AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 12, 1999
REGISTRATION NO. 333-66099
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
DIGITAL LAVA INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
------------
Delaware 7371 95-4584080
(State or Other (Primary Standard (I.R.S.
Jurisdiction of Industrial Classification Employer identification
Incorporation Or Code Number) No.)
Organization)
10850 Wilshire Boulevard, Suite 1260 10850 Wilshire Boulevard, Suite 1260
Los Angeles, CA 90024 Los Angeles, CA 90024
(310) 470-1149 (Address of Principal Place or
(Address and Telephone Number Intended Principal Place
of Principal Executive Offices) of Business)
------------
Joshua D.J. Sharfman
Chief Executive Officer
Digital Lava Inc.
10850 Wilshire Boulevard, Suite 1260
Los Angeles, California 90024
(310) 470-1149
(Name, Address, And Telephone Number Of Agent For Service)
COPIES TO:
Jeffrey D. Abbey, Esq. Lawrence B. Fisher, Esq.
Ehrenreich Eilenberg Krause & Zivian LLP Orrick, Herrington & Sutcliffe LLP
11 East 44th Street 30 Rockefeller Plaza
New York, New York 10017 New York, New York 10112
(212) 986-9700 (212) 506-5000
------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
<PAGE>
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box: [_]
Calculation of Registration Fee
<TABLE>
<CAPTION>
Title of each Class Amount Propose Maximum Proposed Maximum Amount of
of Securities to to be Offering Price Aggregate Offering Registration
be Registered (1) Registered Per Unit (2) Price (2) Fee
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, par value
$.0001 per share(3) ................. 2,760,000 $ 7.50 $20,700,000 $ 5,755
Redeemable common stock
purchase warrants(4) ................ 1,380,000 $ .10 $ 138,000 $ 39
Common stock issuable upon exercise of
redeemable warrants ................. 1,380,000 $ 9.00 $12,420,000 $ 3,453
Representative's
warrants (5) ........................ 120,000 $ .0001 $ 24 --
Common stock issuable upon exercise of
representative's warrants (5) ....... 240,000 $ 9.00 $ 2,160,000 $ 601
Redeemable warrants issuable upon
exercise of representative's
warrants (5) ........................ 120,000 $ .10 $ 12,000 $ 4
Common stock issuable upon
exercise of redeemable warrants
issuable upon exercise of
representative's
warrants (5) ....................... 120,000 $ 9.00 $ 1,080,000 $ 301
Common stock (6) ..................... 880,436 $ 7.50 $ 6,603,270 $ 1,840
- ----------------------------------------------------------------------------------------------------------------
Total ................................ $43,113,294 $ 11,993
================================================================================================================
</TABLE>
(1) Pursuant to Rule 416, there are also being registered such additional
securities as may become issuable pursuant to the anti-dilution provisions
of the redeemable warrants, the representative's warrants and the
redeemable warrants underlying the representative's warrants.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) of the Securities Act of 1933, as amended.
(3) Includes 360,000 shares of common stock that the underwriters have the
option to purchase to cover over-allotments, if any.
(4) Includes 180,000 redeemable common stock purchase warrants that the
underwriters have the option to purchase to cover over-allotments, if any.
(5) In connection with the registrant's sale of the securities offered hereby,
the registrant is granting to the representative of the several
underwriters warrants to purchase 240,000 shares of common stock and
<PAGE>
120,000 redeemable common stock purchase warrants.
(6) Consists of currently outstanding shares held by selling stockholders.
------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 (A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
The information contained in this preliminary prospectus is not complete and may
be changed. These securities may not be sold until the registration statement
filed with the securities and exchange commission is effective. This prospectus
is not an offer to sell nor does it seek an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted.
Subject to Completion, Dated January 12, 1999
DIGITAL LAVA INC.
2,400,000 Shares of Common Stock and
1,200,000 Redeemable Common Stock Purchase Warrants
(as units, each consisting of two shares of
common stock and one redeemable warrant)
This is an initial public offering of 2,400,000 shares of common stock and
1,200,000 redeemable common stock purchase warrants, initially as units, each
unit consisting of two shares of common stock and one redeemable common stock
purchase warrant, of Digital Lava Inc.
No public market currently exists for the common stock or the redeemable
warrants. We anticipate that the initial public offering price will be $7.50 per
share of common stock and $.10 per warrant. We have applied to list the common
stock and the warrants on the American Stock Exchange under the symbols "DGV"
and "DGVW," respectively.
See "Risk Factors" beginning on page 8 to read about certain factors you
should consider before buying shares of common stock or warrants.
-----------------------
Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------------------
<TABLE>
<CAPTION>
Per share Per warrant Total
--------- ----------- -----
<S> <C> <C> <C>
Public offering price.............................. $ $ $
Underwriting discounts and commissions............. $ $ $
Proceeds to Digital Lava........................... $ $ $
</TABLE>
The underwriters may purchase up to an additional 360,000 shares of common
stock and 180,000 redeemable common stock purchase warrants from Digital Lava at
the initial public offering price less the underwriting discount. The
underwriters are offering the common stock and the redeemable warrants on a firm
commitment basis.
DIRKS & COMPANY, INC.
The date of this prospectus is ______________, 1999.
<PAGE>
[Inside Front Cover Page]
[Top of the Page: VideoVisor... desktop video that works. A solution for
distance learning, corporate training and communications applications."]
[Center: Picture of VideoVisor screen, including picture of speaker, a chart of
the broadbrand methods of connecting FDDI networks and captions pointing to the
individual components of the network.]
[Bottom of the Page: Awards received by Digital Lava for its products and a
slogan, "Digital Lava... we're changing the way the world views video"]
-2-
<PAGE>
(continued from cover page)
This prospectus also relates to the registration by Digital Lava, at its
own expense, of 880,436 shares of common stock for the account of certain
selling stockholders identified in this prospectus. Such selling stockholders
are offering such additional 880,436 shares of common stock. The selling
stockholders may not sell such shares for a period of nine months from the date
of this prospectus without the prior written consent of the representative.
Digital Lava will not receive any proceeds from the sale of such shares.
The selling stockholders may sell their shares of common stock from time to
time in transactions, which may include block transactions by or for the account
of the selling stockholders, in the over-the-counter market or in negotiated
transactions, or through the writing of options on their shares, through a
combination of such methods of sale, or otherwise. Sales may be made at fixed
prices which may be changed, at market prices prevailing at the time of sale, or
at negotiated prices. If any selling stockholder sells his, her or its shares of
common stock, or options thereon, pursuant to this prospectus at a fixed price
or at a negotiated price which is, in either case, other than the prevailing
market price or in a block transaction to a purchaser who resells, or if any
selling stockholder pays compensation to a broker-dealer that is other than the
usual and customary discounts, concessions, or commissions, or if there are any
arrangements either individually or in the aggregate that would constitute a
distribution of such shares, a post-effective amendment to the registration
statement of which this prospectus is a part, would need to be filed and
declared effective by the Securities and Exchange Commission before such selling
stockholders could make such sale, pay such compensation or make such a
distribution. Digital Lava is under no obligation to file a post-effective
amendment to the registration statement of which this prospectus is a part under
such circumstances.
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<PAGE>
TABLE OF CONTENTS
Prospectus Summary......................................................... 5
Risk Factors............................................................... 9
Use of Proceeds............................................................ 18
Dividend Policy............................................................ 19
Capitalization............................................................. 20
Dilution................................................................... 21
Selected Financial Data.................................................... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations....................................................... 24
Business................................................................... 29
Management................................................................. 38
Certain Transactions....................................................... 42
Principal Stockholders..................................................... 43
Selling Stockholders....................................................... 45
Description of Securities.................................................. 47
Shares Eligible for Future Sale............................................ 49
Underwriting............................................................... 51
Legal Matters.............................................................. 53
Experts.................................................................... 54
Additional Information..................................................... 54
Index to Financial Statements.............................................. F-1
-4-
<PAGE>
PROSPECTUS SUMMARY
You should read the entire prospectus, including the "Risk Factors" section
and the financial statements and the notes to the financial statements,
carefully. "Digital Lava" refers to us and our predecessor.
DIGITAL LAVA, INC.
Digital Lava is a provider of video publishing software products and
services for corporate training, communications, research and other
applications. Our vPrism(TM) software allows users to organize and manage video
content, link video to other types of files and publish video on CD-ROM or DVD,
or "stream" the interactive video information over intranets or the Internet.
Our award-winning VideoVisor(TM) software allows end-users to access files and
navigate, rearrange, annotate, subtitle text and transcripts, and view
synchronized video, notes and links.
Streaming technology allows an Internet or intranet user to access
information in a file before the file is completely downloaded. As a result,
large multimedia files can be heard or seen almost immediately, even with slower
connections. We believe that the continuing emergence of rich multimedia
capabilities, such as streaming, presents a significant new market opportunity
for software applications that enhance the effectiveness and productivity of
professionals and consumers who rely on video information.
As the Internet continues to evolve as a mass communications medium, we
believe an increasing amount of video content will be "streamed" over the
Internet. RealNetworks, Inc., one of our strategic partners and a leader in the
market, has already registered over 35 million users of its RealPlayer Internet
software, used for viewing on-demand streaming media over the Internet and
intranets. We believe that our video publishing software technology is essential
to this evolution because it provides a more compelling and productive user
experience than broadcast television and videotape, allowing the Internet to
effectively compete with such traditional video delivery methods.
We were formed as a limited liability company in July 1995 and merged into
a Delaware corporation in November 1996. Our address is 10850 Wilshire
Boulevard, Suite 1260, Los Angeles, California 90024, and our telephone number
is (310) 470-1149. Our Web site can be accessed at www.digitallava.com.
Information contained on our Web site is not part of this prospectus.
VideoVisor(TM), vPrism(TM), VideoCapsule(TM), ClipList(TM), TempoLink(TM),
Digital Lava Inc.(TM), Changing the way the world views video(TM), the Digital
Lava logo(TM), the Powered by Digital Lava logo(TM), the VideoVisor logo(TM),
the vPrism logo(TM), Powered by Digital Lava(TM), VideoPlayList(TM), VideoVisor
Server(TM), VideoVisor Professional(TM), VideoVisor Web(TM), VideoVisor Web
Publisher(TM) and VideoVisor iView(TM) are unregistered trademarks, service
marks and trade names of Digital Lava. This prospectus also includes trademarks,
service marks and trade names other than those identified in this paragraph, all
of which are the property of their respective holders.
Unless stated otherwise, all information in this prospectus:
o assumes an initial public offering price of $7.50 per share of common stock
and $.10 per redeemable common stock purchase warrant;
o gives effect to a 1 for 9.139 reverse stock split to be effected
immediately prior to the completion of this offering;
o gives effect to the recapitalization described in "Description of
Securities" which will occur immediately prior to the completion of this
offering; and
o gives effect to the conversion of all outstanding shares of preferred stock
of Digital Lava into
-5-
<PAGE>
shares of common stock, which will occur upon the completion of this
offering.
In addition, unless stated otherwise, all information in this prospectus
assumes the underwriters' over-allotment option is not exercised and does not
give effect to:
o exercise of the redeemable common stock purchase warrants;
o exercise of the representative's warrants, including the exercise of the
warrants underlying the representative's warrants; and
o issuance of shares of common stock upon the exercise of warrants currently
outstanding.
THE OFFERING
Securities Offered ................ 2,400,000 shares of common stock and
1,200,000 redeemable common stock
purchase warrants. The common stock and
the warrants will be separately
tradeable immediately following the
completion of this offering.
Terms of Warrants ................. Each warrant entitles the holder to
purchase, at any time over a four year
period commencing 12 months after the
date of this prospectus, one share of
common stock at a price per share which
shall equal 120% of the initial public
offering price per share. The warrant
exercise price is subject to adjustment
under certain circumstances. Commencing
18 months after the date of this
prospectus, the warrants will be subject
to redemption by us, in whole but not in
part, at $.10 per warrant on 30 days'
prior written notice, provided that the
average closing sale price of the common
stock as reported on the Amex equals or
exceeds 266% of the initial public
offering price of the common stock for
any 20 trading days within a period of
30 consecutive trading days ending on
the fifth trading day prior to the date
of notice of redemption. See
"Description of Securities."
Common Stock Outstanding
Before the Offering(1) ......... 1,996,092 shares
Common Stock Outstanding
After the Offering(1) .......... 4,396,092 shares
Warrants Outstanding
After the Offering ............. 1,200,000 warrants
Use of Proceeds ................... Product development, sales and
marketing, repayment of indebtedness,
facilities and other capital
expenditures, expansion of internal
operations and working capital and
general corporate purposes. See "Use of
Proceeds."
Proposed Amex Symbols ............. Common stock "DGV"
Warrants "DGVW"
-6-
<PAGE>
Risk Factors ...................... For a discussion of certain risks you
should consider before investing in
Digital Lava's securities, see "Risk
Factors."
- ----------
(1) This information excludes: (a) 139,622 shares of common stock reserved for
issuance upon the exercise of options outstanding upon completion of this
offering under Digital Lava's 1996 Incentive and NonQualified Stock Option
Plan; (b) 110,378 shares of common stock reserved for issuance upon the
exercise of options that may be granted under Digital Lava's Stock Option
Plan; and (c) 666,408 shares of common stock reserved for issuance upon the
exercise of warrants currently outstanding. See "Description of
Securities."
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<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
------------------------------ -------------------------------
December 31, December 31, September 30, September 30,
1996 1997 1997 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ............................................... $ -- $ 564,572 $ 376,468 $ 1,147,632
Cost of revenues ....................................... -- 122,976 101,620 244,339
----------- ----------- ----------- -----------
Gross profit ........................................... -- 441,596 274,848 903,293
----------- ----------- ----------- -----------
Operating costs and expenses:
Selling, general and administrative ................ 1,522,757 3,316,961 2,337,115 2,773,240
Research and development ........................... 421,087 445,162 322,385 334,142
----------- ----------- ----------- -----------
Total operating costs and expenses ............... 1,943,844 3,762,123 2,659,500 3,107,382
----------- ----------- ----------- -----------
Loss from operations ................................... (1,943,844) (3,320,527) (2,384,652) (2,204,089)
Interest expense ....................................... 450,563 924,842 762,517 1,057,131
Net loss ............................................... $(2,384,657) $(4,245,369) $(3,147,169) $(3,261,220)
=========== =========== =========== ===========
Basic and diluted loss per share (1) ................... $ (93.00) $ (31.14) $ (23.75) (22.05)
=========== =========== =========== ===========
Weighted average common shares used in
basic and diluted loss per share (1) ............... 25,641 136,353 132,492 147,933
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------------------------------
Pro Forma
Balance Sheet Data: Actual Pro Forma(2) As Adjusted(2)(3)
----------- ------------ -----------------
<S> <C> <C> <C>
Cash and cash equivalents .......... $ 11,786 $ 11,786 $11,154,214
Working capital (deficit) .......... (6,117,681) (4,348,323) 10,219,033
Total assets ....................... 603,366 603,366 11,433,156
Total liabilities .................. 6,629,003 4,859,645 1,122,079
Total stockholders' (deficit) equity (6,025,637) (4,256,279) 10,311,077
</TABLE>
- ----------
(1) For information concerning the computation of net loss per share, see note
2 of notes to financial statements.
(2) Gives effect to the following recapitalization: (a) conversion of the
Series A, B, B-1 and C convertible preferred stock; (b) the recording of a
dividend to the holders of the Series B and C convertible preferred stock
due to a change in conversion ratios; (c) the return and cancellation of
shares of common stock and Series A preferred stock held by certain
officers of Digital Lava; (d) the conversion of certain notes payable,
accrued interest thereon and warrants issued in connection with the notes
into common stock and the recording of an extraordinary loss on the
extinguishment of debt based upon the difference in the fair value of (1)
the notes, accrued interest and warrants converted and (2) the common stock
issued in exchange; and (e) the conversion of certain warrants exercisable
for shares of common stock into common stock. See "Description of
Securities -- Recapitalization."
(3) As adjusted to give effect to (a) the sale of common stock and warrants
offered hereby at an initial public offering price of $7.50 per share of
common stock and $.10 per warrant, (b) the repayment of outstanding notes
payable in the aggregate principal amount of $3,353,500 and accrued
interest and fees in the amount of $468,472 at September 30, 1998, (c) the
proceeds from the issuance of $550,000 in principal amount of bridge notes
and warrants issued in December 1998 and the repayment of the bridge notes
from the proceeds of the offering, and (d) the recognition of the
unamortized portion of the debt discount associated with the notes payable
and bridge notes as an expense.
-8-
<PAGE>
RISK FACTORS
You should carefully consider the following factors and other information
in this prospectus before deciding to invest in shares of common stock and
warrants. This prospectus contains forward-looking statements that involve risks
and uncertainties. Such statements can be identified by the use of words such as
"may," "will," "expect," "anticipate," "estimate," "continue," or other similar
words. These statements discuss future expectations, contain projections of
results of operations or of financial condition, or state other
"forward-looking" information. When considering such statements, you should keep
in mind the risk factors described below and other cautionary statements in this
prospectus. The risk factors described below and other factors noted throughout
this prospectus, including certain risks and uncertainties, could cause our
actual results to differ materially from those contained in any forward-looking
statement.
Limited Operating History. We were originally formed as a limited liability
company in July 1995 and were merged into a corporation in November 1996. We did
not recognize any revenue until 1997. Therefore, we have only a limited
operating history upon which you may judge our performance and prospects. As a
result of our limited operating history and the emerging nature of the markets
in which we compete, we may not be able to achieve anticipated revenues.
History of Losses and Expectation of Future Losses. We have incurred
significant losses since inception and we expect to continue to incur
substantial operating losses for the foreseeable future. As of September 30,
1998, we had an accumulated deficit of $10,229,518. We expect that our sales and
marketing, product development and administrative expenses will increase in the
future and, as a result, will need to generate significant revenues to achieve
profitability. Despite significant investments in sales and marketing and
product development, we may not be able to sustain our growth in revenues,
including revenues from software license fees, in the future. To become
profitable, we must, among other things, establish widespread market acceptance
of our existing products, successfully develop and deliver new products and
services, respond quickly and effectively to competitive, market and
technological developments, expand sales and marketing operations, broaden
customer support capabilities, control expenses and continue to attract and
retain qualified personnel. We may not be able to achieve profitability in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Ability to Continue as a Going Concern. Our independent accountants have
included an explanatory paragraph stating that our financial statements have
been prepared assuming that we will continue as a going concern and that we have
suffered recurring losses from operations and have a working capital deficiency
which cause substantial doubt as to our ability to do so. See financial
statements and notes thereto.
Repayment of Indebtedness; Default on Notes. We have allocated
approximately 29.9% of the net proceeds of this offering for repayment of
certain promissory notes issued in private placements. Of an aggregate principal
amount of $5,319,500 of promissory notes which are currently outstanding, we
will be repaying an aggregate principal amount of $3,903,500 of such notes from
the net proceeds of this offering. An aggregate principal amount of $1,750,000
of notes matured on November 20, 1998. All of the holders of such notes have
agreed to extend the maturity date of their notes until the earlier of January
31, 1999 or the consummation of this offering. As of January 1, 1999, we were in
default on the repayment of an additional aggregate principal amount of
3,019,500 of promissory notes. Holders of an aggregate principal amount of
$2,819,500 of such notes agreed to extend the maturity date of their notes until
the earlier of January 31, 1999 or the consummation of this offering. We are
seeking an identical agreement from the holder of an aggregate principal amount
of $12,500 of such notes. Holders of an aggregate principal amount of $187,500
of such notes previously agreed to extend the maturity date of such notes to
June 30, 1999; however, because the closing of this offering did not occur by
December 31, 1998, the
-9-
<PAGE>
entire principal amount of such notes became due and payable on such date. Such
holders have agreed to waive such default and in consideration we have agreed to
pay the entire principal amount of such notes, and accrued interest, upon the
consummation of this offering. If this offering is not completed by January 31,
1999, and we are unable to reach an agreement with each of the holders to extend
the term of the notes which are now due on such date, then we will be in default
on all of such notes and the holders may foreclose on our assets. In such event,
it is unlikely that we will be able to complete this offering. See "Use of
Proceeds" and "Description of Securities -- Recapitalization."
Quarterly Operating Results May Fluctuate. We expect to experience
significant fluctuations in our future quarterly operating results due to a
variety of factors, many of which are outside our control, including:
o demand for products and services;
o market acceptance of our new products and services;
o price reductions or changes in pricing;
o mix of products and services;
o mix of distribution channels;
o mix of international and North American revenues;
o costs of litigation and intellectual property protection;
o competitive factors;
o growth in the use of the Internet;
o technical difficulties with respect to the use of our products; and
o general economic conditions and economic conditions specifically related to
the Internet.
We believe that our quarterly revenues, expenses and operating results could
vary significantly in the future, and that you should not rely upon
period-to-period comparisons as indications of future performance.
Control by Management. After completion of this offering, our executive
officers and directors will beneficially own approximately 22.0%, or 20.7% if
the underwriters' over-allotment is exercised in full, of our outstanding
shares. As a result, these executive officers and directors may continue to be
able to control the outcome of matters requiring a stockholder vote, including
the election of the members of the Board of Directors. This control could
adversely affect the market price of the shares of common stock or delay or
prevent a change in control of Digital Lava. See "Principal Stockholders."
Broad Discretion Over Use of Proceeds. We intend to use approximately
$4,349,250, or 29.1%, of the net proceeds of the offering to repay outstanding
indebtedness, including accrued interest and fees, and the balance for the other
purposes described under "Use of Proceeds." Although our current estimate as to
the amount of such net proceeds that will be used for each such other purpose is
set forth under "Use of Proceeds," we reserve the right to change the amount of
such net proceeds that will be used for any purpose to the extent that
management determines that such change is advisable. Accordingly, management
will have broad discretion as to the application of the net proceeds of the
offering. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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<PAGE>
Lack of Experience of Representative. Dirks & Company, Inc., the
representative of the underwriters, commenced operations in July 1997. Dirks &
Company has co-managed only two previous public offerings of securities and
participated as an underwriter in only three previous public offerings of
securities. No assurances can be given that the representative will be able to
participate as a market maker of the common stock or warrants or that any
broker-dealer will become a market maker for the common stock or warrants. See
"Underwriting."
Immediate and Substantial Dilution. The initial public offering price per
share of common stock and warrants is substantially higher than the net tangible
book value per share of the outstanding common stock. Purchasers of shares of
common stock will experience immediate and substantial dilution of $5.15 per
share in net tangible book value per share, or approximately 68.7% of the
assumed initial public offering price of $7.50 per share. To the extent
outstanding options and warrants to purchase shares of common stock are
exercised or additional shares of common stock are issued in the future, there
may be further dilution. In addition, sales of shares of common stock by the
selling stockholders may depress the market price of the common stock. See
"Dilution."
Customer Concentration. In the past, we derived a majority of our revenues
in each period from one or two customers. For the nine months ended September
30, 1998, two customers accounted for approximately 58.6% and 17.3%,
respectively, of revenues. For the nine months ended September 30, 1997, a
separate customer accounted for 64.8% of revenues. We do not have a contract
with any of these customers. Although the volume of sales for our customers
varies from year-to-year, the loss of a major customer could have a material
adverse effect on our business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Uncertain Market. The markets for our products and services are in the
early stages of development and are evolving rapidly, with continuing new
developments in technology, product distribution methods, and marketing and
licensing relationships. The development of a market for our products also
depends on increased use of the Internet and intranets for information,
publication, distribution and commerce relating to video and multimedia.
Critical issues concerning use of the Internet and intranets, including
security, reliability, cost, ease of use and quality of service, remain
unresolved and may affect the growth of and the degree to which business is
conducted over the Internet and intranets. If the market for our products and
services fails to grow, develops more slowly than expected or becomes saturated
with competing products or services, our business will be materially adversely
affected.
Our Markets are Highly Competitive. The markets for our products and
services are relatively new, constantly evolving and intensely competitive.
Barriers to entry are low and we expect that competition will intensify in the
future. Many of our current and potential competitors have longer operating
histories, greater name recognition and significantly greater financial,
technical and marketing resources. As a result, our competitors may be able to
develop products comparable or superior to ours or adapt more quickly to new
technologies or evolving customer requirements. In addition, we may, as a
strategic response to changes in the competitive environment, implement pricing,
licensing, service or marketing changes designed to extend our current brand and
technology franchise. Continued price concessions or the emergence of other
pricing or distribution strategies by competitors may have a material adverse
effect on our business, financial condition and results of operations. See
"Business -- Competition."
Uncertainty of Market Acceptance. Our success is highly dependent on market
acceptance of our video publishing software technology. The market for video
publishing software products and services is new and rapidly evolving and we are
not certain that our target customers will adopt and deploy video publishing
technology. As a result, demand and market acceptance for video publishing
software
-11-
<PAGE>
technology is uncertain. We cannot assure you that the market for video
publishing technology will continue to emerge or become sustainable. If the
market for video publishing technology fails to develop or develops more slowly
than we expect, then our business, financial condition and results of operations
will be materially adversely affected.
Rapid Technological Change. The markets for our products are characterized
by rapid technological change, evolving industry standards, and frequent new
product introductions and enhancements. Our future success will depend in part
on our ability to enhance our existing products and to develop and introduce new
products and features that meet changing customer requirements and emerging
industry standards. We may not successfully complete the development or
introduction of products on a timely basis, if at all. Products or technologies
developed by others may render our products or technologies noncompetitive or
obsolete. Any failure by us to anticipate or respond adequately to changing
technologies, or any significant delays in product development or introduction,
could cause customers to delay or decide against purchases of our products and
would have a material adverse effect on our business.
Risk of Product Defects and Product Liability. Software products as complex
as those offered by us often contain undetected errors or failures when first
introduced or as new versions are released. In addition, to the extent that we
may have to develop new products that operate in new environments, such as the
Internet, the possibility for program errors and failures may increase due to
factors such as the use of new technologies or the need for more rapid product
development that is characteristic of the Internet market. Despite pre-release
testing by us and by current and potential customers, there still may be errors
in new products, even after commencement of commercial shipments. The occurrence
of such errors could result in delay, or failure to achieve, market acceptance
of our products, which could have a material adverse effect on our business. In
addition, because our products are used in business-critical applications, any
errors or failures in such products may give rise to substantial product
liability claims, which also could have a material adverse effect on our
business.
Possible Need for Additional Financing. We anticipate that the net proceeds
from this offering and cash provided by operations will allow us to meet our
cash requirements for at least 12 months following the date of this prospectus.
This expectation is based on our current operating plan which can change as a
result of many factors, and we may require additional funding sooner than
anticipated. In addition, unplanned acquisition and development opportunities
and other contingencies may arise, which also could require additional capital.
Sources of funds may include the issuance of common or preferred stock sold in a
public offering or in private placements, or the issuance of debt or bank
financing. If additional capital is raised through the sale of equity, including
preferred stock, or convertible debt securities, the percentage ownership of our
existing stockholders will be reduced and such securities may have rights,
preferences or privileges superior to those of our existing stockholders. We may
not be able to obtain capital on a timely basis, on favorable terms, or at all.
We currently do not have a credit facility or any other committed source of
capital. If we are unable to obtain such financing, or generate funds from
operations sufficient to meet our needs, our business, financial condition and
results of operations will be materially adversely affected. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Inability to Fully Use Net Operating Loss Carryforwards. At December 31,
1997, we had available net operating loss carryforwards of approximately
$2,800,000 to offset future taxable income for federal and state tax purposes.
The utilization of the loss carryforwards to reduce future income taxes will
depend upon our ability to generate sufficient taxable income prior to the
expiration of the net operating loss carryforwards. The federal and state
carryforwards expire beginning in the years 2011 and 2005, respectively.
However, the Internal Revenue Code of 1986, as amended, limits the maximum
annual use of net operating loss and tax credit carryforwards in certain
situations where changes occur in the stock
-12-
<PAGE>
ownership of a corporation. As a result of this offering, a change in ownership
is likely to occur which would substantially restrict our use of the net
operating loss carryforwards for federal and state income tax purposes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Net Operating Loss Carryforwards" and note 11 of notes to financial
statements.
Uncertain Protection of Intellectual Property. Our success depends in part
on our ability to protect our proprietary software and other intellectual
property. To protect our proprietary rights, we generally rely on patent,
copyright, trademark and trade secret laws, confidentiality agreements with
employees and third parties, and license agreements with consultants, vendors
and customers. We have not signed such agreements in every case. Despite such
protections, a third party could copy or otherwise obtain and use our products
or technology, or develop similar technology independently.
We currently have one patent pending in the United States relating to our
product architecture and technology. The pending patent application may not be
granted, or, if granted, may not provide us with any competitive advantage. Many
of our current and potential competitors dedicate substantially greater
resources to protection and enforcement of intellectual property rights,
especially patents. If a patent has been issued or is issued in the future that
would cover our product, we would need to either obtain a license or design
around the patent. We may not be able to obtain such a license on acceptable
terms, if at all, nor design around the patent.
As with other software products, our products are susceptible to
unauthorized copying and uses that may go undetected, and policing such
unauthorized use is difficult. In general, our efforts to protect our
intellectual property rights through patent, copyright, trademark and trade
secret laws may not be effective to prevent misappropriation of our technology,
or to prevent the development and design by others of products or technologies
similar to or competitive with ours. See "Business -- Intellectual Property."
Risks Associated With Licensed Third-Party Technology. We also rely on
certain technology that we license from third parties, including software that
is integrated with internally developed software and used in our products, to
perform key functions. In the future, such third-party technology licenses may
not be available to us on commercially reasonable terms. The loss of any of
these technologies could have a material adverse effect on our business,
financial condition and results of operations. See "Business --Intellectual
Property."
Risks of Infringement. We attempt to avoid infringing known proprietary
rights of third parties in our product development efforts. However, we have not
conducted and do not conduct comprehensive patent searches to determine whether
the technology used in our products infringes patents held by third parties. If
we were to discover that our products violate third-party proprietary rights, we
may not be able to obtain licenses to continue offering such products without
substantial reengineering or that any effort to undertake such reengineering
would be successful, that any such licenses would be available on commercially
reasonable terms, if at all, or that litigation could be avoided or settled
without substantial expense and damage awards. Any claims relating to the
infringement of third-party proprietary rights, even if not meritorious, could
result in the expenditure of significant financial and managerial resources and
could result in injunctions preventing us from distributing certain products.
Such claims could materially adversely affect our business, financial condition
and results of operations. See "Business -- Intellectual Property."
Dependence on Key Personnel. We are dependent on the continued employment
and performance of our executive officers and key employees, particularly Joshua
Sharfman, Chief Executive Officer, and Thomas Stigler, Vice President of Sales
and Business Strategy. Mr. Sharfman will be our President upon completion of
this offering. We have entered into employment agreements with Messrs. Sharfman
and Stigler which commence on the closing date of this offering and expire two
years after such date. Messers.
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<PAGE>
Sharfman and Stigler will each receive an annual base salary of $230,000, 40,000
stock options exercisable at the initial public offering price per share of
common stock and a one-time cash bonus of $60,000. A state court may determine
not to enforce, or only partially enforce, certain provisions of these
agreements. We do not maintain any key man life insurance. The loss of the
services any of our executive officers or key employees could have a material
adverse effect on our business, financial condition and results of operations.
See "Management."
Management of Rapid Growth. Our rapid growth has placed, and is expected to
continue to place, a significant strain on our managerial, technical,
operational and financial resources. To manage our expected growth, we will have
to implement and improve our operational and financial systems and train and
manage our growing employee base. We will also need to maintain and expand our
relationships with customers, marketing partners, licensees, licensors, and
other third parties. Our current and planned personnel, financial and operating
procedures and controls may not be adequate to support our future operations. If
we are unable to manage our growth effectively, our business will be materially
adversely affected. See "Business -- Strategy."
Risks Associated with International Expansion. A component of our strategy
is to expand internationally by opening international sales offices and
developing international distribution and sales networks. We currently have
agreements with a reseller in Australia/New Zealand and a reseller in South
Africa. We may be unable to successfully market, sell and deliver our products
internationally. In addition, we will be subject to the risks of doing business
abroad, including political or economic instability in a region, changes in
diplomatic and trade relationships, tariffs and other barriers and restrictions,
restrictions on the transfer of funds, currency fluctuations, potentially
adverse tax consequences and the burdens of complying with foreign laws and
regulations. Such factors could materially adversely affect our business,
financial condition and results of operations. See "Business --Strategy."
Year 2000 Risk. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field. As a
result, software that records only the last two digits of the calendar year may
not be able to distinguish whether "00" means 1900 or 2000. This may result in
software failures or the creation of erroneous results. We believe that our
products and internal systems are currently year 2000 compliant. We have
confirmed our year 2000 compliance by obtaining representations by third party
vendors of their products' year 2000 compliance, as well as specific testing of
our products. The failure of products or systems maintained by third parties or
our products and systems to be year 2000 compliant could cause us to incur
significant expenses to remedy any problems, or seriously damage our business.
We have not incurred significant costs to date complying with year 2000
requirements, and we do not believe that we will incur significant costs for
such purposes in the foreseeable future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Year 2000 Risk."
Sales and Other Taxes. We currently do not collect sales or similar taxes
with respect to the sale of products, license of technology, or provision of
services in states and countries other than states in which we have offices.
However, one or more states or foreign countries may seek to impose sales or
other tax obligations on companies that engage in online commerce within their
jurisdictions. A successful assertion by one or more states or any foreign
country that we should collect sales or other taxes on the sale of products,
license of technology, or provision of services, or remit payment of sales or
other taxes for prior periods, could have a material adverse effect on our
business.
Governmental Regulation and Legal Uncertainty. We are not currently
directly regulated by any governmental agency, other than laws and regulations
generally applicable to businesses, although certain United States export
controls and import controls of other countries, including controls on the use
of
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<PAGE>
encryption technologies, may apply to our products. Due to the increasing
popularity and use of the Internet, it is possible that a number of laws and
regulations may be adopted in the United States and abroad relating to the
Internet. In addition, the applicability to the Internet of the existing laws
governing issues such as property ownership, content, taxation, defamation and
personal privacy is uncertain. Any such export or import restrictions, new
legislation or regulation or governmental enforcement of existing regulations
may limit the growth of the Internet, increase our cost of doing business,
restrict our business or increase our legal exposure, which could have a
material adverse effect on our business.
Liability for Internet Content. Because content from our Web site is
distributed to others, we may be subjected to claims of negligence, copyright,
patent or trademark infringement, defamation, indecency and other claims. Such
claims have been brought, sometimes successfully, against Internet content
distributors. In addition, we could be subjected to claims based upon the
content that is accessible from our Web site through links to other Web sites.
Although we maintain general liability insurance in the amount of $2,000,000,
our insurance may not cover potential claims of this type or may not be adequate
to indemnify us for all liability that may be imposed. Any imposition of
liability that is not covered by insurance or is in excess of insurance coverage
could have a material adverse effect on our business, financial condition and
results of operations.
Continuing Influence of Representative. Following the completion of this
offering, the representative (a) may designate one person for election to our
Board of Directors for five years from the effective date of the registration
statement; (b) will receive warrants to purchase 240,000 shares of common stock
and 120,000 redeemable common stock purchase warrants; (c) may refuse to allow
us to sell or offer for sale any securities for six months from the date of this
prospectus, except in connection with strategic transactions or mergers and
acquisitions; and (d) will enter into a financial advisory and consulting
agreement with us. Accordingly, the representative will continue to have
influence over our operations following the completion of this offering. See
"Underwriting."
Shares Eligible for Future Sale. Sales of significant amounts of common
stock in the public market after this offering, or the perception that such
sales will occur, could materially and adversely affect the market price of the
common stock or our ability to raise capital through an offering of equity
securities. Assuming no exercise of outstanding options or warrants, 3,280,436
of the 4,396,092 shares of common stock and 1,200,000 warrants to be outstanding
upon completion of this offering (3,640,436 shares of common stock and 1,380,000
warrants if the over-allotment option is exercised in full) will be immediately
freely tradeable without restriction under the Securities Act of 1933, as
amended (the "Securities Act"), except for any securities purchased by an
"affiliate" of Digital Lava, as that term is defined in the Securities Act,
which will be subject to the resale limitations of Rule 144 under the Securities
Act.
The remaining 1,115,656 of the shares of common stock to be outstanding
upon the completion of the offering will be "restricted securities" as defined
in Rule 144. All of such restricted shares will have been held for more than one
year as of the date of this prospectus and, therefore, all of such shares will
be eligible for public sale beginning 90 days after the date of this prospectus
in accordance with the requirements of Rule 144, subject to the lock-up
agreements described below.
Holders of warrants to purchase an aggregate of 653,277 shares of common
stock have certain registration rights with regard to the resale of the shares
issuable upon exercise of such warrants. Additionally, holders of options to
purchase an aggregate of 175,936 shares of common stock from certain of our
founders have certain registration rights with regard to the resale of the
shares underlying such options. Following the completion of this offering, such
holders could require Digital Lava to register for resale the shares issuable
upon exercise of such warrants and the shares underlying such options and such
shares would then be freely tradeable, subject to the lock-up agreements
described below.
Each of our officers and directors, all other holders of shares of common
stock, and all holders of options
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<PAGE>
and warrants to acquire shares of common stock have agreed not to, directly or
indirectly, offer, sell, transfer, pledge, assign, hypothecate or otherwise
encumber or dispose of any of our securities, whether or not presently owned,
for a period of 12 months, or nine months in the case of the selling
stockholders and six months in the case of the holders of warrants to purchase
275,000 shares of common stock issued in connection with our December 1998
bridge financing, after the date of this prospectus, without our prior written
consent and the prior written consent of the representatives. See "Shares
Eligible for Future Sale."
Potential Adverse Effect of Representative's Warrants. Upon the
consummation of the offering, we will sell to the representative and/or its
designees, for nominal consideration, warrants to purchase up to 240,000 shares
of common stock and/or 120,000 warrants. The holders of the representative's
warrants will have, at nominal cost, the opportunity to profit from a rise in
the market price of the common stock and/or warrants without assuming the risk
of ownership, with a resulting dilution in the interest of other security
holders. As long as the representative's warrants remain unexercised, our
ability to obtain additional capital might be adversely affected. Moreover, the
representative may exercise the representative's warrants at a time when we
would, in all likelihood, be able to obtain any needed capital through a new
offering of our securities on terms more favorable than those provided by the
representative's warrants. See "Underwriting."
Speculative Nature of Warrants. The warrants do not confer any rights of
common stock ownership on their holders, such as voting rights or the right to
receive dividends, but rather merely represent the right to acquire shares of
common stock at a fixed price for a limited period of time. The warrants are
subject to modification under certain circumstances. The warrant exercise price
and the number of shares of common stock issuable upon exercise of the warrants
are subject to adjustment in certain events, including stock dividends, stock
splits, combinations or reclassifications of the common stock. Following the
completion of this offering, the market value of the warrants will be uncertain
and the market price of the common stock may never equal or exceed the exercise
price of the warrants and, consequently, it may never be profitable for holders
of the warrants to exercise the warrants. See "Description of
Securities--Warrants."
Warrants May Be Redeemed. Commencing 18 months after the date of this
prospectus, the warrants will be subject to redemption at $0.10 per warrant on
thirty days' prior written notice to the warrantholders if the average closing
sale price of the common stock as reported on the Amex equals or exceeds 266% of
the initial public offering price of the common stock for any 20 trading days
within a period of 30 consecutive trading days ending on the fifth trading day
prior to the date of the notice of redemption. If we decide to redeem the
warrants, holders of the warrants will lose their rights to purchase shares of
common stock issuable upon exercise of such warrants unless the warrants are
exercised before they are redeemed. Upon receipt of a notice of redemption,
holders would be required to: (a) exercise the warrants and pay the exercise
price at a time when it may be disadvantageous for them to do so; (b) sell the
warrants at the current market price, if any, when they might otherwise wish to
hold the warrants; or (c) accept the redemption price, which is likely to be
substantially less than the market value of the warrants at the time of
redemption. See "Description of Securities--Warrants."
Restrictions on Resale of Shares Underlying Warrants. The warrants are not
exercisable unless, at the time of the exercise, we have a current prospectus
covering the shares of common stock issuable upon exercise of the warrants, and
such shares have been registered, qualified or deemed to be exempt under the
securities laws of the state of residence of the exercising holder of the
warrants. Although we have agreed to use our best efforts to keep a registration
statement covering the shares of common stock issuable upon the exercise of the
warrants effective for the term of the warrants, if we fail to do so for any
reason, the warrants may be deprived of value.
The common stock and warrants are detachable and separately transferable
immediately following completion of this offering. Purchasers may buy warrants
in the aftermarket or may move to jurisdictions in which the shares underlying
the warrants are not so registered or qualified during the period that the
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warrants are exercisable. In that event, we would be unable to issue shares to
those persons desiring to exercise their warrants, and holders of warrants would
have no choice but to attempt to sell the warrants in a jurisdiction where such
sale is permissible or allow them to expire unexercised. See "Description of
Securities."
No Prior Public Market and Determination of Offering Price. Prior to this
offering, there has been no public market for our common stock or warrants. We
cannot predict to what extent a trading market for our securities will develop
or how liquid that market may become. The initial public offering price of the
common stock and the redeemable common stock purchase warrants and the exercise
price and terms of the warrants have been determined arbitrarily by negotiations
between us and the representative and may not be indicative of the prices that
will prevail in the trading market. See "Underwriting."
Potential Inability to be Listed on the American Stock Exchange. It is our
intention to have the common stock and warrants listed on the American Stock
Exchange (the "Amex"). However, if we are unable to have our securities listed
on Amex, trading, if any, in the common stock and warrants would be conducted in
the over-the-counter market on the so-called "pink sheets" or the NASD's
"Electronic Bulletin Board." Consequently, the liquidity of our securities could
be impaired, not only in the number of securities which could be bought and
sold, but also through delays in the timing of transactions, reduction in
security analysts' and the news media's coverage of us and lower prices for our
securities than might otherwise be attained.
Possible Volatility of Stock Price. The securities markets have from time
to time experienced significant price and volume fluctuations that may be
unrelated to the operating performance of particular companies. In addition, the
market prices of the common stock of many publicly traded software companies
have in the past been, and can in the future be expected to be, especially
volatile. Economic and other external factors, as well as period-to-period
fluctuations in our financial results, may have a significant impact on the
market prices of the common stock and the warrants.
Only One Independent Director. We currently have only one independent
director on our Board of Directors. Following completion of this offering, we
will be adding at least two additional independent directors to our Board of
Directors. See "Management -- Committees of the Board."
No Dividends. We do not anticipate paying any cash dividends in the
foreseeable future and intend to retain earnings, if any, to develop, operate
and expand our business. As part of our recapitalization, we will record a
dividend of $690,469 to holders of our Series B and C convertible preferred
stock. See "Dividend Policy" and "Description of Securities - Recapitalization."
Anti-Takeover Considerations. Certain provisions of our Amended and
Restated Certificate of Incorporation and Bylaws could make it more difficult
for a third party to acquire control of Digital Lava, even if a change in
control would be beneficial to stockholders. Our Amended and Restated
Certificate of Incorporation and Bylaws require advance notice of special
stockholder meetings and permit the Board of Directors to issue up to 5,000,000
shares of preferred stock without stockholder approval. These provisions could
also limit the price that investors may be willing to pay in the future for the
common stock. These provisions could also affect the voting rights of
stockholders and could result in further dilution. See "Description of
Securities."
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USE OF PROCEEDS
The net proceeds to Digital Lava from the sale of the securities offered
hereby, after deduction of underwriting discounts and other estimated expenses
relating to the offering, are estimated to be approximately $14,964,000, or
$17,328,660 if the over-allotment option is exercised in full. Digital Lava
intends to use the net proceeds as follows:
<TABLE>
<CAPTION>
Percent
Net of
Proceeds Total
----------- -----
<S> <C> <C>
Product development expenses (1) ................. $ 3,000,000 20.0%
Sales and marketing expenditures (2) ............. 5,000,000 33.4
Facilities and other capital expenditures (3) .... 400,000 2.7
Expansion of internal operations (4) ............. 300,000 2.0
Repayment of certain indebtedness (5) ............ 4,469,247 29.9
Working capital and general corporate purposes (6) 1,794,753 12.0
----------- -----
Total ............................ $14,964,000 100%
=========== =====
</TABLE>
- ----------
(1) Digital Lava intends to significantly increase its investment in product
development activities associated with the development of new products,
including new products to be used on the Internet, and the continued
enhancement of Digital Lava's existing products. Digital Lava also expects
to make expenditures for the licensing of technology, for the acquisition
of additional software products, and for the hiring of additional,
experienced, software engineers and development management. See
"Business--Strategy."
(2) Digital Lava intends to increase its sales and marketing efforts by
increasing the size of its sales and marketing staff, increasing
advertising and trade show related activities, expanding the level of
technical support offered to its dealers and customers and opening sales
offices in several locations. See "Business--Strategy."
(3) Digital Lava intends to lease additional space for sales and administrative
offices, and to invest in additional computers, networking systems,
furniture, fixtures, leasehold improvements, and related equipment. See
"Business--Facilities."
(4) Digital Lava intends to expand internal operations, including further
improvement of Digital Lava's management information systems and the
continued development of Digital Lava's Web site. See "Business--Strategy."
(5) Digital Lava intends to repay: (a) an aggregate principal amount of
$1,750,000 of promissory notes, originally issued from November 1997
through February 1998, bearing interest at 12% per annum, and a 10% success
fee due when paid; (b) an aggregate principal amount of $953,500 of
promissory notes, originally issued from April 1997 through July 1997, plus
accrued interest on a portion of such notes; (c) an aggregate principal
amount of $650,000 of promissory notes originally issued from March 1996
through March 1997, plus a success fee of $130,000; and (d) an aggregate
principal amount of $550,000 of promissory notes issued on December 1,
1998, bearing interest at 12% per annum, including a $300,000 promissory
note issued to Henry Stigler, father of James and Thomas Stigler. The
proceeds from all of such loans were used for research and development,
sales and marketing and working capital and general corporate expenses,
including rent, salaries and wages, consulting fees and other general
corporate purposes. No officers, directors or other related parties will
benefit from the
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proceeds allocated for payment of the notes. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Description of Securities -- Recapitalization."
(6) Digital Lava intends to use approximately $580,000 of the net proceeds to
pay consultants' fees and employee bonuses due upon completion of this
offering. In addition, net proceeds will be used for payment of rent,
accrued and on-going expenses, salaries and wages, consulting fees and
other general corporate purposes.
The foregoing represents Digital Lava's best estimate of the allocation of
the net proceeds of the offering, based upon the current status of its
operations, its current plans and current economic conditions. Proceeds may be
reapportioned among the categories listed above. The amount and timing of
expenditures will vary depending upon a number of factors, including progress of
Digital Lava's operations, technical advances, terms of collaborative
arrangements, and changes in competitive conditions. Digital Lava also expects,
when the opportunity arises, to acquire or invest in complementary businesses,
products or technologies. Digital Lava has no present understandings,
commitments or agreements with respect to any material acquisition or
investment.
Digital Lava currently anticipates that the net proceeds of this offering,
along with cash provided by operations, will enable it to meet its operational
and capital requirements for at least the 12 months following the date of this
prospectus. However, there can be no assurance that the net proceeds of this
offering and cash provided by operations will satisfy Digital Lava's
requirements for any particular period of time. To the extent capital resources
are insufficient to meet future capital requirements, Digital Lava will have to
raise additional funds to satisfy Digital Lava's requirements. There can be no
assurance that such funds will be available on favorable terms, or at all. See
"Risk Factors--Possible Need for Additional Financing."
Pending application of the net proceeds of the offering, Digital Lava
intends to invest such net proceeds in short-term, interest bearing securities,
such as bank certificates of deposit, United States government obligations or
money market instruments.
DIVIDEND POLICY
Digital Lava has never declared or paid any cash dividends on its capital
stock. Digital Lava presently intends to reinvest earnings to fund the
development and expansion of its business and, therefore, does not anticipate
paying cash dividends on its common stock in the foreseeable future. The
declaration of dividends in the future will be at the discretion of the Board of
Directors and will depend upon the earnings, capital requirements and financial
position of Digital Lava, general economic conditions and other pertinent
factors. As part of our recapitalization, we will record a dividend of $690,469
to holders of our Series B and C convertible preferred stock. See "Description
of Securities - Recapitalization."
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CAPITALIZATION
The following table sets forth the capitalization of Digital Lava as of
September 30, 1998, (a) on an actual basis, (b) on a pro forma basis (see
footnote 1 below) and (c) on a pro forma, as adjusted basis (see footnote 2
below). This table should be read in conjunction with Digital Lava's financial
statements and related notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
September 30, 1998
---------------------------------------------
Pro Forma As
Actual Pro Forma(1) Adjusted(1)(2)
------------ ------------ --------------
<S> <C> <C> <C>
Notes payable, net of debt discount $ 4,632,749 $ 3,269,095 $ --
============ ============ ============
Stockholders' deficit:
Convertible preferred stock, $.0001 par value; Series A, B, B-1 and C;
5,000,000 shares authorized; 98,349 shares issued
and outstanding, actual (liquidation preference of $1,626,965); none issued
and outstanding pro forma and pro forma as adjusted 9 -- --
Common stock, $.0001 par value; 35,000,000 shares
authorized; 131,524 issued and outstanding, actual; 1,996,092 shares
issued and outstanding, pro forma; 4,396,092 issued
and outstanding, pro forma as adjusted (3) 13 199 439
Additional paid-in capital 4,203,859 10,227,303 25,282,352
Accumulated deficit (10,229,518) (14,483,781) (14,971,714)
------------ ------------ ------------
Total stockholders' deficit and total capitalization $ (6,025,637) $ (4,256,279) $ 10,311,077
============ ============ ============
</TABLE>
(1) Gives effect to the following recapitalization: (a) conversion of the
Series A, B, B-1 and C convertible preferred stock; (b) the recording of a
dividend to the holders of the Series B and C convertible preferred stock
due to a change in conversion ratios; (c) the return and cancellation of
shares of common stock and Series A preferred stock held by certain
officers of Digital Lava; (d) the conversion of certain notes payable,
accrued interest thereon and warrants issued in connection with the notes
into common stock and the recording of an extraordinary loss on the
extinguishment of debt based upon the difference in the fair value of (1)
the notes, accrued interest and warrants converted and (2) the common stock
issued in exchange; and (e) the conversion of certain warrants exercisable
for shares of common stock into common stock. See "Description of
Securities -- Recapitalization."
(2) As adjusted to give effect to (a) the sale of common stock and warrants
offered hereby at an initial public offering price of $7.50 per share of
common stock and $.10 per warrant, (b) the repayment of outstanding notes
payable in the aggregate principal amount of $3,353,500 and accrued
interest and fees in the amount of $468,472 at September 30, 1998, (c) the
proceeds from the issuance of $550,000 in principal amount of bridge notes
and warrants issued in December 1998 and the repayment of the bridge notes
from the proceeds of the offering, and (d) the recognition of the
unamortized portion of the debt discount associated with the notes payable
and bridge notes as an expense.
(3) Does not include: (a) 139,622 shares of common stock reserved for issuance
upon the exercise of options granted under Digital Lava's 1996 Stock Option
Plan immediately prior to the consummation of this offering;(b) 110,378
shares of common stock reserved for issuance upon the exercise of options
that may be granted under Digital Lava's 1996 Stock Option Plan; and (c)
666,408 shares of common stock reserved for issuance upon the exercise of
warrants outstanding immediately prior to the consummation of this
offering. See "Management 1996 Incentive and Non-Qualified Stock Option
Plan" and "Description of Securities."
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<PAGE>
DILUTION
As of September 30, 1998, the pro forma net tangible book value (deficit)
of Digital Lava was $(4,545,391), or approximately $(2.28) per share of common
stock. Pro forma net tangible book value (deficit) per share represents the
amount of total tangible assets less total liabilities divided by the number of
shares of common stock issued and outstanding, after giving effect to the
recapitalization, including (a) the recording of an extraordinary loss on the
extinguishment of debt based upon the difference in the fair value of (1) the
notes, accrued interest and warrants converted and (2) the common stock issued
in exchange and (b) the recording of a dividend to the holders of the Series B
and C convertible preferred stock due to the change in the conversion ratios.
See "Description of Securities." After giving effect to (a) the sale of the
common stock and warrants offered hereby, after deducting underwriting discounts
and commissions and estimated offering expenses payable by Digital Lava, (b) the
repayment of outstanding notes payable in the principal amount of $3,353,500 and
accrued interest and fees in the amount of $468,472 at September 30, 1998, (c)
the proceeds from the issuance of an aggregate principal amount of $550,000 of
bridge notes and warrants issued in December 1998 and the repayment of such
bridge notes from the proceeds of this offering and (d) the recognition of the
unamortized portion of the debt discount associated with the notes payable as an
expense, the pro forma, as adjusted, net tangible book value of Digital Lava at
September 30, 1998 would have been $10,311,077, or approximately $2.35 per share
of common stock. This represents an immediate increase in net tangible book
value of $4.63 per share of common stock to existing stockholders and an
immediate dilution in net tangible book value of $5.15 per share of common
stock, or approximately 68.7%, to new investors. The following table illustrates
this per share dilution:
Assumed initial public offering price
per share of common stock.............................. $7.50
Pro forma net tangible book value (deficit)
prior to the offering.................................. $(2.28)
Increase per share attributable to the offering............ 4.63
------
Pro forma, as adjusted, net tangible book value per
share after the offering............................... 2.35
-----
Dilution per share to new investors (1).................... $5.15
=====
- ----------
(1) If the over-allotment option is exercised in full, the pro forma, as
adjusted, net tangible book value after the offering would have been
$12,675,737 or $2.67 per share of common stock, resulting in dilution to
new investors of $4.83 per share of common stock.
The following table summarizes, as of September 30, 1998, on a pro forma
basis to reflect the same adjustments described above, the number of shares of
common stock purchased from Digital Lava, the total consideration paid and the
average price per share paid by (a) existing stockholders of common stock, and
(b) new stockholders in the offering, assuming the sale of the common stock and
warrants offered hereby. The calculations are based upon total consideration
given by new investors and existing stockholders before any deduction of
underwriting discounts and offering expenses payable by Digital Lava.
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<PAGE>
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------------- ------------------------- Price
Number Percent Amount Percent Per Share
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1) ................... 1,996,092 45% $ 2,729,499 13% $1.37
New investors (2) ........................... 2,400,000 55% 18,000,000 87% $7.50
----------- ----------- ----------- -----------
Total ....................... 4,396,092 100% $20,729,499 100%
=========== =========== =========== ===========
</TABLE>
- ----------
(1) Gives effect to the following recapitalization: (a) conversion of the
Series A, B, B-1 and C convertible preferred stock into common stock; (b)
the return and cancellation of shares of common stock and Series A
preferred stock held by certain officers of Digital Lava; (c) the
conversion of certain notes payable, accrued interest thereon and warrants
issued in connection with the notes into common stock; and (d) the
conversion of certain warrants exercisable for shares of common stock into
common stock. See "Description of Securities -- Recapitalization."
(2) Attributes no value to the warrants.
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<PAGE>
SELECTED FINANCIAL INFORMATION
The following table presents selected financial data for Digital Lava. The
historical selected financial data as of December 31,1997 and for the years
ended December 31, 1996 and 1997 are derived from and should be read in
conjunction with the audited financial statements of Digital Lava included
elsewhere in the prospectus. The historical selected financial data of Digital
Lava as of December 31, 1996 is derived from audited financial statements of
Digital Lava not included herein. The historical selected financial data as of
September 30, 1998 and for nine months ended September 30, 1997 and 1998 are
derived from and should be read in conjunction with the unaudited financial
statements of Digital Lava included elsewhere in the prospectus. In the opinion
of management, the unaudited financial statements include all material
adjustments (consisting of only normal, recurring adjustments) necessary for a
fair presentation of the financial position and results of operations for the
period. Our independent accountants have included an explanatory paragraph
stating that our financial statements have been prepared assuming that we will
continue as a going concern and that we have suffered recurring losses from
operations and have a working capital deficiency which cause substantial doubt
about our ability to do so. The financial statements do not include any
adjustments that might result from the outcome of this uncetainty. The data
presented below should be read in conjunction with "Managements Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and accompanying notes thereto appearing elsewhere in the prospectus.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
--------------------------------------- ----------------------------------------
December 31, 1996 December 31, 1997 September 30, 1997 September 30, 1998
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Software licenses ...................... $ -- $ 273,989 $ 131,804 $ 832,090
Consulting and services ................ -- 290,583 244,664 315,542
----------- ----------- ----------- -----------
Total revenues ...................... -- 564,572 376,468 1,147,632
----------- ----------- ----------- -----------
Cost of revenues:
Software licenses ...................... -- 1,968 1,059 7,708
Consulting and services ................ -- 121,008 100,561 236,631
----------- ----------- ----------- -----------
Total cost of revenues .............. -- 122,976 101,620 244,339
----------- ----------- ----------- -----------
Gross profit ............................... -- 441,596 274,848 903,293
----------- ----------- ----------- -----------
Operating costs and expenses:
Selling, general and administrative .... 1,522,757 3,316,961 2,337,115 2,773,240
Research and development ............... 421,087 445,162 322,385 334,142
----------- ----------- ----------- -----------
Total operating costs and expenses .. 1,943,844 3,762,123 2,659,500 3,107,382
----------- ----------- ----------- -----------
Loss from operations ....................... (1,943,844) (3,320,527) (2,384,652) (2,204,089)
Interest expense ........................... 450,563 924,842 762,517 1,057,131
Net loss ................................... $(2,384,657) $(4,245,369) $(3,147,169) $(3,261,220)
=========== =========== =========== ===========
Basic and diluted loss per share (1) ....... $ (93.00) $ (31.14) $ (23.75) (22.05)
=========== =========== =========== ===========
Weighted average common shares used in
basic and diluted loss per share (1) ... 25,641 136,353 132,492 147,933
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
------------------------------------
Balance Sheet Data: December 31, 1996 December 31, 1997 Actual Pro Forma(2)
----------------- ----------------- ----------- ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents .......... $ 5,185 $ 173,262 $ 11,786 $ 11,786
Working capital (deficit) .......... (1,022,306) (3,713,347) (6,117,681) (4,348,323)
Total assets ....................... 100,598 525,678 603,366 603,366
Total liabilities .................. 1,034,180 4,142,923 6,629,003 4,859,645
Total stockholders' deficit ........ (933,582) (3,617,245) (6,025,637) (4,256,279)
</TABLE>
- ----------
(1) For information concerning the computation of net loss per share, see note
2 of notes to financial statements.
(2) Gives effect to the following recapitalization: (a) conversion of the
Series A, B, B-1 and C convertible preferred stock; (b) the recording of a
dividend to the holders of the Series B and C convertible preferred stock
due to a change in conversion ratios; (c) the return and cancellation of
shares of common stock and Series A preferred stock held by certain
officers of Digital Lava; (d) the conversion of certain notes payable,
accrued interest thereon and warrants issued in connection with the notes
into common stock and the recording of an extraordinary loss on the
extinguishment of debt based upon the difference in the fair value of (1)
the notes, accrued interest and warrants converted and (2) the common stock
issued in exchange; and (e) the conversion of certain warrants exercisable
for shares of common stock into common stock. See "Description of
Securities -- Recapitalization."
-23-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of Digital Lava should be read in conjunction with Digital
Lava's financial statements and notes thereto and the other financial
information included elsewhere in this prospectus. In addition to historical
information, this Management Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this prospectus contain forward-looking
information that involve risks and uncertainties. Digital Lava's actual results
could differ materially from those anticipated by such forward-looking
information as a result of certain factors, including but not limited to, those
set forth under "Risk Factors" and elsewhere in this prospectus.
Overview
Digital Lava Inc. originally operated as LAVA, L.L.C., a New Jersey limited
liability company that was formed in July 1995. In November 1996, LAVA, L.L.C.
merged into Digital Lava Inc., a Delaware corporation. Pursuant to such
transaction, the ownership interests in LAVA, L.L.C. were exchanged for shares
of Series A, Series B, Series B-1 and Series C convertible preferred stock of
Digital Lava Inc.
Digital Lava invested significant resources in sales, marketing,
development and other operating activities during the nine-month period ended
September 30,1998. Digital Lava believes that its success depends largely on
building superior technology and quality into its products, extending its
technological lead on the competition and developing brand recognition early in
a product's life cycle. Accordingly, Digital Lava expects to continue spending
heavily on these activities in the near future. Despite these heavy investments
in marketing and product development, the historical growth in software license
fees may not be sustainable in the future. In light of Digital Lava's limited
operating history and rapid improvements in technology and marketing of its
products, Digital Lava believes that period-to-period comparisons of its
revenues and operating results, including its gross profit and operating
expenses as a percentage of total net revenues, are not necessarily meaningful
and should not be relied upon as indications of future performance.
Digital Lava has incurred significant net losses and negative cash flows
from operations since inception, and as of September 30, 1998, had an
accumulated deficit of $10,229,518. Digital Lava intends to continue to invest
heavily in technology and infrastructure development, and marketing and
promotion. As a result, Digital Lava believes that it will continue to incur
operating losses and negative cash flows from operations for the foreseeable
future and that the rate at which such losses will be incurred may increase from
current levels. There can be no assurance that Digital Lava will be able to
achieve or sustain revenue growth, profitability, or positive cash flow on
either a quarterly or annual basis.
Results of Operations
Comparison of Nine Months Ended September 30, 1998 to Nine Months Ended
September 30, 1997
Revenues
Revenues increased to $1,147,632 for the nine months ended September 30,
1998 from $376,468 for the nine months ended September 30, 1997. The increase of
$771,164 or 204.8% was primarily due to an increase in sales of VideoVisor
products to new customers. Software license revenues accounted for approximately
72.5% and 35.0% of revenues for the nine months ended September 30, 1998 and
1997, respectively. Consulting and services revenues accounted for approximately
27.5% and 65.0% of revenues for the nine months ended September 30, 1998 and
1997, respectively. Digital Lava's largest customer accounted for approximately
58.6% and 64.8% of revenues for the nine months ended September 30, 1998 and
1997, respectively. Digital Lava anticipates that software license revenue will
continue to account for
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<PAGE>
a larger share of revenues for the foreseeable future.
Cost of Revenues
Cost of revenues consist primarily of the cost of materials, freight and
applicable labor incurred for the delivery of the product or service. Costs of
revenues increased to $244,339, or 21.2% of revenues, for the nine months ended
September 30, 1998 from $101,620, or 27.0% of revenues, for the nine months
ended September 30, 1997. This increase was primarily due to the increase in
subcontractor cost incurred in the first nine months of 1998. Digital Lava
expects its cost of revenue to continue to increase in dollar amount while
declining as a percentage of revenue as Digital Lava expands its customer base.
Operating Costs and Expenses
Selling, General and Administrative Expense. Selling, general and
administrative expenses consist primarily of salaries, taxes and benefits and
related costs for general corporate functions, including executive management,
finance, accounting, facilities, legal, fees for professional services and
depreciation and amortization. Selling, general and administrative increased to
$2,773,240, or 241.6% of revenues, for the nine months ended September 30, 1998,
from $2,337,115, or 620.8% of revenues, for the nine months ended September 30,
1997. The increase was primarily due to increases in public relations efforts,
trade shows, additional personnel and professional fees required to build an
infrastructure to support Digital Lava's products and anticipated growth. In
addition, selling, general and administrative expenses for the nine months ended
September 30, 1998 and September 30, 1997 included non-cash compensation
expenses of $396,381 and $789,055, respectively, which represent the granting of
stock options and warrants to non-employees in exchange for services rendered to
Digital Lava. Digital Lava expects that it will incur additional selling,
general and administrative expenses in absolute dollars as Digital Lava
continues to hire personnel and incurs expense related to the further growth of
the business and its operation as a public company.
Research and Development Expenses. Research and development expenses
consist primarily of expenditures related to technology and software development
expenses. Research and development expenses increased to $334,142, or 29.1% of
revenues, for the nine months ended September 30, 1998 from $322,385, or 85.6%
of revenues, for the nine months ended September 30, 1997. The dollar increase
was primarily due to the increased number of developers needed to accelerate the
release of products in 1998 and to expand research efforts in the area of Web
enabled applications. Research and development expenses decreased as a
percentage of revenue because of the growth level in revenues relative to the
growth in the cost structure for research and development. Digital Lava believes
that significant investments in technology and content development are required
to maintain a technological lead and remain competitive and, therefore, expects
that its research and development expenses will continue to increase in absolute
dollars for the foreseeable future; however, research and development expenses
are presently anticipated to continue to decline as a percentage of revenues.
Interest Expense. Interest expense includes interest income from Digital
Lava's cash balances, interest expense related to Digital Lava's financing
obligations and the amortization of debt discount. Interest expense increased to
$1,057,131 for the nine months ended September 30, 1998 from $762,517 for the
nine months ended September 30, 1997. The increase was primarily due to the
amount of notes payable issued by Digital Lava in the nine month period ended
September 30, 1998. Interest expense for the nine months ended September 30,
1998 and September 30, 1997 included amortization of debt discount and issuance
costs related to warrants issued in connection with notes payable of $544,905
and $617,608, respectively.
Net Loss. For the nine months ended September 30, 1998, Digital Lava's net
loss totaled $3,261,220 as
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<PAGE>
compared to $3,147,169 for the nine months ended September 30, 1997.
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996.
Revenues
Revenues increased to $564,572 for the year ended December 31, 1997 from
zero for the year ended December 31, 1996. The increase in revenues were
primarily due to the realization of the impact of sales of vPrism and VideoVisor
which were released in 1997, and associated services revenue. Software license
revenues accounted for approximately 48.5% of revenues for the year ended
December 31, 1997 while consulting and services revenues accounted for
approximately 51.5% of revenues for the same period. Digital Lava's largest
customer accounted for approximately 43.1% of revenues for the year ended
December 31, 1997. Digital Lava anticipates that software license revenue will
account for a larger share of revenues in the future.
Cost of Revenues
Costs of revenues for the year ended December 31, 1997 were $122,976, or
21.8% of revenues. There were no cost of sales for the year ended December 31,
1996. This increase was primarily due to the increase in material and labor cost
incurred in delivering the products and services. Digital Lava expects its cost
of revenue to continue to increase in dollar amount while declining as a
percentage of revenue as Digital Lava expands its customer base.
Operating Costs and Expenses
Selling, General and Administrative Expense. Selling, general and
administrative expenses were $3,316,961, or 587.5% of revenues, and $1,522,757
for the years ended December 31, 1997 and 1996, respectively. The increase was
primarily due to increases in trade shows, additional personnel and legal and
professional fees required to build an infrastructure to support Digital Lava's
products and anticipated growth. In addition, selling, general and
administrative expenses for the years ended December 31, 1997 and 1996 included
non-cash compensation expenses of $866,589 and $261,996, respectively, which
represent the granting of stock options and warrants to non-employees in
exchange for services rendered to Digital Lava.
Research and Development Expenses. Research and development expenses were
$445,162, or 78.9% of revenues, and $421,087 for the years ended December 31,
1997 and 1996, respectively. The increase was primarily due to the increased
number of developers and professional services needed to release vPrism and
VideoVisor in 1997.
Interest Expense. Interest expense increased to $924,842 for the year ended
December 31, 1997 from $450,563 for the year ended December 31, 1996. The
increase is due to the amount of notes payable issued by Digital Lava in 1997.
Interest expense for the years ended December 31, 1997 and 1996 included
amortization of debt discount and issuance costs related to warrants issued in
connection with notes payable of $716,433 and $396,368, respectively.
Net Loss. For the year ended December 31, 1997, Digital Lava's net loss
totaled $4,245,369 as compared to $2,384,657 for the year ended December 31,
1996.
Net Operating Loss Carryforwards. At December 31, 1997, Digital Lava had
available net operating loss carryforwards of approximately $2,800,000 to offset
future taxable income for federal and state tax purposes. The utilization of the
loss carryforwards to reduce future income taxes will depend upon Digital
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<PAGE>
Lava's ability to generate sufficient taxable income prior to the expiration of
the net operating loss carryforwards. The federal and state carryforwards expire
beginning in the years 2011 and 2005, respectively. However, the Internal
Revenue Code of 1986, as amended, limits the maximum annual use of net operating
loss and tax credit carryforwards in certain situations where changes occur in
the stock ownership of a corporation. As a result of this offering, a change in
ownership is likely to occur which would substantially restrict Digital Lava's
use of the net operating loss carryforwards for federal and state income tax
purposes. See note 11 of notes to financial statements.
Liquidity and Capital Resources
Since its inception, Digital Lava has financed its operations primarily
through the private placement of its convertible preferred stock, common stock
and convertible notes. As of September 30, 1998, Digital Lava had $11,786 in
cash.
Net cash used in operating activities increased to $2,195,803 for the year
ended December 31, 1997 from $1,664,962 for the year ended December 31, 1996
resulting primarily from increasing net losses and decreased to $898,372 for the
nine months ended September 30, 1998 from $1,583,410 for the nine months ended
September 30, 1997 primarily due to increasing revenues.
Cash flows used in investing activities decreased to $55,620 for the year
ended December 31, 1997 from $105,519 for December 31, 1996 resulting primarily
from the reduced investment in computers and related equipment and increased
from $54,185 for the nine months ended September 30, 1997 to $313,104 for the
nine months ended September 30, 1998 primarily due to costs incurred in
connection with this offering.
Net cash provided by financing activities increased to $2,419,500 for 1997
from $1,769,680 for 1996. The increase was due to the increase in the issuance
of equity and notes payable. Net cash provided by financing activities decreased
to $1,050,000 for the nine months ended September 30, 1998 from $1,719,500 for
the nine months ended September 30, 1997. The decrease was due primarily to a
reduction in proceeds from notes payable received in the nine months ended
September 30, 1998.
Digital Lava's capital requirements depend on numerous factors, including
market acceptance of Digital Lava's products and services, the amount of
resources Digital Lava devotes to investments in its products, the resources
Digital Lava devotes to marketing and selling its services and its brand
promotions and other factors. Digital Lava has experienced a substantial
increase in its capital expenditures since its inception consistent with the
growth in Digital Lava's operations and staffing, and anticipates that this will
continue for the foreseeable future. Additionally, Digital Lava will continue to
evaluate possible investments in businesses, products and technologies, and
plans to expand its sales and marketing programs and conduct more aggressive
brand promotions. Digital Lava currently anticipates that the net proceeds of
the offering and available funds will be sufficient to meet its anticipated
needs for working capital and capital expenditures for at least the next 12
months.
If the net proceeds of the offering, together with Digital Lava's
internally generated cash flow, are not sufficient to satisfy its financing
needs, Digital Lava will be required to seek additional funding through bank
borrowings, additional public or private sales of its securities, including
equity securities, or through other arrangements. Digital Lava currently has no
credit facility or other committed sources of capital, however it intends to
secure a credit facility after the completion of the offering. There can be no
assurance that additional funds, if required, will be available to Digital Lava
on favorable terms, if at all. See "Use of Proceeds" and "Risk Factors --
Possible Need for Additional Financing".
Digital Lava recently raised $550,000 of capital through the issuance of
promissory notes and warrants to help it meet its cash requirements until it
receives the net proceeds from this offering. Such notes will be
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<PAGE>
paid at the closing of this offering. In connection with the issuance of such
notes, Digital Lava issued warrants to purchase an aggregate of 275,000 shares
of common stock at 130% of the initial public offering price per share.
Digital Lava granted a security interest in all of its assets to investors
participating in the bridge financing completed in February 1998 as collateral
to secure Digital Lava's obligations to such investors under the $1,750,000 of
promissory notes issued in connection with such bridge financing. In connection
with the recapitalization, Digital Lava has also granted a security interest in
all of its assets to holders of an aggregate principal amount of $187,500 of
promissory notes who agreed to extend the term of such notes to June 30, 1999.
See "Description of Securities -- Recapitalization."
Recently Issued Accounting Standards
Effective January 1, 1998, Digital Lava adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income, defined as all changes in equity from non-owner
sources. Adoption of SFAS No. 130 did not have a material effect on Digital
Lava's financial position or results of operations.
Effective January 1, 1998, Digital Lava adopted the provisions of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for the way public enterprises report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to stockholders. Adoption of SFAS No. 131 did not have
a material effect on Digital Lava's financial position or results of operations.
Effective January 1, 1998, Digital Lava adopted American Institute of
Certified Public Accountants Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"). SOP 97-2 generally requires revenue earned on
software arrangements involving multiple elements such as software products,
upgrades, enhancements, post-contract customer support, installation and
training to be allocated to each element based on the relative fair values of
the elements. The adoption of SOP 97-2 did not have an effect on Digital Lava's
financial position or results of operations.
Year 2000 Risk
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results. We believe that our products and
internal systems are currently year 2000 compliant. We have confirmed our year
2000 compliance by obtaining representations by third party vendors of their
products' year 2000 compliance, as well as specific testing of our products. The
failure of products or systems maintained by third parties or our products and
systems to be year 2000 compliant could cause us to incur significant expenses
to remedy any problems, or seriously damage our business. We have not incurred
significant costs to date complying with year 2000 requirements, and we do not
believe that we will incur significant costs for such purposes in the
foreseeable future. See "Risk Factors --Year 2000 Risk."
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<PAGE>
BUSINESS
Overview
Digital Lava is a provider of video publishing software products and
services for corporate training, communications, distance learning, research and
other applications. Digital Lava's video publishing technology provides
companies, educational institutions and government agencies with a way to
re-purpose, publish and deploy on-demand video content and information to
desktop computer users. Digital Lava's video publishing product line includes
vPrism(TM) and VideoVisor(TM) software. vPrism allows users to organize and
manage video content, link video to other types of files and publish video with
all of the linked information as VideoCapsule(TM) files on CD-ROM or DVD, or
stream the interactive video information over intranets or the Internet.
VideoVisor is a desktop productivity tool that allows end-users to access
VideoCapsule files and navigate, rearrange, annotate, subtitle text and
transcripts, and view synchronized video, notes and links. Digital Lava's
VideoVisor software won the "Best New Streaming Product" award at the Desktop
Video Communications (DVC) 1998 Spring Conference in Santa Clara, California, a
"Networked Multimedia People's Choice Award" at the 1998 DVC Fall Conference in
Boston and a "NewMedia Invision 98 award" in a competition sponsored by NewMedia
magazine. Digital Lava also provides turnkey, or complete, video encoding,
publishing and Web hosting services.
Streaming technology allows an Internet or intranet user to access
information in a file before the file is completely downloaded. As a result,
large multimedia files can be heard or seen almost immediately, even with slower
connections. Digital Lava believes that the continuing emergence of rich
multimedia capabilities, such as streaming, presents a significant new market
opportunity for software applications that enhance the effectiveness and
productivity of professionals and consumers who rely on video information.
Digital Lava also believes that as the Internet continues to evolve as a mass
communications medium and as corporations, educational institutions and
government agencies seek to eliminate the high cost and time requirements of
travel through the increased use of video, an increasing amount of video
content, including business, distance learning (instruction where the student is
removed from the instructor) and consumer programs, will be delivered over the
Internet. RealNetworks, one of Digital Lava's strategic partners and a leader in
the streaming media market, has already registered over 35 million users of its
RealPlayer Internet streaming software. Digital Lava believes that its video
publishing software technology is essential to this evolution because it
provides a more compelling and productive user experience than broadcast
television and videotape, allowing the Internet to effectively compete with such
traditional video delivery methods.
Digital Lava's customers include large corporations and business
enterprises, such as Shell Chemicals Company, American General Life Insurance
Company, Ardent Software, Inc., ASI Entertainment, Inc., Bellcore, Diedrich
Coffee, Inc. and Rand Corporation. Our customers also include schools,
universities and research institutions such as Northwestern University, Los
Angeles Unified School District, The Smithsonian Institute, and Educational
Testing Service.
Industry Background
Digital Lava believes the demand for its desktop video publishing solutions
in the corporate training, communications and distance learning markets will be
fueled by the convergence of trends and technologies that enable computer-based
and Internet-based video training and communications solutions to be deployed
increasingly as substitutes for videotapes, instructor-led training, live
meetings and other traditional forms of communications and training. These
trends and enabling technologies include the proliferation of multimedia-capable
computers and networking solutions throughout all levels of organizations,
advances in PC processing power, high speed communications capabilities, the
emergence of the Internet and corporate intranets as platforms for a wide
variety of business applications, and the continued growth of streaming media
applications.
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Streaming technology enables the transmission and playback of continuous
"streams" of multimedia content, such as audio and video, over a network. The
introduction of streaming media platforms from companies such as RealNetworks,
Microsoft and Apple Computer are now providing software developers the
opportunity to efficiently deliver a new generation of rich media content and
applications over the Internet and private intranets. On the Internet, many
businesses and content providers now offer audio, video and other multimedia
content as a means of enriching and differentiating their companies.
RealNetworks estimates that more than 145,000 hours per week of live audio and
video content are broadcast over the Internet using their proprietary streaming
technology, with a substantially greater amount of recorded media already
available on-demand.
Digital Lava believes that the use of streaming media for business and
enterprise applications is growing. Lotus Development Corporation, makers of
Lotus Notes, the market leader in collaborative enterprise software, recently
announced their plan to integrate RealNetworks' RealPlayer with Lotus Notes
client software, enabling 25 million Lotus Notes users worldwide to view and
hear streaming media content at their desktops. Additionally, Netscape
Communications Corporation recently announced that it plans to bundle and
distribute RealNetworks' RealPlayer software as an integral part of its Netscape
Communicator browser software, providing Netscape users with access to streaming
media content without separately having to download the RealPlayer software.
The primary advantages of desktop video distance learning, training and
communications applications over traditional forms include performance
improvements and potential cost savings in the form of reduced instructor
salaries, compressed training times and reduced travel costs. Additional
benefits could come from improved retention, consistent content quality and the
ability to deliver content on CD-ROM or through an Intranet or the Internet.
Internet-based applications offer additional advantages over other forms of
video distribution. Video content can be easily deployed and updated without the
need to create and redistribute CD-ROMs. The ease and speed of deployment
associated with Internet-based deployment allows for "just-in-time" delivery of
video information, broadens the potential use of published video content within
the enterprise and offers a cost- and time-effective method to accumulate and
retain enterprise knowledge. Because of these benefits, Digital Lava believes
that many organizations will target network-based video deployment as an
important corporate intranet application.
The overall market for business and training software is expected to grow
over the next several years. According to International Data Corporation, a
leading information technology consulting company, the worldwide business
software applications market is expected to double over the next five years,
with license revenues from business software applications growing from $50
billion in 1997 to over $100 billion in 2002.
In the United States, corporations are making substantial investments to
train their employees. Video, in the form of videotapes, is already widely used
within corporations to record and distribute training and communications
content. A 1997 U.S. corporate training study conducted by Training Magazine
found that 74 percent of the respondents were using videotapes for training. The
same survey also found that U.S. companies budgeted an estimated $58.6 billion
for employer-provided training in 1997. Digital Lava believes that training on
new information technologies within corporations is growing rapidly worldwide.
According to a recent study published by International Data Corporation's
Information Technologies Training and Education Services research program, the
global information technologies training and education market is expected to
surpass $28.3 billion by 2002.
Although there can be no assurance that the increased use of videotapes in
training will result in sales of its products, Digital Lava believes that its
video publishing technology can leverage the growing demand for business, video
training, communications and distance learning applications. Digital Lava's
software and services provide a rapid, flexible, and low-cost alternative to
videotapes, instructor-led training, live meetings, and other traditional forms
of communications and training, providing a more compelling and
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productive user experience.
Digital Lava's Solution
Today, most desktop video applications provide the user with a passive,
linear experience, similar to viewing a television program or videotape. Digital
Lava's video publishing software provides a fast and easy way for enterprises to
transform video information into highly interactive multimedia programs, and to
deliver them at a fraction of the cost of live meetings or of developing custom
multimedia or computer-based-training programs. Digital Lava's software
products, vPrism and VideoVisor, are designed to be easily integrated into a
customer's personal computer system.
Digital Lava's software technology provides companies and enterprises a
means to rapidly re-purpose, publish and deploy interactive video content for
corporate training, communications and distance learning applications. With
vPrism software, video content publishers can rapidly develop and deploy video
programs that transform the passive, linear viewing experience into an engaging
and interactive multimedia application that can be easily deployed to desktop
computer users across an enterprise. Any video, including corporate training
videos and videos of classroom lectures, can be linked with digitally formatted
files or programs, including Web pages, documents, images and transcripts. With
VideoVisor software, users can productively access the published video content
to view, navigate and manipulate video integrated with a variety of other types
of related information such as text, graphics, animation and image. Digital Lava
supports an open architecture allowing for easy integration of digital video and
audio content with other types of information that are typically stored on the
Internet, a corporate intranet, or locally on the user's computer or server.
Digital Lava believes that the markets for its video publishing software
and services will expand as the enabling technologies, like streaming media and
the Internet, continue to mature. Digital Lava's products and services can
provide distance learning, training and communications solutions in a variety of
vertical industries. For example, universities and local school districts can
leverage published interactive video to deliver stored instructional content to
students at their desks. Hospitals can publish and deploy medical video training
to enable teams of doctors in different locations to diagnose and treat
patients. Sales professionals can deliver video-enabled presentations to
prospective customers and train on new products. Manufacturing companies can
achieve efficiencies by offering factory floor workers just-in-time video
training. Other video applications include sales and reseller training for new
product launches, soft skills training, new employee orientation training,
information technology and systems training, and both internal and external
corporate communications.
Strategy
Digital Lava's objective is to be the leading video publishing software
technology company, providing software and services that enable the delivery of
a broad range of multimedia content over the Internet and intranets. To achieve
this objective, Digital Lava's strategy includes the following key elements:
Extend Technology Leadership. Having received three different product
awards in 1998, Digital Lava intends to continue to maintain its reputation for
quality and innovation by expanding the features and breadth of its publishing
and desktop video product offerings. Digital Lava introduced a new version of
VideoVisor, called "VideoVisor Professional(TM)," in November 1998. Digital Lava
believes that the fundamental architecture of its products can be expanded to
support additional features and functions like the synchronized deployment of
additional data types, enhanced desktop video manipulation, and Web-based video
collaboration. As part of this strategy, Digital Lava has devoted and will
continue to commit significant resources to the development of technologies that
increase the ease-of-use and functionality of its video publishing solutions.
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Build Brand Recognition and Strengthen Sales and Marketing Efforts. Digital
Lava believes that its technology leadership, market position and brand name are
significant assets that Digital Lava can leverage to maintain and increase its
market share and diversify its revenue base. Digital Lava intends to capitalize
on the growth in demand for video publishing software by continuing to develop,
market and support industry-leading products and services. Digital Lava believes
that the introduction of such products and services will expand Digital Lava's
user base and build greater brand recognition. Digital Lava also plans to
strengthen its marketing, sales and customer support efforts as the size of its
market opportunity and customer base increases. Digital Lava will continue to
target large corporations and major universities and educational institutions as
customers.
Pursue Strategic Relationships. Digital Lava has independent software
vendor, licensing, development, distribution and reseller relationships with a
number of software industry leaders. Among other relationships, Digital Lava is
an independent software vendor for the Microsoft Corporation's NetShow products
and licenses Microsoft's Internet Explorer Administration Kit to integrate
Microsoft's Web browser into VideoVisor. RealNetworks has developed custom
software to integrate their RealPlayer intranet and Internet software into
VideoVisor, and Digital Lava has a licensing and distribution agreement with
RealNetworks to distribute the integrated, bundled products to end-user clients.
Digital Lava intends to continue to establish strategic relationships with
industry-leading hardware, software and content companies. See "--Strategic
Relationships".
Enhance and Expand Internal Operations. Digital Lava intends to invest
substantially in operations and systems in anticipation of future growth. This
effort includes improving its management information systems, opening sales
offices in multiple locations, integrating sales activities, investing in
customer service, expanding its public relations, advertising, and trade show
activities, and developing on-line training and support programs which will help
support an outside network of resellers and distributors.
Expand Internationally. Digital Lava intends to expand its international
customer base over the next several years by opening international sales
offices, hiring additional employees, developing international distribution and
sales networks, enhancing its software products by adding localized versions and
multi-language support and increasing its expenditures for marketing.
Products and Services
Digital Lava develops and sells software products and services that enable
the delivery of on-demand interactive video and multi-media content over the
Internet, intranets, local area networks, and on CD-ROM and DVD media. Digital
Lava's software products, VideoVisor and vPrism, provide an open framework in
which video, other desktop applications and data can link, collaborate and
seamlessly integrate on the desktop. Digital Lava also provides various other
services designed to promote widespread usage of Digital Lava's technology.
Digital Lava spent $421,087 and $445,162 on research and development activities
in 1996 and 1997, respectively.
vPrism. vPrism is easy-to-use software that assists in assimilating and
managing digital video and other information from diverse sources, organizes its
content, creates links to other important data, and then rapidly publishes the
information in a VideoCapsule file. VideoCapsules may be distributed on CD-ROM
and DVD media and streamed over LANs, WANs, intranets and the Internet, using
video server solutions provided by RealNetworks, Silicon Graphics, InfoValue
Computing, Starlight Networks, FVC.COM, and Microsoft. Digital Lava provides
these tools for commercial video producers, electronic title companies, training
companies, video content distributors, universities and large corporations.
vPrism also provides a unique and powerful solution for researchers who use
video to collect video data. Primary researchers and market researchers, for
example, use vPrism for video archiving, video event logging, analysis and
coding.
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vPrism provides the video publisher with several key benefits. First, the
system is easy-to-use and does not require proficiency in the use of a
programming, scripting or authoring language. Second, vPrism allows the
publisher to create powerful interactive video programs very rapidly. Depending
on the length of video, a completely interactive, indexed and linked
VideoCapsule program can be produced in a few hours. This is significantly
faster than traditional computer-based-training authoring tools. Third, as a
result of the rapid publishing time, video-based content can be published at a
much lower cost than with traditional computer based training authoring tools.
Prior to December 1998, vPrism was commercially available only on the Apple
Macintosh OS operating system. On December 28, 1998, Digital Lava announced the
availability of a Microsoft Windows95 version of vPrism. vPrism is designed to
manage hundreds of hours of digital video content and is available as a
standalone system or in a workgroup configuration.
VideoVisor. VideoVisor is a personal computer application that is designed
to make users more productive when accessing video and VideoCapsule-formatted
information. VideoVisor, when used in conjunction with VideoCapsules, makes
desktop video an interactive information resource, allowing users to manage and
manipulate video data much like word processors manipulate textual data. With
VideoVisor, end-users can manage, navigate, manipulate and integrate video with
other information on their desktop computers. Users may search and annotate
video, re-arrange and organize video content, subtitle text and transcripts,
access notes, and link to other files, Web sites, images and applications.
VideoVisor is easy-to-use and aimed at users who require instant access to video
and related information and the ability to manipulate and save that information
on their desktop computer.
VideoVisor provides users with several key benefits. First, the software
results in increased user productivity, saving time and enhancing the quality of
the end-user's experience. Second, VideoVisor provides corporations and large
organizations with a powerful, low-cost and effective software platform for
deploying video communications, training, distance learning and other on-demand
video-rich applications. Third, VideoVisor is a powerful external communications
tool that can be used for reseller and channel training, advertising, marketing,
education and other 'extranet' applications.
Digital Lava's VideoVisor software won the "Best New Streaming Product"
award at the Desktop Video Communications (DVC) 1998 Spring Conference in Santa
Clara, California and a "Networked Multimedia People's Choice Award" at the 1998
DVC Fall Conference in Boston and a "NewMedia Invision 98 award" in a
competition sponsored by NewMedia magazine.
VideoVisor is available for the Windows95 and Windows-NT platforms.
VideoVisor supports standard digital video formats and VideoCapsule files
published in a variety of formats, including MPEG-1, MPEG- 2, MPEG-4, QuickTime,
RealVideo, ASF (Netshow), AVI and MOV. VideoVisor conforms to Microsoft Office,
Active-X and DirectShow standards. Digital Lava introduced a new version of the
product, VideoVisor Professional, in November 1998. VideoVisor Professional
replaces the previous version of VideoVisor and contains several new features.
It is being sold at the same price, terms and conditions as the earlier version.
Consulting and Programming Services. Digital Lava provides a range of
consulting and programming services that principally relate to the creation and
maintenance of video publishing content and applications based on Digital Lava's
technology. Commonly provided services include custom programming development,
when consistent with strategic product and business objectives, application
consulting and training.
Video Publishing and Encoding Services. Digital Lava provides turnkey video
publishing and video encoding services to support its customers in the
deployment of Digital Lava's software products. Services
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are often bundled with software license proposals to provide a complete solution
to prospective clients. Digital Lava also offers turnkey video hosting services
to corporate and other customers pursuant to a Web hosting service agreement
with VStream, Inc.
Customer Service and Support
Digital Lava currently provides free customer support, including defect
correction, telephone and Web-based technical support, for companies and
organizations that license its VideoVisor software. Digital Lava does intend to
charge customers for significant version upgrades of its VideoVisor software.
Customers that license vPrism currently receive 12 months of free post sales
support. After one year, customers may elect to sign an extended maintenance
contract.
Digital Lava maintains a technical support hotline to answer inquiries and
provides technical information on the Web site. Digital Lava's support staff
also responds to e-mail inquiries. Digital Lava tracks support requests and
product defects. Digital Lava uses customer feedback as a source of ideas for
product improvements and enhancements.
Strategic Relationships
Digital Lava has independent software vendor, licensing, development,
distribution, and reseller relationships with a number of software industry
leaders. Digital Lava is a NetShow independent software vendor. NetShow is
Microsoft's proprietary software to view on-demand streaming media over the
Internet and intranets. As a NetShow independent software vendor, Digital Lava
has the opportunity to work with Microsoft to (a) raise Digital Lava's
visibility through Microsoft press releases and designation as a NetShow
independent software vendor on Microsoft's NetShow Web site, (b) provide Digital
Lava with technical assistance with regard to NetShow, (c) assist Digital Lava
in its marketing efforts, including invitations to NetShow demonstrations at
conferences and tradeshow exhibits and (d) gain access to mailing lists of
Microsoft registered product users. Digital Lava was selected to participate in
the NetShow JumpStart CD demonstration disc. Digital Lava also licenses
Microsoft's Internet Explorer Administration Kit pursuant to a royalty-free
license and distribution agreement. Such agreement permits Digital Lava to
customize Microsoft's Internet Explorer Web browser for integration with
VideoVisor and distribute the bundled products to Digital Lava's end-users. The
bundled products allow end-users to view "streamed" video content synchronized
with other Web browser content on an intranet or the Internet.
Digital Lava has entered into a consulting and development agreement with
RealNetworks, Inc., pursuant to which RealNetworks has developed custom software
to allow Digital Lava to integrate RealNetworks' RealPlayer software, used for
viewing on-demand streaming media over the Internet and intranets, with
VideoVisor. Under a licensing and distribution agreement with RealNetworks,
Digital Lava is a RealMedia Architecture Partner and licenses RealNetworks'
RealPlayer client software for integration with VideoVisor, distributes the
integrated, bundled products to end-user clients, and is authorized to resell
RealNetworks' server software products. Under this agreement, Digital Lava also
has the opportunity to work with RealNetworks to: (a) raise the visibility of
Digital Lava through press releases, promotional mailings and through
RealNetworks' Web site; and (b) assist Digital Lava in its marketing efforts by
including Digital Lava in RealNetworks user conferences and potentially at
tradeshows and conference events.
Digital Lava has a worldwide distribution agreement with FVC.COM (formally
First Virtual Corporation), a leading manufacturer of high quality corporate and
distance learning video solutions. Under this agreement, FVC.COM bundles
VideoVisor with its video networking and NGI access applications to create
Virtual Classroom(TM), which allows students to access course content and
complementary resources 24 hours a day. FVC.COM distributes its video networking
products through channel partners such as Ascend Communications, Inc., American
Nortel Communications, Inc., IBM Corporation, Ingram Micro, Inc. and Bay
Networks, Inc.
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Digital Lava also offers turnkey video hosting services to corporate and
other customers pursuant to a Web hosting service agreement with VStream, Inc.
Pursuant to such agreement, Digital Lava re-purposes and publishes video content
in its proprietary or custom format, and, through VStream, "hosts" the
customers' published video content so that it is available for on-demand
streaming across the Internet using either RealNetworks or Microsoft NetShow
video servers.
Pursuant to an agreement with MicroVideo Learning Systems, Inc., Digital
Lava converts MicroVideo's software video training courseware to Digital Lava's
proprietary format and resells the published content to Digital Lava's
customers. In addition, Digital Lava allows WingsNet, Inc. to publish its video
course content into Digital Lava's proprietary format for resale to end-users.
Sales, Marketing and Distribution
Sales. Digital Lava has focused and will continue to focus its sales and
marketing efforts on the corporate training, communications and distance
learning markets for the next several years. Once Digital Lava has firmly
established itself in these markets, Digital Lava plans to expand into other
vertical business markets and consumer markets. Digital Lava markets its
products and services through a direct sales force and through resellers.
Digital Lava's direct sales force markets Digital Lava's products and services
primarily to corporate customers worldwide. Digital Lava is in the process of
significantly expanding its direct sales force in North America and plans to
increase the number of direct sales representatives from one to seven by the end
of the first quarter of 1999.
Marketing. Digital Lava participates in trade shows, conferences and
seminars, provides product information through Digital Lava's Web site, and
promotes Digital Lava and its products to industry analysts and the media.
Digital Lava's marketing programs are aimed at informing potential partners and
prospects about the capabilities and benefits of Digital Lava's products and
services, increasing brand name awareness, and stimulating demand across all
market segments. Digital Lava has an agreement with Schwartz Communications,
Inc., a leading high-tech public relations agency, to provide ongoing public
relations and promotional services to gain access to major media and markets.
Digital Lava currently has two employees in marketing and plans to increase its
marketing staff to four employees following the offering.
Distribution. Digital Lava has entered into various reseller relationships
with systems integrators, video software resellers and training companies,
including Roscor Corporation, AE Business Solutions, Producers Studio, IRM
Training Pty. Ltd., VCS Technologies, Inc., WingsNet, Inc., StorNet, Inc. and
DocuVideo Productions, pursuant to which such companies resell Digital Lava's
products and services to end-users and video publishers in the United States,
Australia and New Zealand. Digital Lava also currently distributes its products
domestically and internationally through its direct sales force based in the
United States. Digital Lava may establish international subsidiaries that market
and sell Digital Lava's products and services outside the United States in the
future.
Competition
The market for software and services for the Internet and intranets is
relatively new, constantly evolving and intensely competitive. Digital Lava
expects that competition will intensify in the future. Many of Digital Lava's
current and potential competitors have longer operating histories, greater name
recognition and significantly greater financial, technical and marketing
resources than Digital Lava. Digital Lava's principal competitors in the
development and distribution of video publishing solutions include Eloquent,
Inc., Veon, Inc., Vsoft, Inc., VStream, Inc., LiveNote, Inc., Adobe Systems,
Inc. and Visionary Information Systems, Inc. Digital Lava also competes or may
compete with computer-based training (CBT) software companies including
Macromedia, Inc., Asymetrix Corporation, and Allen Communications, Inc. Digital
Lava also competes or may compete with more general purpose audio and video
streaming software
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companies including Microsoft, RealNetworks, VDOnet Corporation, Xing Technology
Corporation, Cubic VideoComm, Inc., Motorola, Inc., Vosaic LLC and Oracle
Corporation. Digital Lava's vPrism and VideoVisor software also competes
indirectly with delivery systems for multimedia content other than audio and
video, such as Flash by Macromedia and Enliven by Narrative Communications Corp.
Many of such competitors have longer operating histories, greater name
recognition and significantly greater financial, technical and marketing
resources than Digital Lava. As a result, such competitors may be able to
develop products comparable or superior to Digital Lava's or adapt more quickly
to new technologies or evolving customer requirements.
Competitive factors in this market include the quality and reliability of
software; features for creating, editing and publishing content; ease of use and
interactive user features; scalability and cost per user; and compatibility with
the user's existing network components and software systems. To expand its user
base and further enhance the user experience, Digital Lava must continue to
innovate and improve the performance of its software. Digital Lava is committed
to the continued market penetration of its brand, products and services. Digital
Lava may, as a strategic response to changes in the competitive environment,
implement pricing, licensing, service or marketing changes designed to extend
its current brand and technology franchise. For example, Digital Lava may elect
to reduce the price for select versions of its software or even make select
versions available for download free of charge. Continued price concessions or
the emergence of other pricing or distribution strategies by competitors may
have a material adverse effect on Digital Lava's business, financial condition
and results of operations.
Intellectual Property
Digital Lava's success depends in part on its ability to protect its
proprietary software and other intellectual property. To protect its proprietary
rights, Digital Lava relies generally on patent, copyright, trademark and trade
secret laws, confidentiality agreements with employees and third parties, and
license agreements with consultants, vendors and customers, although Digital
Lava has not signed such agreements in every case. Despite such protections, a
third party could copy or otherwise obtain and use Digital Lava's products or
technology, or develop similar technology independently.
Digital Lava currently has one patent pending in the U.S. relating to its
product architecture and technology. The pending patent application may not be
granted, or, if granted, may not provide any competitive advantage to Digital
Lava. Many of Digital Lava's current and potential competitors dedicate
substantially greater resources to protection and enforcement of intellectual
property rights, especially patents. If a patent has issued or issues in the
future which covers Digital Lava's products, Digital Lava would need to either
obtain a license or design around the patent. Digital Lava may not be able to
obtain such a license on acceptable terms, if at all, nor design around the
patent.
Digital Lava attempts to avoid infringing known proprietary rights of third
parties in its product development efforts. However, Digital Lava has not
conducted and does not conduct comprehensive patent or trademark searches to
determine whether it infringes patents or other proprietary rights held by third
parties. In addition, it is difficult to proceed with certainty in a rapidly
evolving technological environment in which there may be numerous patent
applications pending, many of which are confidential when filed, with regard to
similar technologies. If Digital Lava were to discover that its products violate
third-party proprietary rights, there can be no assurance that it would be able
to obtain licenses to continue offering such products without substantial
reengineering or that any effort to undertake such reengineering would be
successful, that any such licenses would be available on commercially reasonable
terms, if at all, or that litigation regarding alleged infringement could be
avoided or settled without substantial expense and damage awards. Any claims
against Digital Lava relating to the infringement of third-party proprietary
rights, even if not meritorious, could result in the expenditure of significant
financial and managerial resources and in injunctions preventing Digital Lava
from distributing certain products. Such
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claims could materially adversely affect Digital Lava.
To license many of its products, Digital Lava relies in part on
"shrinkwrap" and "clickwrap" licenses that are not signed by the end user and,
therefore, may be unenforceable under the laws of certain jurisdictions. As with
other software products, Digital Lava's products are susceptible to unauthorized
copying and uses that may go undetected, and policing such unauthorized use is
difficult. In general, Digital Lava's efforts to protect its intellectual
property rights through patent, copyright, trademark and trade secret laws may
not be effective to prevent misappropriation of its technology, or to prevent
the development and design by others of products or technologies similar to or
competitive with those developed by Digital Lava. Digital Lava's failure or
inability to protect its proprietary rights could materially adversely affect
Digital Lava's business, financial condition and results of operations.
Digital Lava also relies on certain technology that it licenses from third
parties, including software that is integrated with internally developed
software and used in Digital Lava's products, to perform key functions. In the
future, such third-party technology licenses may not be available to Digital
Lava on commercially reasonable terms. The loss of any of these technologies
could have a material adverse effect on Digital Lava's business, financial
condition and results of operations. See "Risk Factors -- Uncertain Protection
of Intellectual Property, -- Risks Associated with Licensed Third-Party
Technology and -- Risks of Infringement."
Employees
Digital Lava currently has 14 full-time employees and two part-time
employees, including four in product development, three in customer service,
four in sales and marketing and five in finance and administration. Both of the
part-time employees will become consultants to Digital Lava following the
completion of this offering. All employees except Roger Berman are based at
Digital Lava's executive offices in Los Angeles, California. Digital Lava has
entered into employment agreements with Joshua Sharfman, Chief Executive
Officer, and Thomas Stigler, Vice President, Sales and Business Strategy, which
commence on the closing date of this offering and expire two years after such
date. Mr. Sharfman will become President of Digital Lava upon completion of this
offering. Messers. Sharfman and Stigler will each receive an annual base salary
of $230,000, 40,000 stock options exercisable at the initial public offering
price per share and a one-time cash bonus of $60,000. Digital Lava intends to
hire additional employees in product development, sales and marketing. None of
Digital Lava's employees is subject to a collective bargaining agreement, and
Digital Lava believes that its relations with its employees are good.
Facilities
Digital Lava's executive offices are located in west Los Angeles,
California in an office building in which Digital Lava leases an aggregate of
3,585 square feet at a current monthly rental of $6,811.50. The lease agreement
is non-cancelable and terminates on June 2, 2000. Digital Lava has an option to
extend the lease agreement for one additional 3 year term. During the next 12
months, Digital Lava plans to acquire additional space at its current location.
If such space is not available, however, Digital Lava will sublease its current
space and lease new space at a new location. Digital Lava anticipates that it
will require additional space within the next 12 months, and that suitable
additional space will be available on commercially reasonable terms, although
there can be no assurance in this regard. Digital Lava does not own any real
estate.
Legal Proceedings
Digital Lava is not currently subject to any material legal proceedings.
Digital Lava may from time to time become a party to various legal proceedings
arising in the ordinary course of its business.
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MANAGEMENT
Directors and Officers
Set forth below are the directors and officers of Digital Lava:
Name Age Position
- ---- --- --------
Dr. James W. Stigler 44 Chairman of the Board
Joshua D.J. Sharfman 41 Chief Executive Officer and Director
Thomas H. Stigler 42 Vice President, Sales and Business
Strategy and Director
Roger Berman 44 Director
Gerald Porter 54 Director
Danny Gampe 44 Chief Financial Officer
Patricia Bodner 36 Vice President of Worldwide Marketing
Michael Goodell 42 Vice President of Consulting and Services
Dr. James W. Stigler has served as Chairman of the Board for Digital Lava
since its inception in July 1995. He is currently a part-time employee of
Digital Lava. Dr. Stigler is a professor, author and researcher in the fields of
education, psychology and video research. Since 1991, Dr. Stigler has served as
a Professor at the University of California, Los Angeles. From 1983 to 1991, Dr.
Stigler served as an Associate Professor at the University of Chicago. Dr.
Stigler holds an A.B. degree from Brown University, a Masters degree from the
University of Pennsylvania and a Ph.D. from the University of Michigan. Dr.
Stigler is the brother of Thomas Stigler.
Joshua D.J. Sharfman has served as Chief Executive Officer and a Director
of Digital Lava since May 1996. Upon completion of this offering, Mr. Sharfman
will become President of Digital Lava. From 1994 to 1996, Mr. Sharfman served as
Vice President of Research and Development at ParcPlace-Digitalk, Inc., a
cross-platform object-oriented software firm. From 1993 to 1994, he operated his
own software development consulting firm. From 1984 to 1993, Mr. Sharfman served
as Executive Vice President of Research and Development at Dassault Systemes
USA, a wholly owned subsidiary of Dassault Systemes SARL, and in a variety of
marketing and development management functions at CADAM Inc., both of which are
CAD/CAM software vendors. From 1981 to 1984, Mr. Sharfman served as Section Head
of the Electro-Optical and Data Systems Group at Hughes Aircraft Company. Since
1980, Mr. Sharfman has also served as an Adjunct Professor of Engineering at the
University of Southern California. Mr. Sharfman holds a B.S. degree from the
University of California, Los Angeles and a M.S. degree from the University of
Southern California.
Thomas H. Stigler has served as Vice President, Sales and Business Strategy
and a Director of Digital Lava since November 1995. From January to November
1995, Mr. Stigler served as an Account Executive at Sybase, Inc, a database
software company. From January 1993 to January 1995, Mr. Stigler served as
District Manager of the Gulf Coast Region for Hitachi Data Systems Corp. From
December 1980 to January 1993, Mr. Stigler held several sales and management
positions at IBM Corporation including Account Executive and Marketing Manager.
Mr. Stigler holds a B.S. degree in Radio, TV and Film from
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Northwestern University. Mr. Stigler is the brother of Dr. James Stigler.
Roger Berman has served as a Director of Digital Lava since its inception
in July 1995. He is currently a part-time employee of Digital Lava. From July
1995 to December 1997, Mr. Berman was the President of Digital Lava. Prior to
joining Digital Lava, Mr. Berman served as President of St. Eve International,
Inc., an apparel company, from May 1992 to July 1995 and Sherne Lingerie, Inc.
from January 1986 to December 1991. Mr. Berman holds a B.A degree from Hamilton
College and an MBA from New York University.
Gerald Porter has served as a Director of Digital Lava since January 1996.
Mr. Porter has been a consultant in the software services industry since 1995.
From 1989 to 1995, Mr. Porter served as President of Systems and Computer
Technology Corp., a software development company. Prior to 1989, Mr. Porter held
several senior positions in the banking industry, including Senior Vice
President at Bank of America and Chief Operating Officer at American Security
Bank. Mr. Porter holds a B.A. degree from Edinboro University in Pennsylvania.
Danny Gampe has served as Chief Financial Officer of Digital Lava since
January 1998. From 1997 to January 1998, Mr. Gampe served as Vice President of
Finance and Administration for eShare Technologies, an Internet software
development firm. From 1992 to 1997, Mr. Gampe served as Chief Financial Officer
of Robbins Research International, a seminar development company. From 1991 to
1992, Mr. Gampe served as Manager of Financial Planning & Analysis at Wahlco
Environmental Systems, Inc. Mr. Gampe holds a B.A. degree from the University of
California at Long Beach and an MBA from the University of Redlands. In
addition, Mr. Gampe has been a Certified Management Accountant since 1993.
Patricia Bodner has served as Vice President of Marketing for Digital Lava
since May 1997. From September 1995 to December 1996, Ms. Bodner served as
Senior Vice President of Marketing for Inscape, a joint-venture between Warner
Music Group, HBO and Nash New Media. From November 1994 to August 1995, Ms.
Bodner served as Vice President of Marketing for BMG Video, a division of BMG
Entertainment of North America. From November 1991 to November 1994, Ms. Bodner
served as Vice President of Marketing at New Line Home Video, a division of Time
Warner Inc. From September 1986 to November 1991, Ms. Bodner served as National
Sales Promotion Manager at Warner Home Video, a division of Time Warner Inc. Ms.
Bodner holds a B.A. degree from the University of Wisconsin-Madison.
Michael Goodell has served as Vice President of Consulting and Services for
Digital Lava since October 1997. From June 1979 to September 1997, Mr. Goodell
held several positions at IBM Corporation, including Principal of Consulting,
Manager of Industry Marketing, Marketing Manager and Senior Sales
Representative. Mr. Goodell holds a B.S. and a M.S. degree from Rice University.
Directors' Compensation
Digital Lava's Directors who are not full-time employees of Digital Lava
receive $1,000 for attendance at each meeting of the Board of Directors or any
committee thereof and will be reimbursed for their out-of-pocket expenses in
connection with their attendance. No directors' fees have been paid to date.
Committees of the Board
Upon completion of this offering, the Board of Directors will have two
standing committees: the Audit Committee and the Compensation Committee. The
Audit Committee will review with Digital Lava's independent public accountants
the scope and adequacy of the audit to be performed by such independent public
accountants, the accounting practices, procedures and policies of Digital Lava,
and all related party
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<PAGE>
transactions. The Compensation Committee will recommend to the Board the
compensation to be paid to officers and directors, administer Digital Lava's
Stock Option Plan and approve the grant of options under the stock option plan.
Digital Lava currently has only one disinterested director on its Board of
Directors. At least two disinterested directors will be added to the Board of
Directors following the completion of this offering and both committees will be
comprised of at least two disinterested directors.
Executive Compensation
Summary Compensation. The following table sets forth the total compensation
paid during 1997 to Digital Lava's Chief Executive Officer and one other
executive officer whose 1997 compensation exceeded $100,000.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
---------------------------- -----------------------------
Securities
Name and Underlying All Other
Principal Position Salary ($) Bonus ($) Options (#) Compensation
- ------------------ ---------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Joshua Sharfman
Chief Executive Officer.................. 190,000 -- -- --
Thomas Stigler
Vice President, Sales/Business Strategy.. 177,501 -- -- --
</TABLE>
No options were granted in 1997 to either of the officers named in the
above table. Such officers held no stock options as of December 31, 1997 and
currently hold no stock options. Pursuant to their employment agreements, each
of the above-named officers will receive options to purchase 40,000 shares of
common stock following the completion of this offering.
Employment Agreements
Digital Lava has entered into an employment agreement with Joshua Sharfman,
Chief Executive Officer, and President, upon completion of this offering, of
Digital Lava, which will commence on the closing date of the offering and expire
on the second anniversary of such date. Pursuant to the terms of the employment
agreement, Mr. Sharfman will receive an annual base salary of $230,000, 40,000
stock options exercisable at the initial public offering price per share, and a
one-time cash bonus of $60,000. Mr. Sharfman will be eligible to receive
additional stock options, bonuses and a higher salary at the discretion of the
Board of Directors. In addition, the employment agreement provides that Mr.
Sharfman will receive a severance payment equal to his annual salary if he is
terminated without cause or required to perform a material portion of his
services at a location more than 25 miles from Digital Lava's current location
in Los Angeles, California, and a severance payment equal to eight months' pay,
or pay through the end of the term if less than eight months, if he elects to
resign after the appointment of an executive officer senior in position or
responsibility to him or designation of another person as the President or Chief
Executive Officer of Digital Lava. A state court may determine not to enforce,
or only partially enforce, certain provisions of the agreement.
Digital Lava has entered into an employment agreement with Thomas Stigler,
Vice President of Sales and Business Strategy of Digital Lava, which will
commence on the closing date of the offering and expire on the second
anniversary of such date. Pursuant to the terms of the employment agreement, Mr.
Stigler will receive an annual base salary of $230,000, 40,000 stock options
exercisable at the initial public offering price per share, and a one-time cash
bonus of $60,000. Mr. Stigler will be eligible to receive additional stock
options, bonuses and a higher salary at the discretion of the Board of
Directors. In addition, the employment agreement provides that Mr. Stigler will
receive a severance payment equal to his annual salary if he is terminated
without cause or required to perform a material portion of his services
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<PAGE>
at a location more than 25 miles from Digital Lava's current location in Los
Angeles, California, and a severance payment equal to eight months' pay, or pay
through the end of the term if less than eight months, if he elects to resign
after the appointment of an executive officer in charge of sales and marketing
or designation of another person as Vice President of Sales and Business
Strategy of Digital Lava. A state court may determine not to enforce, or only
partially enforce, certain provisions of the agreement.
Indemnification of Directors and Officers and Related Matters
The Amended and Restated Certificate of Incorporation (the "Certificate")
of Digital Lava provides that, to the fullest extent permitted by applicable
law, as amended from time to time, Digital Lava will indemnify any person who
was or is a party or is threatened to be made a party to an action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person is or was director, officer, employee or agent of
Digital Lava or serves or served any other enterprise at the request of Digital
Lava.
In addition, the Certificate provides that a director of Digital Lava shall
not be personally liable to Digital Lava or its stockholders for monetary
damages for breach of the director's fiduciary duty. However, the Certificate
does not eliminate or limit the liability of a director for any of the following
reasons: (a) a breach of the director's duty of loyalty to Digital Lava or its
stockholders; (b) acts or omissions not in good faith or that involve
intentional misconduct or knowing violation of law; (c) a transaction from which
the director derived an improper personal benefit; or (d) for unlawful payments
of dividends or unlawful stock redemptions or repurchases.
Digital Lava will purchase and maintain Directors' and Officers' Insurance
as soon as the Board of Directors determines practicable, in amounts which they
consider appropriate, insuring the directors against any liability arising out
of the director's status as a director of Digital Lava regardless of whether
Digital Lava has the power to indemnify the director against such liability
under applicable law.
Digital Lava has been advised that it is the position of the Commission
that insofar as the foregoing provisions may be invoked to disclaim liability
for damages arising under the Securities Act, such provisions are against public
policy as expressed in the Securities Act and are, therefore, unenforceable.
1996 Incentive and Non-Qualified Stock Option Plan
The Board of Directors has adopted Digital Lava's 1996 Incentive and
Non-Qualified Stock Option Plan (the "Plan"). The Plan provides for the grant of
incentive stock options to employees, including employee directors, and
non-qualified stock options to employees, directors and consultants. A total of
250,000 shares of common stock have been reserved for issuance under the Plan.
Upon the completion of this offering, 139,622 options will be outstanding
under the Plan at a weighted average exercise price per share of $7.58, assuming
an initial public offering price of $7.50 per share. All of such outstanding
options will be fully vested and exercisable. The plan is administered by the
Board of Directors and, following the completion of the offering, the
Compensation Committee thereof. Options granted under the plan will vest as
determined by the Compensation Committee, and may accelerate and become fully
vested in the event of an acquisition of Digital Lava if so determined. The
exercise of options granted under the Plan will be as determined by the
Compensation Committee, although the exercise price of incentive stock options
must be at least equal to the fair market value of the common stock on the date
of grant. The Board of Directors may amend or modify the Plan at any time. The
Plan will terminate in 2006 unless terminated earlier by the Board of Directors.
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<PAGE>
CERTAIN TRANSACTIONS
The law firm of Ehrenreich Eilenberg Krause & Zivian LLP ("EEKZ LLP") has
performed legal services for Digital Lava in connection with this offering and
may perform legal services for Digital Lava following this offering. In 1996 and
1997, Digital Lava issued to Eilenberg & Zivian, an affiliate of EEKZ LLP,
warrants to purchase an aggregate of 23,212 shares of common stock at an
exercise price of $6.46. Eilenberg & Zivian is also the owner of 9,334 shares of
common stock which it received from Digital Lava in exchange for services in
1995. Pursuant to an agreement dated as of December 1, 1997, and amended and
restated as of May 1, 1998, E&Z Investments, an affiliate of EEKZ LLP, has
currently exercisable options to purchase an aggregate of 16,420 shares of
common stock at an exercise price of $.91 per share from Messrs. James Stigler
and Berman. E&Z Investments also has currently exercisable options, assigned to
it by Judson Cooper, to purchase an aggregate of 8,207 shares of common stock
from Messrs. James Stigler, Thomas Stigler, Berman and Sharfman at an exercise
price of $.91 per share.
In January 1998, Digital Lava entered into a financial consulting agreement
with Prism Ventures LLC ("Prism") pursuant to which Prism is to receive
$300,000, payable on the earlier of the consummation of this offering or
December 31, 1998 for financial and strategic advisory consulting services. In
1997, Prism received $100,000 from Digital Lava for consulting services. Judson
Cooper is a member of Prism.
Pursuant to an agreement dated as of January 31, 1997, and amended and
restated as of May 1, 1998, Judson Cooper was granted currently exercisable
options to purchase an aggregate of 159,522 shares of common stock from Messrs.
James Stigler, Thomas Stigler, Berman and Sharfman at an exercise price of
$0.91. Of such options, Mr. Cooper assigned options to purchase 8,207 shares to
E&Z Investments.
Digital Lava has entered into a consulting agreement with Roger Berman
pursuant to which Mr. Berman has agreed to provide Digital Lava with certain
financial, operational and strategic development services, including financing
and credit strategies, cash management and human resources. The agreement has a
term of two years and begins on the closing date of this offering. Mr. Berman
will receive $60,000 upon the closing of this offering and an annual fee of
$60,000. Mr. Berman is currently a part-time employee and a Director of Digital
Lava. At the closing of this offering, he will cease to be an employee of
Digital Lava.
Digital Lava has entered into a consulting agreement with James Stigler
pursuant to which Dr. Stigler has agreed to provide certain consulting services
to Digital Lava, including development, financial and strategic advisory
services. The agreement has a term of two years and begins on the closing date
of this offering. Dr. Stigler will receive $40,000 upon the closing of this
offering and an annual fee of $24,000. Dr. Stigler is currently a part-time
employee and Chairman of the Board of Directors of Digital Lava. At the closing
of this offering, he will cease to be an employee of Digital Lava.
Digital Lava issued a $20,000 promissory note to James Stigler in October
1998. The note bears interest at 12% per annum and is payable in October 1999.
In December 1998, Digital Lava issued a $300,000 promissory note to Henry
Stigler, father of James and Thomas Stigler. The note bears interest at 12% per
annum and will be paid at the closing of this offering. Mr. Stigler also
received warrants to purchase 150,000 shares of common stock at 130% of the
initial public offering per share.
Each of the transactions described above were ratified by Digital Lava's
entire Board of Directors, a majority of whom did not have an interest in such
transactions. Digital Lava believes that the terms of the transactions described
above were no less favorable to the company than could have been obtained from
unaffiliated third parties. Digital Lava has adopted a policy, effective
following the consummation of this
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<PAGE>
offering, that all future transactions between it and its officers, directors
and affiliates must (i) be approved by a majority of those members of the Board
of Directors that are not parties, directly or indirectly through affiliates, to
such transactions and (ii) be on terms no less favorable to Digital Lava than
could be obtained from unrelated third parties.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the common stock, as of September 30, 1998 by (a) each person known
by Digital Lava to be the beneficial owner of more than 5% of the outstanding
shares of common stock, (b) each director and executive officer of Digital Lava
and (c) all executive officers and directors of Digital Lava as a group.
<TABLE>
<CAPTION>
Percentage of Common Stock
Shares Beneficially Owned
of Common Stock -----------------------
Name and Address of Beneficial Beneficially Before After
Owner (1) Owned (2) Offering Offering
- --------- --------- -------- --------
<S> <C> <C> <C>
Dr. James W. Stigler.............................. 299,105(3) 15.0% 6.8%
Thomas H. Stigler................................. 239,403(4) 11.8% 5.4%
Roger Berman...................................... 199,403(5) 10.0% 4.5%
Judson Cooper..................................... 151,315(6) 7.6% 3.4%
Joshua D.J. Sharfman.............................. 139,702(7) 6.9% 3.1%
Gerald Porter..................................... 83,330(8) 4.2% 1.9%
Kenneth Mendoza................................... 99,702 5.0% 2.3%
Michael Goodell................................... 16,414(9) * *
Patricia Bodner................................... 7,660(10) * *
Danny Gampe....................................... 5,472(11) * *
All Executive Officers and Directors as........... 990,489(12) 47.0% 22.0%
a Group (8 persons)
</TABLE>
- ----------
* less than 1%
(1) Unless otherwise indicated, the address of each beneficial owner is 10850
Wilshire Boulevard, Suite 1260, Los Angeles, CA 90024.
(2) Beneficial ownership has been determined in accordance with the rules of
the Securities and Exchange Commission and includes voting or investment
power with respect to shares. Except as indicated by footnote, and subject
to community property laws, the persons named in the table above have sole
voting and investment power with respect to the number of shares indicated
as beneficially owned by them. The number of shares of common stock
outstanding used in calculating the percentage ownership for each listed
person includes the shares of common stock underlying options or warrants
held by such person and exercisable within 60 days of September 30, 1998
but excludes shares of common stock underlying options or warrants held by
any other person. Percentage of beneficial ownership is based on 1,996,092
shares of common stock outstanding pro forma as of September 30, 1998 and
4,396,092 shares of common stock outstanding after completion of the
offering.
(3) Includes an aggregate of 68,030 shares which are subject to currently
exercisable options held by Judson Cooper and E&Z Investments ("EZ"), an
affiliate of Ehrenreich Eilenberg Krause & Zivian LLP.
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<PAGE>
(4) Includes (a) 40,000 shares issuable upon the exercise of options which will
become exercisable on the effective date of this offering and (b) 39,880
shares which are subject to currently exercisable options held by Judson
Cooper.
(5) Includes an aggregate of 48,091 shares which are subject to currently
exercisable options held by Judson Cooper and EZ.
(6) Consists of shares issuable upon the exercise of currently exercisable
options to purchase shares of common stock from Messrs. James Stigler,
Thomas Stigler, Berman and Sharfman at an exercise price of $0.91. Mr.
Cooper's address is 181 Harbor Drive, Stamford, CT 06902.
(7) Includes (a) 40,000 shares issuable upon the exercise of options which will
become exercisable on the effective date of this offering and (b) 19,941
shares which are subject to currently exercisable options held by Judson
Cooper.
(8) Includes 3,330 shares issuable upon the exercise of options which will
become exercisable on the effective date of this offering.
(9) Consists of 16,414 shares issuable upon the exercise of options which will
become exercisable on the effective date of this offering.
(10) Consists of 7,660 shares issuable upon the exercise of options which will
become exercisable on the effective date of this offering.
(11) Consists of 5,472 shares issuable upon the exercise of options which will
become exercisable on the effective date of this offering.
(12) Includes an aggregate of 109,546 shares issuable upon the exercise of
options which will become exercisable on the effective date of this
offering.
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<PAGE>
SELLING STOCKHOLDERS
The registration statement, of which this prospectus forms a part, also
relates to the registration by Digital Lava, for the account of the selling
stockholders, of an aggregate of 880,436 shares of common stock. The selling
stockholders shares are not being underwritten by the representative in
connection with this offering. The selling stockholders have agreed with Digital
Lava and the representative not to directly or indirectly offer, sell, transfer
or otherwise encumber or dispose of any of their common stock for a period of
nine (9) months after the date of this prospectus. See "Shares Eligible for
Future Sale" and "Underwriting."
The sale of the selling stockholders shares by the selling stockholders may
be effected from time to time in transactions, which may include block
transactions by or for the account of the selling stockholders, in the
over-the-counter market or in negotiated transactions, or through the writing of
options on the selling stockholders shares, a combination of such methods of
sale, or otherwise. Sales may be made at fixed prices which may be changed, at
market prices prevailing at the time of sale, or at negotiated prices.
The selling stockholders may effect such transactions by selling the
selling stockholders shares directly to purchasers, through broker-dealers
acting as agents for the selling stockholders, or to broker-dealers who may
purchase shares as principals and thereafter sell the selling stockholders
shares from time to time in the over-the-counter market, in negotiated
transactions, or otherwise. Such broker-dealers, if any, may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders and/or the purchaser for whom such broker-dealers may act
as agents or to whom they may sell as principals or both, which compensation as
to a particular broker-dealer may be in excess of customary commissions.
The selling stockholders and broker-dealers, if any, acting in connection
with such sales, might be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act and any commission received by them and any
profit upon the resale of such securities might be deemed to be underwriting
discounts and commissions under the Securities Act.
Sales of any shares of common stock by the selling stockholders may depress
the price of the common stock in any market that may develop for the common
stock.
The following table sets forth certain information known to Digital Lava
regarding beneficial ownership of Digital Lava's common stock by each of the
selling stockholders as of September 30, 1998 and as adjusted to reflect the
sale of shares offered pursuant to this prospectus. None of the selling
stockholders has had any position with, held any office of, or had any other
material relationship with Digital Lava.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Number of Shares Owned After
Name of Beneficial Owner (1) Offering Being Offered Offering (2)
- ---------------------------- -------- ------------- ------------
<S> <C> <C> <C>
Richard Stone.............................. 161,250 161,250 0
Navida, Inc................................ 127,500 127,500 0
Dolphin Waves, Inc. ....................... 60,000 60,000 0
Shahrokh Sedaghat.......................... 47,875(3) 45,000 2,875
Shapour and Parvindokht.................... 45,000 45,000 0
Sedaghat
Theodore Friedman.......................... 33,750 33,750 0
Eli Jacobsen............................... 30,000 30,000 0
David Stone................................ 30,000 30,000 0
Glen Sutton III............................ 30,000 30,000 0
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Norman Veitzer............................. 30,000 30,000 0
Harold Wrobel.............................. 30,000 30,000 0
Broadway Partners.......................... 22,500 22,500 0
Christine Walley........................... 22,500 22,500 0
Sheila Sconiers............................ 19,500 19,500 0
Stephanie Rubin............................ 18,443(4) 7,500 10,943
John Hancock Global........................ 16,667 16,667 0
Technology Fund
Joseph Habert.............................. 15,000 15,000 0
Georgia Schley............................. 15,000 15,000 0
Arthur Steinberg IRA....................... 15,000 15,000 0
R. Steinberg Pension Trust................. 15,000 15,000 0
Grace Terry................................ 15,000 15,000 0
Walter Terry............................... 15,000 15,000 0
Eric Appell................................ 10,975(5) 8,100 2,875
Ester Dusi................................. 7,500 7,500 0
John Glorieux.............................. 7,500 7,500 0
Jerry Heymann.............................. 7,500 7,500 0
Andreas Iseli.............................. 7,500 7,500 0
Mitchell Steinberg......................... 7,500 7,500 0
Stephan Williams........................... 7,500 7,500 0
Lawrence Manus............................. 5,000 5,000 0
John Musinsky.............................. 3,750 3,750 0
Michael Zylberman.......................... 3,750 3,750 0
Frank Loccisano............................ 3,334 3,334 0
Christopher Creamer........................ 3,000 3,000 0
Chana Sasha Foundation..................... 1,667 1,667 0
R. Merrill Hunter.......................... 1,667 1,667 0
Marc Roberts............................... 1,667 1,667 0
Robert Steinberg........................... 1,500 1,500 0
Keith Alliotts............................. 417 417 0
Ryan Schinman.............................. 417 417 0
</TABLE>
- ----------
(1) Digital Lava believes the persons named in the table above, based upon
information furnished by such persons, have sole voting and investment
power with respect to the number of shares beneficially owned by them.
(2) Assumes that all shares of common stock being registered will be sold.
(3) Includes 2,875 shares issuable upon the exercise of currently exercisable
warrants.
(4) Includes 10,943 shares issuable upon the exercise of currently exercisable
warrants held by the Whitestone Group, an entity controlled by Ms. Rubin's
husband. Ms. Rubin disclaims any beneficial ownership of any stock owned by
the Whitestone Group.
(5) Includes 2,875 shares issuable upon the exercise of currently exercisable
warrants.
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<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of Digital Lava consists of 35,000,000 shares
of common stock, $.0001 par value and 5,000,000 shares of preferred stock,
$.0001 par value. Upon completion of the offering, there will be 4,396,092
shares of common stock issued and outstanding, no shares of preferred stock
outstanding and 1,200,000 warrants issued and outstanding.
Recapitalization
Immediately prior to the completion of this offering, Digital Lava will
amend its Certificate of Incorporation to effect a 1 for 9.139 reverse stock
split and complete a recapitalization of its authorized, issued and outstanding
capital stock and debt. Prior to the reverse split and the recapitalization,
Digital Lava will have outstanding: 1,201,960 shares of common stock; 809,565
shares of Series A preferred stock; 50,740 shares of Series B preferred stock;
8,500 shares of Series B-1 preferred stock; and 30,000 shares of Series C
preferred stock. All of such preferred stock automatically converts to common
stock upon an initial public offering of the common stock. In addition, prior to
the recapitalization, Digital Lava will have outstanding an aggregate principal
amount of $5,319,500 of promissory notes. An aggregate principal amount of
$1,750,000 of such notes matured on November 20, 1998. All of the holders of
such notes have agreed to extend the maturity date of their notes until the
earlier of January 31, 1999 or the consummation of this offering. As of January
1, 1999, we were in default on the repayment of an additional aggregate
principal amount of 3,019,500 of promissory notes. In connection with the
recapitalization, (a) holders of an aggregate principal amount of $1,532,000,
with the exception of a holder of a note in the amount of $12,500 who Digital
Lava has not been able to reach due to the illness of such holder, of such notes
agreed to extend the term of their notes to the earlier of the closing date of
this offering or January 31, 1999 and convert one-half of the outstanding
principal of their notes, the accrued interest on such notes and the warrants
received in connection with the issuance of such notes into an aggregate of
456,600 shares of common stock; the remaining one-half of the principal amount
of such notes will be paid at the closing of this offering; (b) holders of an
aggregate principal amount of $187,500 of such notes agreed to extend the term
of such notes to June 30, 1999; however, because the closing of this offering
did not occur by December 31, 1998, the entire principal amount of such notes
became due and payable on such date; such holders have agreed to waive such
default and in consideration Digital Lava has agreed to pay the entire principal
amount of such notes, and accrued interest, at the closing of this offering; (c)
holders of an aggregate principal amount of $1,300,000 of such notes agreed to
extend the term of their notes to the earlier of the closing date of this
offering or January 31, 1999 and convert one-half of the outstanding principal
of their notes, the accrued interest on such notes and the warrants received in
connection with the issuance of such notes into an aggregate of 390,000 shares
of common stock; the remaining one-half of the principal amount of such notes,
and a success fee, will be paid at the closing of this offering; (d) 11,030
shares of common stock and an aggregate of 8,824 shares of Series A preferred
stock held by certain officers and directors and an employee of Digital Lava
will be canceled; (e) holders of outstanding warrants to acquire 107,689 shares
of common stock agreed to convert such warrants into 30,836 shares of common
stock; (f) holders of an aggregate of 3,000 shares of Series B-1 preferred stock
agreed to exchange such shares for an aggregate of 3,600 shares of Series B
preferred stock; and (g) Digital Lava will amend its Certificate of
Incorporation to increase the conversion ratios of the Series B and C preferred
stock from 10:1 to 20.3099:1 and 19.3702:1, respectively. As a result of such
change in conversion ratios, Digital Lava will record a dividend of $690,469 to
the holders of the Series B and C preferred stock. All information set forth
below gives effect to the Amended and Restated Certificate of Incorporation to
be filed immediately prior to the completion of this offering.
Common Stock
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
any outstanding preferred stock. Upon the liquidation, dissolution or winding up
of
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<PAGE>
Digital Lava, the holders of common stock are entitled to receive ratably the
net assets of Digital Lava available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding preferred stock.
Holders of common stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of common stock are, and the shares
offered by Digital Lava in this offering will be, when issued and paid for,
fully paid and nonassessable. The rights, preferences and privileges of holders
of common stock are subject to, and may be adversely affected by, the rights of
the holders of shares of any series of preferred stock which Digital Lava may
designate and issue in the future.
Preferred Stock
Upon the closing of this offering, the Board of Directors will have the
authority, without further action by the stockholders, to issue up to 5,000,000
shares of preferred stock in one or more series and to fix the right,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, which may be greater or lessor
than the voting rights of the common stock, rights and terms of redemption,
liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series without any further
vote or action by the stockholders. The issuance of such shares of preferred
stock could adversely affect the voting power of holders of common stock and the
likelihood that such holders will receive dividend payments and payments upon
liquidation and could have the effect of delaying, deferring or preventing a
change in control of Digital Lava. Digital Lava has no present plans to issue
any additional shares of preferred stock.
Outstanding Warrants
Immediately prior to the completion of the offering, warrants to purchase
an aggregate of 666,408 shares of common stock at a weighted average exercise
price of $8.813 per share will be outstanding. Of such warrants, warrants to
purchase 371,408 will be exercisable immediately prior to the completion of the
offering.
Registration Rights
Holders of warrants to purchase an aggregate of 653,277 of common stock
have certain registration rights with regard to the resale of the shares
issuable upon exercise of such warrants. Additionally, holders of options to
purchase an aggregate of 175,936 shares of common stock from certain of Digital
Lava's founders have certain registration rights with regard to the resale of
the shares underlying such options. Following the completion of this offering,
such holders could require Digital Lava to register for resale the shares
issuable upon exercise of such warrants and the shares underlying such options
and such shares would then be freely tradeable, subject to the lock-up
agreements such holders have entered into with Digital Lava and the
representative. See "Shares Eligible for Future Sale."
Description of Warrants
The following is a brief summary of certain provisions of the warrants but
such summary does not purport to be complete and is qualified in all respects by
reference to the actual text of the Warrant Agreement between Digital Lava and
American Stock Transfer & Trust Company (the "Warrant Agent"), a copy of which
has been filed as an exhibit to the registration statement of which this
prospectus is a part.
Exercise Price and Terms. Each warrant entitles the registered holder
thereof to purchase, at any time commencing 12 months after date of this
prospectus until 60 months after the date of this prospectus, one share of
common stock at a price equal to 120% of the initial public offering price of
the common stock per share, subject to adjustment in accordance with the
anti-dilution and other provisions referred to below. Commencing months after
the date of this prospectus, the warrants will be subject to redemption by
Digital
-48-
<PAGE>
Lava, in whole but not in part, at $.10 per warrant on 30 days' prior written
notice, provided that the average closing sale price of the common stock as
reported on the American Stock Exchange equals or exceeds 266% of the initial
public offering price per share of the common stock for any 20 trading days
within a period of 30 consecutive trading days ending on the fifth trading day
prior to the date of notice of redemption. The holder of any warrant may
exercise such warrant by surrendering the certificate representing the warrant
to the Warrant Agent, with the subscription form thereon properly completed and
executed, together with payment of the exercise price. No fractional shares will
be issued upon the exercise of the warrants. The exercise price of the warrants
bears no relationship to any objective criteria of value and should in no event
be regarded as an indication of any future market price of the securities
offered hereby.
Adjustments. The exercise price of the warrants and the number of shares of
common stock issuable upon the exercise of the warrants are subject to
adjustment in certain events, including stock dividends, stock splits,
combinations or reclassifications of the common stock.
Transfer, Exchange and Exercise. The warrants are in registered form and
may be presented to the Warrant Agent for transfer, exchange or exercise at any
time on or prior to their expiration date sixty (60) months after the date of
this prospectus, at which time the warrants will become wholly void and of no
value. The warrants may not be exercised until 12 months after the date of this
prospectus. If a market for the warrants develops, the holder may sell the
warrants instead of exercising them. There can be no assurance, however, that a
market for the warrants will develop or, if developed, will continue.
Modification of Warrants. Digital Lava and the Warrant Agent may make such
modifications to the warrants as they deem necessary and desirable that do not
adversely affect the interests of the warrantholders.
Certain Charter and By-Law Provisions
Certain provisions of Digital Lava's Certificate and Bylaws may have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of Digital Lava.
Such provisions could limit the price certain investors might be willing to pay
in the future for shares of Digital Lava's common stock. Certain of these
provisions allow Digital Lava to issue preferred stock without stockholder
approval and provide that special meetings of stockholders of Digital Lava may
be called only by the President of Digital Lava, the Board of Directors or
holders of not less than a majority of the votes entitled to be cast at the
special meeting. These provisions may make it more difficult for stockholders to
take certain corporate actions and could have the effect of delaying or
preventing a change in control of Digital Lava.
Transfer Agent And Registrar
The transfer agent and registrar for the common stock and the warrant agent
for the warrants is American Stock Transfer & Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for Digital Lava's
common stock. Future sales of substantial amounts of common stock in the public
market or the availability of such shares for sale, could adversely affect the
prevailing market price and the ability of Digital Lava to raise equity capital
in the future.
Upon completion of this offering, Digital Lava will have 4,396,092 shares
of common stock outstanding,
-49-
<PAGE>
assuming no exercise of outstanding options and warrants or the underwriters'
over-allotment option. After the offering, 3,280,436 of the 4,396,092 shares of
common stock will be freely tradeable without restriction under the Securities
Act, except for any shares purchased by an "affiliate" of Digital Lava, as that
term is defined under the rules and regulations of the Securities Act, which
will be subject to the resale limitations of Rule 144 under the Securities Act.
The remaining 1,115,656 shares of common stock were issued by Digital Lava
in private transactions in reliance upon one or more exemptions contained in the
Securities Act, will be deemed "restricted securities" within the meaning of
Rule 144 promulgated pursuant to the Securities Act and may be publicly sold
only if registered under the Securities Act or sold pursuant to exemptions
therefrom. Because all of such restricted shares will have been held for more
than one year as of the date of this prospectus, all of such shares will be
eligible for public sale beginning 90 days after the effective date of this
prospectus in accordance with the requirements of Rule 144, as amended, subject
to the lock-up agreements described below.
In general, under Rule 144(e), as currently in effect, a stockholder, or
stockholders whose shares are aggregated, including an affiliate, who has
beneficially owned for at least one year shares of common stock that are treated
as "restricted securities," would be entitled to sell publicly, within any
three-month period, up to the greater of 1% of the then outstanding shares of
common stock, 43,538 shares immediately after the completion of this offering,
or the average weekly reported trading volume in the common stock during the
four calendar weeks preceding the date on which notice of sale is given,
provided certain requirements are satisfied. In addition, affiliates of Digital
Lava must comply with additional requirements of Rule 144 in order to sell
shares of common stock, including shares acquired by affiliates in this
offering. Under Rule 144, a stockholder deemed not to have been an affiliate of
Digital Lava at any time during the 90 days preceding a sale by him, and who has
beneficially owned for at least two years shares of common stock that are
treated as "restricted securities," would be entitled to sell those shares
without regard to the foregoing requirements.
Holders of warrants to purchase an aggregate of 653,277 shares of common
stock have certain registration rights with regard to the resale of the shares
issuable upon exercise of such warrants. Additionally, holders of options to
purchase an aggregate of 175,936 shares of common stock from certain of Digital
Lava's founders have certain registration rights with regard to the resale of
the shares underlying such options. Following the completion of this offering,
such holders could require Digital Lava to register for resale the shares
issuable upon exercise of such warrants and the shares underlying such options
and such shares would then be freely tradeable, subject to the lock-up
agreements described below.
Each officer and director of Digital Lava, all other holders of shares of
common stock, and all holders of options and warrants to acquire shares of
common stock have agreed not to, directly or indirectly, offer, sell, transfer,
pledge, assign, hypothecate or otherwise encumber or dispose of any of Digital
Lava's securities, whether or not presently owned, for a period of 12 months, or
nine months in the case of the selling stockholders and six months in the case
of holders of warrants to purchase 275,000 shares of common stock issued in
connection with the December 1998 bridge financing, after the date of this
prospectus, without the prior written consent of Digital Lava and the
representative.
-50-
<PAGE>
UNDERWRITING
The underwriters named below, for whom Dirks & Company, Inc. is acting as
representative, have severally agreed, subject to the terms and conditions
contained in the underwriting agreement to purchase from Digital Lava, and
Digital Lava has agreed to sell to the underwriters on a firm commitment basis,
the respective number of shares of common stock and redeemable common stock
purchase warrants set forth opposite their names.
Number of
Number of Redeemable
Shares Common Stock
of Common Purchase
Underwriters Stock Warrants
------------ ------ --------
Dirks & Company, Inc.
--------- ---------
Total.................................... 2,400,000 1,200,000
========= =========
Digital Lava has agreed to sell the common stock and the redeemable common
stock purchase warrants to the underwriters on a "firm commitment" basis.
Termination may only be based on events that result in a material impairment of
the agreement to offer the securities for sale, as set forth in the section
10(a) of the underwriting agreement The underwriting agreement also provides
that the obligations of the several underwriters are subject to the conditions
precedent specified therein.
The selling stockholders' shares are not being underwritten by the
representative in connection with this offering. The sale of the selling
stockholders shares by the selling stockholders may be effected from time to
time in transactions, which may include block transactions by or for the account
of the selling stockholders, in the over-the-counter market or in negotiated
transactions, or through the writing of options on the selling stockholders
shares, a combination of such methods of sale, or otherwise. Sales may be made
at fixed prices which may be changed, at market prices prevailing at the time of
sale, or at negotiated prices. See "Selling Stockholders."
Digital Lava has been advised by the representative that it initially
proposes to offer the common stock and the redeemable common stock purchase
warrants to the public at the public offering price set forth on the cover page
of this prospectus and may allow to certain dealers who are members of the
National Association of Securities Dealers, Inc. ("NASD") concessions not in
excess of $_______ per share of common stock and $_______ per redeemable common
stock purchase warrant, of which amount a sum not in excess of $__________ per
share of common stock and $______ per redeemable common stock purchase warrant
may in turn be reallowed by such dealers to other dealers. After the initial
distribution of the common stock and the redeemable common stock purchase
warrants, the public offering price, concessions and reallowances may be
changed. The representative has informed Digital Lava that it does not expect
sales to discretionary accounts by the underwriters to exceed five percent of
the common stock and warrants offered by Digital Lava hereby.
Digital Lava has granted to the underwriters an option, exercisable within
45 days of the date of this prospectus, to purchase from Digital Lava at the
offering price, less underwriting discounts and the non-accountable expense
allowance, all or part of an additional 360,000 shares of common stock and/or
180,000 redeemable common stock purchase warrants on the same terms and
conditions of the offering for the sole purpose of covering over-allotments, if
any.
Digital Lava has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act. Digital Lava has
agreed to pay to the representative a non-accountable expense allowance equal to
three percent of the gross proceeds derived from the sale of the common stock
and the redeemable common stock purchase warrants underwritten, $50,000 of which
has been paid to date.
Each of Digital Lava's officers and directors, all other holders of shares
of common stock, and all holders of options and warrants to acquire shares of
common stock have agreed not to, directly or indirectly, offer, sell, transfer,
pledge, assign, hypothecate or otherwise encumber or dispose of any of Digital
Lava's
-51-
<PAGE>
securities, whether or not presently owned, for a period of 12 months, or nine
months in the case of the selling stockholders and six months in the case of
holders of warrants to purchase 275,000 shares of common stock issued in
connection with the December 1998 bridge financing, after the date of this
prospectus, without the prior written consent of Digital Lava and the prior
written consent of the representative. If at any time commencing 180 days after
the date of this prospectus, the closing sale or bid price of the common stock
is greater than 150% of the initial public offering price of the common stock
offered hereby for a period of five (5) consecutive trading days, the
representative will, upon request, release any securities subject to a lock-up
agreement specified above. An appropriate legend shall be marked on the face of
certificates representing all such securities. In addition, Digital Lava has
agreed not to sell or offer for sale any of its securities for a period of six
(6) months from the date of this prospectus without the consent of the
representative, except in connection with strategic transactions or mergers and
acquisitions for which no consent is required.
In connection with the offering, Digital Lava has agreed to issue and sell
to the representative and/or its designees, at the closing of the proposed
underwriting, for nominal consideration, five year representative's warrants to
purchase 240,000 shares of common stock and/or 120,000 redeemable common stock
purchase warrants. The representative's warrants are exercisable at any time
during a period of four years commencing at the beginning of the second year
after their issuance and sale at a price of 120% of the initial public offering
price per share of common stock and 120% of the initial public offering price
per redeemable common stock purchase warrant. The shares of common stock,
warrants and shares of common stock underlying the warrants issuable upon
exercise of the representative's warrants are identical to those offered to the
public hereby. The representative's warrants contain anti-dilution provisions
providing for adjustment of the number of securities issuable upon the exercise
thereof under certain circumstances. The representative's warrants grant to the
holders thereof and to the holders of the underlying common stock and warrants
certain rights of registration of the common stock and warrants underlying the
representative's warrants.
Digital Lava has agreed to grant the representative a right of first
refusal for a period of three (3) years after the effective date of the
registration statement for any sale of securities made by Digital Lava or any
future affiliates or subsidiaries.
Digital Lava has also agreed to provide for a finder's fee to the
representative if Digital Lava completes a merger, acquisition, joint venture or
any other capital business transaction in which the representative introduces
Digital Lava to the other party or parties, for a period of five years following
the effective date of the registration statement, equal to 5% of the first
$3,000,000 of consideration involved in such transaction, 4% of the next
$3,000,000 of consideration, 3% of the next $2,000,000 of consideration, 2% of
the next $2,000,000 of consideration and 1% of the excess, if any, over
$10,000,000 of consideration.
Digital Lava has agreed that for five (5) years from the effective date of
the registration statement, the representative may designate one person for
election to Digital Lava's Board of Directors (the "Designation Right"). In the
event that the representative elects not to exercise the Designation Right, then
it may designate one person to attend all meetings of Digital Lava's Board of
Directors for a period of three years. Digital Lava has agreed to reimburse the
representative's designee for all out-of-pocket expenses incurred in connection
with the designee's attendance at meetings of the Board of Directors.
In connection with this offering, certain underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market prices of the common stock
and warrants. Such transactions may include stabilization transactions effected
in accordance with Rule 104 of Regulation M, pursuant to which such persons may
bid for or purchase the common stock and/or warrants for the purpose of
stabilizing their respective market prices. The underwriters also may create a
short position for the account of the underwriters by selling more common stock
and warrants in connection with the offering than they are committed to purchase
from Digital Lava, and in such case may purchase common stock and warrants in
the open market following completion of the offering to cover all or a portion
of such short position. The underwriters may also cover all or a portion of such
short position, up to 360,000 shares of common stock and 180,000 redeemable
common stock purchase warrants, by exercising the over-allotment option referred
to above. In addition, the representative may impose "penalty bids" under
contractual arrangements with the underwriters whereby it may reclaim from an
underwriter ( or dealer participating in the offering) for the account of other
underwriters, the selling concession with respect to the common stock and
warrants that are distributed in the offering but subsequently purchased for the
account of the underwriters in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the prices of the
common stock and warrants at a level above that which might otherwise prevail in
the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.
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<PAGE>
Prior to this offering, there has been no public market for the common
stock or redeemable common stock purchase warrants. Accordingly, the initial
public offering price of the common stock, the initial public offering price of
the redeemable common stock purchase warrants and the terms of the redeemable
common stock purchase warrants were determined by negotiation between Digital
Lava and the representatives. Among the factors considered in determining such
prices and terms, in addition to the prevailing market conditions, were the
history of and the prospects for the industry in which Digital Lava competes, an
assessment of Digital Lava's management, the prospects of Digital Lava, its
capital structure and such other factors that were deemed relevant. The offering
price does not necessarily bear any relationship to the assets, results of
operations or net worth of Digital Lava.
The expenses of the offering, other than underwriting discounts and
commissions, are set forth below:
SEC Registration Fee ................................ $ 11,867
American Stock Exchange Listing Fee ................. $ 32,500
NASD Filing Fee ..................................... $ 4,768
Accounting Fees and Expenses* ....................... $250,000
Printing and Engraving* ............................. $100,000
Legal Fees and Expenses* ............................ $350,000
Blue Sky Fees and Expenses* ......................... $ 20,000
Transfer Agent and Registrar Fees* .................. $ 5,000
Miscellaneous Expenses* ............................. $ 25,865
--------
Total ............................................... $800,000
========
- --------
* Estimated.
Digital Lava will pay all expenses of the offering, including the expenses
of registering the selling stockholders' shares.
Dirks & Company, Inc., the representative of the underwriters, commenced
operations in July 1997. Dirks & Company has co-managed only two public
offerings of securities and participated as an underwriter in only three public
offerings of securities. Accordingly, the representative has limited experience
as a co-manager or underwriter of public offerings of securities. In addition,
the representative is a relatively small firm and no assurance can be given that
the representative will be able to participate as a market maker in the common
stock or warrants. No assurance can be given that any broker-dealer will be a
market maker in either of the common stock or the warrants.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which are filed as exhibits to the registration
statement. See "Additional Information."
LEGAL MATTERS
The validity of the securities being offered by this prospectus will be
passed upon for Digital Lava by Ehrenreich Eilenberg Krause & Zivian LLP , New
York, New York. Such firm beneficially owns of 57,273 shares of common stock.
Orrick, Herrington & Sutcliffe LLP, New York, New York, has acted as counsel to
the underwriters in connection with this offering.
-53-
<PAGE>
EXPERTS
The financial statements of Digital Lava Inc. as of December 31, 1997 and
for the years ended December 31, 1997 and 1996 included in this prospectus have
been so included in reliance on the report, which contains an explanatory
paragraph relating to Digital Lava's ability to continue as a going concern as
described in note 2 to such financial statements, of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of such firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
Digital Lava has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement") under the Securities Act with respect to the securities offered
hereby. This prospectus, which forms a part of the Registration Statement, does
not contain all the information set forth in the Registration Statement, as
permitted by the rules and regulations of the Commission. For further
information with respect to Digital Lava and the securities offered hereby,
reference is made to the Registration Statement. Statements contained in this
prospectus as to the contents of any contract or other document that has been
filed as an exhibit to the Registration Statement are qualified in their
entirety by reference to such exhibits for a complete statement of their terms
and conditions. The Registration Statement and other information may be read and
copied at the Commission's Public Reference Room at 450 Fifth Street N.W.,
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the Commission at 1-800-SEC-0330. The
Commission maintains a Web site at http://www.sec.gov that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the Commission. Digital Lava's Web site can be accessed
at www.digitallava.com.
Upon effectiveness of the Registration Statement, Digital Lava will be
subject to the reporting and other requirements of the Exchange Act and intends
to furnish its shareholders annual reports containing financial statements
audited by its independent auditors and to make available quarterly reports
containing unaudited financial statements for each of the first three quarters
of each year.
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<PAGE>
DIGITAL LAVA INC.
Index to Financial Statements
Page
----
Report of Independent Accountants...................................... F-2
Balance Sheet.......................................................... F-3
Statement of Operations................................................ F-4
Statement of Stockholders' Deficit..................................... F-5
Statement of Cash Flows................................................ F-6
Notes to Financial Statements.......................................... F-7
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Digital Lava Inc.
The reverse stock split described in Note 12 to the financial statements has not
been consummated at January 12, 1999. When it has been consummated, we will be
in a position to furnish the following report:
"In our opinion, the accompanying balance sheet and related statements of
operations, of stockholders' deficit and of cash flows present fairly, in
all material respects, the financial position of Digital Lava Inc. at
December 31, 1997, and the results of its operations and its cash flows for
the years ended December 31, 1996 and 1997 in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses and
negative cash flows from operations, has deficits in working capital and
stockholders' equity, and expects to incur future losses. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described
in Note 2. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty."
PricewaterhouseCoopers LLP
New York, New York
July 31, 1998 except
as to Note 12 which is as of
January 12, 1999
F-2
<PAGE>
DIGITAL LAVA INC.
Balance Sheet
<TABLE>
<CAPTION>
Pro Forma
September 30,
December 31, September 30, 1998
1997 1998 (Note 13)
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents .................................. $ 173,262 $ 11,786 $ 11,786
Accounts receivable ........................................ 167,112 183,952 183,952
Other current assets ....................................... 89,202 26,472 26,472
Deferred offering costs .................................... -- 289,112 289,112
------------ ------------ ------------
Total current assets ................................... 429,576 511,322 511,322
Fixed assets, net .......................................... 94,137 75,075 75,075
Other assets ............................................... 1,965 16,969 16,969
------------ ------------ ------------
$ 525,678 $ 603,366 $ 603,366
============ ============ ============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable ........................................... $ 391,245 $ 424,496 $ 424,496
Accrued interest ........................................... 239,439 874,176 468,472
Accrued expenses ........................................... 60,151 511,328 511,328
Notes payable, net of debt discount ........................ 3,452,088 4,632,749 3,269,095
Deferred revenue ........................................... -- 186,254 186,254
------------ ------------ ------------
Total current liabilities .............................. 4,142,923 6,629,003 4,859,645
------------ ------------ ------------
Commitments and contingencies (Notes 11 and 12)
Stockholders' deficit:
Convertible preferred stock - Series A, B, B-1
and C, $.0001 par value; 5,000,000 shares authorized;
98,349 shares issued and outstanding at
December 31, 1997 and September 30, 1998, respectively;
none issued and outstanding pro forma (liquidation
preference of $1,626,965) .............................. 9 9 --
Common stock, $0.0001 par value; 35,000,000 shares
authorized; 131,524 shares issued and outstanding at
December 31, 1997 and September 30, 1998, respectively;
1,996,092 issued and outstanding pro forma ............. 13 13 199
Additional paid-in capital ................................. 3,351,031 4,203,859 10,227,303
Accumulated deficit ........................................ (6,968,298) (10,229,518) (14,483,781)
------------ ------------ ------------
Total stockholders' deficit ............................ (3,617,245) (6,025,637) (4,256,279)
------------ ------------ ------------
$ 525,678 $ 603,366 $ 603,366
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
DIGITAL LAVA INC.
Statement of Operations
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
-------------------------- --------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Software licenses .................. $ -- $ 273,989 $ 131,804 $ 832,090
Consulting and services ............ -- 290,583 244,664 315,542
----------- ----------- ----------- -----------
Total revenues ................. -- 564,572 376,468 1,147,632
----------- ----------- ----------- -----------
Cost of revenues:
Cost of software licenses .......... -- 1,968 1,059 7,708
Cost of consulting and services .... -- 121,008 100,561 236,631
----------- ----------- ----------- -----------
Total cost of revenues ......... -- 122,976 101,620 244,339
----------- ----------- ----------- -----------
Gross profit ................... -- 441,596 274,848 903,293
----------- ----------- ----------- -----------
Operating costs and expenses:
Selling, general and administrative 1,522,757 3,316,961 2,337,115 2,773,240
Research and development ........... 421,087 445,162 322,385 334,142
----------- ----------- ----------- -----------
Total operating costs and
expenses ..................... 1,943,844 3,762,123 2,659,500 3,107,382
----------- ----------- ----------- -----------
Loss from operations ........... (1,943,844) (3,320,527) (2,384,652) (2,204,089)
----------- ----------- ----------- -----------
Other income and expenses:
Interest expense ................... (450,563) (924,842) (762,517) (1,057,131)
Other income ....................... 9,750 -- -- --
----------- ----------- ----------- -----------
Total other income
and expenses ................. (440,813) (924,842) (762,517) (1,057,131)
----------- ----------- ----------- -----------
Net loss ....................... $(2,384,657) $(4,245,369) $(3,147,169) $(3,261,220)
=========== =========== =========== ===========
Basic and diluted loss per
share (Note 2) ..................... $ (93.00) $ (31.14) $ (23.75) $ (22.05)
=========== =========== =========== ===========
Weighed average common shares
used in basic and diluted loss per
share (Note 2) .................... 25,641 136,353 132,492 147,933
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DIGITAL LAVA INC.
Statement of Stockholders' Deficit
<TABLE>
<CAPTION>
Series A Series B Series B-1 Series C
Convertible Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
--------------- --------------- ------------------ ----------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 .............................. 88,584 $ 9 1,772 $ -- 602 $ -- -- $ --
Issuance of convertible preferred stock for cash ...... -- -- 2,471 -- 328 -- 2,462 --
Issuance of convertible preferred stock warrants
in conjunction with notes payable ................... -- -- -- -- -- -- -- --
Issuance of convertible preferred stock warrants
for services ........................................ -- -- -- -- -- -- -- --
Modification of outstanding convertible
preferred stock warrants ............................ -- -- -- -- -- -- -- --
Issuance of convertible preferred stock for services .. -- -- 383 -- -- -- 821 --
Issuance of convertible preferred stock in exchange for
elimination of anti-dilution rights ................. -- -- 926 -- -- -- -- --
Issuance of common stock warrants in
conjunction with notes payable ...................... -- -- -- -- -- -- -- --
Issuance of common stock for services ................. -- -- -- -- -- -- -- --
Net loss .............................................. -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ -------- ------ -------
Balance, December 31, 1996 .............................. 88,584 9 5,552 -- 930 -- 3,283 --
Issuance of common stock warrants in
conjunction with notes payable ...................... -- -- -- -- -- -- -- --
Issuance of common stock warrants for services ........ -- -- -- -- -- -- --
Modification of outstanding convertible
preferred stock warrants ............................ -- -- -- -- -- -- -- --
Modification of outstanding common stock warrants ..... -- -- -- -- -- -- --
Issuance of common stock for services ................. -- -- -- -- -- -- -- --
Options issued by management and principal
stockholders for services performed
by consultants ...................................... -- -- -- -- -- -- -- --
Issuance of common stock for elimination of
anti-dilution rights ................................ -- -- -- -- -- -- -- --
Net loss .............................................. -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ -------- ------ -------
Balance, December 31, 1997 .............................. 88,584 9 5,552 -- 930 -- 3,283 --
Unaudited:
Modification of outstanding convertible
preferred stock warrants ............................ -- -- -- -- -- -- -- --
Modification of outstanding common stock warrants ..... -- -- -- -- -- -- --
Issuance of common stock warrants for services ........ -- -- -- -- -- -- --
Issuance of common stock warrants in
conjunction with notes payable ...................... -- -- -- -- -- -- -- --
Modification of options issued by management
and principal stockholders for services
performed by consultants ............................ -- -- -- -- -- -- -- --
Net loss
------ ------ ------ ------ ------ -------- ------ -------
Balance, September 30, 1998 (unaudited) ................. 88,584 $ 9 5,552 $ -- 930 $ -- 3,283 $ --
====== ====== ====== ====== ====== ======== ====== =======
<CAPTION>
Common Stock Additional
--------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ........................... -- $ -- $ 216,991 $ (338,272) $ (121,272)
Issuance of convertible preferred stock for cash ... -- -- 469,680 -- 469,680
Issuance of convertible preferred stock warrants
in conjunction with notes payable ................ -- -- 803,170 -- 803,170
Issuance of convertible preferred stock warrants
for services ..................................... -- -- 50,800 -- 50,800
Modification of outstanding convertible preferred
stock warrants ................................... -- -- 35,000 -- 35,000
Issuance of convertible preferred stock for services -- -- 110,000 -- 110,000
Issuance of convertible preferred stock in exchange
for elimination of anti-dilution rights .......... -- -- 1 -- 1
Issuance of common stock warrants in
conjunction with notes payable ................... -- -- 2,500 -- 2,500
Issuance of common stock for services .............. 110,732 11 101,185 -- 101,196
Net loss ........................................... -- -- -- (2,384,657) (2,384,657)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 ........................... 110,732 11 1,789,327 (2,722,929) (933,582)
Issuance of common stock warrants in
conjunction with notes payable ................... -- -- 501,319 -- 501,319
Issuance of common stock warrants for services ..... -- -- 5,100 -- 5,100
Modification of outstanding convertible preferred
stock warrants ................................... -- -- 153,535 -- 153,535
Modification of outstanding common
stock warrants ................................... -- -- 59,663 -- 59,663
Issuance of common stock for services .............. 4,378 -- 10,000 -- 10,000
Options issued by management and principal
stockholders for services performed
by consultants .................................. -- -- 832,089 -- 832,089
Issuance of common stock for elimination of
anti-dilution rights ............................. 16,414 2 (2) -- --
Net loss ........................................... -- -- -- (4,245,369) (4,245,369)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 ........................... 131,524 13 3,351,031 (6,968,298) (3,617,245)
Unaudited:
Modification of outstanding convertible preferred
stock warrants ................................... -- -- 30,978 -- 30,978
Modification of outstanding common
stock warrants ................................... -- -- 10,050 -- 10,050
Issuance of common stock warrants for services ..... -- -- 49,981 -- 49,981
Issuance of common stock warrants in
conjunction with notes payable ................... -- -- 415,419 -- 415,419
Modification of options issued by management
and principal stockholders for services
performed by consultants ........................ -- -- 346,400 -- 346,400
Net loss ........................................... -- -- -- (3,261,220) (3,261,220)
------------ ------------ ------------ ------------ ------------
Balance, September 30, 1998 (unaudited) .............. 131,524 $ 13 $ 4,203,859 $(10,229,518) $ (6,025,637)
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
DIGITAL LAVA INC.
Statement of Cash Flows
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
------------------------------ ------------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................. $(2,384,657) $(4,245,369) $(3,147,169) $(3,261,220)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Deferred revenues ................................ -- -- -- 186,254
Depreciation and amortization .................... 31,891 104,890 48,453 147,526
Amortization of debt discount .................... 396,368 716,433 617,608 544,905
Compensation from grant of
non-employee stock options
and warrants .................................. 261,996 866,589 789,055 396,381
Changes in assets and liabilities
affecting operating cash flows:
Accounts receivables ........................... -- (167,112) (72,426) (16,840)
Other assets ................................... -- (3,406) -- (14,543)
Accounts payable ............................... 12,006 334,601 79,254 33,251
Accrued interest ............................... 57,279 15,411 118,638 634,737
Accrued expenses ............................... (39,845) 182,160 (16,823) 451,177
----------- ----------- ----------- -----------
Net cash used in operating activities .................. (1,664,962) (2,195,803) (1,583,410) (898,372)
----------- ----------- ----------- -----------
Cash flows used in investing activities:
Acquisition of fixed assets .......................... (105,519) (55,620) (54,185) (23,992)
Deferred offering costs .............................. -- -- -- (289,112)
----------- ----------- ----------- -----------
Net cash used in investing activities .................. (105,519) (55,620) (54,185) (313,104)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from notes payable .......................... 1,300,000 2,869,500 2,169,500 1,050,000
Repayment of notes payable ........................... -- (450,000) (450,000) --
Proceeds from issuance of preferred stock ............ 469,680 -- -- --
----------- ----------- ----------- -----------
Net cash provided by financing activities .............. 1,769,680 2,419,500 1,719,500 1,050,000
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents .......................................... (801) 168,077 81,905 (161,476)
Cash and cash equivalents at beginning of
period ............................................... 5,986 5,185 5,185 173,262
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period ............. $ 5,185 $ 173,262 $ 87,090 $ 11,786
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
1. Nature of Business and Reorganization
Nature of Business
Digital Lava Inc. (the "Company") develops and markets video publishing
software applications for corporate training, communications, distance learning,
research and other applications. The Company's technology allows users to
organize and manage video content, link video to other types of files and
publish video with all of the linked information on CD-ROM or DVD, corporate
intranets or the public Internet.
Reorganization
The Company originally operated as LAVA L.L.C., a New Jersey limited
liability company (the "LLC") which was formed in July 1995. Pursuant to a
Merger Agreement dated November 26, 1996 by and among Digital Lava Inc., a
Delaware Corporation formed in June 1996 specifically for the purpose of this
merger, and the LLC, the ownership interests in the LLC were exchanged for
shares of series A, B, B-1 and C convertible preferred stock of Digital Lava
Inc. (hereinafter all references to the Company refer to Digital Lava Inc. and
its predecessor, the LLC). The accompanying financial statements and footnotes
reflect the reorganization for all periods presented.
2. Summary of Significant Accounting Policies
Basis of presentation
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. Since inception, the Company has
suffered recurring losses and negative cash flows from operations, has deficits
in working capital and stockholders' equity, and expects to incur future losses.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The Company's ability to continue as a going concern is
dependent upon its ability to generate sufficient cash flow to meet its
obligations as they come due. In this regard, management has implemented a plan
to raise additional equity financing through an initial public offering of its
common stock ("IPO") and believes that such financing, together with existing
cash balances and other sources of liquidity (i.e., debt, equity, etc), will be
sufficient to meet its cash needs for at least the next 12 months. The
accompanying financial statements do not include any adjustments relating to the
recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
Unaudited interim information
The information presented as of September 30, 1998, and for the nine month
periods ended September 30, 1997 and 1998, has not been audited. In the opinion
of management, the unaudited interim financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the Company's financial position as of September 30, 1998, and
the results of its operations and its cash flows for the nine months ended
September 30, 1997 and 1998, and the stockholders deficit for the nine months
ended September 30, 1998.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the management of the Company to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
F-7
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
Cash equivalents
The Company considers all highly liquid investments purchased with an
initial maturity of 90 days or less to be cash equivalents and investments with
original maturities of greater than 90 days to be short-term investments.
Fair value of financial instruments
All current assets and liabilities are carried at cost, which approximates
fair value because of the short maturity of those instruments.
Concentration of risk
Financial instruments which potentially subject the Company to
concentration of credit risk consists primarily of accounts receivable. The
company maintains an allowance for uncollectible accounts receivable based upon
expected collectibility and generally does not require collateral. At December
31, 1997, no allowance for uncollectible accounts was deemed necessary by
management. For the year ended December 31, 1997, one customer accounted for
approximately 43% of the Company's total net revenues.
Property and equipment
Property and equipment comprised of computer and office equipment and is
stated at cost, less accumulated depreciation of $67,002 at December 31, 1997.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets, generally 3 to 7 years. Maintenance and repair
expenses are charged to operations as incurred.
Deferred offering costs
In connection with the Company's proposed IPO, the Company has incurred
certain costs which have been deferred. In the event the proposed IPO is not
consummated, the deferred offering costs will be expensed.
Revenue recognition
Revenues from the licensing of the Company's software products are
recognized upon shipment to the customer, pursuant to an executed software
licensing agreement when no significant vendor obligations exist and collection
is probable. If acceptance by the customer is required, revenue is recognized
upon customer acceptance. Consulting and service revenues consist of short-term
professional service contracts, such as system development, consulting and video
encoding and capsule creation, are deferred until significant contractual
obligations have been fulfilled. Costs associated with professional service
contracts, such as salaries and materials, are deferred until the related
revenue is recognized.
Software development costs
Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as incurred
until technological feasibility has been established. After technological
feasibility is established, any additional costs would be capitalized. Through
December 31, 1997, software development has been substantially completed
concurrently with the establishment of technological feasibility and,
accordingly, no costs have been capitalized.
F-8
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
Income taxes
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is provided if it
is more likely than not that some or all of the deferred tax asset will not be
realized.
Prior to November 1996, the Company operated as a limited liability company
that was treated as a partnership for federal and state income tax purposes. As
a result, all federal and state tax matters for the Company prior to November
1996 are the responsibility of the members. There are no pro forma income taxes
presented for the period from January 1, 1996 to November 1996 as the Company
incurred losses for both book and tax purposes.
Stock based compensation
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company accounts for its stock-based compensation arrangements pursuant to APB
Opinion No. 25, Accounting for Stock Issued to Employees. In accordance with the
provisions of SFAS No. 123, the Company discloses the pro forma effects of
accounting for these arrangements using the minimum value method to determine
fair value.
Loss per share
Basic earnings per share ("Basic EPS") is computed by dividing net loss
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share ("Diluted EPS") gives
effect to all dilutive potential common shares outstanding during a period. In
computing Diluted EPS, the treasury stock method is used in determining the
number of shares assumed to be purchased from the conversion of common stock
equivalents. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 98, common stock and convertible preferred stock issued for nominal
consideration prior to the anticipated effective date of the initial public
offering ("IPO"), are included in the calculation of basic and diluted net loss
per share as if they were outstanding for all periods presented.
Net loss per share for the years ended December 31, 1996 and 1997 does not
include the effect of 98,349 (983,490 on an as-if converted basis) shares of
convertible preferred stock outstanding, 5,471 and 42,237, respectively, of
stock options outstanding with a weighted average exercise price of $9.14 per
share, 17,125 (171,250 on an as-if converted basis) warrants to purchase
outstanding shares of a series A convertible preferred stock with exercise
prices ranging from $38.84 to $182.78 per share, or 27,356 and 446,254
respectively, of warrants to purchase common stock with exercise prices ranging
from $3.88 to $11.42 per share, because their effects are anti-dilutive.
New accounting pronouncements
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, Reporting Comprehensive Income ("SFAS 130"). SFAS No. 130 establishes
standards for reporting comprehensive income, defined as all changes in equity
from nonowner sources. Adoption of SFAS No. 130 did not have a material effect
on the Company's financial position or results of operations.
F-9
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. SFAS
No. 131 establishes standards for the way public enterprises report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to stockholders. Adoption of SFAS No. 131 did not have
a material effect on the Company's financial position or results of operations.
Effective January 1, 1998, the Company adopted American Institute of
Certified Public Accountants Statement of Position 97-2, Software Revenue
Recognition (SOP 97-2). SOP 97-2 generally requires revenue earned on software
arrangements involving multiple elements such as software products, upgrades,
enhancements, post-contract customer support, installation and training to be
allocated to each element based on the relative fair values of the elements. The
adoption of SOP 97-2 did not have an effect on the Company's financial position
or results of operations.
3. Accrued Expenses
Accrued expenses comprised the following:
December 31, September 30,
1997 1998
-------- --------
Accrued payroll ........................ $ 46,097 $131,315
Other accrued liabilities .............. 14,054 380,013
-------- --------
$ 60,151 $511,328
======== ========
4. Related Party Transactions
In January 1997, certain members of management and principal stockholders
of the Company granted a consultant options to acquire up to 13,958 of their
shares of series A convertible preferred stock and 19,941 of their shares of
common stock in exchange for services provided to the Company. The options have
an exercise price of $45.70 per share of series A convertible preferred stock
and $4.57 per share of common stock. The Company has recorded the fair value of
the options, in the amount of $754,554 as a contribution of capital by the
stockholders and as general and administrative expense. As discussed in Note 12,
these options were amended in May 1998.
In December 1997, certain members of management and principal stockholders
of the Company granted options to acquire 1,642 of their shares of series A
convertible preferred stock to a consultant in exchange for certain legal and
advisory services provided to the Company. The options have an exercise price of
$45.70 per share. The Company has recorded the fair value of the options, in the
amount of $77,535, as a contribution of capital by the stockholders and as
general and administrative expense. As discussed in Note 12, these options were
amended in May 1998.
Since inception, the Company has received ongoing consulting and legal
services from stockholders. Services rendered for years ended December 31, 1996
and 1997, amounted to $244,316 and $235,669, respectively, of which $153,475 is
included in accounts payable at December 31, 1997.
F-10
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
5. Notes Payable
December 31, September 30,
1997 1998
----------- -----------
Notes payable:
Notes payable ...................... $ 2,117,500 $ 2,117,500
Convertible notes payable .......... 902,000 902,000
Secured convertible notes payable .. 700,000 1,750,000
----------- -----------
3,719,500 4,769,500
Less: debt discount ................ (267,412) (136,751)
----------- -----------
$ 3,452,088 $ 4,632,749
=========== ===========
Notes payable
From March 1996 to July 1996, the Company issued an aggregate of $750,000
in unsecured promissory notes. The notes, as amended, bear interest at rates
ranging from 9% to 12% per annum and are due and payable on the earlier of
December 31, 1998 or upon the date the Company obtains financing in which gross
proceeds exceed $3.5 million. In conjunction with the issuance of the notes, the
holders were granted warrants to purchase 10,669 shares of series A convertible
preferred stock at exercise prices ranging from $68.54 to $182.78 per share. The
value of the warrants at the time of issuance of $535,400 was determined using
the Black-Scholes model and amortized as interest expense over the initial term
of the notes. In July 1996 and February and August 1997, in exchange for waiving
the acceleration of the maturity date caused by the Company raising additional
financing in excess of a specified amount and extending the maturity date of the
notes until December 31, 1998, the exercise price of the warrants were reduced
to prices ranging from $45.70 to $68.54. The total incremental difference
between the value of the warrants before and after the modification of the
terms, as determined using the Black-Scholes model, was $35,000 and $140,535 for
the years ended December 31, 1996 and December 31, 1997, respectively, and is
being amortized as interest expense over the remaining life of the debt. The
warrants are exercisable at any time prior to dates ranging from March 2006 to
July 2006. None of the warrants have been exercised as of September 30, 1998.
In February and March 1997, the Company issued an aggregate of $200,000 in
unsecured promissory notes. The notes, as amended, bear interest at 12% per
annum and are due and payable on the earlier of December 31, 1998 or upon the
date the Company obtains financing in which gross proceeds exceed $3.5 million.
In conjunction with the issuance of the notes, the holders of the notes were
granted warrants to purchase 23,101 shares of common stock at an exercise price
of $6.85. The value of the warrants at the time of issuance of $18,156 was
determined using the Black-Scholes model and was amortized as interest expense
over the initial term of the notes. In August 1997, in exchange for waiving the
acceleration of the maturity date of the notes caused by the Company raising
additional financing in excess of a specified amount until December 31, 1998,
the exercise price of the warrants was reduced to $4.57. The total incremental
difference between the value of the warrants before and after the modification
of the warrant terms, as determined using the Black-Scholes model, was $8,444
and is being amortized as interest expense over the remaining life of the notes.
The warrants are exercisable at any time prior to March 2007. None of the
warrants have been exercised as of September 30, 1998.
In September 1996, the Company completed a private placement of 9 units to
new investors, each consisting of a $50,000 senior promissory note which bears
interest at 12% per annum and was due and payable on the earlier of April 3,
1997 or upon the date the Company obtains financing in which gross proceeds
exceed $1.5 million.
F-11
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
In addition, each unit included warrants to purchase 548 shares of series A
convertible preferred stock at an exercise price of $114.24 per share. Proceeds
received from the offering of $450,000 were repaid in April 1997. The value of
the 4,932 warrants at the time of issuance of $258,970 was determined using the
Black-Scholes model and was amortized as interest expense over the period the
notes were outstanding. The warrants are exercisable at any time prior to
September 2006. None of the warrants have been exercised as of September 30,
1998.
During the period from December 1996 to February 1997, the Company
completed a private placement of 7 units to existing investors, each consisting
of a $50,000 senior promissory note which bears interest at 12% per annum and,
through various amendments, is payable on the earlier of December 31, 1998 or
upon the date the Company obtains financing in which gross proceeds exceed $2.0
million. In addition, each unit included warrants to purchase 5,472 shares of
common stock at an exercise price of $11.42 per share. Proceeds from the
offering totaled $350,000. The total value of the 38,304 warrants at the time of
issuance of $8,500 was determined using the Black-Scholes model and was
amortized as interest expense over the initial term of the notes. In August
1997, in exchange for the waiving the acceleration of the maturity date of the
notes caused by the Company raising additional financing in excess of a
specified amount until December 31, 1998, the exercise price of the warrants was
reduced to $6.85. The incremental difference between the value of the warrants
before and after the modification of the terms, as determined using the
Black-Scholes model, was $16,800 and is being amortized as interest expense over
the remaining life of the debt. The warrants are exercisable at any time prior
to February 2007. None of the warrants have been exercised as of September 30,
1998.
During the period from April 1997 to May 1997, the Company completed a
private placement of 32.7 units to new investors, each consisting of a $25,000
senior promissory note, which bears interest at 6% per annum and, as amended, is
due and payable on the earlier of (i) dates ranging from April 15 1998 to May
30, 1998 or (ii) upon the closing of an initial public offering. In addition,
each unit included warrants to purchase 2,736 shares of common stock at an
exercise price of $9.14 per share. Proceeds from the offering totaled $817,500.
The value of the 89,467 warrants at the time of issuance of $58,043 was
determined using the Black-Scholes model and was amortized as interest expense
over the initial term of the notes. In October and November 1997, in exchange
for extending the maturity date of the notes until December 31, 1998, the
exercise price of the warrants was reduced to $8.23 per share. The incremental
difference between the value of the warrants before and after the modification
of the terms of the warrants, as determined using the Black-Scholes model, was
$8,175 and was amortized as interest expense over the remaining life of the
debt. The warrants are exercisable at any time prior to dates ranging from April
2003 to May 2005. None of the warrants have been exercised as of September 30,
1998. As of May 30, 1998, the Company was in default of the repayment terms of
these notes. As described in Note 12, the Company renegotiated the terms for
promissory notes with an aggregate principle amount of $630,000 and amended the
notes for the remaining $187,500.
Convertible notes payable
During the period from June 1997 to July 1997, the Company completed a
private placement of 36.08 units to new investors, each consisting of a $25,000
convertible promissory note which bears interest at 6% per annum and were due
and payable on the earlier of (i) dates ranging from June 25, 1998 to July 28,
1998 or (ii) upon the closing of an initial public offering. In addition, each
unit included warrants to purchase 2,736 shares of common stock at an exercise
price of $8.86 per share. Proceeds from the offering totaled $902,000.
Outstanding principal and accrued interest is mandatorily convertible upon the
date the Company obtains financing in which gross proceeds exceed $3.5 million
at a price equal to the price obtained in the equity offering. The value of the
98,715 warrants at the time of issuance of $114,554 was determined using the
Black-Scholes model and was amortized as interest expense over the original
maturity of the notes. In December 1997, in exchange for extending the
F-12
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
maturity date of the notes, the exercise price of the warrants was reduced to
$7.40 per share. The incremental difference between the value of the warrants
before and after the modification of the terms of the warrants, as determined
using the Black-Scholes model, was $19,844 and is being amortized as interest
expense over the remaining life of the debt. The warrants are exercisable at any
time prior to dates ranging from June to July 2005. None of the warrants have
been exercised as of September 30, 1998. As of July 28, 1998, the Company was in
default of the repayment terms of the notes and as such they are no longer
convertible. As described in Note 12, the Company renegotiated the terms for
promissory notes with an aggregate principle amount of $902,000.
Secured convertible notes payable
In November and December 1997, the Company completed a bridge financing of
70 units (the "Bridge Units") to investors, each consisting of a $10,000 secured
convertible promissory note (the "Bridge Notes") which bears interest at 12% per
annum plus a one time fee of 10% of the principal amount loaned ("10% Success
Fee") payable upon the payment of the note which is due and payable on the
earlier of (i) November 20, 1998, (ii) upon the closing of an initial public
offering or (iii) upon the date the Company obtains financing in which gross
proceeds exceed $5.0 million. In addition, each unit included warrants to
purchase 1,164 shares of common stock at an exercise price of $8.68 per share.
Proceeds from the offering totaled $700,000 as of December 31, 1997. Outstanding
principal, accrued interest and the 10% Success Fee is convertible at each
holder's option based on a $15 million valuation of the Company or at a price
equal to the price obtained in a private placement of equity securities. The 10%
Success Fee and the value of the 81,480 warrants granted at the time of issuance
of $168,812 are being amortized as interest expense over the period the notes
are outstanding. The warrants are exercisable at any time prior to February
2003. None of the warrants have been exercised as of September 30, 1998. As of
November 20, 1998, the Company was in default on the repayment terms of the
Bridge Notes. As described in Note 12, the Company entered into agreements with
certain holders of the Bridge Notes to extend the due dates of their Bridge
Notes.
Finder warrants
In September 1996, in connection with the September 1996 issuance of
promissory notes, the Company issued warrants to purchase 438 shares of series A
convertible preferred stock at exercise prices ranging from $114.24 to $182.78
per share as a finders fee. The value of the warrants granted of $8,800 was
determined using the Black-Scholes model and was amortized as debt issuance
costs over the period the notes were outstanding. The warrants are exercisable
at any time prior to September 30, 2006. None of the warrants have been
exercised as of September 30, 1998.
In connection with the April 1997 to July 1997 private placements of
promissory notes, the Company issued warrants to purchase 60,513 shares of
common stock at exercise prices ranging form $8.86 to $11.42 per share as a
finders fee. The value of the warrants granted of $79,005 was determined using
the Black-Scholes model and was amortized as debt issuance costs over the
original maturity date of the related notes. The warrants are exercisable at any
time prior to dates ranging from February 2003 to July 2008. None of the
warrants have been exercised as of September 30, 1998.
In connection with the November and December 1997 bridge financing, the
Company issued warrants to purchase 27,356 shares of common stock at an exercise
price of $8.68 per share as a finders fee. The value of the warrants granted of
$56,750 was determined using the Black-Scholes model and was amortized as debt
issuance costs over the original maturity date of the related notes. The
warrants are exercisable at any time prior to February 2003. None of the
warrants have been exercised as of September 30, 1998.
F-13
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
Amortization of debt issue costs for the year ended December 31, 1996 and
1997 was $9,910 and $59,889, respectively, of which $91,167 of unamortized costs
is included in other current assets at December 31, 1997.
6. Convertible Preferred Stock
Convertible preferred stock, $.0001 par value, consists of the following:
Shares Issued Liquidation
and Outstanding Preference
Shares December 31, December 31,
Series: Authorized 1997 1997
---------- ---------- ----------
A 966,065 88,584 $ 809,565
B 50,740 5,552 507,400
B-1 8,500 930 85,000
C 30,000 3,283 225,000
Undesignated 3,944,695 -- --
---------- ---------- ----------
5,000,000 98,349 $1,626,965
========== ========== ==========
The Company has reserved 17,125 shares of series A preferred stock for the
exercise of series A warrants issued.
From August 1995 to June 1996, the Company sold 4,243, 930 and 2,462 shares
of series B, B-1 and C convertible preferred stock, respectively, in a private
placement raising gross proceeds of $686,599.
During the year ended December 31, 1996, the Company issued 383 and 821
shares of series B and C convertible preferred stock, respectively, for
services. The fair market value of the stock issued of $110,000 was recognized
as general and administrative expense.
Conversion and voting rights
Each issued share of convertible preferred stock is convertible, in full
and not in part, into ten shares of common stock, subject to certain
adjustments, at the option of the holder and automatically converts upon the
completion of an underwritten public offering. A total of 983,490 shares of
common stock have been reserved for issuance in the event of the conversion of
convertible preferred stock. Each share of preferred stock has a number of votes
equal to the number of shares of common stock into which it is convertible.
Dividends
Each series of preferred stock issued is entitled to receive dividends when
and if declared by the Board. The dividends are noncumulative and payable in
preference to any dividends on common stock. As of December 31, 1997, the
Company had not declared any dividends.
Liquidation
In the event of liquidation, the series C preferred shareholders are
entitled to receive, prior to any distribution to any other shareholders,
approximately $68.54 per share plus all declared and unpaid dividends. The
series B and B-1 preferred shareholders are entitled to receive, after
distribution to series C preferred shareholders and prior
F-14
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
to any distribution to any other shareholders, approximately $91.39 per share
plus all declared and unpaid dividends. The series A preferred shareholders are
entitled to receive, after distribution to series C, B and B-1 preferred
shareholders and prior to any distribution to any other shareholders,
approximately $9.14 per share plus all declared and unpaid dividends. In
addition, the series A preferred shareholders are entitled to share ratably with
the holders of common stock in any remaining distribution.
Anti-dilution
Holders of series B, B-1 and C convertible preferred stock conversion
prices are subject to anti-dilution protection for issuances by the Company of
additional equity shares. In November 1996, in exchange for the issuance of 926
additional shares of series B convertible preferred stock, holders of the series
B convertible preferred stock agreed to cancel their anti-dilution protection
provision. Also, in August 1997, in exchange for the issuance of 16,414 shares
of common stock and warrants to purchase 16,414 shares of common stock at an
exercise price of $9.14 per share, the holder of the series C convertible
preferred stock agreed to cancel the anti-dilution protection provision
contained in the original agreement.
7. Common Stock
In November 1996, the Company issued 110,732 shares of common stock to an
officer of the Company. The fair market value of common stock issued, based upon
management's estimate, of $101,196 was recognized as compensation expense.
In January and March 1997, the Company issued an aggregate of 4,378 shares
of common stock in exchange for consulting services. The fair market value of
the common stock at the time of issuance, based upon management's estimate, of
$10,000 was recognized as general and administrative expense.
8. Warrants
In November 1996, in exchange for legal services provided, the Company
issued warrants to purchase 1,095 shares of series A convertible preferred stock
at an exercise price of $137.09 per share. The value of the warrants granted of
$50,800 was determined using the Black-Scholes model and was recognized as
general and administrative expense. In August 1997, in consideration for
additional legal services performed, the strike price of the warrants were
reduced to $68.54 per share. The incremental difference between the value of the
warrants before and after the modification of $13,000 was recognized as general
and administrative expense. The warrants are exercisable at any time prior to
November 2006. None of the warrants have been exercised as of September 30,
1998.
In January 1997, in exchange for legal services provided, the Company
issued warrants to purchase 10,943 shares of common stock at an exercise price
of $13.71 per share. The value of the warrants granted of $5,100 was determined
using the Black-Scholes model and was recognized as general and administrative
expense. In August 1997, in consideration for additional legal services
performed, the strike price of the warrants were reduced to $6.85 per share. The
incremental difference between the value of the warrants before and after the
modification of $6,400 was recognized as general and administrative expense. The
warrants are exercisable at any time prior to dates ranging from June to
December 2003. None of the warrants have been exercised as of September 30,
1998.
F-15
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
A number of the warrants granted to consultants and in connection with the debt
offerings during 1996 and 1997 contain anti-dilution provisions requiring
adjustment, if at a later date, securities are issued at prices below the
respective warrants exercise price. The following table is a summary of the
shares issuable upon exercise of warrants outstanding as of December 31, 1997 as
adjusted for events which have triggered anti-dilution provisions contained in
the respective warrant agreements:
Common Exercise
Shares Price
Issuable Per
Expiration Upon Common
Issuance Date Date Exercise Share
-------------- ------- --------
March 1996 March 2006 54,712 $ 4.5695
July 1996 July 2006 51,975 4.5695
September 1996 September 2006 64,445 10.0282
September 1996 September 2006 2,971 14.8088
November 1996 November 2006 11,503 6.5198
December 1996 February 2007 21,884 6.8543
January 1997 January 2007 11,503 6.5198
February 1997 February 2007 16,413 6.8543
February 1997 March 2007 11,550 6.8543
March 1997 March 2007 11,550 6.8543
April 1997 April 2003 56,352 8.2251
May 1997 May 2003 33,100 8.2251
May 1997 May 2003 45,711 11.4238
June 1997 June 2005 43,890 7.4730
July 1997 July 2005 76,872 7.4730
August 1997 February 2003 16,413 9.1390
November 1997 February 2003 56,417 8.6172
December 1997 February 2003 52,311 8.6172
------- --------
Total shares and average exercise
price 639,572 $ 7.8098
======= ========
9. Employee Benefits
1996 stock option plan
The Company's 1996 Stock Option Plan (the "1996 Option Plan") permits the
grant of both "incentive stock options" designed to qualify under the Internal
Revenue Code Section 422 and non-qualified stock options. Incentive stock
options may only be granted to employees of the Company whereas non-qualified
stock options may be granted to non-employees, directors and consultants. A
total of 164,132 shares of Common Stock have been reserved for issuance under
the 1996 Option Plan. Each option, once vested, allows the optionee the right to
purchase one share of the Company's Common Stock. The Board of Directors
determines the exercise price of the options; options granted to date generally
vest ratably over four years and expire ten years from the date of grant.
Compensation expense equal to the difference between the assumed fair value of
the Company's Common Stock at the grant date and the exercise price of the
options, if any, is recognized ratably over the vesting period.
F-16
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
Stock option activity can be summarized as follows:
Options Outstanding
--------------------------
Options Weighted Average
Available Shares Exercise Price
--------- -------- ---------------
Balance at December 31, 1995
Authorized 164,132
Granted (6,347) 6,347 $9.14
Canceled 876 (876) $9.14
-------- -------
Balance at December 31, 1996 158,661 5,471 $9.14
Granted (41,690) 41,690 $9.14
Canceled 4,924 (4,924) $9.14
-------- -------
Balance at December 31, 1997 121,895 42,237 $9.14
======== =======
At December 31, 1997, options to purchase 42,237 shares were exercisable of
which 15,785 shares were vested. Options outstanding at December 31, 1997 have a
weighted average remaining contractual life of 9.5 years and weighted average
exercise price of $9.14. Options granted through December 31, 1997 were granted
at exercise prices in excess of fair market value at grant date. The weighted
average grant-date fair value of such options granted during the years ended
December 31, 1996 and 1997 under the minimum value method was less than $.01 per
share.
In October 1997, the Company accelerated the vesting of options to purchase
2,462 shares of common stock, which were granted in March 1997, and granted
additional options to purchase 2,189 shares of common stock which were
immediately vested to a former employee in lieu of severance pay. The assumed
fair value of such options was less than $1,000 based on the Black Scholes
model.
The fair value of each option grant is estimated on the date of grant using
the minimum value method as prescribed in SFAS 123. Assumptions used for options
granted during the years ended December 31, 1996 and 1997 were as follows:
1996 1997
----- ------
Risk free interest rate 6.194% 6.183%
Expected lives (years) 5 5
Expected dividends -- --
Pro forma information regarding net income or loss is required by SFAS 123.
For purposes of pro forma disclosure, the estimated fair value of the options
are amortized to expense over the options' vesting period. Had compensation cost
for these options been determined consistent with the minimum value method
pursuant to SFAS No. 123, the difference between the Company's net income as
reported and as adjusted for the compensation costs for the years ended December
31, 1996 and 1997 would not have been material.
The minimum value method requires input of highly subjective assumptions in
which changes in those assumptions could materially effect the fair value
estimate. In addition, the minimum value method is only allowed for non-public
entities, as public entities are required to include an expected volatility
factor in addition to factors described above. As such, the effects on pro forma
disclosures of applying SFAS 123 are not likely to be representative of the
effects on pro forma disclosures of future years.
F-17
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
10. Income Taxes
There are no income tax assets, liabilities or income tax expense included
in the financial statements. The Company has incurred losses since inception for
both book and tax purposes and as of December 31, 1997, the Company has net
operating loss carryforwards for federal and state purposes of approximately
$2,800,000. Federal and state net operating loss carryforwards begin expiring in
the years 2011 and 2005 respectively. These losses may be subject to limitation
on future year's utilization should certain ownership changes occur.
Temporary differences between the financial statement and tax bases of
assets and liabilities are primarily attributable to net operating loss
carryforwards and capitalized costs. A full valuation allowance has been
provided for the entire amount of the deferred tax assets arising from these
differences as a result of management's current belief that it is more likely
than not that the benefits related to such temporary differences will not be
realized.
11. Commitments and Contingencies
Operating leases
The Company leases its facility under non-cancelable operating lease which
expires in June 2000. The Company may extend the term of the lease for an
additional three-year period at the then current fair market value. Rent expense
under this lease was $23,582 and $51,169 for the years ended December 31, 1996
and 1997. Future minimum lease payments required under the non-cancelable
operating lease are $81,738, $81,738, and $34,058 for the years ending December
31, 1998, 1999 and 2000, respectively.
In March 1997, the Company entered into a development and two-year software
licensing agreement for the development and license of software to be included
and distributed with one of the Company's software products. Under the terms of
the agreement, royalties are payable on a per unit basis in relation to sales
volume and sales price, and include a one time payment and guaranteed minimum
annual commitment. At December 31, 1997, the Company is committed to payments of
$20,000 in respect of future minimum royalty obligations over the remainder of
this agreement.
12. Subsequent Events
In January and February 1998, the Company issued 105 additional Bridge
Units to investors, raising gross proceeds of $1,050,000. The 10% Success Fee
and the value of the 122,220 warrants granted at the time of issuance of
$253,217 are being amortized as interest expense over the period the notes are
outstanding. In connection with this offering, the Company also issued
additional warrants to acquire 20,368 shares of its common stock as a finder's
fee. The value of such warrants at the time of issuance of $42,203 was recorded
as debt issuance costs is being amortized over the life of the notes. The
warrants are exercisable at any time prior to February 2003. None of the
warrants have been exercised as of September 30, 1998. As of November 20, 1998,
the Company was in default of the repayment terms of the Bridge Notes. In
December 1998 and January 1999, the Company entered into agreements with the
holders of the Bridge Notes to extend the maturity date of their notes until the
earlier of January 31, 1999 or the consummation of the Company's proposed IPO.
Effective January 1, 1998, the Company entered into a financial consulting
agreement expiring on December 31, 1998 with Prism Ventures LLC ("Prism"). Under
the terms of the agreement, Prism is to receive $300,000, payable on the earlier
of (i) the consummation of an initial public offering of the Company's common
stock, or (ii) December 31, 1998, for financial and strategic advisory
consulting services. A stockholder of the Company is a
F-18
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
member of Prism.
In March 1998, in exchange for waiving the acceleration of the maturity
date caused by the Company raising additional financing in excess of a specified
amount and extending the maturity date of the promissory notes issued during the
period from March to July 1996 until December 31, 1998, the exercise price of
the warrants issued in connection with such promissory notes were reduced to
$38.84 per share of series A convertible preferred stock. The total incremental
difference between the value of the warrants before and after the modification
of the warrant terms, as determined using the Black-Scholes model, was $30,978
and is being amortized as interest expense over the remaining life of the debt.
In March 1998, in exchange for waiving the acceleration of the maturity
date caused by the Company raising additional financing in excess of a specified
amount and extending the maturity date of the promissory notes issued during the
period from October 1996 to March 1997 until December 31, 1998, the exercise
price of the warrants issued in connection with such promissory notes was
reduced to exercise prices ranging from $3.88 to $5.71 per share of common
stock. The total incremental difference between the value of the warrants before
and after the modification of the warrant terms, as determined using the
Black-Scholes model, was $10,050 and is being amortized as interest expense over
the remaining life of the debt.
In May 1998, the Company entered into a consulting agreement with the
Whitestone Group LLC ("Whitestone") for corporate finance, financial and
strategic advisory matters. Under the terms of the agreement, the Company issued
Whitestone warrants to acquire 10,943 shares of its common stock at an exercise
price of $4.57 per share. The value of the warrants granted of $38,100 was
determined using the Black-Scholes model and was recognized as general and
administrative expense. The warrants are exercisable at any time prior to May
2004. None of the warrants have been exercised as of September 30, 1998. A
stockholder of the Company is an affiliate of Whitestone.
Effective May 1998, certain members of management and principal
stockholders of the Company (the "Founders") amended the option grant made to a
consultant of the Company in January 1997 (see Note 4). Under the revised terms
and in exchange for additional consulting services provided to the Company, the
strike price of the options were reduced to $9.14 per share of series A
convertible preferred and $.91 per share of common stock. The total incremental
difference between the value of the warrants before and after the modification
of the warrant terms, as determined using the Black-Scholes model, in the amount
of $321,470, was recorded as a contribution of capital by the stockholders and
general and administrative expense. The options are exercisable for a period of
ten years.
Effective May 1998, the Founders amended the option grant made to a
consultant of the Company in December 1997 (see Note 4). Under the revised terms
and in exchange for additional consulting and legal services provided to the
Company, the strike price of the options were reduced to $9.14 per share of
series A convertible preferred stock. The total incremental difference between
the value of the warrants before and after the modification of the warrant
terms, as determined using the Black-Scholes model, in the amount of $24,930,
was recorded as a contribution of capital by the stockholders and general and
administrative expense.
In September 1998, the Company and two members of management entered into
two-year consulting agreements for financial, operational and strategic
development services, effective upon the closing of the IPO. Under the terms of
the agreements, the Company is required to pay bonuses of $100,000 upon the
closing of the IPO and aggregate annual consulting fees of $84,000.
F-19
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
In September 1998, the Company entered into a financial consulting
agreement with a noteholder, effective upon consummation of the IPO. Under the
terms of the agreement, the Company will issue the consultant warrants to
acquire 20,000 shares of common stock at an exercise price equal to 90% of the
price obtained in the IPO.
In September 1998, the Company entered into two-year employement
agreements, effective upon consummation of the IPO, with its Chief Executive
Officer and its Vice President of Sales. Pursuant to the agreements, upon
consummation of the IPO, the Company is required to pay an aggregate of $120,000
in bonuses and issue options to purchase an aggregate of 80,000 shares of common
stock at an exercise price equal to the IPO price. In addition, the Company is
required to pay annual aggregate salaries of $460,000.
In September 1998, the Board of Directors increased the number of shares
reserved for issuance under the 1996 Stock Option Plan to 250,000 shares.
In September 1998, the Company entered into an agreement to settle an
outstanding dispute regarding finders fees on one of the Company's note
issuances. Under the terms of the agreement, the Company granted warrants to
acquire 21,884 shares of Common Stock at an exercise price of $4.11 per share
and pay $62,500 in cash. The fair value of the warrants, in the amount of
approximately $120,000, was recorded as an expense.
In October 1998, the Company issued at $20,000 note payable to a principal
stockholder. The note bears interest at 12% per annum and is payable in October
1999.
In December 1998, the Company entered into a one-year consulting agreement
with an investor relations firm. Under the terms of the consulting agreement,
the investor relations firm is to receive warrants to acquire 13,131 shares of
common stock at an exercise price of $9.14 per share. The fair value of the
warrants, in the amount of approximately $55,000, will be recorded as an
expense.
In November and December 1998, the Company completed a bridge financing of
5.5 units (the "1998 Bridge Units") to investors, each unit consisting of a
$100,000 subordinated promissory note, which bears interest at 12% per annum.
The notes are due and payable on the earlier of (i) dates ranging from May to
June 1999 or (ii) the closing of an initial public offering of the Company's
common stock. In addition, each unit included warrants to purchase 50,000 shares
of common stock at an exercise price equal to 130% of the initial public
offering price. In the event that Company does not close an initial public
offering prior to the due dates of the Notes, the exercise price of the warrants
will be $9.14 per share. The fair value of the warrants, in the amount of
approximately $380,000, will be recorded as a debt discount and amortized over
the life of the notes. A family member of two officers and principle
stockholders of the Company purchased 3 of the 1998 Bridge Units.
In December 1998, the Company issued warrants to acquire 6,000 shares of
common stock to certain noteholders in settlement of an outstanding dispute. The
warrants have an exercise price of $7.38 per share. The fair value of the
warrants, in the amount of approximately $27,000, will be recorded as an
expense.
Proposed public offering
In June 1998, the Company entered into an agreement with an underwriter
(the "Underwriter"), whereby the Underwriter has agreed in principle to sell
shares of the Company's common stock and redeemable warrants in an IPO.
F-20
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
Stock options
In August 1998, Board of Directors declared that upon the consummation of
an initial public offering, the Company will cancel certain outstanding stock
options of employees and consultants and reissue fully vested stock options at
an exercise price equal to the IPO price. The number of shares granted will be
based on the number of stock options such employee or consultant held divided by
the 1 for 9.139 reverse split.
Recapitalization
In August, September and December 1998, effective upon consummation of the
IPO, the Company renegotiated the terms of an aggregate of $2,832,000 of
outstanding promissory notes originally issued from March 1996 through July
1997, with the note holders. Under the revised terms, and in exchange for
extending the maturity date of such notes until December 31, 1998, the Company
will re-pay one-half of the face value of the notes and any 10% Success Fee in
cash upon the closing of the IPO. The remaining one-half of the face value of
the notes, accrued but unpaid interest and the outstanding warrants issued in
connection with the financings will convert into common stock equal to 225% of
the original principal amount of the notes based upon the IPO price per share
(849,600 shares based upon an assumed initial offering price of $7.50 per share)
(the "Note Conversions"). In January 1999, the Company entered into agreements
with the holders of an aggregate principal amount of $2,819,500 of such notes to
extend the maturity date of their notes until the earlier of January 31, 1999 or
completion of the IPO. The Company is currently in default on a note in the
principal amount of $12,500.
In August and September 1998, the Company entered into agreements,
effective upon consummation of the IPO, to convert outstanding warrants to
acquire 107,687 shares of common stock issued in connection with the Bridge
Units in exchange for 30,836 shares of common stock (the "Warrant Conversions").
In August and September 1998, the Company renegotiated the terms of an
aggregate of $187,500 in outstanding notes payable with the note holders. Under
the revised terms, the Company was required to re-pay one-half of the face value
of the notes and accrued interest in cash upon the closing of the IPO. The
remaining one-half of the face value of the notes would bear interest at 12% per
annum and would become due and payable on June 30, 1999; however because the
closing of the IPO did not occur by December 31, 1998, the entire principal
amount of the notes became immediately due and payable on such date. In January
1999, the note holders agreed to waive such default and in consideration the
Company has agreed to pay the entire principal amount of such notes, and accrued
interest, at the closing of the IPO.
In September 1998, the Company's stockholders authorized the Company to
amend its Certificate of Incorporation to effect a 1 for 9.139 reverse stock
split applicable to all issued and outstanding shares of the Company's common
and preferred stock. The Company intends to effect the amendment to its
Certificate of Incorporation immediately prior to the completion of its IPO. All
common and preferred shares, stock options, warrants and related per share data
reflected in the accompanying financial statements and notes thereto have been
adjusted to give retroactive effect to the stock split.
In September 1998, the Company's shareholders authorized the Company to
amend its Certificate of Incorporation to change the conversion rate of the
series B and C convertible preferred stock to 20.3099 to 1 and 19.3702 to 1,
respectively. In addition, the holder of the series C convertible preferred
stock agreed to cancel warrants to acquire 16,413 shares of common stock issued
in August 1997 in connection with the waiver of the anti-dilution protection
provision on the series C convertible preferred stock. The Company intends to
effect the amendment to its certificate of incorporation immediately prior to
the completion of its IPO.
F-21
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
In September 1998, effective upon completion of the IPO, officers of the
Company have agreed to return 11,028 shares of common stock and 8,822 shares of
series A convertible preferred stock to the Company. The Company will cancel the
returned shares.
13. Unaudited Pro Forma Information
Upon completion of the Company's IPO, all shares of the Company's
convertible preferred stock and certain debt, accrued interest and warrants will
convert into Common Stock of the Company. The unaudited pro forma balance sheet
has been presented assuming such conversions had occurred on September 30, 1998
and reflects the following items:
Return of shares by officers of the Company
As described in Note 12, certain officers of the Company have agreed to
return 8,824 and 11,030 shares of Common Stock and series A preferred stock,
respectively, to the Company. The pro forma balance sheet reflects the return
and cancellation of such shares as if it had occurred on September 30, 1998.
Conversion of series A convertible preferred stock
Each share of the Company's series A convertible preferred stock will
automatically convert into ten shares of Common Stock upon completion of the
IPO. The pro forma balance sheet presented reflects the conversion of the 79,760
shares of series A convertible preferred stock outstanding on a pro forma basis
at September 30, 1998 into 797,600 shares of Common Stock.
Conversion of series B-1 convertible preferred stock
Each share of the Company's series B-1 convertible preferred stock was
initially convertible into ten shares of Common Stock. As discussed in Note 6,
the conversion prices of the series B-1 stock is subject to anti-dilution
protection for issuances of additional equity shares by the Company, and as of
September 30, 1998, each share of series B-1 stock will automatically convert
into 21.9335 shares of Common Stock upon completion of the IPO. The pro forma
balance sheet presented reflects the conversion of the 930 shares of series B-1
convertible preferred stock outstanding at September 30, 1998 into 20,415 shares
of Common Stock.
Conversion of series B & C convertible preferred stock
Each share of the Company's series B and C convertible preferred stock was
initially convertible into ten shares of Common Stock. As discussed under
"Recapitalization" in Note 12, the Company's shareholders authorized the Company
to change the conversion rate on the series B and C convertible preferred stock
to 20.3099 to 1 and 19.3702 to 1, respectively. The pro forma balance sheet
reflects the conversion of the 5,552 and 3,283 shares series B and C convertible
preferred stock outstanding at September 30, 1998, respectively, into 177,151
shares of Common Stock. In addition, the pro forma balance sheet reflects the
fair value of the incremental number of 92,062 additional common shares issued
to the holders of the series B and C convertible preferred stock resulting from
the change in conversion rates as a dividend.
Conversion of certain debt, accrued interest and warrants
As more fully described under "Recapitalization" in Note 12, the Company
renegotiated the terms of certain outstanding promissory notes. The pro forma
balance sheet presented reflects the conversion of $1,416,000 in principal
amount of such notes, $405,704 of accrued interest and warrants to acquire
approximately 335,716 shares of Common Stock at a weighted average exercise
price of approximately $6.01 per share into 849,600 shares of Common Stock. The
pro forma balance sheet also reflects the recording of an extraordinary loss in
the amount of $3,563,794 based upon the difference between the fair value of the
(a)
F-22
<PAGE>
DIGITAL LAVA INC.
Notes to Financial Statements
notes, accrued interest and warrants returned to the Company, and (b) the
common stock issued in exchange.
Conversion of outstanding warrants
As described in Note 12, the Company has entered into agreements to convert
outstanding warrants to acquire 107,687 shares of Common Stock into 30,836
shares of common stock. The pro forma balance sheet reflects the conversion of
such warrants as if it had occurred on September 30, 1998.
For the periods ended December 31, 1997 and June 30, 1998, the pro forma
basic and diluted loss per share reflecting the recapitalization would have been
$(4.01) and $(1.50), respectively. The pro forma weighted average shares
outstanding at December 31, 1997 and September 30, 1998 would have been
1,848,586 and 2,094,866 respectively.
F-23
<PAGE>
[Back cover page]
We have not authorized any dealer, salesperson or other person to give any
information or represent anything not contained in this Prospectus. You must not
rely on any unauthorized information. This Prospectus does not offer to sell or
buy any shares in any jurisdiction where it is unlawful. The information in this
Prospectus is current only as of the date of this Prospectus.
LOGO
DIGITAL LAVA INC.
2,400,000 Shares of Common Stock and
1,200,000 Redeemable Common Stock Purchase Warrants
(as units, each consisting of two shares of
common stock and one redeemable warrant)
DIRKS & COMPANY, INC.
___________, 1999.
Until ____________, 1999 (25 days after the date of this Prospectus) all dealers
that buy, sell or trade these securities, whether or not participating in this
offering, may be required to deliver a Prospectus. This is in addition to the
dealers' obligation to deliver a Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgements, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any threatened, pending or completed actions, suits or
proceedings in which such person is made a party by reason of such person being
or having been a director, officer, employee or agent to the Registrant. The
Delaware General Corporation Law provides that Section 145 is not exclusive of
other rights to which those seeking indemnification may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
Article __ of the Registrant's Bylaws provides for indemnification by the
Registrant of its directors, officers and employees to the fullest extent
permitted by the Delaware General Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases, redemptions or
other distributions, or (iv) for any transaction from which the director derived
an improper personal benefit. The Registrant's Certificate of Incorporation
provides for such limitation of liability.
The Registrant intends to obtain directors, and officers, insurance
providing indemnification for certain of the Registrant's directors, officers
and employees for certain liabilities.
Reference is also made to the Underwriting Agreement to be filed as Exhibit
1.1 to the registration Statement for information concerning the Underwriters'
obligation to indemnify the registrant and its officers and directors in ceratin
circumstances.
Item 25. Other Expenses of Issuance and Distribution.
SEC Registration Fee $ 11,867
American Stock Exchange Listing Fee $ 32,500
NASD Filing Fee $ 4,768
Accounting Fees and Expenses* $250,000
Printing and Engraving* $100,000
Legal Fees and Expenses* $350,000
Blue Sky Fees and Expenses* $ 20,000
Transfer Agent and Registrar Fees* $ 5,000
Miscellaneous Expenses* $ 25,865
--------
Total $800,000
========
- --------
* Estimated.
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
The following discussion gives retroactive effect to the one for 9.139
reverse stock split and the recapitalization to be effected immediately prior to
the completion of this offering. Since its organization in July 1995, the
Company has sold and issued the following unregistered securities in
transactions which were exempt from registration under the Securities Act of
1933, as amended, pursuant to Section 4(2) of the Securities Act, as they were
transactions not involving a public offering:
In July 1995, the Company issued an aggregate of 809,565 shares of Common
Stock to Roger Berman, James Stigler, Thomas Stigler and Kenneth Mendoza for
nominal consideration in connection with the formation of the Company.
From August 1995 to June 1996, the Company sold an aggregate of 200,826
shares of Common Stock to 26 individuals, 19 of whom were accredited investors
and 7 of whom were non-accredited investors for $686,599 in cash. Each of the
investors received an offering memorandum which contained appropriate risk
factors and a detailed description of the Company's business. Each of the
investors completed a questionnaire regarding their financial status and
investment history which enabled the Company to determine which investors were
accredited investors.
From March to June 1996, the Company issued an aggregate of 29,334 shares
of Common Stock to a consultant and its legal counsel, Eilenberg & Zivian, in
consideration for services performed for the Company.
In September 1996, in connection with a $450,000 bridge financing completed
in such month, the Company issued warrants to purchase an aggregate of 70,265
shares of Common Stock to two accredited investors, one of which received a
portion of its warrants as a finder. Each of the investors received an offering
memorandum which contained appropriate risk factors and a detailed description
of the Company's business. Each of the investors completed a questionnaire
regarding their financial status and investment history which enabled the
Company to determine that the investors were accredited investors.
In November 1996, the Company issued 110,732 shares of Common Stock to
Joshua Sharfman, Chief Executive Officer of the Company, in consideration for
services performed for the Company.
In November 1996 and January 1997, the Company issued warrants to purchase
an aggregate of 23,212 shares of Common Stock to Eilenberg & Zivian in
consideration for services performed for the Company.
In January and March 1997, the Company issued 4,377 shares of common stock
to two consultants for services performed for the Company.
In May 1997, in connection with the issuance of an aggregate principal
amount of $187,500 of promissory notes, the Company issued warrants to purchase
an aggregate of 20,520 shares of Common Stock to five accredited investors. Each
of the investors received an offering memorandum which contained appropriate
risk factors and a detailed description of the Company's business. Each of the
investors completed a questionnaire regarding their financial status and
investment history which enabled the Company to determine that such investors
were accredited investors.
In May 1997, in connection with a $817,500 bridge financing completed in
April and May 1997, the Company issued warrants to purchase an aggregate of
45,712 shares of Common Stock to three individuals who acted as finders in
connection with such financing. Each of the investors who participated in the
financing received an offering memorandum which contained appropriate risk
factors and a detailed description of the Company's business. Each of the
investors completed a questionnaire regarding their
II-2
<PAGE>
financial status and investment history which enabled the Company to determine
that such investors were accredited investors
In July 1997, in connection with a $902,000 bridge financing completed in
June and July 1997, the Company issued warrants to purchase an aggregate of
15,957 shares of Common Stock to three individuals who acted as finders in
connection with such financing. Each of the investors who participated in the
financing received an offering memorandum which contained appropriate risk
factors and a detailed description of the Company's business. Each of the
investors completed a questionnaire regarding their financial status and
investment history which enabled the Company to determine that such investors
were accredited investors
In February 1998, in connection with the issuance of an aggregate principal
amount of $775,000 of promissory notes, the Company issued warrants to purchase
an aggregate of 96,233 shares of Common Stock to ten accredited investors. Each
of the investors received an offering memorandum which contained appropriate
risk factors and a detailed description of the Company's business. Each of the
investors completed a questionnaire regarding their financial status and
investment history which enabled the Company to determine that such investors
were accredited investors.
In February 1998, in connection with a $1,750,000 bridge financing
completed from December 1997 to February 1998, the Company issued warrants to
purchase an aggregate of 47,730 shares of Common Stock to two finders. Each of
the investors in the financing received an offering memorandum which contained
appropriate risk factors and a detailed description of the Company's business.
Each of the investors completed a questionnaire regarding their financial status
and investment history which enabled the Company to determine that such
investors were accredited investors.
In May 1998, the Company issued warrants to purchase an aggregate of 10,943
shares of Common Stock to the Whitestone Group, in consideration for services
performed for the Company.
In September 1998, the Company issued warrants to purchase an aggregate of
21,885 shares of Common Stock to a finder in consideration for such finder's
release of any claims against the Company under the finder's agreement with the
Company.
In October 1998, the Company issued warrants to purchase an aggregate of
20,000 shares of Common Stock to a Shahrokh Sedaghat in consideration for
services performed for the Company.
In December 1998, the Company issued warrants to purchase an aggregate of
13,131 shares of Common Stock to a Schwartz Communications in consideration for
services performed for the Company.
In December 1998, the Company issued warrants to purchase an aggregate of
6,000 shares of Common Stock to four investors in consideration for such
investors' release of any claims against the Company.
In December 1998, in connection with the issuance of an aggregate principal
amount of $550,000 of subordinated promissory notes, the Company issued warrants
to purchase an aggregate of 275,000 shares of Common Stock to ten accredited
investors. Each of the investors received an offering memorandum which contained
appropriate risk factors and a detailed description of the Company's business.
Each of the investors completed a questionnaire regarding their financial status
and investment history which enabled the Company to determine that such
investors were accredited investors.
In connection with the recapitalization to be completed immediately prior
to the completion of the offering, the Company will issue an aggregate of
846,600 shares of Common Stock to holders of an aggregate principal amount of
$2,832,000 of promissory notes in exchange for one-half of the outstanding
II-3
<PAGE>
principal of their notes, the accrued interest on such notes and the warrants
received in connection with the issuance of such notes. All of such holders
received their notes and warrants in connection with bridge financings completed
from March 1996 through July 1997. In connection with such financings, each
holder received an offering memorandum which contained appropriate risk factors
and a detailed description of the Company's business. Each holder completed a
questionnaire regarding their financial status and investment history which
enabled the Company to determine that such holders were accredited investors.
In connection with the recapitalization to be completed immediately prior
to the completion of the offering, the Company will issue an aggregate of 30,836
shares of Common Stock to holders of an aggregate principal amount of $925,000
of promissory notes in exchange for outstanding warrants to acquire 107,689
shares of Common Stock received in connection with the issuance of such notes.
All of such holders received their notes and warrants in connection a bridge
financing completed from December 1997 to February 1998. In connection with such
financing, each holder received an offering memorandum which contained
appropriate risk factors and a detailed description of the Company's business.
Each holder completed a questionnaire regarding their financial status and
investment history which enabled the Company to determine that such holders were
accredited investors.
Item 27. Exhibits.
Exhibit
Number Description of Exhibits
- ------- --------------------
1(a)** Form of Underwriting Agreement
1(b)** Form of Financial Advisory Agreement
3(a)** Amended and Restated Certificate of Incorporation, in effect
as of the date hereof
3(b)** Form of Amendment to Amended and Restated Certificate of
Incorporation
3(c)** Form of Amended and Restated Certificate of Incorporation
3(d)* Bylaws of the Company, in effect as of the date hereof
3(e)*** Form of Amended and Restated Bylaws of the Company
4(a)* Form of Common Stock Certificate
4(b)** Form of Warrant Agreement
4(c)** Form of Representative's Warrant Agreement
4(d)* 1996 Incentive and Non-Qualified Stock Option Plan (1)
4(e)* Warrant Agreement dated as of September 30, 1996 between the
Company and Millenium Capital Management (2)
4(f)* Warrant Agreement dated as of September 30, 1996 between the
Company and Miracle Investments Co. (2)
II-4
<PAGE>
4(g)* Registration Rights Agreement between the Company, Miracle
Investments Co. and Millenium Capital Management
4(h)* Warrant Agreement dated November 1, 1996 between the Company
and Eilenberg & Zivian(2)(3)
4(i)* Warrant Agreement dated January 27, 1997 between the Company
and Eilenberg & Zivian (2)(3)
4(j)* Warrant Agreement dated May 30, 1997 between the Company and
certain investors and finders(2)
4(k)* Registration Rights Agreement dated May 30, 1997 between the
Company and certain investors and finders
4(l)* Letter Agreement dated October 6, 1998 between the Company
and certain investors
4(m)* Warrant Agreement dated July 11, 1997 between the Company
and certain investors and finders(2)
4(n)* Registration Rights Agreement dated July 11, 1997 between
the Company and certain investors and finders
4(o)** Warrant Agreement between the Company and Schwartz
Communications
4(p)* Warrant Agreement dated February 19, 1998 between the
Company and certain investors and finders (2)
4(q)* Registration Rights Agreement dated February 19, 1998
between the Company and certain investors and finders
4(r)* Form of Promissory Note dated February 19, 1998 between the
Company and certain investors
4(s)* Warrant Agreement dated May 1, 1998 between the Company and
The Whitestone Group (2)
4(t)* Registration Rights Agreement dated May 1, 1998 between the
Company and The Whitestone Group
4(u)* Letter Agreement between the Company and certain investors
and finders dated July 15, 1998
4(v)* Letter Agreement between the Company and certain investors
and finders dated July 16, 1998
4(w)* Letter Agreement between the Company and certain investors
and finders dated July 29, 1998
4(x)* Warrant Agreement dated as of October 7, 1998 between the
Company and certain consultants
II-5
<PAGE>
4(y)* Registration Rights Agreement dated as of October 7, 1998
between the Company and certain consultants
4(z)* Letter Agreement as of October 7, 1998 between the Company
and certain investors
4(aa)* Amended and Restated Option Agreement dated as of May 1,
1998 between the Company, Judson Cooper and certain founders
of the Company (2)
4(ab)* Amended and Restated Option Agreement dated as of May 1,
1998 between the Company, E&Z Investments and certain
founders of the Company (2)
4(ac)*** Warrant Agreement between the Company and United Resources
Partners
4(ad)** Warrant Agreement dated January 7, 1999 between the Company
and certain investors
4(ae)** Warrant Agreement between the Company and certain investors
dated December 7, 1998
4(af)** Registration Rights Agreemnt between the Company and certain
investors dated between December 7, 1998
5(a)*** Opinion of Ehrenreich Eilenberg Krause & Zivian LLP
10(a)* Employment Agreement dated September 1, 1998 between the
Company and Thomas Stigler
10(b)* Employment Agreement dated September 1, 1998 between the
Company and Joshua D.J. Sharfman
10(c)* Consulting Agreement dated September 1, 1998 between the
Company and Roger Berman
10(d)* Consulting Agreement dated September 1, 1998 between the
Company and Dr. James Stigler
10(e)* Consulting Agreement dated September 1, 1998 between the
Company and Prism Ventures LLC
10(f)** Consulting Agreement dated May 1, 1998 between the Company
and the Whitestone Group
10(g)** Consulting Agreement dated October 7, 1998 between the
Company and Shahrokh "Shawn" Sedaghat
10(h)** Agreement dated January 8, 1998 between the Company and
RealNetworks, Inc.(4)
10(i)** Agreement dated April 1, 1998 between the Company and
RealNetworks, Inc.(4)
10(j)** Software License Agreement dated March 31, 1997 between the
Company and Cinax Designs, Inc.(4)
10(k)** Agreement dated August 8, 1998 between the Company and
Lesson Lab
23(a)*** Consent of Ehrenreich Eilenberg Krause & Zivian LLP
(included in opinion filed as Exhibit 5(a))
II-6
<PAGE>
23(b)** Consent of PricewaterhouseCoopers LLP
24(a)* Power of Attorney (included in Part II of the Registration
Statement under the caption Signatures")
27(a)** Financial Data Schedule
- ------------------
* Filed with original SB-2 Registration Statement filed on October 23, 1998.
** Filed herewith
*** To be filed by amendment
(1) Does not reflect increase in number of shares issuable under the Plan
pursuant to resolution of Board of Directors.
(2) These agreements were entered into prior to the reverse split of the
Company's Common Stock and, therefore, do not reflect such reverse split.
(3) These warrant agreements do not reflect exercise price changes made
pursuant to resolutions of the Board of Directors.
(4) Confidential information is omitted and identified by a * and filed
separately with the SEC pursuant to a request for Confidential Treatment.
Item 28. Undertakings.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the small business issuer pursuant to the foregoing provisions, or otherwise,
the undersigned Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the undersigned Registrant of expenses incurred or paid by a director, officer
or controlling person of the undersigned Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
undersigned Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned Registrant in all instances will provide to the
Underwriter at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus
filed as part of a registration statement in reliance upon Rule
430A and contained in the form of prospectus filed by the
undersigned Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be
part of the registration statement as of the time it was declared
effective; and
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-7
<PAGE>
(d) The undersigned Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement; and
(iii) Include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that
time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
II-8
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
undersigned Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, State of California, on the 31st
day of December, 1998.
DIGITAL LAVA INC.
By: /s/ Joshua D.J. Sharfman
----------------------------
Joshua D.J. Sharfman
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in their
respective capacities and on the respective dates set forth opposite their
names.
Signatures Title Date
- ---------- ----- ----
*
- ---------------------------
James Stigler Chairman and Director December 31, 1998
/s/ Danny Gampe
- ---------------------------
Danny Gampe Chief Financial Officer December 31, 1998
(Principal Financial and
Accounting Officer)
*
- ---------------------------
Roger Berman Director December 31, 1998
*
- ---------------------------
Thomas Stigler Director December 31, 1998
*
- ---------------------------
Gerald Porter Director December 31, 1998
/s/ Joshua D.J. Sharfman
- ---------------------------
Joshua D.J. Sharfman Chief Executive Officer December 31, 1998
and Director (Principal
Executive Officer)
*By: /s/ Joshua D.J. Sharfman
---------------------------
Joshua D.J. Sharfman
Attorney-in-fact
II-9
EXHIBIT 1 (a)
<PAGE>
2,400,000 Shares of Common Stock and
1,200,000 Redeemable Common Stock Purchase Warrants
DIGITAL LAVA INC.
FORM OF UNDERWRITING AGREEMENT
New York, New York
_____________, 1998
Dirks & Company, Inc.
As Representative of the
Several Underwriters listed
on Schedule A hereto
520 Madison Avenue
New York, NY 10022
Ladies and Gentlemen:
Digital Lava Inc., a Delaware corporation (the "Company") confirms its agreement
with Dirks & Company, Inc. ("Dirks") and each of the several underwriters named
in Schedule A hereto (collectively, the "Underwriters", which term shall also
include any underwriter substituted as hereinafter provided in Section 11) for
whom Dirks is acting as representative (in such capacity, Security Capital shall
hereinafter be referred to as "you" or the "Representative"), with respect to
the sale by the Company and the purchase by the Underwriters, acting severally
and not jointly, of the respective number of shares ("Shares") of the Company's
common stock, $0.0001 par value per share ("Common Stock"), and redeemable
Common Stock purchase warrants ("the Redeemable Warrants"), each to purchase one
share of Common Stock set forth in Schedule A hereto. The aggregate 2,400,000
Shares of Common Stock and 1,200,000 Redeemable Warrants will be separately
tradable upon issuance and are hereinafter referred to as the "Firm Securities."
Each Redeemable Warrant is exercisable commencing on [____________] [twelve
months after the date of the Prospectus] until [______________] [five years
after the date of the Prospectus], unless previously redeemed by the Company, at
an initial exercise price of $[____________] per share [120% of the initial
public offering price of the Common Stock] of Common Stock. The Redeemable
Warrants may be redeemed by the Company, in whole but not in part, at a
redemption price of $.10 per warrant at any time commencing [__________]
[eighteen months after the date of the Prospectus] on thirty (30) days' prior
written notice, provided that the average closing sale price of the Common Stock
as reported on the American Stock Exchange equals or exceeds $11.25 per share,
for any twenty (20) days within a period of thirty (30) consecutive trading days
ending on the fifth (5th) trading day prior to the date of the notice of
redemption, all in accordance with the terms and conditions of the Warrant
Agreement (herein defined).
Upon the Representative's request, as provided in Section 2(b) of this
Agreement, the Company shall also issue and sell to the Underwriters up to an
additional 360,000 Shares of Common
<PAGE>
Stock and/or 180,000 Redeemable Warrants for the purpose of covering
over-allotments, if any. Such 360,000 shares of Common Stock and 180,000
Redeemable Warrants are hereinafter collectively referred to as the "Option
Securities". The Company also proposes to issue and sell to you warrants (the
"Representative's Warrants") pursuant to the Representative's Warrant Agreement
(the "Representative's Warrant Agreement") for the purchase of an additional
240,000 shares of Common Stock and/or 120,000 Redeemable Warrants. The shares of
Common Stock and Redeemable Warrants issuable upon exercise of the
Representative's Warrants are hereinafter referred to as the "Representative's
Securities." The Firm Securities, the Option Securities, the Representative's
Warrants and the Representative's Securities (collectively, hereinafter referred
to as the "Securities") are more fully described in the Registration Statement
and the Prospectus referred to below.
1. Representations and Warranties of the Company.
(a) The Company represents and warrants to, and agrees with, the
Underwriters as of the date hereof, and as of the Closing Date (hereinafter
defined) and each Option Closing Date (hereinafter defined), if any, as follows:
(i) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form SB-2 (No. 333-66099), including
any related preliminary prospectus ("Preliminary Prospectus"), for the
registration of the Firm Securities, the Option Securities and the
Representative's Securities under the Securities Act of 1933, as amended
(the "Act"), which registration statement and amendment or amendments have
been prepared by the Company in conformity with the requirements of the
Act, and the rules and regulations (the "Regulations") of the Commission
under the Act. The Company will promptly file a further amendment to said
registration statement in the form heretofore delivered to the Underwriters
and will not file any other amendment thereto which the Underwriters shall
have objected to in writing after having been furnished with a copy
thereof. Except as the context may otherwise require, such registration
statement, as amended, on file with the Commission at the time the
registration statement becomes effective (including the prospectus,
financial statements, schedules, exhibits and all other documents filed as
a part thereof or incorporated therein (including, but not limited to those
documents or information incorporated by reference therein) and all
information deemed to be a part thereof as of such time pursuant to
paragraph (b) of Rule 430(A) of the Regulations), is hereinafter called the
"Registration Statement", and the form of prospectus in the form first
filed with the Commission pursuant to Rule 424(b) of the Regulations, is
hereinafter called the "Prospectus." For purposes hereof, "Rules and
Regulations" mean the rules and regulations adopted by the Commission under
either the Act or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as applicable.
(ii) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary
Prospectus, the Registration Statement or the Prospectus or any part of any
thereof and no proceedings for a stop order suspending the effectiveness of
the Registration Statement or any of the Company's securities have been
instituted or are pending or to the Company's knowledge,
<PAGE>
threatened. Each of the Preliminary Prospectus, Registration Statement and
Prospectus at the time of filing thereof conformed with the requirements of
the Act and the Rules and Regulations, and none of the Preliminary
Prospectus, Registration Statement or Prospectus at the time of filing
thereof contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein and necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, except that this representation and warranty does not
apply to statements made in reliance upon and in conformity with written
information furnished to the Company with respect to the Underwriters by or
on behalf of the Underwriters expressly for use in such Preliminary
Prospectus, Registration Statement or Prospectus or any amendment thereof
or supplement thereto. The Company has filed all reports, forms or other
documents required to be filed under the Act or the Exchange Act and the
respective Rules and Regulations thereunder, and all such reports, forms or
other documents, when so filed or as subsequently amended, complied in all
material respects with the Act and the Exchange Act and the respective
rules and regulations thereunder.
(iii) When the Registration Statement becomes effective and at all
times subsequent thereto up to the Closing Date (as defined herein) and
each Option Closing Date (as defined herein), if any, and during such
longer period as the Prospectus may be required to be delivered in
connection with sales by the Underwriters or a dealer, the Registration
Statement and the Prospectus will contain all statements which are required
to be stated therein in accordance with the Act and the Rules and
Regulations, and will conform to the requirements of the Act and the Rules
and Regulations; neither the Registration Statement nor the Prospectus, nor
any amendment or supplement thereto, will contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, provided,
however, that this representation and warranty does not apply to statements
made or statements omitted in reliance upon and in strict conformity with
information furnished to the Company in writing by or on behalf of any
Underwriters expressly for use in the Preliminary Prospectus, Registration
Statement or Prospectus or any amendment thereof or supplement thereto.
(iv) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the state of its
incorporation. The Company does not own an interest in any corporation,
partnership, trust, joint venture or other business entity. The Company is
duly qualified and licensed and in good standing as a foreign corporation
in each jurisdiction in which its ownership or leasing of any properties or
the character of its operations requires such qualification or licensing.
The Company has all requisite power and authority (corporate and other),
and the Company has obtained any and all necessary authorizations,
approvals, orders, licenses, certificates, franchises and permits of and
from all governmental or regulatory officials and bodies (including,
without limitation, those having jurisdiction over environmental or similar
matters), to own or lease its properties and conduct its business as
described in the Prospectus; the Company is and has been doing business in
compliance with all such
<PAGE>
authorizations, approvals, orders, licenses, certificates, franchises and
permits and all applicable federal, state, local and foreign laws, rules
and regulations; and the Company has not received any notice of proceedings
relating to the revocation or modification of any such authorization,
approval, order, license, certificate, franchise, or permit which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would materially and adversely affect the condition, financial or
otherwise, or the earnings, position, prospects, value, operation,
properties, business or results of operations of the Company. The
disclosures in the Registration Statement concerning the effects of
federal, state and local laws, rules and regulations on the Company's
business as currently conducted and as contemplated are correct in all
material respects and do not omit to state a material fact required to be
stated therein necessary to make the statements contained therein not
misleading, in light of the circumstances in which they were made.
(v) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, under "Capitalization" and
"Description of Securities" and will have the adjusted capitalization set
forth therein on the Closing Date and the Option Closing Date, if any,
based upon the assumptions set forth therein, and the Company is not a
party to or bound by any instrument, agreement or other arrangement
providing for it to issue any capital stock, rights, warrants, options or
other securities, except for this Agreement, the Representative's Warrant
Agreement and the Warrant Agreement and as described in the Prospectus. The
Securities and all other securities issued or issuable by the Company
conform or, when issued and paid for, will conform, in all respects to all
statements with respect thereto contained in the Registration Statement and
the Prospectus. All issued and outstanding securities of the Company have
been duly authorized and validly issued and are fully paid and
non-assessable and the holders thereof have no rights of rescission with
respect thereto, and are not subject to personal liability by reason of
being such holders; and none of such securities were issued in violation of
the preemptive rights of any holders of any security of the Company or
similar contractual rights granted by the Company. The Securities are not
and will not be subject to any preemptive or other similar rights of any
stockholder, have been duly authorized and, when issued, paid for and
delivered in accordance with the terms hereof, will be validly issued,
fully paid and non-assessable and will conform to the description thereof
contained in the Prospectus; the holders thereof will not be subject to any
liability solely as such holders; all corporate action required to be taken
for the authorization, issue and sale of the Securities has been duly and
validly taken; and the certificates representing the Securities will be in
due and proper form. Upon the issuance and delivery pursuant to the terms
hereof and the Representative's Warrant Agreement of the Securities to be
sold by the Company hereunder, the Underwriters or the Representative, as
the case may be, will acquire good and marketable title to such Securities
free and clear of any lien, charge, claim, encumbrance, pledge, security
interest, defect or other restriction or equity of any kind whatsoever.
(vi) The financial statements of the Company, together with the
related notes and schedules thereto, included in the Registration
Statement, each Preliminary Prospectus and the Prospectus fairly present
the financial position, income,
<PAGE>
changes in cash flow, changes in stockholders' equity, and the results of
operations of the Company at the respective dates and for the respective
periods to which they and such financial statements have been prepared in
conformity with generally accepted accounting principles and the Rules and
Regulations, consistently applied throughout the periods involved and such
financial statements as are audited have been examined by Pricewaterhouse
Coopers LLP, who are independent certified public accountants within the
meaning of the Act and the Rules and Regulations, as indicated in their
reports filed herewith. There has been no adverse change or development
involving a material prospective change in the condition, financial or
otherwise, or in the earnings, position, prospects, stockholders' equity,
value, operation, properties, business, or results of operations of the
Company, whether or not arising in the ordinary course of business, since
the date of the financial statements included in the Registration Statement
and the Prospectus and the outstanding debt, the property, both tangible
and intangible, and the business of the Company conform in all material
respects to the descriptions thereof contained in the Registration
Statement and the Prospectus. Financial information (including, without
limitation, any pro forma financial information) set forth in the
Prospectus under the headings "Summary Financial Information," "Selected
Financial Information," "Capitalization," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," fairly present,
on the basis stated in the Prospectus, the information set forth therein,
have been derived from or compiled on a basis consistent with that of the
audited financial statements included in the Prospectus; and in the case of
pro forma financial information, if any, the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions and circumstances referred
to therein.
(vii) The Company (i) has paid all federal, state, local, and foreign
taxes for which it is liable, including, but not limited to, withholding
taxes and amounts payable under Chapters 21 through 24 of the Internal
Revenue Code of 1986 (the "Code"), and has furnished all information
returns it is required to furnish pursuant to the Code, (ii) has
established adequate reserves for such taxes which are not due and payable,
and (iii) does not have any tax deficiency or claims outstanding, proposed
or assessed against it.
(viii) No transfer tax, stamp duty or other similar tax is payable by
or on behalf of the Underwriters in connection with (i) the issuance by the
Company of the Securities, (ii) the purchase by the Underwriters of the
Firm Securities and Option Securities from the Company, and the purchase by
the Representative of the Representative's Warrants from the Company, (iii)
the consummation by the Company of any of its obligations under this
Agreement or the Representative's Warrant Agreement, or (iv) resales of the
Firm Securities and the Option Securities in connection with the
distribution contemplated hereby.
(ix) The Company maintains insurance policies, including, but not
limited to, general liability and property insurance, which insures the
Company and its employees, against such losses and risks generally insured
against by comparable
<PAGE>
businesses. The Company (A) has not failed to give notice or present any
insurance claim with respect to any matter, including but not limited to
the Company's business, property or employees, under any insurance policy
or surety bond in a due and timely manner, (B) does not have any disputes
or claims against any underwriter of such insurance policies or surety
bonds or has failed to pay any premiums due and payable thereunder, or (C)
has failed to comply with all conditions contained in such insurance
policies and surety bonds. There are no facts or circumstances under any
such insurance policy or surety bond which would relieve any insurer of its
obligation to satisfy in full any valid claim of the Company.
(x) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including, without
limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, pending or threatened against (or
circumstances that may give rise to the same), or involving the properties
or business of, the Company which (i) questions the validity of the capital
stock of the Company, this Agreement, the Representative's Warrant
Agreement or the Warrant Agreement or of any action taken or to be taken by
the Company pursuant to or in connection with this Agreement, the
Representative's Warrant Agreement or the Warrant Agreement, (ii) is
required to be disclosed in the Registration Statement which is not so
disclosed (and such proceedings as are summarized in the Registration
Statement are accurately summarized in all material respects), or (iii)
might materially and adversely affect the condition, financial or
otherwise, or the earnings, position, prospects, stockholders' equity,
value, operation, properties, business or results of operations of the
Company.
(xi) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Securities, enter into this
Agreement, the Representative's Warrant Agreement and the Warrant Agreement
and to consummate the transactions provided for in such agreements; and
this Agreement, the Representative's Warrant Agreement and the Warrant
Agreement have each been duly and properly authorized, executed and
delivered by the Company. Each of this Agreement, the Representative's
Warrant Agreement and the Warrant Agreement constitutes a legal, valid and
binding agreement of the Company enforceable against the Company in
accordance with its terms. None of the Company's issue and sale of the
Securities, execution or delivery of this Agreement, the Representative's
Warrant Agreement or the Warrant Agreement, its performance hereunder and
thereunder, its consummation of the transactions contemplated herein and
therein, or the conduct of its business as described in the Registration
Statement and the Prospectus, and any amendments or supplements thereto,
conflicts with or will conflict with or results or will result in any
breach or violation of any of the terms or provisions of, or constitutes or
will constitute a default under, or result in the creation or imposition of
any lien, charge, claim, encumbrance, pledge, security interest, defect or
other restriction or equity of any kind whatsoever upon, any property or
assets (tangible or intangible) of the Company pursuant to the terms of,
(i) the certificate of incorporation or by-laws of the Company, (ii) any
license, contract, indenture, mortgage, deed of trust, voting trust
agreement, stockholders
<PAGE>
agreement, note, loan or credit agreement or any other agreement or
instrument to which the Company is a party or by which the Company is or
may be bound or to which any of its properties or assets (tangible or
intangible) is or may be subject, or any indebtedness, or (iii) any
statute, judgment, decree, order, rule or regulation applicable to the
Company of any arbitrator, court, regulatory body or administrative agency
or other governmental agency or body (including, without limitation, those
having jurisdiction over environmental or similar matters), domestic or
foreign, having jurisdiction over the Company or any of its activities or
properties.
(xii) No consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body, domestic
or foreign, is required for the issuance of the Securities pursuant to the
Prospectus and the Registration Statement, the issuance of the
Representative's Warrants, the performance of this Agreement, the
Representative's Warrant Agreement and the Warrant Agreement and the
transactions contemplated hereby and thereby, including without limitation,
any waiver of any preemptive, first refusal or other rights that any entity
or person may have for the issue and/or sale of any of the Securities,
except such as have been or may be obtained under the Act or may be
required under state securities or Blue Sky laws and the rules of the
National Association of Securities Dealers, Inc. (the "NASD") in connection
with the Underwriters' purchase and distribution of the Firm Securities,
the Option Securities and the Representative's Warrants to be sold by the
Company hereunder.
(xiii) All executed agreements, contracts or other documents or copies
of executed agreements, contracts or other documents filed as exhibits to
the Registration Statement to which the Company is a party or by which it
may be bound or to which any of its assets, properties or business may be
subject have been duly and validly authorized, executed and delivered by
the Company, and constitute the legal, valid and binding agreements of the
Company, enforceable against the Company, in accordance with their
respective terms. The descriptions in the Registration Statement of
agreements, contracts and other documents are accurate in all material
respects and fairly present the information required to be shown with
respect thereto by Form SB-2, and there are no contracts or other documents
which are required by the Act to be described in the Registration Statement
or filed as exhibits to the Registration Statement which are not described
or filed as required, and the exhibits which have been filed are in all
material respects complete and correct copies of the documents of which
they purport to be copies.
(xiv) Subsequent to the respective dates as of which information is
set forth in the Registration Statement and Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, the Company has
not (i) issued any securities or incurred any liability or obligation,
direct or contingent, for borrowed money, (ii) entered into any transaction
other than in the ordinary course of business, or (iii) declared or paid
any dividend or made any other distribution on or in respect of its capital
stock of any class, and there has not been any change in the capital stock,
or any material change in the debt (long or short term) or liabilities or
material adverse change in or affecting the
<PAGE>
condition, financial or otherwise, earnings, prospects, stockholders'
equity, value, operations, properties, business or results of operations of
the Company.
(xv) Except as described in the Prospectus, no default exists in the
due performance and observance of any term, covenant or condition of any
license, contract, indenture, mortgage, installment sale agreement, lease,
deed of trust, voting trust agreement, stockholders agreement, partnership
agreement, note, loan or credit agreement, purchase order, or any other
agreement or instrument evidencing an obligation for borrowed money, or any
other material agreement or instrument to which the Company is a party or
by which the Company may be bound or to which the property or assets
(tangible or intangible) of the Company is subject or affected.
(xvi) The Company has generally enjoyed a satisfactory
employer-employee relationship with its employees and is in compliance with
all federal, state, local, and foreign laws and regulations respecting
employment and employment practices, terms and conditions of employment and
wages and hours. There are no pending investigations involving the Company
by the U.S. Department of Labor, or any other governmental agency
responsible for the enforcement of such federal, state, local, or foreign
laws and regulations. There is no unfair labor practice charge or complaint
against the Company pending before the National Labor Relations Board or
any strike, picketing, boycott, dispute, slowdown or stoppage pending or
threatened against or involving the Company or any predecessor entity, and
none has ever occurred. No representation question exists respecting the
employees of the Company, and no collective bargaining agreement or
modification thereof is currently being negotiated by the Company. No
grievance or arbitration proceeding is pending under any expired or
existing collective bargaining agreements of the Company. No labor dispute
with the employees of the Company exists, or is imminent.
(xvii) The Company does not maintain, sponsor or contribute to any
program or arrangement that is an "employee pension benefit plan," an
"employee welfare benefit plan," or a "multiemployer plan" as such terms
are defined in Sections 3(2), 3(1) and 3(37), respectively, of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA
Plans"). The Company does not maintain or contribute, now or at any time
previously, to a defined benefit plan, as defined in Section 3(35) of
ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a
"prohibited transaction" within the meaning of Section 406 of ERISA or
Section 4975 of the Code, which could subject the Company to any tax
penalty on prohibited transactions and which has not adequately been
corrected. Each ERISA Plan is in compliance with all reporting, disclosure
and other requirements of the Code and ERISA as they relate to any such
ERISA Plan. Determination letters have been received from the Internal
Revenue Service with respect to each ERISA Plan which is intended to comply
with Code Section 401(a), stating that such ERISA Plan and the attendant
trust are qualified thereunder. The Company has never completely or
partially withdrawn from a "multiemployer plan."
<PAGE>
(xviii) Neither the Company nor any of its employees, directors,
stockholders, partners, or affiliates (within the meaning of the Rules and
Regulations) of any of the foregoing has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might
be expected to cause or result in, under the Exchange Act, or otherwise,
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Securities or otherwise.
(xix) None of the patents, patent applications, trademarks, service
marks, service names, trade names and copyrights and none of the licenses
and rights to the foregoing presently owned or held by the Company are in
dispute or are in any conflict with the right of any other person or
entity. The Company (i) owns or has the right to use, free and clear of all
liens, charges, claims, encumbrances, pledges, security interests, defects
or other restrictions or equities of any kind whatsoever, all patents,
patent applications, trademarks, service marks, service names, trade names
and copyrights, technology and licenses and rights with respect to the
foregoing, used in the conduct of its business as now conducted or proposed
to be conducted without infringing upon or otherwise acting adversely to
the right or claimed right of any person, corporation or other entity under
or with respect to any of the foregoing and (ii) except as described in the
Prospectus, is not obligated or under any liability whatsoever to make any
payment by way of royalties, fees or otherwise to any owner or licensee of,
or other claimant to, any patent, patent application, trademark, service
mark, service names, trade name, copyright, know-how, technology or other
intangible asset, with respect to the use thereof or in connection with the
conduct of its business or otherwise. There is no action, suit, proceeding,
inquiry, arbitration, investigation, litigation or governmental or other
proceeding, domestic or foreign, pending or threatened (or circumstances
that may give rise to the same) against the Company which challenges the
exclusive rights of the Company with respect to any trademarks, trade
names, service marks, service names, copyrights, patents, patent
applications or licenses or rights to the foregoing used in the conduct of
its business, or which challenge the right of the Company to use any
technology presently used or contemplated to be used in the conduct of its
business.
(xx) The Company owns and has the unrestricted right to use all trade
secrets, know-how (including all other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
inventions, technology, designs, processes, works of authorship, computer
programs and technical data and information (collectively herein
"intellectual property") that are material to the development, manufacture,
operation and sale of all products and services sold or proposed to be sold
by the Company, free and clear of and without violating any right, lien, or
claim of others, including without limitation, former employers of its
employees; provided, however, that the possibility exists that other
persons or entities.
(xxi) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property
stated in the Prospectus, to be owned or leased by it free and clear of all
liens, charges, claims, encumbrances, pledges, security interests, defects,
or other restrictions or equities of any
<PAGE>
kind whatsoever, other than those referred to in the Prospectus and liens
for taxes not yet due and payable.
(xxii) Pricewaterhouse Coopers LLP ("PriceWaterhouse Coopers"), whose
report is filed with the Commission as a part of the Registration
Statement, are independent certified public accountants as required by the
Act and the Rules and Regulations.
(xxiii) The Company has caused to be duly executed legally binding and
enforceable agreements ("Lock-Up Agreement") pursuant to which each of the
Company's officers and directors of the Company, holders of [_____] shares
of Common Stock and holders of securities exchangeable or exercisable for
or convertible into shares of Common Stock have agreed not to, directly or
indirectly, offer, sell, grant any option for the sale of, assign,
transfer, pledge, hypothecate, distribute or otherwise encumber or dispose
of any shares of Common Stock or securities convertible into, exercisable
or exchangeable for or evidencing any right to purchase or subscribe for
any shares of Common Stock (either pursuant to Rule 144 of the Rules and
Regulations or otherwise) or dispose of any beneficial interest therein for
a period of not less than twelve (12) months following the effective date
of the Registration Statement without the prior written consent of the
Representative and the Company. Any shares of Common Stock issued in
connection with a private placement which occurs after the date hereof
shall be subject to Lock-Up Agreements for a period of six (6) months
following the effective date of the Registration Statement. Holders of
[_______] shares of Common Stock have agreed not to, directly or
indirectly, offer, sell, transfer, pledge, assign, hypothecate, or
otherwise encumber any such shares of Common Stock or any securities
convertible into, exercisable or exchangeable for or evidencing any right
to purchase or subscribe for any shares of Common Stock (either pursuant to
Rule 144 of the Rules and Regulations or otherwise) or dispose of any
beneficial interest therein for a period of not less than nine (9) months
following the effective date of the Registration Statement without the
prior written consent of the Representative and the Company. If at any time
commencing 180 days after the effective date of the Registration Statement,
the closing sale or bid price of the Common Stock is greater than 150% of
the initial public offering price of the Common Stock for a period of five
(5) consecutive trading days, the Representative will, upon request,
release any securities subject to a lock-up agreement specified above. In
addition, the Company shall not sell or offer for sale any of its
securities for a period of six (6) months from the effective date of the
Registration Statement without the consent of the Representative except
pursuant to options and warrants issued on the effective date of the
Registration Statement. The Company will cause the Transfer Agent, as
defined below, to mark an appropriate legend on the face of stock
certificates representing all of such securities and to place "stop
transfer" orders on the Company's stock ledgers.
(xxiv) There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities
hereunder or any other arrangements, agreements, understandings, payments
or issuance with respect to the
<PAGE>
Company or any of its officers, directors, stockholders, partners,
employees or affiliates that may affect the Underwriters' compensation, as
determined by the NASD.
(xxv) The Common Stock and Redeemable Warrants have been approved for
listing on the American Stock Exchange ("Amex").
(xxvi) Neither the Company nor any of its directors, officers,
employees, agents, or any other person acting on behalf of the Company,
has, directly or indirectly, given or agreed to give any money, gift or
similar benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer, supplier, employee or agent
of a customer or supplier, or official or employee of any governmental
agency (domestic or foreign) or instrumentality of any government (domestic
or foreign) or any political party or candidate for office (domestic or
foreign) or other person who was, is, or may be in a position to help or
hinder the business of the Company (or assist the Company in connection
with any actual or proposed transaction) which (a) might subject the
Company, or any other such person to any damage or penalty in any civil,
criminal or governmental litigation or proceeding (domestic or foreign),
(b) if not given in the past, might have had a material adverse effect on
the assets, business or operations of the Company, or (c) if not continued
in the future, might adversely affect the assets, business, condition,
financial or otherwise, earnings, position, properties, value operations or
prospects of the Company. The Company's internal accounting controls are
sufficient to cause the Company to comply with the Foreign Corrupt
Practices Act of 1977, as amended.
(xxvii) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, An Act Relating to Disclosure of Doing Business with Cuba, and the
Company further agrees that if it or any affiliate commences engaging in
business with the government of Cuba or with any person or affiliate
located in Cuba after the date the Registration Statement becomes or has
become effective with the Commission or with the Florida Department of
Banking and Finance (the "Department"), whichever date is later, or if the
information reported or incorporated by reference in the Prospectus, if
any, concerning the Company's, or any affiliate's, business with Cuba or
with any person of affiliate located in Cuba changes in any material way,
the Company will provide the Department notice of such business or change,
as appropriate, in a form acceptable to the Department.
(xxviii) Except as set forth in the Prospectus, no officer, director
or stockholder of the Company, or any "affiliate" or "associate" (as these
terms are defined in Rule 405 promulgated under the Rules and Regulations)
of any of the foregoing persons or entities has, either directly or
indirectly, (i) an interest in any person or entity which (A) furnishes or
sells services or products which are furnished or sold or are proposed to
be furnished or sold by the Company, or (B) purchases from or sells or
furnishes to the Company any goods or services, or (ii) a beneficial
interest in any contract or agreement to which the Company is a party or by
which it may be bound or affected. Except as set forth in the Prospectus
under "Certain Transactions," there are no
<PAGE>
existing agreements, arrangements, understandings or transactions, or
proposed agreements, arrangements, understandings or transactions, between
or among the Company and any officer, director, or Principal Stockholder
(as such term is defined in the Prospectus) of the Company or any partner,
affiliate or associate of any of the foregoing persons or entities.
(xxix) Any certificate signed by any officer of the Company, and
delivered to the Representative or to Underwriters' Counsel (as defined
herein) shall be deemed a representation and warranty by the Company to the
Representative as to the matters covered thereby.
(xxx) The minute books of the Company have been made available to the
Representative and contain a complete summary of all meetings and actions
of the directors, stockholders, audit committee, compensation committee and
any other committee of the Board of Directors of the Company, respectively,
since the time of its incorporation, and reflects all transactions referred
to in such minutes accurately in all material respects.
(xxxi) Except and to the extent described in the Prospectus, no
holders of any securities of the Company or of any options, warrants or
other convertible or exchangeable securities of the Company have the right
to include any securities issued by the Company in the Registration
Statement or any registration statement to be filed by the Company or to
require the Company to file a registration statement under the Act and no
person or entity holds any anti-dilution rights with respect to any
securities of the Company.
(xxxii) The Company has as of the effective date of the Registration
Statement entered into employment agreements with Joshua Sharfman and
Thomas Stigler in the forms filed as Exhibits to the Registration
Statements.
(xxxiii) The Company has entered into a warrant agreement,
substantially in the form filed as Exhibit 4(b) to the Registration
Statement (the "Warrant Agreement"), with American Stock Transfer & Trust
Company, as Warrant Agent, in form and substance satisfactory to the
Representative, with respect to the Redeemable Warrants and providing for
the payment of warrant solicitation fees. The Warrant Agreement has been
duly and validly authorized by the Company and, assuming due execution by
the parties thereto other than the Company, constitutes a valid and legally
binding agreement of the Company, enforceable against the Company in
accordance with its terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws
of general application relating to or affecting the enforcement of
creditors' rights and the application of equitable principles in any
action, legal or equitable, and except as obligations to indemnify or
contribute to losses may be limited by applicable law).
(xxxiv) The Company has entered into a financial advisory and
consulting agreement substantially in the form filed as Exhibit _____ to
the Registration
<PAGE>
Statement (the "Consulting Agreement") with the Representative, with
respect to the rendering of consulting services by the Underwriter to the
Company. The Consulting Agreement has been duly and validly authorized by
the Company and assuming due execution by the parties thereto other than
the Company, constitutes a valid and legally binding agreement of the
Company, enforceable against the Company in accordance with its terms
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting enforcement of creditors' rights and the
application of equitable principles in any action, legal or equitable, and
except as rights to indemnify or contribution may be limited by applicable
law).
(xxxv) The Company has filed a Form 8-A with the Commission providing
for the registration under the Exchange Act of the Securities and such Form
8-A has been declared effective by the Commission.
2 2. Purchase, Sale and Delivery of the Securities and Representative's
Warrants.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, and each Underwriter
agrees to purchase from the Company at a price of $____ per share of Common
Stock [90% of the initial public offering price per share of Common Stock] and
$____ per Redeemable Warrant [90% of the initial public offering price per
Redeemable Warrant], that number of Firm Securities set forth in Schedule A
opposite the name of such Underwriter, subject to adjustment as the
Representative in its sole discretion shall make to eliminate any sales or
purchases of fractional shares, plus any additional number of Firm Securities
which such Underwriter may become obligated to purchase pursuant to the
provisions of Section 11 hereof.
(b) In addition, on the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Company hereby grants an option to the Underwriters to purchase
all or any part of an additional 360,000 share of Common Stock at a price of
$___ per share of Common Stock [90% of the initial public offering price per
share of Common Stock] and 180,000 warrants at a price of $____ per Redeemable
Warrant [90% of the initial public offering price per Redeemable Warrant]. The
option granted hereby will expire 45 days after (i) the date the Registration
Statement becomes effective, if the Company has elected not to rely on Rule 430A
under the Rules and Regulations, or (ii) the date of this Agreement if the
Company has elected to rely upon Rule 430A under the Rules and Regulations, and
may be exercised in whole or in part from time to time only for the purpose of
covering over-allotments which may be made in connection with the offering and
distribution of the Firm Securities upon notice by the Representative to the
Company setting forth the number of Option Securities as to which the several
Underwriters are then exercising the option and the time and date of payment and
delivery for any such Option Securities. Any such time and date of delivery (an
"Option Closing Date") shall be determined by the Representative, but shall not
be later than seven full business days after the exercise of said option, nor in
any event prior to the Closing Date, as hereinafter defined, unless otherwise
<PAGE>
agreed upon by the Representative and the Company. Nothing herein contained
shall obligate the Underwriters to make any over-allotments. No Option
Securities shall be delivered unless the Firm Securities shall be simultaneously
delivered or shall theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates for,
the Firm Securities shall be made at the offices of Dirks & Company, Inc. at 520
Madison Avenue, 10th Floor, New York, New York, 10022, or at such other place as
shall be agreed upon by the Representative and the Company. Such delivery and
payment shall be made at 10:00 a.m. (New York City time) on __________, 1998 or
at such other time and date as shall be agreed upon by the Representative and
the Company, but not less than three (3) nor more than seven (7) full business
days after the effective date of the Registration Statement (such time and date
of payment and delivery being herein called "Closing Date"). In addition, in the
event that any or all of the Option Securities are purchased by the
Underwriters, payment of the purchase price for, and delivery of certificates
for, such Option Securities shall be made at the above-mentioned office of the
Representative or at such other place as shall be agreed upon by the
Representative and the Company on each Option Closing Date as specified in the
notice from the Representative to the Company. Delivery of the certificates for
the Firm Securities and the Option Securities, if any, shall be made to the
Underwriters against payment by the Underwriters of the purchase price for the
Firm Securities and the Option Securities, if any, to the order of the Company
for the Firm Securities and the Option Securities, if any, by New York Clearing
House funds. Certificates for the Firm Securities and the Option Securities, if
any, shall be in definitive, fully registered form, shall bear no restrictive
legends and shall be in such denominations and registered in such names as the
Representative may request in writing at least two (2) business days prior to
the Closing Date or the relevant Option Closing Date, as the case may be. The
certificates for the Firm Securities and the Option Securities, if any, shall be
made available to the Representative at such office or such other place as the
Representative may designate for inspection, checking and packaging no later
than 9:30 a.m. on the last business day prior to Closing Date or the relevant
Option Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell to the
Representative the Representative's Warrants to the Representative at a purchase
price of $.0001 per warrant, which warrants shall entitle the holders thereof to
purchase an aggregate of 240,000 shares of Common Stock and/or 120,000
Redeemable Warrants. The Representative's Warrants shall be exercisable for a
period of four (4) years commencing one (1) year from the effective date of the
Registration Statement at a price equaling one hundred twenty percent (120%) of
the initial public offering price of the Common Stock and Redeemable Warrants.
The Representative's Warrant Agreement and form of Warrant Certificate shall be
substantially in the form filed as Exhibit 4(c) to the Registration Statement.
Payment for the Representative's Warrants shall be made on the Closing Date.
3. Public Offering of the Units. As soon after the Registration Statement
becomes effective as the Representative deems advisable, the Underwriters shall
make a public offering of the Firm Securities and such Option Securities as the
Representative may determine (other than to residents of or in any jurisdiction
in which qualification of the Units is required and has not
<PAGE>
become effective) at the price and upon the other terms set forth in the
Prospectus. The Representative may from time to time increase or decrease the
public offering price after distribution of the Units has been completed to such
extent as the Representative, in its discretion deems advisable. The
Underwriters may enter into one of more agreements as the Underwriters, in each
of their sole discretion, deem advisable with one or more broker-dealers who
shall act as dealers in connection with such public offering.
1. Covenants and Agreements of the Company. The Company covenants and
agrees with each of the Underwriters as follows:
(e) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Act or Exchange
Act before termination of the offering of the Units by the Underwriters of which
the Representative shall not previously have been advised and furnished with a
copy, or to which the Representative shall have objected or which is not in
compliance with the Act, the Exchange Act or the Rules and Regulations.
(f) As soon as the Company is advised or obtains knowledge thereof, the
Company will advise the Representative and confirm the notice in writing, (i)
when the Registration Statement, as amended, becomes effective, if the
provisions of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective, (ii)
of the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding, suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto, or the
institution of proceedings for that purpose, (iii) of the issuance by the
Commission or by any state securities commission of any proceedings for the
suspension of the qualification of any of the Securities for offering or sale in
any jurisdiction or of the initiation, or the threatening, of any proceeding for
that purpose, (iv) of the receipt of any comments from the Commission; and (v)
of any request by the Commission for any amendment to the Registration Statement
or any amendment or supplement to the Prospectus or for additional information.
If the Commission or any state securities commission authority shall enter a
stop order or suspend such qualification at any time, the Company will make
every effort to obtain promptly the lifting of such order.
(g) The Company shall file the Prospectus (in form and substance
satisfactory to the Representative) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Representative, pursuant
to Rule 424(b)(4)) not later than the Commission's close of business on the
earlier of (i) the second business day following the execution and delivery of
this Agreement and (ii) the fifteenth business day after the effective date of
the Registration Statement.
<PAGE>
(h) The Company will give the Representative notice of its intention to
file or prepare any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Underwriters in connection with the offering of the Securities which differs
from the corresponding prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised prospectus
is required to be filed pursuant to Rule 424(b) of the Rules and Regulations),
and will furnish the Representative with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file any such prospectus to which the
Representative or Orrick, Herrington & Sutcliffe LLP ("Underwriters' Counsel"),
shall object.
(i) The Company shall endeavor in good faith, in cooperation with the
Representative, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Representative may designate to permit the
continuance of sales and dealings therein for as long as may be necessary to
complete the distribution, and shall make such applications, file such documents
and furnish such information as may be required for such purpose; provided,
however, the Company shall not be required to qualify as a foreign corporation
or file a general or limited consent to service of process in any such
jurisdiction. In each jurisdiction where such qualification shall be effected,
the Company will, unless the Representative agrees that such action is not at
the time necessary or advisable, use all reasonable efforts to file and make
such statements or reports at such times as are or may reasonably be required by
the laws of such jurisdiction to continue such qualification.
(j) During the time when a prospectus is required to be delivered under the
Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act and the Exchange Act, as now and
hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the Prospectus, or
any amendments or supplements thereto. If at any time when a prospectus relating
to the Securities is required to be delivered under the Act, any event shall
have occurred as a result of which, in the opinion of counsel for the Company or
Underwriters' Counsel, the Prospectus, as then amended or supplemented, includes
an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, or if
it is necessary at any time to amend the Prospectus to comply with the Act, the
Company will notify the Representative promptly and prepare and file with the
Commission an appropriate amendment or supplement in accordance with Section 10
of the Act, each such amendment or supplement to be satisfactory to
Underwriters' Counsel, and the Company will furnish to the copies of such
amendment or supplement as soon as available and in such quantities as the
Underwriters may request.
(k) As soon as practicable, but in any event not later than 45 days after
the end of the 12-month period beginning on the day after the end of the fiscal
quarter of the Company
<PAGE>
during which the effective date of the Registration Statement occurs (90 days in
the event that the end of such fiscal quarter is the end of the Company's fiscal
year), the Company shall make generally available to its security holders, in
the manner specified in Rule 158(b) of the Rules and Regulations, and to the
Representative, an earnings statement which will be in the detail required by,
and will otherwise comply with, the provisions of Section 11(a) of the Act and
Rule 158(a) of the Rules and Regulations, which statement need not be audited
unless required by the Act, covering a period of at least twelve (12)
consecutive months after the effective date of the Registration Statement.
(l) During a period of seven (7) years after the date hereof, the Company
will furnish to its stockholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of earnings, and will deliver to the Representative:
(i) concurrently with furnishing such quarterly reports to its
stockholders, statements of income of the Company for each quarter in the
form furnished to the Company's stockholders and certified by the Company's
principal financial or accounting officer;
(ii) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the preceding
fiscal year, together with statements of operations, stockholders' equity,
and cash flows of the Company for such fiscal year, accompanied by a copy
of the certificate thereon of independent certified public accountants;
(iii) as soon as they are available, copies of all reports (financial
or other) mailed to stockholders;
(iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the NASD or
any securities exchange;
(v) every press release and every material news item or article of
interest to the financial community in respect of the Company, or its
affairs which was released or prepared by or on behalf of the Company; and
(vi) any additional information of a public nature concerning the
Company (and any future subsidiary) or its businesses which the
Representative may request.
(vii) During such seven-year period, if the Company has an active
subsidiary, the foregoing financial statements will be on a consolidated
basis to the extent that the accounts of the Company and its
subsidiary(ies) are consolidated, and will be accompanied by similar
financial statements for any significant subsidiary which is not so
consolidated.
<PAGE>
(m) The Company will maintain a transfer agent and warrant agent ("Transfer
Agent") and, if necessary under the jurisdiction of incorporation of the
Company, a Registrar (which may be the same entity as the Transfer Agent) for
its Common Stock and Redeemable Warrants.
(n) The Company will furnish to the Representative or on Representative's
order, without charge, at such place as the Representative may designate, copies
of each Preliminary Prospectus, the Registration Statement and any pre-effective
or post-effective amendments thereto (two of which copies will be signed and
will include all financial statements and exhibits), the Prospectus, and all
amendments and supplements thereto, including any prospectus prepared after the
effective date of the Registration Statement, in each case as soon as available
and in such quantities as the Representative may request.
(o) On or before the effective date of the Registration Statement, the
Company shall provide the Representative with true copies of duly executed,
legally binding and enforceable agreements pursuant to which, for a period of
twelve (12) months from the effective date of the Registration Statement, the
officers and directors of the Company, holders of [____] shares of Common Stock
and holders of securities exchangeable or exercisable for or convertible into
shares of Common Stock, agree that it or he or she will not directly or
indirectly, issue, offer to sell, sell, grant an option for the sale of, assign,
transfer, pledge, hypothecate, distribute or otherwise encumber or dispose of
any shares of Common Stock or securities convertible into, exercisable or
exchangeable for or evidencing any right to purchase or subscribe for any shares
of Common Stock (either pursuant to Rule 144 of the Rules and Regulations or
otherwise) or dispose of any beneficial interest therein without the prior
written consent of the Representative and the Company. On or before the
effective date of the Registration Statement, the Company shall provide the
Representative with true copies of duly executed, legally binding and
enforceable agreements, pursuant to which, for a period of nine (9) months from
the effective date of the Registration Statement, holders of [_____] shares of
Common Stock agree that it or he or she will not, directly or indirectly, issue,
offer, sell, grant an option for the sale of, assign, transfer, pledge,
hypothecate, distribute or otherwise encumber or dispose of such shares of
Common Stock or any securities convertible into, exercisable or exchangeable for
or evidencing any right to purchase or subscribe for any shares of Common Stock
(either pursuant to Rule 144 of the Rules and Regulations or otherwise) or
dispose of any beneficial interest therein without the prior written consent of
the Representative and the Company (together with the agreements described
above, the "Lock-up Agreements"). During the six (6) month period commencing
with the effective date of the Registration Statement, the Company shall not,
without the prior written consent of the Representative, sell, contract or offer
to sell, issue, transfer, assign, pledge, hypothecate, distribute, or otherwise
dispose of, directly or indirectly, any shares of Common Stock or any options,
rights or warrants with respect to any shares of Common Stock, except as set
forth in clause(s) of Section 4 hereof. On or before the Closing Date, the
Company shall deliver instructions to the Transfer Agent authorizing it to place
appropriate legends on the certificates representing the securities subject to
the Lock-up Agreements and to place appropriate stop transfer orders on the
Company's ledgers.
<PAGE>
(p) Neither the Company, nor any of its officers, directors, stockholders,
nor any of their respective affiliates (within the meaning of the Rules and
Regulations) will take, directly or indirectly, any action designed to, or which
might in the future reasonably be expected to cause or result in, stabilization
or manipulation of the price of any securities of the Company.
(q) The Company shall apply the net proceeds from the sale of the
Securities in the manner, and subject to the conditions, set forth under "Use of
Proceeds" in the Prospectus. Except as described in the Prospectus, no portion
of the net proceeds will be used, directly or indirectly, to acquire any
securities issued by the Company.
(r) The Company shall timely file all such reports, forms or other
documents as may be required (including, but not limited to, any reports or
forms as may be required pursuant to Rule 463 under the Act) from time to time,
under the Act, the Exchange Act, and the Rules and Regulations, and all such
reports, forms and documents filed will comply as to form and substance with the
applicable requirements under the Act, the Exchange Act, and the Rules and
Regulations.
(s) The Company shall furnish to the Representative as early as practicable
prior to each of the date hereof, the Closing Date and each Option Closing Date,
if any, but no later than two (2) full business days prior thereto, a copy of
the latest available unaudited interim financial statements of the Company
(which in no event shall be as of a date more than thirty (30) days prior to the
date of the Registration Statement) which have been read by the Company's
independent public accountants, as stated in its letter to be furnished pursuant
to Section 6(j) hereof.
(t) The Company shall cause the Common Stock and the Redeemable Warrants to
be quoted on Amex and for a period of seven (7) years from the date hereof, use
its best efforts to maintain the Amex quotation of the Common Stock and the
Redeemable Warrants to the extent outstanding.
(u) For a period of five (5) years from the Closing Date, the Company shall
furnish to the Representative at the Representative's request and at the
Company's sole expense, (i) daily consolidated transfer sheets relating to the
Common Stock and the Redeemable Warrants (ii) the list of holders of all of the
Company's securities and (iii) a Blue Sky "Trading Survey" for secondary sales
of the Company's securities prepared by counsel to the Company.
(v) As soon as practicable, (i) but in no event more than five (5) business
days before the effective date of the Registration Statement, file a Form 8-A
with the Commission providing for the registration under the Exchange Act of the
Securities and (ii) but in no event more than 30 days from the effective date of
the Registration Statement, take all necessary and appropriate actions to be
included in Standard and Poor's Corporation Descriptions and Moody's OTC Manual
and to continue such inclusion for a period of not less than seven (7) years.
(w) The Company hereby agrees that it will not, for a period of twelve (12)
months from the effective date of the Registration Statement, adopt, propose to
adopt or otherwise permit to exist any employee, officer, director, consultant
or compensation plan or
<PAGE>
similar arrangement permitting (i) the grant, issue, sale or entry into any
agreement to grant, issue or sell any option, warrant or other contract right
(x) at an exercise price that is less than the greater of the public offering
price of the Shares set forth herein and the fair market value on the date of
grant or sale or (y) to any of its executive officers or directors or to any
holder of 5% or more of the Common Stock except pursuant to the Company's 1996
Incentive and Non-Qualified Stock Option Plan; (ii) the maximum number of shares
of Common Stock or other securities of the Company purchasable at any time
pursuant to options or warrants issued by the Company to exceed the aggregate
250,000 shares reserved for future issuance under the Company's 1996 Incentive
and Non-Qualified Stock Option Plan; (iii) the payment for such securities with
any form of consideration other than cash; or (iv) the existence of stock
appreciation rights, phantom options or similar arrangements.
(x) Until the completion of the distribution of the Firm Securities and the
Option Securities, the Company shall not without the prior written consent of
the Representative and Underwriters' Counsel, issue, directly or indirectly, any
press release or other communication or hold any press conference with respect
to the Company or its activities or the offering contemplated hereby, other than
trade releases issued in the ordinary course of the Company's business
consistent with past practices with respect to the Company's operations.
(y) For a period equal to the lesser of (i) five (5) years from the date
hereof, and (ii) the sale to the public of the Representative's Securities, the
Company will not take any action or actions which may prevent or disqualify the
Company's use of Form SB-2 or Form S-1 (or other appropriate form) for the
registration under the Act of the Representative's Securities. The Company
further agrees to use its best efforts to file such post-effective amendments to
the Registration Statement as may be necessary, in order to maintain its
effectiveness and to keep such Registration Statement effective while any of the
Redeemable Warrants or Representative's Warrants remain outstanding.
(z) For a period of five (5) years after the effective date of the
Registration Statement, the Representative shall have the right to designate for
election one (1) individual to the Company's Board of Directors (the "Board").
Such person shall be mutually acceptable to the Company and the Representative.
In the event the Representative elects not to exercise such right, then it may
designate one (1) individual to attend meetings of the Company's Board. The
Company shall notify the Representative of each meeting of the Board and the
Company shall send to such individual all notices and other correspondence and
communications sent by the Company to members of the Board. Such individual
shall be reimbursed for all out-of-pocket expenses incurred in connection with
his attendance of meetings of the Board.
(aa) For a period of twenty four (24) months after the effective date of
the Registration Statement, the Company shall not restate, amend or alter any
term of any written employment, consulting or similar agreement entered into
between the Company and any officer, director or key employee as of the
effective date of the Registration Statement in a manner which is more favorable
to such officer, director or key employee, without the prior written consent of
the Representative.
<PAGE>
(bb) For a period of three (3) years after the effective date of the
Registration Statement, the Company, any subsidiaries and any affiliates hereby
grant a right of first refusal for any sale of securities to be made by the
Company, any affiliates and any subsidiaries.
(cc) The Company will use its best efforts to maintain the effectiveness of
the Registration Statement for a period of five years after the date hereof.
2. Payment of Expenses.
(a) The Company hereby agrees to pay on each of the Closing Date and the
Option Closing Date (to the extent not paid at the Closing Date) all expenses
and fees (other than fees of Underwriters' Counsel, except as provided in (iv)
below) incident to the performance of the obligations of the Company under this
Agreement, the Warrant Agreement and the Representative's Warrant Agreement,
including, without limitation, (i) the fees and expenses of accountants and
counsel for the Company, (ii) all costs and expenses incurred in connection with
the preparation, duplication, printing, (including mailing and handling charges)
filing, delivery and mailing (including the payment of postage with respect
thereto) of the Registration Statement and the Prospectus and any amendments and
supplements thereto and the printing, mailing (including the payment of postage
with respect thereto) and delivery of this Agreement, the Warrant Agreement, the
Representative's Warrant Agreement, the Agreement Among Underwriters, the
Selected Dealer Agreements, and related documents, including the cost of all
copies thereof and of the Preliminary Prospectuses and of the Prospectus and any
amendments thereof or supplements thereto supplied to the Underwriters and such
dealers as the Underwriters may request, in quantities as hereinabove stated,
(iii) the printing, engraving, issuance and delivery of the Securities
including, but not limited to, (x) the purchase by the Underwriters of the Firm
Securities and the Option Securities and the purchase by the Representative of
the Representative's Warrants from the Company, (y) the consummation by the
Company of any of its obligations under this Agreement, the Warrant Agreement
and the Representative's Warrant Agreement, and (z) resale of the Firm
Securities and the Option Securities by the Underwriters in connection with the
distribution contemplated hereby, (iv) the qualification of the Securities under
state or foreign securities or "Blue Sky" laws and determination of the status
of such securities under legal investment laws, including the costs of printing
and mailing the "Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky
Memorandum" and "Legal Investments Survey," if any, and disbursements and fees
of counsel in connection therewith, (v) advertising costs and expenses,
including but not limited to costs and expenses in connection with the "road
show", information meetings and presentations, bound volumes and prospectus
memorabilia and "tomb-stone" advertisement expenses, (vi) costs and expenses in
connection with due diligence investigations, including but not limited to the
fees of any independent counsel or consultant retained, (vii) fees and expenses
of the transfer agent and registrar, (viii) applications for assignments of a
rating of the Securities by qualified rating agencies, (ix) the fees payable to
the Commission and the NASD, and (x) the fees and expenses incurred in
connection with the quotation of the Securities on Amex and any other exchange.
(b) If this Agreement is terminated by the Underwriters in accordance with
the provisions of Section 6 or Section 11, (i) the Company shall reimburse and
indemnify the
<PAGE>
Underwriters for all of their actual out-of-pocket expenses, including the fees
and disbursements of Underwriters' Counsel, less any amounts already paid
pursuant to Section 5(c) hereof.
(c) The Company further agrees that, in addition to the expenses payable
pursuant to subsection (a) of this Section 5, it will pay to the Representative
on the Closing Date by certified or bank cashier's check or, at the election of
the Representative, by deduction from the proceeds of the offering of the Firm
Securities a non-accountable expense allowance equal to three percent (3%) of
the gross proceeds received by the Company from the sale of the Firm Securities,
$25,000 of which has been paid to date. In the event the Representative elects
to exercise the over-allotment option described in Section 2(b) hereof, the
Company agrees to pay to the Representative on the Option Closing Date (by
certified or bank cashier's check or, at the Representative's election, by
deduction from the proceeds of the Option Securities) a non-accountable expense
allowance equal to three percent (3%) of the gross proceeds received by the
Company from the sale of the Option Securities.
3. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, as if it had been
made on and as of the Closing Date or each Option Closing Date, as the case may
be; the accuracy on and as of the Closing Date or Option Closing Date, if any,
of the statements of the officers of the Company made pursuant to the provisions
hereof; and the performance by the Company on and as of the Closing Date and
each Option Closing Date, if any, of its covenants and obligations hereunder and
to the following further conditions:
(a) The Registration Statement shall have become effective not later than
12:00 Noon, New York time, on the date of this Agreement or such later date and
time as shall be consented to in writing by the Representative, and, at Closing
Date and each Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Underwriters' Counsel. If the Company has elected to rely upon
Rule 430A of the Rules and Regulations, the price of the Shares and any
price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Rules and Regulations
within the prescribed time period, and prior to Closing Date the Company shall
have provided evidence satisfactory to the Representative of such timely filing,
or a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements of
Rule 430A of the Rules and Regulations.
(b) The Representative shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements
<PAGE>
therein not misleading, or that the Prospectus, or any supplement thereto,
contains an untrue statement of fact which, in the Representative's opinion, is
material, or omits to state a fact which, in the Representative's opinion, is
material and is required to be stated therein or is necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(c) On or prior to the Closing Date, the Representative shall have received
from Underwriters' Counsel, such opinion or opinions with respect to the
organization of the Company, the validity of the Securities, the
Representative's Warrants, the Registration Statement, the Prospectus and other
related matters as the Representative may request and Underwriters' Counsel
shall have received such papers and information as they request to enable them
to pass upon such matters.
(d) At Closing Date, the Underwriter shall have received the favorable
opinion of Ehrenreich Eilenberg Krause & Zivian LLP, counsel to the Company,
dated the Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) the Company (A) has been duly organized and is validly existing as
a corporation in good standing under the laws of its jurisdiction, (B) is
duly qualified and licensed and in good standing as a foreign corporation
in each jurisdiction in which its ownership or leasing of any properties or
the character of its operations requires such qualification or licensing,
and (C) has all requisite corporate power and authority; and the Company
has obtained any and all necessary authorizations, approvals, orders,
licenses, certificates, franchises and permits of and from all governmental
or regulatory officials and bodies (including, without limitation, those
having jurisdiction over environmental or similar matters), to own or lease
its properties and conduct its business as described in the Prospectus; the
Company is and has been doing business in material compliance with all such
authorizations, approvals, orders, licenses, certificates, franchises and
permits and all federal, state and local laws, rules and regulations; the
Company has not received any notice of proceedings relating to the
revocation or modification of any such authorization, approval, order,
license, certificate, franchise, or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would materially adversely affect the business, operations, condition,
financial or otherwise, or the earnings, business affairs, position,
prospects, value, operation, properties, business or results of operations
of the Company. The disclosures in the Registration Statement concerning
the effects of federal, state and local laws, rules and regulations on the
Company's business as currently conducted and as contemplated are correct
in all material respects and do not omit to state a fact necessary to make
the statements contained therein not misleading in light of the
circumstances in which they were made;
(ii) the Company does not own an interest in any other corporation,
partnership, joint venture, trust or other business entity;
<PAGE>
(iii) the Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, and any amendment or
supplement thereto, under "Capitalization" and "Description of Securities,"
and the Company is not a party to or bound by any instrument, agreement or
other arrangement providing for it to issue any capital stock, rights,
warrants, options or other securities, except for this Agreement, the
Representative's Warrant Agreement and the Warrant Agreement and as
described in the Prospectus. The Securities, and all other securities
issued or issuable by the Company conform in all material respects to all
statements with respect thereto contained in the Registration Statement and
the Prospectus. All issued and outstanding securities of the Company have
been duly authorized and validly issued and are fully paid and
non-assessable; the holders thereof have no rights of rescission with
respect thereto, and are not subject to personal liability by reason of
being such holders; and none of such securities were issued in violation of
the preemptive rights of any holders of any security of the Company or any
similar rights granted by the Company. The Securities to be sold by the
Company hereunder and under the Representative's Warrant Agreement and the
Warrant Agreement are not and will not be subject to any preemptive or
other similar rights of any stockholder, have been duly authorized and,
when issued, paid for and delivered in accordance with the terms hereof,
will be validly issued, fully paid and non-assessable and conform to the
description thereof contained in the Prospectus; the holders thereof will
not be subject to any liability solely as such holders; all corporate
action required to be taken for the authorization, issue and sale of the
Securities has been duly and validly taken; and the certificates
representing the Securities are in due and proper form. The
Representative's Warrants and the Redeemable Warrants constitute valid and
binding obligations of the Company to issue and sell, upon exercise thereof
and payment therefor, the number and type of securities of the Company
called for thereby. Upon the issuance and delivery pursuant to this
Agreement, Representative's Warrant Agreement and the Warrant Agreement of
the Securities to be sold by the Company, the Underwriters and the
Representative, respectively, will acquire good and marketable title to
such Securities free and clear of any pledge, lien, charge, claim,
encumbrance, pledge, security interest, or other restriction or equity of
any kind whatsoever. No transfer tax is payable by or on behalf of the
Underwriters in connection with (A) the issuance by the Company of the
Securities, (B) the purchase by the Underwriters of the Firm Securities and
the Option Securities from the Company and the purchase by the
Representative of the Representative's Warrants from the Company, (C) the
consummation by the Company of any of its obligations under this Agreement,
the Representative's Warrant Agreement or the Warrant Agreement, or (D)
resales of the Firm Securities and the Option Securities in connection with
the distribution contemplated hereby;
(iv) the Registration Statement is effective under the Act, and, if
applicable, filing of all pricing information has been timely made in the
appropriate form under Rule 430A, and no stop order suspending the use of
the Preliminary Prospectus, the Registration Statement or Prospectus or any
part of any thereof or suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or, to the best of such counsel's knowledge,
threatened or contemplated under the Act;
<PAGE>
(v) each of the Preliminary Prospectus, the Registration Statement,
and the Prospectus and any amendments or supplements thereto (other than
the financial statements and other financial and statistical data included
therein, as to which no opinion need be rendered) comply as to form in all
material respects with the requirements of the Act and the Rules and
Regulations;
(vi) (A) there are no agreements, contracts or other documents
required by the Act to be described in the Registration Statement and the
Prospectus and filed as exhibits to the Registration Statement other than
those described in the Registration Statement (or required to be filed
under the Exchange Act if upon such filing they would be incorporated, in
whole or in part, by reference therein) and the Prospectus and filed as
exhibits thereto, and the exhibits which have been filed are correct copies
of the documents of which they purport to be copies; (B) the descriptions
in the Registration Statement and the Prospectus and any supplement or
amendment thereto of contracts and other documents to which the Company is
a party or by which it is bound, including any document to which the
Company is a party or by which it is bound, incorporated by reference into
the Prospectus and any supplement or amendment thereto, are accurate and
fairly represent the information required to be shown by Form SB-2; (C)
there is not pending or threatened against the Company any action,
arbitration, suit, proceeding, inquiry, investigation, litigation,
governmental or other proceeding (including, without limitation, those
having jurisdiction over environmental or similar matters), domestic or
foreign, pending or threatened against (or circumstances that may give rise
to the same), or involving the properties or business of the Company which
(x) is required to be disclosed in the Registration Statement which is not
so disclosed (and such proceedings as are summarized in the Registration
Statement are accurately summarized in all respects), (y) questions the
validity of the capital stock of the Company or this Agreement, the
Representative's Warrant Agreement or the Warrant Agreement, or of any
action taken or to be taken by the Company pursuant to or in connection
with any of the foregoing; (D) no statute or regulation or legal or
governmental proceeding required to be described in the Prospectus is not
described as required; and (E) there is no action, suit or proceeding
pending, or threatened, against or affecting the Company before any court
or arbitrator or governmental body, agency or official (or any basis
thereof known to such counsel) in which there is a reasonable possibility
of a decision which may result in a material adverse change in the
condition, financial or otherwise, or the earnings, position, prospects,
stockholders' equity, value, operation, properties, business or results of
operations of the Company, which could adversely affect the present or
prospective ability of the Company to perform its obligations under this
Agreement, the Representative's Warrant Agreement or the Warrant Agreement
or which in any manner draws into question the validity or enforceability
of this Agreement, the Representative's Warrant Agreement or the Warrant
Agreement;
(vii) the Company has full legal right, power and authority to enter
into each of this Agreement, the Representative's Warrant Agreement and the
Warrant Agreement and to consummate the transactions provided for herein
and therein; and each of this Agreement, the Representative's Warrant
Agreement and the Warrant Agreement
<PAGE>
has been duly authorized, executed and delivered by the Company. Each of
this Agreement, the Representative's Warrant Agreement and the Warrant
Agreement, assuming due authorization, execution and delivery by each other
party thereto constitutes a legal, valid and binding agreement of the
Company enforceable against the Company in accordance with its terms
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting enforcement of creditors' rights and the
application of equitable principles in any action, legal or equitable, and
except as rights to indemnity or contribution may be limited by applicable
law), and none of the Company's execution or delivery of this Agreement,
the Representative's Warrant Agreement and the Warrant Agreement, its
performance hereunder or thereunder, its consummation of the transactions
contemplated herein or therein, or the conduct of its business as described
in the Registration Statement, the Prospectus, and any amendments or
supplements thereto, conflicts with or will conflict with or results or
will result in any breach or violation of any of the terms or provisions
of, or constitutes or will constitute a default under, or result in the
creation or imposition of any lien, charge, claim, encumbrance, pledge,
security interest, defect or other restriction or equity of any kind
whatsoever upon, any property or assets (tangible or intangible) of the
Company pursuant to the terms of, (A) the certificate of incorporation or
by-laws of the Company, (B) any license, contract, indenture, mortgage,
deed of trust, voting trust agreement, stockholders agreement, note, loan
or credit agreement or any other agreement or instrument to which the
Company is a party or by which it is or may be bound or to which any of its
respective properties or assets (tangible or intangible) is or may be
subject, or any indebtedness, or (C) any statute, judgment, decree, order,
rule or regulation applicable to the Company of any arbitrator, court,
regulatory body or administrative agency or other governmental agency or
body (including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, having jurisdiction
over the Company or any of its activities or properties;
(viii) no consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body, domestic
or foreign (other than such as may be required under Blue Sky laws, as to
which no opinion need be rendered) is required in connection with the
issuance of the Securities pursuant to the Prospectus, the Registration
Statement, the issuance of the Representative's Warrants, the performance
of this Agreement, the Representative's Warrant Agreement and the Warrant
Agreement, and the transactions contemplated hereby and thereby;
(ix) the properties and business of the Company conform in all
material respects to the description thereof contained in the Registration
Statement and the Prospectus; and the Company has good and marketable title
to, or valid and enforceable leasehold estates in, all items of real and
personal property stated in the Prospectus to be owned or leased by it, in
each case free and clear of all liens, charges, claims, encumbrances,
pledges, security interests, defects or other restrictions or equities of
any kind whatsoever, other than those referred to in the Prospectus and
liens for taxes not yet due and payable;
<PAGE>
(x) the Company is not in breach of, or in default under, any term or
provision of any license, contract, indenture, mortgage, installment sale
agreement, deed of trust, lease, voting trust agreement, stockholders'
agreement, partnership agreement, note, loan or credit agreement or any
other agreement or instrument evidencing an obligation for borrowed money,
or any other agreement or instrument to which the Company is a party or by
which the Company may be bound or to which the property or assets (tangible
or intangible) of the Company is subject or affected; and the Company is
not in violation of any term or provision of (A) its certificate of
incorporation by-laws, (B) any order, license, certificate, franchise or
permit of any governmental or regulatory official or body or (C) any
judgment, decree, order, statute, rule or regulation to which it is
subject;
(xi) the statements in the Prospectus under "PROSPECTUS SUMMARY," "THE
COMPANY," "RISK FACTORS," "BUSINESS," "MANAGEMENT," "PRINCIPAL
STOCKHOLDERS," "CERTAIN TRANSACTIONS," "DESCRIPTION OF SECURITIES," and
"SHARES ELIGIBLE FOR FUTURE SALE" have been reviewed by such counsel, and
insofar as they refer to statements of law, descriptions of statutes,
licenses, rules or regulations or legal conclusions, are correct in all
material respects;
(xii) the Firm Securities and Option Securities have been accepted for
quotation on Amex;
(xiii) the persons listed under the caption "PRINCIPAL STOCKHOLDERS"
in the Prospectus are the respective "beneficial owners" (as such phrase is
defined in regulation 13d-3 under the Exchange Act) of the securities set
forth opposite their respective names thereunder as and to the extent set
forth therein;
(xiv) other than the Selling Stockholders, no person, corporation,
trust, partnership, association or other entity has the right to include
and/or register any securities of the Company in the Registration
Statement, require the Company to file any registration statement or, if
filed, to include any security in such registration statement;
(xv) there are no claims, payments, issuances, arrangements or
understandings for services in the nature of a finder's or origination fee
with respect to the sale of the Securities hereunder or financial
consulting arrangement or any other arrangements, agreements,
understandings, payments or issuances that may affect the Underwriters'
compensation, as determined by the NASD;
(xvi) assuming due execution by the parties thereto other than the
Company, the Lock-up Agreements are legal, valid and binding obligations of
parties thereto, enforceable against the party and any subsequent holder of
the securities subject thereto in accordance with their terms;
(i) except as described in the Prospectus, the Company does not
(A) maintain, sponsor or contribute to any ERISA Plans, (B) maintain
or contribute, now
<PAGE>
or at any time previously, to a defined benefit plan, as defined in
Section 3(35) of ERISA, and (C) has never completely or partially
withdrawn from a "multiemployer plan";
(ii) the Company is in compliance with all provisions of Section
1 of Laws of Florida, Chapter 92-198, An Act Relating to Disclosure of
Doing Business with Cuba;
(iii) none of the Company or any of its affiliates shall be
subject to the requirements of or shall be deemed an "Investment
Company," pursuant to and as defined under, respectively, the
Investment Company Act;
(iv) the Company owns or possesses, free and clear of all liens
or encumbrances and rights thereto or therein by third parties, the
requisite licenses or other rights to use all trademarks, service
marks, copyrights, service names, trade names, patents, patent
applications and licenses necessary to conduct its business
(including, without limitation, any such licenses or rights described
in the Prospectus as being owned or possessed by the Company), and
there is no claim or action by any person pertaining to, or
proceeding, pending or threatened, which challenges the exclusive
rights of the Company with respect to any trademarks, service marks,
copyrights, service names, trade names, patents, patent applications
and licenses used in the conduct of the Company's business (including,
without limitation, any such licenses or rights described in the
Prospectus as being owned or possessed by the Company); and the
Company's current products, services and processes do not and will not
infringe on the patents currently held by third parties;
(v) Except as described in the Prospectus, the Company is not
under any obligation to pay to any third party, royalties or fees of
any kind whatsoever with respect to any technology or intellectual
properties developed, employed, licensed or used.
Such counsel shall state that such counsel has participated in conferences
with officers and other representatives of the Company and representatives of
the independent public accountants for the Company at which conferences such
counsel made inquiries of such officers, representatives and accountants and
discussed the contents of the Preliminary Prospectus, the Registration
Statement, the Prospectus, and related matters were discussed and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Preliminary Prospectus, the Registration Statement and Prospectus, on the basis
of the foregoing, no facts have come to the attention of such counsel which lead
them to believe that either the Registration Statement or any amendment thereto,
at the time such Registration Statement or amendment became effective or the
Preliminary Prospectus or Prospectus or amendment or supplement thereto as of
the date of such opinion contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading (it being understood that such
counsel need express no opinion with respect to the financial statements and
schedules and other financial and statistical data included in the Preliminary
Prospectus, the Registration Statement or Prospectus), or any supplements or
amendments thereto. Such counsel shall further state that its opinions may be
relied upon by Underwriter's Counsel in rendering its opinion to the
Underwriters.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and
<PAGE>
substance satisfactory to Underwriters' Counsel) of other counsel acceptable to
Underwriters' Counsel, familiar with the applicable laws; (B) as to matters of
fact, to the extent they deem proper, on certificates and written statements of
responsible officers of the Company, and certificates or other written
statements of officers of departments of various jurisdictions having custody of
documents respecting the corporate existence or good standing of the Company,
provided that copies of any such statements or certificates shall be delivered
to Underwriters' Counsel if requested. The opinion shall also state that the
Underwriters' Counsel is entitled to rely thereon. The opinion of such counsel
for the Company shall state that the opinion of any such other counsel is in
form satisfactory to such counsel and that the Representative, Underwriters'
counsel and they are justified in relying thereon. Such opinion shall not state
that it is to be governed or qualified by, or that it is otherwise subject to,
any treatise, written policy or other document relating to legal opinions,
including, without limitation, the Legal Opinion Accord of the ABA Section of
Business Law (1991), or any comparable State bar accord.
At each Option Closing Date, if any, the Underwriters shall have received
the favorable opinion of Ehrenreich Eilenberg Krause & Zivian LLP, counsel to
the Company dated the Option Closing Date, addressed to the Underwriters and in
form and substance satisfactory to Underwriters' Counsel, confirming as of
Option Closing Date the statements made by Ehrenreich Eilenberg Krause & Zivian
LLP in their opinion delivered on the Closing Date.
(e) On or prior to each of the Closing Date and the Option Closing Date, if
any, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company, or herein contained.
(f) Prior to each of the Closing Date and each Option Closing Date, if any,
(i) there shall have been no material adverse change nor development involving a
prospective change in the condition, financial or otherwise, earnings, position,
value, properties, results of operations, prospects, stockholders' equity or the
business activities of the Company, whether or not in the ordinary course of
business, from the latest dates as of which such condition is set forth in the
Registration Statement and Prospectus; (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the
Company, from the latest date as of which the financial condition of the Company
is set forth in the Registration Statement and Prospectus which is materially
adverse to the Company; (iii) except as described in the Prospectus, the Company
shall not be in default under any provision of any instrument relating to any
outstanding indebtedness; (iv) the Company shall not have issued any securities
(other than the Securities); the Company shall not have declared or paid any
dividend or made any distribution in respect of its capital stock of any class;
and there has not been any change in the capital stock of the Company, or any
material change in the debt (long or short term) or liabilities or obligations
of the Company (contingent or otherwise); (v) no material amount of the assets
of the Company shall have been pledged or mortgaged, except as set forth in the
Registration Statement and Prospectus; (vi) no action, suit or proceeding, at
law or in equity, shall have been pending or threatened (or circumstances giving
rise to same) against the Company, or affecting any of its properties or
business before or by any court or federal, state or foreign commission, board
or other administrative agency wherein an unfavorable decision, ruling or
finding may adversely affect the business, operations, prospects or financial
condition or income of the Company, except as set forth in the Registration
Statement and Prospectus; and (vii) no stop order shall
<PAGE>
have been issued under the Act and no proceedings therefor shall have been
initiated, threatened or contemplated by the Commission.
(g) At each of the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or Option Closing Date, as the
case may be, to the effect that each of such persons has carefully examined the
Registration Statement, the Prospectus and this Agreement, and that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or
the Option Closing Date, as the case may be, and the Company has complied
with all agreements and covenants and satisfied all conditions contained in
this Agreement on its part to be performed or satisfied at or prior to such
Closing Date or Option Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement or any part thereof has been issued, and no proceedings for that
purpose have been instituted or are pending or, to the best of each of such
person's knowledge, after due inquiry are contemplated or threatened under
the Act;
(iii) The Registration Statement and the Prospectus and, if any, each
amendment and each supplement thereto, contain all statements and
information required to be included therein, and none of the Registration
Statement, the Prospectus nor any amendment or supplement thereto includes
any untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading and neither the Preliminary Prospectus or any supplement
thereto included any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; and
(iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (a) the Company has
not incurred up to and including the Closing Date or the Option Closing
Date, as the case may be, other than in the ordinary course of its
business, any material liabilities or obligations, direct or contingent;
(b) the Company has not paid or declared any dividends or other
distributions on its capital stock; (c) the Company has not entered into
any transactions not in the ordinary course of business; (d) there has not
been any change in the capital stock or long term debt or any increase in
the short term borrowings (other than any increase in the short term
borrowings in the ordinary case of business) of the Company; (e) the
Company has not sustained any material loss or damage to its property or
assets, whether or not insured; (g) there is no litigation which is pending
or threatened (or circumstances giving rise to same) against the Company,
or any affiliated party of any of the foregoing which is required to be set
forth in an amended or supplemented Prospectus
<PAGE>
which has not been set forth; and (h) there has occurred no event required
to be set forth in an amended or supplemented Prospectus which has not been
set forth.
References to the Registration Statement and the Prospectus in this subsection
(g) are to such documents as amended and supplemented at the date of such
certificate.
(h) By the Closing Date, the Underwriters will have received clearance from
the NASD as to the amount of compensation allowable or payable to the
Underwriters, as described in the Registration Statement.
(i) At the time this Agreement is executed, the Underwriters shall have
received a letter, dated such date, addressed to the Underwriters in form and
substance satisfactory (including the non-material nature of the changes or
decreases, if any, referred to in clause (iii) below) in all respects to the
Underwriters and Underwriters' Counsel, from Pricewaterhouse Coopers LLP;
(i) confirming that they are independent certified public accountants
with respect to the Company within the meaning of the Act and the
applicable Rules and Regulations;
(ii) stating that it is their opinion that the financial statements
and supporting schedules of the Company included in the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations thereunder
and that the Underwriters may rely upon the opinion of Pricewaterhouse
Coopers LLP with respect to such financial statements and supporting
schedules included in the Registration Statement;
(iii) stating that, on the basis of a limited review which included a
reading of the latest available unaudited interim financial statements of
the Company, a reading of the latest available minutes of the stockholders
and board of directors and the various committees of the boards of
directors of the Company, consultations with officers and other employees
of the Company responsible for financial and accounting matters and other
specified procedures and inquiries, nothing has come to their attention
which would lead them to believe that (A) the pro forma financial
information contained in the Registration Statement and Prospectus does not
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations or is not fairly
presented in conformity with generally accepted accounting principles
applied on a basis consistent with that of the audited financial statements
of the Company or the unaudited pro forma financial information included in
the Registration Statement, (B) the unaudited financial statements and
supporting schedules of the Company included in the Registration Statement
do not comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations or are not
fairly presented in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of the
audited financial statements of the Company included in the Registration
Statement, or (C) at a specified date not more than five (5) days prior to
the effective date of the Registration Statement, there has been any change
<PAGE>
in the capital stock of the Company, any change in the long-term debt of
the Company, or any decrease in the stockholders' equity of the Company or
any decrease in the net current assets or net assets of the Company as
compared with amounts shown in the September 30, 1998 balance sheets
included in the Registration Statement, other than as set forth in or
contemplated by the Registration Statement, or, if there was any change or
decrease, setting forth the amount of such change or decrease, and (D)
during the period from September 30, 1998 to a specified date not more than
five (5) days prior to the effective date of the Registration Statement,
there was any decrease in net revenues or net earnings of the Company or
increase in net earnings per common share of the Company, in each case as
compared with the corresponding period beginning September 30, 1998 other
than as set forth in or contemplated by the Registration Statement, or, if
there was any such decrease, setting forth the amount of such decrease;
(iv) setting forth, at a date not later than five (5) days prior to
the date of the Registration Statement, the amount of liabilities of the
Company (including a break-down of commercial paper and notes payable to
banks);
(v) stating that they have compared specific dollar amounts, numbers
of shares, percentages of revenues and earnings, statements and other
financial information pertaining to the Company set forth in the Prospectus
in each case to the extent that such amounts, numbers, percentages,
statements and information may be derived from the general accounting
records, including work sheets, of the Company and excluding any questions
requiring an interpretation by legal counsel, with the results obtained
from the application of specified readings, inquiries and other appropriate
procedures (which procedures do not constitute an examination in accordance
with generally accepted auditing standards) set forth in the letter and
found them to be in agreement; and
(vi) statements as to such other matters incident to the transaction
contemplated hereby as the Underwriters may request.
(j) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from Pricewaterhouse Coopers LLP a letter,
dated as of the Closing Date or the Option Closing Date, as the case may be, to
the effect that they reaffirm the statements made in the letter furnished
pursuant to subsection (i) of this Section hereof except that the specified date
referred to shall be a date not more than five days prior to the Closing Date or
the Option Closing Date, as the case may be, and, if the Company has elected to
rely on Rule 430A of the Rules and Regulations, to the further effect that they
have carried out procedures as specified in clause (v) of subsection (i) of this
Section with respect to certain amounts, percentages and financial information
as specified by the Underwriters and deemed to be a part of the Registration
Statement pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
clause (v).
<PAGE>
(k) On each of the Closing Date and Option Closing Date, if any, there
shall be duly tendered to the Representative the appropriate number of
Securities.
(l) No order suspending the sale of the Securities in any jurisdiction
designated by the Representative pursuant to subsection (e) of Section 4 hereof
shall have been issued on either the Closing Date or the Option Closing Date, if
any, and no proceedings for that purpose shall have been instituted or shall be
contemplated.
(m) On or before the Closing Date, the Company shall have executed and
delivered to the Representative, (i) the Representative's Warrant Agreement
substantially in the form filed as Exhibit 4(c); to the Registration Statement
in final form and substance satisfactory to the Representative, and (ii) the
Representative's Warrants in such denominations and to such designees as shall
have been provided to the Company.
(n) On or before the Closing Date, the Common Stock and the Redeemable
Warrants shall have been duly approved for quotation on Amex, subject to
official notice of issuance.
(o) On or before the Closing Date, there shall have been delivered to the
Representative all of the Lock-up Agreements, in form and substance satisfactory
to Representative's Counsel.
(p) On or before the effective date of the Registration Statement, the
Company shall have executed and delivered to the Representative and the Transfer
Agent the Warrant Agreement, substantially in the form filed as Exhibit 4(b) to
the Registration Agreement in final form and satisfactory to the Representative.
If any condition to the Underwriters' obligations hereunder to be fulfilled
prior to or at the Closing Date or the relevant Option Closing Date, as the case
may be, is not so fulfilled, the Representative may terminate this Agreement or,
if the Representative so elects, it may waive any such conditions which have not
been fulfilled or extend the time for their fulfillment.
4. Indemnification.
(a) The Company, agrees to indemnify and hold harmless each of the
Underwriters (for purposes of this Section 7, "Underwriters" shall include the
officers, directors, partners, employees, agents and counsel of the
Underwriters, including specifically each person who may be substituted for an
Underwriter as provided in Section 11 hereof), and each person, if any, who
controls the Underwriter ("controlling person") within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, from and against any and all
losses, claims, damages, expenses or liabilities, joint or several (and claims,
actions, proceedings, investigations, inquiries, suits and litigation in respect
thereof), whatsoever (including but not limited to any and all costs and
expenses whatsoever reasonably incurred in investigating, preparing or defending
against any such claim, action, proceeding, investigation, inquiry, suit or
litigation, commenced or threatened, or any claim whatsoever), as such are
incurred, to which the Underwriter or such controlling person may become subject
under the Act, the Exchange Act or any other statute or at common law or
otherwise or under the laws of foreign countries, arising out of or based upon
(A)
<PAGE>
any untrue statement or alleged untrue statement of a material fact contained
(i) in any Preliminary Prospectus, the Registration Statement or the Prospectus
(as from time to time amended and supplemented); (ii) in any post-effective
amendment or amendments or any new registration statement and prospectus in
which is included securities of the Company issued or issuable upon exercise of
the Securities; or (iii) in any application or other document or written
communication (in this Section 7 collectively called "application") executed by
the Company or based upon written information furnished by the Company filed,
delivered or used in any jurisdiction in order to qualify the Securities under
the securities laws thereof or filed with the Commission, any state securities
commission or agency, Amex or any other securities exchange, (B) the omission or
alleged omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading (in the case of the
Prospectus, in the light of the circumstances under which they were made), or
(C) any breach of any representation, warranty, covenant or agreement of the
Company contained herein or in any certificate by or on behalf of the Company or
any of its officers delivered pursuant hereto unless, in the case of clause (A)
or (B) above, such statement or omission was made in reliance upon and in
conformity with written information furnished to the Company with respect to any
Underwriter by or on behalf of such Underwriters expressly for use in any
Preliminary Prospectus, the Registration Statement or any Prospectus, or any
amendment thereof or supplement thereto, or in any application, as the case may
be. The indemnity agreement in this subsection (a) shall be in addition to any
liability which the Company may have at common law or otherwise.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of the Act, to the same extent
as the foregoing indemnity from the Company to the Underwriter but only with
respect to statements or omissions, if any, made in any Preliminary Prospectus,
the Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
with, written information furnished to the Company with respect to any
Underwriter by such Underwriter expressly for use in such Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto or in any such application, provided that such written
information or omissions only pertain to disclosures in the Preliminary
Prospectus, the Registration Statement or Prospectus directly relating to the
transactions effected by the Underwriters in connection with this Offering. The
Company acknowledges that the statements with respect to the public offering of
the Securities set forth under the heading "Underwriting" and the stabilization
legend in the Prospectus have been furnished by the Underwriter expressly for
use therein and constitute the only information furnished in writing by or on
behalf of the Underwriters for inclusion in the Prospectus. The indemnity
agreement in this subsection (b) shall be in addition to any liability which the
Underwriters may have at common law or otherwise.
(c) Promptly after receipt by an indemnified party under this Section 7 of
notice of the commencement of any claim, action, suit, investigation, inquiry,
proceeding or litigation, such indemnified party shall, if a claim in respect
thereof is to be made against one or more indemnifying parties under this
Section 7, notify each party against whom indemnification
<PAGE>
is to be sought in writing of the commencement thereof (but the failure so to
notify an indemnifying party shall not relieve it from any liability which it
may have under this Section 7 except to the extent that it has been prejudiced
in any material respect by such failure or from any liability which it may have
otherwise). In case any such claim, action, investigation, inquiry, suit,
proceeding or litigation, is brought against any indemnified party, and it
notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such case
but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by the indemnifying parties in connection with
the defense of such action at the expense of the indemnifying party, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense thereof of
such action, on behalf of the indemnified party or parties), in any of which
events such fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one claim, action, investigation, inquiry, suit, proceeding or litigation or
separate but similar or related claims, actions, investigations, inquiries,
suits, proceedings or litigation in the same jurisdiction arising out of the
same general allegations or circumstances. Anything in this Section 7 to the
contrary notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim, suit, action, investigation, inquiry, proceeding or
litigation effected without its written consent; provided, however, that such
consent was not unreasonably withheld. An indemnifying party will not, without
the prior written consent of the indemnified parties, settle compromise or
consent to the entry of any judgment with respect to any pending or threatened
claim, action, investigation, inquiry, suit, proceeding or litigation in respect
of which indemnification or contribution may be sought hereunder (whether or not
the indemnified parties are actual or potential parties to such claim, action,
suit, investigation, inquiry, proceeding or litigation), unless such settlement,
compromise or consent (i) includes an unconditional release of each indemnified
party form all liability arising out of such claim, action, suit, investigation,
inquiry, proceeding or litigation and (ii) does not include a statement as to or
an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) In order to provide for just and equitable contribution in any case in
which (i) an indemnified party makes claim for indemnification pursuant to this
Section 7, but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that the express
<PAGE>
provisions of this Section 7 provide for indemnification in such case, or (ii)
contribution under the Act may be required on the part of any indemnified party,
then each indemnifying party shall contribute to the amount paid as a result of
such losses, claims, damages, expenses or liabilities (or actions in respect
thereof) (A) in such proportion as is appropriate to reflect the relative
benefits received by each of the contributing parties, on the one hand, and the
party to be indemnified on the other hand, from the offering of the Securities
or (B) if the allocation provided by clause (A) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages, expenses or liabilities, as well
as any other relevant equitable considerations. In any case where the Company is
the contributing party and the Underwriters are the indemnified party, the
relative benefits received by the Company on the one hand, and the Underwriters,
on the other, shall be deemed to be in the same proportion as the total net
proceeds from the offering of the Securities (before deducting expenses) bear to
the total underwriting discounts received by the Underwriters hereunder, in each
case as set forth in the table on the Cover Page of the Prospectus. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company, or by the Underwriters, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, expenses or liabilities (or actions,
investigations, inquiries, suits or proceedings in respect thereof) referred to
above in this subdivision (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action, claim, investigation, inquiry, suit
or proceeding. Notwithstanding the provisions of this subdivision (d) the
Underwriters shall not be required to contribute any amount in excess of the
underwriting discount applicable to the Securities purchased by the Underwriters
hereunder. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of this
Section 7, each person, if any, who controls the Company within the meaning of
the Act, each officer of the Company who has signed the Registration Statement,
and each director of the Company shall have the same rights to contribution as
the Company, subject in each case to this subparagraph (d). Any party entitled
to contribution will, promptly after receipt of notice of commencement of any
action, suit, inquiry, investigation or proceeding against such party in respect
to which a claim for contribution may be made against another party or parties
under this subparagraph (d), notify such party or parties from whom contribution
may be sought, but the omission so to notify such party or parties shall not
relieve the party or parties from whom contribution may be sought from any
obligation it or they may have hereunder or otherwise than under this
subparagraph (d), or to the extent that such party or parties were not adversely
affected by such omission. The contribution agreement set forth above shall be
in addition to any liabilities which any indemnifying party may have at common
law or otherwise.
5. Representations and Agreements to Survive Delivery. All representations,
warranties and agreements contained in this Agreement or contained in
certificates of officers of
<PAGE>
the Company submitted pursuant hereto, shall be deemed to be representations,
warranties and agreements at the Closing Date and the Option Closing Date, as
the case may be, and such representations, warranties and agreements of the
Company and the indemnity agreements contained in Section 7 hereof, shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any Underwriter, the Company, any controlling person of any
Underwriter or the Company, and shall survive termination of this Agreement or
the issuance and delivery of the Securities to the Underwriters and the
Representative, as the case may be.
6. Effective Date.
(a) This Agreement shall become effective at 10:00 a.m., New York City
time, on the next full business day following the date hereof, or at such
earlier time after the Registration Statement becomes effective as the
Representative, in its discretion, shall release the Securities for sale to the
public; provided, however, that the provisions of Sections 5, 7 and 10 of this
Agreement shall at all times be effective. For purposes of this Section 9, the
Securities to be purchased hereunder shall be deemed to have been so released
upon the earlier of dispatch by the Representative of telegrams to securities
dealers releasing such shares for offering or the release by the Representative
for publication of the first newspaper advertisement which is subsequently
published relating to the Securities.
7. Termination.
(a) Subject to subsection (b) of this Section 10, the Representative shall
have the right to terminate this Agreement, after the date hereof, (i) if any
domestic or international event or act or occurrence has materially disrupted,
or in the Representative's opinion will in the immediate future materially
adversely disrupt the financial markets; or (ii) any material adverse change in
the financial markets shall have occurred; or (iii) if trading generally shall
have been suspended or materially limited on or by, as the case may be, any of
the New York Stock Exchange, the American Stock Exchange, the National
Association of Securities Dealers, Inc., the Boston Stock Exchange, the Chicago
Board of Trade, the Chicago Board of Options Exchange, the Chicago Mercantile
Exchange, the Commission or any other government authority having jurisdiction;
or (iv) if trading of any of the securities of the Company shall have been
suspended, or any of the securities of the Company shall have been delisted, on
any exchange or in any over-the-counter market; or (v) if the United States
shall have become involved in a war or major hostilities, or if there shall have
been an escalation in an existing war or major hostilities or a national
emergency shall have been declared in the United States; or (vi) if a banking
moratorium has been declared by a state or federal authority; or (vii) if a
moratorium in foreign exchange trading has been declared; or (viii) if the
Company shall have sustained a loss material or substantial to the Company by
fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity
or malicious act which, whether or not such loss shall have been insured, will,
in the Representative's opinion, make it inadvisable to proceed with the
delivery of the Securities; or (viii) if there shall have occurred any outbreak
or escalation of hostilities or any calamity or crisis or there shall have been
such a material adverse change in the conditions or prospects of the Company, or
such material adverse change in the general market, political or economic
<PAGE>
conditions, in the United States or elsewhere as in the Representative's
judgment would make it inadvisable to proceed with the offering, sale and/or
delivery of the Securities.
(b) If this Agreement is terminated by the Representative in accordance
with the provisions of Section 10(a) the Company shall promptly reimburse and
indemnify the Representative for all of its actual out-of-pocket expenses,
including the fees and disbursements of counsel for the Underwriters (less
amounts previously paid pursuant to Section 5(c) above). Notwithstanding any
contrary provision contained in this Agreement, if this Agreement shall not be
carried out within the time specified herein, or any extension thereof granted
to the Representative, by reason of any failure on the part of the Company to
perform any undertaking or satisfy any condition of this Agreement by it to be
performed or satisfied (including, without limitation, pursuant to Section 6 or
Section 12) then, the Company shall promptly reimburse and indemnify the
Underwriter for all of their actual out-of-pocket expenses, including the fees
and disbursements of counsel for the Underwriter (less amounts previously paid
pursuant to Section 5(c) above). In addition, the Company shall remain liable
for all Blue Sky counsel fees and expenses and filing fees. Notwithstanding any
contrary provision contained in this Agreement, any election hereunder or any
termination of this Agreement (including, without limitation, pursuant to
Sections 6, 10 and 12 hereof), and whether or not this Agreement is otherwise
carried out, the provisions of Section 5 and Section 7 shall not be in any way
affected by such election or termination or failure to carry out the terms of
this Agreement or any part hereof.
8. Substitution of the Underwriters. If one or more of the Underwriters
shall fail otherwise than for a reason sufficient to justify the termination of
this Agreement (under the provisions of Section 6, Section 10 or Section 12
hereof) to purchase the Securities which it or they are obligated to purchase on
such date under this Agreement (the "Defaulted Securities"), the Representative
shall have the right, within 24 hours thereafter, to make arrangement for one or
more of the non-defaulting Underwriters, or any other Underwriters, to purchase
all, but not less than all, of the Defaulted Securities in such amounts as may
be agreed upon and upon the terms herein set forth; if, however, the
Representative shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the total
number of Firm Securities to be purchased on such date, the non-defaulting
Underwriters shall be obligated to purchase the full amount thereof in the
proportions that their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the total number
of Firm Securities, this Agreement shall terminate without liability on the part
of any non-defaulting Underwriters (or, if such default shall occur with respect
to any Option Securities to be purchased on an Option Closing Date, the
Underwriters may at the Representative's option, by notice from the
Representative to the Company, terminate the Underwriters' obligation to
purchase Option Securities from the Company on such date).
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of any default by such Underwriter under
this Agreement.
<PAGE>
In the event of any such default which does not result in a termination of
this Agreement, the Representative shall have the right to postpone the Closing
Date for a period not exceeding seven (7) days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
arrangements.
9. Default by the Company. If the Company shall fail at the Closing Date or
at any Option Closing Date, as applicable, to sell and deliver the number of
Securities which it is obligated to sell hereunder on such date, then this
Agreement shall terminate (or, if such default shall occur with respect to any
Option Securities to be purchased on an Option Closing Date, the Underwriters
may at the Representative's option, by notice from the Underwriters or the
Representative to the Company, terminate the Underwriters' obligation to
purchase Option Securities from the Company on such date) without any liability
on the part of any non-defaulting party other than pursuant to Section 5,
Section 7 and Section 10 hereof. No action taken pursuant to this Section shall
relieve the Company from liability, if any, in respect of such default.
10. Notices. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Representative shall be directed to the
Representative c/o Dirks & Company, Inc. at 520 Madison Avenue, 10th Floor, New
York, New York 10022, Attention: Jessy W. Dirks, with a copy to Orrick,
Herrington & Sutcliffe LLP, 30 Rockefeller Plaza, New York, New York 10112,
Attention: Lawrence B. Fisher, Esq. Notices to the Company shall be directed to
the Company at 10850 Wilshire Boulevard, Suite 1260, Los Angeles, California
90024, Attention: Joshua D.J. Sharfman, with a copy to Ehrenreich Eilenberg
Krause & Zivian LLP, 11 East 44th Street, New York, New York 10017, Attention:
Adam D. Eilenberg, Esq.
11. Parties. This Agreement shall inure solely to the benefit of and shall
be binding upon, the Underwriters, the Company and the controlling persons,
directors and officers referred to in Section 7 hereof, and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained. No
purchaser of Securities from the Underwriters shall be deemed to be a successor
by reason merely of such purchase.
12. Construction. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
14. Entire Agreement; Amendments. This Agreement and the Representative's
Warrant Agreement constitute the entire agreement of the parties hereto and
supersede all prior written or oral agreements, understandings and negotiations
with respect to the subject matter
<PAGE>
hereof. This Agreement may not be amended except in a writing, signed by the
Representative and the Company.
<PAGE>
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
DIGITAL LAVA INC.
By:/s/ Joshua D.J. Sharfman
------------------------
CEO
Confirmed and accepted as of the date first above written.
DIRKS & COMPANY, INC.
By:
------------------------
Name:
Title:
<PAGE>
SCHEDULE A
Underwriter Number of Shares Number of
- ----------- to be Purchased Redeemable Warrants
--------------- to be Purchased
-------------------
Dirks & Company, Inc.
Security Capital Trading, Inc.
TOTAL 2,400,000 1,200,000
EXHIBIT 1 (b)
<PAGE>
FORM OF FINANCIAL ADVISORY AGREEMENT
This Agreement is made and entered into as of this __ day of ______, 1998,
by and between Digital Lava Inc., a Delaware corporation (the "Company"), and
Dirks & Company, Inc. (the "Financial Advisor").
In consideration of and for the mutual promises and covenants contained
herein, and for other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto hereby agree as follows:
1. Purpose. The Company hereby retains the Financial Advisor to furnish advice
to the Company in connection with the acquisition of and/or merger with other
companies, joint ventures with any third parties, license and royalty agreements
and any other financing, including, but not limited to, the sale of the Company
itself (or any significant percentage, subsidiaries or affiliates thereof).
In the event that any such transactions are directly or indirectly
originated by the Financial Advisor for a period of five (5) years from the date
hereof, the Company shall pay fees to the Financial Advisor as follows:
Legal Consideration Fee
1. $ -0- - $3,000,000 5% of legal consideration
2. $ 3,000,001 - $6,000,000 Amount calculated pursuant to
line 1 of this computation,
plus 4% of excess over
$3,000,000
3. $ 6,000,001 - 8,000,000 Amount calculated pursuant to
lines 1 and 2 of this
computation, plus 3% of excess
over $6,000,000
4. $ 8,000,001-$10,000,000 Amount calculated pursuant to
lines 1, 2 and 3 of this
computation, plus 2% of excess
over $8,000,000.
5. above $ 10,000,000 Amount calculated pursuant to
lines 1, 2, 3 and 4 of this
computation, plus 1% of excess
over $10,000,000.
Legal consideration is defined, for purposes of this Agreement, as the
total of stock (valued at market on the day of closing, or if there is no public
market, valued as set forth herein for other property), cash and assets and
property or other benefits exchanged by the Company or received by the Company
or its shareholders (all valued at fair market value as agreed or, if not, by
any independent appraiser), irrespective of period of payment or terms.
<PAGE>
2. Sales or Distributions of Securities. If the Financial Advisor assists
the Company in the sale or distribution of securities to the public or in a
private transaction, the Financial Advisor shall receive fees in the amount and
form to be arranged separately at the time of such transaction.
3. Form of Payment. All fees due to the Financial Advisor pursuant to
Section 1 hereof are due and payable to the Financial Advisor, in cash or by
certified check, at the closing or closings of a transaction specified in such
Section 1 or as otherwise agreed between the parties hereto; provided, however,
that in the case of license and royalty agreements specified in Section 1hereof,
the fees due the Financial Advisor in receipt of such license and royalty
agreements shall be paid as and when license and/or royalty payments are
received by the Company. In the event that this Agreement shall not be renewed
for a period of at least twelve (12) months at the end of the five (5) year
period referred to in Section 1 hereof or if terminated for any reason prior to
the end of such five (5) year period then, notwithstanding any such non-renewal
or termination, the Financial Advisor shall be entitled to the full fee for any
transaction contemplated under Section 1 hereof which closes within twelve (12)
months after such non-renewal or termination.
4. Indemnification. Since the Financial Advisor will be acting on behalf of
the Company in connection with its engagement hereunder, the Company and
Financial Advisor have entered into a separate indemnification agreement
substantially in the form attached hereto as Exhibit A and dated the date
hereof, providing for the indemnification of Financial Advisor by the Company.
The Financial Advisor has entered into this Agreement in reliance on the
indemnities set forth in such indemnification agreement.
5. Severability. Every provision of this Agreement is intended to be
severable. If any term or provision hereof is deemed unlawful or invalid for any
reason whatsoever, such unlawfulness or invalidity shall not affect the validity
of the remainder of this Agreement.
6. Miscellaneous.
A. Any notice or other communication between the parties hereto shall be
sent by certified or registered mail, postage prepaid, if to the Company,
addressed to it at 10850 Wilshire Boulevard, Suite 1260, Los Angeles, California
90024, Attention: Joshua Sharfman, Chief Executive Officer with a copy to
Ehrenreich Eilenberg Krause & Zivian LLP, Attention: Jeffrey Abbey, Esq. or, if
to the Financial Advisor, addressed to it at 520 Madison Avenue, 10th Floor, New
York, New York, Attention: Jessie Dirks, with a copy to Orrick, Herrington &
Sutcliffe, 666 5th Avenue, New York, New York 10103, Attention: Lawrence Fisher,
Esq., or to such address as may hereafter be designated in writing by one party
to the other. Such notice or other communication shall be deemed to be given on
the date of receipt.
B. If, during the term hereof, the Financial Advisor shall cease to do
business, the provisions hereof relating to the duties of the Financial Advisor
and compensation by the Company as it applies to the Financial Advisor shall
thereupon cease to be in effect, except for
<PAGE>
the Company's obligation of payment for services rendered prior thereto. This
Agreement shall survive any merger of, acquisition of, or acquisition by the
Financial Advisor and, after any such merger or acquisition, shall be binding
upon the Company and the corporation surviving such merger or acquisition.
C. This Agreement embodies the entire agreement and understanding between
the Company and the Financial Advisor and supersedes any and all negotiations,
prior discussions and preliminary and prior agreements and understandings
related to the central subject matter hereof.
D. This Agreement has been duly authorized, executed and delivered by and
on behalf of the Company and the Financial Advisor.
E. This Agreement shall be construed and interpreted in accordance with
laws of the State of New York, without giving effect to conflicts of laws.
F. This Agreement and the rights hereunder may not be assigned by
either party (except by operation of law) and shall be binding upon and inure to
the benefit of the parties and their respective successors, assigns and legal
representatives.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date hereof.
DIGITAL LAVA INC.
By:
--------------------------------
Name: Joshua D.J. Sharfman
Title: Chief Executive Officer
DIRKS & COMPANY, INC.
By:
---------------------------------
Name:
Title:
<PAGE>
EXHIBIT A
__________, 1998
DIRKS & COMPANY, INC.
520 Madison Avenue
10th Floor
New York, New York 10022
Ladies and Gentlemen:
In connection with our engagement of DIRKS & COMPANY, INC. (the "Financial
Advisor") as our financial advisor and investment banker, we hereby agree to
indemnify and hold the Financial Advisor and its affiliates, and the directors,
officers, partners, shareholders, agents and employees of the Financial Advisor
(collectively the "Indemnified Persons"), harmless from and against any and all
claims, actions, suits, proceedings (including those of shareholders), damages,
liabilities and expenses incurred by any of them (including, but not limited to,
fees and expenses of counsel) which are (A) related to or arise out of (i) any
actions taken or omitted to be taken (including any untrue statements made or
any statements omitted to be made) by us, or (ii) any actions taken or omitted
to be taken by any Indemnified Person in connection with our engagement of the
Financial Advisor pursuant to the Financial Advisory Agreement, of even date
herewith, between the Financial Advisor and us (the "Financial Advisory
Agreement"), or (B) otherwise related to or arising out of the Financial
Advisor's activities on our behalf pursuant to the Financial Advisor's
engagement under the Financial Advisory Agreement, and we shall reimburse any
Indemnified Person for all expenses (including, but not limited to, fees and
expenses of counsel) incurred by such Indemnified Person in connection with
investigating, preparing or defending any such claim, action, suit or proceeding
(collectively a "Claim"), whether or not in connection with pending or
threatened litigation in which any Indemnified Person is a party. We will not,
however, be responsible for any Claim which is finally judicially determined to
have resulted exclusively from the gross negligence or willful misconduct of any
person seeking indemnification hereunder. We further agree that no Indemnified
Person shall have any liability to us for or in connection with the Financial
Advisor's engagement under the Financial Advisory Agreement except for any Claim
incurred by us solely as a direct result of any Indemnified Person's gross
negligence or willful misconduct.
We further agree that we will not, without the prior written consent of the
Financial Advisor, settle, compromise or consent to the entry of any judgment in
any pending or threatened Claim in respect of which indemnification may be
sought hereunder (whether or not any Indemnified Person is an actual or
potential party to such Claim), unless such settlement,
<PAGE>
compromise or consent includes a legally binding, unconditional, and irrevocable
release of each Indemnified Person hereunder from any and all liability arising
out of such Claim.
Promptly upon receipt by an Indemnified Person of notice of any complaint
or the assertion or institution of any Claim with respect to which
indemnification is being sought hereunder, such Indemnified Person shall notify
us in writing of such complaint or of such assertion or institution, but failure
to so notify us shall not relieve us from any obligation we may have hereunder,
unless, and only to the extent that, such failure results in the forfeiture by
us of substantial rights and defenses, and such failure to so notify us will not
in any event relieve us from any other obligation or liability we may have to
any Indemnified Person otherwise than under this Agreement. If we so elect or
are requested by such Indemnified Person, we will assume the defense of such
Claim, including the employment of counsel reasonably satisfactory to such
Indemnified Person and the payment of the fees and expenses of such counsel. In
the event, however, that such Indemnified Person reasonably determines in its
sole judgment that having common counsel would present such counsel with a
conflict of interest or such Indemnified Person concludes that there may be
legal defenses available to it or other Indemnified Persons different from or in
addition to those available to us, then such Indemnified Person may employ its
own separate counsel to represent or defend it in any such Claim and we shall
pay the reasonable fees and expenses of one other such counsel. Notwithstanding
anything herein to the contrary, if we fail timely or diligently to defend,
contest, or otherwise protect against any Claim, the relevant Indemnified Party
shall have the right, but not the obligation, to defend, contest, compromise,
settle, assert crossclaims or counterclaims, or otherwise protect against the
same, and shall be fully indemnified by us therefor, including, but not limited
to, for the fees and expenses of its counsel and all amounts paid as a result of
such Claim or the compromise or settlement thereof. In any Claim in which we
assume the defense, the Indemnified Person shall have the right to participate
in such defense and to retain its own counsel therefor at its own expense.
We agree that if any indemnity sought by an Indemnified Person hereunder is
held by a court to be unavailable for any reason, then (whether or not the
Financial Advisor is the Indemnified Person) we and the Financial Advisor shall
contribute to the Claim for which such indemnity is held unavailable in such
proportion as is appropriate to reflect the relative benefits to us, on the one
hand, and the Financial Advisor, on the other, in connection with the Financial
Advisor's engagement by us under the Financial Advisory Agreement, subject to
the limitation that in no event shall the amount of the Financial Advisor's
contribution to such Claim exceed the amount of fees actually received by the
Financial Advisor from us pursuant to the Financial Advisor's engagement under
the Financial Advisory Agreement. We hereby agree that the relative benefits to
us, on the one hand, and the Financial Advisor, on the other hand, with respect
to the Financial Advisor's engagement under the Financial Advisory Agreement
shall be deemed to be in the same proportion as (a) the total value paid or
proposed to be paid or received by us or our stockholders as the case may be,
pursuant to the transaction (whether or not consummated) for which the Financial
Advisor is engaged to render services bears to (b) the fee paid or proposed to
be paid to the Financial Advisor in connection with such engagement.
<PAGE>
Our indemnity, reimbursement and contribution obligations under this
Agreement shall be in addition to, and shall in no way limit or otherwise
adversely affect any rights that an Indemnified Party may have at law or at
equity.
Should the Financial Advisor, or any of its directors, officers, partners,
shareholders, agents or employees, be required or be requested by us to provide
documentary evidence or testimony in connection with any proceeding arising from
or relating to the Financial Advisor's engagement under the Financial Advisory
Agreement, we agree to pay all reasonable expenses (including but not limited to
fees and expenses of counsel) in complying therewith and one thousand dollars
($1,000) per day for any sworn testimony or preparation therefor, payable in
advance.
We hereby consent to personal jurisdiction and service of process and venue
in any court in which any claim for indemnity is brought by any Indemnified
Person.
It is understood that, in connection with the Financial Advisor's
engagement under the Financial Advisory Agreement, the Financial Advisor may be
engaged to act in one or more additional capacities and that the terms of the
original engagement or any such additional engagement may be embodied in one or
more separate written agreements. The provisions of this Agreement shall apply
to the original engagement and any such additional engagement and shall remain
in full force and effect following the completion or termination of the
Financial Advisor's engagement(s).
Very truly yours,
DIGITAL LAVA INC.
By:
----------------------------------------
Name: Johsua D.J. Sharfman
Title: CEO
CONFIRMED AND AGREED TO:
DIRKS & COMPANY, INC.
By:
-------------------------------
Name:
Title:
<PAGE>
AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION
OF
DIGITAL LAVA INC.
(Original Certificate of Incorporation
filed on June 5, 1996)
DIGITAL LAVA INC. (the "Corporation"), a corporation organized and existing
under the General Corporation Law of the State of Delaware (as amended from time
to time, the "Law"), does hereby certify:
I. That, by a written consent executed in accordance with Section 141(f)
and Section 242 of the Law and effective November 26, 1996, the Board of
Directors of the Corporation adopted a resolution setting forth the Amended and
Restated Certificate of Incorporation set forth below (referred to herein as the
"Certificate") and declaring its advisability.
II. That, by a written consent executed in accordance with Section 228 of
the Law, the holders of all of the outstanding stock entitled to vote thereon,
and all of the outstanding stock of each class entitled to vote thereon as a
class, have voted in favor of the adoption of this Certificate.
Article 1. NAME
The name of the corporation is DIGITAL LAVA INC. (the "Corporation").
Article 2. REGISTERED OFFICE AND AGENT
The address of the Corporation's registered office in the State of Delaware
is 1013 Centre Road, in the City of Wilmington, in the County of New Castle and
its registered agent at such office is the Corporation Service Company.
Article 3. PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the Law.
Article 4. AUTHORIZED STOCK
The Corporation is authorized to issue two classes of stock, to be
designated, respectively, "Common Stock" and "Preferred Stock". The total number
of shares which the Corporation is authorized to issue is 40,000,000, of which:
(A) 35,000,000 shares shall be
<PAGE>
Common Stock, $.0001 par value per share (herein called "Common"), and(B)
5,000,000 shares shall be Preferred Stock, $.0001 par value per share (herein
called "Preferred"), consisting of the following series:
(i) 966,065 shares called Series A Convertible Preferred Stock, $.0001 par
value per share (herein called "Series A Preferred"),
(ii) 50,740 shares called Series B Convertible Preferred Stock, $.0001 par
value per share (herein called "Series B Preferred"),
(iii) 8,500 shares called Series B-1 Convertible Preferred Stock, $.0001
par value per share (herein called "Series B- 1 Preferred"); and
(iv) 30,000 shares called Series C Convertible Preferred Stock, $.0001 par
value per share (herein called "Series C Preferred"; the Series A Preferred,
Series B Preferred, Series B-1 Preferred and Series C Preferred are collectively
referred to as the "Authorized Preferred").
With respect to the remaining 3,944,695 shares of Preferred, the Board
shall have the authority to fix by resolution the voting powers (full, limited,
multiple, fractional or none), designations, preferences, qualifications,
privileges, limitations, restrictions, options, conversion rights and other
special or relative rights of one or more additional classes or series of
Preferred (the "Additional Preferred") prior to or concurrently with the
issuance of such shares.
The rights, preferences and privileges of and restrictions on the
Authorized Preferred and Common are as follows:
Article 5. POWERS AND QUALIFICATIONS OF COMMON STOCK
5.1 Voting Rights. Except as otherwise required by Law, each share of
Common shall entitle the holder thereof to one vote on each matter submitted to
a vote of the shareholders of the Corporation, and the holders of shares of
Common and Authorized Preferred shall vote together and not as separate classes.
5.2 Dividend Rights. Subject to the rights of the holders of the Authorized
Preferred set forth in Article 6 below, and subject to the rights of the holders
of any Additional Preferred issued pursuant to the penultimate paragraph of
Article 4 above, the holders of the Common shall be entitled to receive, when
and if declared by the Board, but only out of funds legally available therefor,
cash dividends in such amounts as the Board may determine.
5.3 Liquidation Rights. In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, after payment
or provision for payment of the debts and other liabilities of the Corporation
and the preferential amounts to which the holders of any outstanding shares of
Authorized Preferred and Additional Preferred shall be
<PAGE>
entitled upon dissolution, liquidation, or winding up, the holders of the Common
shall be entitled to share ratably in the remaining assets of the Corporation
with the holders of any outstanding shares of Authorized Preferred (with each
share of Authorized Preferred being treated for such purpose as equal to the
number of shares of Common into which each such share of Authorized Preferred is
convertible on the date of such distribution).
Article 6. POWERS AND QUALIFICATIONS OF PREFERRED STOCK
6.1 Voting Rights. Except as otherwise required by law, each share of
outstanding Authorized Preferred shall entitle the holder thereof to vote on
each matter submitted to a vote of the shareholders of the Corporation and to
have the number of votes equal to the number (including any fraction) of shares
of Common into which such share of Authorized Preferred is then convertible
pursuant to the provisions hereof at the record date for the determination of
shareholders entitled to vote on such matters or, if no such record date is
established, at the date such vote is taken or any written consent of
shareholders becomes effective. Except as otherwise required by law, the holders
of shares of Common and Authorized Preferred shall vote together and not as
separate classes. Notwithstanding the foregoing, so long as any series of
Authorized Preferred is outstanding, the Corporation shall not, without the
affirmative vote at a meeting (the notice of which shall state the general
character of the matters to be submitted thereat), or the written consent with
or without a meeting, of the holders of a majority of the then outstanding
shares of such series of Authorized Preferred, voting separately as a class,
amend, alter or repeal any of the provisions of the Certificate of
Incorporation, if the powers, preferences or special rights of such series or
its holders would be adversely affected by any such amendment, alteration or
repeal.
6.2 Dividends.
(a) The holders of the Authorized Preferred shall be entitled to receive,
when and if declared by the Board, but only out of funds legally available
therefor, cash dividends as the Board may determine. No dividend may be paid on
the Common unless all accrued (whether or not declared) and unpaid dividends on
the Authorized Preferred are paid.
(b) If any dividend or other distribution payable in cash, securities or
other property (other than securities of the Corporation the issuance of which
gives rise to adjustment of the Conversion Price pursuant to Section 6.4(c)) is
declared on the Common, each holder of shares of Authorized Preferred on the
record date for such dividend or distribution shall be entitled to receive on
the date of payment or distribution of such dividend or other distribution the
same cash, securities or other property which such holder would have received on
such record date if such holder was the holder of record of the number
(including any fraction) of shares of Common into which the shares of Authorized
Preferred then held by such holder are then convertible. No dividend which has
been previously declared but unpaid shall be paid prior to the voluntary or
involuntary liquidation, dissolution or winding up of the Corporation pursuant
to Section 6.3 below.
6.3 Liquidation Rights. If the Corporation shall be voluntarily or
involuntarily liquidated, dissolved or wound up:
<PAGE>
(a) The holder of each then outstanding share of Series C Preferred shall
be entitled to receive out of the assets of the Corporation available for
distribution to shareholders, and before any payment or declaration and setting
apart for payment of any amount or dividend with respect to the Series B
Preferred, Series B-1 Preferred, Series A Preferred, Common or any other equity
security, (i) the amount of $7.50 per share (such amount to be adjusted
proportionally in the event the Series C Preferred are subdivided into a greater
number or combined into a lesser number of shares) (herein called the "Series C
Base Amount"), plus all declared but unpaid dividends on the Series C Preferred
then held by them, and (ii) in the event the Corporation is a party to a
transaction described in Section 6.3(f)(i) or (ii) below, an amount equal to ten
(10%) percent of the Series C Base Amount compounded annually from January 1,
1996 till the date of the consummation of the transaction described in Section
6.3(f)(i) or (ii) below. If the Corporation shall have insufficient assets and
funds to pay such amounts in full to the holders of the Series C Preferred, then
all assets and funds of the Corporation legally available for distribution shall
be distributed ratably among the holders of the Series C Preferred in accordance
with the number of shares of Series C Preferred held by each such holder.
(b) Subject to the liquidation rights of the holders of the Series C
Preferred set forth in Section 6.3(a) above, the holder of each then outstanding
share of Series B Preferred and Series B-1 Preferred shall be entitled to
receive out of the assets of the Corporation available for distribution to
shareholders, and before any payment or declaration and setting apart for
payment of any amount or dividend with respect to the Series A Preferred, Common
or any other equity security, an amount equal to $10.00 per share (such amount
to be adjusted proportionally in the event the shares of Series B Preferred and
Series B-1 Preferred are subdivided into a greater number or combined into a
lesser number of shares), plus all declared but unpaid dividends thereon. If the
Corporation shall have insufficient assets and funds to pay such amounts in full
to the holders of the Series B Preferred and Series B-1 Preferred, then all
assets and funds of the Corporation legally available for distribution shall be
distributed ratably among the holders of the Series B Preferred and Series B-1
Preferred in accordance with the number of shares of Series B Preferred and
Series B-1 Preferred held by each such holder.
(c) Subject to the liquidation rights of the holders of the Series C
Preferred, Series B Preferred and Series B-1 Preferred set forth in Sections
6.3(a) and (b) above, the holder of each then outstanding share of Series A
Preferred shall be entitled to receive out of the assets of the Corporation
available for distribution to shareholders, and before any payment or
declaration and setting apart for payment of any amount or dividend with respect
to the Common or any other equity security, an amount equal to $1.00 per share
(such amount to be adjusted proportionally in the event the shares of Series A
Preferred are subdivided into a greater number or combined into a lesser number
of shares), plus all accrued or declared but unpaid dividends thereon. If the
Corporation shall have insufficient assets and funds to pay such amounts in full
to the holders of the Series A Preferred, then all assets and funds of the
Corporation legally available for distribution shall be distributed ratably
among the holders of the Series A Preferred in accordance with the number of
shares of Series A Preferred held by each such holder.
(d) Subject to the liquidation rights of the holders of the Series C
Preferred, Series B Preferred, Series B-1 Preferred, and Series A Preferred set
forth in Section 6.3(a), (b) and (c) above, the holder of each then outstanding
share of Series A Preferred and Common shall be entitled to receive out of the
assets of the Corporation available for distribution to shareholders, on a
ratable basis, and before any payment
<PAGE>
or declaration and setting apart for payment of any amount or dividend with
respect to the Common (other than as specified herein) or any other equity
security, an amount equal to $9.00 per share for each share of Series A
Preferred, and $1.00 per share for each share of Common (such amount to be
adjusted proportionally in the event the shares of Series A Preferred or Common
are subdivided into a greater number or combined into a lesser number of
shares), plus all declared but unpaid dividends thereon. If the Corporation
shall have insufficient assets and funds to pay such amounts in full to the
holders of the Series A Preferred and the Common, then all assets and funds of
the Corporation legally available for distribution shall be distributed ratably
among the holders of the Series A Preferred and the Common (with each share of
Series A Preferred being treated, for such purpose, as equal to the number of
shares of Common into which such share of Series A Preferred is convertible on
the date of such distribution).
(e) After payment in full of the amounts payable pursuant to Sections
6.3(a), (b), (c) and (d) above, the holder of each then outstanding share of
Authorized Preferred shall be entitled to share ratably in the remaining assets
of the Corporation with the holders of Common (with each share of Authorized
Preferred being treated, for such purpose, as equal to the number of shares of
Common into which such share of Authorized Preferred is convertible on the date
of such distribution).
(f) For purposes of this Section 6.3, (i) any acquisition of the
Corporation by means of a merger or other form of corporate reorganization in
which outstanding shares of the Corporation are exchanged for securities or
other consideration issued, or caused to be issued, by the acquiring corporation
or its subsidiary, or (ii) a sale of all or substantially all of the assets of
the Corporation [other than a merger, consolidation or reorganization in which
the holders of a majority of the voting capital stock of the Corporation (on an
as-converted basis) immediately prior thereto beneficially own, directly or
indirectly, more than 50% of the combined voting power of the capital stock of
(i) the corporation surviving or resulting from such merger, consolidation or
reorganization or (ii) the purchaser of such assets], shall (for purposes of the
distribution of such securities or other consideration to the holders of Common
and Preferred) be treated as a liquidation, dissolution or winding up of the
Corporation and shall entitle the holders of Common and Preferred to receive at
closing in cash, securities or other property (valued as provided in Section
6.3(g) below) amounts as specified and otherwise in the order of preference as
set forth in Sections 6.3(a), (b), (c), (d) and (e) above.
(g) Whenever the distribution provided in this Section 6.3 shall be payable
in securities or property other than cash, the value of such distribution shall
be the fair market value of such securities or other property as determined in
good faith by the Board.
6.4 Conversion
(a) Terms of Conversion.
(i) Optional Conversion. The holder of each share of Authorized Preferred
shall have the right (the "Conversion Right"), at such holder's option, to
convert all, but not less than all, shares of Authorized Preferred held by such
holder at any time, without cost and otherwise on the terms of this Section 6.4,
into the number of fully paid and non-assessable shares of Common that results
<PAGE>
from dividing the Original Issue Price (as herein defined) of the applicable
series of Authorized Preferred by the conversion price of such series of
Authorized Preferred that is in effect at the time of conversion (the
"Conversion Price"). The initial Conversion Price for each series of Authorized
Preferred is $1.00 per share. The "Original Issue Price" for each series of
Authorized Preferred $10.00 per share. The Conversion Price of each share of
each series of Preferred shall be subject to adjustment from time to time as
provided in this Section 6.4.
(ii) Mandatory Conversion. Upon the occurrence of an Initial Public
Offering (as hereinafter defined) or in the event of the merger of the
Corporation into an entity, or a subsidiary thereof, that is subject to the
registration requirements of Section 12 of the Securities Exchange Act of 1934,
as amended (collectively, a "Conversion Event") each share of Authorized
Preferred shall be automatically converted, without cost and on the terms of
this Section 6.4 into the number of shares of Common into which such share of
Preferred would be convertible under clause 6.4(a)(i) above immediately prior to
such Conversion Event.
(b) Mechanics of Conversion.
(i) Optional Conversion. A holder of any share of Authorized
Preferred may exercise the Conversion Right with respect to all, but
not less than all, of such shares held by such holder by surrendering
the certificate(s) therefor, duly endorsed, at the office of the
Corporation or of any transfer agent for the Authorized Preferred,
together with a written notice to the Corporation which shall state:
(A) that such holder elects to convert the same;
(B) the number of shares of Authorized Preferred being
converted; and
(C) that such number of shares represents all of such shares
of a series of Authorized Preferred held by such holder.
Thereupon, the Corporation shall promptly issue and deliver to the holder of
such shares a certificate or certificates for the number of shares of Common to
which such holder shall be entitled. The conversion of any shares of Authorized
Preferred shall be deemed to have been made immediately prior to the close of
business on the date that the shares of Authorized Preferred to be converted are
surrendered to the Corporation, and the person or persons entitled to receive
the shares of Common issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common on such date.
Any dividends or distributions declared but unpaid at the time of conversion
with respect to the Authorized Preferred so converted shall be paid to the
holder of such Common.
(ii) Mandatory Conversion. The Corporation shall give written
notice to each holder of a share of Authorized Preferred not more than
forty (40) nor less than ten (10) days before the anticipated
effective date of a Conversion Event and shall also give written
notice to each such holder upon the actual occurrence of a Conversion
Event. Following the conversion of such shares, each holder of shares
so converted may surrender the certificate therefor at the office of
the Corporation or any transfer agent
<PAGE>
for the Authorized Preferred. Upon such surrender, the Corporation
shall issue and deliver to each holder a certificate or certificates
for the number of shares of Common to which such holder is entitled.
The conversion of shares of Authorized Preferred shall take place
upon the occurrence of a Conversion Event, whether or not the
certificates representing such shares of Authorized Preferred shall
have been surrendered or new certificates representing the shares of
Common into which such shares have been converted shall have been
issued.
(c) Adjustment of Conversion Price. The Conversion Price for each
share of Authorized Preferred and the kind of securities issuable upon the
conversion of any share of Authorized Preferred shall be adjusted from time
to time as follows:
(i) Subdivision or Combination of Shares. If the Corporation at
any time effects a subdivision or combination of the outstanding
Common, each Conversion Price shall be decreased, in the case of a
subdivision, or increased, in the case of a combination, in the same
proportions as the Common is subdivided or combined, in each case
effective automatically upon, and simultaneously with, the
effectiveness of the subdivision or combination which gives rise to
the adjustment.
(ii) Stock Dividends. If the Corporation at any time pays a
dividend, or makes any other distribution, to holders of Common
payable in shares of Common, or fixes a record date for the
determination of holders of Common entitled to receive a dividend or
other distribution payable in shares of Common, each Conversion Price
shall be decreased by multiplying it by a fraction:
(A) the numerator of which shall be the total number of
shares of Common outstanding immediately prior to such
dividend or distribution, and
(B) the denominator of which shall be the total number of
shares of Common outstanding immediately after such dividend
or distribution (plus, if the Corporation paid cash instead
of fractional shares otherwise issuable in such dividend or
distribution, the number of additional shares which would
have been outstanding had the Corporation issued fractional
shares instead of cash),
in each case effective automatically as of the date the Corporation shall take a
record of the holders of its Common for the purpose of receiving such dividend
or distribution (or if no such record is taken, as of the effectiveness of such
dividend or distribution).
(iii) Reclassification, Consolidation or Merger. If at any time,
as a result of:
(A) a capital reorganization or reclassification (other than
a subdivision, combination or dividend which gives rise to an
adjustment of each Conversion Price pursuant to clauses (i) or
(ii) of this Section 6.4(c)); or
(B) a merger or consolidation of the Corporation with
another corporation (other than a merger or consolidation giving
rise to liquidation rights of the Authorized Preferred as
provided by
<PAGE>
Section 6.3(f)),
the Common issuable upon the conversion of the Authorized Preferred is changed
into, or exchanged for, the same or a different number of shares of any class or
classes of stock of the Corporation or any other corporation, or other
securities convertible into such shares, then, as a part of such reorganization,
reclassification, merger or consolidation, appropriate adjustments shall be made
in the terms of the Authorized Preferred (or of any securities into which the
Authorized Preferred is changed or for which the Authorized Preferred is
exchanged), so that:
(Y) the holders of Authorized Preferred or of such substitute
securities shall thereafter be entitled to receive, upon conversion of the
Authorized Preferred or of such substitute securities, the kind and amount
of shares of stock, other securities, money and property which such holders
would have received at the time of such capital reorganization,
reclassification, merger, or consolidation, if such holders had converted
their Authorized Preferred immediately prior to such capital
reorganization, reclassification, merger, or consolidation, and
(Z) the Authorized Preferred or such substitute securities shall
thereafter be adjusted on terms as nearly equivalent as may be practicable
to the adjustments theretofore provided in this Section 6.4(c).
The provisions of this Section6.4(c)(iii) shall similarly apply to successive
capital reorganizations, re-classifications, mergers, and consolidations.
(iv) Anti-Dilution Protection. (A) For purposes of this Section 6.4(c)(iv),
"Additional Shares" means all shares of Common or Preferred issued by the
Corporation after December 1, 1996, including shares of Common or Preferred
issued upon the exercise of outstanding options and warrants, but excluding:
(1) shares of Common issuable in transactions giving rise to
adjustments under Sections 6.4(c)(i), (ii), or(iii)above; and
(2) shares of Common issuable upon conversion of shares of Preferred.
(B) If at any time the Corporation issues Additional Shares, at such
issuance the Conversion Price with respect to the Series C Preferred and Series
B-1 Preferred shall be reduced to a price per share determined by multiplying
the respective Conversion Prices by a fraction:
(1) the numerator of which shall be the sum of (x) the total number of
shares of Common outstanding immediately prior to the issuance of such
Additional Shares and (y) the total number of shares of Common issuable
upon the conversion of all of the then-outstanding shares of Preferred; and
(2) the denominator of which shall be the sum of (x) the total number
of shares of Common
<PAGE>
outstanding immediately after the issuance of such Additional Shares and
(y) the total number of shares of Common issuable upon the conversion of
all of the shares of Preferred outstanding immediately after the issuance
of such Additional Shares.
(v) Other Action Affecting Common. If at any time the Corporation takes any
action affecting its Common which, in the opinion of the Board, would have an
adverse effect upon the Conversion Rights of the Authorized Preferred, the
Conversion Price and the kind of Securities issuable upon the conversion of
Authorized Preferred shall be adjusted in such manner and at such time as the
Board may in good faith determine to be equitable in the circumstances.
(vi) Notice of Adjustment Events. Whenever the Corporation contemplates the
occurrence of an event which would give rise to adjustments under Sections
6.4(c)(i) - (v) above, the Corporation shall mail to each holder of Authorized
Preferred, at least 15 days prior to the record date with respect to such event
or, if no record date shall be established, at least 15 days prior to such
event, a notice specifying (A) the nature of the contemplated event, (B) the
date on which any such record is to be taken for the purpose of such event, (C)
the date on which such event is expected to become effective, and (D) the time,
if any is to be fixed, when the holders of record of Common (or other
securities) shall be entitled to exchange their shares of Common (or other
securities) for securities or other property deliverable in connection with such
event.
(vii) Notice of Adjustments. Whenever the Conversion Price or the kind of
securities issuable upon the conversion of any one of or all of the Authorized
Preferred shall be adjusted pursuant to Section 6.4(c)(i) - (v) above, the
Corporation shall make a certificate signed by its President or a Vice President
and by its Chief Financial Officer, Secretary or Assistant Secretary, setting
forth, in reasonable detail, the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated (including a
description of the basis on which the Board made any determination hereunder),
and the Conversion Price and the kind of securities issuable upon the conversion
of any one of or all of the Authorized Preferred after giving effect to such
adjustment, and shall cause copies of such certificate to be mailed (by first
class mail postage prepaid) to each holder of Authorized Preferred promptly
after each adjustment.
(d) Reservation of Shares. The Corporation will take such corporate
action as may be necessary from time to time so that at all times it will
have authorized, and reserved out of its authorized but unissued Common for
the sole purpose of issuance upon conversion of shares of Authorized
Preferred, a sufficient number of shares of Common to permit the conversion
in full of all outstanding shares of Authorized Preferred. (e) Full
Consideration. All shares of Common which shall be issued upon the
conversion of any Authorized Preferred (which is itself fully paid and
non-assessable) will, upon issuance, be fully paid and non-assessable. The
Corporation will pay such amounts and will take such other action as may be
necessary from time to time so that all shares of Common which shall be
issued upon the conversion of any Authorized Preferred will, upon issuance
and without cost to the recipient, be free from all preemptive rights,
taxes, liens and charges with respect to the issue thereof.
(f) Definitions. For the purpose of this Article Six, the following
terms shall have the meanings
<PAGE>
ascribed below;
"Board" shall mean the Board of Directors of the Corporation.
"Initial Public Offering" means the consummation of the first issuance and
sale to the public of Common pursuant to an effective registration statement
under the Securities Act of 1933.
Article 7. BOARD OF DIRECTORS.
7.1 Number of Directors. The number of directors composing the Board shall
not be less than four nor more than nine. The exact number shall be determined
from time to time by resolution adopted by the affirmative vote of a majority of
the directors in office at the time of adoption of such resolution.
7.2 Election of Directors. Elections of directors need not be by written
ballot unless the By-laws of the Corporation so provide.
7.3 Vacancies and Newly Created Directorships. Except as required by Law or
this Certificate, all vacancies on the Board and newly-created directorships
resulting from any increase in the authorized number of directors elected by all
of the stockholders having the right to vote as a single class may be filled by
a majority of the directors then in office, although less than a quorum, or by a
sole remaining director, or by the vote of the holders of a majority of the
outstanding shares of stock entitled to vote on the election of directors.
7.4 Initial Directors. Until changed by resolution of the directors in
accordance with Section 7.1 of this Certificate, the number of directors shall
be five. The names and mailing addresses of the persons who are to serve as
directors until the first annual meeting of the stockholders of the Corporation
or until their successors are elected and qualified are as follows:
Name Mailing Address
- ---- ---------------
Roger Berman 10850 Wilshire Boulevard, Suite 1260, Los Angeles, CA 990024
Joshua Sharfman 10850 Wilshire Boulevard, Suite 1260, Los Angeles, CA 990024
Dr. James Stigler 10850 Wilshire Boulevard, Suite 1260, Los Angeles, CA 990024
Thomas Stigler 10850 Wilshire Boulevard, Suite 1260, Los Angeles, CA 990024
Gerald Porter 13 Via Roma, Palm Coast, FL 32137
Article 8. LIABILITY OF DIRECTORS
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided, however, that to the extent required by the Law
this provision shall not eliminate or limit the liability of a director (i) for
any breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Law, or (iv) for any transaction from which the director derived an improper
personal
<PAGE>
benefit.
Article 9. INDEMNIFICATION OF DIRECTORS AND OTHER PERSONS
The Corporation shall indemnify, in accordance with and to the full extent
now or hereafter permitted by law, any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation), by reason of the
fact that he or she is or was a director of the Corporation (and the
Corporation, in the discretion of the Board, may so indemnify a person by reason
of the fact that he or she is or was an officer, employee or agent of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise) against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or her in connection with such action, suit or proceeding;
provided, however, that, the Corporation shall not be obligated to indemnify any
such person (i) with respect to proceedings, claims or actions initiated or
brought voluntarily by such person and not by way of defense, or (ii) for any
amounts paid in settlement of an action effected without the prior written
consent of the Corporation to such settlement. Such indemnification is not
exclusive of any other right to indemnification provided by law, agreement or
otherwise.
Article 10. PROSPECTIVE AMENDMENTS
So long as any series of Authorized Preferred is outstanding, the
Corporation shall not, without the affirmative vote at a meeting (the notice of
which shall state the general character of the matter to be submitted thereat),
or the written consent with or without a meeting, of the holders of a majority
of the then outstanding shares of such series of Authorized Preferred, voting
separately as a class, amend, alter or repeal any of the provisions of this
Certificate if the powers, preferences or special rights of such series or its
holders would be adversely affected by any such amendment, alteration or repeal.
No amendment to or repeal of Article 8 or Article 9 of this Certificate shall
apply to or have any effect on the rights of any individual referred to in
Article 8 or Article 9 for or with respect to acts or omissions of such
individual occurring prior to such amendment or repeal.
Article 11. STOCKHOLDER ACTIONS
At any time after the first sale to the public of shares of Common pursuant
to an Initial Public Offering, any action required or permitted to be taken by
the holders of Common (whether voting separately as a class or together with
other classes) must be taken at a duly convened annual or special meeting of
such stockholders, and may not be taken without a meeting by a consent in
writing by such holders.
Article 12. BUSINESS COMBINATIONS
The Corporation hereby expressly elects not to be governed by Section 203
of the Law.
<PAGE>
Article 13. BY-LAWS
In furtherance and not in limitation of the powers conferred by statute,
the Board is expressly authorized to adopt, amend or repeal the By-Laws of the
Corporation.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation to be signed by its President on November 26, 1996.
DIGITAL LAVA INC.
/s/ Roger Berman
---------------------------
Roger H. Berman, President
EXHIBIT 3(b)
FORM OF
AMENDMENT TO
AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION
OF
DIGITAL LAVA INC.
DIGITAL LAVA INC. (the "Corporation"), a corporation organized and existing
under the General Corporation Law of the State of Delaware (as amended from time
to time, the "Law"), hereby certifies as follows:
1. The name of the Corporation is Digital Lava Inc., the original
Certificate of Incorporation of the Corporation was filed with the Secretary of
State of the State of Delaware on June 5, 1996 and the Amended and Restated
Certificate of Incorporation of the Corporation was filed with the Secretary of
State of the State of Delaware on November 27, 1996.
2. Pursuant to Sections 242 and 245 of the Law, this Amendment to the
Amended and Restated Certificate of Incorporation of the Corporation (this
"Amendment") further amends the Corporation's Certificate of Incorporation.
3. This Amendment has been duly adopted pursuant to the provisions of
Sections 242 and 245 of the Law and has been approved by written consent of the
required number of shares of outstanding stock of the Corporation pursuant to
Section 228 of the Law and written notice pursuant to Section 228(d) of the Law
has been given to those stockholders whose written consent has not been
obtained.
4. That the effective date of this Amendment shall be the closing date of
the Corporation's initial public offering of its securities and that this
Amendment shall not be effective in the event the closing of such initial public
offering does not occur.
5. The Corporation's Amended and Restate Certificate of Incorporation is
hereby amended as follows:
RESOLVED, that the following paragraph shall be added to Article 4 of the
Amended and Restated Certificate of Incorporation of the Corporation:
"Effective at the time of filing with the Secretary of State of the State
of Delaware of this Amended and Restated Certificate of Incorporation (the
"Effective Time"), every 9.139 shares of the Corporation's Preferred Stock and
Common Stock that are issued and outstanding or held in treasury at the
Effective Time shall, automatically and without any action on the part of the
respective holders thereof, be converted into 1 share of the Corporation's
Preferred Stock and Common Stock, respectively; provided, however, that if a
stockholder would be entitled to receive a fractional share of Preferred Stock
or Common Stock, as the case may be, based on the foregoing conversion ratio,
such stockholder shall receive a whole share of Preferred Stock or Common Stock,
as the case may be, in lieu of such fractional share."
<PAGE>
RESOLVED, that Section 6.4(a)(i) of the Amended and Restated Certificate of
Incorporation of the Corporation is hereby amended in its entirety to read as
follows:
"(i) Optional Conversion. The holder of each share of Preferred shall have
the right (the "Conversion Right"), at such holder's option, to convert such
share at any time, without cost and otherwise on the terms of this Section 6.4,
into the number of fully paid and non-assessable shares of Common that results
from dividing the Original Issue Price (as herein defined) of the applicable
series of Authorized Preferred by the conversion price of such series of
Authorized Preferred that is in effect at the time of conversion (the
"Conversion Price"). The initial Conversion Price for each series of Authorized
Preferred is $1.00 per share. The "Original Issue Price" for each series of
Authorized Preferred is as follows: Series A - $10.00 per share; Series B -
$20.3099 per share; Series B-1 - $10.00 per share; Series C - $19.3702 per
share. The Conversion Price of each share of each series of Preferred shall be
subject to adjustment from time to time as provided in this Section 6.4."
RESOLVED, that Section 6.4(c)(iv)(B) of the Amended and Restated
Certificate of Incorporation of the Corporation is hereby amended as follows:
The words "Series C Preferred and Series B-1 Preferred" shall be replaced
with the words "Series B-1 Preferred" in the first sentence of Section
6.4(c)(iv)(B).
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation to be signed by its Chief Executive Officer on
_____________, 1999.
DIGITAL LAVA INC.
Joshua Sharfman, Chief Executive Officer
EXHIBIT 3(c)
FORM OF
SECOND AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION
OF
DIGITAL LAVA INC.
DIGITAL LAVA INC. (the "Corporation"), a corporation organized and existing
under the General Corporation Law of the State of Delaware (as amended from time
to time, the "Law"), hereby certifies as follows:
1. The name of the Corporation is Digital Lava Inc., the original
Certificate of Incorporation of the Corporation was filed with the Secretary of
State of the State of Delaware (the ASecretary@) on June 5, 1996, the Amended
and Restated Certificate of Incorporation of the Corporation was filed with the
Secretary on November 27, 1996, and an Amendment to the Amended and Restated
Certificate of Incorporation of the Corporation was filed with the Secretary on
_____________, 1999.
2. Pursuant to Sections 242 and 245 of the Law, this Second Amended and
Restated Certificate of Incorporation of the Corporation restates and integrates
and further amends the Corporation=s Certificate of Incorporation.
3. The terms and provisions of this Second Amended and Restated Certificate
of Incorporation have been duly adopted pursuant to the provisions of Sections
242 and 245 of the Law and have been approved by written consent of the required
number of shares of outstanding stock of the Corporation pursuant to Section 228
of the Law and written notice pursuant to Section 228(d) of the Law has been
given to those stockholders whose written consent has not been obtained.
4. The text of the Corporation=s Amended and Restated Certificate of
Incorporation is hereby restated and further amended to read in its entirety as
follows:
Article 1.
The name of the corporation is DIGITAL LAVA INC. (the "Corporation").
Article 2.
The address of the Corporation's registered office in the State of Delaware
is 1013 Centre Road, in the City of Wilmington, in the County of New Castle and
its registered agent at such office is the Corporation Service Company.
<PAGE>
Article 3.
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the Law.
Article 4.
A. The Corporation is authorized to issue two classes of stock, to be
designated, respectively, "Common Stock" and "Preferred Stock". The total number
of shares which the Corporation is authorized to issue is 40,000,000, of which:
(A) 35,000,000 shares shall be Common Stock, $.0001 par value per share (herein
called "Common Stock"), and (B) 5,000,000 shares shall be Preferred Stock,
$.0001 par value per share (herein called "Preferred Stock").
B. The Board of Directors shall have the authority to fix by Resolution the
voting powers (full, limited, multiple, fractional or none), designations,
preferences, qualifications, privileges, limitations, restrictions, options,
conversion rights and other special or relative rights of the Preferred Stock or
any class or series thereof prior to or concurrently with the issuance of such
shares.
There shall be no cumulative voting rights for the Common Stock.
The holders of the Common Stock and the Preferred Stock shall be entitled
to dividends, when, as and if declared by the Board of Directors of the
Corporation, payable at such time or times as the Board of Directors may
determine.
Subject to the determination of the Board of Directors with regard to the
Preferred Stock, in the event of any liquidation, dissolution or winding up of
the affairs of the Corporation, whether voluntary or involuntary, all remaining
assets and funds of the Corporation available for distribution to its
stockholders shall be distributed in equal amounts per share and without
preference or priority of one class of common stock over the other.
Any action may be taken by the stockholders of the Corporation by their
written consent without a stockholders' meeting.
No stockholder of this Corporation shall by reason of his holding shares of
any class have any preemptive or preferential right to purchase or subscribe to
any shares of any class of this Corporation, now or hereafter to be authorized,
or any notes, debentures, bonds, or other securities convertible into or
carrying options or warrants to purchase shares of any class, now or hereafter
to be authorized, whether or not the issuance of any such shares, or such notes,
debentures, bonds or other securities, would adversely affect the dividend or
voting rights of such stockholder, other than such rights, if any, as the board
of directors, in its discretion from time to time may grant, and at such price
as the Board of Directors in its discretion may fix; and the Board of Directors
may issue shares
<PAGE>
of any class of this Corporation, or any notes, debentures, bonds, or other
securities convertible into or carrying options or warrants to purchase shares
of any class, without offering any such shares of any class, either in whole or
in part, to the existing stockholders of any class.
Article 5.
The number of directors of the Corporation shall be such as from time to
time shall be fixed by, or in the manner provided in, the by-laws of the
Corporation. No election of directors need be by ballot unless the by-laws so
provide.
Article 6.
The Corporation hereby expressly elects not to be governed by Section 203
of the Law.
Article 7.
A. No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided, however, that this provision shall not eliminate
or limit the liability of a director (i) for any breach of the director's duty
of loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Law, or (iv) from any transaction from
which the director derived an improper personal benefit. If the Law is amended
after approval of by the stockholders of this Article to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of a director shall be eliminated or limited to the fullest extent
permitted by the Law, as so amended.
B. The Corporation shall indemnify, in accordance with and to the full
extent now or hereafter permitted by law, any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(including, without limitation, an action by or in the right of the
Corporation), by reason of his acting as a director of the Corporation (and the
Corporation, in the discretion of the Board, may so indemnify a person by reason
of the fact that he is or was an officer or employee of the Corporation or is or
was serving at the request of the Corporation in any other capacity for or on
behalf of the Corporation) against any liability or expense actually and
reasonably incurred by such person in respect thereof; provided, however, that,
the Corporation shall not be obligated to indemnify any such person (i) with
respect to proceedings, claims or actions initiated or brought voluntarily by
such person and not by way of defense, or (ii) for any amounts paid in
settlement of an action effected without the prior written consent of the
Corporation to such settlement. Such indemnification is not exclusive of any
other right to indemnification provided by law, agreement or otherwise.
<PAGE>
C. No amendment to or repeal of this Article shall apply to or have any
effect on the rights of any individual referred to in this Article for or with
respect to acts or omissions of such individual occurring prior to such
amendment or repeal.
Article 8.
The Board of Directors shall have power without the assent or vote of
the stockholders to make, alter, amend, change, add to or repeal the by-laws of
the Corporation.
Article 9.
The Corporation shall have perpetual existence.
Article 10.
Meetings of stockholders may be held within or without the State of
Delaware, as the by-laws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statute) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the by-laws of the Corporation.
IN WITNESS WHEREOF, the Corporation has caused this Second Amended and
Restated Certificate of Incorporation to be signed by its Chief Executive
Officer on , 1999.
DIGITAL LAVA INC.
Joshua Sharfman, Chief Executive Officer
EXHIBIT 4 (b)
<PAGE>
FORM OF WARRANT AGREEMENT
AGREEMENT, dated this _____ day of ________, 1999, by and between DIGITAL
LAVA INC., a Delaware corporation (the "Company") and AMERICAN STOCK TRANSFER
AND TRUST COMPANY, as Warrant Agent (the "Warrant Agent").
W I T N E S S E T H:
WHEREAS, in connection with (i) the offering to the public of up to
2,400,000 shares of Common Stock (as defined in Section 1) and 1,200,000
redeemable common stock purchase warrants (the "Warrants"), each warrant
entitling the holder thereof to purchase one additional share of Common Stock,
(ii) the over-allotment option to purchase up to an additional 360,000 shares of
Common Stock and/or 180,000 Warrants (the "Over-allotment Option"), and (iii)
the sale to Dirks & Company, Inc. ("Dirks") the representative of the several
underwriters (the "Representative"), of warrants (the "Representative's
Warrants") to purchase up to 240,000 shares of Common Stock and/or 120,000
Warrants, the Company will issue up to 1,500,000 Warrants (subject to increase
as provided in the Representative's Warrant Agreement); and
WHEREAS, the Company desires to provide for the issuance of certificates
representing the Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the Warrants
and the rights of the holders thereof.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Warrants and
<PAGE>
the certificates representing the Warrants and the respective rights and
obligations thereunder of the Company, the holders of certificates representing
the Warrants and the Warrant Agent, the parties hereto agree as follows:
SECTION 1. Definitions. As used herein, the following terms shall have the
following meanings, unless the context shall otherwise require:
(a) "Act" shall mean the Securities Act of 1933, as amended.
(b) "Amex" shall mean the American Stock Exchange.
(c) "Common Stock" shall mean the authorized stock of the Company of any
class, whether now or hereafter authorized, which has the right to participate
in the voting and in the distribution of earnings and assets of the Company
without limit as to amount or percentage.
(d) "Commission" shall mean the Securities and Exchange Commission.
(e) "Corporate Office shall mean the office of the Warrant Agent (or its
successor) at which at any particular time its business in New York, New York,
shall be administered, which office is located on the date hereof at 40 Wall
Street.
(f) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(g) "Exercise Date" shall mean, subject to the provisions of Section 5(b)
hereof, as to any Warrant, the date on which the Warrant Agent shall have
received both (i) the Warrant Certificate representing such Warrant, with the
exercise form thereon duly executed by the Registered Holder thereof or his
attorney duly authorized in writing, and (ii) payment in cash or by official
bank or certified check made payable to the Warrant Agent for the account of the
Company,
<PAGE>
of the amount in lawful money of the United States of America equal to the
applicable Purchase Price (as hereinafter defined) in good funds.
(h) "Initial Public Offering Price" shall mean _________ per Share of
Common Stock.
(i) "Initial Warrant Exercise Date" shall mean _________, 2000.
(j) "Initial Warrant Redemption Date" shall mean __________, 2001.
(k) "NASD" shall mean the National Association of Securities Dealers, Inc.
(l) "Nasdaq" shall mean the Nasdaq Stock Market.
(m) "Purchase Price" shall mean, subject to modification and adjustment as
provided in Section 8, $________ [120% of the Initial Public Offering Price] and
further subject to the Company's right, in its sole discretion, to decrease the
Purchase Price for a period of not less than 30 days on not less than 30 days'
prior written notice to the Registered Holders.
(n) "Redemption Date" shall mean the date (which may not occur before the
Initial Warrant Redemption Date) fixed for the redemption of the Warrants in
accordance with the terms hereof.
(o) "Redemption Price" shall mean the price at which the Company may, at
its option, redeem the Warrants, in accordance with the terms hereof, which
price shall be $0.10 per Warrant, subject to adjustment from time to time
pursuant to the provisions of Section 9 hereof.
(p) "Registered Holder" shall mean the person in whose name any certificate
representing the Warrants shall be registered on the books maintained by the
Warrant Agent pursuant to Section 6.
(q) "Transfer Agent" shall mean American Stock Transfer and Trust Company,
or its authorized successor.
<PAGE>
(r) "Underwriting Agreement" shall mean the underwriting agreement dated
__________, 1999 [date of Prospectus] between the Company and the several
underwriters listed therein relating to the purchase for resale to the public of
the Common Stock and the Warrants.
(s) "Representative's Warrant Agreement" shall mean the agreement dated as
of ___________, 1999 [date of Prospectus] between the Company and the
Representative relating to and governing the terms and provisions of the
Representative's Warrants.
(t) "Warrant Certificate" shall mean a certificate representing each of the
Warrants substantially in the form annexed hereto as Exhibit A.
(u) "Warrant Expiration Date" shall mean, unless the Warrants are redeemed
as provided in Section 9 hereof prior to such date, 5:30 p.m. (New York time),
on ___________, 2004 [five years after date of Prospectus], or the Redemption
Date as defined herein, whichever date is earlier; provided that if such date
shall in the State of New York be a holiday or a day on which banks are
authorized to close, then 5:30 p.m. (New York time) on the next following day
which, in the State of New York, is not a holiday or a day on which banks are
authorized to close. Upon five business days' prior written notice to the
Registered Holders, the Company shall have the right to extend the Warrant
Expiration Date.
SECTION 2. Warrants and Issuance of Warrant Certificates.
(a) Each Warrant shall initially entitle the Registered Holder of the
Warrant Certificate representing such Warrant to purchase at the Purchase Price
therefor from the Initial Warrant Exercise Date until the Warrant Expiration
Date one share of Common Stock upon the exercise thereof in accordance with the
terms hereof, subject to modification and adjustment as provided in Section 8.
<PAGE>
(b) Upon execution of this Agreement, Warrant Certificates representing the
number of Warrants sold pursuant to the Underwriting Agreement (subject to
modification and adjustment as provided in Section 8) shall be executed by the
Company and delivered to the Warrant Agent.
(c) Upon exercise of the Representative's Warrants as provided therein,
Warrant Certificates representing all or a portion of 120,000 Warrants to
purchase up to an aggregate of 120,000 shares of Common Stock (subject to
modification and adjustment as provided in Section 8 hereof and in the
Representative's Warrant Agreement), shall be countersigned, issued and
delivered by the Warrant Agent upon written order of the Company signed by its
Chairman of the Board, Chief Executive Officer, President or a Vice President
and by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant
Secretary.
(d) From time to time, up to the Warrant Expiration Date or the Redemption
Date, whichever date is earlier, the Warrant Agent shall countersign and deliver
Warrant Certificates in required denominations of one or whole number multiples
thereof to the person entitled thereto in connection with any transfer or
exchange permitted under this Agreement. Except as provided herein, no Warrant
Certificates shall be issued except (i) Warrant Certificates initially issued
hereunder and those issued on or after the Initial Warrant Exercise Date, upon
the exercise of fewer than all Warrants held by the exercising Registered
Holder, (ii) Warrant Certificates issued upon any transfer or exchange of
Warrants, (iii) Warrant Certificates issued in replacement of lost, stolen,
destroyed or mutilated Warrant Certificates pursuant to Section 7, (iv) Warrant
Certificates issued pursuant to the Representative's Warrant Agreement, and (v)
at the option of the Company, Warrant Certificates in such form as may be
approved by its Board of Directors, to reflect any adjustment or change in the
Purchase Price, the number of shares of
<PAGE>
Common Stock purchasable upon exercise of the Warrants or the Redemption Price
therefor made pursuant to Section 8 hereof.
SECTION 3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates shall be substantially in the form annexed
hereto as Exhibit A (the provisions of which are hereby incorporated herein) and
may have such letters, numbers or other marks of identification or designation
and such legends, summaries or endorsements printed, lithographed or engraved
thereon as the Company may deem appropriate and as are not inconsistent with the
provisions of this Agreement, or as may be required to comply with any law or
with any rule or regulation made pursuant thereto or with any rule or regulation
of any stock exchange on which the Warrants may be listed, or to conform to
usage. The Warrant Certificates shall be dated the date of issuance thereof
(whether upon initial issuance, transfer, exchange or in lieu of mutilated,
lost, stolen or destroyed Warrant Certificates) and issued in registered form.
Warrants shall be numbered serially with the letter W on the Warrants.
(b) Warrant Certificates shall be executed on behalf of the Company by its
Chairman of the Board, Chief Executive Officer, President or any Vice President
and by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant
Secretary, by manual signatures or by facsimile signatures printed thereon, and
shall have imprinted thereon a facsimile of the Company's seal. Warrant
Certificates shall be manually countersigned by the Warrant Agent and shall not
be valid for any purpose unless so countersigned. In case any officer of the
Company who shall have signed any of the Warrant Certificates shall cease to be
such officer of the Company before the date of issuance of the Warrant
Certificates or before countersignature by the Warrant Agent and issue and
delivery thereof, such Warrant Certificates, nevertheless, may be countersigned
by the Warrant Agent, issued and delivered with the same force and effect as
though
<PAGE>
the person who signed such Warrant Certificates had not ceased to be such
officer of the Company. After countersignature by the Warrant Agent, Warrant
Certificates shall be delivered by the Warrant Agent to the Registered Holder
promptly and without further action by the Company, except as otherwise provided
by Section 4(a) hereof.
SECTION 4. Exercise.
(a) Warrants in denominations of one or whole number multiples thereof may
be exercised by the Registered Holder thereof commencing at any time on or after
the Initial Warrant Exercise Date, but not after the Warrant Expiration Date,
upon the terms and subject to the conditions set forth herein and in the
applicable Warrant Certificate. A Warrant shall be deemed to have been exercised
immediately prior to the close of business on the Exercise Date and the person
entitled to receive the securities deliverable upon such exercise shall be
treated for all purposes as the holder, upon exercise thereof, as of the close
of business on the Exercise Date. If Warrants in denominations other than whole
number multiples thereof shall be exercised at one time by the same Registered
Holder, the number of full shares of Common Stock which shall be issuable upon
exercise thereof shall be computed on the basis of the aggregate number of full
shares of Common Stock issuable upon such exercise. As soon as practicable on or
after the Exercise Date and in any event within five business days after such
date, if one or more Warrants have been exercised, the Warrant Agent on behalf
of the Company shall cause to be issued to the person or persons entitled to
receive the same a Common Stock certificate or certificates for the shares of
Common Stock deliverable upon such exercise, and the Warrant Agent shall deliver
the same to the person or persons entitled thereto. Upon the exercise of any one
or more Warrants, the Warrant Agent shall promptly notify the Company in writing
of such fact and of the number of securities delivered upon such exercise and,
subject to subsection (b) below, shall cause all payments of an
<PAGE>
amount in cash or by check made payable to the order of the Company, equal to
the Purchase Price, to be deposited promptly in the Company's bank account. (b)
The Company shall not be required to issue fractional shares on the exercise of
Warrants. Warrants may only be exercised in such multiples as are required to
permit the issuance by the Company of one or more whole shares. If one or more
Warrants shall be presented for exercise in full at the same time by the same
Registered Holder, the number of whole shares which shall be issuable upon such
exercise thereof shall be computed on the basis of the aggregate number of
shares purchasable on exercise of the Warrants so presented. If any fraction of
a share would, except for the provisions provided herein, be issuable on the
exercise of any Warrant (or specified portion thereof), the Company shall pay an
amount in cash equal to such fraction multiplied by the then current market
value of a share of Common Stock, determined as follows:
(1) If the Common Stock is listed, or admitted to unlisted trading
privileges on a national securities exchange, or is traded on Nasdaq, the
current market value of a share of Common Stock shall be the closing sale
price of the Common Stock at the end of the regular trading session on the
last business day prior to the date of exercise of the Warrants on
whichever of such exchanges or Nasdaq had the highest average daily trading
volume for the Common Stock on such day; or
(2) If the Common Stock is not listed or admitted to unlisted trading
privileges on any national securities exchange, or listed, quoted or
reported for trading on Nasdaq, but is traded in the over-the-counter
market, the current market value of a share of Common Stock shall be the
average of the last reported bid and asked prices of the Common Stock
reported by the National Quotation Bureau, Inc. on the last business day
prior to the date of exercise of the Warrants; or
<PAGE>
(3) If the Common Stock is not listed, admitted to unlisted trading
privileges on any national securities exchange, or listed, quoted or
reported for trading on Nasdaq, and bid and asked prices of the Common
Stock are not reported by the National Quotation Bureau, Inc., the current
market value of a share of Common Stock shall be an amount, not less than
the book value thereof as of the end of the most recently completed fiscal
quarter of the Company ending prior to the date of exercise, determined by
the members of the Board of Directors of the Company exercising good faith
and using customary valuation methods.
SECTION 5. Reservation of Shares; Listing; Payment of Taxes; etc.
(a) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of issue
upon exercise of Warrants, such number of shares of Common Stock as shall then
be issuable upon the exercise of all outstanding Warrants. The Company covenants
that all shares of Common Stock which shall be issuable upon exercise of the
Warrants shall, at the time of delivery thereof, be duly and validly issued and
fully paid and nonassessable and free from all preemptive or similar rights,
taxes, liens and charges with respect to the issue thereof, and that upon
issuance such shares shall be listed on each securities exchange, if any, on
which the other shares of outstanding Common Stock of the Company are then
listed.
(b) The Company covenants that if any securities to be reserved for the
purpose of exercise of Warrants hereunder require registration with, or approval
of, any governmental authority under any federal securities law before such
securities may be validly issued or delivered upon such exercise, then the
Company will file a registration statement under the federal securities laws or
a post-effective amendment, use its best efforts to cause the same to
<PAGE>
become effective and to keep such registration statement current while any of
the Warrants are outstanding and deliver a prospectus which complies with
Section 10(a)(3) of the Act, to the Registered Holder exercising the Warrant
(except, if in the opinion of counsel to the Company, such registration is not
required under the federal securities law or if the Company receives a letter
from the staff of the Commission stating that it would not take any enforcement
action if such registration is not effected). The Company will use its best
efforts to obtain appropriate approvals or registrations under state "blue sky"
securities laws with respect to any such securities. However, Warrants may not
be exercised by, or shares of Common Stock issued to, any Registered Holder in
any state in which such exercise would be unlawful.
(c ) The Company shall pay all documentary, stamp or similar taxes and
other governmental charges that may be imposed with respect to the issuance of
Warrants, or the issuance or delivery of any shares of Common Stock upon
exercise of the Warrants; provided, however, that if shares of Common Stock are
to be delivered in a name other than the name of the Registered Holder of the
Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to the
Warrant Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized as the Transfer
Agent to requisition from time to time certificates representing shares of
Common Stock or other securities required upon exercise of the Warrants, and the
Company will comply with all such requisitions.
SECTION 6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other Warrant Certificates
representing an equal aggregate number of Warrants of the same class or may be
<PAGE>
transferred in whole or in part. Warrant Certificates to be exchanged shall be
surrendered to the Warrant Agent at its Corporate Office, and, upon satisfaction
of the terms and provisions hereof, the Company shall execute and the Warrant
Agent shall countersign, issue and deliver in exchange therefor the Warrant
Certificate or Certificates which the Registered Holder making the exchange
shall be entitled to receive.
(b) The Warrant Agent shall keep, at its office, books in which, subject to
such reasonable regulations as it may prescribe, it shall register Warrant
Certificates and the transfer thereof in accordance with customary practice.
Upon due presentment for registration of transfer of any Warrant Certificate at
such office, the Company shall execute and the Warrant Agent shall issue and
deliver to the transferee or transferees a new Warrant Certificate or
Certificates representing an equal aggregate number of Warrants of the same
class.
(c ) With respect to all Warrant Certificates presented for registration of
transfer, or for exchange or exercise, the subscription or exercise form, as the
case may be, on the reverse thereof shall be duly endorsed or be accompanied by
a written instrument or instruments of transfer and subscription, in form
satisfactory to the Company and the Warrant Agent, duly executed by the
Registered Holder thereof or his attorney-in-fact duly authorized in writing.
(d) A service charge may be imposed by the Warrant Agent for any exchange
or registration of transfer of Warrant Certificates. In addition, the Company
may require payment by such Holder of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for exchange in
case of mutilated Warrant Certificates shall be promptly canceled by the Warrant
Agent and thereafter retained by the Warrant Agent until termination of this
Agreement.
<PAGE>
(f) Prior to due presentment for registration of transfer thereof, the
Company and the Warrant Agent may deem and treat the Registered Holder of any
Warrant Certificate as the absolute owner thereof and of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than a duly authorized officer of the Company or
the Warrant Agent) for all purposes and shall not be affected by any notice to
the contrary.
SECTION 7. Loss or Mutilation. Upon receipt by the Company and the Warrant
Agent of evidence satisfactory to them of the ownership of and the loss, theft,
destruction or mutilation of any Warrant Certificate and (in the case of loss,
theft or destruction) of indemnity satisfactory to them, and (in case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
and the Warrant Agent shall (in the absence of notice to the Company and/or the
Warrant Agent that a new Warrant Certificate has been acquired by a bona fide
purchaser) countersign and deliver to the Registered Holder in lieu thereof a
new Warrant Certificate of like tenor representing an equal aggregate number of
Warrants. Applicants for a substitute Warrant Certificate shall also comply with
such other reasonable regulations and pay such other reasonable charges as the
Warrant Agent may prescribe.
SECTION 8. Adjustment of Purchase Price and Number of Shares of Common
Stock Deliverable.
(a) Except as hereinafter provided, in the event the Company shall, issue
or sell any shares of Common Stock for a consideration per share less than the
Initial Public Offering Price of the shares of Common Stock or issue any shares
of Common Stock as a stock dividend to the holders of Common Stock, or subdivide
or combine the outstanding shares of Common Stock into a greater or lesser
number of shares (any such issuance, subdivision or
<PAGE>
combination being herein called a "Change of Shares"), then, and thereafter upon
each further Change of Shares, the Purchase Price for the Warrants (whether or
not the same shall be issued and outstanding) in effect immediately prior to
such Change of Shares shall be changed to a price (including any applicable
fraction of a cent to the nearest cent) determined by dividing (i) the sum of
(a) the total number of shares of Common Stock outstanding immediately prior to
such Change of Shares, multiplied by the Purchase Price in effect immediately
prior to such Change of Shares and (b) the consideration, if any, received by
the Company upon such sale, issuance, subdivision or combination, by (ii) the
total number of shares of Common Stock outstanding immediately after such Change
of Shares; provided, however, that in no event shall the Purchase Price be
adjusted pursuant to this computation to an amount in excess of the Purchase
Price in effect immediately prior to such computation, except in the case of a
combination of outstanding shares of Common Stock.
For the purposes of any adjustment to be made in accordance with this
Section 8(a), the following provisions shall be applicable:
(A) In case of the issuance or sale of shares of Common Stock (or of
other securities deemed hereunder to involve the issuance or sale of shares
of Common Stock) for a consideration part or all of which shall be cash,
the amount of the cash portion of the consideration therefor deemed to have
been received by the Company shall be (i) the subscription price, if shares
of Common Stock are offered by the Company for subscription, or (ii) the
public offering price (before deducting therefrom any compensation paid or
discount allowed in the sale, underwriting or purchase thereof by
underwriters or dealers or others performing similar services, or any
expenses incurred in connection therewith), if such securities are sold to
underwriters or dealers for public
<PAGE>
offering without a subscription offering, or (iii) the gross amount of cash
actually received by the Company for such securities, in any other case.
(B) In case of the issuance or sale (otherwise than as a dividend or
other distribution on any stock of the Company, and otherwise than on the
exercise of options, rights or warrants or the conversion or exchange of
convertible or exchangeable securities) of shares of Common Stock (or of
other securities deemed hereunder to involve the issuance or sale of shares
of Common Stock) for a consideration part or all of which shall be other
than cash, the amount of the consideration therefor other than cash deemed
to have been received by the Company shall be the value of such
consideration as determined in good faith by the Board of Directors of the
Company, using customary valuation methods and on the basis of prevailing
market values for similar property or services.
(C) Shares of Common Stock issuable by way of dividend or other
distribution on any stock of the Company shall be deemed to have been
issued immediately after the opening of business on the day following the
record date for the determination of shareholders entitled to receive such
dividend or other distribution and shall be deemed to have been issued
without consideration.
(D) The reclassification of securities of the Company other than
shares of Common Stock into securities including shares of Common Stock
shall be deemed to involve the issuance of such shares of Common Stock for
a consideration other than cash immediately prior to the close of business
on the date fixed for the determination of security holders entitled to
receive such shares, and the value of the consideration allocable to such
shares of Common Stock shall be determined as provided in subsection (B) of
this Section 8(a).
<PAGE>
(E) The number of shares of Common Stock at any one time outstanding
shall be deemed to include the aggregate maximum number of shares issuable
(subject to readjustment upon the actual issuance thereof) upon the
exercise of options, rights or warrants and upon the conversion or exchange
of convertible or exchangeable securities.
(b) Upon each adjustment of the Purchase Price pursuant to this Section 8,
the number of shares of Common Stock purchasable upon the exercise of each
Warrant shall be the number derived by multiplying the number of shares of
Common Stock purchasable immediately prior to such adjustment by the Purchase
Price in effect prior to such adjustment and dividing the product so obtained by
the applicable adjusted Purchase Price.
(c) In case the Company shall at any time after the date hereof issue
options, rights or warrants to subscribe for shares of Common Stock, or issue
any securities convertible into or exchangeable for shares of Common Stock, for
a consideration per share (determined as provided in Sections 8(a) and 8(b) and
as provided below) less than the Initial Public Offering Price of the Common
Stock, or without consideration (including the issuance of any such securities
by way of dividend or other distribution), the Purchase Price for the Warrants
(whether or not the same shall be issued and outstanding) in effect immediately
prior to the issuance of such options, rights or warrants, or such convertible
or exchangeable securities, as the case may be, shall be reduced to a price
determined by making the computation in accordance with the provisions of
Sections 8(a) and 8(b) hereof, provided that:
(A) The aggregate maximum number of shares of Common Stock, as the
case may be, issuable or that may become issuable under such options,
rights or warrants (assuming exercise in full even if not then currently
exercisable or currently exercisable in full) shall be deemed to be issued
and outstanding at the time such options, rights or warrants were issued,
for a
<PAGE>
consideration equal to the minimum purchase price per share provided for in
such options, rights or warrants at the time of issuance, plus the
consideration, if any, received by the Company for such options, rights or
warrants; provided, however, that upon the expiration or other termination
of such options, rights or warrants, if any thereof shall not have been
exercised, the number of shares of Common Stock deemed to be issued and
outstanding pursuant to this subsection (A) (and for the purposes of
subsection (E) of Section 8(a) hereof) shall be reduced by the number of
shares as to which options, warrants and/or rights shall have expired, and
such number of shares shall no longer be deemed to be issued and
outstanding, and the Purchase Price then in effect shall forthwith be
readjusted and thereafter be the price that it would have been had
adjustment been made on the basis of the issuance only of the shares
actually issued plus the shares remaining issuable upon the exercise of
those options, rights or warrants as to which the exercise rights shall not
have expired or terminated unexercised.
(B) The aggregate maximum number of shares of Common Stock issuable or
that may become issuable upon conversion or exchange of any convertible or
exchangeable securities (assuming conversion or exchange in full even if
not then currently convertible or exchangeable in full) shall be deemed to
be issued and outstanding at the time of issuance of such securities, for a
consideration equal to the consideration received by the Company for such
securities, plus the minimum consideration, if any, receivable by the
Company upon the conversion or exchange thereof; provided, however, that
upon the termination of the right to convert or exchange such convertible
or exchangeable securities (whether by reason of redemption or otherwise),
the number of shares of Common Stock deemed to be issued and outstanding
pursuant to this subsection (B) (and for the purposes of subsection (E) of
Section 8(a) hereof) shall be reduced by the number of shares as to which
the conversion or exchange rights shall have expired
<PAGE>
or terminated unexercised, and such number of shares shall no longer be
deemed to be issued and outstanding, and the Purchase Price then in effect
shall forthwith be readjusted and thereafter be the price that it would
have been had adjustment been made on the basis of the issuance only of the
shares actually issued plus the shares remaining issuable upon conversion
or exchange of those convertible or exchangeable securities as to which the
conversion or exchange rights shall not have expired or terminated
unexercised.
(C) If any change shall occur in the price per share provided for in
any of the options, rights or warrants referred to in subsection (A) of
this Section 8(c), or in the price per share or ratio at which the
securities referred to in subsection (B) of this Section 8(c) are
convertible or exchangeable, such options, rights or warrants or conversion
or exchange rights, as the case may be, to the extent not theretofore
exercised, shall be deemed to have expired or terminated on the date when
such price change became effective in respect of shares not theretofore
issued pursuant to the exercise or conversion or exchange thereof, and the
Company shall be deemed to have issued upon such date new options, rights
or warrants or convertible or exchangeable securities.
(d) In case of any reclassification or change of outstanding shares of
Common Stock issuable upon exercise of the Warrants (other than a change in par
value, or from par value to no par value, or from no par value to par value or
as a result of a subdivision or combination), or in case of any consolidation or
merger of the Company with or into another corporation (other than (1) a merger
with a subsidiary of the Company in which merger the Company is the continuing
corporation or (2) any consolidation or merger of the Company with or into
another corporation which, in either instance, does not result in any
reclassification or change of the then outstanding shares of Common Stock or
other capital stock issuable upon exercise of the Warrants (other than a change
in par value, or from par value to no par value, or from no par value
<PAGE>
to par value or as a result of subdivision or combination)) or in case of any
sale or conveyance to another corporation of the property of the Company as an
entirety or substantially as an entirety, then, as a condition of such
reclassification, change, consolidation, merger, sale or conveyance, the
Company, or such successor or purchasing corporation, as the case may be, shall
make lawful and adequate provision whereby the Registered Holder of each Warrant
then outstanding shall have the right thereafter to receive on exercise of such
Warrant the kind and amount of securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of securities issuable upon exercise of such Warrant immediately
prior to such reclassification, change, consolidation, merger, sale or
conveyance and shall forthwith file at the Corporate Office of the Warrant Agent
a statement signed by its Chief Executive Officer, President or a Vice President
and by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant
Secretary evidencing such provision. Such provisions shall include provision for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in Sections 8(a), (b) and (c). The above provisions of
this Section 8(d) shall similarly apply to successive reclassifications and
changes of shares of Common Stock and to successive consolidations, mergers,
sales or conveyances.
(e) Irrespective of any adjustments or changes in the Purchase Price or the
number of shares of Common Stock purchasable upon exercise of the Warrants, the
Warrant Certificates theretofore and thereafter issued shall, unless the Company
shall exercise its option to issue new Warrant Certificates pursuant to Section
2(e) hereof, continue to express the Purchase Price per share and the number of
shares purchasable thereunder as the Purchase Price per share and the number of
shares purchasable thereunder were expressed in the Warrant Certificates when
the same were originally issued.
<PAGE>
(f) After each adjustment of the Purchase Price pursuant to this Section 8,
the Company will promptly prepare a certificate signed by the Chairman, Chief
Executive Officer or President, and by the Treasurer or an Assistant Treasurer
or the Secretary or an Assistant Secretary, of the Company setting forth: (i)
the Purchase Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of each Warrant, after such adjustment, and (iii) a
brief statement of the facts accounting for such adjustment. The Company will
promptly file such certificate with the Warrant Agent and cause a brief summary
thereof to be sent by ordinary first class mail to each Registered Holder at his
last address as it shall appear on the registry books of the Warrant Agent. No
failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity thereof except as to the holder to whom the Company
failed to mail such notice, or except as to the holder whose notice was
defective. The affidavit of an officer of the Warrant Agent or the Secretary or
an Assistant Secretary of the Company that such notice has been mailed shall, in
the absence of fraud, be prima facie evidence of the facts stated therein.
(g) No adjustment of the Purchase Price shall be made as a result of or in
connection with (A) the issuance or sale of shares of Common Stock pursuant to
options, warrants, stock purchase agreements and convertible or exchangeable
securities outstanding or in effect on the date hereof and on the terms
described in the final prospectus relating to the public offering contemplated
by the Underwriting Agreement; (B) stock options to be granted under the
Company's [1996 Incentive and Non-Qualified Stock Option Plan] or any other
stock option plan which has been approved by the Company's stockholders to
employees, consultants and directors; or (C) the issuance or sale of shares of
Common Stock if the amount of said adjustment shall be less than $.10, provided,
however, that in such case, any adjustment that would otherwise be required then
to be made shall be carried forward and shall be made at the time of and
together with the next subsequent adjustment that shall amount, together with
any adjustment so carried forward, to at least $.10. In addition, Registered
Holders shall not be entitled to cash dividends paid by the Company prior to the
exercise of any Warrant or Warrants held by them.
SECTION 9. Redemption.
(a) Commencing on the Initial Warrant Redemption Date, the Company may, on
30 days' prior written notice, redeem all the Warrants at ten cents ($.10) per
Warrant, provided, however, that before any such call for redemption of Warrants
can take place, the average closing sale price for the Common Stock as reported
by Amex, if the Common Stock is then traded on Amex, (or the average closing bid
price, if the Common Stock is then traded on Nasdaq) shall have equaled or
exceeded $________ per share [266% of the Initial Public Offering Price] (b) for
any twenty (20) trading days within a period of thirty (30) consecutive trading
days ending on the fifth trading day prior to the date on which the notice
contemplated by (b) and (c) below is given (subject to adjustment in the event
of any stock splits or other similar events as provided in Section 8 hereof).
(b) In case the Company shall exercise its right to redeem all of the
Warrants, it shall give or cause to be given notice to the Registered Holders of
the Warrants, by mailing to such Registered Holders a notice of redemption,
first class, postage prepaid, at their last address as shall appear on the
records of the Warrant Agent. Any notice mailed in the manner provided herein
shall be conclusively presumed to have been duly given whether or not the
<PAGE>
Registered Holder receives such notice. Not less than four (4) trading days
prior to the mailing to the Registered Holders of the Warrants of the notice of
redemption, the Company shall deliver or cause to be delivered to Dirks a
similar notice telephonically and confirmed in writing together with a list of
the Registered Holders (including their respective addresses and number of
Warrants beneficially owned) to whom such notice of redemption has been or will
be given.
(c) The notice of redemption shall specify (i) the redemption price, (ii)
the Redemption Date, which shall in no event be less than thirty (30) days after
the date of mailing of such notice, (iii) the place where the Warrant
Certificate shall be delivered and the redemption price shall be paid, and (iv)
that the right to exercise the Warrant shall terminate at 5:30 p.m. (New York
time) on the business day immediately preceding the date fixed for redemption.
No failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity of the proceedings for such redemption except as to a
holder (a) to whom notice was not mailed or (b) whose notice was defective. An
affidavit of the Warrant Agent or the Secretary or Assistant Secretary of the
Company that notice of redemption has been mailed shall, in the absence of
fraud, be prima facie evidence of the facts stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:30 p.m. (New York
time) on the business day immediately preceding the Redemption Date. The
redemption price payable to the Registered Holders shall be mailed to such
persons at their addresses of record.
SECTION 10. Concerning the Warrant Agent.
(a) The Warrant Agent acts hereunder as agent and in a ministerial capacity
for the Company, and its duties shall be determined solely by the provisions
hereof. The Warrant Agent shall not, by issuing and delivering Warrant
Certificates or by any other act hereunder, be deemed to make any
representations as to the validity or value or authorization of the Warrant
<PAGE>
Certificates or the Warrants represented thereby or of any securities or other
property delivered upon exercise of any Warrant or whether any stock issued upon
exercise of any Warrant is fully paid and nonassessable.
(b) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be made
any adjustment of the Purchase Price or the Redemption Price provided in this
Agreement, or to determine whether any fact exists which may require any such
adjustments, or with respect to the nature or extent of any such adjustments,
when made, or with respect to the method employed in making the same. It shall
not (i) be liable for any recital or statement of fact contained herein or for
any action taken, suffered or omitted by it in reliance on any Warrant
Certificate or other document or instrument believed by it in good faith to be
genuine and to have been signed or presented by the proper party or parties,
(ii) be responsible for any failure on the part of the Company to comply with
any of its covenants and obligations contained in this Agreement or in any
Warrant Certificate, or (iii) be liable for any act or omission in connection
with this Agreement except for its own negligence, bad faith or willful
misconduct.
(c) The Warrant Agent may at any time consult with counsel satisfactory to
it (who may be counsel for the Company or for Dirks) and shall incur no
liability or responsibility for any action taken, suffered or omitted by it in
good faith in accordance with the opinion or advice of such counsel.
(d) Any notice, statement, instruction, request, direction, order or demand
of the Company shall be sufficiently evidenced by an instrument signed by the
Chairman of the Board of Directors, Chief Executive Officer, President or any
Vice President (unless other evidence in respect thereof is herein specifically
prescribed). The Warrant Agent shall not be liable for any
<PAGE>
action taken, suffered or omitted by it in accordance with such notice,
statement, instruction, request, direction, order or demand reasonably believed
by it to be genuine.
(e) The Company agrees to pay the Warrant Agent reasonable compensation for
its services hereunder and to reimburse it for its reasonable expenses
hereunder; the Company further agrees to indemnify the Warrant Agent and save it
harmless from and against any and all losses, expenses and liabilities,
including judgments, costs and counsel fees, for anything done or omitted by the
Warrant Agent in the execution of its duties and powers hereunder except losses,
expenses and liabilities arising as a result of the Warrant Agent's negligence,
bad faith or willful misconduct.
(f) The Warrant Agent may resign its duties and be discharged from all
further duties and liabilities hereunder (except liabilities arising as a result
of the Warrant Agent's own gross negligence or willful misconduct), after giving
30 days' prior written notice to the Company. At least 15 days prior to the date
such resignation is to become effective, the Warrant Agent shall cause a copy of
such notice of resignation to be mailed to the Registered Holder of each Warrant
Certificate at the Company's expense. Upon such resignation, or any inability of
the Warrant Agent to act as such hereunder, the Company shall appoint in writing
a new warrant agent. If the Company shall fail to make such appointment within a
period of 15 days after it has been notified in writing of such resignation by
the resigning Warrant Agent, then the Registered Holder of any Warrant
Certificate may apply to any court of competent jurisdiction for the appointment
of a new warrant agent. Any new warrant agent, whether appointed by the Company
or by such a court, shall be a bank or trust company having a capital and
surplus, as shown by its last published report to its stockholders, of not less
than $10,000,000 or a stock transfer company. After acceptance in writing of
such appointment by the new warrant agent is received by the Company,
<PAGE>
such new warrant agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as the Warrant Agent,
without any further assurance, conveyance, act or deed; but if for any reason it
shall be necessary or expedient to execute and deliver any further assurance,
conveyance, act or deed, the same shall be done at the expense of the Company
and shall be legally and validly executed and delivered by the resigning Warrant
Agent. Not later than the effective date of any such appointment the Company
shall file notice thereof with the resigning Warrant Agent and shall forthwith
cause a copy of such notice to be mailed to the Registered Holder of each
Warrant Certificate.
(g) Any corporation into which the Warrant Agent or any new warrant agent
may be converted or merged, any corporation resulting from any consolidation to
which the Warrant Agent or any new warrant agent shall be a party, or any
corporation succeeding to the corporate trust business of the Warrant Agent or
any new warrant agent shall be a successor warrant agent under this Agreement
without any further act, provided that such corporation is eligible for
appointment as successor to the Warrant Agent under the provisions of the
preceding paragraph. Any such successor warrant agent shall promptly cause
notice of its succession as warrant agent to be mailed to the Company and to the
Registered Holders of each Warrant Certificate.
(h) The Warrant Agent, its subsidiaries and affiliates, and any of its or
their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same manner
and to the same extent and with like effect as though it were not Warrant Agent.
Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.
(i) The Warrant Agent shall retain for a period of two years from the date
of exercise any Warrant Certificate received by it upon such exercise.
<PAGE>
SECTION 11. Modification of Agreement.
The Warrant Agent and the Company may by supplemental agreement make any
changes or corrections in this Agreement (i) that they shall deem appropriate to
cure any ambiguity or to correct any defective or inconsistent provision or
manifest mistake or error herein contained; or (ii) that they may deem necessary
or desirable and which shall not adversely affect the interests of the holders
of Warrant Certificates; provided, however, that no change in the number or
nature of the securities purchasable upon the exercise of any Warrant, or to
increase the Purchase Price therefor or to accelerate the Warrant Expiration
Date, shall be made without the consent in writing of the Registered Holders
representing not less than 66-2/3% of the Warrants then outstanding, other than
such changes as are presently specifically prescribed by this Agreement as
originally executed. In addition, this Agreement may not be modified, amended or
supplemented without the prior written consent of the Representative, other than
to cure any ambiguity or to correct any provision which is inconsistent with any
other provision of this Agreement or to make any such change that is necessary
or desirable and which shall not adversely affect the interests of the
Representatives and except as may be required by law.
SECTION 12. Notices.
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been made when delivered or mailed
first-class registered or certified mail, postage prepaid, as follows: if to the
Registered Holder of a Warrant Certificate, at the address of such holder as
shown on the registry books maintained by the Warrant Agent; if to the Company
at 10850 Wilshire Boulevard, Suite 1260, Los Angeles, CA 90024,
Attn:_______________, or at such other address as may have been furnished to the
Warrant Agent in writing by the Company; and if to the Warrant Agent, at its
Corporate Office. Copies of any
<PAGE>
notice delivered pursuant to this Agreement shall also be delivered to the
Representatives c/o Dirks & Company, Inc., 520 Madison Avenue, 10th Floor, New
York, New York 10022, Attention: General Counsel, or at such other address as
may have been furnished to the Company and the Warrant Agent in writing.
SECTION 13. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York without giving effect to conflicts of laws.
SECTION 14. Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the
Company, the Warrant Agent and their respective successors and assigns and the
holders from time to time of Warrant Certificates or any of them. Nothing in
this Agreement is intended or shall be construed to confer upon any other person
any right, remedy or claim, in equity or at law, or to impose upon any other
person any duty, liability or obligation.
SECTION 15. Termination.
This Agreement shall terminate at the close of business on the Expiration
Date of all of the Warrants or such earlier date upon which all Warrants have
been exercised or redeemed, except that the Warrant Agent shall account to the
Company for cash held by it and the provisions of Section 10 hereof shall
survive such termination.
SECTION 16. Counterparts.
This Agreement may be executed in several counterparts, which taken
together shall constitute a single document.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
[SEAL]
DIGITAL LAVA INC.
By: /s/ Joshua D.J. Sharfman
--------------------------
Name: Joshua D.J. Sharfman
Title: CEO
Attest:
By:
-----------------------
Name:
Title:
AMERICAN STOCK TRANSFER AND
TRUST COMPANY,
As Warrant Agent
By:
--------------------------
Name:
Title:
<PAGE>
EXHIBIT A
No. W______ VOID AFTER _______, 2004
______________ WARRANTS
REDEEMABLE WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
DIGITAL LAVA INC.
CUSIP_____
THIS CERTIFIES THAT, FOR VALUE RECEIVED
______________ or registered assigns (the "Registered Holder") is the owner of
the number of Redeemable Warrants (the "Warrants") specified above. Each Warrant
initially entitles the Registered Holder to purchase, subject to the terms and
conditions set forth in this Certificate and the Warrant Agreement (as
hereinafter defined), one fully paid and nonassessable share of Common Stock of
Digital Lava Inc., a Delaware corporation (the "Company"), at any time between
_____________, 2000 (the "Initial Warrant Exercise Date"), and the Expiration
Date (as hereinafter defined) upon the presentation and surrender of this
Warrant Certificate with the Subscription Form on the reverse hereof duly
executed, at the corporate office of American Stock Transfer and Trust Company,
as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment
of $________ subject to adjustment (the "Purchase Price"), in lawful money of
the United States of America in cash or by check made payable to the Warrant
Agent for the account of the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated ________, 1999,
between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof and shall execute and
deliver a new Warrant Certificate or Warrant Certificates of like tenor, which
the Warrant Agent shall countersign, for the balance of such Warrants.
The term "Expiration Date" shall mean 5:30 p.m. (New York time) on the date
which is forty-eight (48) months after the Initial Warrant Exercise Date. If
each such date shall in the State of New York be a holiday or a day on which the
banks are authorized to close, then the
<PAGE>
Expiration Date shall mean 5:30 p.m. (New York time) on the next following day
which in the State of New York is not a holiday or a day on which banks are
authorized to close.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended (the "Act"), with respect to such securities
is effective or an exemption thereunder is available. The Company has covenanted
and agreed that it will file a registration statement under the Federal
securities laws, use its best efforts to cause the same to become effective, use
its best efforts to keep such registration statement current, if required under
the Act, while any of the Warrants are outstanding, and deliver a prospectus
which complies with Section 10(a)(3) of the Act to the Registered Holder
exercising this Warrant. This Warrant shall not be exercisable by a Registered
Holder in any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may be
redeemed at the option of the Company, at a redemption price of $0.10 per
Warrant, at any time commencing after ________, 2001, provided that the average
closing sale price for the Common Stock as reported by Amex (or the closing bid
price, if the Common Stock is then traded on Nasdaq), shall have equaled or
exceeded $_______ per share [266% of the Initial Public Offering Price per
share] for any twenty (20) trading days within a period of thirty (30)
consecutive trading days ending on the fifth trading day prior to the Notice of
Redemption, as defined below (subject to adjustment in the event of any stock
splits or other similar events). Notice of redemption (the "Notice of
Redemption") shall be given not later than the thirtieth day before the date
fixed for redemption, all as provided in the Warrant Agreement. On and after the
date fixed for redemption, the Registered Holder shall have no rights with
respect to the Warrants except to receive the $.10 per Warrant upon surrender of
this Warrant Certificate.
Prior to due presentment for registration of transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all
<PAGE>
purposes and shall not be affected by any notice to the contrary, except as
provided in the Warrant Agreement.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York without giving effect to conflicts of
laws.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated:
DIGITAL LAVA INC.
[SEAL]
By:
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Name: Joshua D.J. Sharfman
Title: CEO
COUNTERSIGNED:
AMERICAN STOCK TRANSFER AND TRUST COMPANY,
as Warrant Agent
By:
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Authorized Officer
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise Warrants
represented by this Warrant Certificate, and to purchase the securities
issuable upon the exercise of such Warrants, and requests that
certificates for such securitie shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
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-----------------------------
(please print or type name and
address) and be delivered to
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(please print or type name and
address)
<PAGE>
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
Dated: X
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Address
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Social Security or Taxpayer
Identification Number
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Signature Guaranteed
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED,_______________________, hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
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-----------------------------
-----------------------------
-----------------------------
(please print or type name and
address)
___________________ of the Warrants represented by this Warrant Certificate, and
hereby irrevocably constitutes and appoints _____________________ Attorney to
transfer this Warrant Certificate on the books of the Company, with full power
of substitution in the premises.
Dated: X
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Signature Guaranteed
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE
GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
EXHIBIT 4 (c)
<PAGE>
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DIGITAL LAVA, INC.
AND
DIRKS & COMPANY, INC.
REPRESENTATIVE'S
WARRANT AGREEMENT
Dated as of _______, 1999
================================================================================
<PAGE>
REPRESENTATIVE'S WARRANT AGREEMENT dated as of _____, 1999 between DIGITAL
LAVA, INC., a Delaware corporation (the "Company"), DIRKS & COMPANY, INC.
(hereinafter referred to variously as the "Holder" or "Holders" or the
"Representative").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Representative warrants
("Warrants") to purchase up to an aggregate 240,000 shares of Common Stock,
$0.0001 par value, of the Company and/or 120,000 redeemable Common Stock
purchase warrants of the Company ("Redeemable Warrants"), each Redeemable
Warrant to purchase one additional share of Common Stock; and
WHEREAS, the Representative has agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof between the
Company and the several Underwriters listed therein to act as the Representative
in connection with the Company's proposed public offering of up to 2,400,000
shares of Common Stock and 1,200,000 Redeemable Warrants (the "Public Warrants")
at a public offering price of $[7.50] per share of Common Stock and $0.10 per
Redeemable Warrant (the "Public Offering"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Representative in consideration for, and as
part of the Representative's compensation in connection with, the Representative
acting as the Representative pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of an aggregate twenty-four dollars ($24.00), the
agreements herein set forth and other good and valuable consideration, hereby
acknowledged, the parties hereto agree as follows:
1. Grant. The Representative (or its designees) is hereby granted the right
to purchase, at any time from _________, 2000, [twelve months after the date of
this Agreement] until 5:30 P.M., New York time, on __________, 2004 [five years
after the date of this Agreement], up to an aggregate of 240,000 shares of
Common Stock and/or 120,000 Redeemable Warrants at an initial exercise price
(subject to adjustment as provided in Section 8 hereof) of ____________ per
<PAGE>
share of Common Stock [120% of the initial public offering price per share of
Common Stock], and $_________ per Redeemable Warrant [120% of the initial public
offering price per redeemable warrant], subject to the terms and conditions of
this Agreement. One Redeemable Warrant is exercisable to purchase one additional
share of Common Stock at an initial exercise price of $_________ from
__________, 2000, [twelve months after the date of this Agreement] until 5:30
p.m. New York time on ______________, 2004, [five years after the date of this
Agreement] at which time the Redeemable Warrants shall expire. Except as set
forth herein, the shares of Common Stock and the Redeemable Warrants issuable
upon exercise of the Warrants are in all respects identical to the shares of
Common Stock and the Public Warrants being purchased by the Underwriters for
resale to the public pursuant to the terms and provisions of the Underwriting
Agreement. The shares of Common Stock and the Redeemable Warrants issuable upon
exercise of the Warrants are sometimes hereinafter referred to collectively as
the "Securities."
2. Warrant Certificates. The warrant certificates (the "Warrant
Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A, attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. Exercise of Warrant.
ss.3.1 Method of Exercise. The Warrants initially are exercisable at an
aggregate initial exercise price (subject to adjustment as provided in Section 8
hereof) per share of Common Stock and per Redeemable Warrant set forth in
Section 6 hereof payable by certified or official bank check in New York
Clearing House funds, subject to adjustment as provided in Section 8 hereof.
Upon surrender of a Warrant Certificate with the annexed Form of Election to
Purchase duly executed, together with payment of the Exercise Price (as
hereinafter defined) for
<PAGE>
the shares of Common Stock and/or the Redeemable Warrants purchased at the
Company's principal executive offices in Los Angeles (presently located at 10850
Wilshire Boulevard, Suite 1260, Los Angeles, California 90024) the registered
holder of a Warrant Certificate ("Holder" or "Holders") shall be entitled to
receive a certificate or certificates for the shares of Common Stock so
purchased and a certificate or certificates for the Redeemable Warrants so
purchased. The purchase rights represented by each Warrant Certificate are
exercisable at the option of the Holder thereof, in whole or in part (but not as
to fractional shares of the Common Stock and Redeemable Warrants underlying the
Warrants). In the event the Company redeems all of the Public Warrants (other
than the Redeemable Warrants underlying the Warrants), then the Warrants may
only be exercised if such exercise is accompanied by the simultaneous exercise
of the Redeemable Warrant(s) underlying the Warrants being so exercised.
Warrants may be exercised to purchase all or part of the shares of Common Stock
together with an equal or unequal number of the Redeemable Warrants represented
thereby. In the case of the purchase of less than all the shares of Common Stock
and/or the Redeemable Warrants purchasable under any Warrant Certificate, the
Company shall cancel said Warrant Certificate upon the surrender thereof and
shall execute and deliver a new Warrant Certificate of like tenor for the
balance of the shares of Common Stock and Redeemable Warrants purchasable
thereunder.
ss.3.2 Exercise by Surrender of Warrant. In addition to the method of
payment set forth in Section 3.1 and in lieu of any cash payment required
thereunder, the Holder(s) of the Warrants shall have the right at any time and
from time to time to exercise the Warrants in full or in part by surrendering
the Warrant Certificate in the manner specified in Section 3.1 hereof. The
number of shares of Common Stock to be issued pursuant to this Section 3.2 shall
be equal to the difference between (a) the number of shares of Common Stock in
respect of which the
<PAGE>
Warrants are exercised and (b) a fraction, the numerator of which shall be the
number of shares of Common Stock in respect of which the Warrants are exercised
multiplied by the Exercise Price and the denominator of which shall be the
Market Price (as defined in Section 3.3 hereof) of the shares of Common Stock.
The number of Redeemable Warrants to be issued pursuant to this Section 3.2
shall be equal to the difference between (a) the number of Redeemable Warrants
in respect of which the Warrants are exercised and (b) a fraction, the numerator
of which shall be the number of Redeemable Warrants in respect of which the
Warrants are exercised multiplied by the Exercise Price and the denominator of
which shall be the Market Price (as defined in Section 3.3 hereof) of the
Redeemable Warrants. Solely for the purposes of this paragraph, Market Price
shall be calculated either (i) on the date on which the form of election
attached hereto is deemed to have been sent to the Company pursuant to Section
14 hereof ("Notice Date") or (ii) as the average of the Market Prices for each
of the five trading days preceding the Notice Date, whichever of (i) or (ii) is
greater.
ss.3.3 Definition of Market Price. As used herein, the phrase "Market
Price" at any date shall be deemed to be (i) when referring to the Common Stock,
the last reported sale price, or, in case no such reported sale takes place on
such day, the average of the last reported sale prices for the last three (3)
trading days, in either case as officially reported by the principal securities
exchange on which the Common Stock is listed or admitted to trading or by the
Nasdaq SmallCap Market ("Nasdaq SmallCap") or by the National Association of
Securities Dealers Automated Quotation System ("Nasdaq"), or, if the Common
Stock is not listed or admitted to trading on any national securities exchange
or quoted by Nasdaq, the average closing bid price as furnished by the National
Association of Securities Dealers, Inc. ("NASD") through Nasdaq or similar
organization if Nasdaq is no longer reporting such information, or if the
<PAGE>
Common Stock is not quoted on Nasdaq, as determined in good faith (using
customary valuation methods) by resolution of the members of the Board of
Directors of the Company, based on the best information available to it or (ii)
when referring to a Redeemable Warrant, the last reported sales price, or, in
the case no such reported sale takes place on such day, the average of the last
reported sale prices for the last three (3) trading days, in either case as
officially reported by the principal securities exchange on which the Redeemable
Warrants are listed or admitted to trading or by Nasdaq, or, if the Redeemable
Warrants are not listed or admitted to trading on any national securities
exchange or quoted by Nasdaq, the average closing bid price as furnished by the
NASD through Nasdaq or similar organization if Nasdaq is no longer reporting
such information, or if the Redeemable Warrants are not quoted on Nasdaq or are
no longer outstanding, the Market Price of a Redeemable Warrant shall equal the
difference between the Market Price of the Common Stock and the Exercise Price
of the Redeemable Warrant.
4. Issuance of Certificates. Upon the exercise of the Warrants, the
issuance of certificates for shares of Common Stock and Redeemable Warrants
and/or other securities, properties or rights underlying such Warrants and, upon
the exercise of the Redeemable Warrants, the issuance of certificates for shares
of Common Stock and/or other securities, properties or rights underlying such
Redeemable Warrants shall be made forthwith (and in any event within five (5)
business days thereafter) without charge to the Holder thereof including,
without limitation, any tax which may be payable in respect of the issuance
thereof, and such certificates shall (subject to the provisions of Sections 5
and 7 hereof) be issued in the name of, or in such names as may be directed by,
the Holder thereof; provided, however, that the Company shall not be required to
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any such certificates in a name other than that of the
<PAGE>
Holder, and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the shares of
Common Stock and the Redeemable Warrants underlying the Warrants and the shares
of Common Stock underlying the Redeemable Warrants (and/or other securities,
property or rights issuable upon the exercise of the Warrants or the Redeemable
Warrants) shall be executed on behalf of the Company by the manual or facsimile
signature of the then Chairman or Vice Chairman of the Board of Directors or
President or Vice President of the Company. Warrant Certificates shall be dated
the date of execution by the Company upon initial issuance, division, exchange,
substitution or transfer. Certificates representing the shares of Common Stock
and Redeemable Warrants, and the shares of Common Stock underlying each
Redeemable Warrant (and/or other securities, property or rights issuable upon
exercise of the Warrants) shall be dated as of the Notice Date (regardless of
when executed or delivered) and dividend bearing securities so issued shall
accrue dividends from the Notice Date.
5. Restriction On Transfer of Warrants. The Holder of a Warrant
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
are being acquired as an investment and not with a view to the distribution
thereof; that the Warrants may not be sold, transferred, assigned, hypothecated
or otherwise disposed of, in whole or in part, for a period of one (1) year from
the date hereof, except to officers of the Representative.
6. Exercise Price.
ss.6.1 Initial and Adjusted Exercise Price. Except as otherwise provided in
Section 8 hereof, the initial exercise price of each Warrant shall be $12.375
per share of Common Stock and $0.165 per Redeemable Warrant. The adjusted
exercise price shall be the price which shall result from time to time from any
and all adjustments of the initial exercise price in accordance
<PAGE>
with the provisions of Section 8 hereof. Any transfer of a Warrant shall
constitute an automatic transfer and assignment of the registration rights set
forth in Section 7 hereof with respect to the Securities or other securities,
properties or rights underlying the Warrants.
ss.6.2 Exercise Price. The term "Exercise Price" herein shall mean the
initial exercise price or the adjusted exercise price, depending upon the
context or unless otherwise specified.
7. Registration Rights.
ss.7.1 Registration Under the Securities Act of 1933. The Warrants, the
shares of Common Stock and Redeemable Warrants, or other securities issuable
upon exercise of the Warrants, and the shares of Common Stock or other
securities issuable upon exercise of the Redeemable Warrants (collectively, the
"Warrant Securities") have been registered under the Securities Act of 1933, as
amended (the "Act") pursuant to the Company's Registration Statement on Form
SB-2 (Registration No. 333-46005) (the "Registration Statement"). All of the
representations and warranties of the Company contained in the Underwriting
Agreement relating to the Registration Statement, the Preliminary Prospectus and
Prospectus (as such terms are defined in the Underwriting Agreement) and made as
of the dates provided therein, are incorporated by reference herein. The Company
agrees and covenants promptly to file post-effective amendments to such
Registration Statement as may be necessary in order to maintain its
effectiveness and otherwise to take such action as may be necessary to maintain
the effectiveness of the Registration Statement as long as any Warrants are
outstanding. In the event that, for any reason, whatsoever, the Company shall
fail to maintain the effectiveness of the Registration Statement, the
certificates representing the Warrant Securities shall bear the following
legend:
<PAGE>
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("Act"), and
may not be offered or sold except pursuant to (i) an effective
registration statement under the Act, (ii) to the extent applicable,
Rule 144 under the Act (or any similar rule under such Act relating to
the disposition of securities), or (iii) an opinion of counsel, if
such opinion shall be reasonably satisfactory to counsel to the
issuer, that an exemption from registration under such Act is
available.
ss.7.2 Piggyback Registration. If, at any time commencing after the date
hereof and expiring seven (7) years thereafter, the Company proposes to register
any of its securities under the Act (other than pursuant to Form S-4, Form S-8
or a comparable registration statement) it will give written notice by
registered mail, at least thirty (30) days prior to the filing of each such
registration statement, to the Representative and to all other Holders of the
Warrants and/or the Warrant Securities of its intention to do so. If the
Representative or other Holders of the Warrants and/or Warrant Securities notify
the Company within twenty (20) business days after receipt of any such notice of
its or their desire to include any such securities in such proposed registration
statement, the Company shall afford the Representative and such Holders of the
Warrants and/or Warrant Securities the opportunity to have any such Warrant
Securities registered under such registration statement.
Notwithstanding the provisions of this Section 7.2, the Company shall have
the right at any time after it shall have given written notice pursuant to this
Section 7.2 (irrespective of whether a written request for inclusion of any such
securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
ss.7.3 Demand Registration.
(a) At any time commencing after the date hereof and expiring five (5)
years thereafter, the Holders of the Warrants and/or Warrant Securities
representing a "Majority" (as hereinafter defined) of such securities (assuming
the exercise of all of the Warrants) shall have the right (which right is in
addition to the registration rights under Section 7.2 hereof),
<PAGE>
exercisable by written notice to the Company, to have the Company prepare and
file with the Securities and Exchange Commission (the "Commission"), on one
occasion, a registration statement and such other documents, including a
prospectus, as may be necessary in the opinion of both counsel for the Company
and counsel for the Representative and Holders, in order to comply with the
provisions of the Act, so as to permit a public offering and sale of their
respective Warrant Securities for six (6) consecutive months by such Holders and
any other Holders of the Warrants and/or Warrant Securities who notify the
Company within ten (10) days after receiving notice from the Company of such
request.
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 7.3 by any Holder or Holders to all
other registered Holders of the Warrants and the Warrant Securities within ten
(10) days from the date of the receipt of any such registration request.
(c) Notwithstanding anything to the contrary contained herein, if the
Company shall not have filed a registration statement for the Warrant Securities
within the time period specified in Section 7.4(a) hereof pursuant to the
written notice specified in Section 7.3(a) of a Majority of the Holders of the
Warrants and/or Warrant Securities, the Company may, at its option, upon the
written notice of election of a Majority of the Holders of the Warrants and/or
Warrant Securities requesting such registration, repurchase (i) any and all
Warrant Securities of such Holders at the higher of the Market Price per share
of Common Stock and per Redeemable Warrant, determined as of (x) the date of the
notice sent pursuant to Section 7.3(a) or (y) the expiration of the period
specified in Section 7.4(a) and (ii) any and all Warrants of such Holders at
such Market Price less the Exercise Price of such Warrant. Such repurchase shall
be in immediately available funds and shall close within two (2) days after the
later of (i) the
<PAGE>
expiration of the period specified in Section 7.4(a) or (ii) the delivery of the
written notice of election specified in this Section 7.3(c).
ss.7.4 Covenants of the Company With Respect to Registration. In connection
with any registration under Section 7.2 or 7.3 hereof, the Company covenants and
agrees as follows:
(a) The Company shall use its best efforts to file a registration statement
within thirty (30) days of receipt of any demand therefor, shall use its best
efforts to have any registration statements declared effective at the earliest
possible time, and shall furnish each Holder desiring to sell Warrant Securities
such number of prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs (excluding fees and expenses of
Holder(s)' counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
Sections 7.2 and 7.3(a) hereof including, without limitation, the Company's
legal and accounting fees, printing expenses, blue sky fees and expenses.
(c) The Company will take all necessary action which may be required in
qualifying or registering the Warrant Securities included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as reasonably are requested by the Holder(s), provided that the Company
shall not be obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant Securities to
be sold pursuant to any registration statement and each person, if any, who
controls such Holders
<PAGE>
within the meaning of Section 15 of the Act or Section 20(a) of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), against all loss, claim,
damage, expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which any
of them may become subject under the Act, the Exchange Act or otherwise, arising
from such registration statement but only to the same extent and with the same
effect as the provisions pursuant to which the Company has agreed to indemnify
each of the Underwriters contained in Section 7 of the Underwriting Agreement.
(e) The Holder(s) of the Warrant Securities to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against all loss, claim, damage, expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holders, or their successors or assigns, for
specific inclusion in such registration statement to the same extent and with
the same effect as the provisions contained in Section 7 of the Underwriting
Agreement pursuant to which the Underwriters have agreed to indemnify the
Company.
(f) Nothing contained in this Agreement shall be construed as requiring the
Holder(s) to exercise their Warrants prior to the initial filing of any
registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities other than
the Warrant Securities to be included in any registration statement filed
pursuant to Section 7.3
<PAGE>
hereof, or permit any other registration statement to be or remain effective
during the effectiveness of a registration statement filed pursuant to Section
7.3 hereof (other than (i) shelf registrations effective prior thereto and (ii)
registrations on Form S-4 or S-8), without the prior written consent of the
Holders of the Warrants and Warrant Securities representing a Majority of such
securities.
(h) The Company shall furnish to each Holder participating in the offering
and to each underwriter, if any, a signed counterpart, addressed to such Holder
or underwriter, of (i) an opinion of counsel to the Company, dated the effective
date of such registration statement (and, if such registration includes an
underwritten public offering, an opinion dated the date of the closing under the
underwriting agreement) relating to the due incorporation of the Company, the
validity of the shares being issued, the due execution and delivery of the
underwriting agreement and Rule 10b-5, and (ii) a "cold comfort" letter dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, a letter dated the date of the closing
under the underwriting agreement) signed by the independent public accountants
who have issued a report on the Company's financial statements included in such
registration statement, covering substantially the same matters with respect to
such registration statement (and the prospectus included therein) and, with
respect to events subsequent to the date of such financial statements, as are
customarily covered in accountants' letters delivered to underwriters in
underwritten public offerings of securities.
(i) The Company shall as soon as practicable after the effective date of
the registration statement, and in any event within 15 months thereafter, make
"generally available to its security holders" (within the meaning of Rule 158
under the Act) an earnings statement
<PAGE>
(which need not be audited) complying with Section 11(a) of the Act and covering
a period of at least 12 consecutive months beginning after the effective date of
the registration statement.
(j) The Company shall deliver promptly to each Holder participating in the
offering requesting the correspondence and memoranda described below and to the
managing underwriters, copies of all correspondence between the Commission and
the Company, its counsel or auditors and all memoranda relating to discussions
with the Commission or its staff with respect to the registration statement and
permit each Holder and underwriter to do such investigation, upon reasonable
advance notice, with respect to information contained in or omitted from the
registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the NASD. Such investigation shall
include access to books, records and properties and opportunities to discuss the
business of the Company with its officers and independent auditors, all to such
reasonable extent and at such reasonable times and as often as any such Holder
or underwriter shall reasonably request.
(k) The Company shall enter into an underwriting agreement with the
managing underwriters selected for such underwriting by Holders holding a
Majority of the Warrant Securities requested pursuant to Section 7.3(a) to be
included in such underwriting, which may be the Representative. Such agreement
shall be satisfactory in form and substance to the Company, each Holder and such
managing underwriter(s), and shall contain such representations, warranties and
covenants by the Company and such other terms as are customarily contained in
agreements of that type used by the managing underwriter(s). The Holders shall
be parties to any underwriting agreement relating to an underwritten sale of
their Warrant Securities whether pursuant to Section 7.2 or Section 7.3(a) and
may, at their option, require that any or all of the representations, warranties
and covenants of the Company to or for
<PAGE>
the benefit of such underwriter(s) shall also be made to and for the benefit of
such Holders. Such Holders shall not be required to make any representations or
warranties to or agreements with the Company or the underwriter(s) except as
they may relate to such Holders and their intended methods of distribution.
(l) For purposes of this Agreement, the term "Majority" in reference to the
Holders of Warrants or Warrant Securities, shall mean in excess of fifty percent
(50%) of the then outstanding Warrants or Warrant Securities that (i) are not
held by the Company, an affiliate, officer, creditor, employee or agent thereof
or any of their respective affiliates, members of their family, persons acting
as nominees or in conjunction therewith and (ii) have not been resold to the
public pursuant to a registration statement filed with the Commission under the
Act.
8. Adjustments to Exercise Price and Number of Securities.
ss.8.1 Subdivision and Combination. In case the Company shall at any time
subdivide or combine the outstanding shares of Common Stock, the Exercise Price
shall forthwith be proportionately decreased in the case of subdivision or
increased in the case of combination.
ss.8.2 Stock Dividends and Distributions. In case the Company shall pay a
dividend in, or make a distribution of, shares of Common Stock or of the
Company's capital stock convertible into Common Stock, the Exercise Price shall
forthwith be proportionately decreased. An adjustment made pursuant to this
Section 8.2 shall be made as of the record date for the subject stock dividend
or distribution.
ss.8.3 Adjustment in Number of Securities. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Section 8, the number of
Warrant Securities issuable upon the exercise at the adjusted exercise price of
each Warrant shall be adjusted to the nearest full
<PAGE>
amount by multiplying a number equal to the Exercise Price in effect immediately
prior to such adjustment by the number of Warrant Securities issuable upon
exercise of the Warrants immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
ss.8.4 Definition of Common Stock. For the purpose of this Agreement, the
term "Common Stock" shall mean (i) the class of stock designated as Common Stock
in the Certificate of Incorporation of the Company as may be amended as of the
date hereof, or (ii) any other class of stock resulting from successive changes
or reclassifications of such Common Stock consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value.
ss.8.5 Merger or Consolidation. In case of any consolidation of the Company
with, or merger of the Company with, or merger of the Company into, another
corporation (other than a consolidation or merger which does not result in any
reclassification or change of the outstanding Common Stock), the corporation
formed by such consolidation or merger shall execute and deliver to the Holder a
supplemental warrant agreement providing that the holder of each Warrant then
outstanding or to be outstanding shall have the right thereafter (until the
expiration of such Warrant) to receive, upon exercise of such Warrant, the kind
and amount of shares of stock and other securities and property receivable upon
such consolidation or merger, by a holder of the number of securities of the
Company for which such Warrant might have been exercised immediately prior to
such consolidation, merger, sale or transfer. Such supplemental warrant
agreement shall provide for adjustments which shall be identical to the
adjustments provided in Section 8. The above provision of this subsection shall
similarly apply to successive consolidations or mergers.
15
<PAGE>
ss.8.6 No Adjustment of Exercise Price in Certain Cases. No adjustment of
the Exercise Price shall be made if the amount of said adjustment shall be less
than two cents (24) per Warrant Security, provided, however, that in such case
any adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time of and together with the next subsequent
adjustment which, together with any adjustment so carried forward, shall amount
to at least two cents (24) per Warrant Security.
9. Exchange and Replacement of Warrant Certificates. Each Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Securities in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of any Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of shares of Common Stock or
Redeemable Warrants upon the exercise of the Warrants, nor shall it be required
to issue scrip or pay cash in lieu of fractional interests, it being the intent
of the parties that all fractional interests shall be eliminated by rounding any
fraction up to the nearest whole number of shares of Common Stock or Redeemable
Warrants or other securities, properties or rights.
<PAGE>
11. Reservation and Listing of Securities. The Company shall at all times
reserve and keep available out of its authorized shares of Common Stock, solely
for the purpose of issuance upon the exercise of the Warrants and the Redeemable
Warrants, such number of shares of Common Stock or other securities, properties
or rights as shall be issuable upon the exercise thereof. The Company covenants
and agrees that, upon exercise of the Warrants and payment of the Exercise Price
therefor, all shares of Common Stock, Redeemable Warrants and other securities
issuable upon such exercise shall be duly and validly issued, fully paid,
non-assessable and not subject to the preemptive rights of any stockholder. The
Company further covenants and agrees that upon exercise of the Redeemable
Warrants underlying the Warrants and payment of the respective Redeemable
Warrant exercise price therefor, all shares of Common Stock and other securities
issuable upon such exercises shall be duly and validly issued, fully paid,
non-assessable and not subject to the preemptive rights of any stockholder. As
long as the Warrants shall be outstanding, the Company shall use its best
efforts to cause all shares of Common Stock issuable upon the exercise of the
Warrants and Redeemable Warrants and all Redeemable Warrants underlying the
Warrants to be listed (subject to official notice of issuance) on all securities
exchanges on which the Common Stock or the Public Warrants issued to the public
in connection herewith may then be listed and/or quoted on Nasdaq SmallCap or
Nasdaq.
12. Notices to Warrant Holders. Nothing contained in this Agreement shall
be construed as conferring upon the Holders the right to vote or to consent or
to receive notice as a stockholder in respect of any meetings of stockholders
for the election of directors or any other matter, or as having any rights
whatsoever as a stockholder of the Company. If, however, at any time prior to
the expiration of the Warrants and their exercise, any of the following events
shall occur:
<PAGE>
(a) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings or
capital surplus (in accordance with applicable law), as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(b) the Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible
into or exchangeable for shares of capital stock of the Company, or any
option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall
be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least thirty (30) days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend, or the issuance of any convertible or exchangeable securities, or
subscription rights, options or warrants, or any proposed dissolution,
liquidation, winding up or sale.
13. Redeemable Warrants. The form of the certificate representing
Redeemable Warrants (and the form of election to purchase shares of Common Stock
upon the exercise of Redeemable Warrants and the form of assignment printed on
the reverse thereof) shall be
<PAGE>
substantially as set forth in Exhibit "A" to the Warrant Agreement dated as of
the date hereof by and between the Company and Continental Stock Transfer and
Trust Company (the "Redeemable Warrant Agreement"). Each Redeemable Warrant
issuable upon exercise of the Warrants shall evidence the right to initially
purchase a fully paid and non-assessable share of Common Stock at an initial
purchase price of $18.5625 per share from April 22, 1999 until 5:30 p.m. New
York time on April 22, 2003 at which time the Redeemable Warrants, unless the
exercise period has been extended, shall expire. The exercise price of the
Redeemable Warrants and the number of shares of Common Stock issuable upon the
exercise of the Redeemable Warrants are subject to adjustment, whether or not
the Warrants have been exercised and the Redeemable Warrants have been issued,
in the manner and upon the occurrence of the events set forth in Section 8 of
the Redeemable Warrant Agreement, which is hereby incorporated herein by
reference and made a part hereof as if set forth in its entirety herein. Subject
to the provisions of this Agreement and upon issuance of the Redeemable Warrants
underlying the Warrants, each registered holder of such Redeemable Warrant shall
have the right to purchase from the Company (and the Company shall issue to such
registered holders) up to the number of fully paid and non-assessable shares of
Common Stock (subject to adjustment as provided herein and in the Redeemable
Warrant Agreement), free and clear of all preemptive rights of stockholders,
provided that such registered holder complies with the terms governing exercise
of the Redeemable Warrant set forth in the Redeemable Warrant Agreement, and
pays the applicable exercise price, determined in accordance with the terms of
the Redeemable Warrant Agreement. Upon exercise of the Redeemable Warrants, the
Company shall forthwith issue to the registered holder of any such Redeemable
Warrant in his name or in such name as may be directed by him, certificates for
the number of shares of Common Stock so purchased. Except as otherwise provided
in this
<PAGE>
Agreement, the Redeemable Warrants underlying the Warrants shall be governed in
all respects by the terms of the Redeemable Warrant Agreement. The Redeemable
Warrants shall be transferable in the manner provided in the Redeemable Warrant
Agreement, and upon any such transfer, a new Redeemable Warrant Certificate
shall be issued promptly to the transferee. The Company covenants to, and agrees
with, the Holder(s) that without the prior written consent of the Holder(s),
which will not be unreasonably withheld, the Redeemable Warrant Agreement will
not be modified, amended, canceled, altered or superseded, and that the Company
will send to each Holder, irrespective of whether or not the Warrants have been
exercised, any and all notices required by the Redeemable Warrant Agreement to
be sent to holders of Redeemable Warrants.
14. Notices.
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been duly made and sent when delivered,
or mailed by registered or certified mail, return receipt requested:
(a) If to the registered Holder of the Warrants, to the address of
such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3 hereof or
to such other address as the Company may designate by notice to the
Holders.
15. Supplements and Amendments. The Company and the Representative may from
time to time supplement or amend this Agreement without the approval of any
Holders of Warrant Certificates (other than the Representative) in order to cure
any ambiguity, to correct or supplement any provision contained herein which may
be defective or inconsistent with any provisions herein, or to make any other
provisions in regard to matters or questions arising hereunder which the Company
and the Representative may deem necessary or desirable and
<PAGE>
which the Company and the Representative deem shall not adversely affect the
interests of the Holders of Warrant Certificates.
16. Successors. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Holders and their
respective successors and assigns hereunder.
17. Termination. This Agreement shall terminate at the close of business on
April 22, 2005. Notwithstanding the foregoing, the indemnification provisions of
Section 7 shall survive such termination until the close of business on April
22, 2011.
18. Governing Law; Submission to Jurisdiction. This Agreement and each
Warrant Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of New York and for all purposes shall be construed in
accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
The Company, the Representative and the Holders hereby agree that any
action, proceeding or claim against it arising out of, or relating in any way
to, this Agreement shall be brought and enforced in the courts of the State of
New York or of the United States of America for the Southern District of New
York, and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company, the Representative and the Holders hereby irrevocably
waive any objection to such exclusive jurisdiction or inconvenient forum. Any
such process or summons to be served upon any of the Company, the Representative
and the Holders (at the option of the party bringing such action, proceeding or
claim) may be served by transmitting a copy thereof, by registered or certified
mail, return receipt requested, postage prepaid, addressed to it at the address
set forth in Section 14 hereof. Such mailing shall be deemed personal service
and shall be legal and binding upon the party so served in any action,
proceeding or claim. The Company, the Representative and the Holders agree that
the prevailing party(ies) in any such action or proceeding shall be entitled to
recover from the other party(ies) all of its/their reasonable legal costs and
expenses relating to such action or proceeding and/or incurred in connection
with the preparation therefore.
<PAGE>
19. Entire Agreement; Modification. This Agreement (including the
Underwriting Agreement and the Redeemable Warrant Agreement to the extent
portions thereof are referred to herein) contains the entire understanding
between the parties hereto with respect to the subject matter hereof and may not
be modified or amended except by a writing duly signed by the party against whom
enforcement of the modification or amendment is sought.
20. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
21. Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
22. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Representative and any other registered Holder(s) of the Warrant Certificates or
Warrant Securities any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the sole benefit of the Company and
the Representative and any other registered Holders of Warrant Certificates or
Warrant Securities.
23. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
DIGITAL LAVA INC.
By: ____________________________
Name:
Title:
Attest:
__________________________
Secretary
DIRKS & COMPANY, INC
By: ____________________________
Name:
Title:
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, ____, 2004
No. W- Warrants to Purchase
____ shares of Common
Stock and/or _____ Redeemable
Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that _______________, or registered
assigns, is the registered holder of ______________ Warrants to purchase
initially, at any time from ______, 2000 until 5:30 p.m. New York time on
______, 2004 ("Expiration Date"), up to __________ fully-paid and non-assessable
shares of common stock, $0.01 par value ("Common Stock"), of DIGITAL LAVA INC.,
a Delaware corporation (the "Company"), and ___ Redeemable Warrants of the
Company (one Redeemable Warrant entitling the owner to purchase one fully-paid
and non-assessable share of Common Stock) at the initial exercise price, subject
to adjustment in certain events (the "Exercise Price"), of $_____ per share of
Common Stock and $_______ per Redeemable Warrant upon surrender of this Warrant
Certificate and payment of the Exercise Price at an office or agency of the
Company, but subject to the conditions set forth herein and in the warrant
agreement dated as of ______, 1999 between the Company and DIRKS & COMPANY, INC.
(the "Warrant Agreement"). Payment of the Exercise Price shall be made by
certified or official bank check in New York Clearing House funds payable to the
order of the Company or by surrender of this Warrant Certificate.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants.
<PAGE>
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.
Dated as of ______, 1999
DIGITAL LAVA INC.
By:
-----------------------
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
- _______________ shares of Common Stock;
- _______________ Redeemable Warrants;
- _______________ shares of Common Stock together with an equal number
of Redeemable Warrants; or
- _______________ shares of Common Stock together with
_______________ Redeemable Warrants.
and herewith tenders in payment for such securities a certified or official bank
check payable in New York Clearing House Funds to the order of Digital Lava,
Inc. in the amount of $_______________________, all in accordance with the terms
of Section 3.1 of the Representative's Warrant Agreement dated as of ______,
1999 between Digital Lava Inc. and Dirks & Company, Inc. The undersigned
requests that a certificate for such securities be registered in the name of
____________________ whose address is ___________________________ and that such
Certificate be delivered to _________________________________ whose address is
________________.
Dated:
Signature_______________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
________________________________________
(Insert Social Security or Other
Identifying Number of Holder)
27
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
- _______________ shares of Common Stock;
- _______________ Redeemable Warrants;
- _______________ shares of Common Stock together with an equal number
of Redeemable Warrants; or
- _______________ shares of Common Stock together with
_______________ Redeemable Warrants.
and herewith tenders in payment for such securities ________ Warrants all in
accordance with the terms of Section 3.2 of the Representative's Warrant
Agreement dated as of ______, 1999 between Digital Lava Inc. and Dirks &
Company, Inc. The undersigned requests that a certificate for such securities be
registered in the name of ______________________ whose address is ______________
and that such Certificate be delivered to _________________ whose address is
_________________.
Dated:
Signature_______________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
________________________________________
(Insert Social Security or Other
Identifying Number of Holder)
28
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED __________________ hereby sells, assigns and transfers unto
________________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ____ Attorney, to transfer
the within Warrant Certificate on the books of the within-named Company, with
full power of substitution.
Dated: ______________________ Signature_______________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
________________________________________
(Insert Social Security or Other
Identifying Number of Holder)
EXHIBIT 4 (o)
<PAGE>
[Schwartz Communications]
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of December 1, 1998, between DIGITAL LAVA INC.,
a Delaware corporation (the "Company"), and Schwartz Communications, Inc.(the
"Holder").
W I T N E S S E T H:
WHEREAS, Holder has provided public relations services to the Company
during 1998 and pursuant to an agreement dated October 19, 1998 between the
Holder and the Company (the "Letter Agreement"), Holder agreed to receive
partial compensation in consideration therefor of 10,000 warrants per month, for
an aggregate of 120,000 warrants to purchase an aggregate of 120,000 shares of
the Company's common stock, par value $.0001 per share ("Common Stock," shares
of Common Stock shall be referred to as "Shares" or "Common Shares"), at an
exercise price of $1.00 per share (the "Warrants").
NOW THEREFORE, in consideration of the premises herein set forth and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Issue. The Company shall issue to Holder a certificate (the "Warrant
Certificate") dated as of the date hereof providing such Holder with the right
to purchase, at any time, from the date hereof until 5:30 p.m., New York time,
on December 31, 2003, 120,000 Common Shares (the "Warrant Shares") (subject to
adjustment as provided in Section 9 hereof), at an exercise price (subject to
adjustment as provided in Section 9 hereof) of $1.00 per Common Share.
2. Warrant Certificate. The Warrant Certificate to be delivered pursuant to
this Agreement shall be in the form set forth in Exhibit X, attached hereto and
made a part hereof, with such appropriate insertions, omissions, substitutions
and other variations as are required or permitted by this Agreement.
3. Exercisability of Warrants. The Warrants shall be exercisable at any
time until 5:30 p.m., New York time, on December 31, 2003.
<PAGE>
4. Procedure for Exercise of Warrants.
4.1 Cash Exercise. The Warrants are exercisable at an aggregate initial
exercise price per Common Share set forth in Section 7 hereof payable by
certified check or official bank check in New York Clearing House funds. Upon
surrender of a Warrant Certificate with the annexed Form of Election to Purchase
duly executed, together with payment of the Exercise Price (as hereinafter
defined) for the Warrant Shares purchased, at the Company's principal offices in
Los Angeles, California (presently located at 10850 Wilshire Boulevard, Suite
1260, Los Angeles, CA 90024) the registered holder of a Warrant Certificate (the
"Holder") shall be entitled to receive a certificate for the Warrant Shares so
purchased. The purchase rights represented by the Warrant Certificate are
exercisable at the option of the Holder thereof, in whole or in part (but not as
to fractional Common Shares underlying the Warrants). In the case of the
purchase of less than all the Warrant Shares purchasable under the Warrant
Certificate, the Company shall cancel said Warrant Certificate upon the
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Warrant Shares purchasable thereunder.
4.2 Cashless Exercise. In addition to the exercise of all or a portion of
the Warrants by the payment of the Exercise Price in cash or check as set forth
in Section 4.1 above, and in lieu of any such payment, the Holder has the right
to exercise the Warrants, in full or in part, by surrendering the Warrant
Certificate with the annexed Form of Election to Purchase duly executed, in
exchange for the number of Common Shares equal to the product of (x) the number
of Common Shares as to which the Warrants are being exercised multiplied by (y)
a fraction, the numerator of which is the Current Market Price of the Common
Shares (as defined below) less the Exercise Price then in effect and the
denominator of which is the Current Market Price.
5. Issuance of Certificate. Upon the exercise of the Warrants, the issuance
of a certificate for Warrant Shares (or Other Securities) shall be made
forthwith (and in any event within five (5) business days thereafter) without
charge to the Holder thereof including, without limitation, any tax which may be
payable in respect of the issuance thereof, and such certificate shall (subject
to the provisions of Sections 6 and 8 hereof) be issued in the name of, or in
such names as may be directed by, the Holder thereof; provided, however, that
the Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any such certificate in
a name other than that of the Holder and the Company shall not be required to
issue or deliver such certificate unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
The Warrant Certificate and the certificate representing the Warrant Shares
(or Other Securities) shall be executed on behalf of the Company by the manual
or facsimile signature of the then present Chairman or Vice Chairman of the
Board of Directors or President or any Vice President of the Company under its
corporate seal reproduced thereon, attested to by the manual or facsimile
signature of the then present Secretary or any Assistant Secretary of the
Company. The Warrant Certificate shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
<PAGE>
6. Transfer of Warrants. The Holder of the Warrant Certificate, by its
acceptance thereof, covenants and agrees that the Warrants are being acquired as
an investment and not with a view to the distribution thereof. The Warrants may
be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole
or in part, without restriction, subject to compliance with applicable
securities laws.
7. Exercise Price.
7.1 Initial and Adjusted Exercise Price. Except as otherwise provided in
Section 9 hereof, the initial exercise price of each Warrant shall be the price
set forth in Section 1 hereof per Warrant Shares issued thereunder. The adjusted
exercise price shall be the price which shall result from time to time from any
and all adjustments of the initial exercise price in accordance with the
provisions of Section 9 hereof.
7.2 Exercise Price. The term "Exercise Price" herein shall mean the initial
exercise price or the adjusted exercise price, depending upon the context.
8. Registration Under the Securities Act of 1933. The Warrants, the Warrant
Shares and any of the Other Securities issuable upon exercise of the Warrants
have not been registered under the Securities Act of 1933, as amended (the
"Act"). Upon exercise, in whole or in part, of the Warrants, a certificate
representing the Warrant Shares underlying the Warrants, and any of the Other
Securities issuable upon exercise of the Warrants (collectively, the "Warrant
Securities") shall bear the following legend unless such Warrant Shares
previously have been registered under the Act in accordance with the terms
hereof:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), AND MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER
THE ACT (OR ANY SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION
OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL
BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN EXEMPTION
FROM REGISTRATION UNDER THE ACT IS AVAILABLE.
9. Adjustments to Exercise Price and Number of Securities. The Exercise
Price and, in some cases, the number of Warrant Shares purchasable upon the
exercise of the Warrants, shall be subject to adjustment from time to time upon
the occurrence of certain events described in this Section 9.
9.1 Subdivision or Combination of Common Shares and Common Share Dividend.
In case the Company shall at any time subdivide its outstanding Common Shares
into a greater number of Common Shares or declare a dividend upon its Common
Shares payable solely in Common Shares, the Exercise Price in effect immediately
prior to such subdivision or
<PAGE>
declaration shall be proportionately reduced, and the number of Warrant Shares
issuable upon exercise of the Warrants shall be proportionately increased.
Conversely, in case the outstanding Common Shares of the Company shall be
combined into a smaller number of Common Shares, the Exercise Price in effect
immediately prior to such combination shall be proportionately increased, and
the number of Warrant Shares issuable upon exercise of the Warrants shall be
proportionately reduced.
9.2 Notice of Adjustment. Promptly after adjustment of the Exercise Price
or any increase or decrease in the number of Warrant Shares purchasable upon the
exercise of this Warrant, the Company shall give written notice thereof, by
first class mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company. The
notice shall be signed by the Company's chief financial officer and shall state
(i) the effective date of the adjustment and the Exercise Price resulting from
such adjustment and (ii) the increase or decrease, if any, in the number of
Common Shares purchasable at such price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
9.3 Other Notices. If at any time:
(a) the Company shall declare any cash dividend upon its Common Shares;
(b) the Company shall declare any dividend upon its Common Shares payable
in securities (other than a dividend payable solely in Common Shares)
or make any special dividend or other distribution to the holders of
its Common Shares;
(c) there shall be any consolidation or merger of the Company with another
corporation, or a sale of all or substantially all of the Company's
assets to another corporation; or
(d) there shall be a voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
then, in any one or more of said cases, the Company shall give, by certified or
registered mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company, (i)
at least 15 days' prior written notice of the date on which the books of the
Company shall close or a record shall be taken for such dividend, distribution
or subscription rights or for determining rights to vote in respect of any such
dissolution, liquidation or winding-up; (ii) at least 10 days' prior written
notice of the date on which the books of the Company shall close or a record
shall be taken for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger or sale, and (iii) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, at least 15 days' written notice
of the date when the same shall take place. Any notice given in accordance with
clause (i) above shall also specify, in the case of any such dividend,
distribution or option rights, the date on which the holders of Common Shares
shall be entitled thereto. Any notice given in accordance with clause (iii)
above
<PAGE>
shall also specify the date on which the holders of Common Shares shall be
entitled to exchange their Common Shares for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, as the case may be. If the Holder
of the Warrant does not exercise this Warrant prior to the occurrence of an
event described above, except as provided in Sections 9.1 and 9.4, the Holder
shall not be entitled to receive the benefits accruing to existing holders of
the Common Shares in such event.
9.4 Changes in Common Shares. In case at any time the Company shall be a
party to any transaction (including, without limitation, a merger,
consolidation, sale of all or substantially all of the Company's assets or
recapitalization of the Common Shares) in which the previously outstanding
Common Shares shall be changed into or exchanged for different securities of the
Company or common stock or other securities of another corporation or interests
in a non-corporate entity or other property (including cash) or any combination
of any of the foregoing (each such transaction being herein called the
"Transaction" and the date of consummation of the Transaction being herein
called the "Consummation Date"), then, as a condition of the consummation of the
Transaction, lawful and adequate provisions shall be made so that the Holder,
upon the exercise hereof at any time on or after the Consummation Date, shall be
entitled to receive, and this Warrant shall thereafter represent the right to
receive, in lieu of the Common Shares issuable upon such exercise prior to the
Consummation Date, the highest amount of securities or other property to which
the Holder would actually have been entitled as a holder of an Common Share upon
the consummation of the Transaction if the Holder had exercised such Warrant
immediately prior thereto. The provisions of this Section 9.4 shall similarly
apply to successive Transactions.
10. Exchange and Replacement of Warrant Certificate. The Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of the Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
11. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of Common Shares upon the exercise
of the Warrants, nor shall it be required to issue scrip or pay cash in lieu of
fractional interests, it being the intent of the parties that all fractional
interests shall be eliminated by rounding any fraction up to the nearest whole
number of Common Shares or Other Securities.
12. Reservation of Securities. The Company shall at all times reserve and
keep available out of its authorized Common Shares, solely for the purpose of
issuance upon the exercise of the
<PAGE>
Warrants, such number of Common Shares or Other Securities as shall be issuable
upon the exercise thereof. The Company covenants and agrees that, upon exercise
of the Warrants and payment of the Exercise Price therefor, all Common Shares or
Other Securities issuable upon such exercise shall be duly and validly issued,
fully paid, non-assessable and not subject to the preemptive rights of any
holder of Common Shares.
13. Notices to Warrant Holder. Except as otherwise provided in Section 9.4,
nothing contained in this Agreement shall be construed as conferring upon the
Holder by virtue of his holding the Warrant the right to vote or to consent or
to receive notice as a holder of an Common Share in respect of any meetings of
such holders for the election of directors or any other matter, or as having any
rights whatsoever as such a holder of the Company.
14. Notices.
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been duly made and sent when delivered,
or mailed by registered or certified mail, return receipt requested:
(a) If to the registered Holder of the Warrants, to the address of
such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 4 hereof
(with copy to: Ehrenreich Eilenberg Krause & Zivian LLP, 11 East 44th
Street, 17th Floor, New York, NY 10017/Attn. Jeffrey D. Abbey, Esq.) or to
such other address as the Company may designate by notice to the Holder.
15. Supplements and Amendments. The Company and Holder may from time to
time supplement or amend this Agreement in order to cure any ambiguity, to
correct or supplement any provision contained herein which may be defective or
inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and Holder
may deem necessary or desirable.
16. Successors. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Holder and their
respective successors and assigns hereunder.
17. Termination. This Agreement shall terminate at the close of business on
the tenth anniversary of the issuance of the Warrants.
18. Governing Law. This Agreement and the Warrant Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York and for all purposes shall be construed in accordance with the laws of
the State of New York without giving effect to the rules of the State of New
York governing the conflicts of laws.
<PAGE>
19. Entire Agreement; Modification. This Agreement supersedes any prior
agreements between the parties with respect to the subject matter hereof,
including without limitation, the Letter Agreement, and contains the entire
understanding between the parties hereto with respect to the subject matter
hereof and may not be modified or amended except by a writing duly signed by the
party against whom enforcement of the modification or amendment is sought.
20. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
21. Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
22. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and Holder
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and Holder.
23. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be
duly executed, as of the day and year first above written.
Very truly yours,
DIGITAL LAVA INC.
By: /s/ Joshua D.J. Sharfman
--------------------------
Authorized Officer
ACCEPTED AND AGREED TO:
SCHWARTZ COMMUNICATIONS, INC.
By: /s/ Steven M. Schwartz
------------------------------
Name: Steven M. Schwartz
Title: President
Taxpayer Identification No: 04-3107608
<PAGE>
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT") (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY
SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii)
AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS
AVAILABLE.
EXERCISABLE
UNTIL
5:30 P.M., NEW YORK TIME, December 31, 2003
No. W-LAVA-98-SCH-1 120,000 Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that Schwartz Communications, Inc. or
its registered assigns ("Holder"), is the registered holder of 120,000 Warrants
to purchase initially at any time until 5:30 p.m. New York time on December 31,
2003 ("Expiration Date"), up to 120,000 fully-paid and non-assessable shares of
common stock, par value $.0001 per share ("Common Shares") of DIGITAL LAVA INC.,
a Delaware corporation (the "Company"), at an initial exercise price, subject to
adjustment in certain events (the "Exercise Price"), equal to $1.00 per Common
Share, upon surrender of this Warrant Certificate and payment of the initial
exercise price at an office or agency of the Company, but subject to the
conditions set forth herein and in the Warrant Agreement dated as of the date
hereof between the Company and Holder (the "Warrant Agreement"). Payment of the
Exercise Price shall be made by certified check or official bank check in New
York Clearing House funds payable to the order of the Company, unless exercise
is made pursuant to Section 4.2 of the Warrant Agreement.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
Holder (the word "Holder" meaning the registered holder) of the Warrants.
<PAGE>
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificate
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed.
Dated as of December 1, 1998
DIGITAL LAVA INC.
By: /s/ Joshua D.J. Sharfman
------------------------------
Authorized Officer
10
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ______________ Common
Shares and herewith tenders in payment for such securities a certified check or
official bank check payable in New York Clearing House Funds to the order of
DIGITAL LAVA INC. in the amount of $_______, all in accordance with the terms of
Section 4 of the Warrant Agreement dated as of December 1, 1998 between DIGITAL
LAVA INC. and the undersigned (or its assignor). The undersigned requests that a
certificate for such securities be registered in the name of _________ whose
address is ___________ and that such Certificate be delivered to _______________
whose address is ______________________.
Dated: __________________
----------------------------------------
Signature
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
----------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _________________ hereby sells, assigns and transfers unto
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ___________ Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: ____________________
Signature: _________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant
Certificate.)
____________________________________
(Insert Social Security or Other
Identifying Number of Assignee)
EXHIBIT 4 (ad)
<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of January 7, 1999, between DIGITAL LAVA INC.,
a Delaware corporation (the "Company"), and the persons whose names and
addresses are set forth on Schedule I annexed hereto (the "Holders").
W I T N E S S E T H:
1. Issue. The Company shall issue to each Holder a certificate (the
"Warrant Certificate") dated as of the date hereof providing each such Holder
with the right to purchase, at any time, from January 7, 1999, until 5:30 p.m.,
New York time, on July 11, 2003, the number of Common Shares listed next to the
name of each such Holder on Exhibit I (the "Warrant Shares") (subject to
adjustment as provided in Section 9 hereof), at an exercise price (subject to
adjustment as provided in Section 9 hereof) of $0.8073 per Common Share.
2. Warrant Certificate. The Warrant Certificate to be delivered pursuant to
this Agreement shall be in the form set forth in Exhibit X, attached hereto and
made a part hereof, with such appropriate insertions, omissions, substitutions
and other variations as are required or permitted by this Agreement.
3. Exercisability of Warrants. The Warrants shall be exercisable at any
time from January 7, 1999, until 5:30 p.m., New York time, on July 11, 2003.
4. Procedure for Exercise of Warrants.
4.1 Cash Exercise. The Warrants are exercisable at an aggregate initial
exercise price per Common Share set forth in Section 7 hereof payable by
certified check or official bank check in New York Clearing House funds. Upon
surrender of a Warrant Certificate with the annexed Form of Election to Purchase
duly executed, together with payment of the Exercise Price (as hereinafter
defined) for the Warrant Shares purchased, at the Company's principal offices in
Los Angeles, California (presently located at 10850 Wilshire Boulevard, Suite
1260, Los Angeles, CA 90024) the registered holder of a Warrant Certificate
(individually a "Holder" and sometimes collectively the "Holders") shall be
entitled to receive a certificate for the Warrant Shares so purchased. The
purchase rights represented by the Warrant Certificate are exercisable at the
option of the Holder thereof, in whole or in part (but not as to fractional
Common Shares underlying the Warrants). In the case of the purchase of less than
all the Warrant Shares purchasable under the Warrant Certificate, the Company
shall cancel said Warrant Certificate upon the surrender thereof and shall
execute and deliver a new Warrant Certificate of like tenor for the balance of
the Warrant Shares purchasable thereunder.
4.2 Cashless Exercise. In addition to the exercise of all or a portion of
the Warrants by the payment of the Exercise Price in cash or check as set forth
in Section 4.1 above, and in lieu of any such payment, the Holder has the right
to exercise the Warrants, in full or in part, by surrendering the Warrant
Certificate with the annexed Form of Election to Purchase duly executed, in
exchange for the number of Common Shares equal to the product of (x) the number
of Common Shares as to which the Warrants are being exercised multiplied by (y)
a fraction, the numerator of which is the Current Market Price of the Common
Shares (as defined below) less the Exercise Price then in effect and the
denominator of which is the Current Market Price.
4.3 Current Market Price. The term "Current Market Price" shall mean (i) if
the Shares are traded in the over-the-counter market or on the National
Association of Securities Dealers, Inc.
<PAGE>
Automated Quotations System ("NASDAQ"), the average per Share closing bid prices
on the 20 consecutive trading days immediately preceding the date of exercise,
as reported by NASDAQ or an equivalent generally accepted reporting service, or
(ii) if the Shares are traded on a national securities exchange, the average for
the 20 consecutive trading days immediately preceding the exercise date of the
daily per Share closing prices on the principal stock exchange on which the
Shares are listed, as the case may be. The closing price referred to in clause
(ii) above shall be the last reported sales price or, if no such reported sale
takes place on such day, the average of the reported closing bid and asked
prices, in either case on the national securities exchange on which the Shares
are then listed.
5. Issuance of Certificate. Upon the exercise of the Warrants, the issuance
of a certificate for Warrant Shares (or Other Securities) shall be made
forthwith (and in any event within five (5) business days thereafter) without
charge to the Holder thereof including, without limitation, any tax which may be
payable in respect of the issuance thereof, and such certificate shall (subject
to the provisions of Sections 6 and 8 hereof) be issued in the name of, or in
such names as may be directed by, the Holder thereof; provided, however, that
the Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any such certificate in
a name other than that of the Holder and the Company shall not be required to
issue or deliver such certificate unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
The Warrant Certificate and the certificate representing the Warrant Shares
(or Other Securities) shall be executed on behalf of the Company by the manual
or facsimile signature of the then present Chairman or Vice Chairman of the
Board of Directors or President or any Vice President of the Company under its
corporate seal reproduced thereon, attested to by the manual or facsimile
signature of the then present Secretary or any Assistant Secretary of the
Company. The Warrant Certificate shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
6. Transfer of Warrants. The Holder of the Warrant Certificate, by its
acceptance thereof, covenants and agrees that the Warrants are being acquired as
an investment and not with a view to the distribution thereof. The Warrants may
be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole
or in part, without restriction, subject to compliance with applicable
securities laws.
7. Exercise Price.
7.1 Initial and Adjusted Exercise Price. Except as otherwise provided in
Section 9 hereof, the initial exercise price of each Warrant shall be the price
set forth in Section 1 hereof per Warrant Shares issued thereunder. The adjusted
exercise price shall be the price which shall result from time to time from any
and all adjustments of the initial exercise price in accordance with the
provisions of Section 9 hereof.
7.2 Exercise Price. The term "Exercise Price" herein shall mean the initial
exercise price or the adjusted exercise price, depending upon the context.
8. Registration Under the Securities Act of 1933. Subject to the
Registration Rights Agreement between the Company and the Holders dated as of
the date hereof, the Warrants, the Warrant Shares and any of the Other
Securities issuable upon exercise of the Warrants have not been registered
<PAGE>
under the Securities Act of 1933, as amended (the "Act"). Upon exercise, in
whole or in part, of the Warrants, a certificate representing the Warrant Shares
underlying the Warrants, and any of the Other Securities issuable upon exercise
of the Warrants (collectively, the "Warrant Securities") shall bear the
following legend unless such Warrant Shares previously have been registered
under the Act in accordance with the terms hereof:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), AND MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR
ANY SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES),
OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY
SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION
UNDER THE ACT IS AVAILABLE.
9. Adjustments to Exercise Price and Number of Securities. The Exercise
Price and, in some cases, the number of Warrant Shares purchasable upon the
exercise of the Warrants, shall be subject to adjustment from time to time upon
the occurrence of certain events described in this Section 9.
9.1 Subdivision or Combination of Common Shares and Common Share Dividend.
In case the Company shall at any time subdivide its outstanding Common Shares
into a greater number of Common Shares or declare a dividend upon its Common
Shares payable solely in Common Shares, the Exercise Price in effect immediately
prior to such subdivision or declaration shall be proportionately reduced, and
the number of Warrant Shares issuable upon exercise of the Warrants shall be
proportionately increased. Conversely, in case the outstanding Common Shares of
the Company shall be combined into a smaller number of Common Shares, the
Exercise Price in effect immediately prior to such combination shall be
proportionately increased, and the number of Warrant Shares issuable upon
exercise of the Warrants shall be proportionately reduced.
9.2 Dilutive Issuances. In the event that the Company shall sell or issue
at any time after the date of this Warrant and prior to its termination, Shares
(other than Excluded Shares, as defined in Section 9.2.5) at a consideration per
Share less than $0.8073, then the Exercise Price shall be adjusted to a new
Exercise Price (calculated to the nearest cent) determined by dividing
(a) an amount equal to (i) the total number of Shares Outstanding (as defined
below and subject to adjustment in the manner set forth in Section 9.1) on the
date of issuance of this Warrant multiplied by the Exercise Price in effect on
the date of issuance of this Warrant (subject, however, to adjustment in the
manner set forth in Section 9.1), plus (ii) the aggregate of the amount of all
consideration, if any, received by the Company for the issuance or sale of
Shares since the date of issuance of this Warrant, by
(b) the total number of Shares Outstanding immediately after such issuance or
sale.
In no event shall any such adjustment be made pursuant to this Section 9.2 if it
would increase the Exercise Price in effect immediately prior to such
adjustment, except as provided in Sections 9.2.3 and 9.2.4. Upon each adjustment
of the Exercise Price pursuant to this Section 9.2, the holder of this Warrant
shall thereafter be entitled to purchase, at the Exercise Price resulting from
such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such
<PAGE>
adjustment by the number of Warrant Shares purchasable pursuant hereto
immediately prior to such adjustment, and dividing the product thereof by the
Exercise Price resulting from such adjustment.
9.2.1 Definitions. For purposes of this Section 9.2, the following definitions
shall apply:
(a) "Convertible Securities" shall mean any indebtedness or securities
convertible into or exchangeable for Shares.
(b) "Options" shall mean any rights, warrants or options to subscribe for
or purchase Shares or Convertible Securities other than rights, warrants or
options to purchase Excluded Securities (as defined in Section 9.2.5).
(c) "Shares Outstanding" shall mean the aggregate of all Shares outstanding
and all Shares issuable upon exercise of all outstanding Options and conversion
of all outstanding Convertible Securities.
9.2.2 For the purposes of this Section 9.2, the following provisions shall
also be applicable:
9.2.2.1 Cash Consideration. In case of the issuance or sale of
additional Shares for cash, the consideration received by the Company
therefor shall be deemed to be the amount of cash received by the Company
for such Shares (or, if such Shares are offered by the Company for
subscription, the subscription price, or, if such Shares are sold to
underwriters or dealers for public offering without a subscription
offering, the public offering price), without deducting therefrom any
compensation or discount paid or allowed to underwriters or dealers or
others performing similar services or for any expenses incurred in
connection therewith.
9.2.2.2 Non-Cash Consideration. In case of the issuance (otherwise
than upon conversion or exchange of Convertible Securities) or sale of
additional Shares, Options or Convertible Securities for a consideration
other than cash or a consideration a part of which shall be other than
cash, the fair value of such consideration as determined by the Board of
Directors (if any, otherwise by the Managers) of the Company in the good
faith exercise of its business judgment, irrespective of the accounting
treatment thereof, shall be deemed to be the value, for purposes of this
Section 9, of the consideration other than cash received by the Company for
such securities.
9.2.2.3 Options and Convertible Securities. In case the Company shall
in any manner issue or grant any Options or any Convertible Securities, the
total maximum number of Shares of issuable upon the exercise of such
Options or upon conversion or exchange of the total maximum amount of such
Convertible Securities at the time such Convertible Securities first become
convertible or exchangeable shall (as of the date of issue or grant of such
Options or, in the case of the issue or sale of Convertible Securities
other than where the same are issuable upon the exercise of Options, as of
the date of such issue or sale) be deemed to be issued and to be
outstanding for the purpose of this Section 9.2 and to have been issued for
the sum of the amount (if any) paid for such Options or Convertible
Securities and the amount (if any) payable upon the exercise of such
Options or upon conversion or exchange of such Convertible Securities at
the time such Convertible Securities first become convertible or
exchangeable; provided that, subject to the provisions of Section 9.2.3, no
further adjustment of the Exercise Price shall be
<PAGE>
made upon the actual issuance of any such Shares or Convertible Securities or
upon the conversion or exchange of any such Convertible Securities.
9.2.3 Change in Option Price or Conversion Rate. In the event that the
purchase price provided for in any Option referred to in subsection 9.2.2.3, or
the rate at which any Convertible Securities referred to in subsection 9.2.2.3
are convertible into or exchangeable for Shares shall change at any time (other
than under or by reason of provisions designed to protect against dilution),
then, for purposes of any adjustment required by Section 9.2, the Exercise Price
in effect at the time of such event shall forthwith be readjusted to the
Exercise Price that would have been in effect at such time had such Options or
Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold, provided that if such readjustment is an
increase in the Exercise Price, such readjustment shall not exceed the amount
(as adjusted by Sections 9.1 and 9.2) by which the Exercise Price was decreased
pursuant to Section 9.2 upon the issuance of the Option or Convertible Security.
In the event that the purchase price provided for in any such Option referred to
in subsection 9.2.2.3, or the additional consideration (if any) payable upon the
conversion or exchange of any Convertible Securities referred to in subsection
9.2.2.3, or the rate at which any Convertible Securities referred to in
subsection 9.2.2.3 are convertible into or exchangeable for Shares, shall be
reduced at any time under or by reason of provisions with respect thereto
designed to protect against dilution, then in case of the delivery of Shares
upon the exercise of any such Option or upon conversion or exchange of any such
Convertible Security; the Exercise Price then in effect hereunder shall, upon
issuance of such Shares, be adjusted to such amount as would have obtained had
such Option or Convertible Security never been issued and had adjustments been
made only upon the issuance of the Shares delivered as aforesaid and for the
consideration actually received for such Option or Convertible Security and the
Shares, provided that if such readjustment is an increase in the Exercise Price,
such readjustment shall not exceed the amount (as adjusted by Sections 9.1 and
9.2) by which the Exercise Price was decreased pursuant to Section 9.2 upon the
issuance of the Option or Convertible Security.
9.2.4 Termination Of Option or Conversion Rights. In the event of the
termination or expiration of any right to purchase Shares under any Option
granted after the date of this Warrant or of any right to convert or exchange
Convertible Securities issued after the date of this Warrant, the Exercise Price
shall, upon such termination, be readjusted to the Exercise Price that would
have been in effect at the time of such expiration or termination had such
Option or Convertible Security, to the extent outstanding immediately prior to
such expiration or termination, never been issued, and the Shares issuable
thereunder shall no longer be deemed to be Shares Outstanding, provided that if
such readjustment is an increase in the Exercise Price, such readjustment shall
not exceed the amount (as adjusted by Sections 9.1 and 9.2) by which the
Exercise Price was decreased pursuant to Section 9.2 upon the issuance of the
Option or Convertible Security. The termination or expiration of any right to
purchase Shares under any Option granted prior to the date of this Warrant or of
any right to convert or exchange Convertible Securities issued prior to the date
of this Warrant shall not trigger any adjustment to the Exercise Price, but the
Shares issuable under such Options or Convertible Securities shall no longer be
counted in determining the number of Shares Outstanding on the date of issuance
of this Warrant for purposes of subsequent calculations under this Section 9.2.
9.2.5 Excluded Shares. Notwithstanding anything herein to the contrary, the
Exercise Price shall not be adjusted pursuant to this Section 9.2 by virtue of
the issuance and/or sale of Excluded Shares, which shall mean the following: (a)
Shares issuable upon the exercise of the Warrants; (b) Shares, Options or
Convertible Securities to be issued and/or sold to employees, advisors
(including, without limitation, financial, technical and legal advisers),
directors, or officers of, or consultants to, the
<PAGE>
Company or any of its subsidiaries pursuant to a share grant, share option plan,
share purchase plan, pension or profit sharing plan or other share agreement or
arrangement existing as of the date hereof or approved by the Company's Board of
Directors (if any, otherwise by the Managers); (c) the issuance of Shares,
Options and/or Convertible Securities pursuant to Options and Convertible
Securities outstanding as of the date of this Warrant; (d) the issuance of
Shares, Options or Convertible Securities as a share dividend or upon any
subdivision or combination of Shares or Convertible Securities; (e) the issuance
of Shares, Options or Convertible Securities in connection with strategic
partnerships or other business and/or product consolidations or joint ventures
and (f) the issuance of Shares, Options or Convertible Securities by the Company
in connection with a contemplated equity financing currently in progress as of
the date hereof. For all purposes of this Section 9.2, all Shares of Excluded
Shares shall be deemed to have been issued for an amount of consideration per
Share equal to the initial Exercise Price (subject to adjustment in the manner
set forth in Section 9.1). In addition, if the amount of any adjustment pursuant
to this Section 9 shall be less than two cents (24) per Warrant Share no
adjustment to the Exercise Price or to the number of Warrant Shares issuable
upon the exercise of the Warrants shall be made; provided, however, that in such
case any adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment so carried forward,
shall amount to at least two cents (24) per Warrant Share.
9.3 Notice of Adjustment. Promptly after adjustment of the Exercise Price
or any increase or decrease in the number of Warrant Shares purchasable upon the
exercise of this Warrant, the Company shall give written notice thereof, by
first class mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company. The
notice shall be signed by the Company's chief financial officer and shall state
(i) the effective date of the adjustment and the Exercise Price resulting from
such adjustment and (ii) the increase or decrease, if any, in the number of
Common Shares purchasable at such price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
9.4 Other Notices. If at any time:
(a) the Company shall declare any cash dividend upon its Common
Shares;
(b) the Company shall declare any dividend upon its Common Shares
payable in securities (other than a dividend payable solely in Common
Shares) or make any special dividend or other distribution to the holders
of its Common Shares;
(c) there shall be any consolidation or merger of the Company with
another corporation, or a sale of all or substantially all of the Company's
assets to another corporation; or
(d) there shall be a voluntary or involuntary dissolution, liquidation
or winding-up of the Company;
then, in any one or more of said cases, the Company shall give, by certified or
registered mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company, (i)
at least 15 days' prior written notice of the date on which the books of the
Company shall close or a record shall be taken for such dividend, distribution
or subscription rights or for determining rights to vote in respect of any such
dissolution, liquidation or winding-up; (ii) at least 10 days' prior written
notice of the date on which the books of the Company shall close or a record
shall be taken for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger or sale, and (iii) in
the case of any such reorganization, reclassification,
<PAGE>
consolidation, merger, sale, dissolution, liquidation or winding-up, at least 15
days' written notice of the date when the same shall take place. Any notice
given in accordance with clause (i) above shall also specify, in the case of any
such dividend, distribution or option rights, the date on which the holders of
Common Shares shall be entitled thereto. Any notice given in accordance with
clause (iii) above shall also specify the date on which the holders of Common
Shares shall be entitled to exchange their Common Shares for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding-up, as the case may be. If the
Holder of the Warrant does not exercise this Warrant prior to the occurrence of
an event described above, except as provided in Sections 9.1 and 9.5, the Holder
shall not be entitled to receive the benefits accruing to existing holders of
the Common Shares in such event.
9.5 Changes in Common Shares. In case at any time the Company shall be a
party to any transaction (including, without limitation, a merger,
consolidation, sale of all or substantially all of the Company's assets or
recapitalization of the Common Shares) in which the previously outstanding
Common Shares shall be changed into or exchanged for different securities of the
Company or common stock or other securities of another corporation or interests
in a non-corporate entity or other property (including cash) or any combination
of any of the foregoing (each such transaction being herein called the
"Transaction" and the date of consummation of the Transaction being herein
called the "Consummation Date"), then, as a condition of the consummation of the
Transaction, lawful and adequate provisions shall be made so that each Holder,
upon the exercise hereof at any time on or after the Consummation Date, shall be
entitled to receive, and this Warrant shall thereafter represent the right to
receive, in lieu of the Common Shares issuable upon such exercise prior to the
Consummation Date, the highest amount of securities or other property to which
such Holder would actually have been entitled as a holder of an Common Shares
upon the consummation of the Transaction if such Holder had exercised such
Warrant immediately prior thereto. The provisions of this Section 9.5 shall
similarly apply to successive Transactions.
10. Exchange and Replacement of Warrant Certificate. The Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of the Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
11. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of Common Shares upon the exercise
of the Warrants, nor shall it be required to issue scrip or pay cash in lieu of
fractional interests, it being the intent of the parties that all fractional
interests shall be eliminated by rounding any fraction up to the nearest whole
number of Common Shares or Other Securities.
12. Reservation of Securities. The Company shall at all times reserve and
keep available out of its authorized Common Shares, solely for the purpose of
issuance upon the exercise of the Warrants, such number of Common Shares or
Other Securities as shall be issuable upon the exercise thereof. The
<PAGE>
Company covenants and agrees that, upon exercise of the Warrants and payment of
the Exercise Price therefor, all Common Shares or Other Securities issuable upon
such exercise shall be duly and validly issued, fully paid, non-assessable and
not subject to the preemptive rights of any holder of Common Shares.
13. Notices to Warrant Holder. Except as otherwise provided in Section 9.4,
nothing contained in this Agreement shall be construed as conferring upon the
Holder by virtue of his holding the Warrant the right to vote or to consent or
to receive notice as a holder of Common Shares in respect of any meetings of
such holders for the election of directors or any other matter, or as having any
rights whatsoever as such a holder of the Company.
14. Notices.
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been duly made and sent when delivered,
or mailed by registered or certified mail, return receipt requested:
(a) If to the registered Holder of the Warrants, to the address of
such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 4 hereof or
to such other address as the Company may designate by notice to the Holder.
15. Supplements and Amendments. The Company and Holder may from time to
time supplement or amend this Agreement in order to cure any ambiguity, to
correct or supplement any provision contained herein which may be defective or
inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and Holder
may deem necessary or desirable.
16. Successors. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Holder and their
respective successors and assigns hereunder.
17. Termination. This Agreement shall terminate at the close of business on
the tenth anniversary of the issuance of the Warrants.
18. Governing Law. This Agreement and the Warrant Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York and for all purposes shall be construed in accordance with the laws of
the State of New York without giving effect to the rules of the State of New
York governing the conflicts of laws.
19. Entire Agreement; Modification. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof and may not be modified or amended except by a writing duly signed by the
party against whom enforcement of the modification or amendment is sought.
20. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
<PAGE>
21. Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
22. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and Holder
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and Holder.
23. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be
duly executed, as of the day and year first above written.
Very truly yours,
DIGITAL LAVA INC.
By:
-----------------------------------
Authorized Officer
ACCEPTED AND AGREED TO:
INVESTOR:
Name:
Address:
Social Security/Tax I.D. No.:
<PAGE>
DIGITAL LAVA, INC.
SCHEDULE I
Investor (Name) No. of Warrant Shares
1. Ahmed Alfi 13,700
2. Greg Louis Rondinelli 13,700
3. Cosleno, Inc. 13,700
4. Redwood Forest Investments, LP 13,700
<PAGE>
EXHIBIT X
TO
WARRANT AGREEMENT
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT") (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY
SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii)
AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS
AVAILABLE.
EXERCISABLE FROM JANUARY 7, 1999
UNTIL
5:30 P.M., NEW YORK TIME, JULY 11, 2003
No. W-LAVA-99-[ ] [ ] Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that or his/her registered assigns
("Holder"), is the registered holder of [ ] Warrants to purchase initially at
any time from January 7, 1999, until 5:30 p.m. New York time on July 11, 2003
("Expiration Date"), up to [ ] fully-paid and non-assessable shares of common
stock, par value $.0001 per share ("Common Shares") of DIGITAL LAVA INC., a
Delaware corporation (the "Company"), at an initial exercise price, subject to
adjustment in certain events (the "Exercise Price"), equal to $0.8073 per Common
Share, upon surrender of this Warrant Certificate and payment of the initial
exercise price at an office or agency of the Company, but subject to the
conditions set forth herein and in the Warrant Agreement dated as of the date
hereof between the Company and Holder (the "Warrant Agreement"). Payment of the
Exercise Price shall be made by certified check or official bank check in New
York Clearing House funds payable to the order of the Company, unless exercise
is made pursuant to Section 4.2 of the Warrant Agreement.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
<PAGE>
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
Holder (the word "Holder" meaning the registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificate
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed.
Dated as of January 7, 1999
DIGITAL LAVA INC.
By: /s/ Danny Gampe
----------------------
Authorized Officer
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase _______ Common Shares and
herewith tenders in payment for such securities a certified check or official
bank check payable in New York Clearing House Funds to the order of DIGITAL LAVA
INC. in the amount of $_____, all in accordance with the terms of Section 4 of
the Warrant Agreement dated as of January 7, 1999, between DIGITAL LAVA INC. and
the undersigned (or its assignor). The undersigned requests that a certificate
for such securities be registered in the name of __________ whose address is
__________ and that such Certificate be delivered to whose address is _________.
Dated:
Signature ____________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _______ hereby sells, assigns
and transfers unto
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint Attorney, to transfer the
within Warrant Certificate on the books of the within-named Company, with full
power of substitution.
Dated: ________________ Signature:
-------------------------
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
-----------------------------------
(Insert Social Security or Other
Identifying Number of Assignee)
EXHIBIT 4 (ae)
<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of December 7, 1998, between DIGITAL LAVA INC.,
a Delaware corporation (the "Company"), and the persons whose names and
addresses are set forth on Schedule I annexed hereto (the "Holders").
W I T N E S S E T H:
WHEREAS, pursuant to a subscription agreement of even date hereof between
the Company and the Holders, Holders shall be issued an aggregate of up to 5.5
units of the Company's securities ("Units"), each Unit consisting of (i) a
subordinated promissory note in the principal amount of $100,000 (individually,
a "Promissory Note" and collectively, the "Promissory Notes"), and (ii) warrants
(the "Warrants") to purchase shares of the Company's common stock, par value
$.0001 per share ("Common Stock," shares of Common Stock shall be referred to as
"Shares" or "Common Shares").
NOW THEREFORE, in consideration of the premises herein set forth and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Issue. At the earlier of (x) the closing of an anticipated initial
public offering of the Company's securities (the "IPO") or (y) six months from
the date hereof (the "Warrant Certificate Delivery Date"), the Company shall
issue to each Holder a certificate (the "Warrant Certificate") dated as of the
date hereof providing each Holder with the right to purchase, at any time
commencing on the earlier of one year from the date hereof or six months after
closing of the IPO (the "Initial Exercise Date") until 5:30 p.m., New York time,
on December 7, 2003, up to that number of Common Shares equal to the product of
(i) the number of Units purchased by such Holder times (ii) 50,000. Such shares
shall be referred to as the "Warrant Shares". The number of Warrant Shares shall
be subject to adjustment as provided in Section 9 hereof, and the exercise price
per Warrant Share (also subject to adjustment as provided in Section 9 hereof)
shall equal 130% of the offering price of the Common Shares sold by the Company
in the IPO (the "IPO Price"). If there has not been a closing of the IPO on or
before the date that is six months from the date hereof, the number of Warrant
Shares per Unit will equal the product of (x) 50,000 times (y) the most recent
calculation of the reverse share split anticipated to have occurred immediately
prior to the IPO (which, as of the date hereof, is 9.01) and the exercise price
will be $1.00. The Company will give prompt written notice of the actual number
of Warrants shares issuable upon exercise of the Warrants as well as the
exercise price thereof to the Holders, pursuant to Section 9.3 hereof, as
determined in accordance with the foregoing sentences.
2. Warrant Certificate. A Warrant Certificate shall be delivered to each
Holder, to further evidence rights herein and shall be in the form set forth in
Exhibit X, attached hereto and made a part hereof, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Agreement.
3. Exercisability of Warrants. The Warrants shall be exercisable at any
time commencing on the Initial Exercise Date until 5:30 p.m., New York time, on
December 7, 2003.
<PAGE>
4. Procedure for Exercise of Warrants.
4.1 Cash Exercise. The Warrants are exercisable at an aggregate initial
exercise price per Warrant Share set forth in Section 1 hereof payable by
certified check or official bank check in New York Clearing House funds. Upon
surrender of a Warrant Certificate with the annexed Form of Election to Purchase
duly executed, together with payment of the Exercise Price (as hereinafter
defined) for the Warrant Shares purchased, at the Company's principal offices in
Los Angeles, California (presently located at 10850 Wilshire Boulevard, Suite
1260, Los Angeles, CA 90024) the registered holder of a Warrant Certificate
(individually a "Holder" and sometimes collectively the "Holders") shall be
entitled to receive a certificate for the Warrant Shares so purchased. The
purchase rights represented by the Warrant Certificate are exercisable at the
option of the Holder thereof in whole or in part (but not as to fractional
Common Shares underlying the Warrants). In the case of the purchase of less than
all the Warrant Shares purchasable under the Warrant Certificate, the Company
shall cancel said Warrant Certificate upon the surrender thereof and shall
execute and deliver a new Warrant Certificate of like tenor for the balance of
the Warrant Shares purchasable thereunder.
4.2 Cashless Exercise. In addition to the exercise of all or a portion of
the Warrants by the payment of the Exercise Price in cash or check as set forth
in Section 4.1 above, and in lieu of any such payment, the Holder has the right
to exercise the Warrants, in full or in part, by surrendering the Warrant
Certificate with the annexed Form of Election to Purchase duly executed, in
exchange for the number of Warrant Shares equal to the product of (x) the number
of Warrant Shares as to which the Warrants are being exercised multiplied by (y)
a fraction, the numerator of which is the Current Market Price of the Common
Shares (as defined below) less the Exercise Price then in effect and the
denominator of which is the Current Market Price.
4.3 Current Market Price. The term "Current Market Price" shall be deemed
to be the last reported sale price, or, in case no reported sale takes place on
such day, the average of the last reported sales price for the last three (3)
trading days, in either case as officially reported by the principal securities
exchange on which the Common Shares are listed or admitted to trading, or if the
Common Shares are not listed or admitted to trading on any national securities
exchange or quotation by NASDAQ-NMS, the average closing bid price as reported
through NASDAQ (or any similar organization if NASDAQ is no longer reporting
such bid) or, if the Common Shares are not so listed, admitted or quoted, as
determined in good faith by the Board of Directors of the Company based on the
best information available to it.
5. Issuance of Certificate. Upon the exercise of the Warrants, the issuance
of a certificate for Warrant Shares (or Other Securities) shall be made
forthwith (and in any event within five (5) business days thereafter) without
charge to the Holder thereof including, without limitation, any tax which may be
payable in respect of the issuance thereof, and such certificate shall (subject
to the provisions of Sections 6 and 8 hereof) be issued in the name of, or in
such names as may be directed by, the Holder thereof; provided, however, that
the Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any such certificate in
a name other than that of the Holder and the Company shall not be required to
issue or deliver such certificate unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
The Warrant Certificate and the certificate representing the Warrant Shares
(or Other Securities) shall be executed on behalf of the Company by the manual
or facsimile signature of the then present
<PAGE>
Chairman or Vice Chairman of the Board of Directors or President or any Vice
President of the Company under its corporate seal reproduced thereon, attested
to by the manual or facsimile signature of the then present Secretary or any
Assistant Secretary of the Company. The Warrant Certificate shall be dated the
date of execution by the Company upon initial issuance, division, exchange,
substitution or transfer.
5.1 Ownership of Common Shares. Upon the Holder exercising the Warrant, it
shall be deemed to be the owner of the Warrant Shares upon delivery to the
Company, regardless of when the certificates representing the Warrant Shares are
issued.
6. Transfer of Warrants. The Holder of the Warrant Certificate, by its
acceptance thereof, covenants and agrees that the Warrants are being acquired as
an investment and not with a view to the distribution thereof. The Warrants may
be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole
or in part, without restriction, subject to compliance with applicable
securities laws.
7. Exercise Price.
7.1 Initial and Adjusted Exercise Price. Except as otherwise provided in
Section 9 hereof, the initial exercise price of each Warrant shall be the price
set forth in Section 1 hereof. The adjusted exercise price shall be the price
which shall result from time to time from any and all adjustments of the initial
exercise price in accordance with the provisions of Section 9 hereof.
7.2 Exercise Price. The term "Exercise Price" herein shall mean the initial
exercise price or the adjusted exercise price, depending upon the context.
8. Registration Under the Securities Act of 1933. Subject to the
Registration Rights Agreement between the Company and the Holders dated as of
the date hereof, the Warrants, the Warrant Shares and any of the Other
Securities issuable upon exercise of the Warrants have not been registered under
the Securities Act of 1933, as amended (the "Act"). Upon exercise, in whole or
in part, of the Warrants, a certificate representing the Warrant Shares
underlying the Warrants, and any of the Other Securities issuable upon exercise
of the Warrants (collectively, the "Warrant Securities") shall bear the
following legend unless such Warrant Shares or other securities previously have
been registered under the Act in accordance with the terms hereof:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), AND MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER
THE ACT (OR ANY SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION
OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL
BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN EXEMPTION
FROM REGISTRATION UNDER THE ACT IS AVAILABLE.
9. Adjustments to Exercise Price and Number of Securities. The Exercise
Price and, in some cases, the number of Warrant Shares purchasable upon the
exercise of the Warrants, shall be subject to adjustment from time to time upon
the occurrence of certain events described in this Section 9.
<PAGE>
9.1 Subdivision or Combination of Common Shares and Common Share Dividend.
In case the Company shall at any time subdivide its outstanding Common Shares
into a greater number of Common Shares or declare a dividend upon its Common
Shares payable solely in Common Shares, the Exercise Price in effect immediately
prior to such subdivision or declaration shall be proportionately reduced, and
the number of Warrant Shares issuable upon exercise of the Warrants shall be
proportionately increased. Conversely, in case the outstanding Common Shares of
the Company shall be combined into a smaller number of Common Shares, the
Exercise Price in effect immediately prior to such combination shall be
proportionately increased, and the number of Warrant Shares issuable upon
exercise of the Warrants shall be proportionately reduced.
9.2 Dilutive Issuances. In the event that the Company shall sell or issue
at any time after the date of this Warrant and prior to its termination, Shares
(other than Excluded Shares, as defined in Section 9.2.5), or any other equity
securities or rights (including Company treasury stock) which are exercisable,
exchangeable or convertible into Shares, at a consideration per Share less than
the IPO Price (if a closing under the IPO has occurred on or before the date
that is six months from the date hereof) or less than $1.00 (if no such closing
has occurred), as the case may be, then the Exercise Price shall be adjusted to
a new Exercise Price (calculated to the nearest cent) determined by dividing
(a) an amount equal to (i) the total number of Shares Outstanding (as
defined below and subject to adjustment in the manner set forth in Section
9.1) on the date of issuance of this Warrant before such issuance or sale
multiplied by the Exercise Price in effect on the date of issuance of this
Warrant (subject, however, to adjustment in the manner set forth in Section
9.1), plus (ii) the aggregate of the amount of all consideration, if any,
received by the Company for the issuance or sale of Shares since the date
of issuance of this Warrant, by
(b) the total number of Shares Outstanding immediately after such
issuance or sale.
In no event shall any such adjustment be made pursuant to this Section 9.2 if it
would increase the Exercise Price in effect immediately prior to such
adjustment, except as provided in Sections 9.2.3 and 9.2.4. Upon each adjustment
of the Exercise Price pursuant to this Section 9.2, the holder of this Warrant
shall thereafter be entitled to purchase, at the Exercise Price resulting from
such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares purchasable pursuant hereto immediately prior to such adjustment,
and dividing the product thereof by the Exercise Price resulting from such
adjustment.
9.2.1 Definitions. For purposes of this Section 9.2, the following
definitions shall apply:
(a) "Convertible Securities" shall mean any indebtedness or securities
convertible into or exchangeable for Shares.
(b) "Options" shall mean any rights, warrants or options to subscribe
for or purchase Shares or Convertible Securities other than rights,
warrants or options to purchase Excluded Securities (as defined in Section
9.2.5).
<PAGE>
(c) "Shares Outstanding" shall mean the aggregate of all Shares
outstanding and all Shares issuable upon exercise of all outstanding
Options and conversion of all outstanding Convertible Securities.
9.2.2 For the purposes of this Section 9.2, the following provisions shall
also be applicable:
9.2.2.1 Cash Consideration. In case of the issuance or sale of
additional Shares for cash, the consideration received by the Company
therefor shall be deemed to be the amount of cash received by the Company
for such Shares (or, if such Shares are offered by the Company for
subscription, the subscription price, or, if such Shares are sold to
underwriters or dealers for public offering without a subscription
offering, the public offering price), without deducting therefrom any
compensation or discount paid or allowed to underwriters or dealers or
others performing similar services or for any expenses incurred in
connection therewith.
9.2.2.2 Non-Cash Consideration. In case of the issuance (otherwise
than upon conversion or exchange of Convertible Securities) or sale of
additional Shares, Options or Convertible Securities for a consideration
other than cash or a consideration a part of which shall be other than
cash, the fair value of such consideration as determined by the Board of
Directors (if any, otherwise by the Managers) of the Company in the good
faith exercise of its business judgment (in a duly authorized resolution
certified by the secretary of the Company), irrespective of the accounting
treatment thereof, shall be deemed to be the value, for purposes of this
Section 9, of the consideration other than cash received by the Company for
such securities. If the Holder does not agree with the valuation, he may
seek the opinion of a mutually acceptable appraiser. This cost shall be
borne by the Company, unless the value determined by the appraiser is
within 5% of the value determined by the Board.
9.2.2.3 Options and Convertible Securities. In case the Company shall
in any manner issue or grant any Options or any Convertible Securities, the
total maximum number of Shares of issuable upon the exercise of such
Options or upon conversion or exchange of the total maximum amount of such
Convertible Securities at the time such Convertible Securities first become
convertible or exchangeable shall (as of the date of issue or grant of such
Options or, in the case of the issue or sale of Convertible Securities
other than where the same are issuable upon the exercise of Options, as of
the date of such issue or sale) be deemed to be issued and to be
outstanding for the purpose of this Section 9.2 and to have been issued for
the sum of the amount (if any) paid for such Options or Convertible
Securities and the amount (if any) payable upon the exercise of such
Options or upon conversion or exchange of such Convertible Securities at
the time such Convertible Securities first become convertible or
exchangeable; provided that, subject to the provisions of Section 9.2.3, no
further adjustment of the Exercise Price shall be made upon the actual
issuance of any such Shares or Convertible Securities or upon the
conversion or exchange of any such Convertible Securities.
9.2.3 Change in Option Price or Conversion Rate. In the event that the
purchase price provided for in any Option referred to in subsection 9.2.2.3, or
the rate at which any Convertible Securities referred to in subsection 9.2.2.3
are convertible into or exchangeable for Shares shall change at any time (other
than under or by reason of provisions designed to protect against dilution),
then, for purposes of any adjustment required by Section 9.2, the Exercise Price
in effect at the time of such event shall forthwith be readjusted to the
Exercise Price that would have been in effect at such time had such Options or
Convertible Securities still outstanding provided for such changed purchase
price, additional
<PAGE>
consideration or conversion rate, as the case may be, at the time initially
granted, issued or sold, provided that if such readjustment is an increase in
the Exercise Price, such readjustment shall not exceed the amount (as adjusted
by Sections 9.1 and 9.2) by which the Exercise Price was decreased pursuant to
Section 9.2 upon the issuance of the Option or Convertible Security. In the
event that the purchase price provided for in any such Option referred to in
subsection 9.2.2.3, or the additional consideration (if any) payable upon the
conversion or exchange of any Convertible Securities referred to in subsection
9.2.2.3, or the rate at which any Convertible Securities referred to in
subsection 9.2.2.3 are convertible into or exchangeable for Shares, shall be
reduced at any time under or by reason of provisions with respect thereto
designed to protect against dilution, then in case of the delivery of Shares
upon the exercise of any such Option or upon conversion or exchange of any such
Convertible Security; the Exercise Price then in effect hereunder shall, upon
issuance of such Shares, be adjusted to such amount as would have obtained had
such Option or Convertible Security never been issued and had adjustments been
made only upon the issuance of the Shares delivered as aforesaid and for the
consideration actually received for such Option or Convertible Security and the
Shares, provided that if such readjustment is an increase in the Exercise Price,
such readjustment shall not exceed the amount (as adjusted by Sections 9.1 and
9.2) by which the Exercise Price was decreased pursuant to Section 9.2 upon the
issuance of the Option or Convertible Security.
9.2.4 Termination Of Option or Conversion Rights. In the event of the
termination or expiration of any right to purchase Shares under any Option
granted after the date of this Warrant or of any right to convert or exchange
Convertible Securities issued after the date of this Warrant, the Exercise Price
shall, upon such termination, be readjusted to the Exercise Price that would
have been in effect at the time of such expiration or termination had such
Option or Convertible Security, to the extent outstanding immediately prior to
such expiration or termination, never been issued, and the Shares issuable
thereunder shall no longer be deemed to be Shares Outstanding, provided that if
such readjustment is an increase in the Exercise Price, such readjustment shall
not exceed the amount (as adjusted by Sections 9.1 and 9.2) by which the
Exercise Price was decreased pursuant to Section 9.2 upon the issuance of the
Option or Convertible Security. The termination or expiration of any right to
purchase Shares under any Option granted prior to the date of this Warrant or of
any right to convert or exchange Convertible Securities issued prior to the date
of this Warrant shall not trigger any adjustment to the Exercise Price, but the
Shares issuable under such Options or Convertible Securities shall no longer be
counted in determining the number of Shares Outstanding on the date of issuance
of this Warrant for purposes of subsequent calculations under this Section 9.2.
9.2.5 Excluded Shares. Notwithstanding anything herein to the contrary, the
Exercise Price shall not be adjusted pursuant to this Section 9.2 by virtue of
the issuance and/or sale of Excluded Shares, which shall mean the following: (a)
Shares issuable upon the exercise of the Warrants; (b) Shares, Options or
Convertible Securities to be issued and/or sold to employees, advisors
(including, without limitation, financial, technical and legal advisers),
directors, or officers of, or consultants to, the Company or any of its
subsidiaries pursuant to the Company's existing 1996 Stock Option Plan (which
has reserved for issuance 250,000 Common Shares, on a post-reverse split basis)
or any other stock option plan duly adopted by the Board of Directors and
stockholders of the Company; (c) the issuance of Shares, Options and/or
Convertible Securities pursuant Options and Convertible Securities outstanding
as of the date of this Warrant or which the Company has a current obligation to
issue at some future date; (d) the issuance of Shares, Options or Convertible
Securities as a share dividend or upon any subdivision or combination of Shares
or Convertible Securities (for which appropriate adjustments are to be made
pursuant to Section 9.1 hereof); (e) the issuance of Shares (including those
Shares issuable upon the exercise or conversion of Options or Convertible
Securities) in connection a strategic partnership or other business and/or
product consolidation or joint venture and (f) the issuance of Shares, Options
and
<PAGE>
Convertible Securities in connection with the IPO (including, without
limitation, those issued as part of the underwriter's over-allotment option and
as compensation to the underwriter). For all purposes of this Section 9.2, all
Shares of Excluded Shares shall be deemed to have been issued for an amount of
consideration per Share equal to the initial Exercise Price (subject to
adjustment in the manner set forth in Section 9.1). In addition, if the amount
of any adjustment pursuant to this Section 9 shall be less than two cents (24)
per Warrant Share no adjustment to the Exercise Price or to the number of
Warrant Shares issuable upon the exercise of the Warrants shall be made;
provided, however, that in such case any adjustment that would otherwise be
required then to be made shall be carried forward and shall be made at the time
of and together with the next subsequent adjustment which, together with any
adjustment so carried forward, shall amount to at least two cents (24) per
Warrant Share.
9.3 Notice of Adjustment. Promptly after adjustment of the Exercise Price
or any increase or decrease in the number of Warrant Shares purchasable upon the
exercise of this Warrant, the Company shall give written notice thereof, by
first class mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company. The
notice shall be signed by the Company's chief financial officer and shall state
(i) the effective date of the adjustment and the Exercise Price resulting from
such adjustment and (ii) the increase or decrease, if any, in the number of
Common Shares purchasable at such price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
9.4 Other Notices. If at any time:
(a) the Company shall declare any cash dividend upon its Common
Shares;
(b) the Company shall declare any dividend upon its Common Shares
payable in securities (other than a dividend payable solely in Common
Shares) or make any special dividend or other distribution to the holders
of its Common Shares;
(c) there shall be any consolidation or merger of the Company with
another corporation, or a sale of all or substantially all of the Company's
assets to another corporation; or
(d) there shall be a voluntary or involuntary dissolution, liquidation
or winding-up of the Company;
then, in any one or more of said cases, the Company shall give, by certified or
registered mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company, (i)
at least 15 days' prior written notice of the date on which the books of the
Company shall close or a record shall be taken for such dividend, distribution
or subscription rights or for determining rights to vote in respect of any such
dissolution, liquidation or winding-up; (ii) at least 10 days' prior written
notice of the date on which the books of the Company shall close or a record
shall be taken for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger or sale, and (iii) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, at least 15 days' written notice
of the date when the same shall take place. Any notice given in accordance with
clause (i) above shall also specify, in the case of any such dividend,
distribution or option rights, the date on which the holders of Common Shares
shall be entitled thereto. Any notice given in accordance with clause (iii)
above shall also specify the date on which the holders of Common Shares shall be
entitled to exchange their Common Shares for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, as the case may be. If the Holder
of
<PAGE>
the Warrant does not exercise this Warrant prior to the occurrence of an event
described above, except as provided in Sections 9.1 and 9.5, the Holder shall
not be entitled to receive the benefits accruing to existing holders of the
Common Shares in such event.
9.5 Changes in Common Shares. In case at any time the Company shall be a
party to any transaction (including, without limitation, a merger,
consolidation, business combination or other sale or conveyance of all or
substantially all of the Company's assets or recapitalization of the Common
Shares) in which the previously outstanding Common Shares shall be changed into
or exchanged for different securities of the Company or common stock or other
securities of another corporation or interests in a non-corporate entity or
other property (including cash) or any combination of any of the foregoing (each
such transaction being herein called the "Transaction" and the date of
consummation of the Transaction being herein called the "Consummation Date"),
then, as a condition of the consummation of the Transaction, lawful and adequate
provisions shall be made so that each Holder, upon the exercise hereof at any
time on or after the Consummation Date, shall be entitled to receive, and this
Warrant shall thereafter represent the right to receive, in lieu of the Common
Shares issuable upon such exercise prior to the Consummation Date, the highest
amount of Common Shares and/or other securities, rights and property receivable
upon such consolidation, merger, sale or conveyance to which such Holder would
actually have been entitled as a holder of an Common Share upon the consummation
of the Transaction if such Holder had exercised such Warrant immediately prior
thereto. The provisions of this Section 9.5 shall similarly apply to successive
Transactions.
10. Exchange and Replacement of Warrant Certificate. The Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of the Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
11. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of Common Shares upon the exercise
of the Warrants, nor shall it be required to issue scrip or pay cash in lieu of
fractional interests, it being the intent of the parties that all fractional
interests shall be eliminated by rounding any fraction up to the nearest whole
number of Common Shares or Other Securities.
12. Reservation of Securities. The Company shall at all times reserve and
keep available out of its authorized Common Shares, solely for the purpose of
issuance upon the exercise of the Warrants, such number of Common Shares or
Other Securities as shall be issuable upon the exercise thereof. The Company
covenants and agrees that, upon exercise of the Warrants and payment of the
Exercise Price therefor, all Common Shares or Other Securities issuable upon
such exercise shall be duly and validly issued, fully paid, non-assessable and
not subject to the preemptive rights of any holder of Common Shares.
13. Notices to Warrant Holder. Except as otherwise provided in Section 9.4,
nothing contained in this Agreement shall be construed as conferring upon the
Holder by virtue of his holding the Warrant
<PAGE>
the right to vote or to consent or to receive notice as a holder of a Common
Share in respect of any meetings of such holders for the election of directors
or any other matter, or as having any rights whatsoever as such a holder of the
Company.
14. Notices.
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been duly made and sent when delivered,
or mailed by registered or certified mail, return receipt requested:
(a) If to the registered Holder of the Warrants, to the address of
such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 4 hereof
(with copy to: Ehrenreich Eilenberg Krause & Zivian, LLP 11 East 44th
Street, 17th Floor, New York, NY 10017/Attn. Jeffrey D. Abbey, Esq.) or to
such other address as the Company may designate by notice to the Holder.
15. Supplements and Amendments. The Company and Holder may from time to
time supplement or amend this Agreement in order to cure any ambiguity, to
correct or supplement any provision contained herein which may be defective or
inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and Holder
may deem necessary or desirable.
16. Successors. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Holder and their
respective successors and assigns hereunder.
17. Termination. This Agreement shall terminate at the close of business on
the fifth anniversary of the issuance of the Warrants.
18. Governing Law. This Agreement and the Warrant Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York and for all purposes shall be construed in accordance with the laws of
the State of New York without giving effect to the rules of the State of New
York governing the conflicts of laws. Any action or proceeding relating to this
Agreement and the Warrant Certificate may be brought in the courts of New York
sitting in New York County, or in the United States courts located in New York
County, New York, and each of the parties irrevocably consents to the
jurisdiction of such courts in any such action or proceeding.
19. Entire Agreement; Modification. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof and may not be modified or amended except by a writing duly signed by the
party against whom enforcement of the modification or amendment is sought.
20. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
21. Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
<PAGE>
22. Delays or Omission. No delay or omission to exercise any right, power
or remedy accruing to any party to this Agreement (other than delays by the
Holder in the timely exercise of the Warrant), upon any breach or default of
another party under this Agreement, shall impair any such right, power or remedy
of such party nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. All remedies, either under this Agreement or by law or otherwise
afforded to any party, shall be cumulative and not alternative.
23. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and Holder
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and Holder.
24. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement
to be duly executed, as of the day and year first above written.
Very truly yours,
DIGITAL LAVA INC.
By: /s/ Danny Gampe
------------------------------
Authorized Officer
ACCEPTED AND AGREED TO:
INVESTOR:
- --------------------------------
Name:
Address:
Social Security/Tax I.D. No.:__________
NO. OF UNITS OF SUBSCRIPTION:___
<PAGE>
EXHIBIT X
TO
WARRANT AGREEMENT
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT") (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY
SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii)
AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS
AVAILABLE.
EXERCISABLE FROM [Initial Exercise Date]
UNTIL
5:30 P.M., NEW YORK TIME, [5th anniversary of Closing Date]
No. W-LAVA-98-[__] [_________] Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that _____________________ or his/her
registered assigns ("Holder"), is the registered holder of [___] Warrants to
purchase initially at any time commencing on the [Initial Exercise Date] until
5:30 p.m. New York time on [fifth anniversary of Closing Date] ("Expiration
Date"), up to [____________________] fully-paid and non-assessable shares of
common stock, par value $.0001 per share ("Common Shares") of DIGITAL LAVA INC.,
a Delaware corporation (the "Company"), at an initial exercise price, subject to
adjustment in certain events (the "Exercise Price"), equal to [$____] per share,
upon surrender of this Warrant Certificate and payment of the initial exercise
price at an office or agency of the Company, but subject to the conditions set
forth herein and in the Warrant Agreement dated as of the date hereof between
the Company and Holder (the "Warrant Agreement"). Payment of the Exercise Price
shall be made by certified check or official bank check in New York Clearing
House funds payable to the order of the Company, unless exercise is made
pursuant to Section 4.2 of the Warrant Agreement.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
Holder (the word "Holder" meaning the registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new
<PAGE>
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificate shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed.
Dated as of December 7, 1998
DIGITAL LAVA INC.
By: /s/ Danny Gampe
--------------------------
Authorized Officer
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ______________ Common
Shares and herewith tenders in payment for such securities a certified check or
official bank check payable in New York Clearing House Funds to the order of
DIGITAL LAVA INC. in the amount of $___________, all in accordance with the
terms of Section 4 of the Warrant Agreement dated as of [Closing Date] between
DIGITAL LAVA INC. and the undersigned (or its assignor). The undersigned
requests that a certificate for such securities be registered in the name of
________________________________________ whose address is ______________________
and that such Certificate be delivered to _____________ whose address is
______________.
Dated: ______________________
Signature: _____________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
________________________________________
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ____________ hereby sells, assigns
and transfers unto
_______________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ___________ Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: _______________
Signature: _____________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
________________________________________
(Insert Social Security or Other
Identifying Number of Assignee)
<PAGE>
Aggregate
Investor (Name) Amount Invested
- --------------- ---------------
1. Paul C. Bellone $10,000
2. Marshall S. Blackham $50,000
3. Kamlesh Bulchandani $50,000
4. Kamlesh Bulchandani Custodian $25,000
5. Kamlesh Bulchandani Custodian $25,000
6. Kamlesh Bulchandani Custodian $25,000
7. William P. Conner $20,000
8. Charles Read $20,000
9. Adi B. Shroff $25,000
10. Henry W. Stigler $300,000
EXHIBIT 4 (af)
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") dated as of December
7, 1998 is made by and among DIGITAL LAVA INC., a Delaware corporation (the
"Company"), and the persons listed on Schedule I hereto (collectively, the
"Holders", each a "Holder").
RECITALS
In connection with the purchase by the Holders of certain units ("Units")
of the Company's securities pursuant to a Subscription Agreement and a Warrant
Agreement, both between the Company and the Holders dated as of the date hereof,
which agreements among other things provide for the issuance to the Holders of
certain warrants (the "Warrants") to purchase shares of the Company's common
stock ("Common Stock"), the Company has agreed to grant to the Holders certain
registration rights under the Securities Act of 1933, as amended, and the rules
and regulations thereunder (collectively, the "Securities Act") with respect to
the shares of Common Stock issuable upon exercise of the Warrants (the "Warrant
Shares"). This Agreement sets forth the terms and conditions of such
undertaking.
AGREEMENTS
The Company and the Holders covenant and agree as follows:
1. Definitions. For purposes of this Agreement:
(a) The terms "register", "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
statements or similar documents in compliance with the Securities Act and
pursuant to Rule 415 under the Securities Act or any successor rule providing
for offering securities on a continuous basis ("Rule 415"), and the declaration
or ordering of the effectiveness of such registration statement or document by
the Securities and Exchange Commission (the "SEC");
(b) The term "Registrable Securities" means (i) the Warrant Shares and (ii)
any shares of Common Stock issued as (or issuable upon the conversion or
exercise of any convertible security, warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in exchange for
or in replacement of such Warrant Shares, excluding in all cases, however, any
Registrable Securities sold by a Holder in a transaction in which its
registration rights under this Agreement are not assigned.
2. Registration Rights.
2.1 Demand Registration. Subject to the limitations set forth in Section
2.1(b) below, the Company shall, upon the written request of Holders holding a
majority of the sum of (x) the outstanding Registrable Securities and (y) the
then outstanding and unexercised Warrants, use its best efforts to cause the
Registrable Securities specified in such request to be registered under the
Securities Act (a "Demand Registration"). In the event that the Company shall
receive a written request under this Section 2.1, the Company shall give prompt
written notice thereof to any Holder which did not join in such written request.
If requested in writing by any of such other Holders within fifteen days after
the
<PAGE>
Company gives the notice described in the preceding sentence, the Company shall
include among the Registrable Securities that endeavors to register under this
Section 2.1 such Registrable Securities as shall be specified in the request of
such other Holders.
(a) Notice of Demand Registration. Each request delivered pursuant to
Section 2.1 shall: (i) specify the amount of Registrable Securities intended to
be offered and sold by each of the Holders joining in the request; (ii) express
the present intent to offer such Registrable Securities for distribution; (iii)
describe the nature or method of the proposed offer and sale of the Registrable
Securities; and (iv) contain the undertaking of the Holders to provide all such
information and materials and take all such action as may be required in order
to permit the Company to comply with all applicable requirements of the
Securities Act, the SEC and state securities and "blue sky" laws, and to obtain
acceleration of the effective date of the Registration Statement (as defined
below).
(b) Limitations on Demand Registrations. Notwithstanding anything herein to
the contrary, the obligations of the Company to cause any Registrable Securities
to be registered pursuant to Section 2.1 are subject to each of the following
limitations, conditions and qualifications:
(i) The Holders may only request that the Company make any Demand
Registration subsequent to 180 days following the effective date of the
registration statement for the initial public offering of the Company's
securities.
(ii) Any request for Demand Registration made by the Sellers pursuant
to Section 2.1, to be effective, shall request the registration of the
offering and sale or other distribution by the Holders of not less than
one-half of the Registrable Securities.
(iii) In the event the Holders request Demand Registration pursuant to
Section 2.1 and the related offering is to be underwritten, the managing
underwriter shall be a nationally recognized investment banking firm
approved by the Company in the reasonable exercise of its discretion.
(iv) The Company shall be required to effect only two Demand
Registrations pursuant to Section 2.1; provided, however, that a
registration shall not count as a Demand Registration unless 90% of the
Registrable Securities requested to be included in such registration are
sold pursuant to such registration statement.
2.2 Piggyback Registration. Subject to the limitations set forth in Section
2.2(b), at any time that the Company for its account or the account of others
shall propose the registration under the Securities Act of an offering of any of
its securities on a registration form which can be used for registration of the
Registrable Securities, the Company shall give written notice as promptly as
possible of such proposed registration to the Holders, and shall include in the
offering such amount of Registrable Securities as the Holders shall request to
be included by written notice to the Company received within fifteen days after
receipt of the Company's notice, upon the same terms (including the method of
distribution) as the securities being sold by the Company pursuant to any such
offering (a "Piggyback Registration").
(a) Notice of Piggyback Registration. Each request delivered pursuant to
Section 2.2 shall: (i) specify the amount of Registrable Securities intended to
be offered and sold by each of the Holders; and (ii) contain the undertaking of
the Holders to provide all such information and materials and take all such
action as may be required in order to permit the Company to comply with all
<PAGE>
applicable requirements of the Securities Act, the SEC and state securities and
"blue sky" laws and to obtain acceleration of the effective date of the
Registration Statement.
(b) Limitations on Incidental Registrations. Notwithstanding anything
contained herein to the contrary, the obligations of the Company to cause
Registrable Securities to be registered pursuant to Section 2.2 are subject to
each of the following limitations, conditions and qualifications:
(i) The Company shall not be required to give notice or include
Registrable Securities in any registration pursuant to Section 2.2 if the
proposed registration is the Company's registration statement for its
initial public offering currently on file with the SEC or is primarily: (A)
a registration of a stock option, thrift, employee benefit or compensation
plan or of securities issued or issuable pursuant to any such plan; (B) a
registration of securities proposed to be issued in connection with a
dividend reinvestment and stock purchase plan or customer stock purchase
plan; (C) a registration of securities proposed to be issued in exchange
for securities or assets of, or in connection with a merger or
consolidation with, another corporation or other entity; or (D) a
registration of securities which is solely a combination of any of the
above.
(ii) If the Company is advised in writing by the managing underwriter
(or its investment banking firm if the offering is not underwritten) that
the inclusion of Registrable Securities may, in the opinion of such
underwriter or investment banking firm, as the case may be, interfere with
the orderly sale and distribution of the securities proposed to be offered
by the Company or adversely affect the price at which such securities may
be sold, the number of shares of Registrable Securities to be included in
the offering shall be reduced or eliminated to the extent necessary as
shall be reasonably determined by such underwriter or investment banker, as
the case may be, in good faith.
(iii) In the event the Holders request registration pursuant to
Section 2.2 and the related offering is to be underwritten, the Holders
will enter into an underwriting agreement containing representations,
warranties and agreements consistent with those customarily made by an
issuer and a selling shareholder in underwriting agreements with respect to
secondary distributions.
(iv) The Company may, in its sole discretion, without the consent of
the Holders and without liability to any Holder for such action, withdraw
such registration statement and abandon the proposed offering in which the
Holder had requested to participate at any time.
(v) The Holders of Registrable Securities may exercise Piggyback
Registrations pursuant to Section 2.2 so long as such Holders continue to
hold Registrable Securities.
3. Obligations of the Company. When required under the Agreement to effect
the registration of the Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Registration Statements. Prepare and file with the SEC a registration
statement or statements or similar documents (the "Registration Statement") with
respect to all Registrable Securities, other than any Registrable Securities
excluded by Holders pursuant to Sections 2.1 and 2.2, and use its best efforts
to cause the Registration Statement to become effective and maintain the
effectiveness of the Registration Statement until the earlier of (i) the date
all such registered Registrable Securities are sold and any prospectus delivery
requirements under the Securities Act shall have lapsed, and (ii) six months.
<PAGE>
(b) Amendments. Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by the Registration Statement.
(c) Prospectuses. Furnish promptly to each Holders such numbers of copies
of a prospectus, including a preliminary prospectus, and all amendments and
supplements thereto, in conformity with the requirements of the Securities Act,
and such other documents as the Holders may reasonably request in order to
facilitate the disposition of Registrable Securities.
(d) Blue Sky. Use its best efforts to register and qualify the securities
covered by the Registration Statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders, and
to prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements and to take such other actions
necessary or advisable to maintain such registration and qualifications in
effect, and to take all other actions necessary or advisable to enable the
disposition of such securities in such jurisdictions, provided that the Company
shall not be required in connection therewith or as a condition thereto to
qualify to do business or to file a general consent to service of process in any
such states or jurisdictions or to provide any undertaking or make any change in
its charter or bylaws which the Board of Directors determines to be contrary to
the best interest of the Company and its stockholders.
(e) Underwriting Arrangements. Enter into and perform its obligations under
an underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
managing underwriter of such offering. The Holders shall also enter into and
perform their customary obligations under any such agreement including, without
limitation, customary indemnification and contribution obligations.
(f) Notification of Changes. Notify the Holders, at any time when a
prospectus relating to Registrable Securities covered by the Registration
Statement is required to be delivered under the Securities Act, of the happening
of any event as a result of which the prospectus included in the Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances then
existing. The Company shall promptly amend or supplement the Registration
Statement to correct any such untrue statement or omission.
(g) Notification of Stop Orders. Notify the Holders of the issuance by the
SEC of any stop order suspending the effectiveness of the Registration Statement
or the initiation of any proceedings for that purpose. The Company will make
every reasonable effort to prevent the issuance of any stop order and, if any
stop order is issued, to obtain the lifting thereof at the earliest possible
time.
(h) Review by Counsel. Permit a single firm of counsel designated as
selling stockholders' counsel by the holders of a majority in interest of the
Registrable Securities to review the Registration Statement and all amendments
and supplements thereto a reasonable period of time prior to their filing, and
shall not file any document in a form to which counsel reasonably objects.
(i) Opinions. At the request of the Holders, use its best efforts to
furnish on the date that Registrable Securities are delivered to the
underwriters for sale in connection with a registration pursuant to this
Agreement (i) an opinion, dated such date, of the counsel representing the
Company for the purposes of such registration, in form and substance as is
customarily given to
<PAGE>
underwriters in an underwritten public offering, addressed to the underwriters
and (ii) a letter dated such date, from the independent certified public
accountants of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering, addressed to the underwriters.
(j) Due Diligence. Make available for inspection by the Holders, any
underwriters participating in the offering pursuant to the registration and the
counsel, accountants or other agents retained by the Holders or any such
underwriter, all pertinent financial and other records, corporate documents and
properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by the Holders or any
such underwriters in connection with the registration.
(k) Listing. If the class of the Company's securities is then listed on a
national securities exchange, use its best efforts to cause the Registrable
Securities to be listed on such exchange. If the Company's securities are not
then listed on a national securities exchange, use its best efforts to
facilitate the reporting of the Registrable Securities on NASDAQ.
(l) Further Actions. Take all other reasonable actions necessary to
expedite and facilitate disposition by the Holders of the Registrable Securities
pursuant to the Registration Statement.
4. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement with
respect to each Holder that such Holder shall furnish to the Company such
information regarding itself, the Registrable Securities held by it, and the
intended method of disposition of such securities as shall be reasonably
required to effect the registration of the Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request.
5. Expenses of Registration. All expenses other than the underwriting
discounts and commissions incurred in connection with registration, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing, filing and qualification fees, printing and accounting
fees, the fees and disbursements of counsel for the Company (but excluding the
fees and disbursements of any counsel for the Holders) shall be borne by the
Company. If the Company shall fail to comply with the provisions of Sections 2
and 3 hereof, the Company shall, in addition to any equitable or other relief
available to such Holders, extend the Exercise Period by such number of days as
shall equal the delay caused by the Company's failure, and the Company shall be
liable for any damages incurred by such Holders.
6. Indemnification. In the event any Registrable Securities are included in
a Registration Statement under this Agreement:
(a) By Company. To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, the directors, if any, of such Holder, the
officers, if any, of such Holder who sign the Registration Statement, each
person, if any, who controls such Holder, any underwriter (as defined in the
Securities Act) for the Holders and each person, if any, who controls any such
underwriter within the meaning of the Securities Act or the Securities Act of
1934, as amended (the "1934 Act"), against any losses, claims, damages, expenses
or liabilities (joint or several) to which any of them may become subject under
the Securities Act, the 1934 Act or otherwise, insofar as such losses, claims,
damages, expenses or liabilities (or actions or proceedings, whether commenced
or threatened, in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations
<PAGE>
(collectively, a "Violation"): (i) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein, in light of the circumstance in which they are
made, not misleading or (iii) any violation or alleged violation by the Company
of the Securities Act, the 1934 Act, any state securities law or any rule or
regulation promulgated under the Securities Act, the 1934 Act, any state
securities law; and the Company will reimburse the Holders and each such
underwriter or controlling person, promptly as such expenses are incurred, for
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability action or
proceeding; provided, however, that the indemnity agreement contained in this
Section 6(a) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
consent of the Company, which consent shall not be unreasonably withheld, nor
shall the Company be liable in any such case for any such loss, claim, damage,
liability or action to the extent that it arises out of or is based upon a
Violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
the Holders or any such underwriter or controlling person, as the case may be.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Holders or any such underwriter or
controlling person and shall survive the transfer of the Registrable Securities
by Holders.
(b) By Holders. To the extent permitted by law, each Holder, severally and
not jointly, will indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed the Registration Statement, each
person, if any, who controls the Company within the meaning of the Registration
Statement, each person, if any, who controls the Company within the meaning of
the Securities Act or the 1934 Act, any underwriter and any other stockholder
selling securities pursuant to the Registration Statement or any of its
directors or officers or any person who controls such holder or underwriter,
against any losses, claims, damages or liabilities (joint or several) to which
any of them may become subject, under the Securities Act, the 1934 Act or other
federal state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration, and such Holder
will reimburse any legal or other expenses reasonably incurred by any of them in
connection with investigating or defending any such loss, claim, damage
liability or action; provided, however, that the indemnity agreement contained
in this subsection 6(b) shall not apply to amounts paid in settlement of such
loss, claim, damage, liability or action if such settlement is effected without
the consent of such Holder, which consent shall not be unreasonably withheld;
and provided further, that the Holder shall be liable under this paragraph for
only that amount of losses, claims, damages and liabilities as does not exceed
the proceeds to such Holder as a result of the sale of Registrable Securities
pursuant to such registration.
(c) Procedure for Indemnification. Promptly after receipt by an indemnified
party under this Section 6 of notice of the commencement of any action
(including any governmental action), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party under this Section
6, deliver to the indemnifying party a written notice of commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the parties; provided, however, that an indemnified
party shall have the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if, in the reasonable opinion of counsel
for the indemnifying party, representation of such
<PAGE>
indemnified party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential differing interests between such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action shall relieve
such indemnifying party of any liability to the indemnified party under this
Section 6 only to the extent prejudicial to its ability to defend such action,
but the omission so to deliver written notice to the indemnifying party will not
relieve it of any liability that it may have to any indemnified party other than
under this Section 6. The indemnification required by this Section 6 shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, promptly as such expense, loss, damage or liability is
incurred.
(d) Contribution. To the extent any indemnification by an indemnifying
party is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it otherwise would be
liable under this Section 6 to the extent permitted by law, provided that (i) no
contribution shall be made under the circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in this
Section 6, (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any seller of Registrable Securities who
was not guilty of such fraudulent misrepresentation and (iii) contribution by
any seller of Registrable Securities shall be limited in amount to the net
amount of proceeds received by such seller from the sale of such Registrable
Securities.
7. Reports Under Securities Exchange Act of 1934. With a view to making
available to the Holders the benefits of SEC Rule 144 promulgated under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit the Holders to sell securities of the Company to the public without
registration, the Company agrees, following the initial public offer of the
Company's securities, to:
(i) make and keep public information available, as those terms are
understood and defined in SEC Rule 144;
(ii) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the 1934
Act; and
(iii) furnish to each Holder, so long as such Holder owns any
Registrable Securities, forthwith upon request (A) a written statement by
the Company that it has complied with the reporting requirements of SEC
Rule 144, the Securities Act and the 1934 Act, (B) a copy of the most
recent annual or quarterly report of the Company and such other reports and
documents so filed by the Company and (C) such other information as may be
reasonably requested in availing the Holders of any rule or regulation of
the SEC which permits the selling of any securities without registration.
8. Assignment of Registration Rights. The rights to have the Company
register Registrable Securities pursuant to this Agreement may be assigned by
the Holders to transferees or assignees of such securities provided the Company
is, within a reasonable time after such transfer, furnished with written notice
of the name and address of such transferee or assignee and the securities with
respect to which such registration rights are being assigned; provided, further,
that such assignment shall be effective only if immediately following such
transfer the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act. The term "Holders" as used in
this Agreement shall include permitted assignees.
7
<PAGE>
9. Timing of Exercise. Nothing contained in this Agreement shall be
construed as requiring the Holders to exercise their Warrants prior to the
initial filing of any registration statement or the effectiveness thereof.
Holders may seek registration until the last practicable moment.
10. Miscellaneous.
(a) Notices. Notices required or permitted to be given hereunder shall be
in writing and shall be deemed to be sufficiently given when personally
delivered or sent by registered mail, return receipt requested, addressed (i) if
to the Company, at 10850 Wilshire Boulevard, Suite 1260, Los Angeles, CA 90024,
(with a copy to: Ehrenreich Eilenberg Krause & Zivian LLP, 11 East 44th Street,
17th Floor, New York, NY 10017; Attention: Adam D. Eilenberg, Esq.) and (ii) if
to a Holder at the address set forth in Schedule I, or at such other address as
each such party furnishes by notice given in accordance with this Section 9(a).
(b) Waiver. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
will not operate as a waiver thereof. No waiver will be effective unless and
until it is in writing and signed by the party giving the waiver.
(c) No-Action Letter or Opinion of Counsel in Lieu of Registration.
Notwithstanding anything else in this Agreement, if the Company shall have
obtained from the SEC a Ano-action@ letter in which the SEC has indicated that
it will take no action if, without registration under the Securities Act, the
Holders dispose of Registrable Securities covered by any request for
registration made under this Agreement in the specific manner Holders propose to
dispose of the Registrable Securities included in such request (such as
including, without limitation, inclusion of such Registrable Securities in an
underwriting initiated by the Company), or if in the opinion of counsel for the
Company, no registration under the Securities Act is required in connection with
such disposition, due to the applicability of Rule 144(k) as promulgated under
the Securities Act (or any successor provision), the Registrable Securities
included in such request shall not be eligible for registration under this
Agreement; provided, however, that any Registrable Securities not so disposed of
shall be eligible for registration in accordance with the terms of this
Agreement with respect to other proposed dispositions to which this Section
10(c) does not apply. In addition, the obligation of the Company to file or
maintain the effectiveness of any Registration Statement shall be suspended with
respect to any Registrable Securities held by the Holders following such time.
(d) Governing Law. This Agreement shall be enforced, governed and construed
in all respects in accordance with the laws of the State of New York, as such
laws are applied by New York courts to agreements entered into and to be
performed in New York by and between residents of New York. In the event that
any provision of this Agreement is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed inoperative to the
extent that it may conflict therewith and shall be deemed modified to conform
with such statute of rule of law. Any provision hereof which may prove invalid
or unenforceable under any law shall not affect the validity or enforceability
of any other provision hereof.
(e) Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and may be
amended only by a written agreement executed by the Company and the holders of a
majority in interest of the sum of (x) the Registrable Securities and (y) the
then outstanding and unexercised Warrants.
<PAGE>
DIGITAL LAVA INC.
By: /s/ Danny Gampe
------------------------------
Authorized Officer
HOLDER:
-----------------------------------
Name:
Title:
Address:
Social Security/Tax I.D. No.: _________________
NO. OF UNITS OF SUBSCRIPTION: _________________
<PAGE>
Aggregate
Investor (Name) Amount Invested
- --------------- ---------------
1. Paul C. Bellone $10,000
2. Marshall S. Blackham $50,000
3. Kamlesh Bulchandani $50,000
4. Kamlesh Bulchandani Custodian $25,000
5. Kamlesh Bulchandani Custodian $25,000
6. Kamlesh Bulchandani Custodian $25,000
7. William P. Conner $20,000
8. Charles Read $20,000
9. Adi B. Shroff $25,000
10. Henry W. Stigler $300,000
EXHIBIT 10 (f)
<PAGE>
As of May 1, 1998
Digital Lava Inc.
10850 Wilshire Blvd.
Suite 1260
Los Angeles, California 90024
Attn: Mr. Joshua Sharfman, President
Dear Mr. Sharfman:
This is to confirm our understanding that the Whitestone Group, LLC
("Whitestone") has been engaged, for a period of one year commencing as of May
1, 1998, as financial advisor and consultant to Digital Lava Inc., its
subsidiaries and affiliates (collectively the "Company") with respect to the
performance by Whitestone of certain consulting services related to corporate
finance, financial services related to corporate finance, financial services and
strategic advisory matters.
For purposed of this agreement, the term "Transaction" means: (i) any
merger, consolidation, reorganization or other business combination pursuant to
which the business of the other entities are combined with that of the company,
(ii) the acquisition , directly or indirectly, by the company of all or a
substantial portion of the assets or common equity of other entities by way of
negotiated purchase or otherwise, (iii) the acquisition , directly or
indirectly, by other entities of all or a substantial potion of the assets or
common equity of the company by way of negotiated purchase or otherwise; (iv) a
strategic alliance, joint venture, material vendor relationship or others
similar agreement or relationship; and (v) a public or private placement,
offering ,syndication or other sale of equity or debt securities of the company
or other on-balance sheet or off-balance sheet corporate finance transaction of
the company.
A. Advisory Services and Fees.
The company hereby retains Whitestone to perform consulting services
related to corporate finance, financial services matters and strategic advisory
matters, IN this regard, Whitestone shall devote such business, time and
attention to matters on which the company shall request its services, as shall
be determined by Whitestone in its discretion. All services shall be rendered by
Whitestone in the sate of New York unless otherwise determined by Whitestone,
The compensation for such retainer shall be as follows:
(A) $4,000 each September 1,1998, September 15,1998, and November 1,1998, with
the outstanding balance payable upon the consummation of the earlier to occur of
the Company's initial public offering (the "IPO"), currently contemplated to
occur on or before December 31,
<PAGE>
1998 or the completion of a Transaction with a person or entity introduced by
Whitestone; provided , however, that if the IPO or a Transaction is not
consummated by such date, the Company shall pay at least $4,000 to Whitestone
every 60 days, and the unpaid amount shall be accrued and deferred until the end
of the one year consulting term hereunder.
(B) The simultaneous delivery to Whitestone, upon the execution of this letter
agreement, of a warrant (the "warrant") to purchase 100,000 shares of common
stock of the Company, the receipt of which is hereby acknowledge by Whitestone.
(C) In the event the Company consummates a Transaction during the term of this
letter agreement with any person or entity introduced by Whitestone, the company
shall pay to Whitestone 5% of the Value (as defined below) receive by the
Company and/or its stockholders in such Transaction, (ii) the fair market value
of all securities, assets and other property received, directly and indirectly,
by the company, its affiliates and/or stockholders in connection with a
Transaction (collectively, "other property"). The Compensation die to Whitestone
in accordance with this paragraph shall be payable upon receipt by the Company,
its affiliates and /or stockholders , as the case may be , and shall remain
payable notwithstanding the termination or expiration of this letter agreement.
Notwithstanding the foregoing, if the Company is obligated to pay, and does pay,
any similar type of fee or commission to the person or entity to whom Whitestone
introduces the Company, Whitestone's compensation pursuant to this paragraph (c)
shall be 2.5% of the value received by the Company and/or its stockholders in
such Transaction.
During the term of this agreement, Whitestone shall provide the Company
with such regular and customary financial and strategic advisory services as is
reasonable requested by the Company, provided that Whitestone shall not be
required to undertake duties not reasonable within the scope of the advisory
services in which it is generally engaged. In performance of its duties,
Whitestone shall provide the Company with the benefits of its best judgment
efforts. It is understood and acknowledged by the parties that the value of
Whitestone's advice is not measurable in a quantitative manner, and Whitestone,
shall be obligated to render advice upon the request of the company, in good
faith as shall be determined by Whitestone, but shall not be obligated to spend
any specific time in doing so. Whitestone's duties include, but will not
necessarily be limited to:
(a) advice regarding formation of corporate goals an their implementation;
(b) advice regarding the financial structure of the company and divisions
or subsidiaries or any programs and projects;
(c) advice regarding the securing, when necessary and if possible, of
financing (other than with respect to a Financing Transaction);
(d) advice regarding corporate organization, personnel and selection
needed specialty skills; and
(e) review of possible merger, acquisition and similar proposals for the
<PAGE>
Company (other than with respect to an Acquisition Transaction).
The Company acknowledges that Whitestone or its affiliates are in the
business of providing advisory services (of all types contemplated by this
agreement) to others. Nothing here in continued shall be construed to limit or
restrict Whitestone in conducting such business with respect to others, or in
rendering such advice to others.
B. General
In addition to any fees that may be payable to Whitestone under this
agreement, you agree to reimburse Whitestone, upon requests made from time to
time, for all of its reasonable and necessary documented out-of-pocket expenses
incurred in connection with its activities under this agreement, including the
fees and disbursements of its legal counsel; provided, however, Whitestone shall
be responsible for all fees and expenses of the Board Designee (as defined
below) with respect to travel to California to attend meetings of the Board of
Directors of the Company.
Commencing September 1, 1998 and during the remainder of the term of this
letter agreement, Whitestone shall be entitled to designate one person to serve
as a member of the board of directors of the Company (the "Board Designee") if
by that date the Company has not, in Whitestone's reasonable opinion, adopted a
financial plan and taken such action which will insure the Company's long-term
financial viability, including, without limitation, an initial public offering,
merger, strategic alliance or material financing. The Company hereby agrees to
cause the Board Designee to be nominated and elected to the Board of Directors
of the Company and to allow the Board Designee to continue to serve as a member
of the Board of Directors of the Company throughout the term of this letter
agreement.
If, in connection with any services or matters that are the subject of this
agreement, Whitestone becomes involved in any capacity in any action or legal
proceeding, you agree to reimburse Whitestone for the reasonable legal fees and
disbursements of counsel and other expenses (including the cost of investigation
and preparation) incurred by Whitestone. You also agree to indemnify and hold
Whitestone harmless against any losses, claims, damages or liabilities, joint or
several, to which Whitestone may become subject in connection with the services
which are the subject of this agreement, provided however, that you shall not be
liable under the foregoing indemnity agreement in respect of any loss, claim,
damage or liability to the extent that a court having competent jurisdiction
shall have determined by a final judgment that such loss, claim damage or
liability resulted primarily from the willful misfeasance or gross negligence of
Whitestone. The provisions of the paragraph shall survive the expiration of the
period of this agreement set forth in the first paragraph hereof. Your
agreements in this paragraph shall, upon the same terms and conditions, extend
to and inure to the benefit of each person, if any, who may be deemed to control
Whitestone.
<PAGE>
This letter constitutes the entire understanding of the parties with
respect to the subject matter hereof and may not be altered or amended except in
writing and signed by both parties. This agreement shall be governed by and
construed under the laws of the State of New York without regard to principles
of conflicts of laws thereof. This Agreement may not be assigned by either party
hereto without the prior written consent of the other party.
If the foregoing correctly sets forth the terms of our agreement, kindly so
indicate by signing and returning the enclosed copy of this letter.
Very truly yours,
The Whitestone Group, LLC
By: /s/ Jeffrey Rubin
----------------------------
Name: Jeffrey Rubin
Title: Principal
Accepted and Agreed
As of the 1st day of September 1998:
Digital Lava Inc.
By: /s/ Joshua Sharfman
-----------------------------
Name: Joshua Sharfman
Title: President
EXHIBIT 10 (g)
<PAGE>
Dated as of October 7, 1998
Mr. Shahrokh "Shawn" Sedaghat
1715 Green Acres Drive
Beverly Hills, CA 90210
Dear Mr. Sedaghat:
We are delighted you have agreed to serve as a consultant to Digital LAVA, Inc.
(the "Company"). In this letter, I would like to present the terms of your
engagement with the Company.
1. Duties and Term. In connection with your engagement, you will consult with
the Company concerning general corporate matters as the President or Chief
Executive Officer may request from time to time. Your engagement will commence
on October 1, 1998, and will end on September 30, 1999. During your engagement
you agree to such time as may be necessary to your consulting duties, but in no
event more than 10 hours in any month, provided that such consulting (i) does
not interfere with or otherwise limit Mr. Sedaghat's ability to perform his
full-time services for his current employer, and (ii) does not require Mr.
Sedaghat to travel or incur any out-of-pocket expenses.
2. Compensation. In consideration of your services, you will receive payments at
the rate of $8,333.34 during the term of your engagement, payable on the last
day of each month commencing with October, 1998. However, the compensation due
to you will be deferred and shall accrue until the earliest of (i) January 1,
1999, (ii) the termination or abandonment of the Company's efforts to consummate
an initial public offering of the Company's securities (the "IPO"), (iii)
successful consummation of the IPO, or (iv) upon the Company's breach of any of
the covenants set forth in Section 5 of the letter agreement between the Company
and Mr. Sedaghat dated as of the date of this letter. Upon the occurrence of
such event the deferred and accrued salary shall become immediately due and
payable.
3. Other Benefits. You will not be entitled to any other compensation or
benefits for your services, regardless of the compensation or benefits offered
by the Company to its employees or other consultants. The Company will reimburse
you for actual out-of-pocket expenses incurred by you in the performance of your
services provided that such expenditures have been approved in advance by an
officer of the Company in writing.
4. Confidentiality. As a consultant to the Company, you may have access to
information about the Company and third parties which is confidential in nature.
You agree that you will not disclose any such information to any other person or
entity, nor shall you use such information for any purpose other than the
performance of your duties with the Company. You also agree that you will not
disclose to the Company any confidential or proprietary information belonging to
any third party, and will not use such information for the benefit of the
Company.
<PAGE>
5. Miscellaneous. The agreements set forth in this letter are personal, and your
rights set forth above may not be transferred or assigned by you. This letter
agreement represents the entire agreement between you and the Company concerning
your consulting and supersedes all prior negotiations and agreements, whether
written or oral, relating to your engagement.
This letter agreement may not be amended or waived unless pursuant to a
writing signed by you and an officer of the Company. No waiver of any term of
this letter agreement or of any breach of any condition or provision to be
performed under this letter agreement shall be deemed a waiver of a similar or
dissimilar condition or provision at the same time, any prior time or any
subsequent time.
You will bear full and complete liability for the payment of all applicable
income, payroll, withholding and other taxes and deductions required to be paid
on account of amounts received by you pursuant to this Agreement by any law,
rule or regulation of any federal, state or local authority.
The laws of the State of California shall govern the interpretation,
validity and performance of the terms of this letter agreement, without
reference to conflicts of law rules.
You agree that you are an independent contractor to, and not an employee or
agent of, the Company, and that you do not have any authority or right to enter
into any agreements or binding obligations on behalf of the Company.
You may terminate this Agreement at any time by notice to the Company
effective as of the date of such notice, provided that your obligation in
Section 4 above shall continue in full force and effect.
******
To acknowledge your agreement to the terms of your engagement set forth
above, please sign a copy of this letter where indicated and return it to me at
your earliest convenience.
Digital LAVA, Inc.
By: /s/ Joshua D.J. Sharfman
---------------------------
An Authorized Officer
Accepted and Agreed the
date first written above
/s/ Shahrokht Sedaghat
- --------------------------
Consultant
January 8, 1998
Mr. Joshua D. J. Sharfman
CEO, Digital Lava Inc.
10850 Wilshire Boulevard, Suite 1260
Los Angeles, CA 90024
Dear Josh:
This letter shall serve as a formal Agreement between RealNetworks, Inc. ("RN")
and Digital Lava ("Customer"). Customer desires that RN perform consulting
services in connection with the Digital Lava RMA Client Renderer ("DL RMA
Renderer") as set forth below.
1. Services. RN shall provide the Services set forth on Attachment A hereto and
shall deliver to Customer all work product and results of such Services (the
"Deliverables") according to the Delivery Schedule set forth on Attachment A.
Customer will provide RN with unimpeded access to required hardware, software
and communications systems required to complete the Services during the
timeframe set forth in this Agreement. With respect to the performance of
Services, Customer will not direct or supervise RN's employees or staff with
respect to said individuals tasks or responsibilities without RN's express
written consent. RN intends to perform the substantial majority of the Services
at RN's premises.
2. Acceptance. Customer shall have [10] business days after delivery and
installation of the Deliverables (or re-installation resulting from correction
of defects by repair or replacement of the Deliverables) to evaluate and test
the Deliverables to determine that they conform with Attachment A hereto. If
Customer, in its best business judgment, determines that the Deliverables fail
to conform to the requirements of Attachment A, it shall immediately notify RN
in writing, specifying in detail the reasons that Customer believes the
Deliverables fail to conform. RN shall have [15] business days in which to
correct and resubmit the Deliverables to Customer. Customer shall then have [3]
business days in which to re-evaluate and test the Deliverables for conformance
with Attachment A, and shall notify RN as set forth above of any nonconformance.
RN shall have [5] business days in which to correct and resubmit the
Deliverables to Customer. Customer shall then have [2] business days to re-test
the Deliverables, and to provide RN with notice rejection of the Deliverables
for nonconformance. Silence shall be deemed to be acceptance. If RN fails to
correct the Deliverables to conform to Attachment A within such time period,
Customer may terminate this Agreement. Upon acceptance of such Deliverables, RN
shall provide ongoing maintenance and support pursuant to Section 3 of
Attachment A and Section 3 (b) of this Agreement.
3. Fees and Payment.
a. Progress Payments. In consideration for the rights and obligations set
forth herein, Customer will pay RN according to the Payment Schedule set forth
on Attachment A. By executing this Agreement, Customer confirms the budget for
the work, and the charges and purchases set forth
<PAGE>
in Appendix A hereto. If Customer wishes to enlarge the scope of the Services or
implement additional features or subtasks, the parties shall agree upon the
costs therefor in advance in writing.
b. Upgrades and Support. If Customer desires to receive continuing support
and upgrades as set forth on Attachment A, it shall pay RN an amount equal to
*****1 of Payments due for Services. *****1 Subsequent year support and upgrade
fees shall be payable in cash only on the anniversary date of the commencement
of the first year of support.
c. Expenses. Customer will reimburse RN for incidental expenses and
disbursements incurred by RN related to supplies, media (disks and CD-ROM
costs), travel and lodging, shipping, telephone charges, and any other
incidental expenses incurred in the performance of the Services. Customer will
reimburse RN for incidental expenses. RN shall bear sole responsibility for
expenses incurred to acquire the necessary tools to perform the Services. If RN
needs to procure any third party computer software, hardware, other office
supplies or any other subcontracted services or products to implement, perform,
or install items set forth in Attachment A, which purchase will exceed $1000, RN
will notify Customer in advance, and obtain approval for the amount of the
purchase plus any applicable sales tax.
d. Billing. RN will invoice Customer for expenses and any third party
purchases on a monthly basis. The invoice will include a report itemizing the
expenses and third party purchases. Customer shall pay all invoices within 30
days of receipt, and shall not make any deductions thereto.
e. Taxes. As RN is not an employee of Customer, RN understands that
Customer will not take any action or provide RN with any benefits or commitments
inconsistent with any of such undertakings by RN. In particular, Customer will
not: (i) withhold FICA (Social Security) from RN's payments; (ii) make state or
federal unemployment insurance contributions on behalf of RN; (iii) withhold
state and federal income tax from payments to RN; (iv) make disability insurance
contributions on behalf of RN; or (v) obtain workers' compensation insurance on
behalf of RN.
4. Termination.
a. By RN. Failure of Customer to make payments to RN in accordance with
this Agreement shall be considered substantial nonperformance and cause for
termination. If Customer fails to make payments when due, RN may, upon seven
days' written notice to Customer suspend performance under this agreement.
Unless payment in full is received by RN within seven days of the date of the
notice, the suspension shall take effect without further notice. In the event of
a suspension of services, RN shall have no liability to Customer for delay or
damage caused Customer because of such suspension of services.
b. By Customer. Customer shall have the right at any time to terminate this
Agreement on twenty one (21) days' written notice. In the event of such
termination, and provided termination is not as a result of RN's unremedied
breach of this Agreement, Customer shall pay RN then accrued payments due under
the Delivery Schedule, plus the pro-rated portion of the next payment, if any,
due with respect to items being worked on up to the time of termination, plus
reimbursable expenses, plus twenty percent (20%) of the total charges due
through the date of the termination. Should Customer wish to delete specific
subtasks, Customer will notify RN immediately in writing. As long as said
- ----------
(1) Confidential information is omitted and identified by a * and filed
separately with the SEC pursuant to a request for Confidential Treatment.
<PAGE>
deletions represent less than twenty percent of the labor cost for the project,
Customer shall not be liable for the twenty percent termination penalty.
c. Termination for Breach. Either party may terminate this Agreement upon
seven (7) days' written notice to the other party in the event the other party
materially breaches this Agreement and fails to cure such breach within fifteen
(15) days' written notice from the non-breaching party.
5. RMA Agreement. RN and Customer are concurrently negotiating RN's RealMedia
Architecture ("RMA") Partner Program Agreement (the "RMA Agreement"), which RN
has offered to Customer on its standard terms and conditions, and pursuant to
which RN will grant Customer a license to distribute the Deliverables within its
RMA-Enabled Applications. The Services and Deliverables to be provided by RN
under this Agreement have been requested by Customer to enable Customer to
finalize development of its RMA-Enabled Applications. Customer acknowledges that
the Deliverables provided hereunder may only be used by Customer subject to the
terms of the RMA Agreement. If RN and Customer fail, after good faith
negotiations, to finalize the RMA Agreement, all of Customer's rights in and to
the Deliverables shall immediately terminate.
6. Ownership. All right, title and interest in and to the object code only of
the Deliverables shall be owned by RN; *****(1) No license or other rights in
the Deliverables is granted hereby.
7. Warranties of RN. RN represents, warrants and covenants that: (i) it has the
full power to enter into this Agreement and perform the Services provided for
herein, and that such ability is not limited or restricted by any agreements or
understandings between RN and other persons or companies; *****1 (iii) RN will
not enter into any contracts or otherwise obligate Customer in any way without
Customer's express approval; and (iv) RN will use its best efforts to complete
the Services in a timely, competent and professional manner.
8. Indemnification. Customer hereby agrees to indemnify, hold harmless and
defend RN and its employees, contractors and agents from all claims, damages,
costs and expenses, including reasonable attorneys' fees and litigation
expenses, arising out of or in connection with any Customer product by the
Customer, Customer's content, Customer's website or Customer's materials (not
including the Customer's client parties), including, without limitation: (i)
infringement or violation, or alleged infringement or violation, of any
copyright, patent, trademark, trade secret, right of publicity, right of
privacy, or other proprietary rights of any third party; and (ii) unfair trade
practice, defamation or misrepresentation. *****1
9. Limitation of Liability. NEITHER PARTY SHALL, UNDER ANY CIRCUMSTANCES, BE
LIABLE FOR LOSS OF PROFITS OR CONSEQUENTIAL, INCIDENTAL, SPECIAL OR EXEMPLARY
DAMAGES, ARISING FROM OR RELATED TO THIS AGREEMENT, WHETHER SUCH CLAIM ARISES IN
TORT OR IN CONTRACT, AND EVEN IF THE PARTIES HAVE BEEN APPRISED OF THE
LIKELIHOOD OF SUCH DAMAGES OCCURRING. EXCEPT IN RESPECT OF LIABILITY WHICH IS BY
LAW INCAPABLE OF EXCLUSION, IN NO EVENT SHALL EITHER PARTY'S LIABILITY FOR ANY
REASON EXCEED THE TOTAL SUMS PAID UNDER THIS AGREEMENT.
10. Confidential Information. From the date of execution hereof for a period of
*****1 from termination of this Agreement, neither party shall use, disclose, or
permit any person to obtain any confidential information of the other party,
including any materials developed or generated
- ----------
(1) Confidential information is omitted and identified by a * and filed
separately with the SEC pursuant to a request for Confidential Treatment.
<PAGE>
hereunder (whether or not such confidential information is in written or
tangible form), except as specifically authorized by such party. As used herein,
confidential information shall mean a whole or any portion or phase of any
marketing plans, business plans, sales information, customer lists, scientific
or technical information, design, process, procedure, formula, or improvement
relating to the development, design, construction, and operation of a program
that is valuable and not generally known to a party's competitors and any other
information of a party of which the other party becomes aware of as a result of
this Agreement and which is indicated to be confidential or, if not so
indicated, which could reasonably be interpreted to be confidential. The parties
agree that, in the event of a breach or threatened breach of the terms of this
confidentiality provision, the non-breaching party shall be entitled to an
injunction prohibiting any such breach. Any such relief shall be in addition to
and not in lieu of any appropriate relief in the way of money damages. The
parties acknowledge that Confidential Information is valuable and unique and
that disclosure in breach of this confidentiality provision will result in
irreparable injury to its owner.
11. No Assignment. Neither party shall assign, transfer or otherwise dispose of
this Agreement or any rights or duties hereunder without the prior written
consent of the other *****(1)
12. Arbitration. Any controversy, dispute or question arising out of, in
connection with or in relation to this Agreement or its interpretation,
performance or nonperformance, or any breach thereof, shall be determined by
arbitration in the County of King, State of Washington, in accordance with the
rules then obtaining of the American Arbitration Association. The cost and
expenses of such arbitration including the compensation of the arbitrator(s),
the prevailing party's attorney's fees, and the stenographer employed by them,
shall be paid by the party against whom the arbitrator renders a decision. The
decision of the arbitrator shall be final and binding upon the parties hereto
and may be entered as a final decree or judgment in any court of competent
jurisdiction.
13. Miscellaneous. This Agreement and Attachment A attached hereto and
incorporated herein constitute the entire agreement between the parties, and
supersedes any and all agreements, whether written or oral, and may only be
amended or modified by a written instrument signed by both parties.
- ----------
(1) Confidential information is omitted and identified by a * and filed
separately with the SEC pursuant to a request for Confidential Treatment.
<PAGE>
If the terms of this Letter Agreement are acceptable to you, please sign and
date where indicated below and return to RN.
Sincerely,
RealNetworks, Inc.
By: /s/ Ian Freed
-------------------------------------
Ian Freed
General Manager, Consulting Group
Accepted and Agreed to
this 16th day of January, 1998.
DIGITAL LAVA INC.
By: /s/ Joshua D.J. Sharfman
-------------------------------------
Joshua D. J. Sharfman
CEO
<PAGE>
Attachment A: RMA Client
Development
Prepared for Digital Lava
January 21, 1998
This document contains trade secrets and proprietary information belonging to
RealNetworks, Inc. No use or disclosure of the information contained herein is
permitted without the prior written consent of RealNetworks, Inc. *****1
- ----------
(1) Confidential information is omitted and identified by a * and filed
separately with the SEC pursuant to a request for Confidential Treatment.
RealMedia Architecture Partner Program Agreement with Digital Lava, Inc.
for Corporate Intranet Products and Internet Products
This Agreement is entered into as of April 1, 1998 (the "Effective Date") by and
between Real Networks, Inc., a Washington corporation with a principal place of
business at 1111 Third Avenue, Suite 2900, Seattle, Washington 98101 ("RN") and
Digital Lava, Inc., a Delaware corporation with an address at 10850 Wilshire
Boulevard, Suite 1260, Los Angeles, CA 90024 ("Partner").
WHEREAS, RN has developed and owns all right, title and interest in the
RealMedia Architecture ("RMA", as further defined below), an open platform for
development of streaming media applications and tools, which allows software
developers to build new applications and extend current applications to
inter-operate with a wide variety of datatypes;
WHEREAS, RN has established a licensing program (the "Partner Program") which
would allow a partner participating in the Partner Program to create, market and
sublicense for distribution in corporate intranets and the internet,
applications based on RMA, and to receive other benefits of participating in the
Partner Program; and
WHEREAS, Partner desires to participate in the Partner Program and to receive
the attendant rights and benefits;
NOW, THEREFORE, in consideration of the mutual promises and covenants set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. DEFINITIONS
1.1 License Key" means the authorization code that is generated by the License
Key Tool and that enables RMA Server Software to stream RealMedia datatypes.
License Keys that generate User-Streams and enable features of a Partner Product
are licensed to a Partner's end-user customers
1.2 "License Key Tool" means the version of the License Key Tool that is
provided to Partner by RN which is specific and unique to the Partner Product.
The License Key Tool is used to generate unique License Keys for a Partner
Product.
1.3 "Licensed Software" means RMA Players, the RealMedia SDK, including
associated RealMedia Libraries, RMA Server Software, in Object Code and/or
Source Code form, as applicable, License Key Tools and License Keys, and related
User Documentation and specifications.
1.4 "New Release" means a new major release of the RMA Servers or the Partner
Products in which major new
<PAGE>
functionality has been added in addition to any complement of bug fixes
supplied, and which is designated as a change in the digit to the left of the
decimal point in the product version number [(x).x.x]. "Update" means a minor
release, enhancement, revision, modification or upgrade of the RMA Servers or
Partner Products, designated as a change in the tenths digit in the product
version number [x.(x).x], or in the digit to the right of the tenths digit in
the product version number [x.x.(x)]. By way of clarification, if either party
markets a new and distinct product along with and in addition to an existing
program, then such new and distinct product shall be treated as a New Release,
not an Update.
1.5 "Object Code" means computer code assembled or compiled in magnetic binary
form on software media, which are readable and useable by machines, but not
generally readable by humans without reverse-engineering, reverse-compiling or
reverse-assembly.
1.6 "Partner Product(s)" means the products and applications developed by
Partner which are compatible with Licensed Software, as further described on
Exhibit A hereto. Partner Products shall include:
(a) "Partner Client Software," which means software that contains an RMA Player
as defined in Section 1.7(a), or that utilizes the RMA application programming
interfaces ("APIs");
(b) "Digital Lava Client Software" which means the products listed in Exhibit A
which incorporate the custom COM-component being built by RN under contract to
Partner;
(c) "Partner Tools," which means software tools that may import datatypes and
export datatypes using the RealMedia Libraries; and/or that are used to perform
RMA-related functions including, but not limited to, server administration,
plug-in file systems, server monitoring, and assembly; and
(d) "Partner Server Applications," which means software that interfaces with an
RMA Server and adds datatypes that can be streamed from an RMA Server.
1.7 "RealMedia Architecture" or "RMA' means the software platform developed by
RN that allows for the development of streaming media products and tools, and
which is designed specifically for use in the infrastructure of the internet and
corporate intranets. RMA includes the following components:
(a) "RMA Players," which are stand-alone applications that use an RMA Server or
any components of the RMA Player embedded in other applications of Partner that
play media files.
(b) "RealMedia Datatypes," which are datatypes that can be streamed using RMA
Server APIs and played using RMA Player APIs.
<PAGE>
(c) "RealMedia Libraries," which are contained in the RealMedia SDK and are
Object Code implementations of various APIs.
(d) "RealMedia SDK" or "SDK," which contains the tools and information used by
software developers to create tools for use in producing streaming media and to
adapt or build applications that stream from RMA Servers and play in RMA
Players. The SDK contains an RMA Player, RMA Player APIs, Server APIs, RealMedia
Libraries, Sample Source Code and RealMedia Server Software.
(e) "RMA Server Software" or "RMA Server" in Object Code form, which streams
files over networks, and which has the capabilities set forth on Exhibit B
hereto.
(f) "Sample Source Code," which provides an example of how to develop an RMA
application.
1.8 "RN Products" means the RealAudio and RealVideo intranet and internet
products.
1.9 "Term" is defined in Section 6.1.
1.10 "Territory" means the world, except as otherwise agreed by the parties.
1.11 "User Documentation" means RN's user manuals, technical manuals, release
notes including advertisements for RMA Servers, RMA Players, installation and
operation instructions, and other data and documentation describing the use of
RMA Servers and RMA Players normally supplied to RN's customers.
1.12 "User-Stream" means the stream of media-compatible data necessary to
deliver the media type associated with a Partner Product from an RMA Server to a
single end-user client computer. The number of User-Streams being delivered by a
given RMA Server is measured by counting the number of end-users simultaneously
served by User-Streams originating at that RMA Server.
2. GRANT OF LICENSES AND DISTRIBUTION RIGHTS.
2.1 License Grants to Partner.
(a) License to Use Real Media SDK to customize Partner Products for use with
Licensed Products. Subject to the terms and conditions of this Agreement, RN
grants to Partner a non-exclusive, non-assignable license to use and install the
RealMedia SDK, whether in Object Code or Source Code form, for the sole purpose
of developing Partner Products that interoperate with Licensed Products. Partner
shall use the SDK on a single computer
<PAGE>
or on a computer network. Partner may download associated online documentation
for purposes of using the SDK, but may not make further copies of the
documentation.
(b) License to Distribute Certain Products to Corporate lntranet Customers Only.
(i) License to Distribute Partner Products. Subject to the terms and
conditions of this Agreement, and payment of the applicable License Fees
set forth in Section 5.1, RN grants Partner a non-exclusive, non-assignable
license to market, sublicense, promote and distribute, to end-user
corporate customers only, directly or through authorized distributors who
have agreed to comply with the terms and conditions of this Agreement
("Authorized Distributors"), the version of Partner Products containing any
Licensed Software. The license to any such end-user corporate customer is
limited to such customer's intranet purposes only, and is subject to such
end-user corporate customer signing a EULA as defined in Section 2.3 (b).
(ii) License to Use and Sublicense the Licensed Software. Subject to
the terms and conditions of this Agreement, and payment of the applicable
License Fees set forth in Section 5.1, RN also grants Partner a
non-exclusive, non-assignable license to market, sublicense, promote and
distribute, to end-user corporate customers only, directly or through
Authorized Distributors, pursuant to an executed EULA as defined in Section
2.3(b), only Object Code copies of the Licensed Software, and only in
combination with Partner Products, for such customers' intranet purposes
only.
(iii) License to Use and Sublicense the RealAudio and/or RealVideo
Intranet Products. Subject to the terms and conditions of this Agreement,
and payment of the applicable License Fees set forth in Section 5.1, RN
also grants Partner a non-exclusive, non-assignable license to market,
sublicense, promote, and distribute the RealVideo intranet products, to
end-user corporate customers only, directly or through Authorized
Distributors, for such customers' intranet purposes only, and only in
combination with the Partner Products.
(c) License to Distribute RealVideo and RealAudio Internet Products. Subject to
the terms and conditions of this Agreement, and payment of the applicable
License Fees set forth in Section 5.1, RN also grants to Partner a
non-exclusive, non-assignable license to market, sublicense, promote, and
distribute, to internet web site customers, directly or through Authorized
Distributors, and only in combination with the Partner Products, the RealAudio
and/or RealVideo internet products, without the RMA Player.
(d) License to Display an RMA Server. RN grants to Partner and its Authorized
Distributors the non-exclusive, royalty-free right to license and publicly
display an RMA Server with 10 streams for the purpose of: 1) internal
development and testing, 2) demonstration; and 3) marketing.
2.2 License Grant to RN. License to Use Partner Tools, Partner Client Software
and
<PAGE>
Partner Server Applications; License to Use and Distribute the Partner Products.
Partner hereby grants RN a non-exclusive, royalty-free license to use and
publicly display the Partner Tools, Partner Client Software, and Partner Server
Applications for internal testing, demonstration and marketing purposes.
2.3 Limitations. The grant of licenses, including Partner's right to sublicense
and distribute the Licensed Software and the RN Products as set forth above, are
subject to the following limitations:
(a) Except as provided in Section 2.1(b), the SDK may be used solely to develop
and test a Partner Product. It may not be used for any commercial,
non-commercial, educational or internal purpose, and may not be used in any way
that allows or causes the transmission of audio, video or other media files
across the Internet an intranet, or any computer network, unless the parties
otherwise agree.
(b) As a condition of receiving the sublicense from Partner to use and/or
distribute any of the Licensed Software and/or RN Products, Partner shall
require its Authorized Distributors and end-user customers to sign RN's standard
end-user License Agreement ("EULA"), which is contained in RN's product
packaging. The license granted in such EULA shall be between RN and Partner's
end-users and/or Authorized Distributors. Accordingly, Partner agrees that it
shall promptly provide to RN the names and addresses of all end-users and
Authorized Distributors to whom Partner distributes any Licensed Software or RN
Products, concurrently with the provision of monthly reports, as set forth in
Section 5.2.
(c) Except as expressly provided herein, Partner shall not directly or
indirectly, or allow third parties to, copy, modify, reproduce, display,
decompile, reverse engineer, disassemble, store, translate, sublicense, assign,
sell, lease or otherwise transfer or distribute any of the Licensed Software
(which includes the SDK and components of the Licensed Software) or RN Products,
or any of Partner's rights therein, in whole or in part, nor may Partner use any
of the Licensed Software or RN Products, to clone any client, server or other RN
product. Except as expressly provided herein, no license or right is hereby
granted, by implication or otherwise, with respect to the Licensed Software or
any other RN Products or any rights thereto.
(d) Nothing contained in this Agreement shall be deemed or construed to grant
Partner the exclusive right to develop, or have distributed by RN, Partner
Products for any particular category of datatypes.
(e) Partner's end-user license agreements for the Partner Products shall
prohibit further distribution of the RMA Libraries, any RMA files or other
components of RMA by Partner's end-users.
(f) Partner shall include a prominent and valid copyright notice, in the form
requested by RN, in RMA-Compatible Partner Products specifying that components
of such
<PAGE>
products are owned by and used under license from RN and its suppliers. Partner
shall not alter or remove any copyright or trademark notices contained in any
Licensed Software, RN Products, or User Documentation or use such copyright or
trademark notices in combination with any other copyright or trademark notices.
In addition, Partner shall prominently display RN's "RMA logo" and the words
"RMA Compatible" on the product packaging and all product manuals and
documentation, in accordance with any Trademark Usage Guidelines provided by RN.
(g) Partner may only distribute Partner Products that have been designed,
developed, and tested to function with an RMA Server. In creating the Partner
Products, Partner shall ensure that such Partner Products will enable any
datatypes to be played in the RMA Player. To ensure that all components of the
Partner Products interoperate properly and are compatible with the RMA Server,
RN may elect to test the Partner Products (excluding 1.6b), or, at RN's option,
will have the Partner Products (excluding 1.6b) tested by a third party testing
lab at Partner's expense. RN shall provide development support to Partner to aid
in Partner's resolution of problems discovered in the testing process, as set
forth in Section 4.1.
(h) Partner agrees to promptly deliver to RN all releases, including beta
releases, of its Partner Products, for use by RN.
(i) Partner or its Authorized Distributors shall market, sublicense and
distribute Object Code copies only of the RMA Server Software or RMA Player
Software and User Documentation to end-user corporate customers for their
internal corporate intranet use only either as (i) bundled with a Partner
Product on the same media (such as CD-ROM or diskette), or (ii) in the same
finished packaging as the Partner Product (a "Bundle").
(j) Partner shall generate License Keys with an authorized, RN-provided License
Key Tool, and duplicate, market and distribute License Keys associated with
Partner Products to end-user customers.
(k) Partner will determine the price at which it or its Authorized Distributors
will license and distribute the Partner Products, RMA Server Software and
License Keys to end-user customers, independent of any License Fee payable by
Partner to RN.
(l) Partner may either: (i) download RMA Servers from a private RN download
site; or (ii) place an order with RN for physical pre-packaged copies of the RMA
Servers. RN will ship all physical product to Partner or Partner's authorized
designee, by shipment method specified by Partner. All orders are shipped F.O.B.
RN's designated fulfillment location. As a convenience, RN may prepay freight
charges, and such charges will be billed to Partner. All risk of loss or damage
in transit will be borne by Partner. Partner shall inspect the RMA Servers upon
receipt at the delivery location. Acceptance shall be deemed to occur unless
Partner provides RN with notice of nonacceptance within three
<PAGE>
(3) days of receipt. A Partner may only reject an RMA Server for one of the
following reasons: (i) missing labels or User Documentation, (ii) defective
media, performance.
(m) Partner will deposit with Data Securities International, Inc. (the "Escrow
Agent", a complete and correct set of the Source and Object Code version of the
Partner Products (excluding 1.6b) to be held in escrow (the "Escrow Products")
and shall enter into the Escrow Agent's Master Preferred escrow agreement,
pursuant to which RN shall have the right to require that the Escrow Agent
provide some or all of the Escrow Products to RN or third parties if so required
by a governmental agency or court with jurisdiction over RN; in the event that
Partner undertakes or is subject to any of the actions set forth in Section
6.2(b); or in the event of Partner's material breach of this Agreement. Partner
shall pay any required escrow fee directly to the Escrow Agent.
(n) If Partner or its Authorized Distributors distributes the RMA Server
Software as part of a Bundle, RN's "RMA logo" and the words "RMA Compatible"
shall be prominently displayed on the product packaging and all product manuals
and documentation, in accordance with any Trademark Usage Guidelines provided by
RN.
(o) During the Term, Partner shall make available to RN at no charge, upon
release by Partner, a copy of all Updates and New Releases to the Partner
Products. Each Update or New Release shall, upon release by Partner, be subject
to all of the terms and conditions of the Agreement.
3. MARKETING CONSIDERATIONS
In consideration for participating in the Partner Program, and subject to the
terms and conditions of this Agreement, Partner shall be entitled to receive the
following marketing considerations from RN:
3.1 Trademark License. Partner shall have a non-exclusive non-transferable
license to use RN's trademarks and logos solely in connection with Partner's
user interfaces, packaging, collateral material and website, subject to
compliance with RN's Trademark Usage Guidelines, or as otherwise designated in
writing by RN from time to time. Partner agrees to furnish RN with samples of
any proposed usage of RN's trademarks or logos, and obtain RN's prior approval
for such usage, which approval will not be unreasonably withheld.
3.2 *****1
3.3 Participation in RN Events. RN agrees to feature Partner in the Partner Lab
at RN's RealMedia user conference. From time to time, RN will also include
Partner in RN press releases, and offer Partner the opportunity to participate
in trade shows and
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(1) Confidential information is omitted by a * and filed separately with the SEC
pursuant to a request for Confidential Treatment.
<PAGE>
conference displays as RN deems appropriate.
3.4 Real Developer Program. RN will provide partner a complimentary membership
in the Real Developers program at the "Apps Developer" level for one year from
the Effective Date.
3.5 *****(1)
3.6 No Obligation to Include Partner Products. RN shall not be obligated to
include the Partner Client Software in any special versions of the RMA Player
provided to an RN-third party licensee if such licensee will not accept the
Partner Client Software.
4. SOFTWARE SUPPORT; UPGRADES
4.1 Development Support. RN shall provide complimentary technical support to
Partner in connection with Real Developers program for ninety (90) days from the
Effective Date. Such support includes unlimited telephone support and priority
e-mail support, *****(1)
4.2 Technical Support by Partner. Partner shall be solely responsible for
providing, and agrees that it will provide, all technical and customer support
for any Partner Products licensed by Partner or for any Partner Products
licensed and distributed by RN pursuant to Section 2.2. Partner agrees that it
will provide primary technical and customer support, by telephone and e-mail and
in accordance with RN's minimum support requirements, for any Licensed Software
(excluding the RN Products which are subject to Section 4.3), licensed and
distributed by or for Partner pursuant to Section 2.1. RN will enroll Partner,
without charge, in a one-day RealMedia technical training seminar at RN's
facilities, to train Partner to provide technical support to its end-user
customers for the Licensed Software, excluding the RN Products. Partner shall be
responsible for all out-of-pocket costs it incurs to attend such seminar. RN
shall provide back-up technical support, in the form of telephone and e-mail,
from 8:00 A.M. to 5:00 P.M. PST Monday through Friday to Partner's primary
support contact for the Licensed Software, excluding the RN Products.
4.3 Technical Support by RN. RN will be solely responsible for providing
technical and customer support to those end-user customers to whom Partner has
licensed and distributed any RN Products pursuant to Section 2.1, in accordance
with the terms and conditions of a separate support agreement between RN and
each such end-user customer.
4.4 Updates; New Release. During the Term, each party shall make available to
the other party at no charge, upon public release by the party that created such
Updates
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(1) Confidential information is omitted by a * and filed separately with the SEC
pursuant to a request for Confidential Treatment.
<PAGE>
and/or New Releases, a copy of all corresponding Updates or New Releases, on the
RN or Partner website, as applicable. Each Update or New Release, upon release
to either Partner or RN, shall be subject to all of the terms and conditions of
the Agreement.
5. PAYMENT
5.1(a) License Fees Paid by Partner. In consideration of the rights and licenses
granted herein, Partner agrees to pay RN certain license fees as follows:
(1) Partner shall pay RN the applicable license fees as set forth in
Schedules I and 2 ("License Fees").
(2) *****(1)
(3) RN reserves the right to revise the License Fees set forth above
within thirty (30) days of the start of each calendar year and again upon
the commercial release of each New Release. RN shall provide Partner thirty
(30) days' written notice of any change in the License Fee.
5.2 Payment Terms. Partner will provide RN with a written report by the 20th day
of each month for the preceding calendar month setting forth: (a) the number of
RMA Servers distributed; (b) the number of Partner clients distributed; (c) the
names and address to whom the RMA Servers and/or RealAudio and/or RealVideo
products were distributed; (d) the number of Partner Products distributed; (e)
the number of License Keys distributed; (f) the number of RealAudio and/or
RealVideo products distributed; (g) the type and number of any other RMA-based
products or related licenses distributed; (h) the price per unit charged for
each of the foregoing; (i) gross revenue receivable by Partner (whether or not
actually collected); and (j) the amount due to RN pursuant to Section 5.1 for
the preceding month. The report shall be accompanied by the payment due.
Payments shall be calculated based on sales invoiced by Partner and its
Authorized Distributors, whether or not the revenue is actually collected. All
payments due hereunder shall be made in United States Dollars, without
withholding or offset of any kind. Interest shall accrue on all amounts past due
hereunder at the monthly rate of one and one-half percent (1.5%) or at the
maximum legal rate, whichever is less.
5.3 Books and Records. Partner shall keep books of account with respect to the
amounts due and the calculations required to be made under Section 5.1. Upon
RN's reasonable written request, and no more than once per year of the Term, RN
may audit and inspect all such books of account, through an independent third
party auditor and during normal business hours, provided that such auditor shall
undertake in writing to protect the confidentiality of the business data and
records of Partner. The cost of any
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(1) Confidential information is omitted by a * and filed separately with the SEC
pursuant to a request for Confidential Treatment.
<PAGE>
such audit shall be paid by RN; provided, however, that in the event RN
initiates an audit under this Section 5.3 and it is finally determined that the
amount reported and paid by Partner pursuant to Section 5.1 for the period(s)
audited is, in the aggregate, less than ninety-five per cent (95%) of the
aggregate amount actually due, then Partner shall pay the reasonable costs and
expenses of said audit. If any such audit reveals an underpayment of license
fees, Partner shall make any correcting payment within thirty (30) days. Any
underpayment shall be subject to interest of one and one-half percent (1.5%) per
month or the maximum amount allowed by law, whichever is less. Partner will
maintain the books and records to each reporting period for at least three years
following the close of such period
6. TERM AND TERMINATION
6.1 Term. This Agreement shall commence as of the Effective Date, and terminate
on the earlier of *****(1) from the Effective Date (the "Term"), unless earlier
terminated as provided herein. This Term shall automatically be extended for
additional one year periods (each a "Renewal Term") unless either party notifies
the other of its election not to so extend this Agreement no later than 90 days
prior to the end of the Term or a Renewal Term.
6.2 Termination by Either Party. Either party may terminate this Agreement
immediately upon written notice to the other party in the event of any of the
following:
(a) should the other party fail to perform any material term or
condition of this Agreement, which shall constitute a default of this
Agreement, and such default has not been corrected within thirty (30) days
of written notice from the non-breaching party. In the event of a breach of
Section 9 no cure period need be provided.
(b) should the other party (i) make a general assignment for the
benefit of creditors; (ii)institute proceedings to be adjudicated a
voluntary bankrupt, or consent to the filing of a petition of bankruptcy
against it; (iii) be adjudicated by a court of competent jurisdiction as
being bankrupt or insolvent; (iv) seek reorganization under any bankruptcy
act, or consent to the filing of a petition seeking such reorganization; or
(v) have a decree entered against it by a court of competent jurisdiction
appointing a receiver, liquidator, trustee, or assignee in bankruptcy or in
insolvency covering all or substantially all of such party's property or
providing for the liquidation of such party's property or business affairs.
6.3 Termination by RN. RN may terminate this Agreement immediately upon written
notice to Partner in the event of any of the following:
(a) any attempted transfer or assignment of this Agreement or any
right or
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(1) Confidential information is omitted by a * and filed separately with the SEC
pursuant to a request for Confidential Treatment.
<PAGE>
obligation hereunder, or any sale, transfer, relinquishment, voluntary or
involuntary, by operation of law or otherwise, of any interest in the direct or
indirect ownership or control of Partner without RN's prior written approval;
(b) any failure of Partner to pay, when due, any indebtedness owing by
Partner to RN, unless expressly waived in writing by RN.
6.4 Effect of Termination.
(a) Upon the effective date of termination of this Agreement for a
material breach by Partner, the licenses granted hereunder shall terminate
immediately. Partner will either immediately return all Licensed Software
to RN or certify in writing to RN that all copies of all Licensed Software
have been destroyed. RN may discontinue promotion and distribution of
Partner Products or continue to distribute Partner Products during the
Sell-Off Period, set forth in Section 6.4(b), at its sole discretion.
Notwithstanding anything in this Agreement to the contrary, under no
circumstances may Partner distribute Partner Client Software after the
expiration or termination of this Agreement, for any reason, without RN's
express written consent.
(b) For two (2) months after the expiration or termination of this
Agreement other than by reason of Partner's material breach ("Sell-Off
Period"), Partner may advertise and sell the Partner Products, Licensed
Software, or RN Products, in its inventory or necessary to fulfill orders
confirmed as of the expiration or termination date, and shall pay License
Fees and render statements in the same manner as during the Term. After the
end of the Sell-Off Period, Partner shall return to RN, at Partner's
expense, all copies of the Partner Products, Licensed Software and RN
Products, or RN may instruct Partner to destroy them. Partner shall furnish
RN with affidavits certified by an officer of Partner attesting to such
destruction.
(c ) Any termination of this Agreement shall not release Partner from
paying any amount that may then be owing to RN, or that may become due to
RN in the future.
(d) Notwithstanding any other terms or conditions of the Agreement,
the rights of end-user customers to use any Licensed Software, RN Products
and/or Partner Products distributed by Partner shall survive any
termination or expiration of the Agreement, provided that License Fees for
said Licensed Software or RN Products or Partner Products have been paid to
RN.
7. CONFIDENTIALITY
"Confidential Information" means any trade secret information or information
otherwise designated by a party as being confidential relating to either party's
products, product
<PAGE>
plans, designs, computer code, technical information, costs, pricing, financing,
marketing plans, business opportunities, personnel, research and development or
know-how. Confidential Information shall not include information that (i) is or
becomes generally known or available through no fault of the receiving party,
(ii) was known by or disclosed to the receiving party prior to disclosure, (iii)
is independently developed by the receiving party, or (iv) is made generally
available by the disclosing party without any restriction. The parties shall use
reasonable efforts and at least the same care that each uses to protect its own
Confidential Information of like importance, to prevent unauthorized
dissemination or disclosure of the other party's confidential information during
and for three (3) years following the last day of the Term. Neither party will
use the other's Confidential Information for purposes other than those necessary
to directly further the purposes of this Agreement. Neither party will disclose
to third parties the other's Confidential Information without the prior written
consent of the other party, provided, however, that nothing will preclude a
party from making disclosure to a third party for the purpose of due diligence
in a financing transaction, merger, acquisition, business combination or other
similar transaction, or from making any disclosures to any governmental agency
having jurisdiction over the disclosing party, or unless otherwise required by
law, government order or court proceeding. Each party shall return the
Confidential Information to the other party upon termination of the Agreement or
upon the request of the other party. Except as expressly provided in this
Agreement, no ownership or license right is granted in any Confidential
Information.
8. PROPRIETARY RIGHTS
8.1 Partner. Partner shall retain all right, title and interest in and to the
Partner Products, including any copyright, trademarks, patent, trade secret, or
other intellectual property rights therein, subject to RN's underlying ownership
in any Licensed Software or RN Products included therein, and in and to Partner
Confidential Information, regardless of the media or form on or in which the
Partner Products or Partner Confidential Information, or copies thereof, may
exist. Notwithstanding the foregoing, Partner agrees that it shall not register
or attempt to register any copyrights or trademarks, or to seek to obtain any
patents in connection with any Partner Product, including, but not limited to,
in any device, process, method, function or invention included therein or
necessary for the operation thereof, which would in any way interfere with,
limit or prohibit RN's continued use, development or ownership of RMA.
8.2 RN. RN shall retain all right, title and interest in and to the Licensed
Software and RN Products, including any copyright, trademarks, patent, trade
secret, or other intellectual property rights therein, all RN trademarks and in
and to all RN Confidential Information, regardless of the media or form on or in
which the Licensed Software, the RN Products, or the RN Confidential
Information, or copies thereof, may exist. Partner acknowledges and agrees that
the Licensed Software and the RN Products are proprietary to RN, and is
<PAGE>
protected by the copyright laws of the United States and international copyright
treaties. Unauthorized copying of the Licensed Software, or the RN Products,
including modification, merger or inclusion with any other software or products,
is expressly forbidden. Partner shall not be deemed, by anything contained in or
done pursuant to this Agreement, including by implication, to acquire any right,
title or interest in any trademark, copyright, patent or other intellectual
property of RN, and shall do nothing to prejudice the value or validity of RN's
rights therein or ownership thereof.
9. LIMITED WARRANTY
9.1 Limited Warranty. RN warrants, solely for the benefit of Partner, that for a
period of ninety (90) days from the date of delivery to Partner: (i) the
Licensed Software, if operated as directed, will substantially achieve the
functionality described in the User Documentation, and (ii) that the media
containing the Licensed Software, if provided by RN, is free in material
respects from defects in material and workmanship; provided, however, that the
foregoing warranty is expressly contingent (and shall be otherwise void) upon:
(1) the use of the Licensed Software strictly in accordance with the
instructions and User Documentation therefor; (2) the absence of misuse or
damage thereto; (3) the absence of any alteration or modification thereto; and
(4) Partner's acceptance of Licensed Software for distribution with knowledge
that the media upon which the Licensed Software are reproduced by Partner may
contain certain defects. RN makes no representation or warranty that the
information or functions contained in the Licensed Software will meet Partner's
requirements or that the use or operation of the Licensed Software will be
uninterrupted, error free or secure, or that any Licensed Software defects are
correctable or will be corrected. THE FOREGOING WARRANTY SHALL NOT APPLY TO THE
SAMPLE SOURCE CODE, WHICH IS PROVIDED TO PARTNER AS IS, WITHOUT WARRANTY OF ANY
KIND.
9.2 NO OTHER WARRANTIES. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, RN
AND ITS LICENSORS DISCLAIM ALL OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED,
INCLUDING, BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTIBILITY AND FITNESS
FOR A PARTICULAR PURPOSE, WHICH ARE EXPRESSLY DISCLAIMED, WITH REGARD TO THE
LICENSED SOFTWARE, THE RN PRODUCTS, AND THE USER DOCUMENTATION. THIS LIMITED
WARRANTY GIVES PARTNER SPECIFIC LEGAL RIGHTS. PARTNER MAY HAVE OTHERS, WHICH
VARY FROM STATE/JURISDICTION TO STATE/JURISDICTION.
9.3 Remedies. RN's entire liability and Partner's exclusive remedy for any
breach of the limited warranty set forth in Section 9.1 shall be, in RN's sole
discretion: (i) to exercise reasonable efforts to replace in a timely manner,
defective media provided by RN to Partner, or defective media that is
sublicensed by Partner to a Partner's end-user corporate customer pursuant to
Section 2.1; or (ii) to advise Partner or Partner's corporate end-user, within a
reasonable period of time after notice is received from Partner of the defect,
how to achieve substantially the same functionality with the Licensed Software
as
<PAGE>
described in the User Documentation through a procedure different from that set
forth in the User Documentation. Repaired, corrected or replaced Licensed
Software and User Documentation shall be covered by this limited warranty for
the period remaining under the warranty that covered the original Licensed
Software, or if longer, for thirty (30) days after the date RN either shipped to
Partner the repaired or replaced Licensed Software or RN advised Partner as to
how to operate the Licensed Software so as to achieve the functionality
described in the Documentation, whichever is applicable.
10. INDEMNIFICATION
10.1 *****(1)
10.2 Partner Indemnification. Partner shall defend RN and its directors,
officers, agents, employees and representatives, in any third party action for
infringement by, or alleged infringement by the Partner Products of any
trademark, service mark, patent, copyright, or misappropriation of any trade
secret by the Partner Products, and will pay any final judgments awarded or
settlements entered into in any such action. RN agrees that it shall notify
Partner of all threats, claims and proceedings related to any such suit promptly
after such threat, claim or proceeding comes to the attention of RN. Partner
shall have sole control of the defense and/or settlement of any such suit, and
RN shall furnish to Partner, upon request, information available to RN for such
defense, and shall provide Partner with such assistance in defending such suits
as is requested by Partner, at Partner's expense. If RN's use of the Partner
Products under the terms of this Agreement is, or in Partner's opinion is likely
to be, enjoined due to the type of infringement or misappropriation specified
above, then Partner may, at its sole option and expense, either (i) procure for
RN the right to continue using the Partner Products under the terms of this
Agreement; or (ii)replace or modify the affected Partner Products so that it is
noninfringing and substantially equivalent in function to the enjoined Partner
Products. The foregoing obligation of Partner does not apply (i) with respect to
versions of the Partner Products or portions or components thereof: (a)that are
modified after shipment, if the alleged infringement relates to such
modification, and if such modification was not authorized, expressly permitted
or performed by Partner; (b)that are combined with other products, processes or
materials, if the alleged infringement relates to such combination and if
Partner did not authorize or expressly permit the combination; or (c) where RN's
use of the Partner Products is not in accordance with the license granted under
this Agreement; or (ii) for use or distribution of Partner Products or otherwise
not in accordance with the terms and conditions of this Agreement.
11. LIMITATION OF LIABILITY
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(1) Confidential information is omitted by a * and filed separately with the SEC
pursuant to a request for Confidential Treatment.
<PAGE>
IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL, INDIRECT,
INCIDENTAL, OR CONSEQUENTIAL OR PUNITIVE DAMAGE OR LOSS OF ANY NATURE (E.G.,
DAMAGE TO PROPERTY, LOSS OF PROFITS, BUSINESS INTERRUPTION, LOST SAVINGS, LOSS
OF USE, LOST OR DAMAGED FILES OR DATA, INJURY TO PERSON, OR ANY CLAIMS OF THOSE
NOT A PARTY TO THE AGREEMENT)WHICH MAY ARISE IN CONNECTION WITH THE USE,
ADAPTATION, MERGER, CORPORATION,DISTRIBUTION, INSTALLATION, REMOVAL OR SUPPORT
OF THE LICENSED SOFTWARE, THE RN PRODUCTS, AND/OR THE PARTNER PRODUCTS PURSUANT
TO THIS AGREEMENT, REGARDLESS OF WHETHER SUCH CLAIMS ARE BASED IN WARRANTY,
CONTRACT, NEGLIGENCE, TORT, PRODUCTS LIABILITY OR OTHERWISE, EVEN IF THE PARTY
HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE OR LOSS. BECAUSE SOME
STATES/JURISDICTIONS DO NOT ALLOW THE EXCLUSION OR LIMITATION OF LIABILITY FOR
CONSEQUENTIAL OR INCIDENTAL, DAMAGES, THE ABOVE LIMITATION MAY NOT APPLY, AND
THE PARTIES MAY ALSO HAVE OTHER RIGHTS WHICH VARY FROM STATE TO STATE.
12. DISPUTE RESOLUTION
12.1 Coverage. Any dispute arising out of or relating to this Agreement shall be
resolved in accordance with the procedures specified in this Section, which
shall be the sole and exclusive procedures for the resolution of any such
dispute. Other than actual or imminent material breaches of Sections 2, 7 and 8,
any dispute between the parties with respect to this Agreement shall be
submitted for structured negotiation. The commencement, and any resolution
reached as a result, of any dispute resolution under this Section shall be
considered Confidential Information and shall be treated as compromise and
settlement negotiations.
12.2 Structured Negotiation. Either party may invoke this procedure by giving
written notice set forth the details of and its position with respect to the
dispute to the other party, and designating therein a corporate officer with
appropriate authority to be its representative in negotiations relating to the
dispute. The other party shall designate a corporate officer with similar
authority within three (3) business days of its receipt of such notice. The
designated officers shall, following whatever investigation each deems
appropriate, but no event later than twenty (20) business days after the
original notice, enter into discussions concerning the dispute. If the
representatives do not resolve the dispute within an additional twenty (20)
business days of their initial meeting, either party may submit the matter to
binding arbitration under Section 12.3.
12.3 Binding Arbitration.
(a) Any dispute not settled by the parties by structured negotiation
(other than actions for injunctive relief including specific performance)
shall be submitted only to binding arbitration. The arbitration will be
conducted in accordance with the procedures
<PAGE>
set forth herein and the Arbitration Rules for Commercial Arbitration Rules
of the AAA. In the event of a conflict with such rules, this Agreement will
control.
(b) The arbitration shall take place in Seattle, Washington, before a
panel of three arbitrators appointed as follows: each party shall select a
single arbitrator, and the two (2) selected arbitrators shall mutually
agree upon a third. The arbitrators selected shall have knowledge and
experience in the computer software business. The arbitrators shall rule on
the dispute by issuing a written opinion setting forth findings of fact and
the rationale for their decision within thirty (30) days after the close of
hearings. The decision rendered by the arbitrators shall be final and
binding and may be entered as a judgment in any court of competent
jurisdiction. The arbitrators shall control the scheduling so as to process
the matter expeditiously. The times specified in this Section may be
extended upon mutual agreement of the parties upon a showing of good cause.
The parties may submit written briefs. Discovery shall be controlled by the
arbitrators and shall be permitted as follows: each party may submit in
writing to the other party, and that party shall so respond, to a maximum
of any combination of thirty-five (35) (none of which may have subparts) of
interrogatories, demands to produce documents, and requests for admission.
Unless provided otherwise in the Agreement, the arbitrators may not award
non-monetary or equitable relief of any sort. They will have no power to
award damages inconsistent with the Agreement. In no event, even if any
other portion of these provisions is held to be invalid or unenforceable,
shall the arbitrators have power to make an award or impose a remedy that
could not be made or imposed by a court deciding the matter in the same
jurisdiction.
( c) Any issue concerning the extent to which any dispute is subject
to arbitration, or concerning the applicability, interpretation, or
enforceability of these procedures, including any contention that all or
part of these procedures are invalid or unenforceable, shall be governed by
the Federal Arbitration Act and resolved by the arbitrators. No potential
arbitrator may serve on the panel unless he or she has agreed in writing to
abide and be bound by these.
(d) Each party shall bear its own costs of arbitration. A party
seeking discovery shall reimburse the responding party the costs of
production of documents (to include search time and reproduction costs).
The parties shall equally split the fees of the arbitration and the
arbitrators.
12.4 Provisional Remedies. The procedures specified in this Section shall be the
sole and exclusive procedures for the resolution of disputes between the parties
arising out of or relating to this Agreement; provided, however that a party,
without prejudice to the mandatory procedures of this Section, may file a
complaint for statute of limitations or venue reasons, or seek a preliminary
injunction or other provisional judicial relief, if in its sole judgment such
action is necessary to avoid irreparable damage or to preserve the status quo.
Notwithstanding such action, the parties will continue to participate in good
faith in the procedures specified in this Section.
<PAGE>
12.5 Tolling, Statute of Limitations. All applicable statutes or limitation and
defenses based upon the passage of time shall be tolled while the procedures
specified in this Section are pending. The parties will take such action, if
any, required to effectuate such tolling.
12.6 Performance to Continue. Each party agrees, and is required, to continue to
perform its obligations under this Agreement pending final resolution of any
dispute arising out of or relating to this Agreement.
13. GENERAL
13.1 Notice. Any notice or other communication permitted or required under this
Agreement shall be given in writing and shall be deemed effective upon personal
delivery (including courier service), overnight mail delivery, upon confirmed
facsimile transmission, or five (5) days after deposit, postage prepaid, in the
first class mail of the United States properly addressed to the appropriate
party at the address set forth below:
RN: Real Networks, Inc.
1111 Third Avenue, Suite 2900
Seattle, Washington 98101
Point of contact: Len Jordan
Facsimile No.: 206-674-2699
With a copy to: General Counsel
Facsimile No.: 206-674-2695
Partner: Digital Lava Inc.
10850 Wilshire Boulevard, Suite 1260
Los Angeles, CA 90024
Point of contact: Danny Gampe, CFO
Facsimile No.: (310) 470-1769
Either party may from time to time change such address by giving the
other party notice of such change in accordance with this Section.
13.2 Independent Contractors. RN and Partner are independent contractors in all
relationships and actions under and contemplated by the Agreement.
Notwithstanding anything in this Agreement to the contrary, the parties do not
by this Agreement intend to form, nor shall this Agreement be construed to
constitute, a partnership, joint venture, employment, or agency relationship
between them, or to authorize Partner or any Authorized Distributors to enter
into any commitment or agreement binding on RN or to allow one party to accept
service of any legal process addressed to, or intended for, the
<PAGE>
other party. Partner and Authorized Partners shall not make any warranties,
guarantees or any other commitments on behalf of RN pursuant to the Agreement.
13.3 No Assignment. Partner shall not assign, transfer or otherwise dispose of
this Agreement or any rights or duties hereunder without the prior written
consent of RN, *****(1)
13.4 Survival. The following provisions shall survive the expiration or
termination of this Agreement: the applicable provisions of Sections 2.3, 5.3,
6.4, and 7 through 12.
13.5 U.S. Government Restricted Rights and Export Restriction. The Licensed
Software, RN Products, and User Documentation are provided with RESTRICTED
RIGHTS. Use, duplication or disclosure by the Government is subject to
restrictions set forth in subparagraphs (a) through (d) of the Commercial
Computer Software--Restricted Rights at FAR 52.227-19 when applicable, or in
subparagraph (c)(l)(ii) of the Rights in Technical Data and Computer Software
clause at DFARS 252.227-7013, and in similar clauses in the NASA FAR supplement,
as applicable. Manufacturer is Real Networks, Inc./1111 Third Avenue, Suite 500/
Seattle, Washington, 98101. Partner acknowledges that none of the Licensed
Software, RN Products, or underlying information or technology may be downloaded
or otherwise exported or re-exported: (i) into (or to a national or resident of)
Cuba, Iran, Iraq, Libya, North Korea, Syria, Sudan or Angola or any other
country to which the U.S. has embargoed goods; or (ii) to anyone on the U.S.
Treasury Department's list of Specially Designated Nationals or the U.S.
Commerce Department's Table of Denial Orders.
13.6 Miscellaneous. This Agreement, and any exhibits and schedules attached
hereto and incorporated herein, constitute the complete and exclusive agreement
between RN and Partner with respect to the subject matter hereof, and supersedes
all oral or written understandings, communications or agreements not
specifically incorporated herein. If any provision in this Agreement is held by
a court of competent jurisdiction to be invalid, void or unenforceable, the
remaining provisions will continue in full force without being impaired or
invalidated in any way. No waiver, amendment or modification of any provision of
this Agreement shall be effective unless it is in a document which expressly
refers to this Agreement and is signed by authorized representatives of both
parties. Except as specifically provided herein, failure or delay by either
party in exercising any rights or remedy under this Agreement shall not operate
as a waiver of any such right or remedy. Headings shall not be considered in
interpreting this Agreement. This Agreement shall be governed by the laws of the
State of Washington, without regard to its conflict of laws rules. The United
Nations Convention of Contracts for the International Sale of Goods is expressly
excluded.
- ----------
(1) Confidential information is omitted by a * and filed separately with the SEC
pursuant to a request for Confidential Treatment.
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the
Effective Date written above.
REAL NETWORKS, INC. DIGITAL LAVA INC.
By: /s/Len Jordan By: /s/ Joshua D.J. Sharfman
--------------- ----------------------------
Name: Len Jordan Name: Joshua D. J. Sharfman
Title: Senior Vice President MSDIV Title: CEO
Date: 4/13/98 Date: 6 April '98
<PAGE>
EXHIBIT A
Partner Products
VideoVisor
vPrism
VideoVisor Publisher
<PAGE>
EXHIBIT B
RMA Server
The RMA Server includes the following:
1) installer for the appropriate operating system platform
2) operators manual
3) exposed interfaces to plug-in a monitor, administrator, file system,
datatype or broadcast datatype
4) base-level monitoring tool
5) ability to stream a datatype given a file format plug-in or broadcast
plug-in and license key
6) supports the following platforms: Windows NT; UNIX (Free BSD, Solaris 2.5,
Linux, DEC UNIX, BSDI, HP/UX, SunOS 4.1, IRIX and AIX)
<PAGE>
SCHEDULE I
*****(1)
- ----------
1 Confidential information is omitted by a * and filed separately with the
SEC pursuant to a request for Confidential Treatment.
<PAGE>
SCHUEDULE 2
*****(1)
- ----------
1 Confidential information is omitted by a * and filed separately with the
SEC pursuant to a request for Confidential Treatment.
EXHIBIT 10 (j)
<PAGE>
SOFTWARE LICENSE AGREEMENT
This Agreement made effective as of the 31th day of March, 1997 between Cinax
Designs Inc. ("Cinax") having an office at #150-1152 Mainland Street, Vancouver,
B.C. Canada, V6B 4X2 and Digital LAVA (identified in subsection 3.1) on the
following terms and conditions:
1. SCOPE
1.1 Cinax shall create and license software to Digital LAVA who shall utilize
the software as defined below. The software to be supplied is set out in
Schedule A which may be amended from time to time by listing any additional
software to be licensed to Digital LAVA by Cinax on a replacement Schedule A
signed by the parties.
2. DEFINITIONS
2.1 "Engine" shall mean the MPEG software engine developed by Cinax to crop and
concatenate a series of MPEG clips plus the APl documentation. The purpose of
this Engine is to add an editing functionality into the Digital LAVA Product.
2.2 "Product" means the current production version of the Digital LAVA vPrism
software listed in Schedule A to this Agreement, and any future fixes, updates,
enhancements and modifications to those programs created by or for Digital LAVA,
but excluding any subsequent releases or enhancements of the Product which do
not incorporate the Engine.
2.3 "Services" means the design and development of the Engine in accordance with
the Specifications and delivery of the Deliverables.
2.4 "Specifications" means the Specifications for the engine and the contracted
Services, attached to this Agreement as Exhibit A. "Schedule" means the schedule
for completion of the Services, as set forth in the Specifications.
2.5 "Deliverables" means the various alpha, beta and final versions of the
Engine, and supporting documentation, as more fully described in the
Specifications.
2.6 "Errors" means defect(s) in a deliverable which prevent it from performing
in accordance with the Specifications and or a Severity Level 1, 2 or 3 error,
as such errors are described in Schedule B.
2.7 "Library" means the software development library developed by Cinax and used
in the development of the Engine under this Agreement.
2.8 "Derivative Technology" means: (i) for copyrightable or copyrighted
material, any translation (including translation into other computer languages)
portation, modification, correction, addition, extension, upgrade, improvement
compilation, abridgment, or other form in which an existing work may be recast,
transformed or adapted; (ii) for patentable or patented material, any
improvement thereon; and (iii) for material which is protected by trade secret,
any
<PAGE>
new material derived from such existing trade secret material, including any new
material which may be protected by copyright, patent and/or trade secret.
2.9 "Customer" means resellers, system integrators and software wholesale or
retail outlets, and, in the event of Digital LAVA direct sales, end-users.
3. PARTICULARS
3.1 Licensee - Licensee's name and key particulars are:
(a) full name: Digital LAVA Inc
(b) full address: Suite 1260, 10850 Wilshire Boulevard, Los Angeles, CA, USA,
90024
(c) telephone number: 310-470-1149
(d) fax number: 310-470-1769
(e) contact person: Josh Sharfman
(f) e-mail address: [email protected]
4 DEVELOPMENT
4.1 Services - Digital LAVA hereby retains Cinax to design, develop and test the
Engine. Cinax shall use their best efforts to perform the Services in a
workmanlike manner and in accordance with the Schedule and the Specifications.
Cinax is not obligated to perform any Services, and Digital LAVA has not
contracted for any Services, unless and until Exhibit A is executed by both
parties and attached hereto.
4.2 Acceptance of Software - For software executable code deliverables, where
Cinax delivers to Digital LAVA the alpha, beta and final versions of each
Deliverable, Digital LAVA shall evaluate and submit a written acceptance or
rejection to Cinax within five (5) business days of receipt of the alpha and
beta versions and seven (7) business days after receipt of the final version of
the Deliverables. Acceptance shall be in writing, and Digital LAVA shall not
unreasonably withhold its acceptance unless a Deliverable is not according to
the Specifications or is not according to Schedule A. If Digital LAVA identifies
Errors in a deliverable within the acceptance period, Cinax shall correct such
Errors following receipt thereof. Cinax shall use its best efforts to correct
Errors during acceptance testing for the alpha and beta versions of each
Deliverable and within the time specified in Schedule B with respect to errors
discovered during acceptance testing for the final version of each Deliverable.
4.3 Documentation- For documentation or report Deliverables, Digital LAVA shall
evaluate each version of such deliverable and in the event that corrections are
required Digital LAVA shall specify the corrections needed and Cinax shall
deliver an amended version of such documentation within five (5) business days.
4.4 Errors- If Cinax fails to deliver to Digital LAVA any deliverable within the
dates specified in the Schedule A or if any Errors discovered within the
acceptance period cannot be eliminated in the correction period specified in the
Specifications then Digital LAVA may, at its option: (i) retain the Deliverables
to date with rights as set forth in Section 10, and pay Cinax for all
<PAGE>
outstanding payment milestones for which Digital LAVA has accepted corresponding
deliverables; (ii) extend a correction period to Cinax; or (iii) suspend Digital
LAVA's obligations under this Agreement and/or terminate this Agreement for
cause pursuant to paragraph 12.2.
4.5 Design Review and Specification Changes- Cinax understands that there may be
additions, deletions or other changes which may affect the Specifications at any
time during the term of this Agreement. Upon notice of any such changes by
Digital LAVA, Cinax and Digital LAVA agree to work together to make any
necessary changes to the Specifications, and Cinax shall alter the services in
order to accommodate any such changes to the Specifications.
5. GRANT OF LICENSE
5.1 License to Digital LAVA- Cinax hereby grants to Digital LAVA the
non-exclusive, non-transferable worldwide right and license of renewable term
to:
(i) use, copy, demonstrate and sub-license the Engine as a part of its
Product;
and otherwise carry on the activities contemplated by and as set out in this
Agreement subject to the termination provisions contained in this Agreement.
5.2 Royalty to Cinax - In return for such license Digital LAVA agrees to pay
Cinax a royalty based on the revenues or any portion thereof derived by Digital
LAVA from the resale, distribution or sub-license of the Digital LAVA-developed
Product or third party products using the Engine.
6. PURCHASE AND SALE OF PRODUCT
6.1 Reporting- Digital LAVA shall notify Cinax of all Product sales made on a
quarterly basis, in the format specified in Schedule C.
6.2 Title/Security Interest in Engine - Title to Engine shall remain in Cinax
and Cinax shall have a security interest in such units until Digital LAVA pays
Cinax in full for all amounts owing from Digital LAVA to Cinax in connection
with shipments of which the Engine forms a part. Digital LAVA shall sign all
instruments and do all acts that Cinax, acting reasonably, requires to effect,
perfect, register or record such retention of title and security interest.
7. PAYMENT
7.1 Services - Digital LAVA shall pay Cinax for the Services performed as set
forth and in accordance with the applicable Schedule A, not to exceed *****(1)
provided that (i) Cinax has completed the milestones and delivered the
Deliverable; and (ii) Digital LAVA has accepted the Deliverables. Such payments
will be due net five (5) days from the later of (i) acceptance by
- -----------
(1) Confidential information is omitted by a * and filed separately with the SEC
pursuant to a request for Confidentiality Treatment.
<PAGE>
Digital LAVA of the Deliverable associated with any payment milestone or (ii)
receipt by Digital LAVA of a Cinax invoice associated with any payment
milestone.
7.2 Up Front License Fee - Digital LAVA shall pay to Cinax an up front licensing
fee of *****(1) for use of the Engine. *****(1) will be due net thirty (30) days
from the later of (i) acceptance by Digital LAVA of the Final Deliverable or
(ii) receipt by Digital LAVA of a Cinax invoice associated with the Final
Deliverable, and the balance of *****(1) on the first reporting date as per
Schedule A.
7.3 Royalty free copies- The first seventy five (75) copies of the Product
shipped, including upgrades of the Product shipped to existing users, shall not
be subject to royalties.
7.4 Royalties Payable and Base - For each subsequent unit of the Product shipped
Digital LAVA shall pay to Cinax a royalty as set out in Schedule A. which amount
shall reflect the most of: *****(1) of the Product Net Sales Price invoiced by
Digital LAVA to the Customer, or at the royalty floor price of fifty dollars
*****(1).
7.5 Minimum Royalty - During each year the Agreement is in effect, Digital LAVA
shall license from Cinax not less than 200 copies of the Engine at the royalty
floor price of *****(1) US. Digital LAVA shall have the right to prepay
royalties to achieve the minimum in any given year. Failure by Digital LAVA to
license the minimum copies in a particular year of the Agreement shall be a
default of this Agreement on the part of Digital LAVA entitling Cinax to
terminate the Agreement.
7.6 The royalty charges applicable to Product are due upon invoice by Cinax and
Cinax shall invoice the Digital LAVA for such charges and all such invoices
according to Schedule C. Invoices are payable within 30 days of the invoice
receipt. Any amounts outstanding for 30 days shall be subject to interest at a
rate of 1% per month (12% per annum).
7.7 Digital LAVA shall pay all applicable sales, use, withholding and excise
taxes, and any other assessments against the Digital LAVA in the nature of
taxes, duties or charges however designated on the Product or its license or
use, on or resulting from this Agreement, exclusive of taxes based on the net
income of Cinax.
7.8 Inspection Rights - Cinax shall have the right to audit Digital LAVA's
records and papers which are relevant to the resale, distribution or sub
licensing of the Product once per year. Such audits shall be performed by an
independent accounting firm and shall be conducted at Digital LAVA's
headquarters. Written notification of such audits shall be received by Digital
LAVA at least thirty (30) days prior to such audit. Audit costs shall be Cinax's
responsibility, unless audit determines a discrepancy of 25% or greater between
Product shipped and reported, in which case Digital LAVA shall be responsible
for audit costs.
8. SUPPORT
8.1 Software Maintenance : Cinax shall provide software support and maintenance
services
- --------
(1) Confidential information is omitted by a * and filed separately with the
SEC pursuant to a request for Confidential Treatment.
<PAGE>
relative to the product as described herein:
a) Software Maintenance: Cinax shall use its best efforts to rectify any
problem with the Product which results in the Product not being in
substantial conformance to the functional specifications as contained in
the documentation in Schedule A;
b) Support Availability: Cinax shall provide reasonable telephone and e-mail
support for the Engine between the hours of 8:30 a.m. and 5:00 p.m.,
Pacific Standard Time, excluding weekends and Canadian statutory' holidays,
to Digital LAVA only.
c) Cost; there will be no support costs charged.
8.2 Suspension of Support- if Cinax terminates Agreement under Section 12.2 (b)
Cinax shall provide Digital LAVA with a copy of the Engine source code for the
express purpose of providing support, as described above, to end users of its
Product. Digital LAVA will not use the source for any other purpose, or in any
way use this source code to impinge the rights of Cinax as set out in Section
10- Rights and Ownership.
9. WARRANTY
9.1 Limited Warranty of Engine - Cinax warrants that Engine supplied hereunder
shall perform in accordance with the functional specifications as set out in the
documentation accompanying the Engine provided for 90 days following acceptance
of the Product. Cinax's sole obligation and liability hereunder shall be to use
reasonable efforts to remedy any such functional non-conformance which is
reported to Cinax in writing by Digital LAVA within the warranty period. In the
event such non-conformance is unable to be remedied by Cinax, using reasonable
efforts, Cinax shall, in its sole discretion, refund to Digital LAVA the royalty
payment and use reasonable efforts to find a replacement and this Agreement will
be automatically terminated.
9.2 SPECIFIC EXCLUSION OF OTHER WARRANTIES - THE WARRANTIES SET OUT IN SECTION
9.1 AND 10.1 ARE IN LIEU OF ALL OTHER WARRANTIES, AND THERE ARE NO OTHER
WARRANTIES, REPRESENTATIONS, CONDITIONS, OR GUARANTEES OR ANY KIND WHATSOEVER,
EITHER EXPRESS OR IMPLIED BY LAW (in contract or tort) OR CUSTOM, INCLUDING, BUT
NOT LIMITED TO THOSE REGARDING MERCHANTABILITY, FITNESS FOR PURPOSE,
CORRESPONDENCE TO SAMPLE, TITLE, DESIGN, CONDITION, OR QUALITY. WITHOUT LIMITING
THE ABOVE, CINAX DOES NOT WARRANT THAT THE PRODUCT SHALL MEET THE REQUIREMENT OF
DIGITAL LAVA OR THAT THE OPERATION OF PRODUCT SHALL BE FREE FROM INTERRUPTION OR
ERRORS.
9.3 RESTRICTIONS ON WARRANTY - CINAX SHALL HAVE NO OBLIGATION TO REPAIR OR
REPLACE PRODUCT DAMAGED BY ACCIDENT OR OTHER EXTERNAL CAUSE, OR THROUGH THE
FAULT OR NEGLIGENCE OF ANY PARTY OTHER THAN CINAX.
9.4 NO INDIRECT DAMAGES - IN NO EVENT SHALL CINAX BE LIABLE TO DIGITAL LAVA OR
TO ANY OTHER PARTY FOR INDIRECT DAMAGES OR LOSSES (in contract or tort) IN
CONNECTION WITH PRODUCT, SOFTWARE SUPPORT SERVICES OR THIS
<PAGE>
AGREEMENT, INCLUDING BUT NOT LIMITED TO DAMAGES FOR LOST PROFITS, LOST SAVINGS,
OR INCIDENTAL, CONSEQUENTIAL, OR SPECIAL DAMAGES, EVEN IF ClNAX SELLER HAS
KNOWLEDGE OF THE POSSIBILITY OF SUCH POTENTIAL LOSS OR DAMAGE.
9.5 LIMITS ON LIABILITY - IF FOR ANY REASON, CINAX BECOMES LIABLE TO DIGITAL
LAVA OR ANY OTHER PARTY FOR DIRECT OR ANY OTHER DAMAGES FOR ANY CAUSE
WHATSOEVER, AND REGARDLESS OF THE FORM OF ACTION (in contract or tort), INCURRED
IN CONNECTION WITH THIS AGREEMENT, THE PRODUCT, OR SOFTWARE SUPPORT SERVICES
THEN:
(A) THE AGGREGATE LIABILITY OF ClNAX FOR ALL DAMAGES, INJURY, AND LIABILITY
INCURRED BY DIGITAL LAVA AND ALL OTHER PARTIES IN CONNECTION WITH PRODUCT
AND SOFTWARE SUPPORT SERVICES SHALL BE LIMITED TO AN AMOUNT EQUAL TO THE
FEES AND ROYALTIES PAID TO CINAX FOR THE PRODUCT OR SOFTWARE SUPPORT
SERVICES WHICH GAVE RISE TO THE CLAIM FOR DAMAGES; AND
(B) DIGITAL LAVA MAY NOT BRING OR INITIATE ANY ACT OR PROCEEDING AGAINST SELLER
ARISING OUT OF THIS AGREEMENT OR RELATING TO PRODUCT OR SOFTWARE SUPPORT
SERVICES MORE THAN TWO YEARS AFTER THE CAUSE OF ACTION HAS ARISEN.
9.6 SEPARATE ENFORCEABILITY - SECTIONS 9.2, 9.3, 9.4 AND 9.5 ARE TO BE CONSTRUED
AS SEPARATE PROVISIONS AND SHALL EACH BE INDIVIDUALLY ENFORCEABLE.
9.7 Indemnity - Except to the extent of Cinax's obligations under sections 9.1
and 10.1, Digital LAVA shall defend, indemnify and save harmless Cinax, its
affiliates and their respective directors, officers and employees and each of
them from and against all actions, proceedings, demands, claims, liabilities,
losses, damages, judgments, costs and expenses including, without limiting the
generality of the foregoing, legal fees and disbursements on a solicitor and
client basis (together with all applicable taxes) which any indemnified person
hereunder may be liable to pay or may incur by reason of, or directly or
indirectly arising out of, any claim which may be advanced by any Customer
obtaining Product directly or indirectly through Digital LAVA.
10. RIGHTS AND OWNERSHIP OF PRODUCT
10.1 Warranty of Title - Cinax warrants that it has all rights necessary to make
the grant of license herein by having all right, title and interest in and to
the Library and any other software libraries used to develop and/or implement
the Engine.
10.2 Retention of Rights by Cinax - All proprietary and intellectual property
rights, title and interest including copyright in and to the original and all
copies of the Engine and the documentation or any changes or modifications made
to the Engine or related documentation shall be and remain that of Cinax or its
licensor as the case may be. Digital LAVA has no proprietary and intellectual
property rights, title or interest in or to the Engine or related documentation
except as granted herein and Digital LAVA shall not at any time whether before
<PAGE>
or after the termination of this Agreement contest or aid others in contesting,
or doing anything which otherwise impairs the va}idity of any proprietary and
intellectual property rights, title or interest of Cinax in and to the Engine or
related documentation.
10.4 Intellectual Property Indemnity - Cinax shall defend or settle any claim
made or any suit or proceeding brought against Digital LAVA insofar as such
claim, suit or proceeding is based on an allegation that any of the Product
supplied to Digital LAVA pursuant to this Agreement infringes the proprietary
and intellectual property rights of any third party in or to any invention,
patent, copyright or any other rights, provided that Digital LAVA shall notify
Cinax in writing promptly after the claim, suit or proceeding is known to
Digital LAVA and shall give Cinax information and such assistance as is
reasonable in the circumstances. Cinax shall have sole authority to defend or
settle the same at Cinax's expense. Cinax shall indemnify and hold Digital LAVA
harmless from and against any and all such claims and shall pay all damages and
costs finally agreed to be paid in settlement of such claim, suit or proceeding.
This indemnity does not extend to any claim, suit or proceeding based upon any
infringement or alleged infringement of copyright by the combination of the
Product with other elements not under Cinax's sole control nor does it extend to
any Product altered by Digital LAVA either by enhancement or by combination with
product(s) of the Digital LAVA's design or formula. The foregoing states the
entire liability of Cinax for proprietary and intellectual proprietary rights
infringement related to the Product. If the Product in any claim, suit or
proceeding are held to infringe any proprietary or intellectual property rights
of any third party and the use thereof is enjoined or, in the case of settlement
as referred to above, prohibited, Cinax shall have the option, at its own
expense, to either (i) obtain for Digital LAVA the right to continue using the
infringing item, or (ii) replace the infringing item or modify it so that it
becomes non-infringing; provided that no such replacement or modification shall
diminish the performance of the Product.
10.4 Infringement by Third Parties - Should either party become aware of
possible or threatened infringement of the Engine or the Library, or any patents
or patent applications in the same, it shall notify the other party forthwith.
Each party undertakes to cooperate fully with the other party in any action
against any such possible or threatened infringer. Cinax shall have the
exclusive discretion to determine whether to take action, and what action to
take, to enter into any settlement and to receive any proceeds or awards in
respect of alleged infringements of the Engine or Library.
10.5 Infringement of Third Party Rights- In the event either party becomes aware
of the threatened infringement of any third party patent rights or copyrights of
the Engine or the Library, it shall promptly notify the other party of such a
claim. Each party shall have the right to negotiate, settle or defend any claim
by a third party alleging infringement by the Engine or the Library of any
copyrights or patents.
11. CONFIDENTIALITY AND USE LIMITATION
11.1 Confidentiality - Digital LAVA shall not at any time whether before or
after the termination of this Agreement disclose, furnish, or make accessible to
anyone any confidential information, which confidential information is deemed to
include the source code of the Product or related technical documentation or any
part thereof, or permit the occurrence of any of the
<PAGE>
above.
11.2 Safeguards - Digital LAVA shall take reasonable precautions to prevent
Product in its care and control from being duplicated, stolen, disclosed or used
for unauthorized purposes.
11.3 Non-disclosure of Agreement - Digital LAVA shall not disclose the terms,
content or nature of this Agreement to any third party unless Digital LAVA must
disclose such information as a result of a duly issued legal process or a formal
due diligence process.
11.4 References - Digital LAVA agrees that the fact of its use of the Engine may
be disclosed to others and Digital LAVA shall become a reference account for
Cinax and the Engine.
11.5 Competition - The parties acknowledge that this Agreement does not restrict
or prohibit either party from making arrangements with any third parties or
dealing in any way with any other software or hardware even if such party or
said other software or hardware competes with the Engine or services offered by
Cinax or Digital LAVA. Nothing contained in this Agreement shall prevent Digital
LAVA from developing or having developed or from acquiring from third parties,
products similar to and competitive with the Engine. Furthermore, nothing herein
shall preclude Digital LAVA from marketing such Digital LAVA-developed or third
party acquired products to others.
12. TERM AND TERMINATION
12.1 Term - This Agreement shall subsist for an initial term of two (2) years
commencing on the execution date of this Agreement ("Initial Term"). This
Agreement shall be reviewed in one-year periods ("Renewal Terms"), provided that
Digital LAVA is not in default under this Agreement at the time of renewal.
Renewal shall be on the same terms and conditions as are set out herein.
12.2 Termination - This Agreement shall terminate in each of the following
events:
(a) at the option of either party if the other party materially defaults in the
performance or observance of any of its obligations hereunder and fails to
remedy the default within 60 days after receiving written demand therefor;
or
(b) at the option of either party if the other party becomes insolvent or
bankrupt or makes an assignment for the benefit of creditors, or if a
receiver or trustee in bankruptcy is appointed for the other party, or if
any proceeding in bankruptcy, receivership, or liquidation is instituted
against the other party and is not dismissed within 30 days following
commencement thereof;
provided that the right of termination shall be in addition to all other rights
and remedies available to the parties for default or wrong-doing by each other.
12.3 Suspension of Obligations - If either party should default in the
performance or observance of any of its obligations hereunder then in addition
to all other rights and remedies available to the non-defaulting party, the non
defaulting party may suspend performance and observance of any or all its
obligations under this Agreement, without liability, until the other party's
default is remedied, but this section shall not permit Digital LAVA to suspend
its
<PAGE>
obligation to make payments owing in respect of Product.
12.4 Return of Engine - If Digital LAVA discontinues sales of the Product or use
of the Engine, or in the event of termination of this Agreement by either party,
Digital LAVA shall immediately return to Cinax all copies of the Engine thereof
and certify in writing to Cinax that Digital LAVA has done so,
13. GENERAL
13.1 Complete Agreement
This is the complete and exclusive statement of the Agreement between the
parties with respect to the subject matter contained herein and supersedes and
merges all prior representations, proposals, understandings and all other
agreements, oral or written, express or implied, between the parties relating to
the matters contained herein. This Agreement may not be modified or altered
except by written instrument duly executed by both parties.
13.2 Force Majeure
Dates or times by which either party is required to perform under this Agreement
excepting the payment of any fees or charges due hereunder shall be postponed
automatically to the extent that any party is prevented from meeting them by
causes beyond its reasonable control.
13.3 Notices
All notices and requests in connection with this Agreement shall be given or
made upon the respective parties in writing and shall be deemed given as of the
third day following the day the notice is faxed, providing hard copy
acknowledgment of successful faxed notice transmission is retained Notice may
also be deposited in the Canadian or US mails, postage pre-paid, certified or
registered, return receipt requested, and addressed to the respective parties at
the party's address as indicated above
13.4 Governing Law
This Agreement and performance hereunder shall be governed by the taws of
British Columbia.
13.5 Enforceability
If any provision of this Agreement shall be held to be invalid, illegal or
unenforceable under any applicable statute or rule of law, the validity,
legality and enforceability of the remaining provisions shall in no way be
affected or impaired thereby.
13.6 Non-Assignment
Digital LAVA may not assign its rights, duties or obligations under this
Agreement except to a related, affiliated or associated company by way of
reorganization of Digital LAVA or a successor to substantially all of the assets
and undertaking of Digital LAVA, without the prior written consent of Cinax.
Digital LAVA's obligation to pay any fees or charges due hereunder is not
assignable.
13.7 Non-Waiver
The waiver or failure of either party to exercise in any respect any right
provided for herein shall
<PAGE>
not be deemed a waiver of any further right hereunder.
13.8 No Aqency
The parties acknowledge that each as an independent contractor and nothing
herein constitutes a joint venture or partnership and neither party has the
right to bind nor act for the other as agent or in any other capacity.
13.9 Enurement
All covenants, representatives, warranties and agreements of the parties
contained herein shall be binding upon and shall enure to the benefit of the
parties and their respective successors and permitted assigns.
13.10 Survival
Sections 6 and subsections 5.2, 9.2, 9.3, 9.4, 9.5, 9.7, 10.2, 11.1, 11.2, 11.3,
11.4 and 12.3 shall survive termination and expiration of the agreement.
13.11 Interlocutory Remedy
Both parties acknowledge that irreparable harm shall result to the other if
either breaches their obligations under sections 6 and 10 and both parties
acknowledge that such a breach would not be properly compensable by an award of
damages. Accordingly, each party agrees that remedies for any such breach may
include, in addition to other available remedies and damages, injunctive relief
or other equitable relief enjoining such breach at the earliest possible date.
13.12 Disputes - Except with respect to applications for injunctions, any
dispute arising out of or in connection with this Agreement or any legal
relationship associated therewith shall be finally resolved at the British
Columbia International Commercial Arbitration Center (BClCAC) by a sole
arbitrator pursuant to the rules of the BClCAC.
<PAGE>
IN WITNESS WHEREOF the parties thereto have executed this Agreement, through
their respective officers, duly authorized for such purpose, as they so declare
and represent, as the Effective Date.
Digital Lava Inc. Cinax Designs Inc.:
By: /s/ Joshua D.J. Sharfman By: /s/ Eric Camirand
------------------------ -----------------
Joshua D.J. Sharrfman Eric Camirand
- --------------------- -------------
Authorized Signature Authorized Signature
Title: CEO Title: President
------------- ---------------
office of Company's representative office of Company's representative
<PAGE>
SCHEDULE A
SPECIFICATIONS, DELIVERABLES AND SCHEDULE
PRODUCT
Item Description Ownership List Price
- ---- ----------- --------- ----------
1. vPrism, Video Computing Suite Digital Digital Lava *****(1)
PRODUCT FOR LICENSE
Item Description Documentation
- ---- ----------- -------------
1. Windows Engine *****(1) (MPEG crop and concat APl doc
based on timecode inputs)
2. MAC Engine (Shared Library) APl doc
(MPEG crop and concat based on timecode inputs)
GENERAL SPECIFICATIONS *****(1)
PLATFORMS SUPPORTED:
1. Windows 95 and Windows NT compatible.
2. Mac OS System compatible
3. ActiveMovie MPEG-1 playback
- -------------
(1) Confidential information is omitted by a * and filed separately with the SEC
pursuant to a request for Confidentiality Treatment.
<PAGE>
Stream supported:
1. Any ISO 11172 compliant MPEG system streams
DELIVERABLES
Alpha/Project Design- as per specifications
Beta- Mac and Windows version
Final Product- Working version of both Mac and Windows version
<TABLE>
<CAPTION>
SCHEDULE INVOICE AMOUNT PRIME
TARGET DATE MILESTONE (USD) RESPONSIBILITY
- ----------- --------- -------------- --------------
<S> <C> <C> <C>
March 31, 1997 Contract Start *****(1) Cinax
Project Design
April 15, 1997 Delivery of Windows Beta *****(1) Cinax
May 2, 1997 Delivery of MAC Beta *****(1) Cinax
May 12, 1997 Delivery of Documentation *****(1) Cinax
Delivery of Windows and MAC
Final Product
May 16, 1997 License Commences *****(1) Digital LAVA
June 30, 1997 First Reporting Date *****(1) Digital LAVA
</TABLE>
- ------------
(1) Confidential information is omitted by a * and filed separately with the SEC
pursuant to a request for Confidentiality Treatment.
<PAGE>
SCHEDULE C
PRODUCT SALE REPORTING
Digital LAVA shall notify Cinax of all Product sales made on a quarterly basis,
on March 31, June 30, September 30 and December 31, in writing, in the format
specified below :
(i) the number of Product shipped (both Evaluation Copies and Production
Versions);
(ii) the date of shipment from Digital LAVA to third parties including Customers
(iii) the Extended Price of the Product, before shipping and taxes.
<PAGE>
EXHIBIT A
Partner Products
VideoVisor
vPrism
VideoVisor Publisher
<PAGE>
EXHIBIT B
RMA Server
The RMA Server includes the following:
1) installer for the appropriate operating system platform
2) operators manual
3) exposed interfaces to plug-in a monitor, administrator, file system,
datatype or broadcast datatype
4) base-level monitoring tool
5) ability to stream a datatype given a file format plug-in or broadcast
plug-in and license key
6) supports the following platforms: Windows NT; UNIX (Free BSD, Solaris 2.5,
Linux, DEC UNIX, BSDI, HP/UX, SunOS 4.1, IRIX and AIX)
<PAGE>
SCHEDULE I
Except for the RN Products, which are subject to Schedule 2, Partner shall pay
RN at the rate of *****(1) plus *****(1) of the total gross revenue receivable
by Partner from the sale, license or distribution of all RMA-based products,
including Partner Products, RMA Players, RMA Servers, License Keys, Updates, New
Release and any site licenses.
- --------
1 Confidential information is omitted by a * and filed separately with the SEC
pursuant to a request for Confidential Treatment.
<PAGE>
SCHUEDULE 2
Partner shall pay RN at the discounted rate of *****(1) off from RN's listed
retail price for the RN Products.
- --------
(1) Confidential information is omitted by a * and filed separately with the SEC
pursuant to a request for Confidential Treatment.
EXHIBIT 10 (k)
<PAGE>
[LOGO]
Digital Lava Inc.
August 28, 1998
Dr. James Stigler
Lesson Lab, Inc.
12436 Santa Monica Blvd.
Los Angeles, CA 90025
Dear James,
This letter shall serve as a formal Agreement between Digital Lava, Inc.
("Digital Lava") and Lesson Lab, Inc. ("Customer."). Customer desires that
Digital Lava perform custom development and programming services in connection
with Digital Lava's VideoVisor Product ("VideoVisor") to allow Customer to
customize VideoVisor as set forth in Attachment A hereto.
1. Services. Digital Lava shall provide the Services set forth on Attachment A
hereto and shall deliver to Customer all work product, documentation and
results of such Services (the "Deliverables") according to the Delivery
Schedule set forth on Attachment A. With respect to the performance of
Services, Customer will neither direct nor supervise Digital Lava's
employees or staff with respect to said individuals' tasks or
responsibilities without Digital Lava's express written consent. Digital
Lava intends to perform the Services at Digital Lava's premises.
2. Acceptance. Customer shall have [10] business days after delivery and
installation of the Deliverables (or re-installation resulting from
correction of defects by repair or replacement of the Deliverables) to
evaluate and test the Deliverables to determine that they conform with
Attachment A hereto. If Customer, in its best business judgment, determines
that the Deliverables fail to conform to the requirements of Attachment A,
it shall immediately notify Digital Lava in writing, specifying in detail
the reasons that Customer believes the Deliverables fail to conform.
Digital Lava shall have [15] business days in which to correct and resubmit
the Deliverables to Customer. Customer shall then have [3] business days in
which to re-evaluate and test the Deliverables for conformance with
Attachment A, and shall notify Digital Lava as set forth above of any
nonconformance. Digital Lava shall have [5] business days in which to
correct and resubmit the Deliverables to Customer. Customer shall then have
[2] business days to re-test the Deliverables, and to provide Digital Lava
with notice rejection of the Deliverables for nonconformance. Silence shall
be deemed to be acceptance. If Digital Lava fails to correct the
Deliverables to conform to Attachment A within such time period, Customer
<PAGE>
may terminate this Agreement. Upon acceptance of such Deliverables, Digital
Lava shall provide ongoing maintenance and support pursuant to Section 3(b)
of this Agreement.
3. Fees and Payment.
a. Progress Payments. In consideration for the rights and obligations set
forth herein, Customer will pay Digital Lava according to the Payment
Schedule set forth on Attachment A. By executing this Agreement,
Customer confirms the budget for the work, and the charges and
purchases set forth in Appendix A hereto. If Customer wishes to
enlarge the scope of the Services or implement additional features or
subtasks, the parties shall agree upon the costs therefor in advance
in writing.
b. Upgrades and Support. If Customer desires to receive continuing
support and upgrades beyond those set forth on Attachment A, it agrees
to pay Digital Lava an amount equal to Forty Percent (40%) of Payments
due for Services. Any such support and upgrade fees will be due in
cash at the beginning of the year for which such support will be
provided. Note: This was not discussed with Stigler. We can put this
in and choose to waive it.
c. Expenses. Customer will reimburse Digital Lava for incidental expenses
and disbursements incurred by Digital Lava related to travel and
lodging, shipping, and any other incidental expenses incurred in the
performance of the Services. Digital Lava shall bear sole
responsibility for expenses incurred to acquire the necessary tools to
perform the Services. If Digital Lava needs to procure any third party
computer software, hardware, other office supplies or any other
subcontracted services or products to implement, perform, or install
items set forth in Attachment A, which purchase will exceed $1000,
Digital Lava will notify Customer in advance, and obtain approval for
the amount of the purchase plus any applicable sales tax.
d. Billing. Digital Lava will invoice Customer for reimbursable
incidental expenses and disbursements and any Customer approved third
party purchases on a monthly basis. The invoice will include a report
itemizing the expenses and third party purchases. Customer shall pay
all invoices within 30 days of receipt, and shall not make any
deductions thereto.
4. Termination.
a. By Digital Lava. Failure of Customer to make payments to Digital Lava
in accordance with this Agreement shall be considered substantial
nonperformance and cause for termination. If Customer fails to make
payments when due, Digital Lava may, upon seven days' written notice
to Customer suspend performance under this agreement. Unless payment
in full is received by Digital Lava within seven days of the date of
the notice, the suspension shall take
<PAGE>
effect without further notice. In the event of a suspension of
services, Digital Lava shall have no liability to Customer for delay
or damage caused Customer because of such suspension of services.
b. By Customer. Customer shall have the right at any time to terminate
this Agreement on thirty (30) days' written notice. In the event of
such termination, and provided termination is not as a result of
Digital Lava's unremedied breach of this Agreement, Customer shall pay
Digital Lava then accrued payments due under the Delivery Schedule,
plus the pro-rated portion of the next payment, if any, due with
respect to items being worked on up to the time of termination, plus
reimbursable expenses, plus twenty percent (20%) of the total charges
due through the date of the termination. Should Customer wish to
delete specific subtasks, Customer will notify Digital Lava
immediately in writing. As long as said deletions represent less than
twenty percent of the labor cost for the project, Customer shall not
be liable for the twenty percent termination penalty.
c. Termination for Breach. Either party may terminate this Agreement upon
seven (7) days' written notice to the other party in the event the
other party materially breaches this Agreement and fails to cure such
breach within fifteen (15) days' written notice from the non-breaching
party.
5. Ownership. All right, title and interest in and to the object code only of
the Deliverables shall be owned by Digital Lava; provided, however, that
Customer shall have the perpetual, non-exclusive right to use the
Deliverables as set forth in this Agreement. No license or other rights in
the Deliverables is granted hereby.
6. Warranties of Digital Lava. Digital Lava represents, warrants and covenants
that: (i) it has the full power to enter into this Agreement and perform
the Services provided for herein, and that such ability is not limited or
restricted by any agreements or understandings between Digital Lava and
other persons or companies; (ii) any Deliverables, information or materials
developed for, or any advice provided to Digital Lava, shall not rely or in
any way be based upon confidential or proprietary information or trade
secrets obtained or derived by Digital Lava from sources other than Digital
Lava unless Digital Lava has received specific authorization in writing to
use such proprietary information or trade secrets; (iii) Digital Lava will
not enter into any contracts or otherwise obligate Customer in any way
without Customer's express approval; and (iv) Digital Lava will use its
best efforts to complete the Services in a timely, competent and
professional manner.
7. Indemnification. Customer hereby agrees to indemnify, hold harmless and
defend Digital Lava and its employees, contractors and agents from all
claims, damages, costs and expenses, including reasonable attorneys' fees
and litigation expenses, arising out of or in connection with any Customer
product by the Customer, Customer's content, Customer's website or
Customer's materials (not including the Customer's client parties),
including, without limitation: (i) infringement or violation, or alleged
infringement or
<PAGE>
violation, of any copyright, patent, trademark, trade secret, right of
publicity, right of privacy, or other proprietary rights of any third
party; and (ii) unfair trade practice, defamation or misrepresentation.
Digital Lava hereby agrees to indemnify, hold harmless and defend Customer
and its employees, contractors and agents from all claims, damages, costs
and expenses, including reasonable attorneys' fees and litigation expenses,
arising out of or in connection with the Deliverables, including, without
limitation: (i) infringement or violation, or alleged infringement or
violation, of any copyright, patent, trademark, trade secret, right of
publicity, right of privacy, or other proprietary rights of any third
party; and (ii) unfair trade practice, defamation or misrepresentation.
8. Limitation of Liability. NEITHER PARTY SHALL, UNDER ANY CIRCUMSTANCES, BE
LIABLE FOR LOSS OF PROFITS OR CONSEQUENTIAL, INCIDENTAL, SPECIAL OR
EXEMPLARY DAMAGES, ARISING FROM OR RELATED TO THIS AGREEMENT, WHETHER SUCH
CLAIM ARISES IN TORT OR IN CONTRACT, AND EVEN IF THE PARTIES HAVE BEEN
APPRISED OF THE LIKELIHOOD OF SUCH DAMAGES OCCURRING. EXCEPT IN RESPECT OF
LIABILITY WHICH IS BY LAW INCAPABLE OF EXCLUSION, IN NO EVENT SHALL EITHER
PARTY'S LIABILITY FOR ANY REASON EXCEED THE TOTAL SUMS PAID UNDER THIS
AGREEMENT.
9. Confidential Information. From the date of execution hereof for a period of
three (3) years from termination of this Agreement, neither party shall
use, disclose, or permit any person to obtain any confidential information
of the other party, including any materials developed or generated
hereunder (whether or not such confidential information is in written or
tangible form), except as specifically authorized by such party. As used
herein, confidential information shall mean a whole or any portion or phase
of any marketing plans, business plans, sales information, customer lists,
scientific or technical information, design, process, procedure, formula,
or improvement relating to the development, design, construction, and
operation of a program that is valuable and not generally known to a
party's competitors and any other information of a party of which the other
party becomes aware of as a result of this Agreement and which is indicated
to be confidential or, if not so indicated, which could reasonably be
interpreted to be confidential. The parties agree that, in the event of a
breach or threatened breach of the terms of this confidentiality provision,
the non-breaching party shall be entitled to an injunction prohibiting any
such breach. Any such relief shall be in addition to and not in lieu of any
appropriate relief in the way of money damages. The parties acknowledge
that Confidential Information is valuable and unique and that disclosure in
breach of this confidentiality provision will result in irreparable injury
to its owner.
10. No Assignment. Neither party shall assign, transfer or otherwise dispose of
this Agreement or any rights or duties hereunder without the prior written
consent of the other, provided that either party may assign this Agreement
pursuant to a sale of substantially all of its assets, a merger, or
consolidation.
<PAGE>
11. Arbitration. Any controversy, dispute or question arising out of, in
connection with or in relation to this Agreement or its interpretation,
performance or nonperformance, or any breach thereof, shall be determined
by arbitration in the County of Los Angeles, State of California, in
accordance with the rules then obtaining of the American Arbitration
Association. The cost and expenses of such arbitration including the
compensation of the arbitrator(s), the prevailing party's attorney's fees,
and the stenographer employed by them, shall be paid by the party against
whom the arbitrator renders a decision. The decision of the arbitrator
shall be final and binding upon the parties hereto and may be entered as a
final decree or judgment in any court of competent jurisdiction.
12. Miscellaneous. This Agreement and Attachment A attached hereto and
incorporated herein constitute the entire agreement between the parties,
and supersedes any and all agreements, whether written or oral, and may
only be amended or modified by a written instrument signed by both parties.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed by a duly authorized representative as of the most recent date shown
below.
Accepted:
Digital Lava, Inc.
By: /s/ Joshua D. J. Sharfman
-----------------------------------
Joshua D. J. Sharfman
Chief Executive Officer
Date: August 28, 1998
Accepted:
Lesson Lab, Inc.
By: /s/ James Stigler
-----------------------------------
Dr. James Stigler
Chief Executive Officer
Date: August 28, 1998
<PAGE>
Attachment A
Statement of Work
PURPOSE
The purpose of this document is to establish the statement of work for the
contract development that Stigler (provide name of entity) is contracting with
Digital Lava Inc.
PAYMENT SCHEDULE
This work will be performed for the contract amount of eighty thousand dollars
($80,000).
o Twenty-five percent (25%) will be due upon signing the agreement. That is
expected to occur no later than August 31, 1998.
o Twenty-five percent (25%) will be due upon delivery of the specification.
That is expected to occur no later than September 25, 1998.
o Twenty-five percent (25%) will be due upon delivery of a prototype. The
timing will be dependent upon the specification.
o Twenty-five percent (25%) will be due upon delivery of the solution. The
timing will be dependent upon the specification and the prototype.
PROJECT DESCRIPTION
The objective of the project and the contracted development is to enable Stigler
to gain programmatic control of VideoVisor and the VideoVisor database. This
programmatic control will enable Stigler to customize the behavior of VideoVisor
and to augment VideoVisor's function to tailor it for Stigler's unique
applications.
Stigler also desires to add the equivalent of Events Types and Events to the
VideoVisor database.
Lastly, there are some discrete VideoVisor enhancements that are desired that
must be implemented by Digital Lava staff and cannot be implemented externally
since the support does not yet exist within VideoVisor for those functions (to
be defined below).
APPROACH
The general approach will be to provide programmatic access to the VideoVisor
control and to the VideoVisor Logical Database.
<PAGE>
DETAILS
The following details are currently known. Additional details will be exposed in
the specification phase of the project.
1. Queries of physical video position and logical video position. In general,
queries will be supported programmatically by providing documentation and
sample applications that demonstrate how to traverse the VideoVisor object
model. Consider the following (logical - not actual) example where a
programmer would like to determine the current physical video position. The
programmer would create an assignment statement such as:
physicalPositionVariable = object.video.currentPosition.physicalFile()
Digital Lava will be responsible for the following:
o Documentation of the object model.
o Creation of sample applications illustrating the appropriate use of
the object model for the class of queries that Stigler would like to
make.
o Consultation to Stigler's programmer(s).
2. Writing to the VideoVisor database. External programs may write to the
VideoVisor database through the Logical Database Component. The Logical
Database Component provides two significant functions in this context:
o It insulates the application from the physical database complexities,
structure, changes, etc. and provides an object interface to the persistent
data store for VideoVisor.
o It provides input validation, error messages and assures the referential
integrity of the physical database. Thus, this is not a requirement of the
external application.
Digital Lava will need to perform the following tasks:
o Documentation of the logical database model.
o Promotion of any private methods or properties to public methods or
properties. This will require:
o Further documentation
o Creation of the input validation, error messages, etc. to support
the promotion from a private method or property to a public
method or property.
o Creation of sample applications illustrating the appropriate use of
the logical database model for the class of operations that Stigler
would like to perform.
o Consultation to Stigler's programmer(s).
3. Events and Event Types. Events and Event Types are not presently supported
in the VideoVisor object model or the Logical Database component.
<PAGE>
Implementing Events and Event Types as they are implemented in vPrism is
not consistent with the direction of VideoVisor. However, there is a
solution that is consistent that will be described below.
It is important to add the notion of a clip that is not associated with a
playlist to the next evolution of the VideoVisor database. This is
necessary to support publishing from the VideoVisor database substrate.
These clips will require unique naming, ordering, and all of the
classification support that will be useful for the creation of playlist and
the reuse of the clips once defined. To do this, Digital Lava will need to
do the following with respect to unassociated clips:
o The business rules for input validation, error messages, etc. will
need to be defined.
o Support and documentation for these data elements will need to be
added to:
o Physical database
o Logical database component
Once the support for clip publishing has been implemented in the physical
and logical database, then Stigler will be able to implement the precise
Event and Event Type handling that he desires. Since clips will be
identified uniquely in the logical database, Stigler can access them in the
manner described above in items one and two. Events and Event Types are
built on the foundation of clips. Stigler can create any event or event
type desired in a parallel database or in the same physical database as the
one used by VideoVisor. The main difference here is that Event Type and
Event support will not be available through the VideoVisor logical
database. However, with consultation from Digital Lava, Stigler can create
his own "event logical database" that handles all of the business rules for
input validation, error messages, etc. that he will need for supporting
events and event types as Stigler defines them. This will not burden
VideoVisor with "analysis" function and at the same time present the
architecture and substrate for Stigler to take full control of the behavior
of analysis events, the post processing, and the user interface around
them.
4. VideoVisor Enhancements. Support for the following enhancements to
VideoVisor will need to be made by Digital Lava.
a) Second parallel stream. Support for a second parallel reference stream
will need to be added. The most likely use of the parallel stream will
be to select from a second camera source. Only one stream will be
rendered at a time. It will be a requirement that these streams be
synchronized in time. VideoVisor will need to be enhanced to:
i) Define the source of the second stream
ii) Provide a mechanism for selecting which stream is rendered in the
video control window
iii) Provide a mechanism that allows the user to preview the stream
not being displayed in the video window (we will need to work out
how we preview a stream which is not
<PAGE>
a video stream - e.g. audio). This preview is only updated when
the user stops the video control in order to minimize processor
requirements.
b) Display toggle between physical file time and logical playlist time
for the video control LCD display. Note that this is only supported in
the case where the playlist is comprised of a single physical video
file.
c) Copy video frame (with markup, if any) to the clipboard.
d) Copy video position to clipboard and append dlcommand:vidpos= prior to
the video physical file position.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form SB-2 of our report dated July 31, 1998, except as
to Note 12 which is as of January 12, 1999, relating to the financial statements
of Digital Lava Inc., which appears in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
PricewaterhouseCoopers LLP
January 12, 1999
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