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, 1999
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ____ to ____
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Commission File Number: 0-24109
SYNTHONICS TECHNOLOGIES, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 87-0302620
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
31324 Via Colinas, Suite 106, Westlake Village, CA 91362
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(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. [X]
The issuer's revenues for the year ended December 31, 1999 were $157,737.
The aggregate market value of the voting stock held by non-affiliates as of
April 10, 2000 computed based on the average of the bid and ask prices reported
on the OTC Bulletin Board, was $6,569,885.
The number of shares outstanding of the registrant's common stock as of
April 10, 2000 was 28,421,679.
Documents Incorporated by Reference: See Exhibit Index.
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, 1999
INDEX
Page
PART I
Item 1. Description of Business ......................................... 1
Item 2. Description of Properties ....................................... 10
Item 3. Legal Proceedings ............................................... 10
Item 4. Submission of Matters to a Vote of Security Holders ............. 11
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters .............................................. 11
Item 6. Management Discussion and Analysis or Plan of Operation .......... 12
Item 7. Financial Statements ............................................. 16
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures ........................................ 36
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act ....... 36
Item 10. Executive Compensation .......................................... 40
Item 11. Security Ownership of Certain Beneficial Owners and Management .. 41
Item 12. Certain Relationships and Related Transactions .................. 43
Item 13. Exhibits and Reports on Form 8-K ................................ 45
Signatures .............................................................. 48
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
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Synthonics Technologies, Inc. (the "Company") has developed a core
technology, called Rapid Virtual Reality(TM) that enables the creation of
accurate 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, we believe that 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.
The Company embarked on the commercialization of its proprietary technology
during 1998 and is now primarily focused on providing businesses with e-commerce
solutions where the access to accurate 3D databases and graphics, in real-time
by their consumers, will positively influence the purchase decision. Prior to
that time, all efforts were devoted to market research, technology concept
definition, technology design, and technology validation.
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 originally 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.
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. Synthonics Incorporated's
charter, since its acquisition by the Company, has been to continue to advance
the Company's core technology.
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. On April 28, 1998, the Company
filed its Form 10SB12G with the SEC to become a fully reporting public company.
On December 23, 1999, the Company reincorporated under the laws of the State of
Delaware.
Strategy
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Synthonics has determined that certain vertical markets require more
sophisticated intelligence be made available to its consumers in order for those
markets to take advantage of the explosive growth associated with e-commerce
channels. We believe that many current e-commerce solutions fall short in
providing consumers the comfort level they are seeking in order to complete a
purchase outside of the in-store environment. Consequently, many potential
e-commerce consumers use on-line resources to sort and compare products but then
feel it necessary to visit a store to complete the purchase. We have developed a
strategy that addresses the concerns of these consumers.
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Through utilization of our own proprietary 3D technology, along with other
third party technologies, we have developed a national e-commerce enabling
program that can dramatically improve the functionality of any online or offline
shopping experience. We are concentrating our efforts on e-commerce where the
interface is with the business - a business-to-business solution. In doing so,
the customer acquisition is not a requirement of Synthonics but rather the
responsibility of businesses with sound marketing infrastructures already in
place. We are targeting businesses that have products that meet the following
criteria:
o Items where the probability and ease of purchase is increased and
enhanced through the use of 3D modeling.
o Items where the potential markets are large and have clearly
identifiable product extensions.
o Higher ticket items or large scale programs where photographs and
standard spec sheets don't provide enough information to make a final
purchase decision.
o Items that are or can be sold through multi-channel distribution
systems.
Our solution is expected to provide personalized information that we
believe will greatly enhance the consumer's comfort level that the product they
order is going to meet their individual needs without having to physically
examine the product. We will be able to provide this service due to our
proprietary 3D content creation technology. Using our e-commerce solutions, we
believe consumers will be able to match sizes to their body proportions, to
compare products or styles in side-by-side comparisons, to place accurate and
photo-realistic models of the product into personalized 3D environments and to
extract any measurement from the product that is important to their personal use
of the product. Additionally, the consumer will be able to examine the product,
no matter how large, as if he or she were holding it in his or her hands.
We have designed our e-commerce solutions to be very flexible so that our
business customers will be able to take advantage of multi-channel approaches
for the marketing of their products. We envision our solutions being delivered
to consumers in the following manners:
o Digital Catalogs - Catalogs are used extensively in several vertical
markets as a primary method of presenting and selling products.
Catalog consumers are those who have limited access to the store -
either due to time constraints or physical location - and use catalogs
due to the convenience they provide. Catalog consumers have also
demonstrated that they will purchase products without having to
physically interact with them.
o Kiosks - A growing trend at retail locations is to provide product
information on kiosks for the convenience of the consumer. This
approach enables consumers to avoid sales personnel, to compare
products, and to access products that may only be at other locations.
o Internet - Most retailers have now opened or are planning to open an
Internet channel of distribution. These may take the form of its own
website or it may use a portal site to merchandise their products
electronically. Our Internet solution is designed to run seamlessly
across the Internet as a totally web-based solution and to run as an
application within any manufacturer's or retailer's website.
We believe that brand awareness and enhancement is a very important
attribute required to support multi-channel marketing of one's products. We have
designed our e-commerce solutions to take on the unique identities of our
business customers while, at the same time, broadcasting our own brand as the
core technology within the solution.
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Products and Services
---------------------
Current Products - Synthonics has two other products that are currently
available. We published a CD-ROM for the Smithsonian Institution, located in
Washington D.C., that is currently sold through the Smithsonian gift shops and
by several educational products distributors. The CD-ROM is entitled The
Smithsonian Museum Collection and is a virtual 3D tour of the Smithsonian
collections offering more than one hundred hours of edutainment.
We have licensed our Picture Modeler, a 3D content creation product, to
Evans & Sutherland, located in Salt Lake City, UT, as a component in their
recently released RapidSITE 3D visualization product for the architectural
market. Picture Modeler enables the easy and rapid creation of accurate 3D
models of building structures that are comprised of small file sizes.
E-commerce Solutions - Our Digital Double program has been created to
address the needs of businesses selling many types of products. The first
solution that will be available is the Digital Double for Apparel version. As is
the case with other vertical markets, most all retailers and manufacturers of
apparel have launched or are launching e-commerce initiatives in order to
attract and hold the rapidly growing number of convenience and value driven
consumers. The apparel market also currently contains a very large segment of
catalog users. We believe consumers who have decided to shop by way of catalogs
are ideal candidates for conversion to e-commerce shoppers as they are
comfortable "buying without touching" and are used to the order fulfillment
process.
The Digital Double for Apparel product allows consumers to create their own
personal 3D mannequin that is shaped to their body proportions from simple
measurements that anyone can collect by them self in the convenience of their
home. Once the measurements are entered, the mannequin instantly morphs to the
new body proportions. As the consumer then views the many styles of clothing
available, his or her correct size is determined for each and every garment
included in the inventory. Details concerning specific fit are also available
enabling a consumer to conclude that the fit is okay as is, the garment can be
altered, or the particular fit in this style isn't going to work - all before
making a purchase, paying for shipping and then having to return the item.
Finally, the consumer can dress his or her personal mannequin with the garments
he or she is interested in and then mix and match outfits in side-by-side
comparisons.
The Digital Double for Apparel product will be able to be delivered to
consumers as a mailed digital catalog, at a kiosk or over the Internet. In all
cases we believe it will positively impact the number one problem (returns for
wrong size or improper fit) associated with online and mail order purchases of
apparel. We are not aware of any competitive and practical "size intelligent"
e-commerce solution available today within the Apparel industry.
After securing customers within the apparel market, we intend to launch
e-commerce solutions for other vertical markets such as furniture, automotive,
real estate and others.
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Patents
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Synthonics believes its technology to be unique in its approach and
application. We are dedicated to the protection of our trade secrets and source
code through tight security, the advancement of the technology, and the
establishment of strong patent protection. Therefore, we have 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 nine patents by the U.S. Patent & Trademark Office. A brief description
of each patent issued to date is included below:
Patent 1.
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U.S. Patent: #5,661,518
Title: Methods and apparatus for the creation and transmission of 3D
images.
Issue Date: August 26, 1997
Description: Anaglyph generating technique that minimizes eye strain and color
loss. Technique for aligning two images for stereo viewing.
Patent 2.
- --------
U.S. Patent: #5,699,444
Title: Methods and apparatus for using image data to determine camera
location and orientation.
Issue Date: December 16, 1997
Description: Able to precisely locate camera within six degrees of freedom
(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.
Patent 3.
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U.S. Patent: #5,742,291
Title: Method and apparatus for creation of three-dimensional images.
Issue Date: April 21, 1998
Description: Technique for morphing a baseline 3D wireframe into a new shape.
Greatly speeds up the process of generating unique 3D wire
frames.
Patent 4.
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U.S. Patent: #5,742,330
Title: Methods and apparatus for the creation and transmission of
3-dimensional images.
Issue Date: April 21, 1998
Description: Technique for minimizing disturbances and to compensate for
underexposure when transmitting 3D color television images. Will
benefit high definition transmissions.
Patent 5.
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U.S. Patent: #5,748,199
Title: Method and apparatus for converting a two-dimensional motion
picture into a three-dimensional motion picture.
Issue Date: May 5, 1998
Description: Technique for constructing wire frames of object from frames of
2D movie film and then photo-realistically rendering. Enables
original blockbuster 2D movies to be converted to 3D virtual
reality experiences without re-shooting movie.
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Patent 6.
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U.S. Patent: #5,793,372
Title: Methods and apparatus for rapidly rendering photo-realistic
surfaces on 3-dimensional wire frames automatically using user
defined points
Issue Date: August 11, 1998
Description: Technique that accurately and rapidly aligns the photo-texture on
the 3D wire frame. Enables inexpensive, realistic appearing 3D
graphical content to be generated.
Patent 7.
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U.S. Patent: #5,969,722
Title: Methods and apparatus for creation of three-dimensional wire
frames and for three-dimensional stereo morphing.
Issue Date: October 19, 1999.
Description: Technique that accurately and rapidly creates wire frames from
standard shapes (primitives) with the use of a light source that
is projected onto a featureless object to create visual
definition. Enables inexpensive, realistic appearing 3D graphical
content to be generated.
Patent 8.
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U.S. Patent: #6,037,971
Title: Methods and apparatus for the creation and transmission of
3-dimensional images.
Issue Date: March 14, 2000
Description: Techniques for compensating for over or underexposure in a
particular image plane are deployed as well as techniques for
minimizing subjective disturbance when viewing relatively pure
color regions of a 3-dimensional image and for transmission of
3-dimensional color television images to users. Optimizes stereo
performance with red/blue glasses.
Patent 9.
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U.S. Patent: #6,041,140
Title: Apparatus for interactive image correlation for three dimensional
image production.
Issue Date: March 21, 2000
Description: A hardware accelerator board utilizes field programmable gate
arrays that can be reprogrammed on the fly during program
execution to achieve dedicated hardware processing speeds and
greater flexibility than provided by compiled or interpreted
software. The accelerator board is used to permit the user to
interact with the computer system in which the board is installed
to interactively produce a correlation of two images of the same
scene. Correlated images are used to determine depth of objects
in the scene shown in the correlated images. A production
automation technique for hardware accelerated creation of
3-dimensional content.
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.
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Employees
---------
As of March 27, 2000, the Company had seven employees, none of whom are
covered by a collective bargaining agreement. We consider our relationship with
our 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 and how it applies to the needs of e-commerce consumers.
Raw Materials
-------------
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
------------
Several of the matters discussed in this document contain forward-looking
statements that involve risks and uncertainties. Factors associated with the
forward-looking statements that could cause actual results to differ materially
from those projected or forecast appear in the statements below. In addition to
other information contained in this document, readers should carefully consider
the following cautionary statements and risk factors:
IF WE ARE UNABLE TO RAISE SUFFICIENT CAPITAL. Our future success depends
largely on the ability to secure outside capital funding. Required product
concept demos, product development, technology advancement, employee recruitment
and hiring, and related essential operating expenses are all dependent on new
and substantial capital funding being secured. We cannot be certain that
additional financing will be available at the time we need additional funds or
that, if available, it can be obtained on terms that we deem favorable. If
adequate capital funding cannot be secured, we will have to curtail operations
and our business will be adversely affected. Additionally, the sale of stock to
raise additional funds may dilute our stockholders.
WE HAVE A LIMITED RELEVANT OPERATING HISTORY UPON WHICH TO EVALUATE THE
LIKELIHOOD OF OUR SUCCESS. Factors such as the risks, expenses and difficulties
frequently encountered in the operation and expansion of a relatively new
business and the development and marketing of new products must be considered in
evaluating the likelihood of success of our company.
WE HAVE A HISTORY OF LOSSES AND ACCUMULATED DEFICIT AND THIS TREND OF
LOSSES MAY CONTINUE IN THE FUTURE. For the period January 1, 1999 to December
31, 1999 we incurred a net loss of $983,277. For the fiscal year ended December
31, 1998 we had a net loss of $1,664,670. At December 31, 1999 our accumulated
deficit was $6,980,378. Our ability to obtain and sustain profitability will
depend, in part, upon the successful development and marketing of our existing
products and technologies and the successful and timely introduction of new
products.
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OUR PROPRIETARY TECHNOLOGY MAY NOT BE ADEQUATELY PROTECTED FROM COPYING BY
OTHERS. Our future success and ability to compete depends in part upon our
proprietary technology. We rely on trademark, trade secret, patent laws, and
copyright laws to protect our technology, and require all employees and
third-party developers to sign nondisclosure agreements. We cannot be certain,
however, that these precautions will provide meaningful protection from
competition or that competitors will not be able to develop similar or superior
technology independently. We do not copy-protect our software, so it may be
possible for unauthorized third parties to copy our products or to reverse
engineer or otherwise obtain and use information that we regard as proprietary.
Our customers may take inadequate precautions to protect our proprietary
information. If we must pursue litigation in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others, we may not prevail and
will likely make substantial expenditures and divert valuable resources. In
addition, many foreign countries' laws may not protect us from improper use of
our proprietary technologies overseas. We may not have adequate remedies if our
proprietary rights are breached or our trade secrets are disclosed.
IF WE DO NOT ACHIEVE COMMERCIAL ACCEPTANCE OF OUR INTERNET 3D E-COMMERCE
SOLUTION PRODUCTS. We are currently focusing the Company to provide 3D
e-commerce solutions for the Internet that take advantage of our patented 3D
technology. We believe both consumers and businesses, participating in
e-commerce on the Internet, will benefit substantially from the products that we
will develop therefore creating market demand for these products. In designing
our products for e-commerce on the Internet, we will have to make certain
assumptions about consumer preferences, retailer's needs, and the availability
of anticipated Internet related technology advances. Inaccurate assumptions on
our behalf, for any of these categories, will likely downgrade market acceptance
of our Internet 3D e-commerce solution products. If market acceptance of these
products is less than we have forecasted, future results of the company will be
adversely affected.
IF EMERGING TECHNOLOGIES PROVIDE ALTERNATIVES WITH EQUAL OR BETTER BENEFITS
OF OUR TECHNOLOGY. We believe that our current level of 3D technology for the
creation of 3D content provides businesses and consumers with benefits that are
unavailable from competitive technologies. We can only make this evaluation
against other products that have been released and available for public
consumption. Our competitive analysis cannot evaluate products that are
currently under development by other companies. The explosive growth of
e-commerce over the Internet is sufficient incentive for many companies to
invest in technologies that may provide products that offer similar or better
consumer and business benefits than will our products. It is essential that we
execute our Internet e-commerce solution strategy very quickly in order to stay
ahead of the competition's product offerings in this marketplace. Our time to
market with our future products is dependent on our ability to raise adequate
capital funding as described above.
IF WE ARE UNABLE TO IDENTIFY AND SECURE REQUIRED RESOURCES. Our future
results depend largely on our ability to identify and secure resources
including:
* Technical staff
* Business development staff
* Strategic partners
* Outside contractors
We will have to rapidly expand our capabilities, once capital funding is
secured, in order to successfully pursue our Internet e-commerce solution market
strategy. Our capabilities will be expanded by combining internal staffing with
the formation of strategic partnerships and with the selection of outside
contractors such as software program developers. If we are either unable to
identify or to secure these resources in a timely fashion, our future results
will be adversely affected.
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IF WE ARE UNABLE TO RETAIN AND UTILIZE KEY PERSONNEL. As an early stage
company, we are particularly dependent on a limited number of individuals to
execute our business plan. At present, all our officers and directors fall in to
the category of key individuals as each is counted upon for contributions to our
success. We have employment contracts with our Chief Executive Officer, F.
Michael Budd, and our Chief Technical Officer, Charles S. Palm, our only full
time officers. We have been unable to pay either of these employees the
compensation amounts called for in their employment contracts during the past
several fiscal quarters. Each employment contract can be terminated with thirty
days notice to the Company. If either of these individuals were to terminate
employment in the near future, it will have an adverse affect on our financial
performance. Our directors are all individuals who are employed full time by
other, non-competing, companies. As such, involvement of these directors in the
day-to-day running of the business is not practical due to conflicts of interest
for their time. At any given time, any of our directors may be unavailable to us
due to the demands of their employers and this may have an adverse affect on the
financial results of the business.
IF WE ARE UNABLE TO MANAGE OUR EXPANSION AND GROWTH. We are planning to
expand the business very rapidly in order to entrench ourselves in, what we
believe is a very lucrative e-commerce market. Effectively managing this
expansion will be very complex and require the addition of key management
personnel as well as the incorporation of management support systems. Either the
failure to identify and attract key managers or the delayed incorporation of
required management support systems will adversely affect our future financial
results. The successful recruitment of key managers and the timely installation
of management support systems are both largely dependent on our efforts to
secure adequate capital funding that is discussed above.
IF WE ARE UNABLE TO ADEQUATELY ADDRESS INTERNET DOWNLOAD ISSUES. We will be
supplying 3D e-commerce solutions over the Internet. A major element of these
future product solutions will be to require downloads of several 3D data files
to consumers' sites. In order to be successful in this regard, we must be able
to offer download times that do not detract from the e-commerce experience. We
believe that our technology offers the best alternative available in terms of 3D
file sizes. However, we have no assurances that this advantage will be adequate
in the eyes of a consumer. We have no control over the modem type used by a
consumer, the time of day a consumer will be accessing the Internet, the
capacity of the consumer's Internet Service Provider (ISP), or the rate to which
expanded bandwidth solutions will be practically available to consumers. Each of
these can have a negative affect on the length of the download time. We are
attempting to consider all these issues in the design of our 3D e-commerce
solution products but we cannot assure that they will be adequately addressed.
If consumers conclude that the download times are not sufficiently offset by the
benefits provided, our future financial results will be adversely affected.
Impact of Year 2000
-------------------
During 1999 we completed our remediation and testing of management support
systems. Because of those planning and implementation efforts, we experienced no
significant disruptions in mission critical information technology and
non-information technology systems and those systems have successfully responded
to the Year 2000 date change. We did not incur any significant expenses during
1999 in conjunction with remediating our systems. We are not aware of any
material problems resulting from Year 2000 issues, either with our products,
internal systems, or the products and services of third parties. We will
continue to monitor our mission critical computer applications and those of our
suppliers and vendors throughout the year 2000 to ensure any latent Year 2000
matters arising are addressed promptly.
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 that are located at 31324 Via Colinas, Suite 106,
Westlake Village, California 91362. The space is in good condition and 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, 2000.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending, nor is it aware of any
threatened, legal proceedings which it believes could reasonably be expected to
have a material adverse effect on its business, operating results or financial
condition.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 3, 1999 a Special Meeting of shareholders was held for the
purpose of:
1. To consider and vote upon a proposed change in the Company's state of
incorporation from Utah to Delaware.
2. To approve a the 1999 stock option plan authorizing the issuance of
10,000,000 shares of Common Stock.
(a) Reincorporation in Delaware
At the Special Meeting of shareholders, the shareholders approved a
reincorporation in Delaware through a merger of Synthonics Technologies, Inc., a
Utah corporation (the "Company"), with and into its wholly owned subsidiary,
Synthonics Technologies Mergercorp., a Delaware corporation ("Synthonics
Delaware"). There were 28,421,679 shares entitled to vote with 18,743,742 voting
in favor of the proposal and 6,025 voting against the proposal.
The reincorporation became effective on December 23, 1999. The
reincorporation effects only a change in the legal domicile of the Company. It
did not result in any change of the name, business, management, employees,
fiscal year, assets or liabilities, trading symbol ("SNNT") or location of any
of the facilities of the Company. Pursuant to the Agreement and Plan of Merger
between the Company and Synthonics Delaware, each share of the Company's common
stock, par value $.01 per share, was automatically converted into one share of
Synthonics Delaware common stock, par value $.01 per share. Each share of the
Company's Class A Preferred Stock issued and outstanding prior to the
reincorporation was automatically converted into one share of Class A Preferred
Stock of Synthonics Delaware.
(b) Approval of 1999 Stock Option Plan
At the Special Meeting, shareholders also approved a new stock option plan
(the "1999 Plan") authorizing the issuance of 10,000,000 shares of common stock
of the Company. There were 28,421,679 shares entitled to vote with 17,170,151
voting in favor of the proposal and 593,616 voting against the proposal.
The reincorporation and the rights and terms of the 1999 Plan are more
fully described in the Company's proxy statement filed November 19, 1999 which
is incorporated herein by reference.
No other matters were submitted to a vote of security holders, through the
solicitation of proxies, or otherwise, during the fourth quarter of the fiscal
year covered by this report.
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, 1999.
Fiscal 1999 High Low
-------------- ------- ------
First Quarter $0.625 $0.250
Second Quarter $0.310 $0.130
Third Quarter $0.280 $0.070
Fourth Quarter $0.531 $0.070
There were approximately 600 holders of record of the Company's Common
Stock and one holder of record of the Company's Preferred Stock as of December
31, 1999.
The Company has never declared or paid any cash dividend on its shares of
Common Stock.
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During the fiscal years ended December 31, 1997, 1998 and 1999, Synthonics
issued shares of its Common Stock for the purpose of raising operating capital
and repayment of debt. 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. The transactions for each year are described below:
Year Shares Issued Proceeds
---------------------------------------------------------
1999 8,470,400 $1,231,908
1998 2,127,892 $1,143,280
1997 1,921,354 $ 889,615
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATION RESULTS
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.
The following discussion and analysis should be read together with the
Annual Report of Synthonics, Consolidated Financial Statements of Synthonics and
the notes to the Consolidated Financial Statements included elsewhere in this
Form 10-KSB.
This discussion summarizes the significant factors affecting the
consolidated operating results, financial condition and liquidity and cash flows
of Synthonics for the years ended December 31, 1999 and December 31, 1998.
Except for historical information, the matters discussed in this Management's
Discussion and Analysis of Financial Condition and Results of Operations are
forward looking statements that involve risks and uncertainties and are based
upon judgments concerning various factors that are beyond our control. Actual
results could differ materially from those projected in the forward-looking
Statements as a result of, among other things, the factors described below under
the caption "Cautionary Statements and Risk Factors."
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
12
<PAGE>
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.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998.
- -----------------------------------------------------------------------
NET SALES decreased 69.2% for the year ended December 31, 1999 to $157,737
from $512,217 for the year ended December 31, 1998. The majority of sales during
the year ended December 31, 1999 were from ongoing revenue contracts. Sales of
the Smithsonian CD-ROM were $91,971. In addition, $40,000 in sales was generated
during this period from the Company's agreement to license its new software
product called Picture Modeler. The balance of sales during the twelve months of
fiscal 1999 was derived from 3D content creation services rendered. During the
twelve months of fiscal 1998, the Company launched its sales of the Smithsonian
CD-ROM entitled The Smithsonian Museum Collection and provided content creation
and software development services to two customers accounting for the majority
of its sales in that time period.
GROSS PROFIT decreased 46.8% in the year ended December 31, 1999 to $64,968
from $121,662 in the year ended December 31, 1998. This decrease in the gross
profit for fiscal 1999 can be attributed to the reduction in sales for the same
time period. Gross profit as a percentage of sales increased to 41.2% for fiscal
1999 as compared to 23.7% for fiscal 1998.
OPERATING EXPENSES decreased to $1,008,522 for the year ended December 31,
1999 from $1,733,919 for the year ended December 31, 1998. The decrease in
operating expense is primarily due to a decrease in staffing during fiscal 1999.
Overall, the reduction in operating expenses reflects the Company's efforts to
consolidate and cut costs while it attempts to redefine its overall strategy
from that of a 3D software tools provider to that of an Internet 3D e-commerce
solution provider.
PRODUCTION COSTS for the year ended December 31, 1999 were $91,849 or 58.2%
of sales as compared to $447,073 or 87.3% of sales for the year ended December
31, 1998. Production costs decreased due to the fact that during 1998, the
Company had additional costs related to the preparation of the Smithsonian
CD-ROM for its release in October 1998. During fiscal year 1999, production
costs have been primarily associated with the 3D content creation services
provided to the Smithsonian Institution and the development of the first product
for the Company's Internet solution initiative.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $498,719 and $716,365 for the
years ended December 31, 1999 and 1998, respectively. The decrease in expense
reflects the cost reduction effort underway with the re-focusing of the Company
to that of an Internet e-commerce solution provider.
RESEARCH AND DEVELOPMENT EXPENSES totaled $320,754 and $432,858 for the
years ended December 31, 1999 and 1998, respectively. The decrease is primarily
the result of a reduction in development required for the products being
prepared for the Company's joint venture affiliate, Acuscape International, Inc.
Expenditures on research and development are expected to increase in future
periods, particularly in connection with the Company's shift in strategy to
electronic commerce solutions and the investigation and/or development of
additional product lines.
We wrote off $7,710 of uncollectible receivables during the year ended
December 31, 1999. A total of $2,060 of uncollectible receivables were written
off during the year ended December 31, 1998.
As a result of the foregoing factors, we had a net loss of $983,277 for the
year ended December 31, 1999 as compared to a net loss of $1,664,270 for the
year ended December 31, 1998.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary needs for funds are to provide working capital
associated with forecasted growth in sales volume. Specifically, funds are
required to complete the products necessary for the Company's Internet
initiative and to advance its core technology used in the creation of 3D
content. Additionally, funds are required to promote future business
development. Working capital for the year ended December 31, 1999 was funded
primarily through the sale of equity, the assumption of debt and the collection
of accounts receivable.
Net cash used in operating activities during the year ended December 31,
1999 was primarily attributable to a net loss of $983,277. Net cash used in
investing activities in the year ended December 31, 1999 was due primarily to
costs associated with patent filings. Net cash provided by financing activities
for the year ended December 31, 1999 was $761,097 compared to $1,464,833 during
the year ended December 31, 1998. In May 1999 a warrant was exercised for
120,000 shares of Common Stock at $0.20 per share providing $24,000 in cash, and
in June 1999, we closed a private placement of 2,535,000 shares of our Common
Stock, which were issued to three investors. The private placement raised
aggregate proceeds of $253,500, offset by $13,692 of selling expenses and
$12,000 for dividends accrued to be paid to Preferred Stock shareholders. In
October 1999 an option was exercised for $80,000. In December 1999 $500,000 came
into the Company via a convertible debt agreement.
In May of 1999, we had notes payable in the amount of $850,000 come due. We
chose to exercise our option, per the terms of the notes, to issue Common Stock
in lieu of cash in order to pay off the principal and the majority of
outstanding interest associated with these notes. In doing so, we issued a total
of 5,005,000 shares of our Common Stock to the holders of these notes.
At present, our anticipated capital commitments are primarily for the
expenditures associated with the overhauling of our infrastructure, creating of
marketing demonstrations, pursuing strategic alliances, and pursuing capital
funding. We estimate that our current cash balance is not sufficient to meet our
needs through the first quarter of fiscal 2000. Based on our current operating
plan, we anticipate that further capital will be required during the next twelve
months to satisfy our expected increased working capital and research and
development requirements for the new products. We are currently exploring
alternatives to fulfill our financing requirements. No assurance can be given
that additional financing will be available when needed or that, if available,
it will be on terms favorable to our stock holders and us. If needed funds are
not available, we may be required to curtail our operations, which could have a
material adverse effect on our business, operating results and financial
condition. There can be no assurance that our working capital requirements
during this period will not exceed its available resources or that these funds
will be sufficient to meet the Company's longer-term cash requirements for
operations.
14
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
SYNTHONICS TECHNOLOGIES, INC.
Audited Financial Statements
December 31, 1999 and December 31, 1998
<TABLE>
<S> <C>
Independent Auditors' Report ...................................... 16
Consolidated Balance Sheets ....................................... 17
Consolidated Statements of Operations ............................. 18
Consolidated Statements of Stockholders' Equity ................... 19
Consolidated Statements of Cash Flows ............................. 21
Notes to Consolidated the Financial Statements .................... 22
</TABLE>
Page 15
<PAGE>
Report of Independent Auditors' Report
The Board of Directors and Stockholders
Synthonics Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Synthonics
Technologies, Inc. and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the year ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 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, 1999, and the
consolidated results of its operations and its cash flows for the year ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As more fully described in Note 1,
the Company has a working capital deficiency and has incurred significant
recurring losses, which have resulted in an accumulated deficit and a deficit in
stockholders' equity. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
/S/ Ernst & Young LLP
Ernst & Young LLP
April 10, 2000
Los Angeles, California
16
<PAGE>
Synthonics Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1999 1998
----------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 294,583 $ 271,665
Accounts receivable, net 302 15,117
Accounts receivable, related 31,620 31,620
----------------------------
Total current assets 326,505 318,402
Property and equipment, net 34,444 79,855
Intangibles, net 181,314 188,348
Deferred financing costs 82,441 -
Deposits 4,495 13,947
----------------------------
Total assets $ 629,199 $ 600,552
============================
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable 215,534 302,796
Accounts payable, related 195,661 47,366
Other accrued expenses 14,440 14,187
Notes payable - 850,000
----------------------------
Total current liabilities 425,635 1,214,349
Convertible notes payable 500,000 -
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock; 550,000 Class A shares
authorized of $10.00 par value, 10,000
sahres issued and outstanding;
20,000,000 Class B Shares authorized $0.01 par value
no shares issued and outstanding 100,000 100,000
Common Stock; 100,000,000 shares authorized of
$0.01 par value, 28,421,679 and 19,951,279 shares
issued and outstanding in 1999 and 1998, respectively 284,217 199,513
Additional paid-in capital 6,299,725 5,083,791
Accumulated deficit (6,980,378) (5,997,101)
----------------------------
Total stockholders' equity (deficit) (296,436) (613,797)
----------------------------
Total liabilities and stockholders' equity (deficit) $ 629,199 $ 600,552
============================
</TABLE>
See accompanying notes.
17
<PAGE>
Synthonics Technologies, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Net sales $ 157,737 $ 512,217 $ 417,574
Cost of goods sold 92,769 390,555 264,850
-------------------------------------------
Gross profit 64,968 121,662 152,724
Expenses:
Research and development 320,754 432,858 753,014
Production costs 91,849 447,073 -
General and administrative 498,719 716,365 830,415
Depreciation and amortization 89,490 135,563 110,979
Bad debt expense 7,710 2,060 34,780
-------------------------------------------
Total expenses 1,008,522 1,733,919 1,729,188
-------------------------------------------
Loss from operations (943,554) (1,612,257) (1,576,464)
Other income (expense):
Other income 1,168 - 2,104
Interest income 2,424 9,446 6,603
Interest expense (36,650) (59,459) (9,142)
-------------------------------------------
Total other income (expense) (33,058) (50,013) (435)
-------------------------------------------
Loss before provision for income taxes (976,612) (1,662,270) (1,576,899)
Provision for income taxes 6,665 2,400 1,700
-------------------------------------------
Net loss (983,277) (1,664,670) (1,578,599)
Dividends on preferred stock 12,000 24,000 15,000
-------------------------------------------
Net loss applicable to common shareholders $ (995,277) $ (1,688,670) $ (1,593,599)
===========================================
Net loss per common share - basic and diluted
$ (0.04) $ (0.09) $ (0.10)
===========================================
Weighted average number of shares
outstanding - basic and diluted 24,629,271 19,135,167 16,398,006
===========================================
</TABLE>
See accompanying notes.
18
<PAGE>
Synthonics Technologies, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
-------------------------------------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 - $ - 15,902,033 $ 159,020 $ 3,091,389 $ (2,753,832) $ 496,577
Common stock issued upon exercise of warrants - - 517,000 5,170 239,830 - 245,000
Common stock issued upon exercise of options
at $0.22 per share - - 688,500 6,885 144,862 - 151,747
Common stock issued to acquire Christopher
Raphael, Inc. at $0.52 per share - - 10,000 100 5,100 - 5,200
Common stock issued to replace original shares
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 - 25,155
Common stock issued in exchange for the
forfeiture of 750,000 stock options - - 501,000 5,010 243,990 - 249,000
Preferred stock issued for cash at $10.00 per
share net of stock offering costs of $50,620 50,000 500,000 - - (50,620) - 449,380
Additional capital contributed - - - - 279,133 - 279,133
Dividends on preferred stock declared,
$0.30 per share - - - - (15,000) - (15,000)
Net loss - - - - - (1,578,599)(1,578,599)
------------------------------------------------------------------------------------
Balance at December 31, 1997 50,000 500,000 17,823,387 178,234 3,961,790 (4,332,431) 307,593
Common stock issued for cash at
$0.65 per share, net of stock offering
costs of $30,176 - - 550,002 5,500 321,824 - 327,324
Common stock issued in lieu of debt - - 90,875 909 54,560 - 55,469
Common stock issued for services rendered
at $0.66 per share - - 34,815 348 22,630 - 22,978
Conversion of preferred shares to common
shares (40,000) (400,000) 615,200 6,152 393,848 - -
Common stock issued upon exercise of warrants - - 837,000 8,370 263,130 - 271,500
Dividends on preferred stock declared,
$1.20 per share - - - - (24,000) - (24,000)
Additional capital contributed - - - - 90,009 - 90,009
Net loss - - - - - (1,664,670)(1,664,670)
------------------------------------------------------------------------------------
Balance at December 31, 1998 10,000 100,000 19,951,279 199,513 5,083,791 (5,997,101) (613,797)
</TABLE>
See accompanying notes.
19
<PAGE>
Synthonics Technologies, Inc.
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
----------------------------------------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 10,000 $ 100,000 19,951,279 $ 199,513 $ 5,083,791 $ (5,997,101) $(613,797)
Common stock issued in lieu of debt - - 5,015,400 50,154 846,946 - 897,100
Common stock issued for cash, net of
stock offering costs of $13,692 - - 2,535,000 25,350 214,188 - 239,538
Common stock issued upon exercise of stock
options and warrants - - 920,000 9,200 94,800 - 104,000
Compensation expense for stock options
issued for services rendered - - - - 72,000 - 72,000
Dividends on preferred stock declared,
$1.20 per share - - - - (12,000) - (12,000)
Net loss - - - - - (983,277) (983,277)
------------------------------------------------------------------------------------
Balance at December 31, 1999 10,000 $ 100,000 28,421,679 $ 284,217 $ 6,299,725 $ (6,980,378) $(296,436)
====================================================================================
</TABLE>
See accompanying notes.
20
<PAGE>
Synthonics Technologies, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $ (983,277) $ (1,664,670) $ (1,578,599)
Adjustments to reconcile net loss to net cash used by
by operating activities:
Depreciation and amortization 89,490 135,563 110,979
Stock and non-employee stock options issued for
for services 76,389 22,978 274,155
Changes in assets and liabilities:
Accounts receivable and accounts
receivable - related 14,815 (38,405) (7,244)
Prepaid expenses and deposits 9,452 3,803 5,801
Accounts payable and accounts payable - related 103,744 229,597 (39,327)
Accrued expenses (11,747) (107,278) (10,157)
-------------------------------------------
Net cash used in operating activities (701,134) (1,418,412) (1,244,392)
Investing activities
Proceeds from disposal of fixed assets - 3,605 -
Purchase of fixed assets (3,531) (7,562) (18,530)
Patent costs (33,514) (82,409) (126,459)
-------------------------------------------
Net cash used in investing activities (37,045) (86,366) (144,989)
Financing activities
Payments on notes payable - (50,000) -
Cash proceeds from the issuance of notes payable 500,000 850,000 50,000
Deferred financing costs (82,441) - -
Capital contributions - 90,009 279,133
Dividends paid - (24,000) -
Issuance of common and preferred stock 343,538 598,824 846,127
-------------------------------------------
Net cash provided by financing activities 761,097 1,464,833 1,175,260
-------------------------------------------
Net increase (decrease) in cash 22,918 (39,945) (214,121)
Cash at beginning of year 271,665 311,610 525,731
-------------------------------------------
Cash at end of year $ 294,583 $ 271,665 $ 311,610
===========================================
Supplemental cash flow information
Cash paid for:
Interest $ 503 $ 47,709 $ 9,142
Income taxes $ 6,665 $ 2,400 $ 900
Noncash financing activities
Stock issued in conversion of debt to common stock $ 897,100 $ 55,469 $ -
Stock issued for acquisition of subsidiary $ - $ - $ 5,200
</TABLE>
See accompanying notes.
21
<PAGE>
Synthonics Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
1. Organization and Description of Operations
Synthonics Technologies, Inc. (STI) was incorporated on March 27, 1974 under the
state laws of Utah and was reincorporated in the state of Delaware in December
1999. STI engages in the design, development and marketing of
computer-interactive and computer-automated image analysis software and hardware
products. The consolidated financial statements presented are those of STI and
its wholly-owned subsidiaries, Synthonics Incorporated and Christopher Raphael,
Inc. (CRI). All material intercompany accounts and transactions have been
eliminated. Certain reclassifications have been made to the 1998 and 1997
consolidated financial statements to conform to the presentation in 1999.
On October 1, 1997, STI purchased CRI, a general design and print brokerage
company, 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 on the date of acquisition of $0.52 per share. The
acquisition was accounted for as a purchase. The Company recorded $98,184 as the
excess of the purchase price over the fair value of the net tangible assets of
CRI. The excess was amortized over a two year period resulting in amortization
expense in the amounts of $0, $48,092 and $48,092 for the years ended December
31, 1999, 1998 and 1997, respectively.
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 $6,980,378 at December 31, 1999 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 resulting 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
obtain additional equity or debt financing, if required, to sustain operations
until revenues are adequate to cover the costs.
22
<PAGE>
Synthonics Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies
Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
affecting 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.
Cash and Cash Equivalents
Cash equivalents include short-term, highly liquid investments with maturities
of three months or less at the time of acquisition. Cash and cash equivalents
consist of cash on hand, cash held in money market funds and demand deposit
accounts. The carrying amount reported in the consolidated balance sheet for
cash and cash equivalents approximates its fair value.
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 $192,407 and $171,665 at December
31, 1999 and 1998, respectively.
Concentration of Credit Risk and Major Customers
Revenues are derived from sales to customers primarily located in the United
States. The Company had two significant customers, which accounted for 47.9% and
25.4% of total revenues, respectively, during the year ended December 31, 1999.
The Company generally does not require collateral from customers. Credit losses
have been within management's expectations.
Computer Software Development Costs
Costs related to the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility of the product has been established, at which time
such costs are capitalized, subject to expected recoverability. To date, the
Company has not capitalized any development costs related to its software
product since the time between technological feasibility and general release of
a product is not significant and related costs during that period have not been
significant. Costs to obtain or maintain patents for the Company's
23
<PAGE>
Synthonics Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Computer Software Development Costs (continued)
3-D software technology are recorded as intangible assets. The costs are
principally outside legal costs and are amortized over 7 years.
Property and Equipment
Property and equipment is recorded at costs. Depreciation is computed on a
straight-line basis over a period of five years.
Investments in Affiliates
Investments in affiliates owned more than 20% but not in excess of 50%, where
the Company is not deemed able to exercise controlling influence, are recorded
under the equity method. Under the equity method, investments are carried at
acquisition costs and adjusted for the proportionate share of the affiliates'
earnings or losses.
In 1998, the Company entered into a joint venture agreement with a few
individuals to form Acuscape. Acuscape was formed to combine the proprietary
technologies of the parties involved to develop and offer software products to
the medical and dental professions. Acuscape was started with capital obtained
from outside parties and contributions of proprietary technologies by the
founding parties. Synthonics obtained an approximately 25% interest in Acuscape
for its contributed technologies, which has not been valued by the Company due
to the uncertainty of future benefits. Additionally, Synthonics is to receive a
3% royalty on gross revenues generated by Acuscape if and when such revenues are
generated. The Company has recorded no losses related to its investment in
Acuscape as the Company's investment is already recorded at zero and there are
no future funding requirements. At December 31, 1999 and 1998, the Company has a
receivable recorded from Acuscape in the amount of $31,620 related to research
and development work performed for Acuscape. Management believes this amount
will be collected in fiscal 2000 when Acuscape receives further funding.
Long-Lived Assets
Long-lived assets, include, among others, costs in excess of fair value of
assets acquired, intangible assets, investments in affiliates, joint venture
investments and fixed assets. These assets are reviewed periodically to
determine if the related carrying values are
24
<PAGE>
Synthonics Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Long-Lived Assets (continued)
impaired. The Company considers the future undiscounted cash flows of the
acquired companies in assessing the recoverability of these assets. If
indicators of impairment are present, or if long-lived assets are expected to be
disposed of, impairment losses are recorded. Any impairment is charged to
expense in the period in which the impairment is incurred.
Revenue Recognition
Revenues are derived primarily from the sale of packaged products including the
Company's software. Revenues are recognized when the products are shipped and
collectibility is assured in these instances, as the Company has no further
commitments to support or upgrade the software included in these packaged
products.
Revenues are also derived from software licenses. The Company recognizes
revenues from software licenses upon persuasive evidence of an arrangement,
delivery of software to a customer, determination that there are no significant
post-delivery obligations and collection of a fixed and determinable license fee
is considered probable.
Stock-Based Compensation and Other Equity Instruments
The Company accounts for employee and director stock option grants using the
intrinsic value method. Generally, the exercise price of the Company's employee
and director stock option grants equal or exceed the market price of the
underlying stock on the date of grant and no compensation expense is recognized.
If the option price is less than fair value, the Company records compensation
expense over the vesting period of the option. The Company has also awarded
stock options vesting upon the achievement of certain milestones. Such options
are accounted for as variable stock options and as such deferred compensation is
recorded in an amount equal to the difference between the fair market value of
the common stock on the date of determination less the option exercise price and
is adjusted from period to period to reflect changes in the market value of the
common stock until the milestone is achieved (but only after achievement of the
milestone is determined to be probable). No deferred compensation amounts or
expense have been recorded for these variable stock options as of December 31,
1999 as the fair value of the common stock is not significantly different than
the exercise price.
25
<PAGE>
Synthonics Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Stock-Based Compensation and Other Equity Instruments (continued)
The Company also has granted and continues to grant options and warrants to
various consultants of the Company. These options and warrants are generally in
lieu of cash compensation and, as such, compensation expense is recorded related
to these grants. The compensation for these options and warrants is determined
as the fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measured. The compensation expense
is recorded over the period the services are performed, which is generally the
vesting period.
Income Taxes
The Company uses the liability method to record income taxes.
Net Loss Per Common Share
Basic loss per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted loss per share reflects the potential dilution
that would occur if securities or other contracts to issue common stock were
exercised or converted to common stock. Common stock equivalents from all stock
options, warrants and convertible securities for all years presented have been
excluded from this computation as their effect is anti-dilutive.
Basic loss per common share is computed by dividing the net loss by the weighted
average of shares outstanding during the periods presented. Since the effect of
the assumed exercise of common stock options, warrants and other convertible
securities for all periods presented was anti-dilutive, basic and diluted loss
per common share as presented on the consolidated statements of operations are
the same. Dilutive securities amounted to 24,925,204 at December 31, 1999.
26
<PAGE>
Synthonics Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
3. Property and Equipment
Property and equipment consists of the following at December 31:
1999 1998
-----------------------------------
Computer equipment $ 174,369 $ 171,742
Furniture and fixtures 17,850 18,061
Photographic equipment 56,237 55,122
-----------------------------------
248,456 244,925
Less accumulated depreciation (214,012) (165,070)
-----------------------------------
Net property and equipment $ 34,444 $ 79,855
===================================
4. Intangibles
Intangible costs incurred at December 31 are as follows:
1999 1998
-----------------------------------
Trademarks $ 1,484 $ 1,484
Patents 302,598 269,084
-----------------------------------
304,082 270,568
Less accumulated amortization (122,768) (82,220)
-----------------------------------
Total $ 181,314 $ 188,348
===================================
5. Commitments and Contingencies
Leases
The Company is party to leases and other operating commitments, principally for
facilities and equipment. Under the terms of certain of the leases, the Company
is required to pay additional expenses such as maintenance, taxes, insurance,
and other operating costs. Certain leases contain renewal or purchase options
and certain leases provide for rental increases based on defined formulas. Rent
expense under operating leases was approximately $47,456, $80,013 and $89,049
for the years ended December 31, 1999, 1998 and 1997, respectively.
Future minimum payments by year and in the aggregate for noncancelable operating
leases with initial or remaining terms of one year or more consisted of the
following at December 31, 1999:
27
<PAGE>
Synthonics Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
5. Commitments and Contingencies (continued)
Leases (continued)
2000 $ 29,980
2001 3,739
------------
Total minimum lease payments $ 33,719
============
Employment Contracts
The Company 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 had also agreed to pay its
Vice-President of Marketing and Sales, who resigned in April 1999, a base annual
salary of $60,000 plus commissions. During 1999 and 1998, the Company's Board of
Directors approved a reduction in these salaries for the entire 1999 and 1998
years due to a cash shortage. The Company's Board of Directors may also
authorize bonuses on an-ad hoc basis.
Other matters
On January 8, 1998, a default judgment was granted in favor of the Company for
breach of a license agreement and misappropriation of trade secrets. The Company
was awarded damages from the defendant in the amount of $300,000. It is
unlikely, however, the Company will receive any amount from the judgment due to
the poor financial condition of the other party and no income has been
recognized for this judgment.
6. Related Party Transactions
As of December 31, 1999 and 1998, the Company owed $65,000 and $-0-,
respectively, to certain of its officers and shareholders. These amounts
represent accrued wages. During 1998, $99,299 in debt was forgiven by an officer
and was recorded as contributed capital at December 31, 1998. In addition, a
previously forgiven debt of $9,290 was paid out during 1998 resulting in a
reduction of contributed capital at December 31, 1998. The Company also owed
certain related parties $68,968 and $47,366 as of December 31, 1999 and 1998,
respectively, for costs incurred on the Company's behalf.
28
<PAGE>
Synthonics Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
6. Related Party Transactions (continued)
During 1998, the Company obtained operating funds from a related party in
exchange for a $10.71 royalty on future sales of up to 7,000 units on a CD
product. As of December 31, 1999, the Company had completed the sale of the
7,000 CD units and had paid the related party a total of $38,556. At December
31, 1999, the Company has $36,444 in accounts payable - related for the
remaining obligation under this agreement.
During 1998, the Company entered into an agreement with a related party whereby
the related party funded the production of 50,000 CD's in exchange for a royalty
upon future sales of 28,000 CD's. The agreement provides for $3.455 to be paid
to the related party for every CD unit sold for up to 6,000 units and $6.91 to
be paid to the related party for every CD unit for the remaining units. As of
December 31, 1999, the Company had completed the sale of the 9,654 CD units and
had paid the related party a total of $38,556, with a royalty obligation
remaining on 18,346 units at $6.91 per unit. At December 31, 1999, the Company
has $25,249 in accounts payable - related for their obligations under this
agreement on units sold which had not been paid as of that date.
7. Convertible Notes Payable
In December 1999, the Company entered into a Convertible Subordinated Promissory
Note Agreement (Convertible Note) with Future Media Productions, Inc. (Future
Media), a company owned by a related party, in the amount of $500,000. Interest
accrues beginning at the first annual anniversary date of the Convertible Note
at Future Media's borrowing rate. Future Media, at its option, may convert the
Convertible Note into 11,518,096 shares of the Company's common stock within
twelve months of the issuance date; otherwise, the Convertible Note and all
accrued and unpaid interest is due on December 22, 2001. The Convertible Note is
subordinated to any current or future indebtedness, or Senior Indebtedness as
defined in the agreement, of the Company. The Company recorded $82,441 as
deferred financing costs for amounts paid, or to be paid, to an investment
adviser who assisted in obtaining the financing. These deferred financing costs
will be amortized into interest expense over the term of the Convertible Note
or, upon conversion of the note, included as a reduction of paid-in capital.
The Convertible Note agreement also provides the Company with up to 2.0 million
replicated and packaged CDs without charge from Future Media and requires Future
Media to establish, operate and fund a catalog subsidiary or division to develop
and produce 3D interactive digital catalogs licensing the Company's technology.
The Company will retain certain rights from catalog endeavors whereas Future
29
<PAGE>
Synthonics Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
7. Convertible Notes Payable (continued)
Media will retain replication and packaging revenues from the catalog business.
The Company has not recorded any amounts for the replication, packaging and
other services to be performed, and will not record any amounts for these
services until such services are rendered or upon conversion of the Convertible
Note. Upon performance of the services or conversion of the Convertible Note,
the Company will account for such services as a contribution to capital for the
fair market value of the services performed or to be performed.
8. Notes Payable
Notes payable consisted of the following at December 31:
1999 1998
-----------------------------------
Notes payable to various individuals,
interest at 13% per annum, principal and
interest due May 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,
principal due in May 1999
(payable in cash or stock at
$0.20 per share, at the
option of the Company), unsecured
- 550,000
-----------------------------------
Total notes payable - 850,000
Less current portion - (850,000)
-----------------------------------
Long-term notes payable $ - $ -
===================================
These notes and the related accrued interest were settled in May 1999 through
the issuance of 5,005,000 shares of common stock at $0.20 per share in lieu of
cash repayment as provided for in the note agreements.
9. Stock Options, Warrants and Rights
Common Stock Options
The Company has two stock-based compensation plans, the 1998 Plan and the 1999
Plan. Under the Company's stock-based compensation plans, employees, outside
directors and consultants are able to participate in the Company's future
performance through the
30
<PAGE>
Synthonics Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
9. Stock Options, Warrants and Rights (continued)
Common Stock Options (continued)
awards of incentive and nonqualified stock options and stock purchase rights.
The total number of shares reserved and available for grant and issuance
pursuant to the 1998 Plan and 1999 Plan is 2,500,000 and 10,000,000,
respectively. Each stock option is exercisable pursuant to the vesting schedule
set forth in the stock option agreement granting such stock option. Unless the
Board of Directors or a stock option agreement provides a shorter period, each
stock option may be exercisable until December 31, 2009, the term of the option.
No stock option shall be exercisable after the expiration of its option term.
The exercise price of the option shall be 100% of the fair market value of a
share of the Company's common stock on the date the stock option is granted,
provided the option price granted to any owner of 10% or more of the total
combined voting power of the Company shall be 110% of such fair market value.
The aggregate fair market value of the Company's common stock with respect to
which stock options are exercisable for the first time by an optionee during any
calendar year shall not exceed $100,000.
In June 1999, in accordance with a private placement of common stock to an
investor, the Company granted the investor stock options to purchase 1,448,445
shares of common stock at $0.10 per share. At December 31, 1999, 800,000 of
these options had been exercised and 648,445 remain outstanding, which expire in
March 2000.
In September 1999, the Company issued 1,030,298 stock options, which immediately
vested, to certain former employees, founders and officers at an exercise price
of $0.10 per share in recognition of past services. The fair value of these
grants was determined to be $0.07 per share and as a result the Company recorded
compensation expense of $72,000 for the year ended December 31, 1999.
During 1997, certain of the Company's officers were granted 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 owed to them 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. Of the stock
options forfeited, 450,000 were valued at $0.22 per option, the market value of
the shares at that time, and the remaining 300,000 were value at $0.50 per
option, the market value of the shares at that time. The amounts are recorded as
contributed capital at December 31, 1997.
31
<PAGE>
Synthonics Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
9. Stock Options, Warrants and Rights (continued)
Common Stock Options (continued)
The following table summarizes all stock option activity:
<TABLE>
<CAPTION>
Weighted-
Average
Number of Price per Exercise
Shares Share Price
---------------------------------------------------
<S> <C> <C> <C>
Balances at January 1, 1997 8,332,355 $0.22 - 1.00 $ 0.42
Options granted 2,486,290 0.75 - 1.00 0.90
Options exercised (1,543,500) 0.22 - 0.50 0.45
Options cancelled (2,939,000) 0.22 - 1.00 0.33
---------------------------------------------------
Balances at December 31, 1997 6,336,145 0.22 - 1.00 0.62
Options granted 1,253,885 0.53 - 0.66 0.53
Options exercised - - -
Options cancelled (155,000) 0.75 - 1.00 0.80
---------------------------------------------------
Balances at December 31, 1998 7,435,030 0.22 - 1.00 0.60
Options granted 6,023,960 0.07 - 0.20 0.13
Options exercised (800,000) 0.10 0.10
Options cancelled (2,687,855) 0.22 - 1.00 0.41
---------------------------------------------------
Balances at December 31, 1999 9,971,135 $0.07 - 1.00 $ 0.42
===================================================
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
Number Weighted- Number
Outstanding Average Weighted- Exercisable Weighted-
as of Remaining Average as of Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Price 1999 Life (in Years) Price 1999 Price
- ---------------------- ------------------------------------------------ --------------------------------
$0.07 - 0.10 3,328,020 3.4 $ 0.10 3,328,020 $ 0.10
0.13 - 0.20 1,895,940 4.4 0.19 1,068,440 0.18
0.50 - 0.66 2,453,885 5.2 0.52 2,153,885 0.52
0.75 - 1.00 2,293,290 2.5 0.91 2,218,290 0.92
------------------------------------------------ --------------------------------
9,971,135 3.8 $ 0.41 8,768,635 $ 0.42
================================================ ================================
</TABLE>
The Company's policy is to disclose the pro-forma effect on operations of using
the fair value method of valuing stock options. The fair value method of valuing
stock options is based on the use of an option-pricing model. This model
considers volatility, a risk free interest rate and an estimated life of the
option. The Company used a zero expected dividend yield, expected stock price
volatility of 266%, a risk free interest rate of 5.5%
32
<PAGE>
Synthonics Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
9. Stock Options, Warrants and Rights (continued)
Common Stock Options (continued)
and estimated lives of two to five years. These assumptions resulted in a
weighted average fair value of $0.13 for stock options granted in the year ended
December 31, 1999. The pro-forma effect of using the fair value method would be
to increase the consolidated net loss to $1,504,935, or $0.06 per common share,
in the year ended December 31, 1999.
Stock "Rights" and Warrants
In connection with the Convertible Note placement and a private placement during
1999, the Company issued a financial adviser warrants to purchase 2,667,349
shares of common stock at $0.11 per share. In accordance with an agreement with
this adviser, the Company committed to continue to issue warrants to purchase
shares of the Company's common stock to this adviser at $0.11 per share to allow
the adviser to maintain a 5% equity interest in the Company on a fully diluted
basis. Future issuances of these warrants are contingent upon the adviser
continuing to find funding for the Company.
In connection with its acquisition of a predecessor company, the Company
acquired from the predecessor company's stockholders, warrants and "rights" to
acquire 1,369,190 shares of the predecessor company's 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. Of the 2,124,000 stock
purchase warrants granted, 1,950,500 were exercised during 1996 and the
remaining 173,500 warrants expired unexercised in 1996. There were 2,597,355
uncertificated "rights" with an exercise price of $0.11 per share outstanding at
December 31, 1997, of which 562,500 expired January 1, 1998 and 2,034,855
expired May 31, 1999.
During 1996, 337,000 warrants to purchase shares of the Company's common stock
were sold at $1.00 per warrant 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 of the Company's common stock during 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, 1999, the total number of warrants outstanding was 2,843,349
with exercise prices ranging from $0.11 to $2.00 per share and expiration dates
from March 2000 through March 2004.
33
<PAGE>
Synthonics Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
10. Provision for Income Taxes
The provision for income taxes for the years ended December 31, 1999, 1998 and
1997, consists of the following:
1999 1998 1997
----------------------------------------------
State Franchise Taxes $ 6,665 $ 2,400 $ 1,700
==============================================
At December 31, 1999, the Company has net operating loss carryforwards for
federal income tax purposes of $5,705,869 which expire in the years 2004 to
2019. The Company also has state net operating loss carryforwards of $2,473,069
which expire in the years 2003 to 2004. No tax benefit has been reported in the
consolidated financial statements because the Company does not have a history of
profitable operations. Accordingly, the potential tax benefits of these net
operating loss carryforwards have been offset by a valuation allowance of the
same amount.
11. Preferred Stock
At December 31, 1997, the Company had 50,000 outstanding shares of Class A
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
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, 1999 and 1998, the Company has 10,000
outstanding shares of Class A cumulative convertible preferred stock. The
remaining Class A 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. The
Class A cumulative convertible preferred stock may be redeemed at the option of
the Company after December 31, 1998 at $10.50 per share. The accrued dividends
unpaid as of December 31, 1999 and 1998 were $12,000 and $-0-, respectively.
34
<PAGE>
Synthonics Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
12. Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments.
Cash and Cash Equivalents: the carrying amount approximates fair value.
Accounts Receivable and Accounts Payable: the carrying amount approximates fair
value.
Debt: The fair value of the Company's convertible notes payable is estimated
using discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. At December 31,
1999, the fair value of the convertible notes payable was $450,000.
35
<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:
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 53 President, CEO 3 Years 1995
Director
Charles S. Palm 56 Chief Technology 3 Years 1995
Officer, Secretary,
Director
Diana Maranon *** 41 Director 1 Year 1999
Ronald S. Speirs 48 Director 2 Years 1996
Timothy G. Paulson 53 Director 2 Years 1997
Thomas K. Carpenter 58 Chairman of the 2 Years 1997
Board
Vera Campbell**** 52 EVP Apparel, 1 Year 1997
Director
David L. Stewart* 57 Director 3 Years 1995
Alex Sandel** 56 Director 1 Year 1999
</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.
* David Stewart resigned as a Director of the Company effective March 2,
2000. Mr. Stewart's resignation was for personal reasons and was not due to any
disagreements between himself and the management of the Company relating to the
Company's operations, policies and practices.
** Alex Sandel resigned as a Director of the Company effective March 1,
2000. Mr. Sandel's resignation was for personal reasons and was not due to any
disagreements between himself and the management of the Company relating to the
Company's operations, policies and practices.
*** Diana Maranon resigned as a Director of the Company effective March 8,
2000. Ms. Maranon's resignation was for personal reasons and was not due to any
disagreements between herself and the management of the Company relating to the
Company's operations, policies and practices. Ms. Maranon remains as an advisor
to the Company.
36
<PAGE>
**** Vera Campbell resigned as a Director of the Company effective March
24, 2000. Ms. Cambell's resignation was for personal reasons and was not due to
any disagreements between herself and the management of the Company relating to
the Company's operations, policies and practices. Ms. Campbell remains as an
advisor to the Company.
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. Mr. Budd has been associated with the Company since its
inception as a director and shareholder.
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.
Diana Maranon, is owner and President of Averil Capital Markets Group
located in Century City, California. Prior to forming Averil, Ms. Maranon was
Vice President with Wasserstein Perella & Co, Inc. and also practiced law with
Skadden Arps Slate Meagher & Flom, specializing in mergers and acquisitions.
During her career, Ms. Maranon has been involved with transactions totaling in
the aggregate in excess of $10 Billion. Ms. Maranon received her JD & MBA
degrees from UCLA.
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 Emery 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.
Vera Campbell, is owner and President of Design Zone, which she founded 15
years ago and is located in Los Angeles. Design Zone, which sells under the
Knitworks Label, caters to the junior and kids apparel market. Ms. Campbell is a
veteran of more than 30 years in the apparel, retail and Manufacturing business.
Ms. Campbell is a graduate of Ohio State University.
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.
37
<PAGE>
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.
Alex Sandel is a co-founder of Future Media Productions, Inc. and has
served as its Chairman of the Board, CEO and President since June 1994. Mr.
Sandel was one of the original founders of Packard Bell Electronics (1986), an
innovative PC manufacturer that was first to market PCs via traditional consumer
electronics retail outlets. Mr. Sandel served as a director of Packard Bell
Electronics since its inception until 1999. Mr. Sandel is a principal
shareholder in Argoquest, Inc., an incubator focused on investing in early stage
Israeli-based Internet and Internet enabling technology companies. Mr. Sandel
has founded, managed and held engineering positions with several companies over
the past thirty years. He was educated in the Israeli Institute of Technology,
Haifa, Israel. While continuing his education in the United States, he received
his BSEE from California State College, Pomona, California (1969) and MSOR from
the University of Southern California (1974).
Louis Weiss acts as the Chief Financial Advisor of the Company. Mr. Weiss
is currently CFO of Future Media Productions, Inc. A CD-ROM and DVD replication
company located in Valencia, CA. and a strategic partner with Synthonics. Mr.
Weiss has a BA and MBA from the University of Wisconsin.
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
---------------------------------
Amit Dembsky, VP of Product Development is considered a key employee within
the Company and we feel that his activities will be material to our operational
results. Born in Israel, Mr. Dembsky has most recently directed NEC's Internet
software engineering organization dedicated to Internet applications for the
company's consumer and commercial desktop PCs, providing long-term vision and
ongoing enhancements to the company's e-Commerce and self-healing technical
support solutions. Mr. Dembsky previously directed the Research and Development
department at Packard Bell where he was responsible for software and hardware
planning, software tools development, and software integration. His previous
startup experience was with Iconet (ISRAEL Connection Network), where he founded
the first Hebrew speaking WWW based virtual community in the US. Mr. Dembsky
earned his Bachelor of Science in Architecture and Town Planning at the Technion
(Israel Institute of Technology in Haifa).
Family Relationships
--------------------
David Stewart and Ronald Speirs are cousins. Other than this relationship,
there are no family relationships that exist 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;
38
<PAGE>
(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,
1999, all Section 16(a) filing requirements applicable to each person who, at
any time during the fiscal year ended December 31, 1999, was an officer,
director and greater than ten percent beneficial owner, were complied with.
39
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Annual Compensation
-------------------
The aggregate annual remuneration, during the fiscal year ending December
31, 1999, 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 1999 $101,800(1) $0 $0 $0 757,453 $0 $0
President & CEO 1998 $ 45,000 $0 $0 $0 720,465 $0 $0
1997 $ 90,000 $0 $0 $0 378,860 $0 $0
Charles S. Palm 1999 $103,000(2) $0 $0 $0 1,583,349 $0 $0
Secretary & CTO 1998 $ 75,000 $0 $0 $0 385,142 $0 $0
1997 $150,000 $0 $0 $0 189,430 $0 $0
Joseph R. Maher 1999 $ 60,000(3) $0 $6,641(3) $0 53,453 $0 $0
VP Marketing & 1998 $101,500 $0 $0 $0 78,195 $0 $0
Sales 1997 $ 36,000(4) $0 $0 $0 750,000 $0 $0
</TABLE>
- --------------------
(1) $32,500 of Mr. Budd's 1999 salary is deferred.
(2) $32,500 of Mr. Palm's 1999 salary is deferred
(3) Mr. Maher's agreement with the Company pays him a base salary of
$60,000 per annum plus commissions on sales of product. Mr. Maher
resigned from the Company on April 12, 1999. Total salary paid to Mr.
Maher in 1999 was $21,641 and total commissions paid to Mr. Maher were
$6,641.
(4) Mr. Maher was hired by the Company on October 1, 1997
Employment Contracts/Stock Incentive Plans
------------------------------------------
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 $0.50 and the 750,000 shares vest over a four-year period
with all shares being vested by July 1, 2000.
In 1997, 1998 and 1999, the Directors of the Company adopted resolutions
for each fiscal year to reduce the compensation of each of its Executive
Officers in an effort to reduce cash needs during each specific fiscal year. The
totals in the table above reflect the reduced compensation amounts approved by
the Company's Directors.
40
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Stock Options
-------------
At a Special Meeting of Shareholders on December 3, 1999, the shareholders
approved the 1999 Stock Option Plan (the "1999 Plan"). The 1999 Plan allows the
Company to attract and retain employees and directors of the Company and its
subsidiaries by providing such persons with incentives and awards for superior
performance. The 1999 Plan is administered by the Board of Directors of the
Company, which has broad flexibility in designing stock-based incentives. The
Board of Directors determines the number of shares granted and the option
exercise price, but such price may not be less than one hundred percent of the
fair market value of the Common Sock on the grant date.
The following tables reflect certain information with respect to stock
options granted to certain executive officers and directors during fiscal 1999.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
---------------------------------------
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES OR BASE
GRANTED IN FISCAL PRICE EXPIRATION
NAME (#) YEAR(%) ($/SH) DATE
- ------------------------------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
F. Michael Budd 757,453 15.2% $0.07 to $0.20 9/30/03 to 9/30/04
Charles S. Palm 1,583,349 31.7% $0.07 to $0.20 9/30/03 to 9/30/04
Ronald G. Speirs 29,846 0.6% $0.10 9/30/03
Timothy G. Paulson 13,431 0.3% $0.10 9/30/03
Thomas K. Carpenter 31,215 0.6% $0.10 9/30/03
David L. Stewart 14,293 0.3% $0.10 9/30/03
Diana Maranon 0 0% N/A N/A
Vera Campbell 1,115,000 22.3% $0.20 6/24/04
Argoquest 7
(Alex Sandel) 1,448,445 29.0% $0.10 (1)
</TABLE>
(1) The option expires ninety days after the closing of a next round of
financing in excess in excess of $1,000,000.
41
<PAGE>
The following table reflects certain information with respect to the
exercise of stock options by certain executive officers and directors during
fiscal 1999.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND
FY-END OPTION VALUES
-------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END(#) FY-END($)
SHARES VALUE --------------- -------------------
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------- ----------- -------- --------------- -------------------
<S> <C> <C> <C> <C>
F. Michael Budd 0 $0 2,156,778/150,000 $87,182/$0
Charles S. Palm 0 $0 3,170,181/150,000 $211,813/$0
Ronald G. Speirs 0 $0 229,846/0 $4,477/$0
Timothy G. Paulson 0 $0 80,931/22,500 $2,015/$0
Thomas K. Carpenter 0 $0 195,392/45,000 $4,683/$0
David L. Stewart 0 $0 114,923/0 $2,239/$0
Diana Maranon 0 $0 0/0 $0/$0
Vera Campbell 0 $0 317,500/797,500 $15,875/$39,875
Argoquest 7
(Alex Sandel) 800,000 $0 648,445/0 $97,267/$0
</TABLE>
Security Ownership of Certain Beneficial Owners
-----------------------------------------------
The following table sets forth ownership information as of December 31,
1999 with respect to all officers, directors and promoters, and each shareholder
who beneficially owns more than 5% of the outstanding shares:
<TABLE>
<CAPTION>
Title of Name of Amount of Percent of
Class Beneficial Owner Ownership Class
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock Argoquest 7
(Alex Sandel) 3,100,000(1) 10.9%
Common Stock F. Michael Budd 1,735,750(2) 6.1%
Common Stock Ryan Katz 1,512,000 5.3%
</TABLE>
(1) Argoquest 7 holds an option to purchase 648,445 additional shares of
the Company's Common Stock at a price of $0.10 per share. This option
expires 90 days after the closing of the next round of financing by
the Company in excess of $1.0 million. Argoquest 7 holds an option to
purchase additional Common Stock of the Company and to bring its total
holdings up to 10% on a fully diluted basis. This option must be
exercised within thirty days of the Company's notification of an
intended financing transaction for a next round of financing in excess
of $1.0 million and the price per share of the option is equivalent to
the share price in the next round of financing. In addition, Alex
Sandel, through another affiliate (Future Media Productions, Inc.),
holds a note for debt that is convertible to equity in the form of the
Company's Common Stock. In return for $500,000 cash and future
services (CD-ROM replication and digital catalog production services)
valued at $1.5 million, Future Media will receive 11,518,096 shares of
the Company's Common Stock upon conversion of the note.
(2) F. Michael Budd holds options for 2,306,778 additional shares of the
Company's Common Stock of which 2,156,778 are vested and currently
exerciseable.
There are no other shareholders known to the Company who beneficially own
at least 5% of its stock.
42
<PAGE>
Security Ownership of Management
--------------------------------
The following table sets forth security ownership information as of the
close of business on December 31, 1999, 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 F. Michael Budd(1) 1,735,750 6.1%
Common Stock Charles S. Palm 428,751 1.5%
Common Stock Ronald G. Speirs 50,000 0.2%
Common Stock Timothy G. Paulson 20,000 0.1%
Common Stock Thomas K. Carpenter 0 0.0%
Common Stock David L. Stewart 8,892 0.0%
Common Stock Diana Maranon(2) 0 0.0%
Common Stock Vera Campbell 0 0.0%
Common Stock Alex Sandel(3) 0 0.0%
</TABLE>
(1) F. Michael Budd holds options for 2,306,778 additional shares of the
Company's Common Stock of which 2,156,778 are vested and currently
exerciseable.
(2) Diana Maranon is the owner of Chloe Holdings. Chloe Holdings owns
35,000 shares of the Company's Common Stock. Chloe Holdings also holds
a Warrant to purchase 2,667,349 shares of the Company's Common Stock.
This Warrant expires during March 2004.
(3) Alex Sandel is a Principal in both Argoquest and Future Media
Productions. Argoquest 7 owns 3,100,000 shares of the Company's Common
Stock. Argoquest 7 holds an option to purchase 648,445 additional
shares of the Company's Common Stock at a price of $0.10 per share.
This option expires 90 days after the closing of the next round of
financing by the Company in excess of $1.0 million. Argoquest 7 holds
an option to purchase additional Common Stock of the Company and to
bring its total holdings up to 10% on a fully diluted basis. This
option must be exercised within thirty days of the Company's
notification of an intended financing transaction for a next round of
financing in excess of $1.0 million and the price per share of the
option is equivalent to the share price in the next round of
financing. In addition, Alex Sandel, through another affiliate (Future
Media Productions, Inc.), holds a note for debt that is convertible to
equity in the form of the Company's Common Stock. In return for
$500,000 cash and future services (CD-ROM replication and digital
catalog production services) valued at $1.5 million, Future Media will
receive 11,518,096 shares of the Company's Common Stock when it
converts the note.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended 1998, the Company entered into a Reservation
Agreement with LeRoy Speirs, the father of director Ron Speirs. Under the terms
of this Agreement, Mr. Speirs provided the Company with $50,000 in operating
funds in return for the receipt of $10.71 for every CD-ROM sold to the
Smithsonian Institution up to 7,000 CDs total. As of the end of fiscal 1999, the
Company had paid Mr. Speirs a total of $38,556 and owed him a total of $36,444
and has completed the sale of 7,000 CDs to the Smithsonian.
During the year ended 1998, the Company entered into a Reservation
Agreement with I&I Investment, the two principals being first cousins of the
spouse of F. Michael Budd. Under the terms of this Agreement, I&I Investment
provided the Company $131,659 in cash to fund the production of 50,000
Smithsonian CD-ROMs. In return for the cash, the Company agreed to pay I&I
Investment $3.455 for every CD-ROM sold to the Smithsonian Institution up to
6,000 CDs and $6.91 for every CD-ROM sold to the Smithsonian Institution after
the first 6,000 CDs and for the next 22,000 CDs. As of the end of fiscal 1999,
the Company had paid I&I Investment a total of $20,730 and owed a total of
$25,249. The Company still has an obligation to pay I&I $6.91 per CD it sells to
the Smithsonian Institution for the next 18,346 CDs sold.
43
<PAGE>
During the year ended 1999, the Company received a loan in the amount of
$100,000 from Future Media Productions, Inc. a company owned by Alex Sandel. The
principal and interest associated with this loan were paid in full to Future
Media Productions, Inc. by the Company prior to the end of 1999.
During the year ended 1999, the Company entered into a Convertible Debt
Agreement with Future Media Productions, Inc. a company owned by Alex Sandel.
Under the terms of this Agreement, Future Media provides the Company cash and
future services in exchange for a conversion right to 11,518,096 shares of the
Company's Common Stock. The Convertible Note is unsecured by the Company and no
interest is due on the principal ($500,000) until after December 23, 2000 and
only if the Note has not been converted by Future Media. To date the Company has
received $500,000 cash and a commitment towards future services consisting of
the replication of 2,000,000 CD-ROMs and the establishment by Future Media of an
entity to develop and produce 3D digital catalogs on behalf of Synthonics.
Future Media has until December 23, 2001 to convert the Note to equity. If the
Note is not converted by Future Media on or before the above date, the principal
amount of $500,000 and any outstanding interest is due to Future Media by the
Company, by December 23, 2001.
44
<PAGE>
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) Article of Incorporation and By-Laws.
3.8 Certificate of Incorporation of the Registrant.
(incorporated by reference to Exhibit B of the Registrant's
Proxy Statement on Form 14A filed with the Commission on
NOvember 19, 1999).
3.9 By-Laws of the Registrant (incorporated by reference to
Exhibit 2.1 of the Registrant's Current Report on Form 8-K
filed with the Comission on December 30, 1999.)
(4) Instruments defining the rights of holders.
4.1 Statement of Rights, Preferences and Privileges of
Common and Preferred Stock of the Registrant as of September
6, 1997, (incorporated by reference to Exhibit 4.1 of the
Registrant's Registration Statement on Form 10-SB dated
April 28, 1998; Commission File No. 0-24109).
(10) Material Contracts
10.1 Management Cash Incentive Plan (incorporated by
reference to Exhibit 10.1 of the Registrant's Registration
Statement on Form 10-SB dated April 28, 1998; Commission
File No. 0-24109).
10.2 1998 Stock Option Plan (incorporated by reference to
Exhibit 10.2 of the Registrant's Registration Statement on
Form 10-SB dated April 28, 1998; Commission File No.
0-24109).
10.3 Acuscape License Agreement (incorporated by reference
to Exhibit 10.3 of the Registrant's Amendment No. 1 to the
Registration Statement on Form 10-SB filed on November 6,
1998; Commission File No. 0-24109).
10.4 Smithsonian License Agreement dated October 2, 1997
(incorporated by reference to Exhibit 10.4 of the
Registrant's Amendment No. 1 to the Registration Statement
on Form 10-SB filed on November 6, 1998; Commission File No.
0-24109).
10.5 Amendment No. 1 to Smithsonian License Agreement
(incorporated by reference to Exhibit 10.5 of the
Registrant's Amendment No. 1 to the Registration Statement
on Form 10-SB filed on November 6, 1998; Commission File No.
0-24109).
10.6 Centro Alameda Inc. Contract Agreement dated December
19, 1997 (incorporated by reference to Exhibit 10.6 of the
Registrant's Amendment No. 1 to the Registration Statement
on Form 10-SB filed on November 6, 1998; Commission File No.
0-24109).
10.7 Knowledge LINK Strategic Alliance Agreement
(incorporated by reference to Exhibit 10.7 of the
Registrant's Amendment No. 1 to the Registration Statement
on Form 10-SB filed on November 6, 1998; Commission File No.
0-24109).
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).
45
<PAGE>
10.10 Dell Financial Lease No. 004591649-001 (incorporated
by reference to Exhibit 10.10 of the Registrant's Amendment
No. 1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.11 Dell Financial Lease No. 004591649-002 (incorporated
by reference to Exhibit 10.11 of the Registrant's Amendment
No. 1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.12 Americorp Financial Inc. - Lease 6976-2 (incorporated
by reference to Exhibit 10.12 of the Registrant's Amendment
No. 1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.13 Sanwa Leasing Corporation - Lease Agreement
(incorporated by reference to Exhibit 10.13 of the
Registrant's Amendment No. 1 to the Registration Statement
on Form 10-SB filed on November 6, 1998; Commission File No.
0-24109).
10.14 AT & T Equipment Lease - 003866952 (incorporated by
reference to Exhibit 10.14 of the Registrant's Amendment No.
1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.15 AT & T Equipment Lease - 003871854 (incorporated by
reference to Exhibit 10.15 of the Registrant's Amendment No.
1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.16 F. Michael Budd Employment Agreement (incorporated by
reference to Exhibit 10.16 of the Registrant's Amendment No.
1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.17 Charles S. Palm Employment Agreement (incorporated by
reference to Exhibit 10.3 of the Registrant's Amendment No.
1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.18 First Colony Life Insurance Policy (incorporated by
reference to Exhibit 10.18 of the Registrant's Amendment No.
1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.19 Software Remarketing Agreement between Synhonics
Technologies, Inc. and Evans & Sutherland Computer
Corporation. (incorporated by reference to Registrant's Form
10-KSB for the year ended December 1998, filed on March 11,
1999).
10.20 Engagement Letter between the Company and Averil &
Associates dated April 1, 1999, (incorporated by reference
to Exhibit 10.20 of the Quarterly Report on Form 10-QSB
filed on August 13, 1999.
10.21 Equity Agreement between the Company and Alex Sandel
dated June 2, 1999, attached hereto. (incorporated by
reference to Exhibit 10.21 of the Quarterly Report on Form
10-QSB filed on August 13, 1999.
10.22 Subscription Agreement for Convertible Note of
Synthonics Technologies, Inc., dated December 22, 1999.
10.23 Convertible Subordinated Promissory Note of Synthonics
Technologies, Inc., dated December 22, 1999.
(27) Financial Data Schedule
27.1. Financial Data Schedule (submitted electronically for
SEC information only).
46
<PAGE>
(b) The Registrant filed a Form 8-K on December 30, 1999. Additionally,
subsequent to the quarter covered by this report, the Registrant file a Form 8-K
on February 1, 2000. There were no other reports on Form 8-K filed during the
quarter of the period covered.
The following Exhibit Index sets forth the Exhibit attached hereto
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
-------------------------------------------------------------------------
<S> <C>
10.22 Subscription Agreement for Convertible Note of Synthonics
Technologies, Inc., dated December 22, 1999.
10.23 Convertible Subordinated Promissory Note of Synthonics
Technologies, Inc., dated December 22, 1999.
</TABLE>
47
<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: April 14, 2000 /s/ F. Michael Budd
---------------------------------
By: F. Michael Budd
Its: President
Chief Executive Officer
and principal Financial
and Accounting Officer
48
SUBSCRIPTION AGREEMENT FOR CONVERTIBLE NOTE OF
SYNTHONICS TECHNOLOGIES, INC.
This Subscription Agreement is made this 22nd day of December, 1999, by and
between Synthonics Technologies, Inc., a Utah Corporation (hereinafter the
"Company" or "Synthonics") and the undersigned prospective purchaser (the
"Purchaser") who is subscribing for a note, in the form attached hereto as
Exhibit A (the "Note"), convertible pursuant to the terms and conditions
thereof, into ELEVEN MILLION, FIVE HUNDRED AND EIGHTEEN THOUSAND AND NINETY-SIX
(11,518,096) shares of Common Stock of the Company, par value $.01 (the
"Shares").
The Note and the Shares have not been registered with the Securities and
Exchange Commission or any State securities commission in reliance of an
exemption from such registration pursuant to Rule 506 of Regulation D of the
Securities Act of 1933 (the "Act") and certain other State securities laws. The
Note and the Shares are "Restricted Securities" as defined in the Act and may
not be resold unless registered under the Act, or an exemption from registration
under the Act is available.
In consideration of the Company's agreement to sell the Note and upon the
conversion of the Note in accordance with its terms to accept the undersigned as
a Shareholder of the Company, the undersigned agrees and represents as follows:
1. SUBSCRIPTION.
1.1. The undersigned hereby subscribes to purchase the Note for the
cash consideration of FIVE HUNDRED THOUSAND DOLLARS ($500,000) and the
non-cash and/or other consideration described in that certain "Investment
Term Sheet" attached hereto as Exhibit B (the "Term Sheet"), the terms and
conditions of which are hereby incorporated into this Agreement by
reference. The cash portion of the consideration set forth in the Term
Sheet shall be paid and delivered to the Company at a closing to be held on
December 23, 1999 in the form of a check or wire transfer (the "Payment")
payable to Synthonics Technologies, Inc., 31324 Via Colinas, Suite 106,
Westlake Village, California 91362.
1.2 It is understood and agreed that this subscription is made subject
to the following terms and conditions:
(a) The Company shall have the right to accept or reject this and
any other subscription for the Note in whole or in part at any time
prior to the closing (the "Closing Date) of the sale of the Note being
purchased hereby, notwithstanding prior receipt by the undersigned of
notice of acceptance; and
(b) In the event this Subscription is accepted by the Company, in
whole or in part, and subject to the conditions set forth in Section
1.2(a) above of this Subscription Agreement, the Company shall deliver
to you the Note, substantially in the form of Exhibit A, executed by
an authorized officer of the Company and a fully executed copy of this
Subscription Agreement.
1
<PAGE>
2. REPRESENTATIONS AND WARRANTIES OF THE SUBSCRIBER
2.1 The undersigned hereby represents and warrants to, and agrees
with, the Company as follows:
(a) The Note is being purchased for his or her own account, for
investment purposes only, and not for the account of any other person,
and not with a view to distribution, assignment or resale to others or
to fractionalization in whole or in part and no other person has or
will have a direct or indirect beneficial interest in the Note or the
Shares and the undersigned will not sell, hypothecate or otherwise
transfer the Note or the Shares except in accordance with the
Securities Act of 1933 (the "ACT") and applicable state securities
laws or unless, in the opinion of counsel for the Company, an
exemption from the registration requirements of the ACT and such laws
is available.
(b) The undersigned has been furnished with and has carefully
read the Public Filings and all other information which the
undersigned considers necessary or appropriate for deciding whether to
purchase the Note. In evaluating the suitability of an investment in
the Company, the undersigned has not relied upon any representations
or other information (whether oral or written) from the Company, or
any of its agents other than as set forth in the Public Filings, and
no oral or written representations have been made or oral or written
information furnished to the undersigned or his advisors, if any, in
connection with the offering of the Note which were in any way
inconsistent with the Public Filing.
(c) The Company has made available to the undersigned all
documents and information that the undersigned has requested relating
to an investment in the Company.
(d) The undersigned recognizes the Company is an emerging growth
stage Company, that it has generated very little revenue from
operations, has limited working capital and that proposed development,
marketing and promotional expenditures are expected to result in
additional losses over at least the next twelve months, and perhaps
longer. Investment in the Company involves substantial risk, and
investors should not purchase the Note unless they can afford the
complete loss of their investment, and the undersigned has taken full
cognizance of and understands all of the risk factors related to the
purchase of the Note.
(e) The undersigned has carefully considered and has, to the
extent he believes such discussion necessary, discussed with his
professional legal, tax and financial advisers the suitability of an
investment in the Company for his particular tax and financial
situation and he has determined that the Note is a suitable investment
for him or her.
2
<PAGE>
(f) All information which the undersigned has provided to the
Company concerning the undersigned and his financial position is
correct and complete as of the date set forth below, and if there
should be any change in such information prior to the conversion of
the Note, he or she will immediately provide such information to the
Company and will promptly send confirmation of such information to the
Company.
(g) If this Subscription Agreement is executed and delivered on
behalf of a partnership, corporation, trust, estate or other entity:
(i) the undersigned's execution, delivery and performance of
and under this Subscription Agreement, and all documents
ancillary hereto, and the consummation of the transactions
contemplated hereby and thereby have been duly authorized, and
the undersigned is duly authorized (a) to execute and deliver
this Subscription Agreement and all other instruments executed
and delivered on behalf of such partnership, corporation, trust,
estate or other entity, in connection with the purchase of the
Shares; and (b) to purchase and hold Shares,
(ii) such entity has not been formed for the specific
purpose of acquiring the Note; and
(iii) when executed and delivered by the Company, will
constitute such partnership's, corporation's, trust's, estate's
or other entity's legal, valid and binding obligation enforceable
against it in accordance with its terms.
(h) The undersigned is an "Accredited Investor" as such term is
defined in Rule 501(a) of Regulation D of the Securities Act of 1933.
(i) The undersigned acknowledges that the Note and the Shares
have not been registered with the Securities and Exchange Commission
or any State securities commission in reliance of an exemption from
such registration pursuant Rule 506 of Regulation D and certain other
State securities laws. The Note and (upon issuance) the Shares are
"Restricted Securities" as defined in the Act and may not be resold
unless registered under the Act, or an exemption from registration
under the Act is available.
(j) You have been advised by the Company that this transaction
has not been reviewed, approved or disapproved, by the United States
Securities and Exchange Commission or any securities administrator of
any State in the United States or self-regulatory organization, in
reliance of an exemption from such registration pursuant to Rule 506
of Regulation D and certain other State securities laws, and that the
Company's reliance thereon is based in part upon the representations
made by you in this Subscription Agreement. You acknowledge that you
have been informed by the Company of, or are otherwise familiar with,
the nature of the limitations imposed by the Securities Act and the
rules and regulations thereunder on the transfer of securities,
including Rule 144 of the Act. In particular, you agree that no sale,
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assignment or transfer of the Note or, upon conversion, the Shares
shall be valid or effective, and the Company shall not be required to
give any effect to any such sale, assignment or transfer, unless (i)
the sale, assignment or transfer of the Note or the Shares are
registered under the Securities Act, it being understood that neither
the Note nor the Shares are currently registered for sale and that the
Company has no obligation or intention to so register such, or (ii)
the Note or, upon conversion, the Shares are sold, assigned or
transferred in accordance with all the requirements and limitations of
Rule 144, it being understood that Rule 144 is not available at the
present time for the sale of the Note or the underlying Shares, or
(iii) such sale, assignment, or transfer is otherwise exempt from
registration under the Securities Act. You acknowledge that the Note
and, upon conversion, the Shares shall be subject to a stop transfer
order and the certificates evidencing any Shares shall bear a
restrictive legend.
(k) It never has been represented, guaranteed or warranted by any
broker, the Company, any of the officers, directors, shareholders,
attorneys, employees or agents of either, or any other persons,
whether expressly or by implication, that:
(i) the Company or you will realize any given percentage of
profits, if any, or amount or type of consideration, profit, if
any, or loss as a result of the Company activities or your
investment in the Company; or
(ii) the past performance or experience of the management of
the Company, or of any other person, will in any way indicate the
future results of the ownership of the securities or of the
Company's activities.
(l) You acknowledge that you understand the meaning and legal
consequences of the representations and warranties contained in this
Section 2.1, and you hereby agree to indemnify and hold harmless the
Company and each incorporator, officer, director, employee, attorney,
agent and controlling person thereof, past, present or future, from
and against any and all loss, damage or liability due to or arising
out of a breach of any such representation or warranty.
(m) Neither this Subscription Agreement, nor any of your
interests herein, shall be assignable or transferable by you in whole
or in part except by operation of law.
(n) You are not subscribing for the Note as a result of or
subsequent to any advertisement, article, notice or other
communication published in any newspaper, magazine or similar media or
broadcast over television or radio, or presented at any seminar or
meeting, or any solicitation of a subscription by a person not
previously known to you in connection with investments in securities
generally.
(o) You or your purchaser representative have such knowledge and
experience in finance, tax, securities, investments and other business
matters so as to be able to protect your interests in connection with
this transaction, and your investment in the Company hereunder is not
material when compared to your total financial capacity.
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(p) The foregoing representations and warranties are true and
accurate as of the date hereof, shall be true and accurate as of the
date of the acceptance hereof by the Company and shall survive the
execution and delivery of this Subscription Agreement and the purchase
of the Note, the conversion of the Note and thereafter.
(q) The undersigned shall indemnify and hold harmless the Company
and any of its officers, employees, registered representatives,
directors or control persons of any such entity who was or is a party
or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of or arising from any
actual or alleged misrepresentation or misstatement of facts or
omission to represent or state facts made by the undersigned to the
Company concerning himself or his financial position in connection
with the offering or sale of the Note or the Shares which is not
remedied by timely notice to the Company as provided above, against
losses, liabilities and expenses for which the Company or any of its
officers, employees, registered representatives, directors or control
persons of any such entity which have not otherwise been reimbursed
(including attorneys' fees, judgments, fines and amounts paid in
settlement) as actually and reasonably incurred by such person or
entity in connection with such action, suit or proceeding.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to, and agrees with, you as follows:
3.1 Organization. Company is duly organized, validly existing and in good
standing under the laws of the State of Utah, with all requisite power and
authority to own, lease, license, and use its properties and assets and to carry
out the business in which it is engaged as described in the Public Filings. The
Company is duly qualified to transact the business in which it is engaged and is
in good standing as a foreign corporation in every jurisdiction in which its
ownership, leasing, licensing or use of property or assets or the conduct of its
business make such qualification necessary, except where the failure to be so
qualified would not, in the aggregate, have a material adverse effect on the
business, operations, liabilities or condition (financial or otherwise) of the
Company.
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3.2 Capitalization.
(a) The Company is authorized by its Certificate of
Incorporation, as amended, to issue 100,000,000 shares of Common Stock
and 20,550,000 shares of Preferred Stock, and at the date of this
Agreement, 28,421,679 shares of the Common Stock are currently issued
and outstanding, and 10,000 shares of Series A Convertible Preferred
Stock, par value $10.00 per share (the "Preferred Stock") are
currently issued and outstanding. The Company has also authorized
20,000,000 shares of Series B Preferred Stock par value $0.01, of
which no shares are issued and outstanding. Immediately prior to the
issuance of the Note, the Company had 45,919,386 shares of Common
Stock outstanding on a fully diluted basis. All of the issued and
outstanding shares of the Common Stock and the Preferred Stock have
been duly authorized and validly issued and are fully-paid and
non-assessable and were issued in material compliance with or in
reliance upon an exemption or exemptions from, the registration and
prospectus delivery requirements of all applicable state and federal
laws regulating the offer, sale or issuance of securities, and the
purchasers of such securities have no right to rescission arising from
failure by the Company to comply with applicable state or federal
securities laws. The Company has no authority to issue any other
classes or series of capital stock.
(b) Except as set forth in the Public Filings, and except for
options granted under any stock option or incentive plan of the
Company, there are no outstanding options, contracts, commitments,
warrants, preemptive rights agreements or other rights of any
character affecting or relating in any manner to the issuance, upon
the conversion of the Note, of the Shares or other equity securities
of the Company, or entitling any person or entity to acquire any of
the Shares or other equity securities of the Company, including
options granted under any stock option or incentive plan.
3.3 Public Filings. The Company has heretofore furnished the Purchasers
with true and complete copies of the following public filings (the "Public
Filings") of the Company: (i) Annual Report on Form 10-KSB for the year ended
December 31, 1998, as filed with the SEC, (ii) Quarterly Report on Form 10-QSB
for the fiscal quarter ended September 30, 1999 (a copy of which is attached
hereto as Exhibit C), (iii) Proxy Statement relating to the Company's 1999
Annual Meeting, (iv) the Proxy Statement, filed with the SEC on November 19,
1999, relating to the Company's proposed re-incorporation in Delaware and
adoption of a new stock option plan, and (v) all other reports, other than Form
SR's or Registration Statements filed by the Company with the SEC since December
31, 1998. As of their respective dates, such reports and statements complied as
to form in all material respects with the requirements applicable thereto and
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements,
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in light of the circumstances under which they were made, not misleading. The
audited financial statements and unaudited interim financial statements of the
Company included or incorporated by reference in such reports have been prepared
in accordance with GAAP applied on a consistent basis (except as may be
indicated therein or in the notes thereto) and fairly present the assets,
liabilities and financial position of the Company as of and at the dates thereof
and the results of operations and changes in financial position for the periods
then ended, subject in the case of the unaudited interim financial statements,
to normal, recurring year-end adjustments and any other adjustments described
therein. As of September 30, 1999, the Company had no Liabilities or obligations
(absolute, accrued, contingent or otherwise) material to the Company of a nature
required by GAAP to be stated on a balance sheet of the Company (the
"Liabilities") which were not reflected on the balance sheet included in the
Company's Quarterly Report on form 10-QSB for the period ended September 30,
1999 (the "Balance Sheet"). Since September 30, 1999, the Company has incurred
no Liabilities except (a) Liabilities incurred in the ordinary course of
business consistent with past practice and (b) Liabilities incurred, other than
in the ordinary course of business consistent with past practice, which do not,
individually or in the aggregate, exceed $100,000, other than a loan from Future
Media Productions, Inc. in the principal amount of $100,000.
3.4 Authorization. The Company has all requisite power and authority to
execute, deliver and perform its obligations under this Subscription Agreement,
and to issue, sell and deliver the Note, and upon conversion, the Shares. This
Subscription Agreement has been duly authorized by the Company, and (subject,
with respect to enforceability, to the provisions of specific performance,
bankruptcy and similar laws and principles of equity) when executed and
delivered by the Company, will constitute the legal, valid and binding
obligations of the Company, enforceable as to the Company in accordance with its
respective terms.
3.5 To the best of the Company's knowledge, no consent, authorization,
approval, order, license, certificate or permit of or from, or declaration or
filing with, a federal, state, local or other governmental authority or any
court or any other tribunal is required by the Company for the execution,
delivery or performance by the Company of this Subscription Agreement, or the
execution, issuance, sale, delivery or performance of the its obligations under
the Note, or upon conversion of the Note, the issuance and delivery of the
Shares (except as specified herein or as may be required under Federal and State
securities laws).
3.6 To the best of the Company's knowledge, no consent of any party to any
contract, agreement, instrument, lease, license, arrangement or understanding to
which the Company is a party or to which any of its properties or assets are
subject is required for the execution, delivery or performance by the Company of
this Subscription Agreement.
3.7 The execution, delivery and performance by the Company in accordance
with the terms and conditions of this Subscription Agreement, and the execution,
issuance, sale, and delivery of the Note, and upon conversion, the Shares by the
Company in accordance with any instrument or other document governing the rights
and obligations of any such securities, will not violate, result in a breach of,
conflict with (with or without the giving of notice or the passage of time or
both) or entitle any party to terminate or call a default under any material
contract, agreement, instrument, lease, license, arrangement or understanding or
violate or result in a breach of any term of the certificate of incorporation or
by-laws of, or conflict with any law, rule, regulation, order, judgment or
decree binding upon, the Company or to which any of its operations, businesses,
properties or assets are subject, the result of which may have a material
adverse effect on the business, operations, liabilities or condition (financial
or otherwise) of the Company.
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3.8 To the knowledge of the Company the Public Filings do not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading.
There has been no material adverse change in the financial condition, results of
operation, business, properties, assets, liabilities or future prospects of the
Company from the latest information set forth in the Public Filings.
4. REGISTRATION RIGHTS
4.1 Definitions. For the purposes of this Agreement, the following words
shall have the meanings set forth below:
(a) An "Affiliate" of any Person is any other Person which controls,
is controlled by or is under common control with such Person.
(b) "Registrable Securities" means (x) the Common Stock issued or
issuable upon the conversion of the Note; and (y) any Common Stock or other
securities of the Company issued or issuable with respect to the securities
identified in clause (x) above by reason of a stock dividend or stock split
or in connection with a conversion, exchange, combination of shares,
recapitalization, merger, consolidation or other reorganization.
Each share of Registrable Securities shall continue to be Registrable
Securities in the hands of each subsequent holder thereof; provided, that
each share of Registrable Securities shall cease to be Registrable
Securities when transferred to any Person who is not an Affiliate of a
holder of Registrable Securities, pursuant to a registered public offering
or pursuant to Rule 144.
(c) The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act.
4.2 Incidental Registration.
(a) If the Company at any time proposes to register on a firmly
underwritten public offering basis any of its Common Stock to be offered
for cash for its own account pursuant thereto it shall give written notice
(the "Company's Notice"), at its expense, to all holders of Registrable
Securities of its intention to do so at least 15 days prior to the filing
of a registration statement with respect to such registration with the
Commission. If any holder of Registrable Securities desires to dispose of
all or part of such stock, he, she or it may request registration thereof
in connection with the Company's registration by delivering to the Company,
within ten days after receipt of the Company's Notice, written notice of
such request (the "Holder's Notice") stating the number of shares of
Registrable Securities which such holder desires to sell pursuant to the
registration. The Company shall use its best efforts to cause all shares
specified in the Holder's Notice to be registered under the Securities Act
so as to permit the sale or other disposition by such holder or holders of
the shares so registered, subject however, to the limitations set forth in
Section 4.3 hereof.
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(b) Notwithstanding anything to the contrary contained in this Section
4.2, no person (as defined, for these purposes, in Rule 144) who then
beneficially owns 1% or less of outstanding shares of any class of
securities of the Company or is not subject to the volume limitations set
forth in Rule 144 may request that any of its Registrable Securities be
included in any registration statement filed by the Company pursuant to
this Section 4.2 unless, in the opinion of counsel for such person, such
person's intended disposition of Registrable Securities could not be
effected within 90 days of the date of said opinion without registration of
such shares under the Securities Act (assuming, for this purpose, that if
"current public information" (as defined in Rule 144) is available with
respect to the Company as of the date of such opinion, it will remain so
available for such 90-day period).
4.3 Limitations on Incidental Registration.
(a) The Company shall have the right to limit the aggregate size of
the offering or the number of shares to be included therein by shareholders
of the Company if requested to do so in good faith by the managing
underwriter or agent of the offering. Only securities which are to be
included in the underwriting may be included in the registration.
(b) Whenever the number of shares which may be registered pursuant to
Section 4.2 is limited by the provisions of Section 4.3(a) above, the
Company will include in such registration, (i) first, the shares the
Company proposes to sell, (ii) second, the Common Stock issued or issuable
upon conversion of the Series A Convertible Preferred Stock allocated among
the holders of such stock (iii) third, the Common Stock issued or issuable
upon conversion of the Series B Preferred Stock allocated among the holders
of such stock and (iv) fourth, the other securities requested to be sold by
all other shareholders of the Company who have the contractual right to
include all or a portion of their shares in the registration allocated pro
rata among such holders on the basis of the number of registrable
securities owned by each such holder; provided, that if any such holder of
Registrable Securities or holder of other securities would thus be entitled
to include more shares than such holder requested to be registered, the
excess will be allocated among the other holders of Registrable Securities
or the holders of other securities, respectively, on the basis of the
number of shares of Registrable Securities or other registrable securities,
respectively, then held by each holder.
(c) The Company may grant subsequent investors registration rights
which shall have priority over the registration rights granted to the
holders of Registrable Securities by this Agreement.
4.4 Expenses of Registration. All expenses incurred in effecting any
registration pursuant to Section 4.2 hereof, including, without limitation, all
registration and filing fees, printing expenses, expenses of compliance with
Blue Sky laws, fees and disbursements of counsel for the Company, and expenses
of any audits incidental to or required by any each registration shall be borne
by the Company; provided, that each holder of Registrable Securities shall bear
his, her or its own legal expenses (if he, she or it retains separate counsel)
and all underwriting discounts or brokerage fees or commissions relating to the
sale of its Registrable Securities or other registrable securities of the
Company.
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4.5 Indemnification.
(a) In the event of any registration of any of its securities under
the Securities Act pursuant to this Agreement, the Company shall indemnify
and hold harmless each holder of Registrable Securities requesting or
joining in a registration of such securities, each underwriter (as defined
in the Securities Act), and each controlling person (within the meaning of
the Securities Act) of any holder or underwriter, if any, against any
losses, claims, damages or liabilities, joint or several (or actions in
respect thereof), to which such holder, underwriter or controlling person
may be subject under the Securities Act, under any other statute or at
common law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon (i) any untrue
statement (or alleged untrue statement) of any material fact contained in
any registration statement under which such securities were registered
under the Securities Act, any preliminary prospectus or final prospectus
contained therein, or any summary prospectus issued in connection with any
securities being registered, or any amendment or supplement thereto, or any
other document used to sell the securities (including an illegal
prospectus), or (ii) any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any violation by the Company of
the Securities Act or any Blue Sky law, or any rule or regulation
promulgated under the Securities Act or any Blue Sky law, or any other law,
applicable to the Company in connection with any such registration and
shall reimburse each such holder, underwriter or controlling person for any
legal or other expenses reasonably incurred by such holder, underwriter or
controlling person in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the
Company shall not be liable to any holder, underwriter or controlling
person in any such event to the extent that any such loss, claim, damage or
liability arises out of or is based upon any such untrue statement or
omission, or alleged untrue statement or omission, made in such
registration statement, preliminary prospectus, summary prospectus, final
prospectus, or amendment or supplement thereto, or any other document, in
reliance upon and in conformity with written information furnished to the
Company by any such holder, underwriter, controlling person or expert (as
that term is defined by the Securities Act) specifically for use therein,
and provided, further, that the Company shall not be required to indemnify
any person against any liability arising from any untrue or misleading
statement or omission or any alleged untrue statement or omission in the
preliminary prospectus if such deficiencies are corrected in the final
prospectus. The indemnity provided for herein shall remain in full force
and effect regardless of any investigation made by or on behalf of such
holder, underwriter or controlling person, and shall survive transfer of
such securities by such holder.
(b) In the event of any registration of any of the Company's
securities under the Securities Act in which a holder of Registrable
Securities or other registrable securities of the Company participates
pursuant to this Agreement, each such holder shall furnish to the Company
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in writing such information and affidavits as the Company reasonably
requests for use in connection with such registration statement and agrees
to indemnify and hold harmless the Company, its directors, each underwriter
(as defined in the Securities Act) and each controlling person (within the
meaning of the Securities Act) of the Company or underwriter, if any, and
the Company's accountants and attorneys, against any losses, claims,
damages or liabilities, joint or several (or actions in respect thereof),
to which the Company, or any director, underwriter or controlling person
may be subject under the Securities Act, under any other statute or at
common law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon (i) any untrue
statement (or alleged untrue statement) of any material fact contained in
any registration statement under which such securities were registered
under the Securities Act, any preliminary prospectus or final prospectus
contained therein, or any summary prospectus issued in connection with any
securities being registered, or any amendment or supplement thereto, or any
other document used to sell the securities (including an illegal
prospectus), or (ii) any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and shall reimburse the Company, any
director, underwriter, and controlling person for any legal or other
expenses reasonably incurred by such persons in connection with
investigating or defending any such loss, claim, damage, liability or
action; in each case, to the extent, and only to the extent, that such
untrue statement or omission (or alleged untrue statement or omission) is
contained in any information or affidavit so furnished in writing by such
holder. The indemnity provided for herein shall survive transfer of such
securities by said holder.
(c) If the indemnification provided for in Sections 4.5(a) or (b)
above is unavailable to an indemnified party in accordance with its terms
in respect of any losses, claims, damages or liabilities referred to
therein, then the indemnitor in lieu of indemnifying such indemnified party
thereunder shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or
liabilities, in such proportion as is appropriate to reflect the relative
fault of the indemnitor on the one hand and of the indemnified parties on
the other in connection with the statements or omissions which resulted in
such losses, claims, damages, or liabilities, as well as any other relevant
equitable considerations. The relative fault of the indemnitor and of the
indemnified parties shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by
the indemnitor, or the indemnified parties, and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Purchaser agree
that it would not be just and equitable if contribution pursuant to this
Section 4.5(c) were determined by pro rata allocation or by any other
method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities or actions in respect thereof referred to
in the immediately preceding paragraph shall be deemed to include, subject
to the limitations set forth above, any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim. No person guilty of a fraudulent
misrepresentation (within the meaning of the Securities Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
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(d) Promptly after receipt by an indemnified party under Sections
4.5(a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made
against an indemnitor under such Sections, notify the indemnitor in writing
of the commencement thereof; but the omission so to notify the indemnitor
shall not relieve it from any liability which it may have to any
indemnified party otherwise than under such Sections 4.5(a) or (b) or to
the extent that it has not been prejudiced as a proximate result of such
failure. In case any action shall be brought against any indemnified party,
and it shall notify the indemnitor of the commencement thereof, the
indemnitor shall be entitled to participate therein and, to the extent that
it shall wish, to assume the defense thereof. Upon the assumption by the
indemnitor of the defense of such action, the indemnitor shall not be
liable to such indemnified party under this Section 4.5 for any legal or
other expenses subsequently incurred by such indemnified party in
connection with the defense thereof.
4.6 Covenants of Holder.
(a) Purchaser will furnish to the Company in writing such information
as the Company may reasonably require from such seller, and otherwise
reasonably cooperate with the Company in connection with any Registration
Statement with respect to such Registrable Securities.
(b) Purchaser will not (until further notice) effect sales of
Registrable Securities involved in any Registration Statement thereof after
receipt of written notice from the Company to suspend sales to permit the
Company to correct or update such Registration Statement or Prospectus.
(c) At the end of any period during which the Registration Statement
is current and effective, Purcahser shall discontinue sales of shares
pursuant to such Registration Statement on receipt of notice from the
Company of its intention to remove from registration the shares covered by
such Registration Statement which remain unsold, and Holder shall notify
the Company of the number of shares registered which remain unsold promptly
after receipt of such notice from the Company.
(d) Notwithstanding any other provision herein to the contrary,
Purchaser shall not be required to exercise his right to convert the Note
in connection with any registration until the actual sale of the shares of
Common Stock issuable upon exercise of such Note. The Company shall enter
into such agreements and shall otherwise cooperate with Purchaser in order
to ensure that Purchaser is not required to exercise his right to convert
the Note prior to the date of the actual sale of the shares of Common Stock
issuable upon exercise of such conversion right.
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5. MARKET STAND-OFF.
The Purchaser agrees that, in connection with any underwritten public
offering by the Company of its securities pursuant to an effective registration
statement filed under the Securities Act, as amended, the Purchaser shall agree
not to sell, make any short sale of, loan, hypothecate, pledge, grant any option
for the repurchase of, or otherwise dispose or transfer for value or otherwise
agree to engage in any of the foregoing transactions with respect to any
securities of the Company without the prior written consent of the Company or
its underwriters, for such period of time from and after the effective date of
such registration statement as may be requested by the Company or such
underwriters.
6. UNDERSTANDINGS
6.1 The undersigned understands, acknowledges and agrees with the Company
as follows:
(a) This Subscription is and shall be irrevocable, except that the
undersigned shall have no obligations hereunder in the event that (i) this
subscription is rejected for any reason; or (ii) the purchase and sale of
Shares is not consummated by the Closing Date.
(b) No federal agency or state agency or regulatory agency has made
any finding or determination as to the fairness of this offering or
investment, nor any recommendation or endorsement of the Note or the
Shares.
(c) There can be no assurance that the undersigned will be able to
sell or dispose of the Note or Shares. Moreover, no assignment, sale,
transfer, exchange or other disposition of the Note or Shares can be made
other than in accordance with all applicable securities laws. It is
understood that in order not to jeopardize the offering's exempt status
under Rule 506 of Regulation D of the Act, the transferee will be required
to fulfill certain investor suitability requirements.
(d) There can be no assurance as to the Federal, State or local tax
results of an investment in the Note.
(e) The undersigned has such knowledge and experience in financial and
business matters that he is capable of evaluating the merits and risks of
investment in the Company and of making an informed investment decision.
(f) The undersigned, by reason of his business or financial
experience, is capable of evaluating the merits and risks of the purchase
of the Note in order to protect the undersigned's own interest in
connection with this transaction.
(g) The undersigned agrees, and any future permitted transferee of the
Note or Shares agrees, that the Shares shall not be sold, assigned,
transferred or otherwise disposed of except as permitted by, and in
compliance with, the provisions of Rule 144 promulgated under the
Securities Act; You acknowledge that the certificates evidencing the Shares
shall bear a legend relating to such restrictions.
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6.2 The representations, warranties, understandings, acknowledgments and
agreements made by the undersigned in this Agreement are true and accurate as of
the date hereof, shall be true and correct as of the date of the acceptance
hereof by the Company and shall survive thereafter.
7. MISCELLANEOUS
7.1 All pronouns and any variations thereof used herein shall be deemed to
refer to the masculine, feminine, singular or plural as the identity of the
person or persons may require.
7.2 Neither this Subscription Agreement nor any provisions hereof shall be
waived, modified, changed, discharged, terminated, revoked or canceled except by
an instrument in writing signed by the party against whom any change, discharge
or termination is sought.
7.3 Notices required or permitted to be given hereunder shall be in writing
and shall be deemed to be sufficiently given when personally delivered or sent
by registered mail, return receipt requested, addressed, if to the Company:
Synthonics Technologies, Inc., 31324 Via Colinas, Suite 106, Westlake Village
California 91362, or if to Purchaser the address set forth below, as amended
from time to time, or to such other address furnished by notice given in
accordance with this Article 7.
7.4 Failure of the Company to exercise any right or remedy under this
Subscription Agreement or any other agreement between the Company and the
undersigned, or otherwise, or delay by the Company in exercising such right or
remedy, will not operate as a waiver thereof. No waiver by the Company will be
effective unless and until it is in writing and signed by the Company.
7.5 This Subscription Agreement shall be enforced, governed and construed
in all respects in accordance with the laws of the State of California, and
shall be binding upon the undersigned, his heirs, estate, legal representatives,
successors and assigns and shall inure to the benefit of the Company and its
successors and assigns.
7.6 In the event that any provision of this Subscription Agreement is
invalid or unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any provision hereon which may prove invalid or unenforceable under any law
shall not affect the validity or enforceability of any other provision hereof.
7.7 This Subscription Agreement constitutes the entire agreement among the
parties hereto with respect to the subject matter hereof and supersede any and
all prior or contemporaneous representations, warranties, agreements and
understandings in connection therewith. This Agreement may be amended only by a
writing executed by all parties hereto.
14
<PAGE>
7.8 This Subscription Agreement may be executed in one or more counterparts
representing, however, one and the same Agreement.
IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement on the attached Signature Page.
15
<PAGE>
SUBSCRIPTION AGREEMENT - SIGNATURE PAGE
- --------------------------------------------------------------------------------
This page constitutes the Signature Page to this Subscription Agreement.
The undersigned represents to the Company that (a) the information contained
herein is complete and accurate on the date hereof and may be relied upon by the
Company, and (b) the undersigned will notify the Company immediately of any
change in any of such information occurring prior to the acceptance of the
subscription and prior to the Closing relating to the Shares, once the
Subscription Agreement is accepted, and will promptly send the Company written
confirmation of such change. The undersigned hereby certifies that he has read
and understands the Public Filings and this Subscription Agreement.
Under penalty of perjury, the undersigned also certifies that he is not
subject to backup withholding under the rules and regulations of the Internal
Revenue Service. Please make the check payable to "Synthonics Technologies,
Inc."
IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement this __ day of December, 1999.
- -----------------------------------------------
SIGNATURE OF PURCHASER
Future Media Productions, Inc.
- ------------------------------
NAME OF PURCHASER
- ------------------------------------------------
Title of Authorized Signatory if Purchaser is
a corporation, partnership or other entity
- ------------------------------------------------
Address, City, State and Zip Code
THE NOTE AND SHARES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION IN RELIANCE OF AN EXEMPTION FROM
SUCH REGISTRATION PURSUANT TO RULE 506 OF REGULATION D OF THE SECURITIES ACT OF
1933 (THE "ACT").
Accepted by: Synthonics Technologies, Inc.
_______________________________________ Dated: ______________
16
THIS SUBORDINATED CONVERTIBLE PROMISSORY NOTE AND THE SECURITIES ISSUABLE
HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND HAVE
BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE
SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF
COUNSEL FOR THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE
SECURITIES ACT OF 1933.
- ------------------------------------------------------------------------------
$500,000.00 December 22, 1999
Los Angeles, CA
SYNTHONICS TECHNOLOGIES, INC.
CONVERTIBLE SUBORDINATED PROMISSORY NOTE
FOR VALUE RECEIVED, Synthonics Technologies, Inc., a Utah corporation (the
"Company"), promises to pay to Future Media Productions, Inc ("Holder"), at its
offices at 25136 Anza Drive, Valencia, CA 91355 or such other location as is
reasonably requested by Holder, the principal sum of Five Hundred Thousand
$500,000.00. Interest shall accrue from the first anniversary of the date of
this Note on the unpaid principal amount at the rate equal to the average rate
of interest incurred by Holder on its outstanding secured borrowings, compounded
annually, until paid. Such principal amount, together with accrued but unpaid
interest, shall be payable on demand by the Holder after December 22, 2001 (the
"Term"), unless earlier converted in accordance with Section 2 of this
Convertible Note (the "Note").
1. Payment. Payment shall be made in lawful tender of the United States and
shall be credited first to the accrued but unpaid interest due and the remainder
applied to principal.
2. Conversion. Subject to and in compliance with the provisions of this
Section 2, up to but not following the first anniversary of the date of this
Note, the Note may, at the option of the Holder, be converted at any time into
fully-paid and nonassessable shares of Common Stock. The number of shares of
Common Stock to which the Holder shall be entitled to at any time upon
conversion of the Note shall be Eleven Million, Five Hundred and Eighteen
Thousand and Ninety-Six (11,518, 096), subject to adjustment as provided herein.
2.1. Adjustment for Stock Splits, Stock Subdivisions or Combinations
of Shares. The number of shares of Common Stock issuable upon conversion of
this Note (or any shares of stock or other securities at the time issuable
upon conversion of this Note) shall be proportionally increased to reflect
any stock split or subdivision of the Company's Common Stock and
proportionally decreased to reflect any combination of the Company's Common
Stock.
1
<PAGE>
2.2. Adjustment for Dividends or Distributions of Stock or Other
Securities or Property. In case the Company shall make or issue, or shall
fix a record date for the determination of eligible holders entitled to
receive, a dividend or other distribution with respect to the Common Stock
(or any shares of stock or other securities at the time issuable upon
conversion of the Note) payable in (a) securities of the Company or (b)
assets (excluding cash dividends paid or payable solely out of retained
earnings), then, in each such case, the Holder of this Note on conversion
hereof at any time after the consummation, effective date or record date of
such dividend or other distribution, shall receive, in addition to the
shares of Common Stock (or such other stock or securities) issuable on such
conversion prior to such date, and without the payment of additional
consideration therefore, the securities or such other assets of the Company
to which such Holder would have been entitled upon such date if such Holder
had converted this Note on the date hereof and had thereafter, during the
period from the date hereof to and including the date of such conversion,
retained such shares and all such additional securities or other assets
distributed with respect to such shares as aforesaid during such period
giving effect to all adjustments called for by this Section 2.
2.3. Reclassification. If the Company, by reclassification of
securities or otherwise, shall change any of the securities as to which
purchase rights under this Note exist into the same or a different number
of securities of any other class or classes, this Note shall thereafter
represent the right to acquire such number and kind of securities as would
have been issuable as the result of such change with respect to the
securities that were subject to the conversion rights under this Note
immediately prior to such reclassification or other change, and the number
of shares of Common Stock issuable upon conversion of this Note shall be
appropriately adjusted, all subject to further adjustment as provided in
this Section 2. No adjustment shall be made pursuant to this Section 2.3
upon any conversion or redemption of the Common Stock which is the subject
of Section 2.5.
2.4. Adjustment for Capital Reorganization, Merger or Consolidation.
In case of any capital reorganization of the capital stock of the Company
(other than a combination, reclassification, exchange or subdivision of
shares otherwise provided for herein), or any merger or consolidation of
the Company with or into another corporation, or the sale of all or
substantially all the assets of the Company then, and in each such case, as
a part of such reorganization, merger, consolidation, sale or transfer,
lawful provision shall be made so that the Holder of this Note shall
thereafter be entitled to receive upon conversion of this Note, during the
period specified herein, the number of shares of stock or other securities
or property of the successor corporation resulting from such
reorganization, merger, consolidation, sale or transfer that a holder of
the shares deliverable upon conversion of this Note would have been
entitled to receive in such reorganization, consolidation, merger, sale or
transfer if this Note had been converted immediately before such
reorganization, merger, consolidation, sale or transfer, all subject to
further adjustment as provided in this Section 2. The foregoing provisions
of this Section 2.4 shall similarly apply to successive reorganizations,
consolidations, mergers, sales and transfers and to the stock or securities
of any other corporation that are at the time receivable upon the
conversion of this Note. If the per-share consideration payable to the
Holder hereof for shares in connection with any such transaction is in a
form other than cash or marketable securities, then the value of such
consideration shall be determined in good faith by the Company's Board of
2
<PAGE>
Directors. In all events, appropriate adjustment (as determined in good
faith by the Company's Board of Directors) shall be made in the application
of the provisions of this Note with respect to the rights and interests of
the Holder after the transaction, to the end that the provisions of this
Note shall be applicable after that event, as near as reasonably may be, in
relation to any shares or other property deliverable after that event upon
conversion of this Note.
2.5. Conversion of Common Stock. In case all or any portion of the
authorized and outstanding shares of Common Stock of the Company are
redeemed or converted or reclassified into other securities or property
pursuant to the Company's Certificate of Incorporation or otherwise, or the
Common Stock otherwise ceases to exist, then, in such case, the Holder of
this Note, upon conversion hereof at any time after the date on which the
Common Stock is so redeemed or converted, reclassified or ceases to exist
(the "Termination Date"), shall receive, in lieu of the number of shares of
Common Stock that would have been issuable upon such conversion immediately
prior to the Termination Date, the securities or property that would have
been received if this Note had been converted in full and the Common Stock
received thereupon had been simultaneously converted immediately prior to
the Termination Date, all subject to further adjustment as provided in this
Note.
3. Subordination. The indebtedness evidenced by this Note is hereby
expressly subordinated, to the extent and in the manner hereinafter set forth,
in right of payment to the prior payment in full of all the Company's Senior
Indebtedness, as hereinafter defined.
3.1 Senior Indebtedness. As used in this Note, the term "Senior
Indebtedness" shall mean the principal of and unpaid accrued interest on
(i) current or future indebtedness of the Company or with respect to which
the Company is a guarantor, to banks, insurance companies, lease financing
institutions or other financial institutions regularly engaged in the
business of lending money, which is for money borrowed (or purchase or
lease of equipment in the case of lease financing) by the Company (whether
or not secured) in the ordinary course of business, and (ii) any such
indebtedness or any debentures, notes or other evidence of indebtedness
issued in exchange for such Senior Indebtedness, or any indebtedness
arising from the satisfaction of such Senior Indebtedness by a guarantor.
3.2 Default on Senior Indebtedness. If there should occur any
receivership, insolvency, assignment for the benefit of creditors,
bankruptcy, reorganization or arrangements with creditors (whether or not
pursuant to bankruptcy or other insolvency laws), sale of all or
substantially all of the assets, dissolution, liquidation or any other
marshaling of the assets and liabilities of the Company, or if this Note
shall be declared due and payable upon the occurrence of an event of
default with respect to any Senior Indebtedness, then (i) no amount shall
be paid by the Company in respect of the principal of or interest on this
Note at the time outstanding, unless and until the principal of and
interest on the Senior Indebtedness then outstanding shall be paid in full,
and (ii) no claim or proof of claim shall be filled with the Company by or
on behalf of the Holder of this Note that shall assert any right to receive
any payments in respect of the principal of and interest on this Note,
except subject to the payment in full of the principal of and interest on
all of the Senior Indebtedness then outstanding. If there occurs an event
of default that has been declared in writing with respect to any Senior
Indebtedness, or in the instrument under which any Senior Indebtedness is
outstanding, permitting the holder of such Senior Indebtedness to
3
<PAGE>
accelerate the maturity thereof, then, unless and until such event of
default shall have been cured or waived or shall have ceased to exist, or
all Senior indebtedness shall have been paid in full, no payment shall be
made in respect of the principal of or interest on this Note, unless within
180 days after the happening of such event of default, the maturity, of
such Senior Indebtedness shall not have been accelerated.
3.3 Effect of Subordination. Subject to the rights, if any, of the
holders of Senior Indebtedness under this Section 3 to receive cash,
securities or other properties otherwise payable or deliverable to the
Holder of this Note, nothing contained in this Section 3 shall impair, as
between the Company and the Holder, the obligation of the Company, subject
to the terms and conditions hereof, to pay to the Holder the principal
hereof and interest hereon as and when the same become due and payable, or
shall prevent the Holder of this Note, upon default hereunder, from
exercising all rights, powers and remedies otherwise provided herein or by
applicable law.
3.4 Subrogation. Subject to the payment in full of all Senior
Indebtedness and until this Note shall be paid in full, the Holder shall be
subrogated to the rights of the holders of Senior Indebtedness (to the
extent of payments or distributions previously made to such holders of
Senior Indebtedness pursuant to the provisions of Section 3 above) to
receive payments or distributions of assets of the Company applicable to
the Senior Indebtedness. No such payments or distributions applicable to
the Senior Indebtedness shall, as between the Company and its creditors,
other than the holders of Senior Indebtedness and the Holder, be deemed to
be a payment by the Company to or on account of this Note; and for the
purposes of such subrogation, no payments or distributions to the holders
of Senior Indebtedness to which the Holder would be entitled except for the
provisions of this Section 3 shall, as between the Company and its
creditors, other than the holders of Senior Indebtedness and the Holder, be
deemed to be a payment by the Company to or on account of the Senior
Indebtedness.
3.5 Undertaking. By its acceptance of this Note, the Holder agrees to
execute and deliver such documents as may be reasonably requested from time
to time by the Company or the lender of any Senior Indebtedness in order to
implement the foregoing provisions of this Section 3. The provisions of
this Section 3 shall bind any successors or assignees of Holder and shall
benefit any successors or assigns of any lender of Senior Indebtedness,
and, if the Company refinances a portion of the Senior Indebtedness with a
new lender, such new lender shall be deemed a successor or assign of a
lender of Senior Indebtedness for the purposes of this Section 3. This
Section 3 is solely for the benefit of Holder and lenders of Senior
Indebtedness and not for the benefit of the Company or any other party. The
provisions of this Section 3 may be amended only by written instrument
signed by Holder and the lenders of Senior Indebtedness. In the event of
any legal action to enforce the rights of a party, under this Section 3,
the party prevailing in such action shall be entitled, in addition to such
other relief as may be granted, all reasonable costs and expenses,
including reasonable attorneys' fees, incurred in such action.
4. Transfers.
4.1 The Holder acknowledges that this Note has not been, and the
Common Stock, when and if issued, will not be, registered under the
Securities Act of 1933 (the "Securities Act"), and agrees not to sell,
pledge, distribute, offer for sale, transfer or otherwise dispose of this
Note or any Common Stock issued upon its conversion in the absence of (i)
4
<PAGE>
an effective registration statement under the Securities Act as to this
Note and/or such Common Stock and registration or qualification of this
Note and/or such Common Stock under any applicable Blue Sky or state
securities law then in effect, or (ii) an opinion of counsel, satisfactory
to the Company, that such registration and qualification are not required.
Each certificate or other instrument evidencing shares of such Common Stock
issued upon the conversion of this Note shall bear a legend substantially
to the foregoing effect.
4.2 Subject to the terms and conditions of this Note and compliance
with all applicable securities laws, this Note and all rights hereunder may
be transferred, in whole, but not in part, (i) to the Holder's parent,
subsidiary or affiliate (including the parties to that certain June 2, 1999
letter agreement with the Company), (ii) to the surviving corporation in
any merger or consolidation of the Holder with or into another corporation
or (iii) to the purchaser of all or substantially all of the assets of the
Holder, on the books of the Company maintained for such purpose at the
principal office of the Company referred to above, by the Holder hereof in
person, or by duly authorized attorney, upon surrender of this Note
properly endorsed and upon payment of any necessary transfer tax or other
governmental charge imposed upon such transfer. Other than as permitted by
the immediately preceding sentence, no other transfer of this Note (or any
shares of stock or other securities issued upon the exercise thereof) may
be transferred shall be permitted without the prior written consent of the
Company, which may be granted or withheld in its sole discretion.
4.3 Until any transfer of this Note is made in the Note register, the
Company may treat the registered holder of this Note as the absolute owner
hereof for all purposes; provided, however, that if and when this Note is
properly assigned, the Company may (but shall not be required to) treat the
bearer hereof as the absolute owner hereof for all purposes,
notwithstanding any notice to the contrary.
The Company will maintain a register containing the names and
addresses of the registered holders of this Note. Any registered holder may
change such registered holder's address as shown on the Note register by
written notice to the Company requesting such change.
4.5 In the discretion of the Company, the Company may condition any
transfer of all or any portion of this Note upon the transferee's delivery
to the Company of a written agreement, in form and substance satisfactory
to the Company, whereby the transferee (i) makes certain standard
investment representations and warranties to and for the benefit of the
Company, in a form reasonably acceptable to the Company, and (ii) agrees to
be bound by the transfer restrictions set forth in this Section 4.
5. Default.
5.1 Events of Default. The occurrence of any of the following shall
constitute an "Event of Default" under this Note:
a. Default on Senior Indebtedness. An event of default with respect
to any Senior Indebtedness shall occur, including without
limitation the failure to pay when due any principal or interest
payment on the due date thereunder;
5
<PAGE>
b. Voluntary Bankruptcy or Insolvency Proceedings. The Company shall
(i) apply for or consent to the appointment of a receiver,
trustee, liquidator or custodian of itself or of all or a
substantial part of its property, (ii) be unable, or admit in
writing its inability, to pay its debts generally as they mature,
(iii) make a general assignment for the benefit of its or any of
its creditors, (iv) be dissolved or liquidated in full or in
part, (v) become insolvent (as such term may be defined or
interpreted under any applicable statute), (vi) commence a
voluntary case or other proceeding seeking liquidation,
reorganization or other relief with respect to itself or its
debts under any bankruptcy, insolvency or other similar law now
or hereafter in effect or consent to any such relief or to the
appointment of or taking possession of its property by any
official in an involuntary case or other proceeding commenced
against it, or (vii) take any action for the purpose of effecting
any of the foregoing;
c. Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for
the appointment of a receiver, trustee, liquidator or custodian
of Company or of all or a substantial part of the property
thereof, or an involuntary case or other proceedings seeking
liquidation, reorganization or other relief with respect to
Company or the debts thereof under any bankruptcy, insolvency or
other similar law or hereafter in effect shall be commenced and
an order for relief entered or such proceeding shall not be
dismissed or discharged within thirty (30) days of commencement.
5.2 Rights of Holder Upon Default. Subject to the Section 3 above,
upon the occurrence or existence of any Event of Default and at any time
thereafter during the continuance of such Event of Default, Holder may
declare all outstanding amounts payable by Company hereunder to be
immediately due and payable without presentment, demand, protest or any
other notice of any kind, all of which are hereby expressly waived. In
addition to the foregoing remedies, upon the occurrence or existence of any
Event of Default, Holder may exercise any other right, power or remedy
granted to it or otherwise permitted to it by law, either by suit in equity
or by action at law, or both.
6. Investment; Transfer of Securities.
6.1 Representations. Holder has been advised that this Note and the
Common Stock issuable upon its conversion (collectively referred to herein
as the "Securities") have not and will not be registered under the
Securities Act of 1933, as amended (the "Securities Act"), nor registered
or qualified under any state blue sky law, pursuant to certain exemptions
from registration and qualification, and that in this connection the
Company is relying in part on the representations of Holder set forth in
this Section 6. Holder represents and Notes that Holder:
a. has a preexisting personal or business relationship with the
Company;
b. has such knowledge and experience in business and financial
matters as to be capable of evaluating the merits and risks of an
investment in the Company and has the capacity to protect his or
her own interest in connection with the acquisition of the
Securities;
6
<PAGE>
c. has the financial ability to bear the economic risk of his or her
investment, has adequate means for providing for his or her
current needs and foreseeable contingencies, has no need now, and
anticipates no need in the foreseeable future, to sell the
Securities, is able to hold the Securities for an indefinite
period of time and can afford a complete loss of his or her
investment (and that his or her overall commitment to
investments, including this one, which are not readily marketable
is not disproportionate to his or her net worth, and that this
investment will not cause his or her commitment to become
excessive);
d. is acquiring the Securities for his or her own account, for
investment purposes only, and not with a view to or for sale in
connection with any resale or distribution of such Securities in
violation of the Securities Act and no other person will have any
direct or indirect beneficial interest in or right to the
Securities;
e. was not presented with or solicited by any leaflet, public
promotional meeting, circular, newspaper or magazine article,
radio or television advertisement or any other form of general
advertising or solicitation for the purchase of the Securities;
f. has had the opportunity to discuss with the officers of the
Company, all material aspects of an investment in the Company,
including the opportunity to ask such questions concerning the
Company's business and other relevant matters as deemed necessary
or desirable, and has been given all such information as has been
requested, in order to evaluate the merits and risks of an
investment in the Company;
g. is not relying on the accuracy of any projections with respect to
the Company or its operations in making any investment in the
Company;
h. has had reasonable opportunity to seek the advice of independent
counsel respecting his or her investment and the risks and the
implications thereof; and
i. is a resident of the state noted in his or her address line on
the signature page hereto.
6.2 The representations and warranties herein contained shall be
binding upon the Holder's heirs, executors, administrators, successors and
assigns.
6.3 Legend. Any certificate or certificates evidencing the Securities
shall bear a legend substantially in the following form:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND HAVE BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN
OPINION OF COUNSEL FOR THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED UNDER THE SECURITIES ACT OF 1933.
7
<PAGE>
6.4 Transfer. No Securities shall be sold, transferred, assigned,
pledged, encumbered or otherwise disposed of (with or without
consideration) (each a "Transfer") and the Company shall not be required to
register any such Transfer unless and until all of the following events
shall have occurred:
a. the Securities are Transferred pursuant to and in conformity with
(i) (x) an effective registration statement filed with the
Securities and Exchange Commission (the "Commission") pursuant to
the Securities Act, or (y) an exemption from registration under
the Securities Act, and (ii) the securities laws of any state of
the United States; and
b. Holder has, prior to the Transfer of such Securities, and if
requested by the Company, provided all relevant information to
Company's counsel so that upon the Company's request, the
Company's counsel is able to, and actually prepares and delivers
to the Company a written opinion that the proposed Transfer (i)
(x) is pursuant to a registration statement which has been filed
with the Commission and is then effective, or (y) is exempt from
registration under the Securities Act as then in effect, and the
rules and regulations thereunder, and (ii) is either qualified or
registered under any applicable state securities laws, or exempt
from such qualification or registration. The Company shall bear
all reasonable costs of preparing such opinion.
7. Miscellaneous.
7.1 Costs. If action is instituted to collect this Note by Holder, the
Company hereby agrees to pay all costs and expenses, including reasonable
attorneys' fees incurred by Holder in connection with such action.
7.2 Delay. No extension of time for payment of any amount owing
hereunder shall affect the liability, of the Company for payment of the
indebtedness evidenced hereby. No delay by the Holder or any holder hereof
in exercising any power or right hereunder shall operate as a waiver of any
power or right hereunder.
7.3 Waiver and Amendment. No waiver or modification of the terms of
this Note shall be valid without the written consent of the Holder;
provided, however, that any such waiver or modification of Section 3 shall
require the written consent of all holders of Senior Indebtedness.
7.4 Governing Law. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA AS APPLIED TO CONTRACTS
ENTERED INTO BETWEEN CALIFORNIA RESIDENTS WHOLLY TO BE PERFORMED IN
CALIFORNIA.
7.5 Severability. In case any provision contained herein (or part
thereof) shall for any reason be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or other
unenforceability shall not affect any other provision (or the remaining
part of the affected provision) hereof, but this Note shall be construed as
if such invalid, illegal, or unenforceable provision (or part thereof) had
never been contained herein, but only to the extent that such provision is
invalid, illegal, or unenforceable.
8
<PAGE>
7.6 Notice. Any notice or other communication required or permitted
hereunder shall be in writing and shall be deemed to have been duly given
on the date of service if served personally or by facsimile, or five days
after the date of mailing if mailed, by first class mail, registered or
certified, postage prepaid. Notices shall be addressed as follows:
To Holder at: Future Media Productions, Inc.
25136 Anza Drive
Valencia, CA 91355
Attention: President
To Company at: Synthonics Technologies, Inc.
31324 Via Colonias, Suite 106
Westlake Village, CA 91362
Attention: President
or to such other address as a party has designated by notice in writing to the
other party in the manner provided by this Section 7.6.
7.7 Counterparts. This Note may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
7.8 Entire Agreement. This Note constitutes the full and entire
understanding and agreement between the parties with regard to the subject
matter hereof.
9
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be duly executed
and delivered by its authorized officer as of the date first above written.
COMPANY:
SYNTHONICS TECHNOLOGIES, INC.
By:
HOLDER:
FUTURE MEDIA PRODUCTIONS, INC.
By:
Title:
10
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
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<COMMON> 284,217
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<TOTAL-LIABILITY-AND-EQUITY> 629,199
<SALES> 157,737
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<CGS> 92,769
<TOTAL-COSTS> 1,008,522
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