecured bank line-of-credit at 11.5%
interest, interest paid monthly,
principle amount due December, 1998 - 50,000
------------- --------------
Total Notes Payable 850,000 100,000
Less: Current Portion (850,000) (100,000)
------------- --------------
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 27
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
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 December 31, 1998, there were 948,602 additional outstanding
warrants at prices ranging from $0.20 to $0.75 per share. These
warrants are to be exercised from March 1999 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.
The total amount of outstanding stock options of the Company at
December 31, 1998 is summarized as follows:
<TABLE>
<CAPTION>
Shares Exercise Price Exercised By
------------------------------------------------
<S> <C> <C>
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
</TABLE>
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.
Page 28
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 8 - PROVISION FOR INCOME TAXES
The provision for income taxes for the years ended December 31, 1998,
1997 and 1996, consists of the following:
For the Years Ended
December 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
State Franchise Taxes $ 2,400 $ 1,700 $ 800
============= ============= =============
NOTE 9 - 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 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 December 31, 1998 and 1997 were
$-0- and $15,000, respectively.
NOTE 10 - 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 29
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16 (a) OF THE EXCHANGE ACT
See Item 11 for information on the beneficial ownership of the Company's
securities.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position Term Served Since
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
F. Michael Budd 52 President, CEO 3 Years 1995
Director
Charles S. Palm 55 Chief Technology 3 Years 1995
Officer, Secretary,
Director
LeRoy K. Speirs 75 Chairman of Board 3 Years 1978
Ronald S. Speirs 47 Director 2 Years 1996
Timothy G. Paulson 52 Director 2 Years 1997
Thomas K. Carpenter 57 Director 2 Years 1997
Joseph R. Maher 38 VP Marketing 1 Year 1997
& Sales, Director
David L. Stewart 55 Director 1 Year 1995
</TABLE>
Each of the persons listed in the above table possesses sole investment
power and sole voting power over the shares set forth in the table included in
Item 11.
There are no arrangements or understandings between any of the directors or
executive officers, or any other person or person pursuant to which they were
selected as directors and/or officers.
F. Michael Budd is a founder of Synthonics, Incorporated. He holds a BS in
Industrial Engineering from the General Motors Institute in Flint, Michigan, and
an MBA from the University of Detroit in 1973. Mr. Budd has had a long and
distinguished career in the administration of engineering and manufacturing
facilities, including 30 years of increasing management responsibility with
General Motors Corporation, Rockwell International, ITT Corporation, and Harman
International. During his career, Mr. Budd has orchestrated successful mergers,
acquisitions, divestitures, expansions, and start-ups for the companies with
whom he has been affiliated. He has successfully managed business units with
revenues up to $500 million, more than 7,000 employees, and with locations
around the world. Although he is most noted for his "turnaround" management
capabilities that convert marginal or losing operations into strong positive
cash-flow operations, Mr. Budd has been equally successful with new start-up
endeavors. Mr. Budd has been associated with the Company since its inception as
a director and shareholder.
Page 30
<PAGE>
Dr. Charles S. Palm, the "father" of Synthonics' technology, is a founder
of Synthonics, Incorporated. He received a Ph.D. in Engineering Sciences from
the University of Florida in 1975. Prior to joining the Company, he co-founded
Colorocs Corporation in Atlanta, Georgia. Colorocs developed and marketed
full-color copier and full-color laser printers that were marketed under several
different Brand names (such as Sharp and Savin) worldwide. Dr. Palm received
nine patents related to electro-photographic technologies used in his copier
designs. He was a member of the management team that took Colorocs through an
initial public offering in 1986. Dr. Palm supervised the Lunar Laser Ranging
Experiment at the University of Texas McDonald Observatory between 1975 and
1977. While in that capacity, he modified a gigawatt laser system used to
measure the distance from the Earth to the moon within an accuracy of 1.5
inches. Dr. Palm has led or been part of teams that have developed many
important inventions during his career. Besides those mentioned above, he was
very instrumental in the development of a device that was used by the US
Department of Defense, for nearly two decades, to track submerged Russian
submarines from satellite stereo photos of the ocean's surface.
Joseph R. Maher, combines sales, marketing, and promotional expertise with
a broad financial background. Mr. Maher has been responsible for the founding
and the senior level management of a variety of successful companies, both local
and national in scope. These include the publishing of consumer and trade
magazines, producing live entertainment for corporate and private clients,
directing the sales effort of the top out-placement firm in the United States,
and spearheading the growth and capital fund raising for several for-profit and
non-profit corporations. Mr. Maher was the founder and owner of Christopher
Raphael Marketing Design which was acquired by Synthonics during 1997.
LeRoy K. Speirs has been a successful entrepreneur throughout his entire
adult life with a number of different companies in endeavors as diverse as
opening a bookstore upon returning from World War II to the founding of Contract
Insurance Underwriters located in Pasadena, California, which was a credit life
managing general agency, that grew to be the third-largest independent producer
of credit life insurance in California. He was a founder of the Brigham Young
University Center for Entrepreneurship in the Marriott School of Management and
recently received the prestigious Honorary Alumni Award (a life achievement
award) from Brigham Young University.
Ronald S. Speirs, was awarded BS and MS degrees in Computer Integrated
Manufacturing by Brigham Young University in 1986/1987. Mr. Speirs was a Senior
Industrial Engineer in Advanced Manufacturing Technologies for Allied Signal
Aerospace for five years, and is currently an independent computer consultant
and project facilitator for various high-tech enterprises.
David L. Stewart, Esq., is a patent attorney and partner in the firm of
McDermott, Will and Emory in Alexandria, Virginia. He holds a Bachelor of
Science degree in physics from California State University at Los Angeles and a
Juris Doctor degree from George Washington University in the District of
Columbia. Mr. Stewart was a Ph.D. candidate in information technology at George
Mason University in Fairfax, Virginia. He also served four years as
Administrative Patent Judge (Examiner-in-Chief) at the Board of Patent Appeals
and Interferences, United States Patent and Trademark Office.
Thomas K. Carpenter is an experienced executive with extensive P&L
responsibility and a heavy involvement in operational, technical, and
marketing/sales responsibilities. Mr. Carpenter has gained particular expertise
with software tools and applications within industrial, retail, government,
distribution, and medical marketplaces. Known as a persuasive, high energy
problem solver, he has demonstrated successes in both start-up and turn around
situations. Mr. Carpenter, a veteran of the software industry, is playing a key
role for the Company in the formation and execution of its operating strategy.
Mr. Carpenter is currently a member of the Board of Directors or the Board of
Advisors for three other companies all involved in the software industry.
Timothy G. Paulson has been a Corporate Vice President and the Treasurer of
Litton Industries, Inc. since 1994. With Litton since 1970, Mr. Paulson started
his career as a staff auditor and has progressed through several senior level
management positions prior to being appointed its Treasurer. He also earned his
Certified Public Accountant status in 1974. As a key member of management during
Litton's rise to prominence as a premier defense contractor, Mr. Paulson will
provide expert oversight guidance as Synthonics grows into a prominent software
tool provider.
Page 31
<PAGE>
Directorships
-------------
No Director of the Company or person nominated or chosen to become a
Director holds any other directorship in any company with a class of securities
registered pursuant to section 12 of the Exchange Act or subject to the
requirements of section 15(d) of such Act or any other company registered as an
investment company under the Investment Company Act of 1940.
Identity of Significant Employees
---------------------------------
The Company has no employees who are not executive officers, but who are
expected to make a significant contribution to the Company's business. It is
expected that current members of management and the Board of Directors will be
the only persons whose activities will be material to the Company's operations.
Members of management are the only persons who may be deemed to be promoters of
the Company
Family Relationships
--------------------
The Chairman of the Board, LeRoy K. Speirs is the father of director Ronald
S. Speirs. Other than the father - son relationship of Messrs. Speirs, there is
no family relationship between any director or executive officer of the Company.
Involvement in Certain Legal Proceedings
----------------------------------------
During the past five years, no present or former director, executive
officer or person nominated to become a director or an executive officer of the
Company:
(1) was a general partner or executive officer of any business against
which any bankruptcy petition was filed, either at the time of the
bankruptcy or two years prior to that time;
(2) was convicted in a criminal proceeding or named subject to a
pending criminal proceeding (excluding traffic violations and other
minor offenses);
(3) was subject to any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of
business, securities or banking activities; or
(4) was found by a court of competent jurisdiction (in a civil
action), the Securities and Exchange Commission or the Commodity
Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed,
suspended or vacated.
Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of
the Company's Common Stock, to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes of ownership of Common Stock
of the Company. Officers, directors and greater than ten percent stockholders
are required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, with respect to the year ended December 31,
1998, all Section 16(a) filing requirements applicable to each person who, at
any time during the fiscal year ended December 31, 1998, was an officer,
director and greater than ten percent beneficial owner, were complied with, with
the exception of the Annuual Statement of Changes in Beneficial Ownership for
the following officers and directors, which were filed 4 days late: F. Michael
Budd, Charles S. Palm, LeRoy K. Speirs, Ronald S. Speirs, Timothy G. Paulson,
Thomas K. Carpenter, Joseph R. Maher, and David L. Stewart.
Page 32
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Annual Compensation
-------------------
The aggregate annual remuneration, during the fiscal year ending December
31, 1998, of the three highest paid persons who are Officers of the Company was
as follows:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
---------------------------
------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
------------------------------------------------------------------------------
Awards Payouts
------------------------------------------------------------------------------
Securities All
Other Underlying Other
Name and Year or Annual Restricted Options/ LTIP Compen-
Principal Period Salary Bonus Compen- Stock SAR's Payouts sation
Position Ended ($) ($) sation) Awards (#) ($) ($)
($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
F. Michael Budd,
President and CEO 1998 $ 45,000 $0 $0 $0 720,465 $0 $0
Charles S. Palm
Secretary and Chief
Technical Officer 1998 $ 75,000 $0 $0 $0 385,142 $0 $0
Joseph R. Maher
Vice President of
Marketing and Sales 1998 $101,500 $0 $0 $0 78,195 $0 $0
</TABLE>
In 1998, the Directors of the Company adopted a resolution for fiscal year
1998 to reduce the compensation of each of its Executive Officers in an effort
to reduce cash needs during 1998. The totals in the table above reflect the
reduced compensation amounts approved by the Company's Directors.
Employment Contracts
--------------------
F. Michael Budd the CEO and President of the Company and a director and Dr.
Charles S. Palm, the Chief Technical Officer and a director of the Company each
have employment contracts with the Company. Each of these employment agreements
provide for an annual base salary of $240,000 per year. Each of these employment
agreements begin on July 1, 1996 and end on December 31, 2,000. Each contract
contains an Incentive Stock Option for 750,000 shares of common stock, of which
Mr. Budd has exercised 300,000 shares from the option that he holds. The option
price per share is $0.50 and the 750,000 shares vest over a four year period
with all shares being vested by July 1, 2000.
Joseph R. Maher has an employment contract with the Company. It is
effective until September 30, 2001. Mr. Maher's compensation includes a $60,000
annual base salary plus commissions. His contract also contains an Incentive
Stock option for 750,000 shares of common stock. The option price per share is
$1.00 and the 750,000 shares vest over a three year period. The total number of
shares that vest is dependent on the overall performance of Christopher Raphael,
Inc., but cannot exceed a total of 750,000 shares.
Page 33
<PAGE>
Stock Options
-------------
At the Annual Meeting of Shareholders in April 1998, the shareholders
approved the 1998 Stock Option Plan (the "1998 Plan"). The 1998 Plan allows the
Company to attract and retain employees and directors of the Company and its
subsidiaries and to provide such persons with incentives and awards for superior
performance. The 1998 Plan is administered by the Board of Directors of the
Company, which has broad flexibility in designing stock-based incentives. The
Board of Directors determines the number of shares granted and the option
exercise price, but such price may not be less than one hundred percent of the
fair market value of Common Stock on the grant date.
The following tables reflect certain information, with respect to stock
options granted to certain executive officers and directors during fiscal 1998.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
---------------------------------------
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES OR BASE
GRANTED IN FISCAL PRICE EXPIRATION
NAME (#) YEAR(%) ($/SH) DATE
- ------------------------------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
F. Michael Budd ............... 720,465 60.05% $0.53 12/31/98
Charles S. Palm ............... 385,142 31.24% $0.53 12/31/03
LeRoy K. Speirs ............... 0 0.00% N/A N/A
Ronald S. Speirs .............. 0 0.00% N/A N/A
Timothy G. Paulson ............ 0 0.00% N/A N/A
Thomas K. Carpenter ........... 29,177 2.37% $0.53 12/31/03
Joseph R. Maher ............... 78,195 6.34% $0.53 12/31/03
David L. Stewart .............. 0 0.00% N/A N/A
</TABLE>
The following tables reflect certain information, with respect to the
exercise of stock options by certain executive officers during fiscal 1998.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND
FY-END OPTION VALUES
-------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END(#) FY-END($)
SHARES VALUE --------------- -------------------
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------- ----------- -------- --------------- -------------------
<S> <C> <C> <C> <C>
F. Michael Budd ............... 0 0 1,549,325 0
Charles S. Palm ............... 0 0 2,861,832 279,788
LeRoy K. Speirs ............... 0 0 200,000 0
Ronald S. Speirs .............. 0 0 200,000 0
Timothy G. Paulson ............ 0 0 90,000 0
Thomas K. Carpenter ........... 0 0 209,177 0
Joseph R. Maher ............... 0 0 858,195 0
David L. Stewart .............. 0 0 100,000 0
</TABLE>
Page 34
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
-----------------------------------------------
The following table sets forth security ownership information as of the
close of business on December 31, 1998, for any person or group, known by the
Company to own more than five percent (5%) of the Company's voting securities.
<TABLE>
<CAPTION>
Title of Name of Amount of Percent of
Class Beneficial Owner Ownership Class
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock F. Michael Budd 1,130,750 5.7%
743 Cedar Point Pl.
Westlake Village, CA 91362
</TABLE>
F. Michael Budd has sole investment power and sole voting power over the
shares set forth in the above table. There are no other shareholders known to
the Company who beneficially own at least 5% of its stock.
Security Ownership of Management
--------------------------------
The following table sets forth security ownership information as of the
close of business on December 31, 1998, for any director, executive officer or
group of the Company's voting securities:
<TABLE>
<CAPTION>
Title of Name of Amount of Percent of
Class Beneficial Owner Ownership Class
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock LeRoy K. Speirs 200,334 1.0%
312 West Palm Dr.
Arcadia, CA 91007
Common Stock F. Michael Budd 1,130,334 5.7%
743 Cedar Point Pl.
Westlake Village, CA 91362
Common Stock Charles S. Palm 428,751 2.1%
31324 Via Colinas
Suite 106
Westlake Village, CA 91362
Common Stock David L. Stewart 8,892 0.0%
99 Canal Center Plaza
Suite 300
Alexandria, Virginia 22314
Common Stock Ronald Speirs 50,000 0.3%
1632 S. Pacific Coast Hwy.
#455
Redondo Beach, CA 90277
Common Stock Joseph R. Maher 110,000 0.6%
1336 N. Moorpark Rd.
#161
Thousand Oaks, CA 91360
Common Stock Thomas K. Carpenter 0 0.0%
29 Via Falerno
Laguna Hills, CA 92656
Common Stock Timothy G. Paulson 20,000 0.1%
21240 Burbank Blvd.
Woodland Hills, CA 91367
Common Stock All Directors & Officers
as a Group (8 Persons) 1,948,727 9.8%
-----------------------------------------------------------
</TABLE>
Page 35
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended December 31, 1998, the Company was the recipient of a
$100,000 loan from F. Michael Budd. The terms of this loan are identical to
those made to all participants of a Note Offering made during May, 1998. From
this Offering, a total of $550,000 was borrowed by the Company to use as working
capital. The term of the loan is for one year and it pays 10% annual interest.
The Company has the option to repay the loan principle either in cash or in its
restricted Common Stock at a conversion price of $0.20 per share. Each
participant also received a Warrant to purchase a pro-rated number of shares of
the Company's restricted Common Stock at an exercise price of $0.20 per share.
Mr. Budd's Warrant associated with his loan to the Company allows the purchase
of up to 120,000 shares.
ITEM 13. 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).
3.7 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).
Page 36
<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).
Page 37
<PAGE>
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.
(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 quarter of the
period covered.
Page 38
<PAGE>
The following Exhibit Index sets forth the Exhibit attached hereto
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
-------------------------------------------------------------------------
<S> <C>
Exhibit 10.19 Software Remarketing Agreement between
Synthonics Technologies, Inc. and Evans &
Sutherland Computer Corporation.
</TABLE>
Page 39
<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: March 9, 1999 /s/ F. Michael Budd
---------------------------------
By: F. Michael Budd
Its: President
Chief Executive Officer
and principal Financial
and Accounting Officer
Page 40
Exhibit 10.19
-------------
SOFTWARE REMARKETING AGREEMENT
between
Synthonics Technologies, Inc.
and
Evans & Sutherland Computer CORPORATION
This Agreement is effective January 22, 1999 ("Effective Date") between Evans &
Sutherland Computer Corporation, a Utah corporation, including its
majority-owned subsidiaries, with its principal place of business at 600 Komas
Drive, Salt Lake City, Utah 84108 ("E&S") and Synthonics Technologies, Inc. a
Utah corporation, with its principal place of business at 31324 Via Colinas
#106, Westlake Village, CA 91362 ("Company").
RECITAL
Company has developed technology and software programs for the purpose of
rapidly constructing photo-textured 3D models from digital images. This
Agreement allows for Company's software programs to be integrated or bundled
with E&S software and/or hardware products and marketed and sold worldwide
through E&S sales distribution channels. E&S will market these products to
potential customers and pay certain compensation to Company for sublicenses
granted under the terms and conditions of this Agreement. E&S will not market
and sell stand-alone versions of Company's software programs.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS. The following definitions shall apply to this Agreement:
(a) "Software Programs" means the object code form of Company software
products which are listed in Exhibit A, including user documentation
and translators, libraries and user interfaces which allow Software
Programs to be integrated and/or compatible with E&S software and/or
hardware products. The term "Software Programs" also includes all
releases, revisions, enhancements and updates to Software Programs
during the term of this Agreement.
(b) "Customer" means an end-user who has been offered or acquires Software
Programs under the terms of an E&S license agreement.
(c) "Support Customer" means a Customer who purchases E&S support service
for E&S software and/or hardware products, which include integrated or
bundled Software Programs, under the terms of an E&S support
agreement.
2. TERM OF AGREEMENT. This Agreement takes effect on the Effective Date and
expires 2 years after that date ("Initial Term"). This Agreement will then
be automatically renewed for 3 years. After the Initial Term, the Agreement
may be terminated by either party giving 12 months prior written
notification.
Page 1
<PAGE>
3. Confidentiality. To assist in their performance under this Agreement the
parties may exchange certain information which the disclosing party deems
confidential. All confidential information disclosed under this Agreement
will be disclosed and treated in accordance with the Confidential
Information Exchange Agreement (CIEA) attached as Exhibit B. The CIEA shall
remain in force during the term of this Agreement and for a period of five
years following expiration or termination of this Agreement.
4. SOFTWARE PROGRAM DEVELOPMENT. The parties shall perform their respective
responsibilities to develop, deliver and maintain Software Programs when
and as described in Exhibits C and G.
5. GRANT OF LICENSES.
5.1 Software Programs. Company grants E&S a nontransferable, worldwide,
irrevocable license to use, reproduce and sublicense Software Programs
and to integrate or bundle Software Programs with E&S products, for
the following purposes:
(a) to sublicense Software Programs which have been integrated or
bundled into E&S products to Customers pursuant to the terms of
this Agreement;
(b) for use by E&S, including its employees, consultants and
contractors, for the following purposes:
(i) E&S internal use;
(ii) quality assurance tests, demonstrations and benchmarks for
potential sales; and (iii) providing support to Customers;
(c) to temporarily sublicense Software Programs to prospective
Customers, for evaluation purposes under E&S standard loan
processes, which may include the use of a shrink-wrap license;
and
(d) to sublicense Software Programs to colleges and universities.
5.2 Exclusivity. The licenses granted in Subsection 5.1 shall be
nonexclusive, except for the Exclusivity Provisions specified in
Exhibit F.
5.3 License Survival. The licenses granted in Subsection 5.1 shall survive
and continue through any bankruptcy proceeding involving Company,
subject to E&S obligations pursuant to Section 8. Termination or
expiration of this Agreement shall have no effect on the licenses then
existing between E&S and its sublicensees.
Company and E&S agree that in the event a proceeding is commenced by
or against Company under the United States Bankruptcy Code (the
"Code"), Section 365(n) of the Code will be applicable to this
Agreement and that, for purposes of applying Section 365(n), this
Agreement is an "executory contract," all rights and licenses granted
Page 2
<PAGE>
to E&S under or pursuant to this Agreement are, and shall otherwise be
deemed to be, licenses to rights of "intellectual property," Company
is a "licensor of a right to intellectual property," as those terms
are defined and used in the Code, and that the "Escrow Agreement"
attached as Exhibit E and executed by Company in connection herewith
constitutes "agreements supplementary" to this Agreement and E&S'
license of Software Programs, as that term is used in the Code. If
Company is under any proceeding under the United States Bankruptcy
Code (the "Code") and the trustee in bankruptcy of Company, or
Company, as a debtor in possession, rightfully elects to reject this
Agreement or the Escrow Agreement, E&S may, pursuant to 11 U.S.C.
Sections 365(n)(1) and (2), retain any and all of E&S' rights
hereunder and thereunder, to the maximum extent permitted by law,
subject to the payments specified herein and the conditions specified
therein.
5.4 Use of Trademarks, Tradenames. E&S shall have the right to use
Company's name and trademarks in connection with the distribution of
Software Programs. E&S may, at its option, use or apply its own name
and trademarks in connection with the products covered by this
Agreement. E&S will prominently display Company's name in Software
Programs which are integrated or bundled into E&S products.
5.5 E&S Software. E&S grants Company a non-exclusive, nontransferable
royalty-free license to use E&S software provided to Company pursuant
to the terms and conditions of Exhibit D, exclusively for performing
Company's responsibilities as described in the Agreement.
6. Title and Ownership. Title to all E&S software (including content) and
hardware, all patents and copyrights, and all copies thereof, excluding
Software Programs, and all specifications, designs, programs, utilities and
trademarks provided by E&S under this Agreement shall remain with E&S. E&S
shall also have title to all derivative software and hardware developed by
E&S personnel or agents, whether or not this development occurs in
collaboration with Company. Title to all Software Programs, all patents and
copyrights, and all copies thereof, excluding any E&S software and hardware
or derivative works, and all specifications, designs, programs, utilities
and trademarks provided by Company under this Agreement shall remain with
Company.
7. ESCROW OF SOURCE CODE. Concurrently with the execution of this Agreement,
the parties shall execute the Escrow Agreement attached as Exhibit E. Prior
to or concurrently with the delivery of any Software Programs under this
Agreement, Company shall transfer to the escrow agent under the Escrow
Agreement the source code and materials described in the Escrow Agreement.
Materials placed into escrow will be released to E&S on the terms and
conditions set forth in the Escrow Agreement.
8. FEES AND PAYMENT.
8.1 Royalty Fees. As described in Exhibit A, E&S shall pay fees to Company
for Software Programs sublicensed to Customers and for support
provided to Support Customers. Payments are payable quarterly,
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<PAGE>
beginning with the quarter in which the first shipment for revenue
occurs, within 30 days following the end of each calendar quarter. E&S
shall provide a statement showing the number of sublicenses of the
Software Programs during the calendar quarter for which a fee is owed,
and a calculation of the fees due. Company shall have the right to
audit the accounting and sales books and records of E&S relevant to
this Agreement to ensure compliance with the terms of this Agreement.
Any such audit shall be conducted by a representative of a nationally
recognized independent certified public accounting firm whose fee is
paid by Company, other than on a contingent fee basis, and who signs a
non-disclosure agreement reasonably acceptable to E&S. E&S shall be
entitled to 30 days prior written notice to schedule an audit on a
mutually convenient date and such audit shall not be held more than
once per calendar year.
8.2 Prepaid Royalty Fees. E&S will prepay royalties in the amount of
$40,000, as provided below, upon the successful delivery by Company
and the acceptance by E&S of Software Programs which meet E&S
requirements. These prepaid royalties will be applied as a credit
against royalty fee payments due to Company from E&S. No additional
royalty fee payments will be made to Company by E&S until this credit
has been eliminated. Fees will be paid as follows:
- $20,000 upon delivery and acceptance of Software Programs meeting
the Model Generation functionality outlined in the document
"Software Specification - Existing Building Modeler" on or before
2/28/99; and
- $20,000 upon delivery and acceptance of completed Software
Programs which are fully tested and ready for Beta testing and
which meet the Performance Goals outlined in the document
"Software Specification - Existing Building Modeler" on or before
4/30/99.
9. DISTRIBUTION AND MARKETING.
9.1 Distribution. E&S shall have the right to distribute Software Programs
worldwide through whatever sales distribution channels that E&S shall
deem appropriate, including telesales and independent sales
organizations and distributors. E&S makes no representations as to the
level of marketing and sales effort it will provide or the number or
volume of sales that will be made under this Agreement.
9.2 Pricing and Discounts. Company guarantees that the pricing and
discounts terms extended to E&S for Software Programs shall be at
least as favorable as Company's best distribution pricing and
discounts for all distribution channels used by Company, including
direct channels within Company, and indirect channels such as
representatives, distributors, joint marketing agents, and other OEM's
(collectively "Distribution Channel"). If Company extends prices or
discounts to any Distribution Channel more favorable than those
extended to E&S, E&S shall receive corresponding prices and discounts.
Such price decrease for E&S shall be effective as of the date on which
it is granted for any other Distribution Channel. Company agrees to
undergo at E&S request and expense an audit by an independent third
party to assure compliance with this section.
Page 4
<PAGE>
9.3 Commissions. E&S will be responsible for any commissioning of its
sales representatives on the sales of Software Programs made to
Customers.
9.4 Competitors. Company shall not enter into any agreement to directly
provide or market Software Programs to any other company for the
purposes in the markets prohibited in Exhibit F during the Initial
Term of this Agreement. The "Exclusivity Provisions" of Exhibit F will
terminate immediately if the E&S Pixel Products Division begins to
market and sell products in which Company's Software Programs have
been replaced with alternative technology for rapidly constructing
photo-textured 3D models of existing structures from digital images.
9.5 Independent Development. Except as provided in this section, nothing
in this Agreement shall prohibit either party from independently
developing, marketing, distributing, and/or licensing similar products
or engaging a third party to develop, market, distribute, and/or
license such products or establishing a business relationship with any
third party with products similar to those of the other party.
10. REPRESENTATIONS AND WARRANTIES.
10.1 Rights and Title. Company represents and warrants that it has title to
Software Programs and the right to enter into and grant the licenses
described in this Agreement. Company represents that it has sufficient
facilities, resources and personnel to adequately perform its
obligations under this Agreement and is not precluded by any existing
agreement from entering into or performing under this Agreement.
Company warrants that Company distribution agreements shall not
preclude E&S in any way from distributing Software Programs worldwide
to the markets identified in Exhibit F.
10.2 Year 2000; Harmful Code. The Software Programs are Year 2000
Compliant. As used in the preceding sentence, "Year 2000 Compliant"
means that the Software Programs will function accurately and without
interruption before, during and after January 1, 2000, and will
accurately process date and time data (including, but not limited to,
calculating, comparing, sequencing, sorting and representing) from,
into and between the twentieth and twenty-first centuries, and the
years 1999 and 2000 and leap year calculations, to the extent that
other technology used in combination with the Software Programs
properly exchanges date and time data with such programs. The Software
Programs do not contain any virus or other code, including but not
limited to codes, commands or instructions that may be used without
authorization to access, alter, delete, damage or disable the Software
Programs or technology used in combination with the Software Programs.
10.3 Software Program Performance. Company represents and warrants that
Software Programs shall meet at a minimum the performance and
Page 5
<PAGE>
functional specifications set forth in all applicable data sheets,
user and reference documentation and in all Software Program
specifications, including the requirements agreed between Company and
E&S as provided in Exhibit C. Company warrants to E&S that Software
Programs will substantially conform with such specifications for a
period of 90 days after installation at a Customer's site unless
modified or misused. Pursuant to Exhibit G, E&S shall report
non-conforming Software Programs to Company to enable Company to
address and correct the non-conformity. Where a non-conformity is
identified by a Customer which significantly affects performance in
accordance with such published specifications, and written
notification is provided to E&S within the 90 day warranty period,
Company will use its best efforts to provide, at no cost, appropriate
resolution by telephone to correct or avoid such non-conformity. If a
Customer returns a Software Program or withholds payment for the
Software Program for any reason, E&S may withhold the sublicense fee
payment until payment for the Software Program is received from the
Customer or shall receive credit from Company if payment has already
been made to Company.
11. SOFTWARE PROGRAM Support. Support for Software Programs shall be provided
by the parties pursuant to this section.
11.1 Technical Support. Company shall provide E&S with technical support
and telephone support to enable E&S to provide support to Support
Customers pursuant to the requirements in Exhibit G.
11.2 Diagnostic Software. Company shall provide E&S with available
diagnostic software, which is not otherwise commercially available,
for installation, troubleshooting and support of Software Programs at
no charge.
11.3 Intentionally Omitted.
11.4 Support Following Termination or Expiration. Upon termination or
expiration of this Agreement for any reason or if a third party
purchases or acquires an interest in Company, Company agrees that, for
a period of two years, Company or its successor in interest shall
continue to provide to E&S and Support Customers the same level of
support as described in this section at the price effective pursuant
to this Agreement on the date of expiration, termination or
consummation of the Sale or Acquisition, whichever applies. Failure of
Company or its successor in interest to provide such support services
shall be subject to E&S' rights under Section 7 and Exhibit E. If E&S
has obtained the source code and a fully paid license to Software
Programs by exercising its rights under Section 7 and Exhibit E, E&S
will assume total responsibility for support.
12. TRAINING AND SALES SUPPORT.
12.1 Training. Company will provide without charge training in the
operation and support of Software Programs to E&S personnel as
necessary to fulfil the terms and intent of this Agreement. E&S will
supply all necessary demonstration equipment for the training. The E&S
Liaison identified in Section 13 below will coordinate requests for
training. Each party shall be responsible for its travel expenses
Page 6
<PAGE>
incurred in attending or providing training, provided that training
takes place at E&S headquarters in Salt Lake City. Company shall not
be required to provide more than forty teacher hours per quarter of
training.
12.2 Pre/Post-sales Support. Company will provide without charge reasonable
levels of pre-sales and post-sales support, including Customer visits,
joint sales calls, demonstrations and benchmark support, for Software
Programs to E&S and Customers during the term of this Agreement. E&S
shall pay out-of-pocket travel expenses for such support.
12.3 Product Bulletins. Company will provide without charge product
improvement, technical, service and other product-related bulletins
describing all improvements and anticipated changes in Software
Programs and in service techniques and procedures. All written
information shall be provided electronically in Microsoft Word format
or shipped at no charge to the Liaison identified in Section 13.
12.4 Sales Leads. Company sales staff will contact the appropriate E&S
regional sales personnel with any sales leads they may identify that
E&S could supply.
13. LIAISONS AND REVIEW.
13.1 Liaisons. Each party shall cooperate and provide such assistance to
the other, including the execution of such additional documents,
instruments, agreements and certificates and taking such other
actions, as may be reasonably requested and necessary to fulfill the
purposes described in this Agreement. Each party designates the
following representative as its liaison to coordinate the performance
of its responsibilities and exchange information. Either party may
designate a replacement liaison by giving the other party notice
pursuant to Section 17.2.
Company: E&S:
F. Michael Budd Robert Ard
31324 Via Colinas #106 Pixel Products Division
Westlake Village, CA 91362 600 Komas Drive
Salt Lake City, UT 84108
Phone: 818-707-6000 Phone: 801-588-1489
Fax: 818-707-6016 Fax: 801-588-4551
13.2 Quarterly Review Meetings. Unless otherwise agreed, the parties shall
have quarterly meetings to review all aspects of this Agreement and
the overall performance of the parties. Such quarterly meetings shall
be held alternately at E&S' headquarters and at Company's
headquarters.
14. PATENT, COPYRIGHT AND TRADE SECRET INDEMNIFICATION.
14.1 Non-infringement. Company warrants that Software Programs, including
without limitation each component, and the use and licensing of
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<PAGE>
Software Programs will not infringe upon or violate any patent,
copyright or trade secret of any third party.
14.2 Indemnification. Company will defend, at its expense, and will
indemnify and hold harmless E&S against any loss, cost, expense or
liability arising out of any claim by a third party against E&S or
Customers asserting or involving a patent, copyright, trade secret or
proprietary right violation involving any Software Programs acquired
by or licensed to E&S under this Agreement, whether or not such
Software Programs have been transferred or sublicensed to third
parties, and whether or not such claim is successful, provided: (a)
Company is notified by E&S in writing within a reasonable time after
E&S' receipt of written notice of such claim, action or allegation of
infringement; (b) Company is provided all material information
reasonably available to E&S and reasonable assistance to settle or
defend the action; and (c) Company is granted control of the defense
or settlement of the action subject to E&S' reasonable approval.
14.3 Infringement Claim. If an injunction or order is obtained against E&S'
or Customers' use or sublicense of Software Programs or if Company
determines that Software Programs are likely to become the subject of
a claim of infringement or violation of a patent, copyright, trade
secret or other proprietary right of a third party, Company will, at
its option and expense: (a) procure for E&S the right to continue
using and sublicensing Software Programs and for Customers the right
to continue using Software Programs; or (b) replace or modify the same
so that it becomes noninfringing provided such modification or
replacement does not adversely affect the specifications for or the
use or operation of Software Programs by E&S or Customers. If neither
(a) nor (b) is reasonably available, Company shall accept the return
of Software Programs and all other Company-supplied products with
which the infringing product is integrated, refund the fees paid by
E&S to Company as described in Exhibit A, and secure a release of E&S
and Customers from any further liability.
14.4 No Liability. Company shall have no liability under this section if
the alleged infringement is based upon: (a) the combination of
Software Programs with any product not furnished by Company to E&S to
the extent such combination causes the infringement; (b) the
modification of Software Programs other than by Company to the extent
such modification causes the infringement; (c) compliance with E&S'
specifications, designs or instructions; or (d) the use of other than
a current, unaltered release of Software Programs if the current
release has been made available to E&S, to the extent the prior
release causes the infringement.
15. INTENTIONALLY OMITTED.
16. TERMINATION.
16.1 Termination for Breach. Either party may terminate this Agreement
without liability upon 30 days written notice to the other party if
the other party is in material breach of its obligations under this
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Agreement and has failed to cure such breach prior to the expiration
of such 30-day period. Material breach of a party's obligations
includes, but is not limited to, the failure of one party to pay the
other party per the terms of this Agreement, and Company's failure to
deliver conforming Software Programs in accordance with Exhibit C or
the software specification document contemplated under Exhibit C.
16.2 Notice of Breach, Cure. In the event of a breach of the obligations of
a party under this Agreement, the nonbreaching party shall provide
written notice to the breaching party setting forth, in sufficient
detail, a description of the breach and the applicable cure period. If
the breach is either party's breach of the confidentiality provisions,
the notice of breach shall provide for a cure period of not less than
five days. For all other types of breach, including without
limitation, the failure to pay any amounts due in a timely manner, the
notice of breach shall provide for a cure period of not less than 30
days.
16.3 Termination after the Initial Term. After the Initial Term, the
Agreement may be terminated by either party giving 12 months prior
notification.
16.4 Termination upon Sale or Acquisition of Company. If Company is sold or
acquired by a company which E&S deems to be a competitor, E&S may
elect to terminate this Agreement. E&S may also purchase a fully-paid,
perpetual, irrevocable license to Software Products and their Source
Code, as specified in Exhibit E.
17. GENERAL PROVISIONS.
17.1 Entire Agreement; Exhibits. This document and its Exhibits contain the
entire agreement between the parties relating to the subject matter
contained in this Agreement. All prior or contemporaneous agreements,
representations or warranties, written or oral, between the parties
regarding Software Programs and services are superseded by this
Agreement. This Agreement may not be modified except by written
document signed by an authorized representative of each party. In the
event that any part of this Agreement is found to be unenforceable,
the remainder shall continue in effect, to the extent consistent with
the intent of the parties as of the Effective Date. The following
documents are attached as Exhibits to and made a part of this
Agreement:
Exhibit A Software Programs and Fees
Exhibit B Confidential Information Exchange Agreement
Exhibit C Software Program Development and Delivery
Exhibit D Temporary Software License Agreement
Exhibit E Escrow Agreement
Exhibit F Exclusivity Provisions
Exhibit G Software Support Responsibilities
17.2 Notice. All notices required or authorized under this Agreement shall
be given in writing and shall refer to this Agreement by the Effective
Date. All notices shall be effective upon delivery if delivered in
person or upon mailing if mailed at a U.S. Post Office, first class
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mail, postage prepaid, addressed or delivered as follows or at such
other address that either party provides by advance written notice to
the other party.
If to Company: If to E&S:
Attn: President Attn: General Manager
Synthonics Technologies, Inc. E&S Pixel Products Division
31324 Via Colinas #106 600 Komas Road
Westlake Village, CA 91362 Salt Lake City, Utah 84108
Phone: 818-707-6000 Phone: 801-588-1000
Fax: 818-707-6016 Fax: 801-588-4551
17.3 Informal Dispute Resolution. If any dispute arises from or relates to
this Agreement, authorized representatives of Company and E&S shall
meet no later than ten working days after receipt of notice by either
party of request for dispute resolution and shall enter into good
faith negotiations aimed at resolving the dispute. If the
representatives are unable to resolve the dispute in a mutually
satisfactory manner within the next five working days, the dispute
shall be escalated to top management level and each party shall
designate a top management executive to meet in an attempt to resolve
the dispute for a period of 30 days prior to either party's
instituting legal proceedings.
17.4 Publicity. The specific provisions of this Agreement are confidential
and may not be disclosed to any third party without the prior written
consent of the other party. Neither party shall issue any news release
or announcement concerning this Agreement without the prior written
consent of the other party, which will not be unreasonably withheld.
Failure by a party to respond to a request for approval of a press
release or other public statement within ten business days after
receipt of the proposed release and written request by such party's
public relations department will constitute consent.
17.5 Non-agency. Neither E&S nor Company are agents of the other party.
This Agreement does not establish a joint venture, partnership or
agency relationship. E&S and Company do not have any right or
authority to create any obligation, representation or responsibility,
express or implied on behalf of the other party in any manner
whatsoever except as specifically set forth in this Agreement.
17.6 Non-assignment. This Agreement is not assignable by either party
without the prior written consent of the other, except, with respect
to Company, to a successor to all or substantially all of the business
by reason of merger, sale of assets or other form of acquisition which
shall be subject to E&S' rights under Section 16.4, and with respect
to E&S, to a successor to all or substantially all of the business or
assets of E&S or the Pixel Products Division by reason of merger, sale
of assets or other form of acquisition, merger or consolidation. This
Agreement shall inure to the benefit of and shall be binding upon the
respective successors and assigns, if any, of the parties.
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17.7 Headings and Provisions. The headings of the sections of this
Agreement are for reference only and do not control the interpretation
of any term or condition of this Agreement. No provision of this
Agreement shall be considered waived and no breach excused by either
party unless made in writing. No consent, waiver, or excuse by either
party, express or implied, shall constitute a subsequent consent,
waiver or excuse. If any provision of this Agreement is held invalid,
illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired.
17.8 Controlling Law. This Agreement and all transactions under it shall be
governed by the laws, excluding choice of law rules, of the State of
Utah.
17.9 Legal Expenses. In the event either party takes legal action to
enforce any of the terms of this Agreement, the prevailing party shall
be entitled to reimbursement for its expenses, including court costs
and reasonable attorneys' fees at trial, on appeal or in connection
with any petition for review.
17.10Survival of Provisions. The following sections shall survive
termination of this Agreement for any reason: 3, 5.3, 6, 10, 14, and
17.
17.11Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original, but all of
which constitute but one and the same instrument.
COMPANY E&S
By: /S/ F. Michael Budd By: /S/ Robert H. Aral
- ---------------------------------- ------------------------------
(Authorized Representative) (Authorized Representative)
Name: F. Michael Budd Name: Robert H. Aral
- ---------------------------------- ------------------------------
(Print or Type) (Print or Type)
Title: President and CEO Title: General Manager
Pixel Productions Division
Date: 1/27/99 Date: Janaury 27, 1999
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EXHIBIT A
SOFTWARE PROGRAMS AND FEES
During the term of this Agreement, E&S shall pay a fee to Company on each copy
of Software Programs that is sublicensed pursuant to the terms below.
1. Software Programs covered in this agreement.
Synthonics Optical Architect
2. PROGRAM FEES. E&S will pay royalties to Company for licenses sold during
each quarter of E&S model generation software which includes Software
Programs. The amount paid to Company for each such E&S model generation
original software license will be equal to the following percentages of the
end-user sales price or international distributor buy price:
<TABLE>
<CAPTION>
Cumulative original licenses sold % of sales price
---------------------------------- -----------------------
<S> <C>
1-250 8%
251-500 7%
501-1000 6%
1001+ 5%
</TABLE>
No fee shall be payable for demonstration or evaluation licenses.
3. SUPPORT FEES. E&S will pay support fees to Company each quarter for E&S
model generation software which includes Software Programs. The amount paid
to Company for each E&S model generation software license will be equal to
5% of the software support fees collected by E&S.
4. UPGRADE FEES. If upgrades are sold to E&S model generation software which
includes Software Programs, the amount paid to Company will be equal to the
same percentage as is currently being paid for original licenses of the
end-user sales price or international distributor buy price. Upgrade sales
are not counted as part of the cumulative original licenses described in
Section 2 above.
5. EDUCATIONAL GIFTS. E&S may sublicense Software Programs to colleges and
universities without a payment due to Company, if E&S does not receive
payment for these licenses. Sales by E&S to colleges and universities will
be covered by the provisions of this Exhibit A. Educational gifts and
discounted sales are not counted as part of the cumulative original
licenses described in Section 2 above.
6. ADDITIONAL USE BY E&S. E&S will pay royalties to Company for all licenses
of Software Programs used internally by E&S to generate models for other
E&S businesses and customers. The price will be equal to the average
royalty amount E&S pays to Company for other licenses sold during that
quarter. E&S may include Software Programs in its simulation and mission
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planning products and pay the same percentages of end-user sales price or
international distributor price specified in Section 2 of this Exhibit A.
Company will also not unreasonably withhold the right for E&S to include
Software Programs in other E&S product offerings for other markets. The
terms and pricing for this usage will be separately negotiated.
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EXHIBIT B
CONFIDENTIAL INFORMATION EXCHANGE AGREEMENT
The parties agree as follows:
1. Purpose. To assist in their performance pursuant to Section 3 of the
underlying Agreement, Company and E&S enter into this agreement to
establish a confidential relationship and to exchange confidential
information which shall be protected by the receiving party from a
disclosure or use that is not authorized by the disclosing party.
2. Designated Liaisons. The parties' designated liaisons for coordinating the
receipt, disclosure or exchange of confidential information are:
For E&S: Robert Ard
Located at: 600 Komas Drive, Salt Lake City, UT 84108
For Company: F. Michael Budd
Located at: 31324 Via Colinas, #106, Westlake Village, CA 91362
3. Confidential Information Transmittal Forms. The confidential information
being disclosed under this CIEA shall be described in Transmittal Forms or
otherwise marked as described in this CIEA. The initial Transmittal Form
shall be signed by authorized representatives of both parties and attached
to this CIEA as Attachment 1. Subsequent disclosures of confidential
information under this CIEA for the purpose identified above may be
described in additional Transmittal Forms which shall be signed by the
Designated Liaisons for E&S and Company. Transmittal Forms may also be used
for written confirmation of confidential information initially disclosed in
intangible form, as further described in Paragraph 4.
4. Marking of Confidential Information. Confidential information which is
disclosed in written or other tangible form shall be marked by the
disclosing party as "Confidential" or by any other appropriate legend.
Information that is to be confidential information under this CIEA and
which is disclosed in oral, visual or other intangible form (including
electronic transfers), shall be identified as confidential at the time of
disclosure and confirmed in writing (by use of a Transmittal Form or other
writing) by the disclosing party to the receiving party within 30 days of
disclosure. Such written confirmation may be transmitted to the receiving
party via mail or facsimile. The receiving party shall maintain all notices
and legends included on information identified as confidential as received
from the disclosing party.
5. Use and Protection of Confidential Information. In all cases, the
confidential information disclosed shall remain the sole property of the
disclosing party. The receiving party shall not use confidential
information for any purpose other than the purpose for which disclosed. The
receiving party shall disclose confidential information to its employees on
a need-to-know basis only. Each party represents that it protects its own
confidential information from unauthorized use or disclosure. Each party
shall protect confidential information received under this CIEA with the
same degree of care, but no less than a reasonable degree of care, which it
regularly employs to protect its own confidential information from
unauthorized use or disclosure.
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6. Exceptions to Obligations of Confidentiality. The obligations of
confidentiality imposed by this CIEA shall not apply to any information
which: (a) is rightfully received by the receiving party from a third party
without accompanying markings or disclosure restrictions; (b) is
independently developed by the receiving party without use of the
confidential information; (c) is or becomes publicly available through no
wrongful act of the receiving party; (d) is already known by the receiving
party without an obligation of confidentiality; (e) is disclosed without
identification and appropriate markings as further described in Paragraph
4; or (f) is approved for release in writing by an authorized
representative of the disclosing party.
7. Disclosure of Confidential Information Pursuant to Judicial Order. Nothing
in this CIEA shall restrict the right of a receiving party to disclose
confidential information to the extent required by judicial order. A
receiving party which is subject to a judicial order shall notify the
disclosing party of such order in sufficient time to permit the disclosing
party to respond to such order. All confidential markings shall be
maintained on any confidential information which is disclosed pursuant to
judicial order.
8. Independent Development. Each party understands that the other party may
have already developed, or received from third parties, information or
material similar to that received under this CIEA, or in the future may be
internally developing, or receiving from third parties, information or
material similar to that received under this CIEA. Provided that
confidential information is not used in violation of this CIEA, nothing in
this CIEA shall be construed as a representation or inference that either
party has not or will not develop information, material, technology or
products, for itself or for others, that is similar to information,
material, or technology disclosed under this CIEA or that competes with
products of the other party.
9. Network Access. To facilitate certain purposes for which this CIEA may be
signed, E&S may allow Company access to E&S' business or engineering
computer networks. Such access may be given on site at E&S or remotely via
computer modem. To the extent such access is given to Company, Company
agrees to protect such access, and all information, whether marked
confidential or not, obtained via such access, in accordance with all terms
of this CIEA. Company agrees to limit such network access to those
employees of Company with a need-to-know. If Company obtains network access
through the use of Company owned equipment, Company shall physically and
electronically secure such equipment to prevent unauthorized use. Company
acknowledges that E&S will monitor Company's network access and may
terminate such access at any time.
10. Copying/Return/Destruction of Confidential Information. Copies of
confidential information are limited to those reasonably necessary in
connection with the use contemplated for such information. All confidential
information and copies shall remain the property of the disclosing party
and shall be destroyed or returned upon the request of the disclosing
party.
11. Waiver/Non-Exclusive Remedies. The failure of either party to enforce any
right under this CIEA shall not be deemed a waiver of any right. The rights
and remedies of the parties under this CIEA are not exclusive and are in
addition to any other rights and remedies provided in law or in equity. The
invalidity in whole or in part of any term of this CIEA shall not affect
the validity of any other term.
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12. Entire Agreement/Amendment/Modification of CIEA. This CIEA constitutes the
entire agreement between the parties with respect to the subject matter of
this CIEA. No amendment or modification of this CIEA shall be valid or
binding on the parties unless (a) approved in advance by the E&S Legal
Department, (b) set forth in writing and (c) signed by an authorized
representative of each party.
13. Termination. This CIEA shall continue in effect until terminated by either
party upon 30 days prior written notice. The period of confidentiality
described in Paragraph 15 below shall survive such termination.
14. No Licenses. Neither this CIEA nor any disclosure of confidential
information under this CIEA grants the receiving party any license under
any patent, copyright or trade secret.
15. Period of Confidentiality. Unless a different period of confidentiality is
specified in a Transmittal Form, the period for which the receiving party
shall be obligated to protect the confidentiality of information disclosed
under this CIEA shall commence on the date the information is received by
the receiving party and end three years thereafter.
16. Successors and Assigns/Nonassignment. This CIEA shall be binding upon each
party's successors and assigns. Neither party may assign this CIEA to any
third party without the prior written consent of an authorized
representative of the other party.
17. Controlling Law. This CIEA shall be construed in accordance with the laws
of the State of Utah, exclusive of the conflict of laws provisions.
18. Residuals. Notwithstanding any other provisions of this Agreement, both
parties shall be free to use for any purpose the residuals resulting from
access to or work with the confidential information provided by the other
party. The term "residuals" means information in non-tangible form which
may be retained in the unaided memories of the personnel who have had
access to confidential information, including ideas, concepts, know-how or
techniques contained therein. Neither party shall have any obligation to
limit or restrict the assignment of such persons or to pay royalties for
any work resulting from the use of residuals. However, the foregoing shall
not be deemed to grant any license under a party's copyrights or patents.
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ATTACHMENT 1
CONFIDENTIAL INFORMATION TRANSMITTAL FORM
Disclosure Date:
CIEA No.:
The parties identified below agree that the following confidential information
shall be received, disclosed or exchanged in accordance with the terms of the
Confidential Information Exchange Agreement (CIEA) identified above.
1. Describe confidential information disclosed. (Be specific. Include subject
or product, any document title, drawing/document number, date, revision
number, etc.) (Use additional sheets, if necessary.) (If a party is not
disclosing information, indicate "none.")
E&S' confidential information:
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Company's confidential information:
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
2. This Transmittal Form covers the above described confidential information
to be received, disclosed or exchanged on or after the Disclosure Date.
3. The parties agree that unless the blank set forth below is filled in, the
period of confidentiality for the above described confidential information
shall be three years from the date of receipt by the receiving party.
The terms of the CIEA notwithstanding, the period of confidentiality for
the above described confidential information shall be ___ months/years.
(Not less than two years or more than five years.)
4. All other terms and conditions of the CIEA remain the same.
COMPANY E&S
Address 600 Komas Drive
Address Salt Lake City, Utah 84108
By: By:
(Designated Liaison) (Designated Liaison)
(Name) (Name)
(Date) (Date)
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EXHIBIT C
SOFTWARE PROGRAM DEVELOPMENT AND DELIVERY
1. SOFTWARE PROGRAM DEVELOPMENT.
1.1 Delivery and Acceptance. Company and E&S shall mutually review and
agree upon the requirements in the document "Software Specification -
Existing Building Modeler", dated January 6, 1999 for the initial
delivery of Software Programs. Company shall develop and deliver
alpha, beta and final (releasable) versions of the Software Programs
in accordance with the schedule provided in the Agreement, the
Software Specification documents or as otherwise agreed. The parties
may by mutual agreement modify the requirements and schedule for the
Software Programs. E&S will accept incremental delivery of Software
Programs by Company to E&S when the requirements for each delivery
have been met to the satisfaction of E&S.
1.2 Quality Assurance. Company and E&S shall mutually review and agree
upon the standard quality assurance procedures, as specified in the
document "Quality Assurance Specification - Existing Building
Modeler", dated January 6, 1999, that will be employed by Company.
Such procedures shall be satisfactorily completed prior to shipment by
Company of each release of any Software Program to E&S or Customers.
Company shall provide E&S with results evidencing quality assurance to
E&S' satisfaction. These procedures shall be subject to modification
as required from time to time to address any failures not identified
by the current procedure. E&S shall have the right to participate in
the Company quality assurance process and provide input for increasing
product quality. E&S shall require Company to provide beta versions of
new releases for quality assurance and compatibility testing. E&S may
inform Company of problems in Software Programs and Company shall
correct such problems pursuant to Section 11 of the Agreement and
Exhibit G.
1.3 Release Schedules. Company shall support each current release and the
prior release of all Software Programs. Software Programs shall be
updated for each E&S software release. Company shall use its best
efforts to synchronize with E&S' release cycles and milestones.
1.4 Compatibility. Company shall retain the right to develop, improve and
maintain Software Programs; provided, however, that Company shall not
make changes in the appearance or functionality of Software Programs
which result in incompatibility of Software Programs with E&S software
or loss of functionality used by E&S and E&S customers. Company and
E&S acknowledge that maintaining full software compatibility between
Software Programs and E&S software is important to the ability of E&S
to satisfy Customers and to meet its obligations under this Agreement.
Company shall ensure the compatibility of Software Programs with E&S
software and Company shall cooperate to ensure the continuing support
and control of such compatibility.
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1.5 Source Code Tree. If Company intends to maintain more than one source
code tree for all Software Programs for all Distribution Channels,
Company shall maintain and support the source code tree for E&S at a
level equal to or greater than any other source code tree maintained
or supported by Company. Company shall inform E&S of product plans in
a timely manner.
1.6 Competitiveness. Company will use its best efforts to ensure that
Software Programs remain competitive in the marketplace.
1.7 Enhancements. Company will work with E&S to understand and prioritize
enhancement requests made by E&S and E&S customers. Company will use
its best efforts to make enhancements to Software Programs which are
mutually agreed to be high priority on a timely basis.
2. OPERATING SYSTEM. Software Programs shall initially run under Microsoft
Windows NT 4.0, Service Pack 3.0. Company shall insure Software Programs
run on all new releases of the Windows NT operating systems within three
months after the release becomes available.
3. DELIVERY.
3.1 Release Updates. Company will use its best efforts to delivery to E&S
code release updates as follows:
(a) the beta, pre-production, versions of Software Programs no later
than four weeks before the scheduled beta release by E&S of
products which include integrated or bundled Software Programs;
(b) the production release of Software Programs no later than four
weeks before the production release by E&S of products, which
include integrated or bundled Software Programs; and
(c) access to advance information and to all significant product
improvements in the Software Programs no later than other sales
channels and OEM's of Company.
3.2 Compliance. Company's failure to comply with Section 3.1 of this
Exhibit shall be deemed a nonmaterial breach of this Agreement and E&S
may withhold any payment due until Company has complied.
3.3 Master Copies. Within 5 days after the Effective Date, Company shall
deliver reproducible master copies of all Software Programs including
software in object code form and documentation in the form identified
below to E&S. Software Programs shall be shipped F.O.B. Company
facilities to E&S' designated facility. E&S shall be responsible for
all freight, duty, export or import licensing and insurance charges.
3.4 Copies of Documentation. Company shall provide to E&S at no charge two
copies of any existing documentation including user's manuals and
training manuals in laser-printed form and one copy of each manual in
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machine-readable format for each type of Software Program for
reproduction. As Software Programs are modified and the documentation
is updated Company shall provide E&S with updates to documentation in
laser-printed form and in machine-readable format for reproduction.
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EXHIBIT D
TEMPORARY SOFTWARE LICENSE AGREEMENT
This Temporary Software License Agreement is designated Exhibit D to the
Software Remarketing Agreement dated January 22, 1999 (Underlying Agreement)
between E&S Corporation, with its principal place of business at 600 Komas
Drive, Salt Lake City, Utah 84108 (E&S) and Company, with its principal place of
business at 31324 Via Colinas #106, Westlake Village, CA 91362 (Company).
E&S and Company agree as follows:
1. TEMPORARY LICENSE. E&S will temporarily license to Company certain software
and documentation which is described in Attachment A (Software). E&S grants
to Company, for the term specified in Attachment A, a nontransferable,
nonexclusive license to use Software only on the equipment listed in
Attachment A, in machine-readable form only, solely for the purposes
described in the Underlying Agreement. Company agrees that all Software is
the sole property of E&S or its licensors. Company shall not mortgage,
pledge or encumber Software in any way.
2. COPIES AND LOCATION. Company may not make copies, in whole or in part, of
any Software or other material temporarily licensed by E&S. Company shall
keep Software at the ship-to address described in Attachment A. Company
shall not move Software without the prior written consent of E&S.
3. PROTECTION AND SECURITY OF SOFTWARE. Software is trade secret or
confidential information of E&S. Company:
(a) shall not make Software available in any form or disclose or permit
disclosure of Software, including any portion thereof, or the methods
or concepts utilized therein, to anyone except employees of Company
whose job performance requires such access;
(b) shall take appropriate action to protect the confidentiality of
Software and to ensure that any person permitted access to Software
does not provide or disclose it to others;
(c) shall not reverse-assemble, reverse-compile, or otherwise
reverse-engineer Software, in whole or in part;
(d) shall not remove or obscure any notice or legend included in Software
or affixed to Software's medium or medium container; and
(e) shall, before recycling, discarding or disposing of any media
containing Software or any portion thereof, erase or otherwise destroy
such Software.
The provisions of this Section 3 shall survive the expiration or
termination of this agreement.
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4. EXPIRATION OR TERMINATION OF AGREEMENT. This Agreement shall expire or
terminate on the date specified in Attachment A. Company shall promptly
destroy or return Software to E&S and furnish to E&S a certificate signed
by an officer of Company stating that Software has been destroyed or
returned to E&S.
5. DISCLAIMER OF WARRANTY. SOFTWARE IS PROVIDED "AS IS" AND WITHOUT WARRANTY.
EXCEPT AS PROVIDED IN THE UNDERLYING AGREEMENT, E&S SHALL HAVE NO
OBLIGATION TO SUPPORT OR OTHERWISE MAINTAIN SOFTWARE. E&S MAKES NO
WARRANTIES, EXPRESS OR IMPLIED WITH RESPECT TO SOFTWARE INCLUDING ANY
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
6. LIMITATION OF LIABILITY. E&S SHALL NOT BE LIABLE FOR ANY PROPERTY DAMAGE,
PERSONAL INJURY, LOSS OF PROFITS, INTERRUPTION OF BUSINESS, OR FOR ANY
OTHER SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES, HOWEVER CAUSED, WHETHER
FOR BREACH OF WARRANTY, CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT
LIABILITY OR OTHERWISE.
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Attachment A
to the
TEMPORARY SOFTWARE LICENSE AGREEMENT
Term: ________ to ________
Qty Part Number Description Platform Host ID#
- -------------------------------------------------------------------------------
COMPANY E&S
By: By:
- ------------------------------------- -----------------------------
(Authorized Representative) (Authorized Representative)
Name: Name:
(Print or Type) (Print or Type)
Title: Title:
Date: Date:
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EXHIBIT E
ESCROW AGREEMENT
Effective January 22, 1999, this Escrow Agreement is entered into by E&S, with
its principal place of business at 600 Komas Drive, Salt Lake City, Utah 84108
(E&S) and Company, with its principal place of business at 31324 Via Colinas
#106, Westlake Village, CA 91362 (Company), and U.S. Bank National Association
(Escrow Agent) whose address is 15 West South Temple, Suite 200, Salt Lake City,
Utah 84101.
RECITALS
Company has agreed to provide E&S with software programs in object code form,
and related documentation (Software Programs) pursuant to the certain Software
Remarketing Agreement dated January 22, 1999 between E&S and Company (Underlying
Agreement). Except as otherwise indicated, all capitalized terms in this
Agreement have the same meaning as defined in the Underlying Agreement. Pursuant
to the terms of the Underlying Agreement, Company has also agreed to provide
support services for Software Programs (Support Services). E&S relies upon the
continuing availability of Software Programs and Support Services to E&S in
performing its obligations under the Underlying Agreement.
This Escrow Agreement provides assurance to E&S of the ability to access source
code for Software Programs (Source Code) upon the occurrence of the events
described in this Escrow Agreement.
AGREEMENT
E&S, Company and Escrow Agent agree as follows:
1. DEPOSIT OF SOURCE CODE.
1.1 Date of Deposit. Prior to or concurrently with the delivery of the
initial copy of any Software Programs to be provided under the
Underlying Agreement, Company shall deposit and Escrow Agent shall
accept, for storage purposes only, the buildable Source Code of each
Software Program. Deposit shall be made at 15 West South Temple, Suite
200, Salt Lake City, Utah 84101.
1.2 Source Code, Updates and Enhancements. Source Code shall include
copies of all current source code lines, comment lines, write ups,
flow charts, structure diagrams, and debugging tools along with any
other related materials necessary to allow a reasonably skilled E&S
programmer to maintain, build and update the object code versions of
Software Programs without the help of any other person or reference to
any other material. Source Code and all updates shall consist of, at a
minimum, the following:
(a) one copy of each Software Program in a language and form readable
and understandable by a human and encoded on a magnetic medium
capable of generating a copy on printed paper;
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(b) one copy of all related documentation including, without
limitation, programmer's guides and manuals;
(c) a description of the commercially available programs that
generate Software Programs from the respective Source Code
images;
(d) one copy of each script that generates a successful build of
Software Programs from the respective Source Code images;
(e) any other programs not commercially available that are required
to generate Software Programs from the respective Source Code
images;
(f) for each Software Program, a copy of a transcript of a successful
object code build from the Source Code; and
(g) proprietary licensing software or buildable software without
licensing protection.
1.3 List of Source Code. A list of Source Code currently on deposit with
Escrow Agent will be attached as Attachment 1 to this Escrow Agreement
upon deposit of the Source Code. This list will be supplemented and
updated by Company and Company shall provide E&S and Escrow Agent with
copies of new lists with each future deposit of Source Code. For each
deposit, Escrow Agent will issue receipts to Company and E&S.
1.4 Updates. During the term of this Escrow Agreement, Company shall keep
the Source Code in escrow current by depositing the Source Code of any
release or update or revision of a Software Program that is provided
or to be provided under the Underlying Agreement prior to the delivery
of the initial copy of any such release, update or revision. Such
periodic deposits shall contain each and every bug fix, update,
correction, program option, enhancement or revision of the Software
Programs provided or to be provided under the Underlying Agreement.
With each periodic deposit an officer of Company shall certify in a
notarized written document, subject to the penalty of perjury, that
the Source Code deposited conforms to the requirements of this Escrow
Agreement.
1.5 Verification. At the site of the deposit and at its own cost, E&S may
appoint a mutually agreeable third party to inspect, test and review,
but not copy, the original and every subsequent deposit of the Source
Code in escrow at the time of the deposit and at other reasonable
times to verify that the deposited materials are the basis for the
Software Programs.
2. TITLE TO MEDIA AND SOURCE CODE. Subject to the terms of this Escrow
Agreement, title to the media upon which the Source Code is written or
stored is and shall be irrevocably vested in E&S when Source Code is
deposited with and retained by the Escrow Agent. Notwithstanding the
foregoing, Company will retain ownership of all intellectual property
contained on the media, including all copyright, trade secret, patent or
other intellectual property rights subsisting in such Source Code.
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<PAGE>
3. RELEASE OF SOURCE CODE TO E&S. The copy of the Source Code on deposit in
escrow pursuant to this Escrow Agreement shall be released to E&S only in
accordance with the terms of this Escrow Agreement.
3.1 Automatic Release Events.
(a) Bankruptcy. If Company is under any proceeding under the United
States Bankruptcy Code (the "Code") and the trustee in bankruptcy
of Company, or Company, as a debtor in possession, rightfully
elects to reject the Underlying Agreement or this Escrow
Agreement, E&S shall so notify the Escrow Agent in writing,
providing evidence of the filing and such rejection, and Escrow
Agent shall promptly release the Source Code to E&S.
(b) Sale or Acquisition of Company by a competitor to E&S. If E&S
elects to terminate the Underlying Agreement pursuant to Section
16.4 of the Underlying Agreement, E&S shall have the option to
purchase a fully-paid, perpetual, irrevocable license to the
Source Code for continued use as defined in this Agreement. The
amount paid by E&S to Company for this license will not exceed
the greater of three times the royalties paid by E&S to Company
in the past 12 months or $2,500,000. If E&S elects to exercise
this option, E&S shall notify the Escrow Agent in writing and,
upon receipt of such notice, the Escrow Agent shall promptly
release the Source Code to E&S.
3.2 Failure to Meet Obligations. If E&S concludes in good faith that
Company or Company's successor in interest has failed or is
substantially unable to provide Software Programs or support services
as required by the Underlying Agreement for any reason, including
insolvency of Company as defined in Article 1-201(23) of the Uniform
Commercial Code, E&S shall so notify Company in writing (Deficiency
Notice), specifying in reasonable detail the basis for E&S' good faith
conclusion that Company has failed to or is unable to provide Software
Programs or support services. E&S shall serve a copy of the Deficiency
Notice simultaneously upon the Escrow Agent.
(a) For a period of 30 days after service of the Deficiency Notice
(Cure Period), Company shall have the right to cure the alleged
deficiencies and shall correspond with and deal directly with E&S
as directed in the Deficiency Notice.
(b) If, at the end of the Cure Period, E&S believes in good faith
that the alleged deficiency with respect to the Software Programs
or support services has not been cured, E&S shall notify Company
and the Escrow Agent in writing, specifying in reasonable detail
the deficiency and make a formal demand that the Escrow Agent
release the Source Code to E&S (Demand Notice). Upon receipt of
the Demand Notice, the Escrow Agent shall promptly release the
Source Code to E&S.
3.3 Improper Request for Release. If Company disagrees with the Demand
Notice or believes that any request by E&S for release of Source Code
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<PAGE>
pursuant to this section is improper, Company shall have the right to
pursue any remedy available to it at law, subject to Section 5;
provided, however, that Company shall not have the right to prevent
Escrow Agent's release of the Source Code to E&S as provided by this
section.
4. IRREPARABLE HARM. Company and E&S acknowledge and agree that E&S will
suffer irreparable harm in the event release of the Source Code to E&S is
wrongfully delayed by Company, and that E&S may obtain injunctive relief to
prevent Company from taking any action that may delay the release
unjustifiably. Exercise of any remedy provided Company in this Escrow
Agreement shall not be considered an unjustifiable objection to release of
Source Code.
5. DISPUTES. In the event of any dispute involving the release of the Source
Code under Section 3.2, authorized representatives of Company and E&S shall
meet pursuant to Section 17.3 of the Underlying Agreement.
6. LICENSE OF SOURCE CODE. If the Source Code is delivered out of escrow to
E&S pursuant to Section 3, E&S shall be licensed by Company, and Company
does so grant E&S a fully-paid, perpetual, irrevocable license to the
Source Code with a right to sublicense Software Programs to third parties,
subject to the conditions of this Escrow Agreement and the Underlying
Agreement and only to pursue business in the initial target market defined
in Exhibit F, without payment of any further license fees from E&S to
Company. The license entitles E&S to grant sublicenses of Software Programs
to third parties and to use, copy, modify, maintain and update the Source
Code in all such respects as may be necessary for E&S to maintain and
update Software Programs.
7. TECHNOLOGY TRANSFER. If the Source Code is delivered out of escrow to E&S
pursuant to Section 3, Company will facilitate the transfer of technology
to E&S by providing no-cost access to engineers who are thoroughly
knowledgeable with the Source Code for a period of up to 2 months. If
Company is in Bankruptcy, E&S will pay the actual costs for Company
engineers to transfer the technology.
8. CONFIDENTIALITY AND USE OF SOURCE CODE. Upon release of the Source Code to
E&S pursuant to this Escrow Agreement, E&S shall preserve the Source Code
in confidence in accordance with the same degree of care practiced by it to
safeguard its proprietary source code against unauthorized use and
disclosure, and shall use the Source Code only as authorized under this
Escrow Agreement and the Underlying Agreement. These obligations do not
apply to the Source Code to the extent that such materials:
(a) are rightfully received by E&S from a third party who has a right to
disclose such materials;
(b) are independently developed by E&S without use of the Source Code;
(c) are or become publicly available through no wrongful act of E&S;
(d) are already known by E&S prior to the date of release of the Source
Code to E&S;
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<PAGE>
(e) are disclosed to a third party by Company without restrictions on use
or disclosure, or
(f) are approved for release in writing by an authorized representative of
Company.
This section shall survive the termination of this Escrow Agreement for a
period of five years.
9. ESCROW AGENT FEES AND RESPONSIBILITIES.
9.1 Fees. E&S shall pay to Escrow Agent, in advance, fees at the standard
rate prescribed from time to time by Escrow Agent for performance of
services under this Escrow Agreement.
9.2 No Duty to Inquire. Escrow Agent shall not be required to inquire into
the truth of any statements or representations contained in any
notices, certificates or other documents required or otherwise
provided hereunder, and shall be entitled to assume that the
signatures on such documents are genuine, that the persons signing on
behalf of any party thereto are duly authorized to execute the same,
and that all actions necessary to render any such documents binding on
the party purportedly executing the same have been duly undertaken.
9.3 Right to Require Additional Documents. Without in any way limiting the
other terms of this Amendment, Escrow Agent may in its discretion
require from Company or E&S additional documents which it deems to be
necessary or desirable in the course of performing its obligations
under this Escrow Agreement.
9.4 No Liability. Both Company and E&S release Escrow Agent from and
against any and all liability to them for losses, damages, and
expenses, including attorneys' fee, that may be incurred by them on
account of Escrow Agent's compliance in good faith with the terms of
this Escrow Agreement.
10. NOTICES. Notices, demands and other communications under this Escrow
Agreement shall be in writing, and shall be delivered by registered or
certified mail, return receipt requested, to the intended recipient at the
address set forth below, or to such other address as such recipient shall
have designated by notice to the sending party. Notices shall be deemed to
have been given and received when signed for on the return receipt.
If to Company: If to E&S:
Attn: President General Manager
Company Synthonics Technologies, Inc. E&S Pixel Products Division
31324 Via Colinas #106 600 Komas Drive
Westlake Village, CA 91362 Salt Lake City, Utah 84108
Telephone: (818)707-6000 Telephone: (801) 588-1000
FAX: (818)707-6016 FAX: (801) 588-4551
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<PAGE>
If to Escrow Agent:
Attn: Escrow Officer - Kim Galbraith
15 West South Temple, Suite 200
Salt Lake City, Utah 84101
Telephone: (801) 534-6083
FAX: (801) 534-6208
11. TERMINATION. On the effective termination date of the Underlying Agreement,
this Escrow Agreement will also be terminated. Otherwise this Escrow
Agreement may not be terminated or modified except in writing signed by
Escrow Agent, Company and E&S. Upon termination of this Escrow Agreement
Escrow Agent shall return Source Code to Company and title to the actual
copies of Source Code deposited shall revert to Company upon delivery. The
foregoing shall not apply to rejection of the Underlying Agreement in a
bankruptcy proceeding as contemplated in Section 3.1(a) hereof, nor shall
it affect rights acquired by E&S pursuant to Section 6 hereof prior to such
termination.
IN WITNESS WHEREOF, the parties have caused this Escrow Agreement by their duly
authorized representatives as of the date or dates set forth below.
COMPANY E&S
By: /S/ F. Michael Budd By: Robert H. Aral
- ----------------------------------- ----------------------------------
(Authorized Representative) (Authorized Representative)
Name: F. Michael Budd Name: F. Michael Budd
- ----------------------------------- ----------------------------------
(Print or Type) (Print or Type)
Title: President & CEO Title: General Manager of
Pixel Productions Division
Date: 1/27/99 Date: Janaury 27, 1999
U.S. BANK NATIONAL ASSOCIATION
By: /S/ Kim R. Galbraith
- -----------------------------------
(Authorized Representative)
Name: Kim Galdraith
- -----------------------------------
(Print or Type)
Title: Vice President
Date: 1/27/99
Page 29
<PAGE>
ATTACHMENT 1
LIST OF SOURCE CODE DEPOSITED
Page 30
<PAGE>
EXHIBIT F
EXCLUSIVITY PROVISIONS
Company will not embed or bundle its Software Programs to any other company for
the purpose of 3D Visualization in the initial target market of E&S until after
12/31/2000, so long as cumulative E&S license royalty payments to Company equal
or exceed the following:
<TABLE>
<CAPTION>
Date Cumulative Licenses
-------------- ------------------------
<S> <C>
12/31/1999 150
3/31/2000 300
6/30/2000 500
9/30/2000 1000
</TABLE>
The initial target market of E&S is defined as planners, developers,
architects, and engineering firms performing these functions. 3D
Visualization is defined as photo-realistic, interactive investigation and
presentation of the visual impacts of proposed and planned changes in urban
and suburban environments. Reverse engineering and measurement extraction
applications are not included in the definition of 3D visualization.
If any of the above royalty payment milestones are not achieved by E&S,
Company will be free to market their 3D model creation technology directly
to other companies that supply to the initial target market.
Company will not disclose to other company that E&S is pursuing the initial
target market with a 3D Visualization product, until product is announced
by E&S, without the prior consent from E&S. Company will maintain the
confidentiality of E&S product plans.
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<PAGE>
EXHIBIT G
SOFTWARE SUPPORT Responsibilities
Technical support for Support Customers using Software Programs will be provided
by E&S and Company as described below.
1. DEFINITIONS. The following definitions shall apply to this Exhibit.
1.1 "Backup Support" means the party responsible for all Error
Corrections, New Versions and product enhancements. The Backup Support
party is responsible for providing software and documentation New
Version masters to the other party for that party's distribution to
its Support Customers.
1.2 "Documentation Updates" means Error Corrections, updates, and changes
to documentation which keep it current with the Software Programs and
specifications. Company will provide core documentation and
Documentation Updates to E&S. E&S may customize documentation to meet
E&S requirements.
1.3 "Error Correction" means the development of a Workaround, Fix or New
Version of Software Programs which brings the product back into
specification or allows the Software Programs to be reasonably
convenient to use within the Support Customer's environment.
1.4 "First Line Support," means responding to the initial request for
support, determining the product being used, and as appropriate,
routing the issue to the Primary Support provider for resolution.
1.5 "Fix" means a change required in the Software Programs to make the
product perform in accordance with specifications or to correct a
Product Deficiency. A Fix may be provided by telephone, facsimile, or
software patch.
1.6 "New Version" means a new version of Software Programs or portions of
Software Programs and related documentation, which is distributed to
Support Customers and is intended to provide Fixes, Error Corrections,
new features, performance enhancements, and increased reliability,
performance, or capacity.
1.7 "Primary Support," means taking responsibility for the customer issue,
communicating regular status updates, using reasonable efforts to
determine the cause of the problem, or reproducing the problem, if
possible, and working directly with Support Customers on a Product
Report if required to resolve the problem. In addition, the Primary
Support provider will:
(a) explain product usage; or
(b) identify product problems and resolve or provide Workarounds or
Fixes; or
(c) ensure that the resolution of the Product Report or enhancement
request is satisfactory to the customer;
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(d) track and close all issues with Support Customers; and
(e) provide all New Versions to Support Customers.
1.8 "Product Deficiency" means a problem reported by Support Customers or
E&S where the behavior of the Software Programs is not as predicted by
the Software Programs functional specification or documentation, but
which significantly impact product usage. Product Deficiencies may
include bugs, non-compliance with standards, or problems which make
the software inconsistent or inconvenient to use, performance
significantly less than competitors, or capacity significantly less
than competitors.
1.9 "Product Report" means the form of documentation describing a request
for Error Correction.
1.10 "Support Services Sales" means selling support services to Support
Customers, including accepting a purchase order and paying support
fees to the other party as applicable.
1.11 "Workaround" means an alternative method to use Software Programs to
avoid Product Deficiencies. Workarounds provided to Support Customers
and E&S will include a description of the symptoms of the problem
fixed.
2. Support responsibility matrix. Support related activities for Software
Programs will be provided by the parties as follows:
Support Activity Party
Support Services Sales E&S
Error Correction Company
Documentation Updates Company
First Line Support E&S
Primary Support E&S
Backup Support Company
3. E&S' RESPONSIBILITIES. First Line and Primary Support for Support Customers
will be provided by E&S. E&S Support Engineers will attempt to diagnose all
incoming Product Reports, provide Fixes or Workarounds and refer problems
which require additional engineering of Software Programs to Company via
phone or email for resolution. E&S shall use reasonable efforts to ensure
that questions regarding training and use of Software Programs are not
directed to the Company technical support telephone line.
4. COMPANY'S RESPONSIBILITIES. Company shall provide Backup Support to E&S.
Such support shall include, without limitation, diagnostics,
troubleshooting, operation and service recommendations and answers to
general technical inquiries. The Company North American technical support
telephone number is (___) ___-______. The support line shall be available
between 8:00 am and 5:00 pm Pacific Time excluding weekends and holidays.
International technical support shall be available as agreed by the
parties. In addition:
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<PAGE>
4.1 Notification of Product Deficiencies. Company shall acknowledge
receipt of notification of Product Deficiencies by E&S, within four
working hours of such notice. It may be necessary for E&S Support
Engineers to send problem descriptions, test cases, or problem files
to Company for final diagnosis and resolution. Company may request E&S
to submit a written Product Report documenting a Product Deficiency.
Company shall have the capability to receive files electronically via
email and FTP from E&S.
4.2 Test Cases. Any test case provided by E&S on behalf of a Support
Customer shall be disclosed to Company pursuant to the terms of the
CIEA attached as an exhibit to this Agreement.
4.3 Product Deficiency, Workarounds. Company shall report all known
Product Deficiencies and provide their Workarounds to E&S Customer
Support in written or electronic form as soon as such Workarounds are
available.
4.4 New Versions. Company shall provide New Versions of Software Programs
to E&S as soon as such versions are available. Each New Version of the
Software Programs shall be provided on mutually agreed to media and
shall include release notes, a listing of all Product Deficiencies and
Product Reports fixed, a listing of all open Product Deficiencies and
Product Reports, and a listing of all enhancements included in the New
Version.
4.5 Correction of Errors. Company will use best efforts to design, code
and implement programming changes and modifications to correct
reproducible errors in order to bring the software into conformance
with the specifications and performance standards.
4.6 Priority. The priority of an error will determine the response time
requirements. Company shall use its reasonable best efforts to correct
all bugs or Product Deficiencies in accordance with the resolution
times described below:
(a) Critical. Within two business days of notification by E&S and
receipt of file, Company will:
(i) provide a Workaround or Fix; or
(ii) if the Fix cannot be provided within two business days,
propose a date, subject to E&S' approval, when a Fix will be
provided; and in any event,
(iii)provide a Fix to the Support Customer within 30 calendar
days; and
(iv) fix the Product Deficiency in the next available New
Version.
(b) High. Within 14 calendar days of notification by E&S and receipt
of file, Company will:
(i) communicate the commitment to a Workaround or Fix
availability within 14 calendar days of notification, and
(ii) deliver the Fix in the next available New Version to the
Support Customer within 60 calendar days; or
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<PAGE>
(iii)provide a Workaround or Fix within 60 calendar days and fix
the Product Deficiency in the next available New Version.
(c) Medium. Within four weeks of notification by E&S and receipt of
file, Company will:
(i) communicate the commitment to a Workaround or Fix and New
Version availability; and
(ii) deliver to such commitment.
(d) Low. Within six weeks of notification by E&S and receipt of file,
Company will:
(i) communicate the commitment to a Workaround or Fix and New
Version availability; and
(ii) deliver to such commitment.
4.7 Problem Priority. For purposes of this Exhibit, the priority level
which indicates the impact of the problem on the Support Customer is
defined below:
(a) Critical. The problem prevents use of Software Programs where use
of Software Programs is on Support Customer's critical path, no
Workaround exists for the problem, and use is mission critical to
the customer.
(b) High. The problem prevents use of Software Programs where use of
Software Programs will soon be on Support Customer's critical
path and no Workaround exists for the problem. If this problem is
not corrected in a timely fashion, it may become "critical".
(c) Medium. The problem impairs use of Software Programs where use of
Software Programs is on Support Customer's critical path, and a
Workaround exists; the Workaround process is tedious (impacts
productivity); or the problem prevents use of Software Programs
not on Support Customer's critical path, and no Workaround
exists. In either case, there is a significant impact on
productivity and the problem is seen by the Support Customer as a
major inconvenience. Or, a high volume of Support Customers is
affected. Or it is a chronic problem.
(d) Low. The problem impacts productivity and is seen by the Support
Customer as a minor inconvenience and an acceptable Workaround
exists for the problem. Other descriptors may include: nuisance;
easily worked around; annoyance; trivial; or the likelihood of
running into it elsewhere is very low and it is not a severe
problem.
4.8 Failure to Comply. If Company does not comply with this section 4
within a reasonable time, E&S shall give Company written notice of
such failure pursuant to this Agreement. In addition to its other
rights under this Agreement, E&S shall have the right to suspend
support payments to Company.
Page 35
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 271,665
<SECURITIES> 0
<RECEIVABLES> 46,737
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 318,402
<PP&E> 244,925
<DEPRECIATION> (165,070)
<TOTAL-ASSETS> 600,552
<CURRENT-LIABILITIES> 1,214,349
<BONDS> 0
0
100,000
<COMMON> 199,513
<OTHER-SE> (913,310)
<TOTAL-LIABILITY-AND-EQUITY> 600,552
<SALES> 512,217
<TOTAL-REVENUES> 512,217
<CGS> 390,555
<TOTAL-COSTS> 1,731,859
<OTHER-EXPENSES> 7,386
<LOSS-PROVISION> (1,662,270)
<INTEREST-EXPENSE> (59,459)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,664,670)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.06)
</TABLE>
