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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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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.
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Commission file number 0-23171.
ON2.COM INC.
(Exact name of registrant as specified in its charter)
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COLORADO
(State or other jurisdiction of incorporation 84-1280679
or organization) (I.R.S. Employer Identification No.)
375 GREENWICH STREET, NEW YORK, NY 10013
(Address of principal executive offices) (Zip Code)
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(212) 941-2400
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Securities Registered Pursuant to Section 12(b) of the Act:
COMMON STOCK
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 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 not 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. / /
Issuer's revenues for the 12 months ended December 31, 1999 were
approximately $178,112.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing price on the American Stock Exchange on
February 15, 2000 was approximately $385,023,146.
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
24,286,596 as of December 31, 1999.
Transitional Small Business Disclosure Format (Check one): / / Yes /X/ No
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TABLE OF CONTENTS
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ITEM 1 DESCRIPTION OF BUSINESS..................................... 3
ITEM 2 DESCRIPTION OF PROPERTY..................................... 10
ITEM 3 LEGAL PROCEEDINGS........................................... 10
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 11
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.... 12
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS........................ 12
ITEM 7 FINANCIAL STATEMENTS........................................ 27
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 27
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT.............................................. 28
ITEM 10 EXECUTIVE COMPENSATION...................................... 32
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 35
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 36
ITEM 13 EXHIBITS LIST AND REPORTS ON FORM 8-K....................... 37
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
On2.com Inc.'s ("On2" or "On2.com" or the "Company") strategy is to be the
early leader in the broadband Internet market for delivery of content. We plan
to achieve this through our technological expertise in video compression and
streaming software, our early entrance into the broadband Internet market and
our exclusive focus on broadband Internet users (connected through cable modem,
DSL, T1 or satellite).
On2 has developed a proprietary technology platform that delivers
television-quality video over the Internet at data rates low enough to allow
broadband users to access and view this video in real time, on demand, without
waiting for downloads. This technology allows us to deliver a high-quality
broadband experience and will help to establish On2.com as a premier broadband
destination site. Initially, we are developing and launching On2.com as a
showcase site featuring On2Movies and On2Reports, which launched February 18,
2000. We intend the On2.com site to evolve into an aggregator of the best
broadband content on the Web. Subsequently, we will make our technology and
infrastructure available to partner content sites to enable them to achieve
superior broadband content distribution from their own sites.
Until 1998, the Company was primarily engaged in the development,
production, and distribution of video compression/decompression software
technology ("codecs") that enabled developers of computer video games and
multi-media presentations to convert analog video signals into digital video
signals, and to compress the signal for storage and playback. Perceiving
consumer broadband Internet usage to be the next high growth Internet market,
the Company elected to exploit its technology's commercial possibilities by
focusing on the broadband market.
INDUSTRY OVERVIEW
GROWTH OF BROADBAND ACCESS TO HOME
The market for high-speed, or "broadband" access to the Internet from home
is expanding at a rapid pace. According to Forrester Research, an industry
research firm, more than 5 million U.S. households are expected to have
broadband Internet access via cable modems, DSL telephone lines or direct
satellite by the end of 2000, increasing to almost 19 million households by the
end of 2002. These broadband systems typically allow sustained data transfer to
the user of at least 256,000 bits per second, or approximately 5 times the
access speed of the fastest standard narrowband modems.
This increased availability of broadband Internet access is paralleled by an
accelerated pace of development in both content available to users of the World
Wide Web and the technology delivering the content. New technologies in video
and audio streaming enable the creation of new forms of content, combining
aspects of traditional, narrowband web design (including text, graphics, and
hyper-links) with the video-based production concepts of television.
While this market is growing rapidly, it presently accounts for less than 5%
of the Internet users online today. Accordingly, most companies involved in the
development of technology and content for the Web are focusing on solutions that
are intended to provide an acceptable experience for the predominant narrowband
customer, while offering an improved version of the same experience to broadband
users.
GROWTH OF ONLINE COMMERCE
The Internet is dramatically affecting the methods by which consumers and
businesses are buying and selling goods and services. The Web provides online
merchants with the ability to reach a global audience and to operate with
minimal infrastructure, reduced overhead and greater economies of scale, while
providing consumers with a broad selection, increased pricing power and
unparalleled convenience. As a
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result, a growing number of consumers are transacting business on the Web,
including trading securities, buying consumer goods, paying bills and purchasing
airline tickets. Jupiter Communications estimates that approximately 29% of Web
users purchased goods or services over the Web in 1999 and that approximately
54% of Web users will make online purchases in 2003. Jupiter also estimates that
retail consumer purchases of goods and services over the Internet will increase
from $14.9 billion in 1999 to $78 billion in 2003. The Company believes that as
electronic commerce expands, advertisers and direct marketers will increasingly
use the Web to advertise products, drive traffic to their Web sites, attract
customers and facilitate transactions.
GROWTH OF INTERNET ADVERTISING
The Web is evolving into an important medium for advertisers due to its
interactive nature, global reach, rapidly growing audience and the expected
increase in online commerce. Unlike more traditional advertising methods, the
Web gives advertisers the potential to target advertisements to broad audiences
or to selected groups of users with specific interests and characteristics. The
Web also allows advertisers and direct marketers to measure the effectiveness
and response rates of advertisements and to track the demographic
characteristics of Web users. The interactive nature of Web advertising enables
advertisers to better understand potential customers, and to change messages
rapidly and efficiently in response to customer behavior and product
availability.
The Company anticipates a significant increase in online advertising.
Forrester Research estimates that the dollar value of Internet advertising in
the U.S. will increase from $2.8 billion in 1999 to $10.4 billion in 2003,
representing a 39% compounded annual growth rate. International online ad
spending is expected to grow from $0.2 billion in 1998 to $4.7 billion in 2003,
representing an 87% compounded growth rate. By comparison,
McCann-Erikson/Jupiter Communications estimate that $173 billion was spent in
1999 on traditional media advertising in the U.S., including television, radio,
outdoor advertising and print. Until recently, the leading Internet advertisers
have been technology companies, search engines and Web publishers. However, many
of the largest advertisers utilizing traditional media, including consumer
products companies and automobile manufacturers, are expanding their use of
online advertising. We believe that online advertising will continue to capture
an increasing share of available advertising dollars and that this trend will
drive demand for online ad inventory and for sophisticated Internet advertising
solutions.
The Company believes that significant opportunities exist for those willing
to focus exclusively on broadband technology and content. By providing services
and capabilities that are not possible in a narrowband environment, the Company
expects to expand its business and reputation, as a leading innovator in
broadband Internet technology, content, and distribution.
STRATEGY
The Company's strategy is to position itself as the early leader in the
broadband Internet market. We plan to achieve this through our exclusive focus
on the broadband market, our technological expertise in video-compression and
streaming software, and our early entrance into the market.
Leveraging our proprietary technology advantage, we are developing a network
of Web destinations, or "channels", that will meld the immediacy and quality of
television with the interactivity of the World Wide Web.
We have developed two initial channels, On2Movies and On2Reports, that are
available to any consumer with a standard, first-generation broadband Internet
connection. Connecting to On2Movies, a consumer can browse through the latest
movie trailers, behind-the-scenes footage, interviews with stars and directors,
and much more. On2 video hosts, or "web-jockeys" guide users through the
available selections, in a familiar, TV-like format. At any time the user can
rewind, fast-forward, pause, and resume playback. Additionally, users have
multiple opportunities to interact with the environment through video
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hot-spots, synchronized links, and globally accessible segment and channel
menus. Connecting to On2Reports, a consumer can call up, on demand, news video
footage that is updated daily. Both channels were launched on February 18, 2000.
On2Networks will feature three broad destinations: entertainment, lifestyle
and business. Additional channels will be a part of one of these destinations,
including music, games, sports and fashion. We are also pursuing partnerships
with content providers and customers to build additional content channels. As
On2's technology is made available and is adopted by broadband content
developers, On2.com will evolve into an aggregator of the best of broadband
content available on the Internet.
On2.com intends to establish a strong and loyal base of users through its
web destination and connected sites. Management believes that the combination of
superior technology and a loyal user base will create revenue opportunities
through monetization of the technology, infrastructure, and know-how.
In addition to the On2 branded content offerings, we plan to market our
technology and related services to third party content developers for use on
their own Web sites. This activity is expected to not only build revenue, but
also to allow us to increase the scope of information and content accessible
through On2.com, increasing our value as a destination to media both on and off
the Web.
ON2.COM DESTINATION SITE--ON2 NETWORKS
On2.com is developing channels with broad appeal to home-based Internet
consumers. Focusing on popular entertainment and leisure categories such as
movies, music, travel, video games and sports, while staying true to the
traditional role of the Internet as an information resource, the On2.com
destination will act as an aggregator of broadband Internet content. Initially,
because most entertainment media is still delivered through traditional media,
this will be reflected in our content. For example, On2Movies will contain
information about movies released in theatres, home video, and television
environments. Over time, as content developers become familiar and more
comfortable with the medium, we anticipate increased delivery of the content
itself over the Internet.
In summary, the On2.com Internet destination will:
- Create a Web-based community that integrates content and commerce.
- Create and establish On2.com as the leading broadband content brand.
- Offer multiple advertising solutions, research and electronic commerce
opportunities.
- Demonstrate the technology platform for delivery of superior content to
broadband-enabled consumers.
- Serve as a basis for future On2 technology products and services.
ADVERTISING
Advertising will primarily consist of 10, 15 and 20-second video commercial
spots adapted from television campaigns or custom-created for the Internet.
On2's advanced video quality level enables advertisers and their agencies to go
beyond the current Internet banner ad, utilizing successful legacy techniques
from television advertising to build brand awareness and communicate product
differentiation. Unlike television, however, commercials on On2 will be fully
interactive. Consumers can click on ads, hot spots or associated links, which
will lead to additional product information, e-commerce opportunities, or
advertiser Web sites.
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E-COMMERCE
The On2.com channels will provide opportunities for users to request
information about various products and services, in many cases culminating with
an online purchasing opportunity. These consumer-advertiser interactions may
include commission and/or sales lead revenue to On2.com.
On2.com views its network of channels as an opportunity to enhance the
traditional model of commerce by presenting it as complimentary content to the
other forms of entertainment available. On2.com is developing product
fulfillment partnerships across the content areas within the channels as well as
across the network. As a result, viewers will be able to access deep content and
product information on each On2 channel and click through to make a purchase.
PRODUCTION
The Company will utilize both in-house and out-sourced production
capabilities to offer a unique and value-enhanced experience for the
broadband-enabled user. A video host acts as an interactive guide for the user
of our network and channels. On2 programs are and will be tailored for specific
audiences in order to build community and content awareness. We believe that our
high-quality production capabilities will deliver content that is more
compelling than existing Internet-based streaming video as a result of its
interactivity and production values.
On2 programs will be produced on a recurring basis and in short-form. By
using the Internet and other digital delivery networks for distribution, On2
users can access our channels at any time and also are able to access and view
archived episodes on demand. We have the flexibility to produce programs to the
appropriate length for the relevant subject matter, which allows us to tailor
our programming according to creative demand and audience appeal. Our network
infrastructure incorporates software to assess the impact of and response to
both programming and advertising. Each On2 program will contain multiple
opportunities for advertiser and sponsor placements and e-commerce applications.
MARKETING AND SALES
Advertising, sponsorships and business services are sold through a
dedicated, in-house direct sales team. A marketing and communications department
has been established to broaden awareness of the On2.com brand, our technology
products and services.
Through our content channels, we offer advertising packages targeted to
specific audiences and demographics. Additionally, unlike Web sites that provide
only text-based banner advertisements, On2 offers multimedia packages
incorporating custom audio and video applications, as well as broadcast-quality
video advertisements. Advertisers will have the ability to sponsor one or more
of our programming channels or shows, enabling them to co-brand sections of our
channels. For example, a channel or show sponsorship may involve both rotating
and permanent placement of buttons, logos and Web site links, integrated ads,
promotional advertisements, and editorial mentions on the On2.com home page or
channel home page. On2 will also introduce in-stream ads, advertisements within
the Internet feed of programming, similar to those seen on a television network.
This feature allows advertisers to follow consumers wherever they may go on the
On2Network.
The Company's marketing efforts are dedicated to promoting the On2.com
brand, driving traffic to On2's sites and promoting awareness of our technology
products and services. Our marketing is specifically targeted to reaching
broadband-enabled users, potential broadband users, potential content and
technology partners, as well as the financial and investment communities. We
will use both traditional and new media vehicles for marketing and promotional
purposes, to include outdoor venues, newspapers, interactive media, radio,
television, "in theatre" placements, and print advertisements. We will exhibit
and make presentations at appropriate trade shows, conferences and seminars, and
provide On2 product information through our Web sites and through participation
and co-promotions of special events.
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TECHNOLOGY PRODUCTS AND SERVICES
On2 is implementing a scalable infrastructure necessary to deliver content
to broadband customers at a very high level of service and quality. This
infrastructure initially will consist of a number of computer servers,
strategically located at specific points on the Internet backbone, in order to
maximize our capacity to serve broadband Internet users. In addition, we intend
to co-locate servers with select broadband service providers, thus increasing
capacity while reducing the cost of delivery. The combination of our proprietary
technology and our server network represents a significant strategic asset that
management believes may be used to create new opportunities for revenue growth.
We expect to profit from this investment in the form of technology licensing
fees, fees for consulting services provided in conjunction with deployment of
On2 technology, and fees for hosting and serving third-party content on the
network.
We believe our broadband content sites and network infrastructure will
create demand in the marketplace for our technology and expertise. We are
developing a set of products and services to monetize this anticipated demand
immediately after the launch of our first channels.
To offer broadband platform solutions to our potential customers and
partners, we will:
- Leverage the experience gained through our own broadband channels to
refine our core video-compression technology, client/server architecture
and publishing tools.
- Partner with an established network and/or streaming media delivery
company to maximize our capabilities and reach.
- Promote the popularity and broadband capabilities of our channels to
demonstrate our technology to potential customers.
- Create a dedicated team to market and sell our broadband solutions.
BROADBAND STREAMING SERVICES
Any broadband content provider must pay to secure the bandwidth and peering
arrangements (network in place) necessary to support their anticipated
viewership. On2 is already installing multiple POP's (Points Of Presence)
provisioned with video server "farms" (numerous units in a single physical
location, remotely maintainable). These installations can collectively support
many thousands of simultaneous users, and can be scaled up quickly. We are also
in discussions with broadband Internet Service Providers ("ISPs"), including the
major cable modem and DSL providers, to develop co-location or private peering
arrangements. These agreements will enable us to support more users at lower
cost and higher reliability. In addition, we are pursuing major strategic
relationships with existing streaming media service providers, to support our
software and greatly extend our "reach", or ability to support ever-greater
numbers of simultaneous users.
This network of servers and relationships with service providers will allow
us to bundle the costs of bandwidth within a value-added broadband streaming
service. Our technology platform and support are expected to provide substantial
added value to customers as compared to competitive services. Paul Kagan
Associates' estimates that total streaming media revenues will reach
$21.4 billion by 2008, driven by Web Radio, Internet TV, and Web Pay Per View.
SOFTWARE SALES & LICENSING
While most of our major technology components will be available either free
(video players) or as part of our bundled commercial streaming service, our
software will be made available where appropriate through direct sale over the
Internet as well as through traditional distribution channels to those companies
who wish to manage video streaming on their own. Software products with revenue
potential include player upgrades, compression tools, network server software,
back-end e-commerce and reporting systems, and workflow management tools.
Software product sales are no longer the sole revenue stream for
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software-based technology; software upgrades can provide significant incremental
revenue. Additionally, software sales provide a mechanism by which serious
developers can purchase enhanced features and support, which cannot be
economically provided to all users for free.
CONSULTING
On2 is rapidly becoming a leading developer of broadband Web-based content
distribution as well as technology. Our experience in building our distribution
network and back-end database system has created valuable know-how and
first-mover advantages. We will monetize our know-how, skills, and human
resources (i.e. trained employees) through consulting arrangements with
customers in need of rapid, low-risk deployment of their broadband strategies.
Consulting areas will include technology choices, content design, network
architecture, e-commerce and back-end functionality, and audio/video processing
and compression workflow.
HIGH BANDWIDTH NETWORK COST AND MANAGEMENT
On2.com is embarking on a new undertaking: providing high-bandwidth video
content to a multitude of Internet users. While current high-bandwidth ISP's,
primarily RoadRunner-Registered Trademark- and @Home-Registered Trademark-,
provide high-bandwidth connectivity to subscribers, the subscriber usage is
primarily limited to obtaining existing Internet downloads at high speed. On2,
however, provides video content at sustained bandwidth levels not previously
accomplished.
On2.com will locate multiple video servers at strategic locations on the
Internet backbone for maximum efficiency. To the extent possible, we intend to
negotiate co-location agreements with high-bandwidth ISPs, such as telephone
companies introducing consumer DSL Internet services and cable companies.
Wherever possible, we will co-locate servers at cable and/or telco head ends.
On2.com anticipates that initially, its services will be over backbone
bandwidth purchased by the Company from ISPs. On2.com believes that the volume
of bandwidth it requires as its services grow will enable it to acquire such
bandwidth at attractive prices.
STRATEGIC INITIATIVES
We have entered into relationships with content, distribution, and
technology companies:
- CONTENT: On2.com has secured content, film trailers and on-line
promotional material from many film studios and distributors including
Artisan Films, Fine Line Films, First Look, Fox Searchlight, Lions Gate
Films, MGM, Miramax Films, New Line Cinema, Paramount Classics, Samuel
Goldwyn, Sony-Columbia/Tristar Pictures, Sony Pictures Classics, Twentieth
Century Fox, Universal Pictures, USA Films, and Walt Disney Co.-Buena
Vista Film Distribution. In addition, the Company has secured short film
content from AtomFilms and Trailervision, Inc. These materials will be
featured on the On2Movies channel.
- ANDROMEDIA INC.: Andromedia will provide us with its
LikeMinds-Registered Trademark- Personalization Server, and the
award-winning movie recommendation product, MovieCritic-TM-. Andromedia's
technology will enable our first network, On2Movies, to gather information
from visitors, evaluate their actions, and analyze the information in real
time to deliver content tailored to the preferences of each visitor.
- BURKE ICE RESEARCH: Burke will provide us with market research tools to
enable us to evaluate our consumers' preferences, attitudes, and
perceptions in order for us to communicate those needs to advertisers.
- CONEXANT SYSTEMS: Conexant will distribute the
TrueMotion-Registered Trademark- RT CODEC to its customers enabling them
to develop their own Digital VCR applications. The combination of On2's
video compression
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software and Conexant's hardware will enable users to record full-screen,
full-motion video directly onto their computer from any source-including
television and cable broadcasts, VCRs and live camera feeds.
- HOLLYWOOD STOCK EXCHANGE: On2's multi-tiered partnership with the
Hollywood Stock Exchange includes a range of marketing, content and
technology initiatives to deliver the two companies' innovative online
entertainment experiences to broadband users.
- NORTHPOINT COMMUNICATIONS: On2 is one of the partners to participate in
the Northpoint "Blast" broadband initiative. Northpoint is creating
centers to broadcast full-motion video, audio and other new content to
users. The centers will use technology from such companies as Digital
Island Inc., Akamai Technologies Inc. and On2.com Inc. to speed delivery
of content over digital subscriber lines bought from Northpoint or its
more than 250 Internet service provider partners.
- REUTERS: Reuters has agreed to provide its Reuters Online Video and Online
Reuters/Variety Entertainment Report on the On2Movies channel.
- ROAD RUNNER: On2Movies will be available on Road Runner's Entertainment
Channel. On2Movies will be featured within Road Runner's movie guide, as
well as on its A/V Extreme Channel, which showcases cutting edge broadband
destinations.
- SHOOTING GALLERY: On2 and Shooting Gallery will jointly market their
capabilities and collaborate on broadband video-based projects for
advertisers, advertising agencies and Web design firms.
- TRIBUNE MEDIA SERVICES: Tribune will offer consumers access to Tribune's
MovieQuest on the On2Movie channel. The partnership will provide consumers
show and running times, plot descriptions, ratings, theatre attributes and
ticketing for movie theatres.
- UAL CORP.: UAL will be the main corporate sponsor for travel related
broadband content and services.
BUSINESS MODEL
The On2.com business model consists of revenue from two distinct sources:
(1) revenues derived from advertising, sponsorships and e-commerce on the
On2.com Web site and associated channels and (2) expected revenues from
commercialization of the technology infrastructure and know-how developed to
enable high-quality video streaming over the Internet. These revenue sources
include software sales, broadband streaming services ("hosting" third party
video content on our server network), and consulting to developers of broadband
content.
COMPETITION
The Internet industry is highly competitive and affected by rapid change. We
believe that the principal competitive factors in our business include
technological innovation, pricing, customer service, network quality, service
offerings and the flexibility to adapt to changing market conditions.
In establishing our broadband strategy, we face a number of strong,
firmly-entrenched competitors who are currently providing similar services to
low-bandwidth users. These and other companies have announced plans to provide
broadband video-based services and technology. In addition to competition from
other Internet content and technology companies, well-established media
distribution companies, particularly in the cable television and satellite
markets, have established, and continue to seek to establish, interactive,
on-demand digital services through the development of sophisticated digital
set-top technology and related back-end server systems. Although these systems
can offer services directly competitive to the Company's current content plans,
they will almost certainly also allow Internet access, which could allow users
access to our technology and services. We are pursuing distribution agreements
with telephone (DSL), cable and satellite companies in order to secure access to
their end-users.
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INTELLECTUAL PROPERTY
We regard our copyrights, service marks, trademarks, trade secrets,
proprietary technology and similar intellectual property as critical to our
success, and we rely on trademark, copyright, trade secret and patent protection
to protect our proprietary rights. While we try to assure that the quality of
the On2.com brand is maintained through such measures, there can be no assurance
that steps we have taken and continue to take to protect our proprietary rights
will be adequate or that third parties will not infringe on our intellectual
property. In addition, there can be no assurance that third parties will not
assert infringement claims against us which, even if not meritorious, could
result in the expenditure of substantial resources and management effort.
ACQUISITIONS & AGREEMENTS
On September 27, 1999 the Company acquired the assets of MetaVisual
Creations Limited, a company incorporated under the laws of England. The
purchase price was valued at $2,518,572. In addition to paying $400,000 in cash,
the Company issued 169,444 shares of its common stock valued at $1,768,572 based
on the closing price of the Company's common stock on the American Stock
Exchange on the acquisition date and issued a note payable in the amount of
$350,000. The primary asset acquired by the Company consisted of video
compression and decompression technology complementary to that developed by the
Company.
On November 11, 1999 the Company entered into an employment agreement with
an individual to provide celebrity interviews for the Company's On2Movies Web
site. The company paid $250,000 and issued 182,314 common shares to the
individual in addition to the negotiated salary and benefits. The shares were
valued at $2,256,161. One third of the shares vested upon signing the agreement.
The remainder are held in escrow and vest over two years on each anniversary
date. The Company also received title to certain audio interviews conducted or
acquired by the individual prior to the agreement.
EMPLOYEES
As of December 31, 1999, we had 79 full-time employees. None of our
employees are represented by a labor union, and we consider our relationship
with our employees to be good. We supplement our work force from time to time
with contractors, administrative personnel through employment agencies, and part
time employees.
ITEM 2. DESCRIPTION OF PROPERTY.
We do not own any real property. We lease approximately 8,000 square feet of
space where our principal executive and administrative offices are located at
375 Greenwich Street, New York, NY 10013 at an annual rent of approximately
$187,000. The lease expires on June 30, 2001. We lease 11,000 square feet for
engineering and production offices at 145 Hudson Street, New York, NY 10013 at
an annual rental of approximately $330,000. This lease also expires on June 30,
2001. We maintain an engineering office in the Albany, New York area of 3,000
square feet at an annual rental of $36,000. This lease expires on November 30,
2002. Management believes these facilities are all in usable condition. The
Company intends to invest approximately $200,000 in modifications to the offices
at 145 Hudson Street. We believe these facilities are sufficient to meet our
needs for the immediate future.
ITEM 3. LEGAL PROCEEDINGS.
We are a defendant in a litigation matter entitled Edward Botwinick v. The
Duck Corporation et al., Index No. 60250/96. The matter was commenced on or
about May 14, 1996 in Supreme Court, New York County, New York. Botwinick
alleges that we breached an agreement pursuant to which Botwinick agreed to act
as Chairman of our Board of Directors and
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provide other services in exchange for shares of our stock. The complaint
contains four causes of action: (1) breach of contract, (2)unjust enrichment by
Duck (our corporate predecessor), (3) fraud, and (4) unjust enrichment by
certain individual defendants. The complaint sought damages in the amount of
$1,950,000 for each cause of action, together with punitive damages in the
amount of $2,000,000.
We and the other defendants filed an answer denying the substantive
allegations of the complaint and moved for an order granting partial summary
judgement dismissing Botwinick's second, third and fourth causes of action. Our
motion was granted in all respects. The remaining matter was tried in September,
1998, at which time Botwinick was found to have been validly terminated. The
Court found that Botwinick's damages were limited to $60,000, together with
interest from October 18, 1993. Pursuant to this judgement, we accrued and paid
$88,976 to Botwinick.
Botwinick filed a notice of appeal with respect to the summary judgement and
trial decision. We opposed the appeal and cross-appealed with respect to
denomination of prevailing party. The Court of Appeals affirmed the trial
court's summary judgement decision and trial decision in all respects, except it
held that we were the prevailing party and were thus entitled to recover
reasonable counsel fees. A fee hearing was held and the amount of fees to be
recovered by us is presently pending before the court. Any determination in this
regard cannot have an adverse effect on the Company.
We are not aware of any proceedings against us contemplated by any
governmental authority.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matter to a vote of security holders during
the fourth quarter of fiscal 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Common Stock was listed on the American Stock Exchange (the "Amex") on
June 30, 1999 under the symbol "ONT." On June 30, 1999, the high reported sales
price was $13.125 and the low sales price for such day was $7.516. From June 15
to June 30, 1999, our stock was quoted on the Over the Counter Bulletin Board
("OTCBB"), operated by the National Association of Securities Dealers, but no
material trading occurred on that system. Prior to our merger on June 15, 1999,
the stock of our corporate predecessor, Applied Capital Funding, Inc., was
quoted on the OTCBB, but only nominal trading occurred. During this period, the
common stock of The Duck Corporation was not traded on a public exchange.
The following table sets forth the high and low sales prices per share for
the Common Stock as reported to the Company by the Amex for the periods
indicated:
<TABLE>
<CAPTION>
FISCAL YEAR 1999 HIGH LOW
- ---------------- -------- --------
<S> <C> <C>
Second Quarter.............................................. 13.125 7.516
Third Quarter............................................... 21.250 7.063
Fourth Quarter.............................................. 40.750 10.313
</TABLE>
According to our transfer agent, approximately 141 people owned our stock as
of December 31, 1999. In addition, we believe a significant number of our public
shareholders hold our common stock through brokerage accounts, and such
shareholders do not appear individually on our stock transfer records.
It is our present policy not to pay cash dividends and to retain future
earnings to support our growth. We do not anticipate paying any cash dividends
in the foreseeable future.
On June 15, 1999, co-incident with the merger with The Duck Corporation, the
Company issued 2,000,000 shares of Series A Preferred Stock in exchange for
$14,614,113 (net of $385,887 in issuance related expenses). The issuance was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.
On September 27, 1999 the Company issued 169,444 shares of its common stock
in exchange for certain technology assets. The issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
On November 11, 1999 the Company issued 182,314 common shares in
consideration of an employment agreement and certain assets. The issuance was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.
On December 30, 1999 the Company issued 799,825 shares of its common stock
in exchange for $10,168,449 (net of $133,297 in issuance related expenses). See
note 8 to Financial Statements included herein.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS REPORT.
This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements relate to future events or our future
financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expect," "plan,"
"anticipate," "believe,"
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"estimate," "predict," "potential" or "continue," the negative of such terms, or
other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. In this regard, the business and operations of the Company are
subject to substantial risks which increase the uncertainty inherent in the
forward-looking statements contained in this Form 10-KSB. In evaluating the
Company's business, you should give careful consideration to the information set
forth below under the caption "Risk Factors That May Affect Future Operating
Results," in addition to the other information set forth herein.
The inclusion of the forward-looking statements should not be regarded as a
representation by the Company, or any other person, that such forward-looking
statements will be achieved. Although we believe the that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance, or achievements. We undertake
no duty to update any of the forward-looking statements, whether as a result of
new information, future events or otherwise. In light of the foregoing, readers
are cautioned not to place undue reliance on the forward-looking statements
contained in this report.
OVERVIEW
The Company's strategy is to position itself as the early leader in the
broadband Internet market. We plan to achieve this through our exclusive focus
on the broadband market, our technological expertise in video-compression and
streaming software and our early entrance into the market.
Leveraging proprietary video streaming and compression technology, the
On2.com network will initially provide a range of video-centric information and
entertainment in such areas as movies, games, music and travel. The Company
launched its initial Web channels, On2Movies and On2Reports, on February 18,
2000. These Web channels are intended not only to provide revenue to the Company
but also serve as a demonstration of the Company's technology and know-how. The
Company perceives a significant business opportunity providing technology based
business to business services, including broadband video hosting, software
licensing, consulting and support to content companies who want to take
advantage of the Company's technology and know-how.
Founded in 1992, the Company developed and marketed video compression /
decompression software technology ("codecs") that enabled developers of computer
video games, video games for dedicated video game consoles and multi-media
presentations on computers to convert an analog video signal to a digital video
signal, and to compress the signal for storage and playback on the required
device. The Company also developed its own proprietary video streaming
technology, enabling delivery of high quality video signals over high bandwidth
networks. Additionally, the Company developed technology allowing for real-time
capture, compression and storage of digital video signals.
Historically, substantially all of the Company's revenue was derived from a
few large technology licensing agreements whereby the Company received
non-refundable advances against future royalties based on sales by the licensee,
or outright license of certain elements of the Company's technology. With video
codecs rapidly becoming a low-priced or even free commodity, the Company
determined that reliance on its historical business model placed serious
constraints on potential growth. The Company's current software technology
enables distribution of television quality video signals to broadband Internet
users (those with Internet connections faster than 250 kilobits per second).
Perceiving consumer broadband Internet usage to be the next high growth Internet
market, the Company elected to exploit its technology's commercial possibilities
by creating a unique, broadband-focused, video-enhanced, advertiser and
e-commerce supported Web destination, rather than to rely solely on its existing
technology licensing model. Management recognized that directing the Company's
efforts to build the On2.com network would have a negative short-term impact on
revenue, but believed it was warranted by the potential long-term opportunity.
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In view of the rapidly evolving nature of its business and its limited
operating history, the Company has little experience forecasting its revenues.
Therefore, the Company believes that period-to-period comparisons of financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance. To date, the Company has incurred substantial
costs to create technology and services. The Company will continue to incur
costs to develop content, introduce and enhance services, build brand awareness
and grow the business. The Company may also incur significant additional costs
and expenses related to content creation, technology, marketing or acquisitions
of businesses and technologies to respond to changes in this rapidly changing
industry. These costs may not correspond with any meaningful increases in
revenues in the near term.
Duck Merger
On June 15, 1999, Applied Capital Acquisition Corp., a Delaware corporation,
a wholly-owned subsidiary of Applied Capital Funding, Inc., a Colorado
corporation, merged (the "Merger") with and into The Duck Corporation, a
Delaware corporation ("Duck"). In connection with the Merger, the Company issued
15 million shares of its Common Stock to the shareholders of Duck's issued and
outstanding shares of common stock in exchange for 100% of the issued and
outstanding common stock of Duck. After the Merger, former Duck stockholders
owned approximately 65% of the issued and outstanding Common Stock of the
Company. The Merger has been accounted for as a reverse merger in which Duck is
the accounting acquirer. The historical records of Duck became the historical
records of the Company.
Following the Merger, the business conducted by the Company is the business
conducted by Duck prior to the Merger. In conjunction with the Merger, the
Company changed its name to "On2.com Inc." Additionally, on June 30, 1999, the
Company listed its shares on the American Stock Exchange under the symbol,
"ONT." Prior to that time its shares were quoted on the Over the Counter
Bulletin Board operated by the National Association of Securities Dealers, Inc.
MetaVisual Acquisition
On September 27, 1999 the Company acquired the assets of MetaVisual
Creations Limited, a foreign private issuer organized and incorporated under the
Small Companies Act of the United Kingdom, for a purchase price of $2,518,572.
The purchase price consisted of $400,000 cash, a $350,000 note payable and
169,444 shares of the Company's common stock valued at $1,768,572 based on the
closing price of the Company's shares on the American Stock Exchange on the
acquisition date. The purpose of the acquisition was to obtain software
technology developed by MetaVisual's majority shareholder and only employee,
relating to compression/decompression ("codec") of video signals. This
technology will assist us in implementing our strategic operating plan for
distribution of television-quality video signals to broadband Internet users.
Our alternatives were to develop the technology internally, or purchase it
through the acquisition. After considering the time and resources that would be
required to develop similar technology internally, along with the risks and
costs of unsuccessful attempts and related delays, we decided to pursue the
acquisition.
Prior to the acquisition, MetaVisual generated limited revenue from
development contracts and licensing an earlier version of the technology to a
single customer. On2.com is using the core technology acquired as part of its
software architecture platform for distribution of video signals over the World
Wide Web. The historic operations of the developer have no relationship to
On2.com's future use of the technology.
The historical results of operations, cash flows and financial condition of
MetaVisual were not material to On2.com. The purchase price was primarily
allocated to the identifiable intangible asset associated with the codec
technology acquired (see Note 4 to the financial statements).
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Employment Agreement
On November 11, 1999 the Company entered into an employment agreement with
an individual to provide interviews of celebrities for the Company's On2Movies
Web site. The company paid $250,000 in cash and issued 182,314 common shares to
the individual that were valued at $2,256,161 and vest over two years, in
addition to a salary and benefits. The Company also received title to certain
audio interviews conducted or acquired by the individual. The purchase price was
determined through arm's length negotiation and was premised upon fulfilling the
Company's strategic business objective supporting the launch of its "On2Movies"
web channel.
The agreement provides the Company with, among other things, access to an
extensive industry audience, rights to market programming and solicit
advertising and business partners through use of the individual's name and
history as a Hollywood "insider" and media personality and the rights to develop
and distribute original programming content hosted by the individual over the
On2 Network, including interviews with entertainment industry celebrities that
may also be syndicated to radio stations.
Private Placement
On December 30, 1999 the Company completed a private placement of its Common
Stock. The Company issued 799,825 common shares in exchange for $10,168,449 (net
of expenses). The Company also issued to the investors warrants to purchase
246,438 of its common stock at an exercise price of $28.375, the closing price
of the Company's Common Stock on the American Stock Exchange on the day prior to
the grant. In addition, the investors acquired 21,635 shares of Common Stock
from non-management stockholders.
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<PAGE>
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1999
The following comparative discussion includes the results of operations for
the most recently completed fiscal year ended December 31, 1999 and the
conformed results for the twelve months ended December 31, 1998. The 1998
conformed results are included to facilitate a comparison of the Company's
results of operations. They are made necessary by a change in fiscal year
resulting from the Company's acquisition of The Duck Corporation on June 15,
1999, which was accounted for as a reverse-merger. Prior to the merger, The Duck
Corporation's fiscal year end was September 30, while the Company reported on a
December 31 year-end basis. See "Notes to the Audited Financial Statements" for
a complete discussion of the transaction and change in fiscal year.
The unaudited conformed results of operations for the twelve months ended
December 31, 1998 include adjustments to eliminate the revenues and expenses for
the three months ended December 31, 1997 from the reported results for the
fiscal year ended September 30, 1998 and include the revenues and expenses for
the three months ended December 31, 1998. A table is presented below, with
summary line-item captions, reflecting these adjustments. The conformed results
for the twelve months ended December 31, 1998 have not been audited and are
presented herein for comparative purposes only.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
FISCAL YEAR THREE MONTHS THREE MONTHS TWELVE MONTHS FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1998 1999
----------- ----------- ---------- ----------- ------------
UNAUDITED UNAUDITED
Revenues.......................... $ 1,448,288 $ 565,290 $ 21,001 $ 903,999 $ 178,112
----------- ----------- ---------- ----------- ------------
Operating Expenses................
Research and development........ 1,286,032 329,140 346,575 1,303,467 2,837,750
Content development &
distribution.................. -- -- -- -- 1,875,459
Sales and marketing............. 1,044,023 234,670 270,952 1,080,305 1,956,491
General and administrative...... 2,126,677 489,901 402,910 2,039,686 3,816,073
----------- ----------- ---------- ----------- ------------
Total operating expenses...... 4,456,732 1,053,711 1,020,437 4,423,458 10,485,773
----------- ----------- ---------- ----------- ------------
Loss from operations.......... (3,008,444) (488,421) (999,436) (3,519,459) (10,307,661)
Interest income and other....... 94,154 48,851 18,516 63,819 243,052
----------- ----------- ---------- ----------- ------------
Loss before provision for
income taxes.............. (2,914,290) (439,570) (980,920) (3,455,640) (10,064,609)
Provision for income taxes........ 102,000 51,940 524 50,584 22,933
----------- ----------- ---------- ----------- ------------
Net loss.................... $(3,016,290) $ (491,510) $ (981,444) $(3,506,224) $(10,087,542)
=========== =========== ========== =========== ============
</TABLE>
REVENUE
Net revenue of $178,112 and $903,999 for the fiscal year ended December 31,
1999 and twelve months ended December 31, 1998 (unaudited) respectively, were
derived primarily from the sale and/or licensing of the Company's
TrueMotion-Registered Trademark- technology. For the fiscal year ended
December 31, 1999, approximately 59% of revenue was earned from one customer as
a non-returnable advance against future royalties. An additional customer
accounted for 8% of the Company's revenue. For the twelve months ended
December 31, 1998, approximately 69% of the Company's revenue was derived from
one customer as royalties or advances against future royalties. Future royalty
payments from this customer are dependent on the customer recovering its
advances to the Company. There can be no assurance that the customer will use
the Company's technology in developing content for its systems, nor is it
possible to predict when, if ever, the customer will recover the advances
already paid. The balance of revenue was from sales of individual licenses to
content developers.
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<PAGE>
During the fiscal year ended December 31, 1999, the Company devoted
substantially all of its efforts to building the On2.com network, developing the
technology to operate the site, attracting the investment to fund its efforts
and hiring the required staff.
Future revenue will be derived from the On2.com network, providing hosting
and other services to broadband content owners and/or licensing the associated
technology to other companies. The Company's business model is based on deriving
revenue from advertising and sponsorship agreements with major product and brand
advertisers on the On2.com network, from the sales of goods and services to
users and from sales commissions from the sale of goods and services on behalf
of other companies. In addition, the Company expects to generate revenue from
the licensing of the Company's technology to other companies, and providing
consulting services to these licensees and other services, including hosting
video for others on the Company's server network. The Company launched its first
Web channels, On2Movies and On2Reports on February 18, 2000.
OPERATING EXPENSES
The Company's operating expenses consist of research and development,
content development and distribution, sales and marketing, and general and
administrative expenses. Operating expenses of $10,485,773 for the fiscal year
ended December 31, 1999 increased $6,062,315 or 137% from the twelve months
ended December 31, 1998.
Research and development expenses consist primarily of salaries and related
expenses for personnel and fees to outside contractors and consultants. Research
and development expenses for the fiscal year ended December 31, 1999 of
$2,837,750 increased approximately $1,534,283 or 118% from the twelve months
ended December 31, 1998, reflecting the additional costs incurred in developing
new technology.
The increase in research and development expenses is due primarily to the
increase in salaries and consulting expenses. Salaries and related expenses of
$1,432,280 for the fiscal year ended December 31, 1999 increased $265,733 or 23%
from $1,166,547 (unaudited) for the twelve months ended December 31, 1998.
Consulting expenses related to research and development of $1,180,027 for the
fiscal year ended December 31, 1999 increased $1,087,079 from $92,948
(unaudited) for the twelve months ended December 31, 1998.
For the fiscal year ended December 31, 1999, substantially all of the
Company's research and development effort was focused on the development of
technology to deliver television quality video signals to broadband Internet
users. For the twelve months ended December 31, 1998, the Company's efforts were
primarily directed to completing the development of technology licensed to a
customer as well as developing the technology to be used on the On2Network. The
Company expects research and development costs to continue at high levels in
coming periods as we continue to develop the On2Network of Web channels and the
related technology.
Content development and distribution are the costs associated with
producing, acquiring, processing and distributing content on our Web site. For
the fiscal year ended December 31, 1999, these costs amounted to $1,875,459.
Expenses associated with these activities were not incurred in the twelve months
ended December 31, 1998. The content production, acquisition and distribution
expenses consist primarily of costs of salaries and independent contractors
engaged in producing content and the costs of Internet bandwidth associated with
access to our Web site. Salaries, independent contractor costs and bandwidth
costs incurred in the fiscal year ended December 31, 1999 were $851,696,
$548,599 and $215,778 respectively. Included in salary costs is non-cash
compensation of $125,342 related to the employment of an executive, referred to
in "Recent Developments" above and in Note 8 to the financial statements.
Sales and marketing expenses for the fiscal year ended December 31, 1999 of
$1,956,491 increased $876,186 or 81% from $1,080,305 in the twelve months ended
December 31, 1998. The increase is due to additional staff engaged in marketing
activities and increased promotional activities related to our efforts
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<PAGE>
to develop the On2.com network and our business services. The sales and
marketing expenses consist primarily of salaries related to developing business
arrangements with prospective partners, creating awareness of new services and
costs of communicating to the industry and potential users. Salaries of $613,569
in the fiscal year ended December 31, 1999 increased $62,961 or 11% from
$550,608 (unaudited) in the twelve months ended December 31, 1998. Advertising
and promotion of $773,743 in the fiscal year ended December 31, 1999 increased
$445,846 or 136% from $327,897 in the twelve months ended December 31, 1998. We
expect our advertising and marketing expenses to increase in future periods as
we accelerate our marketing efforts to build our business.
General and administrative expenses consist primarily of salaries and
related personnel expenses, rent, accounting and legal services and general
operating expenses. For the fiscal year ended December 31, 1999, general and
administrative expenses of $3,816,073 increased $1,776,387 or 87% from the year
earlier period, reflecting increased salaries, recruiting costs and office and
computer supplies associated with the increase in the number of employees;
increased legal and accounting costs associated with reporting as a publicly
owned company; and increased depreciation and amortization related to the
acquisition of fixed assets and the amortization of acquired technology. Salary
expenses of $1,030,345 in the fiscal year ended December 31, 1999 increased
$105,642 or 11% from $924,703 in the twelve months ended December 31, 1998.
Legal, accounting and consulting expenses of $1,039,217 in the fiscal year ended
December 31, 1999 increased $728,849 or 235% from $310,368 (unaudited) in the
twelve months ended December 31, 1998. Recruiting costs of $311,164 increased
$302,692 from the twelve months ended December 31, 1998. Office and computer
supplies of $423,585 increased $311,231 from $112,354 (unaudited) in the twelve
months ended December 31, 1998. Depreciation and amortization of $391,291 for
the twelve months ended December 31, 1999 increased $165,748 or 73% from
$225,549 (unaudited) for the twelve months ended December 31, 1998, primarily
due to amortization of technology acquired.
As the Company expands its business in 2000 and beyond, its operating
expenses will continue to increase. Research and development expenses will
increase as the Company adds engineers and outside consultants to its technology
and development teams. Sales and marketing expenses will increase as the Company
adds additional business development, sales and marketing personnel to build
business relationships, sell advertising time and build brand awareness. In
addition, advertising and public relations expenses will increase as the Company
invests to grow its business. Content development and distribution will increase
as we add more content to our On2.com Web site and more consumers access our
sites. General and administrative expenses will increase as the Company
continues to build its management infrastructure, including additional
personnel, office space and internal information systems.
From January 1999 through December 1999 the Company hired 53 additional
employees in order to accelerate the growth of the business. The Company expects
the number of employees to continue to increase. At December 31, 1999 the
Company had 75 full-time employees.
OTHER INCOME (EXPENSE)
Other income (primarily interest income) of $243,052 for the fiscal year
ended December 31, 1999 increased $179,233 from $63,819 (unaudited) for the
twelve months ended December 31, 1998, primarily due to increased investments
from the sale of Series A Convertible Preferred Stock on June 15, 1999. For the
twelve months ended December 31, 1998 (unaudited), other income (expense)
includes legal settlement expense in the amount of $88,976.
PROVISION FOR INCOME TAXES
The provision for income taxes consists of state and local taxes and foreign
taxes withheld at source upon payment of royalties by a foreign licensee. The
decrease in taxes from $50,584 (unaudited) for the twelve months ended
December 31, 1998 to $22,933 for the fiscal year ended December 31, 1999, a
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<PAGE>
decrease of $27,651 or 55%, reflects primarily the decrease in revenue received
from a foreign customer noted under the caption "Revenue" above.
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
Subsequent to the merger with Duck, On2.com Inc. elected to continue its
fiscal year ending December 31. Prior to the merger, Duck had maintained a
fiscal year ended September 30. Under SEC reporting rules, this constitutes a
change in fiscal year, since Duck's historical operations became those of
On2.com as a result of the merger. In order to reconcile Duck's historical
results to the December 31 fiscal year of On2.com, the post-merger historical
financial statements of On2.com present audited results for the three month
transition period ended December 31, 1998 which are reported herein compared to
the unaudited results for December 31, 1997.
REVENUE
Net revenues of $21,001 and $565,290 for the three months ended
December 31, 1998 and 1997, respectively, were derived primarily from the sale
and/or licensing of our TrueMotion-Registered Trademark- technology. For the
three months ended December 31, 1997, approximately 99% of our revenue was
derived from one customer. 11% of our revenue was earned from royalties paid
pursuant to license agreements with the customer, 53% was non-refundable
engineering fees and 35% of revenue was a non-refundable advance from the
customer against future royalties. Future royalty payments from the customer
pursuant to these licenses are dependent on the customer recouping its advances
to us. There can be no assurance that the customer will use our technology in
developing content for its systems, nor is it possible to predict when, if ever,
the customer will recoup the advances already paid.
During the three months ended December 31, 1998, we devoted substantially
all our efforts to building the On2.com network, developing the technology to
operate the site and attracting the investment to fund our efforts. During this
period, two customers accounted for 49.6% and 26.6% of our revenues.
OPERATING EXPENSES
Our operating expenses consist of research and development, sales and
marketing, and general and administrative expenses. Operating expenses of
$1,020,437 for the three months ended December 31, 1998 decreased $33,274 or 1%
from $1,053,711 for the same period in 1997.
Research and development expenses consist primarily of salaries and related
expenses for personnel and fees to outside contractors and consultants. Research
and development expenses for the three months ended December 31, 1998 of
$346,575 increased approximately $17,435 or 5.3% from the same period in 1997,
reflecting the additional costs incurred in developing new technology.
Sales and marketing expenses for the three months ended December 31, 1998 of
$270,952 increased $36,282 or 15.5% from the year earlier period as we expanded
our marketing activities related to developing the On2.com network. Sales and
marketing expenses consist primarily of salaries related to developing business
arrangements with prospective partners, marketing planning and market research
and costs of communicating information about our new services to the industry
and potential users.
General and administrative expenses consist primarily of salaries and
related personnel expenses, rent, accounting and legal services and general
operating expenses. For the three months ended December 31, 1998, general and
administrative expenses of $402,910 decreased $86,991 or 17.8% due to general
cost controls that we implemented.
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OTHER INCOME
Other income (primarily interest income) of $18,516 for the three months
ended December 31, 1998 decreased $30,335 or 62% from $48,851 for the same
period in 1997, primarily from reduced cash balance available for investment as
we used cash to support the operations of the Company.
PROVISION FOR INCOME TAXES
The provision for income taxes consists of foreign taxes withheld at source
upon payment of royalties by a foreign customer. The decrease in taxes from
$51,940 for the three months ended December 31, 1997 to $524 for the three
months ended December 31, 1998, a decrease of $51,416 or 99%, reflects the
decrease in revenue received from that customer noted under the caption
"Revenue" above.
LIMITATION ON USE OF NET OPERATING LOSS AND OTHER TAX CREDIT CARRY-FORWARDS
At December 31, 1999 we had available net operating loss carry-forwards of
approximately $15.4 million for federal income tax purposes. The net operating
loss carry-forwards expire at various dates through 2019.
Section 382 of the Internal Revenue Code provides that when a company
undergoes an "ownership change," the corporation's use of its net operating
losses is limited in each subsequent year. An "ownership change" occurs when, as
of any testing date, the sum of the increases in ownership of each shareholder
that owns five percent or more of the value of a company's stock as compared to
that shareholder's lowest percentage ownership during the preceding three-year
period exceeds fifty percentage points. For purposes of this rule, certain
shareholders who own less than five percent of a company's stock are aggregated
and treated as a single five-percent shareholder.
The merger of The Duck Corporation and Applied Capital Funding, Inc. may
have involved an "ownership change" and thus we may be unable to use a material
portion of our available federal net operating loss carry-forwards. Furthermore,
in the ordinary course of the Company's future business operations, it could
become necessary to issue shares in conjunction with acquisitions or additional
financing, in order to meet the Company's growth objectives and liquidity
constraints. In addition, the exercise of outstanding warrants and certain
options to purchase shares of our common stock may require us to issue
additional shares of our common stock. The issuance of a significant number of
shares of common stock could result in an "ownership change." If we were to
experience such an "ownership change," we estimate that we would not be able to
use a substantial amount of our available federal net operating loss
carry-forwards to reduce future taxable income.
The extent of the actual future use of our federal net operating loss
carry-forwards is subject to inherent uncertainty because it depends on the
amount of otherwise taxable income we may earn. We cannot give any assurance
that we will have sufficient taxable income in future years to use any of our
federal net operating loss carry-forwards before they would otherwise expire.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash and cash equivalents of
$15,083,419 compared to $1,227,706 at December 31, 1998. On December 30, 1999
the Company completed a private placement of its Common Stock. The Company
issued 799,825 common shares in exchange for $10,168,449, net of related
expenses. In addition, the investors purchased 21,635 shares of common stock in
a private transaction from certain non-management stockholders. The Company also
issued 246,438 warrants to purchase shares of its common stock at an exercise
price of $28.375 to the investors.
The Company's capital requirements have been, and will continue to be,
significant. Since inception, On2.com Inc. has financed its operations primarily
through sales of stock. Through December 31, 1999, On2.com Inc. had raised
approximately $35,700,000 from the sale of preferred stock and Common Stock.
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At December 31, 1999, the principal source of liquidity for the Company was
$15,083,419 of cash and cash equivalents.
The following comparative discussion includes the cash flows for the most
recently completed fiscal year ended December 31, 1999 and the unaudited
conformed results for the twelve months ended December 31, 1998. The 1998
unaudited conformed results are included to facilitate a comparison of the
Company's cash flows. They are made necessary by a change in fiscal year
resulting from the Company's acquisition of The Duck Corporation on June 15,
1999, which was accounted for as a reverse-merger. Prior to the merger, The Duck
Corporation's fiscal year end was September 30, while the Company reported on a
December 31 year-end basis. See "Notes to the Audited Financial Statements" for
a complete discussion of the transaction and change in fiscal year.
The unaudited conformed cash flows for the twelve months ended December 31,
1998 include adjustments to eliminate the cash flows from operating, investing
and financing activities for the three months ended December 31, 1997
(unaudited) from the reported results for the fiscal year ended September 30,
1998 and include the cash flows from operating investing and financing
activities for the three months ended December 31, 1998. A table is presented
below, with summary line-item captions, reflecting these adjustments. The
conformed results for the twelve months ended December 31, 1998 have not been
audited and are presented herein for comparative purposes only.
21
<PAGE>
Any references to the twelve months ended December 31, 1998 refers to the
conformed statements of On2.com Inc. for that period. The conformed statement of
cash flows for the fiscal year ended December 31, 1999 is shown below compared
the twelve months ended December 31, 1998 (unaudited).
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
FISCAL YEAR THREE MONTHS THREE MONTHS TWELVE MONTHS FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1998 1999
----------- ---------- ---------- ----------- ------------
Cash flows from operating
activities
Net loss........................ $(3,016,290) $ (491,510) $ (981,444) $(3,506,224) $(10,087,542)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization................ 217,307 46,593 54,835 225,549 484,372
Non-cash compensation......... -- -- -- -- 125,342
Changes in operating assets
and liabilities:
Accounts receivable......... 414,448 471,406 96,925 39,967 (123,004)
Prepaid expenses and other
current assets............ 30,250 7,370 (4,615) 18,265 (442,091)
Other assets................ (100,000) (15,000) 2 (84,998) (97,444)
Accounts payable and accrued
expenses.................. (163,189) (79,605) (71,669) (155,253 1,187,532
----------- ---------- ---------- ----------- ------------
Net cash used in operating
activities.............. (2,617,474 (60,746) (905,966) (3,462,694) (8,952,835)
----------- ---------- ---------- ----------- ------------
Cash flows from investing
activities
Purchase of fixed assets........ (248,854) (44,936) (3,581) (207,499) (1,233,575)
Acquisition of intangible assets
(net of cash acquired).......... -- -- -- -- (390,715)
Loans to stockholders........... (68,918) (111,282) (3,407) 38,957 (2,536)
Security deposits............... (10,078) -- -- (10,078) (304,500)
Purchase of trademarks.......... -- -- -- -- (50,000)
----------- ---------- ---------- ----------- ------------
Net cash used in investing
activities.............. (327,850) (156,218) (6,988) (178,620) (1,981,326)
----------- ---------- ---------- ----------- ------------
Cash flows from financing
activities
Proceeds from sale of Series A
Convertible preferred stock,
net of expenses............... -- -- -- -- 14,614,113
Proceeds from sale of common
stock, net of expenses........ -- -- -- -- 10,168,449
Proceeds from exercise of
employee stock options........ 2,340 -- -- 2,340 46,688
Payments on note payable to
stockholder................... -- -- -- -- (40,376)
Proceeds from warrant to
purchase common stock......... -- -- -- -- 1,000
----------- ---------- ---------- ----------- ------------
Net cash provided by
financing activities.... 2,340 -- -- 2,340 24,789,874
----------- ---------- ---------- ----------- ------------
Net (decrease) increase in
cash and cash
equivalents............. (2,942,984) (216,964) (912,954) (3,638,974) 13,855,713
Cash and cash equivalents,
beginning of period............. 5,083,644 5,083,644 2,140,660 4,866,680 1,227,706
----------- ---------- ---------- ----------- ------------
Cash and cash equivalents, end of
period.......................... $ 2,140,660 $4,866,680 $1,227,706 $ 1,227,706 $ 15,083,419
=========== ========== ========== =========== ============
</TABLE>
For the fiscal year ended December 31, 1999 the Company used $8,952,835 in
operating activities versus $3,462,694 for the twelve months ended December 31,
1998 (unaudited) due to the increased costs
22
<PAGE>
to develop technology, design our Web site and produce and acquire content and
reduced revenue to offset expenses.
Cash used by investing activities for the fiscal year ended December 31,
1999 of $1,981,326 was used for the acquisition of technology, the acquisition
of fixed assets, the initial payments for the acquisition of a trade name and
for a security deposit on additional office space. Cash used in investing
activities for the twelve months ended December 31, 1998 (unaudited) of $178,620
was used primarily for the acquisition of fixed assets. The Company expects to
expend additional amounts for equipment, software and fixtures over the next
24 months.
Cash provided by financing activities was $24,789,874 for the fiscal year
ended December 31, 1999 and represents the proceeds received from the preferred
stock offering of $14,614,113 (net of related expenses); proceeds of $10,168,449
(net of related expenses) from the private sale of common stock and from the
sale of common stock to employees pursuant to the exercise of incentive stock
options, less payments on a note to a stockholder and increased loans to a
stockholder. For the twelve months ended December 31, 1998, cash from financing
activities consisted of proceeds from the sale of common stock to an employee
pursuant to the exercise of an incentive stock option.
The market for distribution of interactive broadband video content is highly
competitive and requires significant expenditures to procure the personnel,
technology and business partners necessary to establish a leadership position in
the industry. The Company will continue to build the On2Network, develop its
technology and hire additional employees. Operating costs are expected to
continue to increase during this period of development. The Company anticipates
it may require additional funding within the next twelve months to adequately
finance its growth and development objectives. The Company believes it has
several financing alternatives available to it. There can be no assurance that
the Company will be able to acquire such additional funding on terms acceptable
to the Company, or at all. In such event, the Company could reduce the pace of
development until such funds were available on terms acceptable to the Company.
IMPACT OF YEAR 2000
Many computer systems and software products were originally coded to accept
only two-digit entries in date code fields. Beginning in the year 2000, these
date code fields needed to distinguish 21st century dates from 20th century
dates. As a result, computer systems and/or software used by many companies
needed to be upgraded to comply with "Year 2000" requirements. We believe our
network is Year 2000 compliant.
Upon the "rollover" to January 1, 2000 and subsequent to that date, the
Company has not experienced any Year 2000 related outages or interruptions of
services received or provided. At this point, we are not aware of any Year 2000
problems relating to systems that we operate or systems operated by third
parties, that have had any material effect on our business, results of
operations or financial condition.
We have not incurred any significant costs related to the assessment of, or
efforts to comply with, our Year 2000 review and remediation plan. We do not
anticipate any further costs associated with remediating any non-compliant
computer systems or products. There can be no assurance to that effect. Any such
cost will be funded through working capital. We do not expect that any remaining
collateral effects of the Year 2000 issue will have a material adverse effect on
our financial condition or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 provides
guidance for determining whether computer software is internal-use software and
on accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the
23
<PAGE>
costs incurred for computer software developed or obtained for internal use.
On2.com adopted the provisions of SOP 98-1 effective January 1, 1999. There were
no material effects on the consolidated financial statements from adoption of
SOP 98-1.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities," ("SFAS No. 133") which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The implementation date
of SFAS No. 133 was recently extended and will be effective for fiscal years
beginning after June 15, 2000. The adoption of Statement of Financial Accounting
Standards No. 133 is not expected to have a material effect on our results of
operations, financial position or cash flows as we do not currently hold
derivative instruments or engage in hedging activities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion addresses our exposure to market risk related to
changes in interest rates, equity prices and foreign currency exchange rates.
This discussion contains forward-looking statements that are subject to risks
and uncertainties. Actual results could vary materially as a result of a number
of factors including those set forth in the Risk Factors section.
As of December 31, 1999, we had cash and cash equivalents of approximately
$15.1 million. Substantially all of these investments consisted of short term
investments with remaining maturities at the date of purchase of 60 days or
less. These investments are not considered subject to interest rate risk and
will not decrease in value by a significant amount if market interest rates
increase. A hypothetical 100 basis point adverse move in interest rates along
the entire interest rate yield curve would not materially effect the fair value
of interest sensitive financial instruments at December 31, 1999. We have the
ability to hold these investments until maturity, and therefore we do not expect
the value of these investments to be affected to any significant degree by the
effect of a sudden change in market interest rates. Declines in interest rates
over time will, however, reduce our interest income.
We do not own any equity investments. Therefore, we do not currently have
any direct equity price risk.
We do not maintain significant asset or cash account balances in currencies
other than the United States dollar. Therefore, we do not believe that we
currently have any significant direct foreign currency exchange rate risk.
INVESTMENT CONSIDERATIONS.
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, TOGETHER WITH OTHER
INFORMATION IN THIS REPORT, BEFORE MAKING AN INVESTMENT DECISION. OUR BUSINESS,
FINANCIAL CONDITION AND OPERATING RESULTS COULD BE ADVERSELY AFFECTED BY ANY OF
THE FOLLOWING FACTORS, IN WHICH EVENT THE TRADING PRICE OF OUR COMMON STOCK
COULD DECLINE. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES
THAT WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US, OR
THAT WE CURRENTLY THINK ARE IMMATERIAL, MAY ALSO IMPAIR OUR BUSINESS.
WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOW AND ANTICIPATE CONTINUED
LOSSES.
Since our inception, we have incurred significant losses and negative cash
flow from operations, and as of December 31, 1999, we had an accumulated deficit
of approximately $15.4 million. We have not achieved profitability and we expect
to continue to incur operating losses for the foreseeable future as we fund
operating and capital expenditures in areas such as establishment and expansion
of the On2.com network, advertising, brand promotion, content acquisition and
development, sales and marketing, and operating infrastructure. Our business
model assumes that consumers will be attracted to and use broadband-specific
video compression technology to access content available on our Web sites which
will, in turn, allow us the opportunity to sell advertising designed to reach
those consumers. Our business model
24
<PAGE>
is not yet proven, and we cannot assure you that we will ever achieve or sustain
profitability or that our operating losses will not increase in the future.
WE DEPEND ON THE GROWTH OF BROADBAND INTERNET USAGE.
Our technology only works over "broadband" Internet connections. The
services we are building require high-bandwidth access to the Internet and
delivery of data volumes that are higher than most service providers are
presently delivering. While we are confident we can overcome the technical and
business hurdles inherent in establishing a network of this nature, there can be
no assurance we will be successful in obtaining the bandwidth required to
provide our services, or obtain it at economical cost.
Broadband web usage may be inhibited for a number of reasons, such as
- inadequate network infrastructure;
- security concerns;
- inconsistent quality of service; and
- availability of cost-effective, high-speed service.
Our business would be adversely affected if broadband web usage does not
continue to grow.
SINCE WE RECENTLY CHANGED OUR BUSINESS FOCUS, WE ARE ESSENTIALLY A NEW COMPANY
AND ACCORDINGLY ARE SUBJECT TO THE RISKS ASSOCIATED WITH A NEW COMPANY.
Even though our business was founded in 1992, we have only been active
online since 1999 and the On2.com Web site just recently launched on
February 18, 2000. As a result, our company is essentially a new venture.
Therefore, we do not have a significant operating history upon which you can
evaluate us and our prospects, and you should not rely upon our past performance
to predict our future performance. In transitioning to our new business model,
we are substantially changing our business operations, sales and implementation
practices, customer service and support operations and management focus. We also
face new risks and challenges, including a lack of meaningful historical
financial data upon which to plan future budgets, competition from a new range
of sources, the need to develop strategic relationships and other risks
described below. We cannot guarantee that we will be able to transition
successfully to our new business model.
Our ability to generate profits, if any, will depend on our ability:
- to attract viewers to our Web site;
- to attract advertisers to our Web site;
- to generate e-commerce revenues from our On2.com Web site; and
- to control costs.
We anticipate continued significant operating losses for the foreseeable
future as the On2.com Web site is launched, improved and marketed and the
On2.com network is developed. We cannot assure you that profitability will ever
be attained.
WE HAVE ONLY RECENTLY LAUNCHED OUR WEB SITE.
Our business depends in large part on our ability to implement the
technology that we are developing on our web site and build a business based on
it. We have only recently launched our web site. Although we are confident that
our launch will be successful, we could be adversely affected by a contrary
result.
25
<PAGE>
OUR SUCCESS DEPENDS ON OUR ABILITY TO CONTINUE TO ATTRACT, RETAIN AND MOTIVATE
HIGHLY SKILLED EMPLOYEES.
Our ability to execute our growth plan and be successful depends on our
continuing ability to attract, retain and motivate other highly skilled
employees. As we continue to grow, we will need to hire additional personnel in
all operational areas. Competition for personnel throughout the Internet
industry is intense. We may be unable to retain our key employees or attract,
assimilate or retain other highly qualified employees in the future. We have
from time to time in the past experienced, and we expect to continue to
experience in the future, difficulty in hiring and retaining highly skilled
employees with appropriate qualifications. If we do not succeed in attracting
new personnel or retaining and motivating our current personnel, our business
will be adversely affected.
MUCH OF OUR WEB SITE RELIES ON OWNED OR LICENSED INTELLECTUAL PROPERTY AND WE
CANNOT BE SURE THAT SUCH RIGHTS ARE PROTECTED FROM THE USE OF OTHERS, INCLUDING
POTENTIAL COMPETITORS.
We regard much of our Web site and its technology as proprietary and try to
protect it by relying on trademarks, copyrights, patents, trade secret laws and
confidentiality agreements with consultants. In connection with our license
agreements with third parties, we seek to control access to and distribution of
our technology, documentation and other proprietary information. Even with all
of these precautions, it could be possible for someone else to either copy or
otherwise obtain and use our proprietary information without our authorization
or to develop similar technology independently. Effective trademark, copyright
and trade secret protection may not be available in every country in which our
services are made available through the Internet, and policing unauthorized use
of our proprietary information is difficult and expensive. We cannot be sure
that the steps we have taken will prevent misappropriation of our proprietary
information. Such misappropriation could have a material adverse effect on our
business. In the future, we may need to go to court to either enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Such litigation might
result in substantial costs and diversion of resources and management attention.
We currently license from third parties certain technologies incorporated
into On2.com. As we continue to introduce new services that incorporate new
technologies, we may be required to license additional technology from others.
We cannot be sure that these third-party technology licenses will continue to be
available on commercially reasonable terms, if at all.
WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGE TO REMAIN COMPETITIVE
Our future success depends, in large part, on our ability to use leading
technologies effectively, to develop our technological expertise, to enhance our
existing services and to develop new services that meet changing customer needs
on a timely and cost-effective basis. We are unable to predict which
technological development will challenge our competitive position or the amount
of expenditures that will be required to respond to a rapidly changing
technological environment. Our failure to respond in a timely and effective
manner to new and evolving technologies could have a negative impact on our
operating results and financial condition.
OUR BUSINESS MAY FACE ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO
US WHICH COULD CAUSE OUR BUSINESS TO SUFFER.
In addition to the risks specifically identified in this Risk Factors
section or elsewhere in this prospectus, we may face additional risks and
uncertainties not presently known to us or that we currently deem immaterial
which ultimately impair our business, results of operations and financial
condition.
26
<PAGE>
INTERNET CAPACITY CONSTRAINTS MAY IMPAIR THE ABILITY OF CONSUMERS TO ACCESS OUR
WEB SITE, WHICH COULD HINDER OUR ABILITY TO GENERATE ADVERTISING REVENUE.
Our success will depend, in large part, upon a robust communications
industry and infrastructure for providing Internet access and carrying Internet
traffic. The Internet may ultimately not prove to be a viable commercial medium
because of:
- inadequate development of the necessary infrastructure such as a reliable
network backbone;
- failure to timely develop complementary products such as high speed modems
that will enable broadband access for individuals;
- delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity; or
- increased government regulation.
If the Internet continues to experience significant growth in the number of
users and the level of use, then the Internet infrastructure may not be able to
continue to support the demands placed on it.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements are included herein and filed as a part of this
report. See Index on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On July 27, 1999, we dismissed Nelson, Mayoka & Co., our former certifying
accountants. Nelson, Mayoka & Co. has not reported on our financial statements.
The decision to change accountants was recommended and approved by our board of
directors. There were no disagreements between us and Nelson, Mayoka & Co. Also
on July 27, 1999, we dismissed Ernst & Young LLP, the former certifying
accountants of our subsidiary, The Duck Corporation. Ernst & Young LLP had not
issued an adverse opinion or a disclaimer of opinion, and its opinion has not
been qualified or modified as to uncertainty, audit scope, or accounting
principles. There have been no disagreements between us and Ernst & Young LLP.
On July 27, 1999, we appointed Arthur Andersen LLP as our new independent public
accountants. We reported these events on a current report on Form 8-K on
August 2, 1999 (amended August 9, 1999).
27
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below are the executive officers and directors of On2.com:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- -------- -----
<S> <C> <C>
Daniel Miller................. 40 Co-founder, President, Chief Executive Officer, Director
David Silver.................. 38 Chief Operating Officer, Director
Barry Shereck................. 58 Chief Financial Officer
Jack Rivkin................... 59 Director
Ajmal Khan.................... 38 Director
Stephen Klein................. 40 Director
Strauss Zelnick............... 42 Director
</TABLE>
Our executive officers are elected at the discretion of the Board of
Directors with no fixed term. There are no family relationships between or among
any of the executive officers or directors of the Company. Messrs. Rivkin,
Miller and Silver were appointed as directors by the board of Applied Capital
Funding, Inc. in connection with its merger with The Duck Corporation. Directors
are elected to one-year terms or until the next annual meeting of shareholders,
whichever is the shorter period.
Set forth below are the key personnel of On2.com other than officers and
directors included above:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- -------- -----
<S> <C> <C>
Randy Cohen.............................. 41 Senior Vice President of Marketing and Sales
Fabian Friedland......................... 34 Senior Vice President of Business Development
Douglas Song............................. 32 Senior Vice President of Corporate Development
Kenneth Pearl............................ 42 Senior Vice President of Sales
Joel Roodman............................. 40 Vice President of Business Development
D. Lane Fisher........................... 34 Executive Producer
Alan Rojer, PhD.......................... 41 Director of Research and Development
Neil Radisch............................. 35 Director of Engineering--Network Systems
Eric Ameres.............................. 33 Director of Engineering--Product Development
</TABLE>
MANAGEMENT AND DIRECTORS
DANIEL B. MILLER co-founded the Company in 1992 and has served as a director
since that time. He has served as President since 1994. He was appointed CEO in
June of 1999. He has an extensive background beginning with practical
applications of computer technology that led to his entrepreneurial activities.
As a recording engineer, he designed computer-controlled musical equipment. He
co-founded Computer Crossware Labs, which developed language products for the
Atari ST and Amiga computers, and developed hardware and software for use in
computer music production. As an independent software consultant, Mr. Miller
worked on various audio, video, and multimedia projects. In 1991 he commenced
work on video compression algorithms.
Mr. Miller is the primary architect of our video compression technology. As
President and CEO, he is responsible for corporate policy, strategy, general
management and organization and as Chief Technical Officer, he oversees ongoing
research and development of video compression technology.
DAVID S. SILVER serves as Chief Operating officer and director. When he
joined the company in 1993, Mr. Silver had a varied background in software
development and media production. As an independent
28
<PAGE>
developer, he produced MIDI music software applications published by Dr. T's
Music Software, Opcode Systems and Aesthetic Engineering. Earlier in his career,
he was a Research Associate at the Columbia University Biology Department
Computer Graphics facility, and as a consultant to AT&T he was involved in the
early development of interactive laserdisc projects. Mr. Silver holds a Bachelor
of Fine Arts degree in Film and Television from the Tisch School of the Arts at
New York University, and a Master of Science degree in Computer Science from the
Courant Institute of Mathematical Sciences, also at NYU.
BARRY M. SHERECK joined the company in November of 1997 and serves as our
Chief Financial Officer. From August 1996 to October 1997, Mr. Shereck was Chief
Financial Officer of Concord Camera Corp., a multinational manufacturer and
distributor of 110, 35mm and APS cameras. From September 1995 to August 1996
Mr. Shereck was a Managing Director of Spring Investment Corp., a privately
owned management company and served a member of the Board of Directors of
Greater China Corp., a client company. From February 1992 to September 1995 he
was Chief Financial Officer of Tyco Playtime, Inc., (a subsidiary of Tyco
Toys, Inc.), an international manufacturer and distributor of toys. Mr. Shereck
directly oversees our financial activities. He holds a B.Sc. degree from McGill
University in Montreal, an MBA. from the Columbia University Graduate School of
Business, and is a CPA.
JACK L. RIVKIN has served as a director since May of 1997. Mr. Rivkin is
Executive Vice President of Citigroup Investments, Inc., a subsidiary of
Citigroup Inc. He was Vice Chairman and Director of Global Research at Smith
Barney from March 1993 to October 1995. From 1987 to 1992, Mr. Rivkin was
Director of the Equities Division and Director of Research of Lehman Brothers
from 1987 to 1992. From 1984 to 1987, Mr. Rivkin was President of Paine Webber
Capital, Inc., the merchant banking arm of Paine Webber Group, and Chairman of
Mitchell Hutchins Asset Management. He has held various senior management
positions in the securities and investment management industries since 1973. He
is a director of a number of private venture companies in which affiliates of
Citigroup Investments, Inc. have an investment. Mr. Rivkin graduated with
distinction from the Harvard University Graduate School of Business
Administration in 1968 with an MBA and the Colorado School of Mines in 1962 with
a degree in Metallurgical Engineering. He is an adjunct professor at the
Columbia University Graduate School of Business.
AJMAL KHAN has served as a director since June of 1999. Mr. Khan is
President and CEO of Verus International Group Ltd. and founded Verus Capital
Corporation, a diversified investment group in 1989 and has served as its
President and Chief Executive Officer since its inception. Mr. Khan serves on
the board of directors of private and publicly quoted companies including
eMagine Corporation, Wattage Monitor Inc., PredictIt Inc. and iParty Corp.
STEPHEN D. KLEIN has served as director since December of 1999. From 1997 to
the present, Mr. Klein has been Chairman of iBalls (now a Division of Avenue A),
an Internet Media data marketing company he founded.
From 1991 to 1999 Mr. Klein held various positions in the advertising
industry; at Grey Advertising, New York; at Scali McCabe Sloves (which is now
mergerd into an agency called Lowe & Partners); and as Managing Partner/Director
of Media and Interactive Services at Kirshenbaum, Bond & Partners, founding the
agency's media department as well as its interactive services.
Mr. Klein is a founding partner and serves as a Managing Director of
Dawntreader LP, a venture capital fund dedicated to early-stage Internet
companies. As a member of Dawntreader and as an angel investor and company
incubator, Mr. Klein has venture investments in more than twenty-five Internet
businesses. Mr. Klein serves as chairman of the board of Wattage Monitor (WMON),
and sits on the board of Flashbase.com.
STRAUSS ZELNICK has served as director since January of 2000. From 1994 to
present, Mr. Zelnick has been an executive with BMG. In July 1998 he was
appointed President and Chief Executive Officer of BMG Entertainment. From
December 1994 to July 1998 Mr. Zelnick was President and Chief Executive Officer
of BMG's North American business unit. From 1993 to 1994 he was President and
Chief Executive
29
<PAGE>
Officer of Crystal Dynamics, a producer and distributor of interactive
entertainment software. From 1989 to 1993 Mr. Zelnick was President and Chief
Operating Officer of 20th Century Fox. From 1986 to 1989 he served in senior
executive roles at Vestron Inc. becoming President and Chief Operating Officer
in 1988. From 1983 to 1986 Mr. Zelnick served as Vice President, International
Television for Columbia Pictures.
Mr. Zelnick is an associate member of the National Academy of Recording Arts
and Sciences and serves on the Board of Directors of the Recording Industry
Association of America. He holds an MBA and a JD from Harvard University and a
BA from Wesleyan University.
RANDY COHEN joined us in June 1999 as Senior Vice President of Marketing.
Mr. Cohen spearheads our investment in strategic branding, advertising and
communications initiatives. From 1998 to 1999 Mr. Cohen was the vice president
of marketing for Red Herring, an integrated media company focusing on the
business of technology. Prior to his position with Red Herring, Cohen spent
eleven years from 1987 to 1998 at Ziff-Davis. As the executive director of
marketing for ZD's Consumer Group, Cohen managed the company's consumer property
marketing efforts, including strategic planning, business development,
communications, market research, direct mail, public relations and advertising.
Randy began his career at Grey Advertising in 1982 working on consumer accounts
such as, Procter & Gamble, General Foods and Canon.
FABIAN FRIEDLAND has served as our Director of Product Marketing and Sales
upon joining us in March 1997. Mr. Friedland was promoted to Vice President and
Senior Vice President of Business Development in March 1999 and September 1999
respectively. Mr. Friedland has worked in the software industry for more than
eight years. From 1995 to 1997 he was a senior producer of a New York-based
multi-media content development company producing a wide variety of digital
content. From 1994 to 1995 he was a research consultant at AT&T during their
interactive television trials. In 1993, Mr. Friedland served on the staff of the
Executive Director of the Columbia Institute for Tele-Information, an institute
of the Columbia University Graduate School of Business. Mr. Friedland has a B.A.
in mathematics from The Courant Institute of New York University and an M.A.
from the New York University Interactive Telecommunications Program.
DOUGLAS SONG joined us on September 1, 1999 as Vice President Corporate
Development. In February 2000 he was promoted to Senior Vice President of
Corporate Development. From March 1996 to March 1999, Mr. Song was a Managing
Director at BlueStone Capital Partners, where he was a senior banker and a
manager of the Corporate Finance Department. Mr. Song was responsible for the
execution of public offerings, private placements and merger & acquisition
transactions. From June 1993 to February 1996, he was a banker in the Global
Energy & Power Group at Smith Barney, Inc., where he was responsible for
strategic advisory and structuring public and private financing transactions.
Prior to Smith Barney, Mr. Song held multiple banking positions at Chase
Manhattan Bank, including the Mergers & Acquisitions and Restructuring Groups.
Mr. Song received a Bachelor of Science Degree from the School of Management at
Boston University.
KENNETH PEARL has been the Senior Vice President of Sales for On2 since
November 17, 1999. He is responsible for developing and leading our worldwide
advertising and broadband-solutions sales. Before joining On2.com, Mr. Pearl was
the Publisher of Ziff Davis Publishing's Computer Life, a leading consumer
computing magazine and Web site from 1995 to 1998. Prior to his position with
Ziff Davis, Pearl spent nearly seven years, from 1989 to 1995, as a senior
executive at CMP Media where he led business-to-business media sales as the
Associate Publisher of Computer Reseller News and later as the founding
publisher of Computer Retail Week. From 1984 to 1989 Mr. Pearl was part of the
Ziff Davis PCWeek start-up sales team where he was later made National
Advertising Director. In 1980, Mr. Pearl started his business career as a
marketing representative for IBM. In 1979, Pearl earned a BA in communications
from the University of Arizona.
JOEL ROODMAN joined us in June 1999 as Vice President Business
Development--Entertainment Group. From March 1991 to March 1995 and from
August 1997 to May 1999 Mr. Roodman was Vice
30
<PAGE>
President--Enterprises at Miramax Films, where he developed new business
programs within the company's marketing, distribution, merchandising and new
media divisions. From April 1995 to July 1997 Mr. Roodman was an independent
film producer.
D. LANE FISHER joined us in November 1998. He has worked in the new media
industry for 7 years. From February 1993 to July 1995 he was President of Black
Sun Interactive a multimedia and Internet-development firm he co-founded. From
July 1995 to May 1996 he worked as a Producer for Meta4 Digital Design, where he
oversaw the design and construction of the General Electric web site, then one
of the largest commercial sites in the world. From August 1996 to March 1997 he
was employed by Grafica Interactive, as the Producer for the Intranets and
Extranets of AT&T and Lucent. From April 1997 to October 1998 he served as
CIO & consultant for Business Development to Night Kitchen Media in
Philadelphia. As a part-time faculty member of the New School for Social
Research from September 1994 to May 1997, Mr. Fisher taught courses on
Advertising and Information Technologies, both on-line and in the classroom;
with an upcoming course on Interactive Marketing.
Mr. Fisher holds a Bachelor of Fine Arts in Sociology from Vassar College,
and a Master of Science degree in Sociology from Duke University.
ALAN ROJER joined us in July 1997 as a Senior Scientist in algorithm
development for video compression. In 1998, he was promoted to Director of
Research and Development and is currently responsible for the management of our
development of video compression technology.
From March 1996 to July 1997 Dr. Rojer was a Vice President in the Fixed
Income Research Group at Lehman Brothers Inc. From March 1995 to March 1996 He
was employed by Sumitomo Bank Capital Markets as a Vice President in the systems
group. From September 1992 to March 1995 Dr. Rojer was employed by Bear Stearns
Corp, initially as a senior analyst in fixed income analytics and structured
transactions and subsequently as Vice President and Associate Director in the
same group. Dr. Rojer graduated from Cornell University with Bachelor degrees in
Biological Sciences and Mechanical Engineering. He has an M.Sc. in Computer
Science from the Stevens Institute of Technology and a Ph.D. in Computer Science
from the Courant Institute of New York University. Dr. Rojer conducted research
in the Computational Neuroscience Laboratory, jointly affiliated with the
Courant Institute and the New York University School of Medicine.
NEIL RADISCH joined us in 1996, initially serving as lead developer of our
network products and more recently as Director of Engineering for Consumer
Products. From October 1995 to August 1996 Mr. Radisch was a lead programmer for
Downtown Digital's internet trivia games. From January 1994 to September 1995
Mr. Radisch was an independent software developer. From July 1990 to
January 1994 Mr. Radisch was a programmer at Information Builders. He obtained a
Bachelor of Science in Engineering--Computer Science at the University of
Pennsylvania.
ERIC AMERES has served as our Director of Engineering for Professional
Products since joining the Company in April 1994. He graduated from Rensselaer
Polytechnic Institute with a BS in Computer and Systems Engineering. While
finishing his studies at RPI, he was employed by Intelligent Computer Music
Systems to develop graphical applications employing algorithmic and artificial
intelligence techniques to compose and perform music. When ICMS was sold to a
competitor, he joined Digitronix/Sixnet, developing process control and
automation hardware and software. In 1990 he joined Polaris Consulting, a
division of Deloitte & Touche, as a technical practice leader and senior
consultant. In 1992 he returned to RPI as a Research Engineer for the Center for
Intelligent Robotic Systems for Space Exploration (CIRSSE) and the New York
Center for Advanced Technology (CAT).
31
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors, executive officers and persons who own more
than 10% of any class of the Company's capital stock to file with the Securities
and Exchange Commission initial reports of ownership and reports of changes in
ownership and to provide copies of such reports to the Company. Based solely on
a review of the copies of such reports furnished to the Company and written
representations that no other reports were required to be filed during the
fiscal year ended December 31, 1999, the Company believes that all filing
requirements applicable to its officers, directors and beneficial owners of
greater than 10% of its Common Stock have been complied with during the most
recent fiscal year, with the exception that Messrs. Khan, Klein and Rivkin filed
Form 5s within 45 days following the end of the Company's fiscal year, in place
of Form 3s, with regard to their ownership as of the dates on which they became
directors of the Company.
ITEM 10. EXECUTIVE COMPENSATION.
The following tables set forth information concerning the cash compensation,
stock options and retirement benefits provided to On2.com's executive officers
for the fiscal year ended September 30, 1998, the three month transition period
ended December 31, 1998 and the fiscal year ended December 31, 1999. The notes
to these tables provide more specific information concerning compensation.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION ALL OTHER
------------------- ------------------ COMPENSATION
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS OPTIONS/SARS(#)(2) ($) (3)
- ------------------------------------ -------- -------- -------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Daniel Miller....................... 1999 $150,000 $75,000 -- $1,125
President, CEO and Director 1998-T 41,296 -- -- 310
1998 221,478 -- -- 1,661
David Silver........................ 1999 $127,500 $15,000 -- $1,275
Chief Operating Officer and Director 1998-T 32,571 -- -- 330
1998 167,855 -- -- 1,679
Barry Shereck (4)................... 1999 $175,547 $15,000 66,700 $ 439
Chief Financial Officer 1998-T 43,887 -- -- 110
1998 160,645 -- 111,167 365
Alan Rojer (5)...................... 1999 $175,851 -- 88,933 $1,000
Director of Research and Development 1998-T 43,963 -- -- --
1998 175,355 -- 133,400 1,315
Timothy Murphy...................... 1999 $125,000 -- -- $1,250
Director of Research 1998-T 32,464 -- -- 325
1998 127,452 -- -- 1,275
</TABLE>
- ------------------------
1) After the recent merger with The Duck Corporation ("Duck") on June 15, 1999,
the historical records of Duck became the historical records of the Company.
The fiscal year end of Duck was September 30. The Company's fiscal year end
remained December 31. Under SEC reporting rules, this constitutes a change
in fiscal year as of the merger date and results in the requirement for a
"transition report" for the historical three month period ended
December 31, 1998 to reconcile Duck's historical financial results to the
Company's December 31 year end. The results reported in the "Summary
Compensation Table" for the period designated "1998-T" are for the three
months transition period ended December 31, 1998.
2) Options to acquire shares of common stock. The Company does not have any
outstanding stock appreciation rights.
32
<PAGE>
3) Represents Company matching contributions under defined contribution plan.
4) Mr. Shereck was employed by the Company effective November 1, 1997.
5) Mr. Rojer was employed by the Company effective July 1, 1997.
We did not pay to our Chief Executive Officer or any named executive officer
any compensation intended to serve as incentive for performance to occur over a
period longer than one year pursuant to a long-term incentive plan in the fiscal
years ended September 30, 1998, December 31, 1999 or the three month transition
period ended December 31, 1998. We do not have any defined benefit or actuarial
plan with respect to our Chief Executive Officer or any named executive officer
under which benefits are determined primarily by final compensation and years of
service.
OPTION GRANTS
The following table summarizes all stock options granted to our Chief
Executive Officer and other named executive officers of On2.com whose total
annual salary and bonus exceeded $100,000 for the fiscal year ended
December 31, 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- ----------------------------------------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF TOTAL AT ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS/SARS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR 10-YEAR OPTION TERM (1)(2)(3)(4)
OPTIONS/SARS EMPLOYEES IN BASE PRICE ---------------------------------
NAME GRANTED (#) (1) 1999 ($/SH) EXPIRATION DATE 5% ($) 10% ($)
- ---- --------------- ---------------- ----------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Daniel Miller........ -- -- -- -- -- --
David Silver......... -- -- -- -- -- --
Barry Shereck........ 66,700 3.6% 1.12 3/1/20/2009 $46,981 $119,059
Alan Rojer........... 88,933 4.8% 1.12 3/1/20/2009 62,641 158,745
Timothy Murphy....... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) The estimated fair market value of the common stock on March 1, 1999 (grant
date) was $1.12, as determined by the Board of Directors.
(2) The potential realizable value is calculated assuming the exercise price on
the date of grant appreciates at the indicated rate for the entire term of
the option and that the option is exercised at the exercise price and sold
on the last day of its term at the appreciated price. All options listed
have a term of 10 years. Stock price appreciation of 5% and 10% is assumed
pursuant to the rules of the Securities and Exchange Commission. There can
be no assurance that the actual stock price will appreciate over the 10-year
option term at the assumed 5% and 10% levels or at any other defined level.
Unless the market price of the common stock appreciates over the option
term, no value will be realized from the option grants made to the named
executive officers.
(3) Based on the market value of the Company's common stock at December 31, 1999
of $29.00 the potential realizable value for Mr. Shereck would be $2,942,804
and $4,567,616 assuming 5% and 10% appreciation, respectively, over the
remaining term of the options. The potential realizable value for Mr. Rojer
would be $3,923,724 and $6,090,132 assuming 5% and 10% appreciation,
respectively, over the remaining term of the options. Actual gains, if any,
on stock option exercises and common stock holdings are dependent on the
future performance of the common stock and overall market conditions. There
can be no assurance that the amounts reflected in this table will be
achieved.
(4) These values do not take into account amounts required to be paid as income
taxes under the Internal Revenue Code of 1986 and any applicable state laws
or option provisions providing for termination of an option following
termination of employment, non-transferability or vesting.
33
<PAGE>
AGGREGATE OPTION EXERCISES AND OPTION VALUES
The following table sets forth information with respect to the Named
Executive Officers concerning option exercises for the fiscal year ended
December 31, 1999 and exercisable and unexercisable options held as of
December 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT 12/31/99 THE-MONEY OPTIONS AT
# OF SHARES 12/31/99 (1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Daniel Miller.................. -- -- -- -- -- --
David Silver................... -- -- -- -- -- --
Barry Shereck.................. -- -- 74,109 103,758 $2,149,161 $3,008,982
Alan Rojer..................... -- -- 88,933 133,400 2,579,057 3,868,600
Timothy Murphy................. -- -- 228,567 35,565 6,628,443 1,031,385
</TABLE>
- ------------------------
(1) Based on a value of $29 per share, the closing price of the Company's common
shares on the American Stock Exchange on December 31, 1999 minus the share
exercise price, multiplied by the number of shares issued upon exercise of
the options.
34
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding the beneficial
ownership of the Company's common shares by our directors, Chief Executive
Officer and the four other highest paid executive officers, all holders of in
excess of 5% of the Company's common shares, and the directors and executive
officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL
OWNERSHIP OF COMMON SHARES AS OF
NAME 12/31/99 (1) PERCENT OF CLASS
- ---- -------------------------------- ----------------
<S> <C> <C>
Daniel Miller..................................... 1,708,856 7.04%
David Silver...................................... 793,405 3.27%
Barry Shereck (2)................................. 96,342 0.40%
Alan Rojer (2).................................... 118,577 0.49%
Timothy Murphy (3)................................ 231,235 0.94%
Jack Rivkin (4)................................... -- --
Ajmal Khan (5).................................... 262,500 1.08%
Stephen Klein..................................... -- --
Strauss Zelnick................................... -- --
Stanley Marder (6)................................ 2,587,963 10.66%
Edelson Technology Partners III LP (7)............ 3,033,049 12.15%
Travelers Insurance (8)........................... 7,827,321 28.56%
All directors and named executive officers as a
group........................................... 3,210,915 12.98%
</TABLE>
- ------------------------
(1) Pursuant to current regulations of the Securities and Exchange Commission,
securities must be listed as "beneficially owned" by a person who directly
or indirectly has or shares the power to vote or to direct the voting of
("voting power") or the power to dispose or to direct the disposition of
("dispositive power") the securities, whether or not the person has any
economic interest in the securities. In addition, a person is deemed a
beneficial owner if he has the right to acquire beneficial ownership within
60 days, whether upon the exercise of a stock option or warrant, conversion
of a convertible security or otherwise.
(2) Represents shares that may be purchased within 60 days of December 31, 1999,
pursuant to outstanding vested stock options.
(3) Represents 2,668 common shares owned and shares that may be purchased within
60 days of December 31, 1999, pursuant to outstanding vested stock options.
(4) Mr. Rivkin is a director of On2.com Inc. and Executive Vice President of
Citigroup Investments, an affiliate of Travelers Insurance Company.
(5) Includes the right to purchase 200,000 shares of the Company's common stock
from Verus Investments Holdings, Inc.
(6) Mr. Marder served as Chairman and a director of The Duck Corporation until
June 9, 1999. Of such shares, 862,654 shares are owned of record by Goldman
Sachs International ("GSI"). The Company is relying on certain
representations by Mr. Marder that he retains beneficial ownership of such
shares despite the transfer to GSI.
(7) Includes currently exercisable warrants to purchase 683,051 common shares.
(8) Includes 1,600,000 common shares, 400,000 shares of preferred stock
convertible into common shares, and currently exercisable warrants to
purchase 445,762 common shares, owned by The Travelers Insurance Company and
3,104,717 common shares and currently exercisable warrants to purchase
2,276,842 common shares owned by the Travelers Indemnity Company.
35
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Effective June 9, 1999, the Company entered into a Separation and Release
Agreement with Mr. Stanley Marder, a shareholder and former chairman and
director. In connection with the agreement, among other things, the Company
repurchased 302,374 shares of the Company's Common Stock from Mr. Marder at a
price of $1.12 per share through the issuance of a note payable to Mr. Marder.
At December 31, 1999, the Company had a note receivable from Mr. Marder of
$294,624. Under the terms of the Separation and Release Agreement, on
January 15, 2000 the Company offset the remaining balance of the note payable to
Mr. Marder against the notes and advances receivable from him.
Additionally, the Company agreed to pay Mr. Marder $10,000 per month for a
period of eight months for consulting services related to marketing and business
development. During fiscal 1999 the Company paid Mr. Marder $66,667 for
consulting services.
Ajmal Khan, one of our directors, owns all of the securities of Verus
Capital Corporation ("Verus"), a diversified investment group. On June 15, 1999,
the Company entered into a two-year consulting contract with Verus whereby the
Company pays to Verus $12,500 per month in exchange for management and
consulting services. During fiscal 1999, the Company paid Verus $75,000 in
consulting fees and reimbursed Verus $8,864 for expenses incurred on behalf of
the Company.
Pursuant to the acquisition of the assets of MetaVisual, the Company issued
to the selling shareholders of MetaVisual, who became shareholders of the
Company, notes payable in the amount of $350,000 due September 27, 2000 and
bearing interest at a rate of 8% per annum.
The Company has committed to purchase certain Internet advertising services
from February 2000 through May 2000 from iballs llc ("iballs"), an interactive
media buying and marketing services company of which Stephen Klein, a director,
is chairman. During this period, the Company expects to purchase approximately
$400,000 in advertising space on third-party Internet publishers through iballs,
utilizing iballs to execute, track and optimize these advertising purchases.
Management believes that the costs incurred for the advertising and for iball's
services are at fair market value for such services.
36
<PAGE>
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K.
(a) The following exhibits are to be filed as part of this report:
<TABLE>
<CAPTION>
EXHIBIT
NO. IDENTIFICATION OF EXHIBIT
- --------------------- -------------------------
<S> <C>
3.1(1) Articles of Incorporation of the Company
3.2(2) Amendment to Articles of Incorporation
3.3(2) Second Amendment to Articles of Incorporation
3.3(1) By-laws of the Company
4.1 Securityholders Agreement
4.2 Form of Investment Rights Agreement
4.3 Form of Warrant
4.4 Escrow Agreement
10.1 Employment Agreement
16.1 Letter on Change in Certifying Accountant--Nelson Mayoka &
Company, P.C.
16.2 Letter on Change in Certifying Accountant--Ernst & Young LLP
27.1 Financial Data Schedule
99.1 Power of Attorney (see signature page)
</TABLE>
- ------------------------
(1) Filed as an exhibit to the Company's registration statement on Form 10-SB,
SEC File No. 000-23171 and incorporated by reference herein.
(2) Filed as an exhibit to the Company's Current Report on Form 8K, SEC File
No. 001-15117 and incorporated by reference herein.
(b) The following Current Reports on Form 8-K were filed during the three
months ended December 31, 1999:
Item 2: Acquisition of MetaVisual Creations Limited, filed on October 12,
1999.
Item 5: Employment Agreement with Mr. Joseph Berlin and acquisition of audio
and video tape library of celebrity interviews, filed on
November 26, 1999.
Item 7: MetaVisual Creations Limited acquisition pro-forma financial
statements filed on December 10, 1999.
37
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned on March 17,
2000, thereunto duly authorized.
<TABLE>
<S> <C> <C>
On2.com Inc.
By: /s/ BARRY M. SHERECK
-----------------------------------------
Barry M. Shereck
CHIEF FINANCIAL OFFICER
</TABLE>
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Barry M. Shereck his attorney-in-fact, for him in
any and all capacities, to sign any amendments to this report, and to file the
same, with exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons on March 17, 2000 in the capacities
indicated.
<TABLE>
<C> <S>
/s/ BARRY M. SHERECK
------------------------------------------- Chief Financial Officer (Principal Financial
Barry M. Shereck and Accounting Officer)
/s/ DANIEL B. MILLER
------------------------------------------- President, Chief Executive Officer, Director
Daniel B. Miller (Principal Executive Officer)
/s/ DAVID SILVER
------------------------------------------- Chief Operating Officer, Director
David Silver
/s/ JACK RIVKIN
------------------------------------------- Director
Jack Rivkin
/s/ AJMAL KHAN
------------------------------------------- Director
Ajmal Khan
/s/ STEPHEN KLEIN
------------------------------------------- Director
Stephen Klein
/s/ STRAUSS ZELNICK
------------------------------------------- Director
Strauss Zelnick
</TABLE>
38
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................... F-2
FINANCIAL STATEMENTS:
Balance Sheets............................................ F-3
Statements of Operations.................................. F-4
Statements of Stockholders' Equity........................ F-5
Statements of Cash Flows.................................. F-6
NOTES TO FINANCIAL STATEMENTS............................... F-7
</TABLE>
F-1 39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To On2.com, Inc.:
We have audited the accompanying consolidated balance sheets of
On2.com, Inc. and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholder's equity and cash flows for
the twelve months ended December 31, 1999, the three months ended December 31,
1998 and the twelve months ended September 30, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of On2.com, Inc. and
subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for the twelve months ended December 31, 1999,
the three months ended December 31, 1998 and the twelve months ended
September 30, 1998 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
New York, New York
February 24, 2000
F-2 40
<PAGE>
ON2.COM INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
ASSETS ------------ -----------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............................... $ 15,083,419 $ 1,227,706
Accounts receivable..................................... 136,766 13,762
Loans receivable from stockholders...................... 294,624 292,088
Prepaid expenses and other current assets............... 459,295 17,201
------------ -----------
Total current assets.................................. 15,974,104 1,550,757
Fixed assets, net....................................... 1,322,690 360,417
Intangible assets, net of amortization of $289,143 in
1999.................................................. 4,476,305 --
Patent costs, net of accumulated amortization of
$165,608 and $123,004 at December 31 1999 and 1998,
respectively.......................................... 140,753 90,024
Other assets............................................ 518,020 116,076
------------ -----------
Total assets.......................................... $ 22,431,872 $ 2,117,274
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Notes payable to stockholders........................... $ 649,624 $ --
Accounts payable and accrued expenses................... 1,419,048 181,515
------------ -----------
Total current liabilities............................. 2,068,672 181,515
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock; no par value;
(liquidation preference of $7.50 per share); authorized
5,000,000 shares; issued and outstanding 2,000,000
shares in 1999 and none in 1998......................... 14,614,113 --
Common stock, no par value; 50,000,000 shares authorized;
24,286,596 shares outstanding at December 31,1999;
15,302,374 shares outstanding at December 31, 1998...... 21,106,003 7,171,013
Accumulated deficit....................................... (15,356,916) (5,235,254)
------------ -----------
Total stockholders' equity............................ 20,363,200 1,935,759
------------ -----------
Total liabilities and stockholders' equity............ $ 22,431,872 $ 2,117,274
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3 41
<PAGE>
ON2.COM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1999 AND SEPTEMBER 30, 1998 AND THE
THREE MONTH TRANSITION PERIOD ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
THREE MONTH
FISCAL YEAR TRANSITION PERIOD FISCAL YEAR
ENDED ENDED ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 SEPTEMBER 30, 1998
----------------- ----------------- ------------------
<S> <C> <C> <C>
REVENUES.................................... $ 178,112 $ 21,001 $ 1,448,288
------------ ----------- -----------
OPERATING EXPENSES
Research and development.................. 2,837,750 346,575 1,286,032
Content development and distribution...... 1,875,459 -- --
Sales and marketing....................... 1,956,491 270,952 1,044,023
General and administrative................ 3,816,073 402,910 2,126,677
------------ ----------- -----------
Total operating expenses................ 10,485,773 1,020,437 4,456,732
------------ ----------- -----------
Loss from operations.................. (10,307,661) (999,436) (3,008,444)
INTEREST INCOME AND OTHER................. 243,052 18,516 94,154
------------ ----------- -----------
Loss before provision for income
taxes............................... (10,064,609) (980,920) (2,914,290)
PROVISION FOR INCOME TAXES.................. 22,933 524 102,000
------------ ----------- -----------
Net loss.............................. $(10,087,542) $ (981,444) $(3,016,290)
============ =========== ===========
Loss per share--basic and diluted......... $(0.51) $(.06) $(.20)
Weighted average common shares
outstanding--basic and diluted.......... 19,609,947 15,302,374 15,299,867
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4 42
<PAGE>
ON2.COM INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1999 AND SEPTEMBER 30, 1998 AND
THE THREE MONTH TRANSITION PERIOD ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE
PREFERRED STOCK COMMON STOCK TOTAL
----------------------- ------------------------ ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT DEFICIT EQUITY
--------- ----------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, September 30, 1997.......... -- $ -- 15,299,706 $ 7,168,673 $(1,237,520) $ 5,931,153
Exercise of incentive stock
options.......................... -- -- 2,668 2,340 -- 2,340
Net loss........................... -- -- -- -- (3,016,290) (3,016,290)
--------- ----------- ---------- ----------- ------------ ------------
BALANCE, September 30, 1998.......... -- -- 15,302,374 7,171,013 (4,253,810) 2,917,203
Net loss........................... -- -- -- -- (981,444) (981,444)
--------- ----------- ---------- ----------- ------------ ------------
BALANCE, December 31, 1998........... -- -- 15,302,374 7,171,013 (5,235,254) 1,935,759
Purchase and retirement common
stock............................ -- -- (302,374) (340,000) -- (340,000)
Reverse merger with The Duck
Corporation...................... -- -- 8,000,000 34,120 (34,120) --
Issuance of Series A convertible
preferred stock, net of related
expenses......................... 2,000,000 14,614,113 -- -- -- 14,614,113
Issuance of Common Stock, net of
related expenses................. -- -- 799,825 10,168,449 -- 10,168,449
Exercise of incentive stock
options.......................... -- -- 20,750 46,688 -- 46,688
Common stock issued upon
acquisition of intangible
assets........................... -- -- 351,758 4,024,733 -- 4,024,733
Common stock issued upon cashless
exercise of warrant.............. -- -- 114,263 -- -- --
Issuance of warrant to purchase
common stock..................... -- -- -- 1,000 -- 1,000
Net loss........................... -- -- -- -- (10,087,542) (10,087,542)
--------- ----------- ---------- ----------- ------------ ------------
BALANCE, December 31, 1999........... 2,000,000 $14,614,113 24,286,596 $21,106,003 $(15,356,916) $ 20,363,200
========= =========== ========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5 43
<PAGE>
ON2.COM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1999 AND SEPTEMBER 30, 1998 AND
THE THREE MONTH TRANSITION PERIOD ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
THREE MONTH
FISCAL YEAR TRANSITION PERIOD FISCAL YEAR
ENDED ENDED ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 SEPTEMBER 30, 1998
----------------- ----------------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss...................................... $(10,087,542) $ (981,444) $(3,016,290)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............... 609,714 54,835 217,307
Changes in operating assets and liabilities:
Accounts receivable....................... (123,004) 96,925 414,448
Prepaid expenses and other current
assets.................................. (442,091) (4,615) 30,250
Other assets.............................. (97,444) 2 (100,000)
Accounts payable and accrued expenses..... 1,187,532 (71,669) (163,189)
------------ ---------- -----------
Net cash used in operating activities... (8,952,835) (905,966) (2,617,474)
------------ ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets...................... (1,233,575) (3,581) (248,854)
Acquisitions (net of cash acquired) (Note
4).......................................... (390,715) -- --
Loans to stockholders......................... (2,536) (3,407) (68,918)
Security deposits............................. (304,500) -- (10,078)
Purchase of trademarks........................ (50,000) -- --
------------ ---------- -----------
Net cash used in investing activities... (1,981,326) (6,988) (327,850)
------------ ---------- -----------
CASH FLOWS FROM FINANCING ACIVITIES
Proceeds from warrant to purchase Common
Stock....................................... 1,000 -- --
Proceeds from sale of Series A Convertible
preferred stock, net of expenses............ 14,614,113 -- --
Proceeds from sale of common stock, net of
related expenses............................ 10,168,449 -- --
Proceeds from exercise of employee stock
options..................................... 46,688 -- 2,340
Payments on notes payable to stockholder...... (40,376) -- --
------------ ---------- -----------
Net cash provided by financing
activities............................ 24,789,874 -- 2,340
------------ ---------- -----------
Net (decrease) increase in cash and cash
equivalents........................... 13,855,713 (912,954) (2,942,984)
Cash and cash equivalents, beginning of
period........................................ 1,227,706 2,140,660 5,083,644
------------ ---------- -----------
Cash and cash equivalents, end of period........ $ 15,083,419 $1,227,706 $ 2,140,660
============ ========== ===========
</TABLE>
F-6 44
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NONCASH INVESTING AND
FINANCING ACTIVITIES
<TABLE>
<CAPTION>
THREE MONTH
TRANSITION PERIOD TWELVE MONTHS
FISCAL YEAR ENDED ENDED ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 SEPTEMBER 30, 1998
----------------- ----------------- ------------------
<S> <C> <C> <C>
CASH PAID DURING THE PERIOD FOR:
Interest.................................. $ 754 -- $ 277
Taxes..................................... $ 22,441 $524 $110,700
Acquisition of intangibles for common
stock and note payable.................. $4,374,733 -- --
Purchase and retirement of common stock... $ 340,000 -- --
</TABLE>
Effective June 9, 1999, On2.com Inc. (the "Company") entered into a
Separation and Release Agreement with an officer and shareholder. In connection
with the agreement, the Company repurchased 302,374 shares of the Company's
Common Stock from the officer and shareholder at a price of $1.12 per share
through issuance of a note payable to the shareholder. Under the terms of the
Separation and Release Agreement, on January 15, 2000 the Company will offset
the remaining balance of the note payable of $299,624 to the shareholder against
certain notes and advances receivable from the shareholder.
The accompanying notes are an integral part of these consolidated statements.
F-7 45
<PAGE>
ON2.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 31, 1999 AND SEPTEMBER 30, 1998 AND
THE THREE MONTHS ENDED DECEMBER 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
On2.com Inc. (the "Company"), formed by the merger of The Duck Corporation
("Duck") into and with a subsidiary of Applied Capital Funding, Inc.,
("Applied") a Colorado corporation, (the "Merger"), is developing a network of
Web channels for broadband-enabled internet users. The Company's technology
combines the classic elements of television with the interactivity of the
Internet, utilizing proprietary video compression and streaming technology. In
connection with the Merger, the Company changed its name from Applied Capital
Funding, Inc. to On2.com Inc.
The Company's Common Stock was listed on the American Stock Exchange on
June 30, 1999 and currently trades under the symbol "ONT." Prior to that time it
was traded on the Over-the-Counter Bulletin Board operated by the National
Association of Securities Dealers, Inc.
PRINCIPLES OF CONSOLIDATION
The consolidated balance sheets at December 31, 1999 and 1998 include the
accounts of On2.com Inc. and its wholly owned-subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
RECLASSIFICATIONS
Certain fiscal and short period amounts have been reclassified to conform to
the 1999 presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. At December 31, 1999, the
majority of the Company's cash is maintained in short term investments with
maturities of less than 60 days.
Such investments are made in accordance with the Company's investment
policy, that establishes guidelines for diversification, maturities and credit
quality designed to maintain safety and liquidity.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation on computer equipment and
furniture and fixtures is provided for by the straight-line method over the
estimated useful lives of the assets ranging from three to seven years.
Leasehold improvements are amortized over the term of the lease or the estimated
useful life of the improvement, whichever is shorter. Licensed software is
stated at cost and is being amortized over a period of three years using the
straight-line method.
AMORTIZATION OF INTANGIBLES
Intangible assets are amortized on the straight line method over the
estimated period of benefit associated with the intangible asset.
LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of
F-8 46
<PAGE>
ON2.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 31, 1999 AND SEPTEMBER 30, 1998 AND
THE THREE MONTHS ENDED DECEMBER 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
("SFAS No. 121"). SFAS No. 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets. The Company assesses the
impairment of long-lived assets when events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. The Company does not
believe any impairment currently exists with respect to its long-lived assets.
CONCENTRATION OF CREDIT RISK
The Company from time to time maintains a substantial portion of its cash
and cash equivalents in certificates of deposit and money market accounts with
one financial institution. The Company has established guidelines relative to
diversification and maturities to maintain safety and liquidity.
PATENT COSTS
Patent costs are being amortized over a period of five years using the
straight-line method. Trademarks acquired are being amortized over ten years.
SOFTWARE DEVELOPMENT COSTS
Costs for the development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, at which time any additional
costs will be capitalized, as prescribed by SFAS No. 86, "Software Development
Costs". The Company completed its software development concurrently with the
establishment of technological feasibility and, accordingly, no software
development costs have been capitalized to date.
REVENUE RECOGNITION
The Company's revenues consist primarily of license fees received from third
parties.
In October 1997 the AICPA issued SOP 97-2, SOFTWARE REVENUE RECOGNITION,
which was amended by SOP 98-4, DEFERRAL OF THE EFFECTIVE DATE OF CERTAIN
PROVISIONS OF SOP 97-2, and SOP 98-9, SOFTWARE REVENUE RECOGNITION. SOP No. 97-
2, as amended, provides guidance on applying generally accepted accounting
principles for software revenue recognition transactions. Full adoption of SOP
No. 97-2, as amended, will be effective for the fiscal year beginning
January 1, 2000. Based on the Company's interpretation of the requirements of
SOP No. 97-2, as amended, application of this statement will not materially
impact the Company's revenues, results of operations or financial position.
For the Fiscal year ended December 31, 1999 approximately 59% and 8% of
revenues were derived from two customers. For the three months ended
December 31, 1998, approximately 50% and 27% of revenues were derived from two
customers. For the fiscal year ended September 30, 1998, approximately 81% of
revenues were derived from one customer.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and
F-9 47
<PAGE>
ON2.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 31, 1999 AND SEPTEMBER 30, 1998 AND
THE THREE MONTHS ENDED DECEMBER 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
INCOME TAXES
Income taxes are accounted for in accordance with SFAS No. 109, "Accounting
for Income Taxes", which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. Income tax expense is the tax
payable for the period and the change during the period in deferred tax assets
and liabilities, if any.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company accounts for stock-based compensation agreements in accordance
with the provisions of APB No. 25, Accounting for Stock Issues to Employees, and
complies with the disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. Under APB No. 25, compensation expense is based on the
difference, if any, on the date of grant, between the estimated fair value of
the Company's stock and the exercise price of options to purchase that stock.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share." Under the provisions of SFAS No. 128, basic and diluted
net loss per share are computed by dividing the net loss available to common
stockholders by the weighted average number of common and common equivalent
shares outstanding during the period. Common equivalent shares, comprised of
incremental common shares issuable upon the exercise of stock options and
warrants, have not been included in the computation of diluted net loss per
share as their effect is anti-dilutive.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 provides
guidance for determining whether computer software is internal-use software and
on accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. On2.com adopted the provisions of SOP
98-1 effective January 1, 1999. There were no material effects on the
consolidated financial statements from adoption of SOP 98-1.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for transactions
entered into after March 31, 2000 and requires that
F-10 48
<PAGE>
ON2.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 31, 1999 AND SEPTEMBER 30, 1998 AND
THE THREE MONTHS ENDED DECEMBER 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
all derivative instruments be recorded on the balance sheet at fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and the type of hedge transaction. The
ineffective portion of all hedges will be recognized in earnings. On2.com is
currently assessing the impact of this statement. The Company has not held any
derivative instruments or participated in any hedging activities to date.
2. THE MERGER
On June 15, 1999, Applied Capital Acquisition Corp., a Delaware corporation,
a wholly-owned subsidiary of Applied Capital Funding, Inc. merged with and into
The Duck Corporation ("Duck"), In connection with the Merger, the Company,
issued 15,000,000 shares of its Common Stock to the shareholders of Duck's
issued and outstanding common stock in exchange for 100% of the issued and
outstanding common stock of Duck. After the Merger, former Duck stockholders
owned approximately 65% of the issued and outstanding Common Stock of the
Company. The Merger has been accounted for as a reverse merger in which Duck is
the accounting acquirer. The historical records of Duck became the historical
records of the Company. Following the Merger, the business conducted by the
Company is the business conducted by Duck prior to the Merger.
Prior to the Merger, the Company was a non-operating "shell" corporation.
Pursuant to SEC rules, the merger of a private operating company (Duck) into a
non-operating public shell corporation with nominal net assets (Applied) is
considered a capital transaction and has the consequences referred to in the
following paragraph. The accounting is identical to that of a reverse merger but
there are no material assets, liabilities or operations included with those of
Duck as of June 15, 1999.
Historical operations of the Company include only those operations of Duck.
Historical stockholders' equity and loss per share prior to the Merger have been
retroactively restated for the equivalent number of shares received in the
merger after giving effect to the difference in par value of Duck's common stock
($.001 par value) and Applied's Common Stock (no par value). Duck common stock
outstanding prior to the Merger has been converted to an equivalent number of
shares of On2.com Inc. that were issued to Duck stockholders as a consequence of
the Merger. Common stock acquired by Duck prior to the Merger from an officer
and stockholder, pursuant to the Separation and Release Agreement, was converted
to equivalent On2.com Inc. common shares at December 31, 1998.
Coincident with the Merger, the Company issued 2,000,000 preferred stock
purchase units (the "Units") pursuant to Rule 506 under the Securities Act of
1933, as amended, for an aggregate purchase price of $15,000,000 in a private
offering.
Each Unit consisted of one share of no par value, Series A Convertible
Preferred Stock and a warrant to purchase 1.114404 shares of Common Stock of the
Company at an exercise price of $3.14 per share. Each share of Series A
Preferred Stock is non-voting and may be converted at the holder's option, at
any time, into one share of Common Stock of the Company. The conversion rate
will be adjusted for stock splits, stock dividends and similar events.
F-11 49
<PAGE>
ON2.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 31, 1999 AND SEPTEMBER 30, 1998 AND
THE THREE MONTHS ENDED DECEMBER 31, 1998
2. THE MERGER (CONTINUED)
The Series A Convertible Preferred Stock includes a liquidation preference.
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of shares of Series A Convertible
Preferred Stock are entitled to receive an amount per share equal to the
original purchase price of $7.50. The current total liquidation preference is
$15,000,000.
Prior to the Merger, The Travelers Insurance Company ("Travelers"), a
subsidiary of Citigroup Inc., held approximately 27% of Duck's voting equity
securities on a fully diluted basis. In connection with the offering of the
Units, Travelers purchased from the Company 400,000 Units for an aggregate
purchase price of $3,000,000. In addition, prior to the Merger, Travelers
purchased 1,600,000 shares of Common Stock of the Company from existing
stockholders in privately negotiated transactions. Following consummation of the
Merger and after giving effect to the foregoing purchases, Travelers holds
approximately 20.4% of the outstanding Common Stock of the Company.
3. FISCAL YEAR END
The Company's fiscal year end is December 31. The fiscal year end of The
Duck Corporation was September 30. After the Merger the Company will continue to
report on its December 31 fiscal year-end schedule. Under SEC reporting rules,
this results in the requirement for a "transition report" to reconcile Duck's
audited twelve months results to the December 31 year-end. The report including
audited financial statements for the three month transition period ended
December 31, 1998 was filed with the SEC on Form 10-KSB on September 28, 1999
and amended on October 21, 1999.
4. METAVISUAL CREATIONS LIMITED ACQUISITION
On September 27, 1999 the Company acquired the assets of MetaVisual
Creations Limited ("MetaVisual"), a foreign private issuer organized and
incorporated under the Small Companies Act of the United Kingdom, for a purchase
price of $2,518,572. The purchase price consisted of $400,000 cash, a $350,000
note and 169,444 shares of the Company's common stock valued at $1,768,572 based
on the closing price of the Company's common stock on the American Stock
Exchange on the acquisition date. The purpose of the acquisition was to obtain
video signal compression/decompression technology ("codec") developed by
MetaVisual's majority shareholder and only employee. On2.com Inc. is using the
core technology acquired as part of its software architecture platform for
distribution of video signals over the World Wide Web.
Prior to the acquisition, MetaVisual generated limited revenue from
development contracts and licensing an earlier version of the technology.
MetaVisual had no corporate facilities, distribution systems or sales force.
On2.com did not acquire any customer base or trade names as part of the
acquisition. The historical results of operations, cash flows and financial
condition of MetaVisual were not material to On2.com and have no relationship to
On2.com's future use of the technology.
F-12 50
<PAGE>
ON2.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 31, 1999 AND SEPTEMBER 30, 1998 AND
THE THREE MONTHS ENDED DECEMBER 31, 1998
4. METAVISUAL CREATIONS LIMITED ACQUISITION (CONTINUED)
The purchase price was allocated to tangible assets and the identifiable
intangible asset, based on their fair values, as follows:
<TABLE>
<S> <C>
Purchase Price:............................................. $2,518,572
==========
Cash acquired............................................... $ 9,232
Fixed assets (primarily computer equipment)................. 5,989
Less: accounts payable assumed.............................. (5,936)
Intangible asset--software technology acquired.............. 2,509,287
----------
$2,518,572
==========
</TABLE>
The acquired technology is being amortized over a period of 4 years, on the
straight line method. The amortization period was determined by estimating the
useful life of the acquired technology after assessing the effects of
obsolescence, development of superior technology, competition and similar
economic factors. The recoverability of the intangible asset's value will be
addressed on an ongoing basis.
5. EMPLOYMENT AGREEMENT AND OTHER INTANGIBLES
On November 11, 1999 the Company entered into a three year employment
agreement with an executive to provide video interviews of celebrities for
distribution through the Company's On2Movies broadband Web Site. The Company
paid $250,000 in cash and issued 182,314 shares of its common stock valued at
$2,256,161 in addition to salary and benefits, for the exclusive rights to the
executive's services during the term of the agreement. One third of the shares
vested immediately. The remainder are held in escrow and vest on each
anniversary date in the next two years, unless the employment agreement is
terminated by either party
The Company also received title to video and audio tapes of celebrity
interviews acquired or produced by the executive prior to his employment by the
Company. The intangible assets acquired are being amortized over the three-year
term of the employment agreement. A portion of the purchase price was allocated
to the tapes. The balance was allocated to future compensation.
The purpose of the transaction was to obtain the services of this well-known
entertainment syndication personality to build relationships in the
entertainment community and to create celebrity interview video programming for
our On2Movies Web site.
The transaction price was allocated to intangible assets and the employment
agreement, based on their fair values, as follows:
<TABLE>
<S> <C>
Transaction Price........................................... $2,506,161
==========
Other assets (audio tapes acquired):........................ $ 100,000
Intangible asset--employment agreement:..................... 2,406,161
----------
$2,506,161
==========
</TABLE>
F-13 51
<PAGE>
ON2.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED DECEMBER 31, 1999 AND SEPTEMBER 30, 1998 AND
THE THREE MONTHS ENDED DECEMBER 31, 1998
5. EMPLOYMENT AGREEMENT AND OTHER INTANGIBLES (CONTINUED)
The employment agreement is being amortized over its three-year term. The
audio tapes acquired are being amortized over the estimated useful life of three
years.
6. FIXED ASSETS
Fixed assets consisted of the following at December 31, 1999 and 1998
<TABLE>
<S> <C> <C>
Furniture and fixtures................................ $ 86,102 $ 60,236
Computer equipment.................................... 1,488,344 684,337
Leasehold improvements................................ 167,205 132,238
Licensed software..................................... 418,736 50,000
---------- ---------
2,160,387 926,812
Less--Accumulated depreciation........................ (837,697) (566,395)
---------- ---------
Fixed assets, net..................................... $1,322,690 $ 360,417
========== =========
</TABLE>
7. INCOME TAXES
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Components of the Company's net deferred tax assets and liabilities as of
December 31, 1999 are as follows:
<TABLE>
<S> <C>
Conversion of accrual to cash basis tax reporting........... $ 62,000
Patent costs................................................ (30,000)
Net operating loss carryforwards............................ 6,160,000
-----------
6,192,000
Less- valuation allowance................................... (6,192,000)
-----------
$ --
===========
</TABLE>
F-14 52
<PAGE>
7. INCOME TAXES (CONTINUED)
The Company incurred a 10% foreign tax on certain royalties paid to it
pursuant to a United States-Japanese tax treaty. This is the primary component
of the income tax provision.
For Federal income tax purposes, the Company has net operating loss
carryforwards of approximately $15.4 million, which expire at various dates
through 2019.
The effective income tax rate differs from the Federal statutory rate
primarily due to state and local taxes, foreign taxes not currently deductible
in the United States, certain nondeductible expenses and the establishment of a
full valuation allowance for the net deferred tax assets.
8. STOCKHOLDERS' EQUITY
The stockholders' equity section has been restated pursuant to the merger of
Duck with and into a subsidiary of On2.com Inc. and accounted for as a reverse
merger. Following the merger the historical operations of Duck became the
historical operations of On2.com, Inc. The stockholders' equity of the Company
has been retroactively restated in accordance with generally accepted accounting
principles.
On June 15, 1999, pursuant to the Merger, the Company issued 2,000,000
Series A Preferred shares. The Company received $15,000,000 of gross proceeds.
On September 27, 1999, the Company issued 169,444 common shares in
conjunction with acquisition of the assets of MetaVisual Creations Limited. The
issuance of the shares was valued at the closing price of the Company's common
stock on the American Stock Exchange on the day of closing.
On November 11, 1999, the Company entered into an employment agreement with
an executive to produce and acquire interviews with celebrities and build
relationships in the entertainment community. The Company also acquired a
library of audio tapes of celebrity interviews. As an inducement to the
executive to enter into the exclusive employment agreement, the Company issued
182,314 common shares valued at $12.375, the closing price of the Company's
common stock on the American Stock Exchange on the closing date. One third of
the shares vested with the executive on the date of issuance. The remaining two
thirds are held in escrow and vest on each of the two forthcoming annual
anniversary dates of the original issuance.
On December 30, 1999 the Company issued 799,825 shares of its common stock
pursuant to a private placement to accredited investors under Rule 506 of the
Securities Act of 1933. None of the purchasers had any prior relationship with
the Company. The shares were issued at a price of $12.88 per share. The closing
price of the Company's common stock on the American Stock Exchange on the
closing date was $28.375. The Company received cash of $10,301,746 and incurred
expenses of $133,297 related to the issuance.
The Company also issued warrants to purchase common stock of the Company to
the purchasers of the common stock. The purchasers received one warrant to
purchase common stock at an exercise price of $28.75 for each share of common
stock purchased pursuant to the offering. The warrants expire on December 29,
2004.
9. OPTIONS
During fiscal year 1998, the Company adopted a 1998 Stock Option Plan (the
"1998 Plan"). Under the 1998 Plan, 800,401 shares of common stock were reserved
for issuance.
In 1999 the Company adopted the 1999 Stock Option Plan (the "1999 Plan")
which replaced all prior stock option plans. Under the 1999 Plan all options
issued under prior plans are recognized as issued and
F-15 53
<PAGE>
9. OPTIONS (CONTINUED)
outstanding under the original terms granted. Under the 1999 Plan, 4,000,000
shares of common stock are reserved for issuance.
Subsequent to December 31, 1999 the Company amended the 1999 Plan to provide
for the issuance of restricted stock grants and increased the total common
shares available for issuance under the plan to 5,500,000 shares.
The following table summarizes the stock option activity under the plans
from inception:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding September 30, 1997........................... 684,787 $0.88
Granted................................................ 447,335 2.25
Exercised.............................................. 2,668 0.88
Canceled............................................... 124,507 0.88
--------- -----
Outstanding September 30, 1998........................... 1,004,947 1.49
Granted................................................ 26,680 2.25
Exercised.............................................. -- --
Canceled............................................... -- --
--------- -----
Outstanding at December 31, 1998......................... 1,031,627 1.52
Granted................................................ 1,854,352 7.30
Exercised.............................................. 20,750 2.25
Canceled............................................... -- --
--------- -----
Outstanding at December 31, 1999......................... 2,865,229 $5.25
========= =====
</TABLE>
Options exercisable as of December 31, 1999 were 896,057 and 1,114,021
shares were available for future issuance under the Company's stock option plans
at December 31, 1999. Additional information regarding stock options outstanding
at December 31, 1999 follows:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
WEIGHTED AVERAGE -------------------
WEIGHTED REMAINING NUMBER WEIGHTED
RANGE OF EXERCISE NUMBER AVERAGE CONTRACTUAL LIFE OF AVERAGE
PRICES OF SHARES PRICE (IN YEARS) SHARES PRICE
- ----------------- ---------- -------- ---------------- -------- --------
<S> <C> <C> <C> <C> <C>
$0.88--$2.25................................. 2,012,829 $ 1.39 8.5 896,057 $1.28
$9.81--$12.94................................ 540,800 $11.80 9.8 -- --
$13.00--$19.50............................... 251,100 $16.37 9.7 -- --
$22.13--$34.00............................... 60,500 $28.91 9.9 -- --
</TABLE>
The effect of applying the SFAS 123 fair value method to determine the
weighted average grant date fair value of the Company's options results in a
value that is not materially different from the weighted average exercise price
for the twelve months ending December 31, 1999, the three months ending
December 31, 1998 and the twelve months ending September 30, 1998.
Pro forma information regarding net income or loss is required to be
disclosed in accordance with SFAS No. 123. The pro forma information is to be
determined as if the Company had accounted for its employee stock options under
the fair value method prescribed in that Statement. The effect of applying
F-16 54
<PAGE>
9. OPTIONS (CONTINUED)
the SFAS 123 fair value method to the Company's stock-based awards results in a
pro forma net loss as follows for the periods ending December 31, 1999 and 1998
and September 30, 1998:
<TABLE>
<CAPTION>
THREE MONTH
FISCAL YEAR TRANSITION TWELVE MONTHS
ENDED PERIOD ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1999 1998 1998
------------- ------------ -------------
<S> <C> <C> <C>
Net loss, as reported................ $(10,087,542) $(981,444) $(3,016,290)
Net loss, pro forma.................. (10,335,300) (997,694) (3,087,867)
Loss per share, as reported.......... $ (0.51) $(0.06) $ (0.20)
Loss per share, pro forma............ $ (0.53) $(0.07) $ (0.20)
Weighted average risk free interest
rate............................... 5.5% 6.0% 6.0%
Volatility........................... 75% 30% 30%
Weighted average expected life....... 3 yrs. 3 yrs. 3 yrs.
</TABLE>
10. RELATED PARTY TRANSACTIONS
Effective June 9, 1999, the Company entered into a Separation and Release
Agreement with an officer and shareholder. In connection with the agreement,
among other things, the Company repurchased 302,374 shares of the Company's
Common Stock from the officer and shareholder at a price of $1.12 per share
through issuance of a note payable to the shareholder. Under the terms of the
Separation and Release Agreement, on January 15, 2000 the Company will offset
the remaining balance of the note payable to the shareholder against certain
notes and advances receivable from the shareholder.
At December 31, 1999, the Company had a note receivable from the officer and
shareholder of $294,624.
Additionally, the Company agreed to pay the officer and shareholder $10,000
per month for a period of eight months for consulting services related to
marketing and business development. During fiscal 1999 the Company paid the
officer and shareholder $66,667 for consulting services.
One of the Company's directors owns all of the securities of Verus Capital
Corporation ("Verus"), a diversified investment group. On June 15, 1999, the
Company entered into a two-year consulting contract with Verus whereby the
Company pays to Verus $12,500 per month in exchange for management and
consulting services. During fiscal 1999, the Company paid Verus $75,000 in
consulting fees and reimbursed Verus $8,864 for expenses incurred on behalf of
the Company.
Pursuant to the acquisition of the assets of MetaVisual, the Company issued
to the selling shareholders of MetaVisual, who became shareholders of the
Company, notes payable in the amount of $350,000 due September 27, 2000 and
bearing interest at a rate of 8% per annum.
The Company has committed to purchase certain Internet advertising services
from February 2000 through May 2000 from an interactive media buying and
marketing services company, of which a director of the Company is chairman. The
Company expects to purchase approximately $400,000 during this period in
advertising space on third-party Internet publishers through this company,
utilizing it to execute, track and optimize these advertising purchases.
Management believes that the costs incurred for the advertising and for the
company's services are at fair market value for such services.
F-17 55
<PAGE>
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE
The Company leases office space under non-cancelable operating leases.
During the fiscal years ended December 31, 1999 and September 30, 1998 and the
three months ended December 31, 1998 the Company incurred approximately
$247,793, $49,750, and $231,000 respectively, in rent expense. The aggregate
minimum future lease commitments at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000........................................................ $558,000
2001........................................................ $303,000
2002........................................................ $ 41,000
</TABLE>
LINE OF CREDIT
At December 31, 1998, the Company had a $500,000 line of credit from a bank
secured by a certificate of deposit. At December 31, 1998, the Company had no
outstanding borrowings under this line of credit. The line of credit expired in
March 1999.
CONTINGENCY
The Company is a defendant in a lawsuit regarding an alleged breach of
contract that seeks damages in the millions of dollars. The Company has denied
the substantive allegations and has contested the case vigorously. During fiscal
year 1998, the court ruled that the plaintiff is entitled to $60,000 based on
the contract, plus interest. Accordingly, the Company accrued and paid $89,000
relating to this matter. The Plaintiff filed a notice of appeal with respect to
the summary judgement and trial decision. The Company opposed the appeal and
cross-appealed with respect to denomination of prevailing party. The Court of
Appeals affirmed the trial court's summary judgement decision and trial decision
in all respects, except it held that the Company was the prevailing party and
was thus entitled to recover reasonable counsel fees. A fee hearing was held and
the amount of fees to be recovered by the Company is presently pending before
the court. Any determination in this regard cannot have an adverse affect on the
company.
12. RETIREMENT PLAN
The Company has a 401(k) retirement plan which covers substantially all
employees. Under the 401(k) Plan, employees are permitted to contribute up to 4%
of gross compensation not to exceed the annual 402(g) limitation for any plan
year. The Company provides a matching contribution of the first 1% contributed
by each employee. Company contributions to the plan were $19,522, $3,855 and
$19,771 for the twelve months ended December 31, 1999, the three months ended
December 31, 1998 and the twelve months ended September 30, 1998, respectively.
F-18 56
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
- --------------------- -------------------------
<S> <C>
3.1(1) Articles of Incorporation of the Company
3.2(2) Amendment to Articles of Incorporation
3.3(2) Second Amendment to Articles of Incorporation
3.3(1) By-laws of the Company
4.1 Securityholders Agreement
4.2 Form of Investment Rights Agreement
4.3 Form of Warrant
4.4 Escrow Agreement
10.1 Employment Agreement
16.1 Letter on Change in Certifying Accountant--Nelson Mayoka &
Company, P.C.
16.2 Letter on Change in Certifying Accountant--Ernst & Young LLP
27.1 Financial Data Schedule
99.1 Power of Attorney (see signature page)
</TABLE>
- ------------------------
(1) Filed as an exhibit to the Company's registration statement on Form 10-SB,
SEC Filed No. 000-23171 and incorporated by reference herein.
(2) Filed as an exhibit to the Company's Current Report on Form 8K, SEC File No.
001-15117 and incorporated by reference herein.
57
<PAGE>
EXHIBIT 4.1 SECURITYHOLDERS AGREEMENT
SECURITYHOLDERS AGREEMENT
This Securityholders Agreement is made as of December 1, 1999, by and among
On2.com Inc. (the "Company"), a Colorado corporation having its principal
address at 375 Greenwich Street, 4(th) Floor, New York, NY 10013, and those
persons named in Schedule A to this Agreement (collectively, the "Holders").
Certain capitalized terms used in this Agreement without definition shall have
the meanings given them in Section 13.
PREAMBLE
Each of the Holders is (a) the Holder of record of shares of Common Stock,
(b) the Holder of record of one or more Common Stock Warrants or (c) the Holder
of record of shares Series A Preferred.
Prior to the Merger, certain of the Holders held shares of common stock of,
or warrants to acquire shares of common stock of Duck.
Each of the Holders designated as a "Former Duck Holder" on Schedule A (the
"Former Duck Holders") voted in favor of or consented to the Merger.
Pursuant to the Merger Agreement, on June 16, 1999 ACAC merged with and into
Duck and each of the outstanding shares of common stock of Duck was converted
into 0.889334306 shares of the Common Stock.
The Merger Agreement also provided that each Holder of warrants to acquire
shares of Duck's common stock would exchange those warrants for certain Common
Stock Warrants in the ratio provided therein.
Section 2.6 of the Merger Agreement provided that the Company would, on or
prior to the ninetieth day after the closing of the Merger, file a registration
statement with the Commission to register for resale to the public shares of the
Common Stock owned by the Former Duck Holders, shares of Common Stock underlying
the Common Stock Warrants and shares of the Common Stock underlying the
Series A Preferred, as well as shares of the Common Stock underlying options
issued to former holders of options to acquire common stock of Duck, on or prior
to the ninetieth day after the closing of the Merger.
Pursuant to the MetaVisual Registration Rights Agreement, the Company has
granted certain rights to the persons who are parties thereto to register shares
of Common Stock held by them.
Pursuant to the Berlin Registration Rights Agreement, the Company has
granted certain rights to the persons who are parties thereto to register shares
of Common Stock held by them.
NOW, THEREFORE, in consideration of the premises and mutual agreements set
forth herein, the Company and the Holders agree as follows:
1. RESTRICTIONS ON TRANSFERABILITY. During the Term, except as permitted by
Section 3.1 or 3.2, no Holder may Sell any Restricted Securities, whether or not
for value, except in compliance with the terms and conditions of this Agreement,
regardless of whether the intended Sale is permitted pursuant to Rule 144 or is
otherwise exempt from the registration requirements of the Securities Act. At
such time as the Restricted Securities cease to be Restricted Securities under
the terms of this Agreement, the provisions of this Agreement shall no longer
apply to any securities that theretofore were Restricted Securities
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<PAGE>
2. RESTRICTIVE LEGEND.
2.1. SHARES OF COMMON STOCK. Each certificate representing Restricted
Securities that are shares of Common Stock shall be stamped or otherwise
imprinted with a legend substantially in the following form (in addition to
any legend required under applicable state securities laws or otherwise):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
(THE "SECURITIES ACT"). THESE SHARES MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE SECURITIES ACT.
THE SALE, ASSIGNMENT, TRANSFER, PLEDGE AND OTHER DISPOSITION OF THE
SHARES REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED BY THE
SECURITYHOLDERS AGREEMENT (THE "SECURITYHOLDERS AGREEMENT"), DATED AS OF
DECEMBER 1, 1999, AMONG CERTAIN SECURITYHOLDERS OF THE CORPORATION. A
COPY OF THE SECURITYHOLDERS AGREEMENT IS ON FILE WITH THE CORPORATE
SECRETARY AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION. A COPY
THEREOF MAY BE OBTAINED AT NO COST UPON WRITTEN REQUEST THEREFOR MADE BY
THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE CORPORATE SECRETARY AT
THE PRINCIPAL OFFICES OF THE CORPORATION.
2.2. SHARES OF PREFERRED STOCK. Each certificate representing
Restricted Securities that are shares of Series A Preferred shall be stamped
or otherwise imprinted with a legend substantially in the following form (in
addition to any legend required under applicable state securities laws or
otherwise):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
(THE "SECURITIES ACT"). THESE SHARES MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE SECURITIES ACT.
THE SALE, ASSIGNMENT, TRANSFER, PLEDGE AND OTHER DISPOSITION OF THE
SHARES REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED BY THE
SECURITYHOLDERS AGREEMENT (THE "SECURITYHOLDERS AGREEMENT"), DATED AS OF
DECEMBER 1, 1999, AMONG CERTAIN SECURITYHOLDERS OF THE CORPORATION. A
COPY OF THE SECURITYHOLDERS AGREEMENT IS ON FILE WITH THE CORPORATE
SECRETARY AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION. A COPY
THEREOF MAY BE OBTAINED AT NO COST UPON WRITTEN REQUEST THEREFOR MADE BY
THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE CORPORATE SECRETARY AT
THE PRINCIPAL OFFICES OF THE CORPORATION.
2.3. STOP TRANSFER INSTRUCTIONS. The Holders consent to the Company's
making a notation on its records and giving instructions to any transfer
agent of the Restricted Securities in order to implement the restrictions on
transfer established in this Agreement.
3. NOTICE AND OTHER REQUIREMENTS OF TRANSFER.
3.1. PERMITTED SALES. During the Term, a Holder may Sell Restricted
Securities:
a. the intended Sale is permitted or required by Section 10;
2
<PAGE>
b. a registration statement under the Securities Act covering such
proposed sale is effective, and the Holder Sells in accordance with such
registration statement;
c. (i) if the proposed Sale is, for value, including Sales made in a
private offering by both the Company and certain of its stockholders
scheduled to occur in December 1999 and the first quarter of 2000, or is
a Sale to which the provisions of clauses a, b, d, and e of this Section
do not apply, such Holder has notified the Company of the proposed Sale
and has furnished the Company with a detailed statement of the
circumstances surrounding the proposed Sale including the name and
address of the buyer and identifying the Restricted Securities with
respect to which such rights are being assigned, and (ii) the buyer, as a
condition to the effectiveness of such Sale, has executed a counterpart
of this Agreement expressly assuming the obligations of a Holder under
this Agreement; and, if the Company requests, such Holder shall also
furnish the Company with an opinion of counsel, reasonably satisfactory
to the Company, that such Sale does not require registration of such
Securities under the Securities Act;
d. (i) if the proposed Sale is a transfer by gift, or other transfer
by a Holder to a member of the Holder's Immediate Family to which the
provisions of clause e of this Section 3 does not apply, and (ii) the
donee or other transferee, as a condition to the effectiveness of such
Sale, has executed a counterpart of this Agreement expressly assuming the
obligations of a Holder under this Agreement; or
e. (i) if the proposed Sale is a transfer to a spouse or former
spouse pursuant to an agreement of separation or divorce approved by a
court of competent jurisdiction, and (ii) the transferee, as a condition
to the effectiveness of such Sale, has executed a counterpart of this
Agreement expressly assuming the obligations of a Holder under this
Agreement.
f. (i) if the proposed Sale is a transfer to an Affiliate, and
(ii) the Affiliate transferee, as a condition to the effectiveness of
such Sale, has executed a counterpart of this Agreement expressly
assuming the obligations of a Holder under this Agreement.
3.2. SALES UNDER RULE 144. In addition to Section 3.1, during the
period commencing on June 15, 2000 and ending on the last day of the
Term, each Holder may Sell up to an aggregate of 25% (rounded to the
nearest whole share) of the shares of Common Stock that are Restricted
Securities as of the date of this Agreement if and only if such sales are
made in full compliance with Rule 144.
4. PIGGYBACK REGISTRATION.
4.1. NOTICE TO HOLDERS REQUIRED. If at any time during the Term the
Company shall determine to register any shares of Common Stock for its own
account or the account of any of the Holders, other than (a) a transaction
relating solely to the sale of convertible debt instruments, (b) a
registration on Form S-4 or S-8 or another form not available for
registering the Restricted Securities for sale to the public or (c) any
registration comprised in whole or in substantial part of shares underlying
stock options granted by the Company or its predecessor, the Company will
give to the Holders notice as soon as practicable prior to filing the
registration statement and include in such registration all the Restricted
Securities specified in one or more written requests which have been made
within 15 days after receipt of such written notice from the Company by any
of the Holders, except as set forth in Section 4.2.
4.2. REGISTERED PUBLIC OFFERING INVOLVING AN UNDERWRITING. If the
registration is for a registered public offering involving an underwritten
offering, the Company shall so advise each Holder as a part of the written
notice given pursuant to Section 4.1. In such event, the right of each
Holder to registration pursuant to this Section shall be conditioned upon
such Holder's participation in such underwriting and the inclusion of such
Holder's Restricted Securities in the underwriting to the extent provided
herein. If any Holder proposes to distribute his securities through such
underwriting, such
3
<PAGE>
Holder shall (together with the Company and the other Holders distributing
their securities through such underwriting) enter into an underwriting
agreement in customary form with the underwriter or underwriters selected
for such underwriting by the Company. Notwithstanding any other provision of
this Section 4, if the managing underwriter determines that marketing
factors require a limitation of the number of shares to be underwritten, the
managing underwriter may limit the number of Restricted Securities to be
included in the underwriting or may limit the number of Restricted
Securities to be included in such registration. The Company shall so advise
each of the Holders, and the number of shares of Restricted Securities and
other securities that may be included in the registration and underwriting
shall be allocated among such Holder and other holders of Common Stock that
hold rights granted by the Company to cause shares of Common Stock held by
them to be included in such registration or underwriting, in proportion, as
nearly as practicable, to the respective amounts of Restricted Securities
held by each Holder and each other such holder that are requested to be
included in the registration or underwriting. To facilitate the allocation
of shares in accordance with the above provisions, the Company or the
underwriter may round the number of shares allocated to any Holders to the
nearest one hundred shares. If any of the Holders disapproves of the terms
of any such underwriting, he may elect to withdraw therefrom by written
notice to the Company. Any Restricted Securities excluded or withdrawn from
such underwriting shall be withdrawn from such registration.
4.3. OTHER REGISTRATION RIGHTS. Each of the Holders acknowledges and
agrees that (a) pursuant to the Berlin Registration Rights Agreement and the
MetaVisual Registration Rights Agreement, certain holders of Common Stock
are entitled to participate on a pro rata basis in registration of Common
Stock that may occur pursuant to Section 4.1 and (b) the Company may from
time to time grant comparable registration rights to other persons in order
to facilitate business transactions which the Company determines to be in
its best interest.
4.4. LOCKUP AGREEMENTS. In consideration for the Company's performance
of its obligations under this Agreement, if any Restricted Securities of
such Holder are included in a registration under Section 4.2, each Holder
will at the request of the Company or the underwriters managing any
underwritten offering of the Company's securities, agree not to sell any
Restricted Securities (other than those included in the registration)
without the prior written consent of the Company or such underwriters, as
the case may be, for such period of time as the underwriters may specify.
5. NONPUBLIC INFORMATION. Notwithstanding any other provision of this
Agreement, the Company's obligation to file a registration statement under
Section 4.1, or to cause such registration statement to become and remain
effective, shall be suspended for a period not to exceed 90 days (and for
periods not exceeding, in the aggregate, 180 days in any 12-month period) if
there exists at the time material non-public information relating to the Company
which, in the reasonable opinion of the Company, should not be disclosed.
6. EXPENSES OF REGISTRATION. The Company will bear all reasonable expenses
incurred in connection with registrations pursuant to Section 4, including
without limitation all registration, filing and qualification fees, printing
expenses, fees and disbursements of counsel for the Company and independent
accountants for the Company and expenses of any special audits of the Company's
financial statements incidental to or required by such registration, fees of the
National Association of Securities Dealers, Inc., transfer taxes, fees of
transfer agents and registrars' fees, but the Company will not pay underwriters'
fees, discounts or commissions relating to the Restricted Securities or any fees
or expenses of legal counsel for any or all of the Holders.
7. REGISTRATION PROCEDURES. In the case of each registration effected by
the Company pursuant to this Agreement, the Company will keep the Holders
participating therein advised in writing as to the initiation of each
registration and as to the completion thereof.
4
<PAGE>
8. INDEMNIFICATION.
8.1. INDEMNITY BY THE COMPANY. If the Company registers any Restricted
Securities under the Securities Act pursuant to Section 4, the Company will
indemnify and hold harmless the Holders of such Restricted Securities
thereunder, each underwriter of such Restricted Securities thereunder and
each other person, if any, who controls any Holder or underwriter within the
meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which such Holders, underwriter or
controlling persons may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which such Restricted Securities were
registered under the Securities Act, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereof, or
arise out of or are based upon the 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 any violation by the Company of
any rule or regulation promulgated under the Securities Act or any state
securities law applicable to the Company and relating to action or inaction
required of the Company in connection with any such registration, and will
reimburse the Holders, each of their respective officers, directors and
partners, and each person controlling any of the Holders, each such
underwriter and each person who controls any such underwriter, for any
reasonable legal and any other expenses incurred in connection with
investigating, defending or settling any such claim, loss, damage, liability
or action, provided that the Company will not be liable in any such case to
any Holder to the extent that any such claim, loss, damage or liability
arises out of or is based on any untrue statement or omission based upon
written information furnished to the Company or to an underwriter by an
instrument duly executed by such Holder specifically for use therein.
8.2. INDEMNITY BY THE HOLDERS. Each Holder will, if Restricted
Securities held by or issuable to such Holder are included in the securities
as to which such registration is being effected, severally and not jointly,
indemnify and hold harmless the Company, each of its directors, each officer
who signs the registration statement, each underwriter, if any, of the
Company's securities covered by such a registration statement, each person
who controls the Company and each underwriter within the meaning of the
Securities Act, against all claims, losses, expenses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained
in any such registration statement, prospectus, offering circular or other
document, or 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 will reimburse the Company, such directors,
officers, partners, persons or underwriters for any reasonable legal or any
other expenses incurred by them in connection with investigating, defending
or settling any such claim, loss, damage, liability or action, in each case
to the extent, but only to the extent, that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Company by an instrument duly executed by such Holder specifically for use
therein; provided, that the total amount for which any Holder, its officers,
directors and partners, and any person controlling such Holders, shall be
liable under this Section 8.2 shall not in any event exceed the proceeds
(net of underwriting discounts and commissions) received by such Holder from
the sale of Restricted Securities sold by such Holder in such registration.
8.3. NOTICE BY THE INDEMNIFIED PARTY. Each party entitled to
indemnification under this Section 8 (the "Indemnified Party") shall give
notice to the party required to provide indemnification (the "Indemnifying
Party") promptly after such Indemnified Party has actual knowledge of any
claims as to which indemnity may be sought, and shall permit the
Indemnifying Party to assume the defense of any such claim or any litigation
resulting therefrom, provided that counsel for the Indemnifying Party, who
shall conduct the defense of such claim or litigation, shall be approved by
the Indemnified Party
5
<PAGE>
(whose approval shall not be unreasonably withheld), and the Indemnified
Party may participate in such defense at such party's expense, and provided
further that the failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations
hereunder, unless such failure resulted in actual detriment to the
Indemnifying Party. No Indemnifying Party, in the defense of any such claim
or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in
respect of such claim or litigation.
8.4. UNDERWRITING AGREEMENT. Notwithstanding the foregoing, to the
extent that the provisions on indemnification contained in the underwriting
agreements entered into among the selling Holders, the Company and the
underwriters in connection with the underwritten public offering are in
conflict with the foregoing provisions, the provisions in the underwriting
agreement shall be controlling as to the Restricted Securities included in
the public offering; provided, that if, as a results of this Section 8.4,
the Holders, and any persons controlling such Holders is held liable for an
amount which exceeds the aggregate proceeds received by such Holders from
the sale of Restricted Securities included in a registration, as provided in
Section 8.2, pursuant to such underwriting agreement (the "Excess
Liability"), the Company shall reimburse any such Holders for such Excess
Liability.
8.5. CONTRIBUTION. If the indemnification provided for in this Section
is held by a court of competent jurisdiction to be unavailable to an
Indemnified Party with respect to any loss, liability, claim, damage or
expense referred to therein, then the Indemnifying Party, 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 loss,
liability, claim, damage or expense in such proportion as is appropriate to
reflect the relative fault of the Indemnifying Party on the one hand and of
the Indemnified Party on the other hand in connection with the statements or
omissions which resulted in such loss, liability, claim, damage or expense
as well as any other relevant equitable considerations. The relevant fault
of the Indemnifying Party and the Indemnified Party 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 Indemnifying Party or by the
Indemnified Party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. Notwithstanding the foregoing, the amount that any Holder shall be
obligated to contribute pursuant to this Section 8.5 shall be limited to an
amount equal to the proceeds to such Holder of the Restricted Securities
sold pursuant to the registration statement which gives rise to such
obligation to contribute (less the aggregate amount of any damages which
such Holder has otherwise been required to pay in respect of such loss,
claim, damage, liability or action or any substantially similar loss, claim,
damage, liability or action arising from the sale of such Restricted
Securities).
8.6. SURVIVAL OF INDEMNITY. The indemnification provided by this
Section shall be a continuing right to indemnification and shall survive the
registration and sale of any securities by any person entitled to
indemnification hereunder and the Term.
9. HOLDER'S COOPERATION.
9.1. INFORMATION REGARDING HOLDERS. Each of the Holders shall promptly
furnish to the Company such information regarding such Holder and the
distribution proposed by such Holder as the Company may request in writing
and as shall be required in connection with any registration referred to
herein.
6
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9.2. OBLIGATIONS OF THE HOLDERS. Each of the Holders holding shares
included in the registration will not (until further notice by the Company)
effect sales thereof (or deliver a prospectus to any purchaser) after receipt of
telegraphic or written notice from the Company to suspend sales to permit the
Company to correct or update a registration statement or prospectus. At the end
of the period during which the Company is obligated to keep any registration
statement filed under Section 4 current and effective as required by applicable
law, the Holders holding shares of Restricted Securities included in the
registration shall discontinue sales of shares pursuant to such registration
statement upon receipt of notice from the Company of its intention to remove
from registration the shares of Restricted Securities covered by such
registration statement that remain unsold, and each of the Holders shall notify
the Company of the number of such shares registered that remain unsold
immediately upon receipt of such notice from the Company.
10. SALES OF PROPORTIONATE PERCENTAGES OF SHARES.
10.1. TAG ALONG RIGHTS.
a. If during the Term any Holder or Holders of more than 33 1/3% of the
Common Stock proposes to Sell (as such term is defined in Section 10.3) in a
single transaction or a series of related transactions an aggregate number
of shares of Stock which represents more than 33 1/3% of the issued and
outstanding shares of Stock (other than to any Affiliates of such Holders),
such Holders (the "Selling Holders") shall comply with the provisions set
forth in Sections 10.1a through 10.1e. For all purposes of this Section,
Warrantholders and Series A Stockholders shall be deemed to hold the shares
of the Common Stock underlying their Common Stock Warrants and Series A
Preferred, as applicable.
b. Prior to effecting any Sale limited by Section 10.1a, the Selling
Holders shall notify the Company of the proposed sale pursuant to this
Section (which notice shall set forth the terms and conditions of such
proposed Sale in reasonable detail), and offer each other Holder (the "Other
Holders") by such notice the right to participate in the Sale on the terms
set out in the notice. The Company shall promptly send copies of the notice
to each of the Other Holders. Each Other Holder may elect to participate in
the contemplated Sale by notifying the Company within ten business days
after receipt of the Company's notice to them, specifying the number of
shares of the Common Stock that such Other Holder elects to Sell, which Sale
shall be on the same terms and conditions (including purchase price)
available to the Selling Holders. Each Other Holder may elect to Sell in the
contemplated transaction up to a number of shares of the Common Stock equal
to the product obtained by multiplying the number of shares of the Common
Stock which the Other Holder owns by a fraction, the numerator of which
shall be the number of shares of the Common Stock that the Selling Holders
propose to Sell, and the denominator of which shall be the aggregate number
of shares of the Common Stock that are held by Selling Holders. If the Other
Holders and Selling Holders (singularly, a "Selling Party", and,
collectively, the "Selling Parties") determine to sell in the aggregate more
than the total number of shares of the Common Stock than the Selling
Holders' buyer or buyers wish to purchase, then each Selling Party shall be
entitled to sell to the buyer or buyers that number of shares of the Common
Stock to be so purchased by the buyer or buyers from the Selling Parties
multiplied by a fraction, the numerator of which is the number of shares of
the Common Stock such Selling Party elects to Sell and the denominator of
which is the aggregate number of shares of the Common Stock which all Other
Holders have determined to Sell.
c. Each Other Holder electing to do so shall participate in a Sale to
the Selling Holders' buyer or buyers pursuant to this Section. All shares of
the Common Stock proposed to be sold by each of the Other Holders shall be
sold free and clear of all liens, claims and encumbrances of any kind.
d. The exercise or nonexercise of the rights of the Other Holders under
this Section shall not adversely affect any right of any Other Holder to
participate in subsequent Sales by the Selling Holders that satisfy the
conditions specified in this Section.
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e. Any sale or transfer made pursuant to this Section shall be
consummated within 90 days of the expiration of the Selling Holders' sale
notice.
10.2. BRING ALONG RIGHTS.
a. If during the Term Selling Holders shall intend to Sell or exchange
in a business combination or otherwise, in a single transaction or in a
series of related transactions, all the Common Stock owned by them in a bona
fide arm's length transaction with a third party that desires to purchase
not less than 80% of the Common Stock, such Selling Holders shall have the
right to require that (X) the Holders other than the Selling Holders (the
"Noninitiating Holders") Sell the same proportion of their shares of the
Common Stock held as of the date of this Agreement in the same transaction
at the same price and on the same terms and conditions applicable to the
Selling Holders and (Y) if stockholder approval of the transaction is
required, that each Noninitiating Holder shall vote his shares in favor
thereof.
b. Each Noninitiating Holder shall participate in a Sale to the Selling
Holders' buyer or buyers pursuant to this Section 10.2. All the Common Stock
proposed to be sold by each Noninitiating Holder shall be sold free and
clear of all liens, claims and encumbrances of any kind.
10.3. DEFINITION OF SELL/SALE. For all purposes of Section 10, a "Sale"
shall include a merger, consolidation or similar combination, exchange, sale of
assets followed by a liquidation, or any disposition for cash, marketable
securities, or debt obligations, or a combination thereof; provided, that a
"Sale" shall not include a public offering of shares to be registered under the
Securities Act.
11. RELEASE OF THE COMPANY, ITS DIRECTORS AND OFFICERS. Each Holder hereby
releases and discharges the Company, its directors and officers from any and all
claims, demands, damages, debts, liabilities, accounts, obligations, costs,
expenses, actions and causes of action of every kind and nature whatsoever,
whether now known or unknown, suspected or unsuspected, choate or inchoate,
whether arising before or after the date of this Agreement (a) arising under the
Merger Agreement and relating to any registration, sale or other transfer of
shares of capital stock or other securities of the Company or Duck or (b) in any
other way relating to any registration, sale or other transfer of shares of
capital stock or other securities of the Company or Duck, except in either case
for those obligations of the Company which are expressly set forth above in this
Agreement.
12. EFFECTIVENESS OF THIS AGREEMENT. This Agreement shall become effective
when executed by Holders owning at least 66 2/3% of the Restricted Securities.
13. DEFINITIONS. As used in this Agreement, the following terms shall have
the following meanings:
a. "ACAC" means Applied Capital Acquisition Corp., a Delaware
corporation.
b. "Affiliate" has the meaning given it in Rule 405 under the
Securities Act.
c. "Berlin Registration Rights Agreement" means the Registration
Rights Agreement, dated November 11, 1999, between the Company and the
persons named therein.
d. "Commission" shall mean the U. S. Securities and Exchange
Commission, or any other federal agency at the time administering the
Securities Act.
e. "Common Stock" shall mean shares of the Company's Common Stock,
no par value.
f. "Common Stock Warrants" mean warrants to purchase shares of the
Common Stock.
g. "Duck" means The Duck Corporation, a Delaware corporation and a
wholly-owned subsidiary of the Company.
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h. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar United States statute and the rules and
regulations thereunder, all as the same shall be in effect at the time.
i. "Holders" shall mean the persons named in Schedule I to this
Agreement and any other person who holds Restricted Securities and who
has assumed the obligations of this Agreement pursuant to clauses c, d,
and e of Section 3.
j. "Immediate Family" means the spouse, parent, child or grandchild
or a Holder of a trust exclusively for the exclusive benefit of spouse,
children or grandchildren of such Holder.
k. "Merger" means the merger transaction contemplated by the
Agreement and Plan of Merger (the "Merger Agreement"), dated as of
June 9, 1999, by and among the Company, Applied Capital Acquisition Corp.
("ACAC") and Duck.
l. "Merger Agreement" means the Agreement and Plan of Merger, dated
as of June 9, 1999, by and among the Company, ACAC and Duck.
m. "MetaVisual Registration Rights Agreement" means the Registration
Rights Agreement, dated September 27, 1999, between the Company and the
persons named therein.
n. "Register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of
the effectiveness of such registration statement, and compliance with
applicable state securities laws of such states in which any of the
Holders notifies the Company of his intention to offer Registrable
Securities.
o. "Restricted Securities" shall mean the (i) the shares of the
Common Stock held by the Holders, (ii) the shares of Common Stock
issuable to the Warrantholders upon the exercise of the Warrants held by
them and (iii) the shares of Common Stock issuable to the Holders of the
Series A Preferred upon conversion of the Series A Preferred, in each
case only to the extent the same have not been sold to the public. As to
any particular Restricted Securities, such securities shall cease to be
Restricted Securities when a registration statement with respect to the
sale of such securities shall have become effective under the Securities
Act and such securities shall have been disposed of under such
registration statement; in no event however shall the fact that such
securities shall have become eligible for resale pursuant to Rule 144
terminate such securities as Restricted Securities under this Agreement
(except to the extent set forth in Section 3.2), it the being intent of
the parties to this Agreement that the restrictions imposed by Section 1
of this Agreement will continue to apply to such securities until such
restrictions terminate by operation of the express provisions of this
Agreement and not otherwise. As to any particular Restricted Securities,
such securities shall cease to be Restricted Securities when (i) such
securities shall have been otherwise transferred or disposed of, and
(x) new certificates therefor not bearing a legend restricting further
transfer shall have been delivered by the Company, and (y) subsequent
transfer or disposition of them shall not require their registration or
qualification under the Securities Act or any similar state law then in
force or compliance with Rule 144, or (ii) such securities shall have
ceased to be outstanding.
p. "Rule 144" shall mean Rule 144 under the Securities Act or any
successor or similar rule as may be enacted by the Commission from time
to time.
q. "Sale" means any sale, transfer, assignment, pledge or other
disposition; "Sell" means to sell, transfer, assign or otherwise dispose
of; provided that for all purposes of Section 10 "Sale" and "Sell" shall
have the particular meanings given them in Section 10.3.
r. "Rule 145" shall mean Rule 145 under the Securities Act or any
successor or similar rule as may be enacted by the Commission from time
to time.
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s. "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar United States statute and the rules and
regulations thereunder, all as the same shall be in effect at the time.
t. "Series A Preferred" shall mean shares of the Company's Series A
Preferred Stock, no par value.
u. "Series A Stockholder" mean a holder of Series A Preferred.
v. "Stockholder" means a holder of record of shares of the Common
Stock.
w. "Term" means the period beginning on the date on which this
Agreement has become effective pursuant to Section 12 and ending on
December 20, 2000.
x. "Warrantholder" means a holder of record of Common Stock
Warrants.
14. MISCELLANEOUS.
14.1. AMENDMENTS. This Agreement may be amended only by a written
instrument executed by (a) the Holders of 75% of the Restricted Securities
which are parties to this Agreement and (b) the Company. Any such amendments
shall be binding upon all Holders who have executed or assumed this
Agreement.
14.2. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which shall constitute a single instrument.
14.3. NOTICES, ETC. All notices, requests, demands and other
communications required or permitted to be given hereunder shall be in
writing and shall be given personally, sent by facsimile transmission or
sent by prepaid air courier or certified or express mail, postage prepaid.
Any such notice shall be deemed to have been given (a) when received, if
delivered in person, sent by facsimile transmission and confirmed in writing
within three business days thereafter or sent by prepaid air courier or
(b) three business days following the mailing thereof, if mailed by
certified first class mail, postage prepaid, in the case of the Company to
its address set forth in the initial paragraph of this Agreement or, in the
case of the Holders, to their addresses as set forth in the Company's
Stockholder list (or to such other address or addresses as a party may have
advised the other in the manner provided in this Section 14.3).
14.4. SEVERABILITY. If any provision of this Agreement shall be held to
be illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any
manner affect or render illegal, invalid or unenforceable any other
provision of this Agreement, and this Agreement shall be carried out as if
any such illegal, invalid or unenforceable provision were not contained
herein.
14.5. GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of New York without regard to principles of
conflict of law.
14.6. JURISDICTION. Each of the Holders and the Company hereby
irrevocably and unconditionally consents and submits to the exclusive
jurisdiction of any state or federal court located within the County of New
York, State of New York, in connection with any, actions, suits or
proceedings arising out of or relating to this Agreement or any of the
agreements delivered in connection herewith or the transactions contemplated
hereby or thereby. Each of the Company and Holders hereby waives any
objection to venue in such jurisdiction, and agrees that service of any
summons, complaint, notice or other process relating to such proceeding may
be effected as provided by Section 14.3.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written above.
<TABLE>
<S> <C> <C>
THE COMPANY:
ON2.COM INC.
By:
-----------------------------------------
Name: Daniel B. Miller
Title: President and Chief Executive
Officer
THE HOLDERS:
/s/ ERIC AMERES
---------------------------------------------
Eric Ameres
/s/ JOHN GABRIEL
---------------------------------------------
John Gabriel
/s/ DANIEL B. MILLER
---------------------------------------------
Daniel B. Miller
/s/ EMILY HARROW
---------------------------------------------
Emily Harrow
/s/ TIM MURPHY
---------------------------------------------
Tim Murphy
/s/ DAVID SILVER
---------------------------------------------
David Silver
/s/ FRAYA BERG
---------------------------------------------
Fraya Berg
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
/s/ PETER BERGER / JANE BERGER
---------------------------------------------
Peter Berger / Jane Berger
/s/ ARTHUR HARROW
---------------------------------------------
Arthur Harrow
/s/ ANDREW LANGSAM
---------------------------------------------
Andrew Langsam
EDELSON TECHNOLOGY PARTNERS III, L.P.
By: /s/ HARRY EDELSON
-----------------------------------------
Name: Harry Edelson
Title: General Partner
THE TRAVELERS INSURANCE COMPANY
By: /s/ JORDAN M. STITZER
-----------------------------------------
Name: Jordan M. Stitzer
Title: Vice President
</TABLE>
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EXHIBIT 4.2 FORM OF INVESTORS' RIGHTS AGREEMENT
INVESTORS' RIGHTS AGREEMENT
This Investors' Rights Agreement is made as of December 1, 1999, by and
among On2.com Inc. (the "Company"), a Colorado corporation having its principal
address at 375 Greenwich Street, 4(th) Floor, New York, NY 10013, and those
persons named in Schedule A to this Agreement (collectively, the "Holders").
Certain capitalized terms used in this Agreement without definition shall have
the meanings given them in Section 14.
PREAMBLE
Each of the Holders has acquired shares of Common Stock Warrants to acquire
Common Stock pursuant to the Common Stock Unit Subscription Agreement (the
"Subscription Agreement"), dated as of December 1, 1999, between the Company and
the persons named in Section I thereto.
Pursuant to the Subscription Agreement, the Company and the Holders have
agreed to enter into an Investor's Rights Agreement.
NOW, THEREFORE, in consideration of the premises and mutual agreements set
forth herein, the Company and the Holders agree as follows:
1. RESTRICTIONS ON TRANSFERABILITY. None of the Restricted Securities may be
sold, assigned, transferred, pledged or otherwise disposed of, whether or not
for value, except in compliance with the terms and conditions of this Agreement.
At such time as the Restricted Securities cease to be Restricted Securities
under the terms of this Agreement, the provisions of this Agreement shall no
longer apply to the shares of the Common Stock that theretofore were Restricted
Securities
2. RESTRICTIVE LEGEND.
2.1. SHARES OF COMMON STOCK. Each certificate representing Restricted
Securities that are shares of Common Stock shall be stamped or otherwise
imprinted with a legend substantially in the following form (in addition to
any legend required under applicable state securities laws or otherwise):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE
"SECURITIES ACT"). THESE SHARES MAY NOT BE SOLD, ASSIGNED, TRANSFERRED,
PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER THE SECURITIES ACT.
THE SALE, ASSIGNMENT, TRANSFER, PLEDGE AND OTHER DISPOSITION OF THE SHARES
REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED BY THE INVESTOR'S RIGHTS
AGREEMENT (THE "INVESTOR'S RIGHTS AGREEMENT"), DATED AS OF DECEMBER 1, 1999,
AMONG CERTAIN SECURITYHOLDERS OF THE COMPANY. A COPY OF THE SECURITYHOLDERS
AGREEMENT IS ON FILE WITH THE CORPORATE SECRETARY AT THE PRINCIPAL EXECUTIVE
OFFICES OF THE CORPORATION. A COPY THEREOF MAY BE OBTAINED AT NO COST UPON
WRITTEN REQUEST THEREFOR MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO
THE CORPORATE SECRETARY AT THE PRINCIPAL OFFICES OF THE COMPANY.
2.2. WARRANT CERTIFICATE. Each certificate representing Common Stock
Warrants that shall bear a legend substantially in the following form (in
addition to any legend required under applicable state securities laws or
otherwise):
THIS WARRANT AND ANY SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"), NOR UNDER
ANY STATE SECURITIES LAW AND SUCH SECURITIES MAY NOT
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BE PLEDGED, SOLD, ASSIGNED, HYPOTHECATED, OR OTHERWISE TRANSFERRED UNTIL
(1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT
AND ANY APPLICABLE STATE SECURITIES LAW OR (2) THE COMPANY RECEIVES AN
OPINION OF COUNSEL TO THE COMPANY OR COUNSEL TO THE HOLDER OF SUCH
SECURITIES, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE
COMPANY, THAT SUCH SECURITIES MAY BE PLEDGED, SOLD, ASSIGNED, HYPOTHECATED,
OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS.
THE TRANSFER OF THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE
HEREOF ARE RESTRICTED AS DESCRIBED HEREIN.
THE SALE, ASSIGNMENT, TRANSFER, PLEDGE AND OTHER DISPOSITION OF THIS WARRANT
AND THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT ARE RESTRICTED BY
THE INVESTORS' RIGHTS AGREEMENT (THE "INVESTORS' RIGHTS AGREEMENT"), DATED
AS OF DECEMBER 1, 1999. A COPY OF THE INVESTORS' RIGHTS AGREEMENT IS ON FILE
WITH THE CORPORATE SECRETARY AT THE PRINCIPAL EXECUTIVE OFFICES OF THE
COMPANY. A COPY THEREOF MAY BE OBTAINED AT NO COST UPON WRITTEN REQUEST
THEREFOR MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE CORPORATE
SECRETARY AT THE PRINCIPAL OFFICES OF THE COMPANY.
2.3. STOP TRANSFER INSTRUCTIONS. The Holders consent to the Company's
making a notation on its records and giving instructions to any transfer
agent of the Restricted Securities in order to implement the restrictions on
transfer established in this Agreement.
3. NOTICE AND OTHER REQUIREMENTS OF TRANSFER. No Holder will sell, assign,
transfer, pledge or otherwise dispose of any Restricted Securities until the
first anniversary of the date of this Agreement, and thereafter a Holder may
sell, assign, transfer, pledge or otherwise dispose of any Restricted Securities
if and only if:
a. the intended sale, assignment, transfer, pledge or other
disposition is permitted by the other provisions of this Agreement; or
b. there is in effect a registration statement under the Securities
Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
c. (i) such Holder has notified the Company of the proposed
disposition and has furnished the Company with a detailed statement of
the circumstances surrounding the proposed sale, pledge or other
disposition for value, including the name and address of the buyer and
identifying the Restricted Securities with respect to which such rights
are being assigned, and (ii) the buyer, as a condition to the
effectiveness of such disposition, has executed a counterpart of this
Agreement expressly assuming the obligations of a Holder under this
Agreement; and, if the Company requests, such Holder shall also furnish
the Company with an opinion of counsel, reasonably satisfactory to the
Company, that such disposition for value does not require registration of
such shares under the Securities Act:
4. PIGGYBACK REGISTRATION.
4.1. NOTICE TO HOLDERS REQUIRED. If at any time during the Term the
Company shall determine to register any shares of Common Stock for its own
account or the account of any of the Holders, other than (a) a transaction
relating solely to the sale of convertible debt instruments, (b) or a
registration on Form S-4 or S-8 or another form not available for
registering the Restricted Securities for sale to the public, or (c) any
registration comprised in whole or in substantial part of shares underlying
stock options granted by the Company or its predecessor, the Company will
give to the Holders notice as soon as practicable prior to filing the
registration statement and include in such registration all the
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<PAGE>
Restricted Securities specified in one or more written requests which have
been made within 15 days after receipt of such written notice from the
Company by any of the Holders, except as set forth in Section 4.2
4.2. REGISTERED PUBLIC OFFERING INVOLVING AN UNDERWRITING. If the
registration is for a registered public offering involving an underwritten
offering, the Company shall so advise each Holder as a part of the written
notice given pursuant to Section 4.1. In such event, the right of each
Holder to registration pursuant to this Section shall be conditioned upon
such Holder's participation in such underwriting and the inclusion of such
Holder's Restricted Securities in the underwriting to the extent provided
herein. If any Holder proposes to distribute his securities through such
underwriting, such Holder shall (together with the Company and the other
Holders distributing their securities through such underwriting) enter into
an underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting by the Company. Notwithstanding
any other provision of this Section 4, if the managing underwriter
determines that marketing factors require a limitation of the number of
shares to be underwritten, the managing underwriter may limit the number of
Restricted Securities to be included in the underwriting or may limit the
number of Restricted Securities to be included in such registration. The
Company shall so advise each of the Holders, and the number of shares of
Restricted Securities and other securities that may be included in the
registration and underwriting shall be allocated among such Holder and other
holders of Common Stock that hold rights granted by the Company to cause
shares of Common Stock held by them to be included in such registration or
underwriting, in proportion, as nearly as practicable, to the respective
amounts of Restricted Securities held by each Holder and each other such
holder that are requested to be included in the registration or
underwriting. To facilitate the allocation of shares in accordance with the
above provisions, the Company or the underwriter may round the number of
shares allocated to any Holders to the nearest one hundred shares. If any of
the Holders disapproves of the terms of any such underwriting, he may elect
to withdraw therefrom by written notice to the Company. Any Restricted
Securities excluded or withdrawn from such underwriting shall be withdrawn
from such registration.
5. NONPUBLIC INFORMATION. Notwithstanding any other provision of this
Agreement, the Company's obligation to file a registration statement under
Section 4.1, or to cause such registration statement to become and remain
effective, shall be suspended for a period not to exceed 90 days (and for
periods not exceeding, in the aggregate, 180 days in any 12-month period) if
there exists at the time material non-public information relating to the Company
which, in the reasonable opinion of the Company, should not be disclosed.
6. EXPENSES OF REGISTRATION. The Company will bear all reasonable expenses
incurred in connection with registrations pursuant to Section 4, including
without limitation all registration, filing and qualification fees, printing
expenses, fees and disbursements of counsel for the Company and independent
accounts for the Company and expenses of any special audits of the Company's
financial statements incidental to or required by such registration, fees of the
National Association of Securities Dealers, Inc., transfer taxes, fees of
transfer agents and registrars' fees, but the Company will not pay underwriters'
fees, discounts or commissions relating to the Restricted Securities or any fees
or expenses legal counsel for any or all of the Holders.
7. REGISTRATION PROCEDURES. In the case of each registration effected by the
Company pursuant to this Agreement, the Company will keep the Holders
participating therein advised in writing as to the initiation of each
registration and as to the completion thereof.
8. INDEMNIFICATION.
8.1. INDEMNITY BY THE COMPANY. If the Company registers any Restricted
Securities under the Securities Act pursuant to Section 4, the Company will
indemnify and hold harmless the Holders of such Restricted Securities
thereunder, each underwriter of such Restricted Securities thereunder and
3
<PAGE>
each other person, if any, who controls any Holder or underwriter within the
meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which such Holders, underwriter or
controlling persons may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which such Restricted Securities were
registered under the Securities Act, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereof, or
arise out of or are based upon the 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 any violation by the Company of
any rule or regulation promulgated under the Securities Act or any state
securities law applicable to the Company and relating to action or inaction
required of the Company in connection with any such registration, and will
reimburse the Holders, each of their respective officers, directors and
partners, and each person controlling any of the Holders, each such
underwriter and each person who controls any such underwriter, for any
reasonable legal and any other expenses incurred in connection with
investigating, defending or settling any such claim, loss, damage, liability
or action, provided that the Company will not be liable in any such case to
the extent that any such claim, loss, damage or liability arises out of or
is based on any untrue statement or omission based upon written information
furnished to the Company by an instrument duly executed by any of the
Holders or underwriter specifically for use therein.
8.2. INDEMNITY BY THE HOLDERS. The Holders will, if Restricted
Securities held by or issuable to the Holders are included in the securities
as to which such registration is being effected, indemnify and hold harmless
the Company, each of its directors, each officer who signs the registration
statement, each underwriter, if any, of the Company's securities covered by
such a registration statement, each person who controls the Company and each
underwriter within the meaning of the Securities Act, against all claims,
losses, expenses, damages and liabilities (or actions in respect thereof)
arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or 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 will reimburse
the Company, such directors, officers, partners, persons or underwriters for
any reasonable legal or any other expenses incurred by them in connection
with investigating, defending or settling any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such registration statement, prospectus,
offering circular or other document in reliance upon and in conformity with
written information furnished to the Company by an instrument duly executed
by the Holders specifically for use therein; provided, that the total amount
for which the Holders, its officers, directors and partners, and any person
controlling such Holders, shall be liable under this Section 8.2 shall not
in any event exceed the proceeds (net of underwriting discounts and
commissions) received by the Holders from the sale of Restricted Securities
sold by such Holders in such registration.
8.3. NOTICE BY THE INDEMNIFIED PARTY. Each party entitled to
indemnification under this Section 8 (the "Indemnified Party") shall give
notice to the party required to provide indemnification (the "Indemnifying
Party") promptly after such Indemnified Party has actual knowledge of any
claims as to which indemnity may be sought, and shall permit the
Indemnifying Party to assume the defense of any such claim or any litigation
resulting therefrom, provided that counsel for the Indemnifying Party, who
shall conduct the defense of such claim or litigation, shall be approved by
the Indemnified Party (whose approval shall not be unreasonably withheld),
and the Indemnified Party may participate in such defense at such party's
expense, and provided further that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of
its obligations hereunder, unless such failure resulted in actual detriment
to the Indemnifying Party. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified
Party,
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<PAGE>
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in
respect of such claim or litigation.
8.4. UNDERWRITING AGREEMENT. Notwithstanding the foregoing, to the
extent that the provisions on indemnification contained in the underwriting
agreements entered into among the selling Holders, the Company and the
underwriters in connection with the underwritten public offering are in
conflict with the foregoing provisions, the provisions in the underwriting
agreement shall be controlling as to the Restricted Securities included in
the public offering; PROVIDED, that if, as a results of this Section 8.4,
the Holders, and any persons controlling such Holders is held liable for an
amount which exceeds the aggregate proceeds received by such Holders from
the sale of Restricted Securities included in a registration, as provided in
Section 8.2, pursuant to such underwriting agreement (the "Excess
Liability"), the Company shall reimburse any such Holders for such Excess
Liability.
8.5. CONTRIBUTION. If the indemnification provided for in this Section
is held by a court of competent jurisdiction to be unavailable to an
Indemnified Party with respect to any loss, liability, claim, damage or
expense referred to therein, then the Indemnifying Party, 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 loss,
liability, claim, damage or expense in such proportion as is appropriate to
reflect the relative fault of the Indemnifying Party on the one hand and of
the Indemnified Party on the other hand in connection with the statements or
omissions which resulted in such loss, liability, claim, damage or expense
as well as any other relevant equitable considerations. The relevant fault
of the Indemnifying Party and the Indemnified Party 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 Indemnifying Party or by the
Indemnified Party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. Notwithstanding the foregoing, the amount that any Holder shall be
obligated to contribute pursuant to this Section 8.5 shall be limited to an
amount equal to the proceeds to such Holder of the Restricted Securities
sold pursuant to the registration statement which gives rise to such
obligation to contribute (less the aggregate amount of any damages which
such Holder has otherwise been required to pay in respect of such loss,
claim, damage, liability or action or any substantially similar loss, claim,
damage, liability or action arising from the sale of such Restricted
Securities).
8.6. SURVIVAL OF INDEMNITY. The indemnification provided by this Section
shall be a continuing right to indemnification and shall survive the
registration and sale of any securities by any person entitled to
indemnification hereunder and the Term.
9. LOCKUP AGREEMENT. In consideration for the Company's performance of its
obligations under this Agreement, each Holder will, in connection with any
registration of any Restricted Securities in an underwritten offering, at the
request of the Company or the underwriters managing any underwritten offering of
the Company's securities, agree not to sell, make any short sale of, loan, grant
any option for the purchase of, or otherwise dispose of any Restricted
Securities (other than those included in the registration) without the prior
written consent of the Company or such underwriters, as the case may be, for
such period of time (not to exceed 180 days) from the effective date of such
registration as the Company and the underwriters may specify, so long as the
Holders or stockholders holding more than one percent (1%) of the Common Stock
and all officers and directors of the Company are bound by a comparable
obligation.
10. HOLDER'S COOPERATION.
10.1. INFORMATION REGARDING HOLDERS. Each of the Holders shall promptly
furnish to the Company such information regarding such Holder and the
distribution proposed by such Holder as the
5
<PAGE>
Company may request in writing and as shall be required in connection with
any registration referred to herein.
10.2. OBLIGATIONS OF THE HOLDERS. Each of the Holders holding shares
included in the registration will not (until further notice by the Company)
effect sales thereof (or deliver a prospectus to any purchaser) after
receipt of telegraphic or written notice from the Company to suspend sales
to permit the Company to correct or update a registration statement or
prospectus. At the end of the period during which the Company is obligated
to keep any registration statement filed under Section 4 current and
effective as required by applicable law, the Holders holding shares of
Restricted Securities included in the registration shall discontinue sales
of shares pursuant to such registration statement upon receipt of notice
from the Company of its intention to remove from registration the shares of
Restricted Securities covered by such registration statement that remain
unsold, and each of the Holders shall notify the Company of the number of
such shares registered that remain unsold immediately upon receipt of such
notice from the Company.
11. RULE 144. With a view to making available to the Holders of Restricted
Securities the benefits of certain rules and regulations of the SEC which may
permit the sale of the Restricted Securities to the public without registration,
the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144; and
(b) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act.
12. TERMINATION OF RIGHTS.
12.1. The rights of any Holder to cause the Company to register
securities under Section 4 shall terminate at such time as such Holder is
able to dispose of all of the Restricted Securities owned by him in one
three-month period pursuant to the provisions of Rule 144.
12.2. Notwithstanding the provisions of Section 12.1, all rights of the
Holders under this Agreement shall terminate at 5:00 p.m. Eastern time on
the date seven years after the date of this Agreement.
13. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to the Holders as follows:
13.1. The execution, delivery and performance of this Agreement by the
Company have been duly authorized by all requisite corporate action and will
not violate any provision of law, any order of any court or other agency of
government, the Articles of Organization or Bylaws of the Company or any
provision of any indenture, agreement or other instrument to which it or any
of its properties or assets is bound, conflict with, result in a breach of
or constitute (with due notice or lapse of time or both) a default under any
such indenture, agreement or other instrument or result in the creation or
imposition of any lien, charge or encumbrance of any nature whatsoever upon
any of the properties or assets of the Company.
13.2. This Agreement has been duly executed and delivered by the Company
and constitutes the legal, valid and binding obligation of the Company,
enforceable in accordance with its terms, subject to (i) applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance and moratorium
laws and other laws of general application affecting enforcement of
creditors' rights generally and (ii) the availability of equitable remedies
as such remedies may be limited by equitable principles of general
applicability (regardless of whether enforcement is sought in a proceeding
in equity or at law).
6
<PAGE>
14. DEFINITIONS. As used in this Agreement, the following terms shall have
the following meanings:
a. "Commission" shall mean the U. S. Securities and Exchange
Commission, or any other federal agency at the time administering the
Securities Act.
b. "Common Stock" shall mean shares of the Company's Common Stock, no
par value.
c. "Common Stock Warrants" mean warrants to purchase shares of the
Common Stock.
d. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar United States statute and the rules and
regulations thereunder, all as the same shall be in effect at the time.
e. "Holders" shall mean the persons named in Schedule I to this
Agreement and any other person who holds Restricted Securities and who
has assumed the obligations of this Agreement pursuant to clauses c, d,
and e of Section 3.
f. "Register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of
the effectiveness of such registration statement, and compliance with
applicable state securities laws of such states in which any of the
Holders notifies the Company of his intention to offer Registrable
Securities.
g. "Restricted Securities" shall mean the shares of the Common Stock
issued to the Sellers pursuant to the Subscription Agreement, the Common
Stock Warrants and shares of Common Stock issued upon due exercise of the
Common Stock Warrants, in each case only to the extent the same have not
been sold to the public. As to any particular Restricted Securities, such
securities shall cease to be Restricted Securities when (i) a
registration statement with respect to the sale of such securities shall
have become effective under the Securities Act and such securities shall
have been disposed of under such registration statement, (ii) such
securities shall have become eligible for resale pursuant to Rule 144(k)
and any restrictive legend on certificates representing such securities
shall have been removed, (iii) such securities shall have been otherwise
transferred or disposed of, and (x) new certificates therefor not bearing
a legend restricting further transfer shall have been delivered by the
Company, and (y) subsequent transfer or disposition of them shall not
require their registration or qualification under the Securities Act or
any similar state law then in force or compliance with Rule 144, or
(iv) such securities shall have ceased to be outstanding. Notwithstanding
the foregoing, Restricted Securities shall not include otherwise
Restricted Securities (i) sold by a person in a transaction in which his
rights under this Agreement are not properly assigned; or (ii) (A) sold
to or through a broker or dealer or underwriter in a public distribution
or a public securities transaction, or (B) sold in a transaction exempt
from the registration and prospectus delivery requirements of the
Securities Act under Section 4(1) thereof so that all transfer
restrictions, and restrictive legends with respect thereto, if any, are
removed upon the consummation of such sale or (C) the registration rights
associated with such securities have been terminated pursuant to
Section 13.
h. "Rule 144" shall mean Rule 144 under the Securities Act or any
successor or similar rule as may be enacted by the Commission from time
to time.
i. "Rule 145" shall mean Rule 145 under the Securities Act or any
successor or similar rule as may be enacted by the Commission from time
to time.
j. "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar United States statute and the rules and
regulations thereunder, all as the same shall be in effect at the time.
7
<PAGE>
15. MISCELLANEOUS.
15.1. AMENDMENTS. This Agreement may be amended only by a written
instrument executed by (a) the Holders of 75% of the Restricted Securities
which are subject to this Agreement and (b) the Company. Any such amendments
shall be binding upon all Holders who have executed or assumed this
Agreement.
15.2. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which shall constitute a single instrument.
15.3. NOTICES, ETC. All notices, requests, demands and other
communications required or permitted to be given hereunder shall be in
writing and shall be given personally, sent by facsimile transmission or
sent by prepaid air courier or certified or express mail, postage prepaid.
Any such notice shall be deemed to have been given (a) when received, if
delivered in person, sent by facsimile transmission and confirmed in writing
within three business days thereafter or sent by prepaid air courier or
(b) three business days following the mailing thereof, if mailed by
certified first class mail, postage prepaid, in any such case to the
respective addresses set forth in Schedule I to the Subscription Agreement
(or to such other address or addresses as a party may have advised the other
in the manner provided in this Section 15.3).
15.4. SEVERABILITY. If any provision of this Agreement shall be held to
be illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any
manner affect or render illegal, invalid or unenforceable any other
provision of this Agreement, and this Agreement shall be carried out as if
any such illegal, invalid or unenforceable provision were not contained
herein.
15.5. GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of New York without regard to principles of
conflict of law.
15.6. JURISDICTION. Each of the Holders and the Company hereby
irrevocably and unconditionally consents and submits to the exclusive
jurisdiction of any state or federal court located within the County of New
York, State of New York, in connection with any, actions, suits or
proceedings arising out of or relating to this Agreement or any of the
agreements delivered in connection herewith or the transactions contemplated
hereby or thereby. Each of the Company and Holders hereby waives any
objection to venue in such jurisdiction, and agrees that service of any
summons, complaint, notice or other process relating to such proceeding may
be effected as provided by Section 15.3.
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written above.
<TABLE>
<S> <C> <C>
THE COMPANY:
ON2.COM INC.
By: /s/ DANIEL B. MILLER
-----------------------------------------
Name: Daniel B. Miller
Title: President and Chief Executive
Officer
</TABLE>
9
<PAGE>
EXHIBIT 4.3 FORM OF WARRANT
THIS WARRANT AND ANY SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"), NOR UNDER ANY
STATE SECURITIES LAW AND SUCH SECURITIES MAY NOT BE PLEDGED, SOLD, ASSIGNED,
HYPOTHECATED, OR OTHERWISE TRANSFERRED UNTIL (1) A REGISTRATION STATEMENT WITH
RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES
LAW OR (2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE COMPANY OR COUNSEL
TO THE HOLDER OF SUCH SECURITIES, WHICH COUNSEL AND OPINION ARE REASONABLY
SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE PLEDGED, SOLD,
ASSIGNED, HYPOTHECATED, OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS.
THE TRANSFER OF THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE HEREOF
ARE RESTRICTED AS DESCRIBED HEREIN.
THE SALE, ASSIGNMENT, TRANSFER, PLEDGE AND OTHER DISPOSITION OF THIS WARRANT AND
THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT ARE RESTRICTED BY THE
INVESTORS' RIGHTS AGREEMENT (THE "INVESTORS' RIGHTS AGREEMENT"), DATED AS OF
DECEMBER 1, 1999. A COPY OF THE INVESTORS' RIGHTS AGREEMENT IS ON FILE WITH THE
CORPORATE SECRETARY AT THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY. A COPY
THEREOF MAY BE OBTAINED AT NO COST UPON WRITTEN REQUEST THEREFOR MADE BY THE
HOLDER OF RECORD OF THIS CERTIFICATE TO THE CORPORATE SECRETARY AT THE PRINCIPAL
OFFICES OF THE COMPANY.
ON2.COM INC.
WARRANT TO PURCHASE SHARES OF COMMON STOCK,
NO PAR VALUE
No.W- December 30, 1999
THIS CERTIFIES that, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, (the "Holder"), is
entitled to subscribe for and purchase from On2.com Inc., a Colorado
corporation (the "Company"), upon the terms and conditions set forth herein,
at any time or from time to time, during the period commencing on the date
set forth above and expiring at 5:00 p.m. on December , 2004 (the "Exercise
Period"), ( ) shares of the Company's Common Stock,
no par value per share (the "Common Stock"), at an exercise price (the
"Exercise Price") per share equal to $ . As used herein, the term "this
Warrant" shall mean and include this Warrant and any Warrant or Warrants
hereafter issued as a consequence of the exercise or transfer of this
Warrant in whole or in part. As used herein, the term "Holder" shall include
any transferee to whom this Warrant has been transferred in accordance with
the terms hereof.
The number of shares of Common Stock issuable upon exercise of this Warrant
(the "Warrant Shares") and the Exercise Price may be adjusted from time to time
as hereinafter set forth in Section 6.
1. This Warrant may be exercised during the Exercise Period, as to the whole
or any lesser number of whole Warrant Shares, by transmission by telecopy of the
Election to Exercise, followed within three (3) business days by the surrender
of this Warrant (with the Election to Exercise attached hereto duly executed) to
the Company at its office at 375 Greenwich Street, New York, New York 10013, or
at such other place as is designated in writing by the Company, together with a
certified or bank cashier's check payable to the order of the Company in an
amount equal to the product of the Exercise Price and the number of Warrant
Shares for which this Warrant is being exercised (the "Aggregate Exercise
Price").
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<PAGE>
2. Upon each exercise of the Holder's rights to purchase Warrant Shares, the
Holder shall be deemed to be the holder of record of the Warrant Shares issuable
upon such exercise, notwithstanding that the transfer books of the Company shall
then be closed or certificates representing such Warrant Shares shall not then
have been actually delivered to the Holder. Within five (5) business days after
each such exercise of this Warrant and receipt by the Company of this Warrant,
the Election to Exercise and the Aggregate Exercise Price, the Company shall
issue and deliver to the Holder a certificate or certificates for the Warrant
Shares issuable upon such exercise, registered in the name of the Holder or its
designee. If this Warrant should be exercised in part only, the Company shall,
upon surrender of this Warrant for cancellation, execute and deliver a new
Warrant evidencing the right of the Holder to purchase the balance of the
Warrant Shares (or portions thereof) subject to purchase hereunder.
3. Any Warrants issued upon the transfer or exercise in part of this Warrant
shall be numbered and shall be registered in a Warrant register (the "Warrant
Register") as they are issued. The Company shall be entitled to treat the
registered holder of any Warrant on the Warrant Register as the owner in fact
thereof for all purposes and shall not be bound to recognize any equitable or
other claim to or interest in such Warrant on the part of any other person, and
shall not be liable for any registration of transfer of Warrants which are
registered or to be registered in the name of a fiduciary or the nominee of a
fiduciary unless made with the actual knowledge of the general counsel of the
Company that a fiduciary or nominee is committing a breach of trust in
requesting such registration of transfer. In all cases of transfer by an
attorney, executor, administrator, guardian, or other legal representative, duly
authenticated evidence of his or its authority shall be produced. Upon any
registration of transfer, the Company shall deliver a new Warrant or Warrants to
the person entitled thereto. This Warrant may be exchanged, at the request of
the Holder thereof, for another Warrant, or other Warrants of different
denominations, of like tenor and representing in the aggregate the right to
purchase a like number of Warrant Shares (or portions thereof), upon surrender
to the Company or its duly authorized agent. Notwithstanding anything contained
herein to the contrary, the Company shall have no obligation to cause Warrants
to be transferred on its books to any person if, in the opinion of counsel to
the Company, such transfer does not comply with the provisions of the Act and
the rules and regulations thereunder.
4. The Company, until the expiration or termination of this Warrant, shall
reserve and keep available out of its authorized and unissued common stock,
solely for the purpose of providing for the exercise of the rights to purchase
all Warrant Shares granted pursuant to this Warrant and all other Common Stock
Warrants, such number of shares of common stock as shall, from time to time, be
sufficient therefor. The Company covenants that all shares of stock issuable
upon exercise of this Warrant, upon receipt by the Company of the full Exercise
Price therefor, shall be validly issued, fully paid, nonassessable, and free of
preemptive rights.
5. The issuance of any Warrant, Warrant Shares or other securities upon the
exercise of this Warrant, and the delivery of certificates or other instruments
representing such Warrant Shares or other securities, except as otherwise
required by law, shall be made without charge to the Holder for any tax or other
charge in respect of such issuance, other than applicable transfer taxes.
Notwithstanding anything contained herein, all applicable transfer taxes shall
be borne by the Holder.
6. The number of Warrant Shares and the Exercise Price shall be subject to
adjustment from time to time as provided in this Section.
6.1 If, during the Exercise Period, the Company shall pay or make a dividend
or other distribution on any class of capital stock of the Company in
Common Stock, the number of Warrant Shares shall be increased by
multiplying such number of shares by a fraction of which the denominator
shall be the number of shares of Common Stock outstanding at the close of
business on the day immediately preceding the date of such distribution,
and the numerator shall be the sum of (a) such number of shares and
(b) the total number of shares constituting such dividend or other
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<PAGE>
distribution, such increase to become effective immediately after the
opening of business on the date following such distribution.
6.2 If, during the Exercise Period, the outstanding shares of Common Stock
shall be subdivided into a greater number of shares of Common Stock, the
number of Warrant Shares at the opening of business on the day following
the day upon which such subdivision or combination becomes effective
shall be proportionately increased, and, conversely, if outstanding
shares of Common Stock shall each be combined into a smaller number of
shares of Common Stock, the number of Warrant Shares at the opening of
business on the day following the day upon which such combination becomes
effective shall be proportionately decreased, such increase or decrease,
as the case may be, to become effective immediately after the opening of
business on the day following the day upon which such subdivision or
combination becomes effective.
6.3 The reclassification of Common Stock into securities (other than Common
Stock) and/or cash and/or other consideration shall be deemed to involve
a subdivision or combination, as the case may be, of the number of shares
of Common Stock outstanding immediately prior to such reclassification
into the number or amount of securities and/or cash and/or other
consideration outstanding immediately thereafter, and the effective date
of such reclassification shall be deemed to be "the day upon which such
subdivision becomes effective" or "the day upon which such combination
becomes effective," as the case may be, within the meaning of
Section 6.1.
7. Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction, or mutilation of any Warrant (and upon surrender of any Warrant if
mutilated), and upon reimbursement of the Company's reasonable incidental
expenses and, if reasonably requested, an indemnity reasonably acceptable to the
Company, the Company shall execute and deliver to the Holder thereof a new
Warrant of like date, tenor, and denomination.
8. The Holder of any Warrant shall not have, solely on account of such
status, any rights of a stockholder of the Company, either at law or in equity,
or to any notice of meetings of stockholders or of any other proceedings of the
Company, except as provided in this Warrant.
9. This Warrant shall be governed by and construed in accordance with the
laws of the State of Colorado, without giving effect to the rules governing the
conflicts of laws.
10. The parties hereby irrevocably consent to the jurisdiction of the courts
of the State of New York and of any federal court located in such State in
connection with any action or proceeding arising out of or relating to this
Warrant, any document or instrument delivered pursuant to, in connection with,
or simultaneously with this Warrant, or a breach of this Warrant.
IN WITNESS WHEREOF, the undersigned has caused this Warrant to be duly
executed by its officers thereunto duly authorized as of the date and year set
forth below.
Dated: December 30, 1999
<TABLE>
<S> <C> <C>
ON2.COM INC.
By: --------------------------------------
Name: Daniel B. Miller
Title: President and Chief Executive
Officer
</TABLE>
3
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Warrant.)
FOR VALUE RECEIVED, hereby sells, assigns, and
transfers unto a Warrant to purchase shares of Common
Stock, no par value per share, of On2.com Inc. (the "Company"), together with
all right, title, and interest therein, and does hereby irrevocably constitute
and appoint attorney to transfer such Warrant on the books of the
Company, with full power of substitution.
Dated: ____________
Signature ____________________________
Signature Guaranteed:
NOTICE
The signature on the foregoing Assignment must correspond to the name as
written upon the face of this Warrant in every particular, without alteration or
enlargement or any change whatsoever.
4
<PAGE>
To: On2.com Inc.
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase Warrant
Shares covered by the within Warrant and tenders payment herewith [in the amount
of $ ] in accordance with the terms thereof, certifies that he owns
this Warrant free and clear of any and all claims, liens and/or encumbrances and
requests that certificates for such securities be issued in the name of, and
delivered to:
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant, that a new Warrant for the balance of the Warrant
Shares covered by the within Warrant be registered in the name of, and delivered
to, the undersigned at the address stated below. Dated: _____ Name: _________
(Print)
Address: _______________________________________________________________________
(Signature)
5
<PAGE>
EXHIBIT 4.4
ESCROW AGREEMENT
THIS ESCROW AGREEMENT, dated as of November 11, 1999 (the "Escrow
Agreement"), is made by and among CELEBRITY INTERVIEWS, INC. a Delaware
corporation (the "Purchaser"), with offices at 375 Greenwich Street, 4(th)
Floor, New York, New York 10013, Joey Berlin ("Berlin"), an individual having
his address at 1629 Rising Glen Road, Los Angeles, CA 90069 and Ivy Tombak
("Tombak", and together with Berlin, the "Sellers"), an individual having her
address at 1626 Rising Glen Road, Los Angeles, CA 90069 and Levisohn, Lerner,
Berger & Langsam ("LLBL") (the "Escrow Agent") with offices at 757 Third Avenue,
Suite 2400, New York, New York, 10017, as escrow agent under this Agreement.
BACKGROUND
A. The Purchaser and the Sellers have entered into the Asset Purchase
Agreement "Purchase Agreement") dated as of November 11, 1999, pursuant to which
the Purchaser has acquired from the Sellers the business conducted and intended
to have been conducted by Audio Magazines, Inc. (the "Company"), a dissolved New
York corporation, in exchange for the Share Consideration. Capitalized terms
used in this Agreement without definition shall have the respective meanings
given them in the Purchase Agreement.
B. The Purchaser and the Sellers propose to engage the Escrow Agent for the
purpose of receiving depositing and holding certain portions of the Share
Consideration until such portions are available for delivery to the Sellers or
returned to the Purchaser in accordance with the terms of this Agreement.
C. Berlin and the Purchaser have entered into the Employment Agreement,
pursuant to which Berlin will be employed by the Purchaser.
D. The Purchaser and the Sellers have agreed that at the Closing two-thirds
of those shares of the Purchaser's Common Stock which comprises the Share
Consideration (the "Escrowed Property") would be placed into escrow for release
from time to time during Berlin's employment under the Employment Agreement.
E. The Escrow Agent has agreed to act as escrow agent to hold and distribute
the Escrowed Property in accordance with the terms of this Agreement.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, for
themselves, their successors and assigns, hereby agree as follows:
1. APPOINTMENT AND ACKNOWLEDGMENT OF THE ESCROW AGENT. The Purchaser and
the Sellers hereby appoint the Escrow Agent, and the Escrow Agent hereby agrees
to serve, as escrow agent pursuant to the terms of this Agreement.
2. DEPOSIT INTO ESCROW. There is hereby deposited into escrow 121,543
shares of the Purchaser's Common Stock, which shares, together with any and all
dividends paid theron and all proceeds thereof, constitute the Escrowed
Property.
3. DISTRIBUTION OF SHARES HELD IN ESCROW. If the Purchaser or the Company
terminate Berlin's employment for Cause or if Berlin terminates his employment
with the Company voluntarily prior to the
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<PAGE>
respective dates set forth below, then promptly upon such termination, the
Escrow Agent will redeliver to the Purchaser the Escrowed Property set forth
below:
<TABLE>
<CAPTION>
DATE OF TERMINATION OF EMPLOYMENT SHARE CONSIDERATION
- --------------------------------- ---------------------------------------------
<S> <C>
On or prior to October 1, 2000............... 121,543 shares of the Purchaser's Common
Stock
After October 1, 2000 but on or prior to
October 1, 2001............................ 60,772 shares of the Purchaser's Common Stock
After October 1, 2001........................ No shares of the Purchaser's Common Stock
</TABLE>
PROVIDED, that the foregoing provisions shall not apply if Berlin's termination
of his employment follows the occurrence and continuance of a breach by the
Purchaser of its obligations under the Employment Agreement (and in no event
shall Berlin's death or disability (as defined in the Employment Agreement) be
deemed to be termination of employment for the purposes of this Section);
PROVIDED, FURTHER, that Berlin has complied fully with the requirements of
Section 7.d of the Employment Agreement as to such breach (such breach being
referred to below as a "Fully Noticed Purchaser Breach"). If and to the extent
that the Purchaser has not terminated Berlin's employment for Cause and Berlin
has not terminated his employment with the Purchaser on or prior to each of the
dates set forth above, then the Escrow Agent will deliver to Berlin promptly
after October 1, 2000 and October 1, 2001 one or more certificates representing
60,771 shares and 60,772 shares of the Share Consideration, respectively. If
upon the expiration of all notice and cure periods relating to a Fully Noticed
Purchaser Breach, such Fully Noticed Purchaser Breach is continuing and Berlin
terminates his employment with the Company within ten business days thereafter,
the Escrow Agent will promptly, upon notice from Berlin, deliver to Berlin all
Escrowed Property which at the time is subject to this Agreement.
4. SHARES SUBJECT TO CLAIMS BY THE PURCHASER. If during the term of this
Agreement, the Purchaser shall notify the Escrow Agent that it has made a claim
for indemnifiction under Article 7 of the Purchase Agreement and that the
threshold set forth in Section 7.5 has been exceeded by claims payable
thereunder and if the notice further specifies the number of shares of the Share
Consideration that the Purchase estimates will satisfy its claim (the "Estimated
Shares"), then notwithstanding any other provision of this Agreement the Escrow
Agrent shall retain and not distribute the Estimated Shares and will hold the
Estimated Shares until (i) instructed by a joint instrument signed by the
Purchaser and the Sellers or (ii) directed by a final order issued by a court
that has adjudicated the disposition of the Estimated Shares as between the
Purchaser and the Sellers.
5. FURTHER PROVISIONS RELATING TO THE ESCROW.
(a) The Purchaser shall indemnify and hold harmless the Escrow Agent against
and in respect of any and all claims, suits, actions, proceedings (formal
and informal), investigations, judgments, deficiencies, damages,
settlements, liabilities and legal and other expenses (including legal
fees and expenses of attorneys chosen by the Escrow Agent) as and when
incurred arising out of or based upon any act, omission, alleged act or
alleged omission by the Escrow Agent, or its agents, or any other cause,
in any case in connection with the acceptance of or the performance or
non-performance by the Escrow Agent, or its agents, of any of the Escrow
Agent's duties under this Escrow Agreement. The Escrow Agent shall be
fully protected by acting in reliance upon any notice, advice, direction,
other document, or signature believed by Escrow Agent to be genuine, by
assuming that any person purporting to give the Escrow Agent any notice,
advice, direction or other document in accordance with the provisions
hereof, in connection with this Escrow Agreement, or in connection with
the Escrow Agent's duties under this Escrow Agreement, has been duly
authorized so to do, or by acting or failing to act in good faith on the
advice of any counsel retained by the Escrow Agent.
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<PAGE>
(b) The Escrow Agent shall not be liable to the Purchaser or any Seller for
any mistake of fact or of law, any error of judgment, any act or omission
to act or any act of negligence. The Purchaser and each Seller waive any
such claim against the Escrow Agent.
(c) The Escrow Agent makes no representation as to the validity, value,
genuineness, or the collectibility of any security or other document or
instrument held by or delivered to the Escrow Agent.
(d) The Escrow Agent shall have no duties or responsibilities except those
expressly set forth herein. The Escrow Agent shall not be bound by any
notice of a claim, or demand with respect hereto, or any waiver,
modification, amendment, termination, cancellation, or revision of this
Escrow Agreement, unless it is in writing, signed by the other parties
hereto and received by the Escrow Agent. If the Escrow Agent's duties as
the Escrow Agent hereunder are affected by any such waiver, modification,
amendment, termination, cancellation or revision of this Agreement, then
the Escrow Agent shall not be bound thereby unless the Escrow Agent shall
have given its prior written consent thereto. The Escrow Agent shall not
be bound by any assignment by the Purchaser or any Seller of its rights
hereunder unless the Escrow Agent shall have received written notice
thereof from the assignor. The Escrow Agent is authorized to comply with
and obey all laws, orders, judgments, decrees, and regulations of any
governmental authority, court, tribunal, or arbitrator. If the Escrow
Agent complies with any such law, order, judgment, decree, or regulation,
the Escrow Agent shall not be liable to any of the parties hereto or to
any other person even if such law, order, judgment decree, or regulation
is subsequently reversed, modified, annulled, set aside, vacated, found
to have been entered without jurisdiction or found to be in violation of
or beyond the scope of a constitution or a law.
(e) If the Escrow Agent shall be uncertain as to the Escrow Agent's duties
or rights hereunder, shall receive any notice, advice, direction or other
document from any other party with respect to the Escrowed Property
which, in the Escrow Agent's opinion, is in conflict with any of the
provisions of this Escrow Agreement, or should be advised that a dispute
has arisen with respect to the payment, ownership, or right of possession
of the Escrowed Property or any part thereof (or as to the delivery,
non-delivery or content of any notice, advice, direction, or other
document), the Escrow Agent shall be entitled, without liability to
anyone, to refrain from taking any action other than to use the Escrow
Agent's best efforts to keep safely the Escrowed Property until the
Escrow Agent shall be directed otherwise in writing by the other parties
hereto or by an order, decree, or judgment of a court of competent
jurisdiction which has been finally affirmed on appeal or which by lapse
of time or otherwise is no longer subject to appeal. The Escrow Agent
shall be under no duty to institute or to defend any such proceeding
although the Escrow Agent may, in the Escrow Agent's discretion and at
the expense of the Purchaser, institute or defend such proceedings.
(f) If LLBL shall be unable to act or shall resign as the Escrow Agent
hereunder, the successor escrow agent shall be a proper entity chosen by
the Purchaser in its sole discretion (the "Successor"). LLBL and any
other Escrow Agent may at any time give written notice of its resignation
(the "Resignation Notice") to the other parties hereto, Such resignation
shall take effect when the Successor accepts in writing its appointment
as successor escrow agent and receives the Escrowed Property. If no
successor escrow agent has been appointed and has accepted the Escrowed
Property within 5 days after the Resignation Notice is sent, the
Purchaser or the Seller may petition any court of competent jurisdiction
for the appointment of a successor escrow agent. Such court may thereupon
appoint a successor escrow agent after the Escrowed Property has been
deposited into court and after such notice, if any, to the other parties
hereto as the court may deem proper and prescribe. This Escrow Agreement
shall not otherwise be assignable by LLBL without the prior written
consent of the other parties hereto.
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(g) The Purchaser and the Sellers authorize LLBL if LLBL is threatened with
litigation or is sued, to interplead all interested parties in any court
of competent jurisdiction and to deposit the Escrowed Property with the
clerk of that court.
(h) LLBL "s responsibilities and liabilities hereunder, except as a result
of LLBL "s own bad faith or gross negligence, will terminate upon the
delivery by LLBL of all the Escrowed Property under any provision of this
Escrow Agreement.
6. FURTHER ACTION. At any time and from time to time, the Purchaser
agrees, at its expense, to take such actions and to execute and deliver such
documents as may be reasonably necessary to effectuate the purposes of this
Escrow Agreement. The Purchaser shall pay any transfer tax arising out of the
placing of the Escrowed Property into the Escrow, the delivery of the Escrowed
Property out of the Escrow, or the transfer of the Escrowed Property into the
name of a person or entity other than the Purchaser if the Escrowed Property is
delivered other than to the Purchaser pursuant to the terms of this Escrow
Agreement. LLBL shall have no liability if the Purchaser fails to comply with
the obligations set forth in the prior sentence.
7. SURVIVAL. The covenants, agreements, representations, and warranties
contained in or made pursuant to this Escrow Agreement shall survive the
delivery by LLBL of the Escrowed Property.
8. MODIFICATION. This Escrow Agreement sets forth the entire understanding
of the parties with respect to the subject matter hereof, supersedes all
existing agreements among them concerning such subject matter, and may be
modified only by a written instrument duly executed by each party.
9. NOTICES. Any notice, advice, direction, or other document or
communication required or permitted to be given hereunder shall be in writing
and shall be delivered either by certified mail, return receipt requested,
Federal Express, or similar overnight delivery or courier service, or delivered
(in person or by telecopy, or similar telecommunications equipment) against
receipt to the party to whom it is to be. given at the address of such party set
forth in the preamble or Schedule A to this Escrow Agreement (or to such other
address as the party shall have furnished in writing in accordance with the
provisions of this Section 9). Any notice, advice, direction, or other document
or communication given by certified mail shall be deemed given at the time of
certification thereof, except for a notice changing a party's address which
shall be deemed given at the time of receipt thereof. Any notice given by other
means permitted by this Section 9 shall be deemed given at the time of receipt
thereof.
10. WAIVER. Any waiver by any party of a breach of any provision of this
Escrow Agreement shall not operate as or be construed to be a waiver of any
other breach of such provision or of any breach of any other provision of this
Escrow Agreement. The failure of a party to insist upon strict adherence to any
term of this Escrow Agreement on one or more occasions shall not be considered a
waiver or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this Escrow Agreement. Any waiver
must be in writing.
11. BINDING EFFECT. The provisions of this Escrow Agreement shall be
binding upon and inure to the benefit of the Purchaser, each Investor and the
Escrow Agent and their respective heirs, executors, successors and assigns.
12. NO THIRD PARTY BENEFICIARIES. This Escrow Agreement does not create,
and shall not be construed as creating, any rights enforceable by any person not
a party to this Escrow Agreement.
13. GOVERNING LAW. This Escrow Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to the rules governing the conflict of laws.
14. JURISDICTION. The parties hereby irrevocably consent to the
jurisdiction of the courts of the State of New York and of any federal court
located in such State in connection with any action or proceeding arising out of
or relating to this Escrow Agreement, any document or instrument delivered
pursuant to, in connection with, or simultaneously with this Escrow Agreement, a
breach of this Escrow Agreement or of
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any such document or instrument, or the Escrowed Property. The parties also
agree that service of process may be satisfied by the delivery of notice of such
process as set forth in Section 9 of this Escrow Agreement which shall
constitute good and sufficient service.
15. SEPARABILITY. To the extent any provision of this Escrow Agreement is
held to be invalid by a court of competent jurisdiction, such provision shall be
unenforceable without affecting the enforceability of the remainder of such
provision or the remaining provisions of this Escrow Agreement.
16. HEADINGS. The headings in this Escrow Agreement are solely for
convenience of reference and shall be given no effect in the construction or
interpretation of this Escrow Agreement.
17. COUNTERPARTS. This Escrow Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have duly executed this Escrow Agreement as of
the date first written above.
<TABLE>
<S> <C> <C>
CELEBRITY INTERVIEWS, INC.
By:
-----------------------------------------
Daniel Miller
Name: Daniel Miller
Title: Chairman
Escrow Agent
LEVISOHN LERNER BERGER & LANGSAM
By:
-----------------------------------------
Peter Berger
Name: Peter Berger
Title: Partner
---------------------------------------------
Joey Berlin
---------------------------------------------
Ivy Tombak
</TABLE>
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EXHIBIT 10.1 EMPLOYMENT AGREEMENT
CELEBRITY INTERVIEWS, INC.
375 GREENWICH STREET
NEW YORK, NEW YORK 10013
November 1, 1999
Mr. Joey Berlin 1629 Rising Glen Road
Los Angeles, CA 90069
Dear Mr. Berlin:
The following constitutes the employment agreement (the "Agreement") between
you (the "Executive") and Celebrity Interviews, Inc. (the "Company"), a Delaware
corporation and a wholly-owned subsidiary of On2.com Inc., a Colorado
corporation ("On2.com"). This is the Employment Agreement referred to in the
Asset Purchase Agreement (the "Purchase Agreement"), dated as of November 11,
1999, among On2.com, the Company, the Executive and Ivy Tombak. Capitalized
terms used herein without definition shall have the meanings accorded them in
the Purchase Agreement.
1. EMPLOYMENT; ACCEPTANCE OF EMPLOYMENT The Company hereby employs the
Executive during the Term (as defined below) on a full-time and in-person basis
to render exclusive services to the Company as its president. The Executive
hereby accepts this employment and will render his services as required by the
Company conscientiously, loyally, competently and to the best of his talents and
abilities throughout the Term in accordance with the direction and control of
his designated supervisor. During the Term, the Executive will also have the
title of Senior Vice President, Program Content and Licensing, of On2.com.
2. TERM OF AGREEMENT. The initial term of this Agreement shall commence on
the date hereof and terminate on the day prior to the third anniversary of the
date of this Agreement. This Agreement may be renewed by the Company upon
90 days' written notice to the Executive prior to the expiration of the initial
term or any renewal term and acceptance of such offer of renewal by the
Executive. The initial term, as extended by any renewal term agreed to by the
parties, is referred to herein as the "Term".
3. EXECUTIVE'S DUTIES AND RIGHTS.
a. The Executive's principal duties shall be to use his contacts and
experience in the entertainment industry to further the interests of
On2.com in its effort to become a significant presence as a producer
of and an outlet for entertainment-related audio and video information
distributed on the World Wide Web and syndicated in various other
media. The Executive shall endeavor to conduct video and audio
interviews with celebrities, in cooperation with the needs of On2.com,
and appear on-screen as host and interviewer upon request. The
Executive shall manage the ongoing syndication business of the Company
subject to direction by On2.com. The Executive shall provide such
other related duties and services as may be reasonably assigned to him
from time to time in the conduct of the business of the Company or
On2.com.
b. The Executive's services shall be rendered at the Company's West Coast
and East Coast offices, as appropriate. The Executive shall travel
between the Company's offices and to such other locations as the
Company may request consistent with its business needs. Travel and all
ordinary and necessary business expenses will be reimbursed by the
Company in accordance with the Company's policies applicable to its
senior executives.
c. At the request of the Executive, the Company will employ up to three
employees, at an aggregate annual compensation cost of $105,000 (plus
standard employee benefits), who will
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primarily participate in the ongoing interviewing and radio
syndication business of the Company.
d. At the request of the Executive, the Company will employ as many
independent contractors as it believes necessary as long as the fees
paid to such independent contractors are within the Company's annual
budget as approved by its Board.
4. EXCLUSIVITY, RESTRICTIVE AGREEMENTS.
a. During his employment, the Executive shall devote all of his business
time, skill and energies exclusively to the business of the Company
and On2.com; PROVIDED, that (i) the Executive shall have the right to
devote such amounts of his time to produce and broadcast the Critics'
Choice Awards for the Broadcast Film Critics Association ("BFCA")
consistent with past requirements and to his own screenwriting
activities (so long as, in either case), the Executive performs the
work outside the course of his employment and without interruption to
his duties and without the use or benefit of any property owned by the
Company or On2.com and (ii) nothing in this Agreement shall impair the
rights of the Executive to his book TOXIC FAME and all proceeds of any
exploitation thereof.
b. The Executive acknowledges that the nature of the services, position
and expertise of the Executive are such that he is capable of
competing with the Company and seriously damaging its business and its
prospects to the detriment of its stockholders and employees. In
consideration of the Company's performance of its obligations under
this Agreement, during the Term and thereafter during the Restricted
Period (as defined below) the Executive shall not (i) directly or
indirectly enter into the employ of, or render any advice or services,
whether or not for compensation, to, any Person (as defined below)
engaged in any Competitive Business (as defined below); (ii) directly
or indirectly engage in any Competitive Business; and (iii) directly
or indirectly become interested, whether or not for compensation, in
any Competitive Business as an individual, partner, shareholder,
creditor, director, officer, principal, agent, employee, trustee,
consultant, advisor or in any other relationship or capacity or, in
the case of any such company whose securities are traded on a national
securities exchange in the United States or otherwise or in the
over-the-counter market, acquire, directly or indirectly, an interest
in excess of one percent (1%) of the outstanding capital stock of such
company. The Company's business is worldwide in scope; accordingly,
the Executive agrees that this covenant not to compete shall not be
subject to any geographical limit.
c. For purposes of this Section, any "Competitive Business" shall mean
any business (including, for the avoidance of doubt, any division,
unit, subsidiary or affiliate of any other business whether or not
such other business is a Competitive Business, unless the Executive
can demonstrate that his employment by, engagement in, or his interest
in, such unit, division, subsidiary or affiliate does not and will not
require him to provide services, information, advice or relevant
knowledge, skill, know-how or contacts to the Competitive Business
during the Restricted Period) which is principally engaged in the
design or development of digital compression, or streaming
technologies, in the design, development or operation of broadcast
sites on the Internet, or in the production of broadband or other
content which is directly competitive with content produced by
On2.com.
d. For purposes of this Section, "Person" shall mean any corporation,
partnership, trust, individual or any other entity.
e. For all purposes of this Section 4, "Restricted Period" shall be the
365 days immediately following termination of employment if such
termination is by resignation by the Executive or termination by the
Company with Cause (as defined in Section 7.a). There shall be no
Restricted Period upon expiration of the Term.
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5. COMPENSATION.
a. During the Term, the Executive shall receive base compensation at the
rate of $125,000 per year, payable in accordance with the Company's
regular payroll policies. In addition, the Executive will be entitled
to receive an annual bonus of at least $25,000 as determined by the
Company's Board of Directors in its sole discretion. In determining
the amount of the bonus in excess of $25,000, the Company's Board of
Directors will consider (i) the extent to which efforts of the
Executive have increased the assets or the results of On2.com or have
otherwise added value to the business of On2.com, and (ii) the
productivity of the Executive in developing new materials exploitable
by On2.com in its business.
b. The Company will reimburse the Executive for expenses related to its
business actually incurred or paid by the Executive in the performance
of his duties under this Agreement in accordance with policies
applicable to its senior executives or the senior executives of
On2.com, upon presentation of accountings, expense statements,
vouchers or such other supporting information as may be required by
the Company's policies.
c. The Company will provide the Executive with a monthly car allowance of
$850. Fuel expenses incurred in the course of the Company's business
will be reimbursed in accordance with the Company's policies
applicable to reimbursement of business expenses.
6. EXECUTIVE BENEFITS.
a. During the Term, the Executive shall be entitled to participate in
such group health, retirement, profit sharing, 401(k) and other
benefits programs or plans, qualified or unqualified, including any
future stock option, bonus or other incentive program, which are or
become available to other senior executives of the Company, subject to
the policies of the Company with respect to all of such programs or
plans. Nothing in this Section 6.a shall be construed to create a
contractual obligation to provide the Executive with any particular
form or type of benefit or to limit the discretion of the Board of
Directors or Compensation Committee or any other duly authorized or
appointed plan administrator.
b. During the Term, the Executive shall be entitled to three weeks' paid
vacation per Year of employment to be scheduled on reasonable notice
to the Company and to be taken, accrued and paid on the same basis as
other employees of the Company.
7. TERMINATION OF EMPLOYMENT FOR CAUSE.
a. The Company may terminate employment of the Executive for any of the
following reasons, each of which is defined as "Cause":
i. commission of a felony, any crime of moral turpitude or any act of
fraud or dishonesty involving the business of the Company or
On2.com;
ii. repeated failure to satisfactorily perform material services
required under this Agreement in accordance with the requests of
the Board of Directors of the Company or On2.com;
iii. willful misconduct or gross negligence in the performance of his
duties;
iv. disregard or violation of the legal rights of any employees of the
Company or On2.com or of the written policies of On2.com or the
Company regarding harassment or discrimination; or
v. a breach of any material provisions of this Agreement (including,
but not limited to, any breach of Sections 3 or 9).
If the Company terminates the employment of the Executive for Cause, or if
the Executive resigns during the Term, certain shares of the common stock of
On2.com shall become forfeitable in accordance
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with the terms of the Escrow Agreement, and the Company's obligations under this
Agreement to pay further compensation shall cease forthwith, except that the
Company will pay the Executive, within 30 days from the date of termination of
his employment, in full and complete satisfaction of all of the Company's
obligations under this Agreement, (i) the Base Salary and, subject to submission
of all required documentation, reimbursable expenses accrued (but unpaid) to the
date of termination and (ii) any accrued but unused vacation days paid at the
rate of the Executive's Base Salary.
b. If the Executive dies during the Term, such death shall be deemed
termination for Cause and the Company's obligation to the Executive's
estate shall be the same as those for termination for Cause as defined
in Section 7.a.
c. If, as a result of the Executive's disability or incapacity during the
Term due to physical illness or condition, or mental illness during
his employment with the Company, the Executive is unable to perform
his duties hereunder for a consecutive 6-calendar week period, or an
aggregate period of 12 calendar weeks during any 12 months (or such
longer period as may be required to comply with the Family Leave Act
or other applicable law), the Company shall have the right, upon
written notice to the Executive, to terminate the Executive's
employment under this Agreement. Such a termination shall be deemed
termination for Cause as defined in Section 7.a, but shall in no case
become effective until the date at which the Company's long-term
disability plan pays benefits to him.
d. Any alleged breach of this Agreement by either party shall not be
deemed a breach until such time as the breaching party shall have
received written notice from the non-breaching party setting forth the
alleged breach ("Alleged Breach Notice") and the breaching party shall
not have cured (if curable) the breach set forth in the Alleged Breach
Notice in the 15 days (10 days for defaults in payments) after receipt
of such Alleged Breach Notice. If the breach set forth in the Alleged
Breach Notice is not curable and has not resulted in a substantive and
material adverse effect on the party sending the Alleged Breach
Notice, the Company and the Executive shall, at the request of the
other, attempt to meet and discuss such alleged breach before
resorting to remedies or rights under this Agreement or otherwise.
Notwithstanding the foregoing, this Section shall not apply to, and
the Executive shall have no right to cure, a breach by him under
clauses (i) and (iv) of the definition "Cause" contained in
Section 7.a.
8. TERMINATION OTHER THAN FOR CAUSE.
If the Company terminates the Executive's employment without Cause, the
Company's obligations under this Agreement to pay further compensation shall
cease forthwith, except that the Company will pay the Executive (i) all Base
Salary for the period remaining under the Term, (ii) within 30 days after
submission of all required documentation, reimbursable expenses accrued (but
unpaid) to the date of termination and (iii) within 10 business days after such
termination, any accrued but unused vacation days paid at a rate determined
consistently with the Company's practices; provided; that payments of Base
Salary shall not be accelerated and shall remain payable as otherwise provided
in this Agreement. Notwithstanding the foregoing, at all times after termination
the Executive shall have the affirmative duty to seek other employment of
comparable stature and with comparable base compensation to attempt to mitigate
his right to payment, and the foregoing payments of Base Salary shall decrease
if and to the extent that the Executive obtains other employment or provides his
services as a consultant by the amount of compensation (other than contingent or
in kind compensation) payable thereunder in respect of services provided to or
provided by the Executive during the time period prior to the termination of the
Term (without giving effect to early termination). For purposes of defining the
Executive's obligation to mitigate damages and the obligation of the Company to
make the payments referred to in this Section following termination of
employment without Cause, the "Term" shall be the remaining period of the
unexpired Term. The provisions of this Section 8 are the exclusive provisions
that will apply if a court or arbitrator
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should determine that the Company's termination of the Executive's employment
was without Cause or by reason of a material breach by the Company of any of its
material obligations under this Agreement.
9. NONDISCLOSURE.
a. Except as required in order to perform his obligations under this
Agreement, the Executive shall not, without the express prior written
consent of the Company, directly or indirectly, disclose or divulge to
any other person or entity any of the Company's Confidential
Information or Trade Secrets at any time (during or after the
Executive's employment) during which such data or information
continues to constitute Confidential Information or a Trade Secret;
PROVIDED, that the provisions of this Section 9.a shall not restrict
the Executive from exercising his rights strictly in accordance with
Section 7.9 of the Purchase Agreement nor from disclosing the
provisions of this Agreement to his personal advisors. The Executive
shall not disclose or divulge to any other person (particularly to any
other employee) any terms of the Executive's compensation under this
Agreement. Upon any termination or expiration of his employment, the
Executive will promptly upon request therefor deliver to the Company
all data, lists, information, memoranda, documents and all other
property belonging to the Company or containing Confidential
Information or Trade Secrets of the Company.
b. As used in this Agreement:
i. "Confidential Information" of the Company shall mean any valuable,
competitively sensitive data and information related to the
Company's business other than Trade Secrets that are not generally
known by or readily available to the Company's competitors,
including, among other things, that which relates to services
performed by the Executive for the Company, or was created or
obtained by the Executive while performing services for the Company
or by virtue of the Executive's relationship with the Company; and
ii. "Trade Secrets" shall mean information or data of the Company,
including but not limited to technical or non-technical data,
compilations, programs, devices, methods, techniques, processes,
financial data and financial plans, that: (a) derive economic
value, actual or potential, from not being generally known to, and
not being readily ascertainable by proper means by, other persons
who can obtain economic value from their disclosure or use; and
(b) are the subject of efforts that are reasonable under the
circumstances to maintain their secrecy. To the extent that the
foregoing definition is inconsistent with a definition of "trade
secret" mandated under applicable law, the latter definition shall
govern for purposes of interpreting the Executive's obligations
under this Agreement.
iii. The obligations set forth in this Section shall not be applicable
to any information which: (i) the Company has authorized the
Executive in writing to publicly disclose, copy or use, but only
to the extent of such authorization; (ii) is generally known or
becomes part of the public domain through no fault of the
Executive; (iii) is disclosed to the Company by third parties
without restrictions on disclosure; or (iv) is required to be
disclosed in the context of any administrative or judicial
proceedings; PROVIDED that, if the Executive is requested or
becomes legally compelled to disclose any Confidential Information
or Trade Secrets, the Executive will provide the Company with
prompt written notice so that the Company may seek a protective
order or other appropriate remedy and/or waive compliance with the
provisions of this Section and the Executive will cooperate with
the Company in any effort the Company undertakes to obtain a
protective order or other remedy. If such a protective order or
other remedy is not obtained or the Company waives compliance with
this Section, the Executive will furnish only that portion of the
Confidential Information and Trade Secrets that is legally
required and will exercise all reasonable efforts to obtain
reliable assurance that confidential treatment will be accorded
the Confidential Information to be disclosed. The Company hereby
agrees to indemnify and hold harmless the Executive from
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all costs and expenses, including attorneys' fees, he incurs in
carrying out his obligations under the proviso provisions of this
subsection 9.b.iii and further agrees upon the written request of
the Executive to advance to the Executive the anticipated cost of
complying with his obligations under such proviso provisions.
10. REPRESENTATIONS AND WARRANTIES. The Executive hereby represents and
warrants that (a) he has the right to enter into this Agreement with the Company
and to grant the rights contained in this Agreement, and (b) the provisions of
this Agreement do not violate any other contracts or agreements that the
Executive has entered into with any other individual or entity.
11. SERVICES OF THE EXECUTIVE. In the course of his employment under this
Agreement, the Executive will have access to Trade Secrets, the disclosure or
unauthorized use of which, the Company seeks to protect and the Executive has
agreed to protect. As a result of benefits accruing to the Executive from his
access to such Trade Secrets, and of the improvement in his knowledge, and
proficiency arising therefrom, the Executive acknowledges that (a) his services
are and will remain special and extraordinary, and have and will have a peculiar
value, the loss of which cannot be reasonably or adequately compensated in
damages in any action at law; (b) he is willing to comply with the restrictions
contained in Sections 4.b and 4.c; (c) the restrictions contained in those
Sections will not impair his ability to earn a living in any businesses other
than those businesses from which he is prohibited during the time of such
restriction; and (d) a material breach of his obligations under Sections 4.b,
4.c or 9 will cause the Company irreparable injury and damage. It is, therefore,
agreed that the Company, in addition to any other remedies, shall be entitled to
injunctive and other equitable relief to enforce its rights under, and to
prevent a breach of, Sections 4.b, 4.c and 9 of this Agreement by the Executive.
12. ASSIGNABILITY, ETC. This Agreement shall be nondelegable and
nonassignable by the Executive. This Agreement shall be binding upon and inure
to the benefit of the Company and any entity succeeding to all or substantially
all of the business assets of the Company by merger, consolidation, purchase of
assets or otherwise.
13. NOTICES. Any notice pertaining to this Agreement shall be in writing and
shall be served by delivering said notice (i) by hand, (ii) by overnight mail by
an internationally recognized carrier, (iii) by sending it by certified mail,
postage prepaid, return receipt requested, or (iv) by confirmed telefax, with
notice confirmed, to the Executive at the address first stated above or his
office at the Company, with a courtesy copy to Berlack, Israels & Liberman, LLP,
120 West 45(th) Street, New York, NY 10036, Attention: Stuart Neuhauser, Esq.
and to the Company at:
375 Greenwich Street
New York, New York 10013
Attn.: President
Fax: (212) 941-3853
with a courtesy copy to:
William A. Newman, Esq.
Greenberg Traurig
200 Park Avenue
New York, New York 10166
Fax: (212) 801-6400
The addresses for notice may be changed by notice given to the other party
pursuant to this Section.
14. MISCELLANEOUS.
a. This Agreement shall be governed by and construed under the laws and
decisions 0of the State of New York applicable without regard to the
principles of conflicts of laws. The parties to this Agreement agree
that the state or federal courts in the State of New York shall have
personal
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jurisdiction over them with respect to, and shall be the exclusive
forum for the resolution of, any matter or controversy arising from or
with respect to this Agreement. Service of a summons and complaint
concerning any such matter or controversy may, in addition to any
other lawful means, be effected by sending a copy of such summons and
complaint by certified mail to the party to be served as specified in
Section 13 of this Agreement or at such other address as the party to
be served shall have provided in writing to the other from time to
time in accordance with Section 13.
b. To the extent permitted by law, the Executive and the Company
irrevocably waive trial by jury and any objection which he or it may
now or hereafter have to the venue of any suit, action or proceeding
arising out of or relating to this Agreement brought in the City of
New York, and to the extent permitted by law, the Executive and the
Company hereby further irrevocably waive any claim that any such suit,
action or proceeding brought in the City of New York has been brought
in an inconvenient forum.
c. This Agreement contains the entire understanding of the parties to
this Agreement with respect to the subject matter of this Agreement
and supersedes all previous written and oral agreements between the
parties with respect to the subject matter set forth in this
Agreement.
d. This Agreement may not be modified or amended except by a writing
signed by the parties to this Agreement.
e. Any provision of this Agreement that is deemed invalid, illegal or
unenforceable in any jurisdiction shall, as to that jurisdiction and
subject to this Section, be ineffective to the extent of such
invalidity, illegality or unenforceability, without affecting in any
way the remaining provisions of this Agreement in such jurisdiction or
rendering that or any other provision of this Agreement invalid,
illegal or unenforceable in any other jurisdiction. If the covenant
should be deemed invalid, illegal or unenforceable because its scope
is considered excessive, such covenant shall be modified so that the
scope of the covenant is reduced only to the minimum extent necessary
to render the modified covenant valid, legal and enforceable.
f. The following provisions of this Agreement shall survive in accordance
with their terms, the expiration or termination of this Agreement for
any reason: Sections 4, 5, 7, 8, 9 and 14.
g. A waiver by either party of any Section, term or condition of this
Agreement in any instance shall not be deemed or construed to be a
waiver of such Section, term or condition for the future or of any
subsequent breach thereof, and any such waiver must be in writing,
signed by the party to be charged. All rights and remedies contained
in this Agreement are cumulative, and none of them shall be construed
so as to limit any other right or remedy of either party.
h. This Agreement may be executed in counterparts, all of which shall
constitute one and the same agreement.
i. The headings and titles to the Sections of this Agreement are inserted
for convenience only and shall not be deemed a part of or affect the
construction or interpretation of any provisions of this Agreement.
j. All references to Sections shall be to sections and schedules of this
Agreement.
k. All references using male pronouns shall be deemed to include female
pronouns.
l. This Agreement may be signed in multiple counterparts, each of which
shall be deemed an original. Any executed counterpart returned by
facsimile shall be deemed an original executed counterpart.
7
<PAGE>
If the foregoing accurately reflects the Executive's understanding, please
countersign and return one counterpart of this Agreement to the Company.
<TABLE>
<S> <C> <C>
Sincerely yours,
CELEBRITY INTERVIEWS, INC.
By:
-----------------------------------------
Name: Daniel Miller
Title: Chairman
</TABLE>
Accepted and agreed to:
<TABLE>
<C> <S> <C>
-------------------------------------------
Joey Berlin
</TABLE>
8
<PAGE>
GUARANTEE
1. In consideration of the sum of $10.00 now paid by the Executive to
On2.com, Inc. ("On2.com") receipt whereof is hereby acknowledged, On2.com
hereby irrevocably and unconditionally guarantees as a continuing guarantee
the payment when due of all sums due, owing or outstanding from the Company
to the Executive hereunder and the performance of all of the Company's
obligations hereunder and agrees to idemnify the Executive from and against
all loss, damage, costs and expenses which the Executive may suffer through
or arising from any failure by the Company duly, fully and punctually to pay
any such sum required to be paid by it in relation to or otherwise to
perform its obligations under this Agreement.
2. Without prejudice to the Executive's rights against the Company as between
the Executive and On2.com, On2.com shall be liable hereunder as if it were
the sole principal debtor and not merely a surety, and On2.com's liability
hereunder shall not be released, discharged or diminished by:
(a) any legal limitation, lack of capacity or authorization or defect in the
actions of the Company in relation to, any invalidity or unenforceability
of, or any variation (whether or not agreed by On2.com) of any of the
terms of this Agreement, the bankruptcy, liquidation, insolvency, or
dissolution of the Company or any change in the Company's identity,
constitution, status or control; or
(b) any forbearance, neglect or delay in seeking performance of the
obligations of the Company, any granting of time indulgence or other
relief to the Company in relation to such performance, or any composition
with, discharge, waiver or release of the Company; or
(c) any other act, omission, fact or circumstance which might otherwise
release, discharge or diminish the liability of a guarantor.
3. Any release, settlement or discharge between the Executive and On2.com shall
be conditional upon no security or payment made or given to the Executive
being avoided, reduced, set aside or rendered unenforceable by virtue of any
provision or enactment now or hereafter in force relating to bankruptcy,
insolvency or liquidation and if any such security or payment shall be
avoided, reduced, set aside or rendered unenforceable, the Executive shall
be entitled to recover the full amount or value of any such security or
payment from On2.com and otherwise to enforce this Section as if such
release, settlement or discharge had not taken place.
IN WITNESS WHEREOF, the undersigned has executed this Guarantee as of
November , 1999.
ON2.COM INC.
a Colorado corporation
By: __________________________________
Name:
Title:
9
<PAGE>
EXHIBIT 16.1
[LOGO]
Nelson, Mayoka & Company, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
551 5(TH) Avenue
New York, New York
10176-0001
-------
Tel. (212) 697-7979
Fax (212) 697-8997
DIRECT LINE
August 2, 1999
Board of Directors
On2.com, Inc.
375 Greenwich Street
New York, NY 10013
We would like to inform you that we resign as the auditors of On2.com, Inc. as
of July 27, 1999. We agree that the reference to us that you have included in
the Current Report on form 8-K that you propose to file on August 2, 1999.
Very truly yours,
/s/ NELSON, MAYOKA & CO.
--------------------------------------
Nelson, Mayoka & Co.
<PAGE>
EXHIBIT 16.2
[LOGO]
EXHIBIT 1 TO FORM 8-K
August 4, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Gentlemen:
We have read Item 4 of Form 8-K dated August 2, 1999, of On2.com, Inc. and are
in agreement with the statements contained in the second paragraph therein with
respect to The Duck Corporation. We have no basis to agree or disagree with
other statements of the registrant contained therein.
[LOGO]
/S/ ERNST & YOUNG LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 15,083,419
<SECURITIES> 0
<RECEIVABLES> 136,766
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,974,104
<PP&E> 2,160,387
<DEPRECIATION> 837,697
<TOTAL-ASSETS> 22,431,872
<CURRENT-LIABILITIES> 2,068,672
<BONDS> 0
0
14,614,113
<COMMON> 21,106,003
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,431,872
<SALES> 0
<TOTAL-REVENUES> 178,112
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,485,773
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,064,609)
<INCOME-TAX> 22,933
<INCOME-CONTINUING> (10,087,542)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,087,542)
<EPS-BASIC> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
