AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 26, 1999
REGISTRATION NO. 333-66099
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DIGITAL LAVA INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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Delaware 7371 95-4584080
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification identification No.)
Incorporation Or Code Number)
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>
Units, comprised of two shares of
common stock, par value $.0001
per share, and one redeemable common
stock purchase warrant, each exercisable
for one share of common stock(3) ....... 1,380,000 $ 15.10 $20,838,000 --
Common stock, par value
$.0001 per share(4) .................... 2,760,000 $ 7.50 $20,700,000 $ 5,755
Redeemable common stock
purchase warrants(5) ................... 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 (6) ........................... 120,000 $ .0001 $ 24 --
Common stock issuable upon exercise of
representative's warrants (6) .......... 240,000 $ 9.00 $ 2,160,000 $ 601
Redeemable warrants issuable upon
exercise of representative's
warrants (6) ........................... 120,000 $ .10 $ 12,000 $ 4
Common stock issuable upon
exercise of redeemable warrants
issuable upon exercise of
representative's
warrants (6) .......................... 120,000 $ 9.00 $ 1,080,000 $ 301
Common stock (7) ........................ 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 180,000 units that the underwriters have the option to purchase to
cover over-allotments, if
<PAGE>
any.
(4) Includes 360,000 shares of common stock that the underwriters have the
option to purchase to cover over-allotments, if any.
(5) Includes 180,000 redeemable common stock purchase warrants that the
underwriters have the option to purchase to cover over-allotments, if any.
(6) In connection with the registrant's sale of the securities offered, the
registrant is granting to the representative of the several underwriters
warrants to purchase 240,000 shares of common stock and 120,000 redeemable
common stock purchase warrants.
(7) Consists of currently outstanding shares held by selling stockholders.
------------
THE REGISTRANT 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 26, 1999
DIGITAL LAVA INC.
2,400,000 Shares of Common Stock and
1,200,000 Redeemable Common Stock Purchase Warrants
This is an initial public offering of 2,400,000 shares of common stock and
1,200,000 redeemable common stock purchase warrants of Digital Lava Inc. The
shares of common stock and the redeemable warrants will initially be offered as
units, each unit consisting of two shares of common stock and one redeemable
warrant.
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. The common stock and the warrants
have been approved for listing on the American Stock Exchange under the symbols
"DGV" and "DGV.WS," respectively.
The selling stockholders identified in this prospectus are offering an
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.
See "Risk Factors" beginning on page 7 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.
-----------------------
Per share Per warrant Total
--------- ----------- -----
Public offering price...................... $ $ $
Underwriting discounts and commissions..... $ $ $
Proceeds to Digital Lava................... $ $ $
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"]
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<PAGE>
TABLE OF CONTENTS
Prospectus Summary.......................................................... 5
Risk Factors................................................................ 7
Limited operating history......................................... 7
History of losses................................................. 7
Future profitability is uncertain................................. 7
Ability to continue as a going concern............................ 7
Potential default on notes........................................ 7
Quarterly operating results may fluctuate......................... 8
Our current management may be able to continue to
control the company.......................................... 8
Broad discretion over use of proceeds............................. 8
Lack of experience of representative.............................. 8
Purchasers of our securities will experience immediate
and substantial dilution..................................... 9
Customer concentration............................................ 9
Uncertain market.................................................. 9
Our markets are highly competitive................................ 9
Ability to adapt to rapid technological change.................... 9
Risk of product defects and product liability..................... 9
We may need additional financing ................................. 10
Inability to fully use net operating loss carryforwards........... 10
Risks associated with licensed third-party technology............. 10
Risks of infringement............................................. 10
Dependence on key personnel....................................... 10
Risks associated with international expansion..................... 10
Potential failure to be year 2000 compliant....................... 11
Sales and other taxes may be imposed upon us...................... 11
Liability for Internet content.................................... 11
Continuing influence of representative............................ 11
Shares eligible for future sales may adversely
affect market price.......................................... 12
Potential adverse effect of representative's warrants............. 12
Warrants may be redeemed.......................................... 12
Restrictions on resale of shares underlying warrants.............. 12
No prior public market for our securities......................... 13
Arbitrary determination of offering price of our securities....... 13
Need for two independent directors................................ 13
Use of Proceeds............................................................. 14
Dividend Policy............................................................. 15
Capitalization.............................................................. 16
Dilution.................................................................... 17
Selected Financial Information.............................................. 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................................ 21
Business.................................................................... 26
Management.................................................................. 35
Certain Transactions........................................................ 40
Principal Stockholders...................................................... 42
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<PAGE>
Selling Stockholders........................................................ 44
Description of Securities................................................... 46
Shares Eligible for Future Sale............................................. 49
Underwriting................................................................ 51
Legal Matters............................................................... 53
Experts..................................................................... 54
Additional Information...................................................... 54
Index to Financial Statements............................................... F-1
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<PAGE>
PROSPECTUS SUMMARY
DIGITAL LAVA INC.
Digital Lava is a provider of software products and services related to the
use of video for corporate training, communications, research and other
applications. Our vPrism(TM) software allows users to organize video content,
link video to other types of files and publish video on compact discs or digital
video discs, or "stream" the video information over intranets or the Internet.
Our award-winning VideoVisor(TM) software allows users to manage, manipulate and
integrate video with other information on their computers, much like word
processors manipulate textual data.
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 the Internet as a mass
communications medium and the advent of rich multimedia capabilities, such as
streaming, presents a significant new market opportunity for software
applications that enhance the effectiveness and productivity of persons who rely
on video information. We believe that our software technology 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.
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.
Common Stock Outstanding
Before the Offering 1,996,092 shares; excludes outstanding
options, including underwriters'
over-allotment option, and warrants.
Common Stock Outstanding
After the Offering 4,396,092 shares; excludes outstanding
options, including underwriters'
over-allotment option, and warrants.
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.
Amex Symbols common stock "DGV"
warrants "DGV.WS"
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<PAGE>
SUMMARY FINANCIAL INFORMATION
For information concerning the computation of net loss per share, see note
2 of notes to financial statements. Pro forma information gives effect to the
following recapitalization:
o conversion of the Series A, B, B-1 and C convertible preferred stock;
o the recording of a dividend to the holders of the Series B and C
convertible preferred stock due to a change in conversion ratios;
o the return and cancellation of shares of common stock and Series A
preferred stock held by certain officers of Digital Lava;
o 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
o the conversion of certain warrants exercisable for shares of common
stock into common stock.
The pro forma, as adjusted information also gives effect to:
o 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;
o 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;
o 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
o the recognition of the unamortized portion of the debt discount
associated with the notes payable and bridge notes as an expense.
<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 .................................... $ -- $ 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
----------- ----------- ----------- -----------
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 Total operating costs and expenses . 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 ............ $ (93.00) $ (31.14) $ (23.75) (22.05)
=========== =========== =========== ===========
Weighted average common shares used in
basic and diluted loss per share ........ 25,641 136,353 132,492 147,933
=========== =========== =========== ===========
<CAPTION>
September 30, 1998
-------------------------------------------------------
Pro Forma
Balance Sheet Data: Actual Pro Forma As Adjusted
----------- ----------- -----------
<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>
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<PAGE>
RISK FACTORS
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. 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.
Future profitability is uncertain. 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:
o establish widespread market acceptance of our existing products;
o successfully develop and deliver new products and services;
o respond quickly and effectively to competitive, market and technological
developments;
o expand sales and marketing operations;
o broaden customer support capabilities; o control expenses; and
o continue to attract and retain qualified personnel.
We may not be able to achieve profitability in the future.
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.
Potential default on notes. 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. We are currently seeking an agreement from such
holders to extend the maturity date of their notes to the earlier of February
19, 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 currently seeking an agreement from such
holders to extend the maturity date of their notes to the earlier of February
19, 1999 or the consummation of this offering. We are also seeking an identical
agreement from the holder of a note in the principal amount of $12,500 who has
been unavailable due to illness. We remain in default on such note and if we are
unable reach an agreement with the holder, he could foreclose on our assets
which may affect our ability to complete this offering. Holders of an aggregate
principal amount of $187,500 of such notes previously agreed to extend the
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<PAGE>
maturity date 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 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.
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.
Our current management may be able to continue to control the company.
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.
Broad discretion over use of proceeds. Although our current intent as to
the use of proceeds 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. Stockholders may not agree with management's
determination as to the use of proceeds and we cannot predict that the proceeds
will be invested to yield a favorable return.
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.
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<PAGE>
Purchasers of our securities will experience 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.
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.
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. As a result, demand and market
acceptance for our technology is uncertain. We cannot assure you that the market
for our technology will continue to emerge or become sustainable. 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. Barriers to entry in our market 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.
Ability to adapt to rapid technological change. 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
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<PAGE>
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.
We may need 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.
On occasions in the past, we have had to raise capital prior to when we had
originally anticipated. 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 have had some difficulty raising capital in the past
and 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.
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 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.
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.
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 continue selling such products without substantial changes to
such products, assuming such changes were possible. 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.
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. 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.
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
-10-
<PAGE>
addition, we will be subject to the risks of doing business abroad, including:
o political or economic instability in a region;
o changes in diplomatic and trade relationships;
o tariffs and other barriers and restrictions;
o restrictions on the transfer of funds;
o currency fluctuations;
o potentially adverse tax consequences; and
o the burdens of complying with foreign laws and regulations.
Such factors could materially adversely affect our business, financial condition
and results of operations.
Potential failure to be year 2000 compliant. 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. 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. However, should products or systems maintained by third
parties or our products and systems fail to be year 2000 compliant, despite the
representations of third parties and the testing of our products, we could incur
significant expenses to remedy any problems and our business could be seriously
damaged.
Sales and other taxes may be imposed upon us. 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.
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:
o may designate one person for election to our board of directors for five
years from the effective date of the registration statement;
o will receive warrants to purchase 240,000 shares of common stock and
120,000 redeemable common stock purchase warrants;
o 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
o will enter into a financial advisory and consulting agreement with us.
-11-
<PAGE>
Accordingly, the representative will continue to have influence over our
operations following the completion of this offering.
Shares eligible for future sale may adversely affect market price. If our
stockholders sell significant amounts of common stock, including shares issuable
upon the exercise of outstanding options and warrants, in the public market
after this offering, the market price of our common stock could fall. Such
sales, or the perception that such sales will occur, also may make it more
difficult 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 will be immediately freely tradeable. If the
over-allotment option is exercised in full, 3,640,436 shares of common stock and
1,380,000 warrants will be immediately freely tradeable. The remaining 1,115,656
of the shares of common stock to be outstanding upon the completion of the
offering will be eligible for public sale beginning 90 days after the date of
this prospectus, subject to the lock-up agreements described in the following
paragraph.
Except as noted below, all holders of shares of common stock and all
holders of options and warrants to acquire shares of common stock have entered
into 12 month lock-up agreements with us and the representative. The selling
stockholders and the holders of warrants to purchase 275,000 shares of common
stock issued in connection with our December 1998 bridge financing have entered
into nine month and six month lock-up agreements, respectively.
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.
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. We can only redeem the
warrants 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:
o exercise the warrants and pay the exercise price at a time when it may be
disadvantageous for them to do so;
o sell the warrants at the current market price, if any, when they might
otherwise wish to hold the warrants; or
o accept the redemption price, which is likely to be substantially less than
the market value of the warrants at the time of redemption.
-12-
<PAGE>
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
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.
No prior public market for our securities. 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. Since there has not been an active public market, the initial
public offering price may not bear any relationship to the actual value of the
common stock and the warrants.
Arbitrary determination of offering price of our securities. 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 are
not necessarily related to our asset value, net worth or other established
criteria of value, and may not be indicative of the prices that will prevail in
the trading market.
Need for two independent directors. 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. The American Stock Exchange requires us to have at least two
independent directors within 90 days of the completion of this offering. If we
do not have at least two independent directors by such date, our securities may
be de-listed by Amex which could severely impair the liquidity of our
securities.
You should carefully consider the risk factors described above 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 and other cautionary statements in this prospectus. The
risk factors 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.
-13-
<PAGE>
USE OF PROCEEDS
The net proceeds to Digital Lava from the sale of the securities offered in
this offering, 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:
Percent
Net of
Proceeds Total
----------- -----
Product development expenses ...................... $ 3,000,000 20.0%
Sales and marketing expenditures .................. 5,000,000 33.4
Facilities and other capital expenditures ......... 400,000 2.7
Expansion of internal operations .................. 300,000 2.0
Repayment of certain indebtedness ................. 4,469,247 29.9
Working capital and general corporate purposes .... 1,794,753 12.0
----------- -----
Total ............................. $14,964,000 100%
=========== =====
Product development expenses. Digital Lava intends to significantly
increase its investment in product development activities associated with the
development of new products and the enhancement of existing products, and also
expects to make expenditures for the licensing of technology, the acquisition of
additional software products and the hiring of software engineers and
development management.
Sales and marketing expenditures. 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.
Facilities and other capital expenditures. 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.
Expansion of internal operations. Digital Lava intends to expand internal
operations, including further improvement of its management information systems
and the continued development of its Web site.
Repayment of certain indebtedness. Digital Lava intends to repay:
o 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;
o 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;
o 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
o 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
-14-
<PAGE>
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 proceeds allocated for
payment of the notes.
Working capital and general corporate purposes. 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.
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.
-15-
<PAGE>
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 and (c) on
a pro forma, as adjusted basis. Pro forma information gives effect to the
following recapitalization:
o conversion of the Series A, B, B-1 and C convertible preferred stock;
o the recording of a dividend to the holders of the Series B and C
convertible preferred stock due to a change in conversion ratios;
o the return and cancellation of shares of common stock and Series A
preferred stock held by certain officers of Digital Lava;
o 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
o the conversion of certain warrants exercisable for shares of common stock
into common stock.
The pro forma, as adjusted information also gives effect to:
o 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;
o 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;
o 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
o the recognition of the unamortized portion of the debt discount associated
with the notes payable and bridge notes as an expense.
o the recognition of the unamortized portion of the debt discount associated
with the notes payable and bridge notes as an expense.
Shares of common stock outstanding does not include 250,000 shares of
common stock reserved for issuance under Digital Lava's stock option plan, of
which 139,622 shares will be subject to outstanding options upon completion of
this offering, and 666,408 shares of common stock issuable upon exercise of
outstanding warrants. 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
Actual Pro Forma As Adjusted
------------ ------------ ------------
<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>
-16-
<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:
o 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
o 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.
After giving effect to:
o the sale of the common stock and warrants offered in this offering, after
deducting underwriting discounts and commissions and estimated offering
expenses payable by Digital Lava,
o 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,
o 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
o the recognition of the unamortized portion of the debt discount associated
with the notes payable and the bridge notes 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 .................... $5.15
=====
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 in this offering. The calculations are based upon total
consideration given by new investors and
-17-
<PAGE>
existing stockholders before any deduction of underwriting discounts and
offering expenses payable by Digital Lava. The calculations regarding the
existing stockholders give effect to the following recapitalization:
o conversion of the Series A, B, B-1 and C convertible preferred stock into
common stock;
o the return and cancellation of shares of common stock and Series A
preferred stock held by certain officers of Digital Lava;
o the conversion of certain notes payable, accrued interest on such notes and
warrants issued in connection with the notes into common stock; and
o the conversion of certain warrants exercisable for shares of common stock
into common stock.
The calculations regarding the new investors attribute no value to the warrants.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
-------------------------- -------------------------- Price
Number Percent Amount Percent Per Share
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders 1,996,092 45% $ 2,729,499 13% $ 1.37
New investors 2,400,000 55% 18,000,000 87% $ 7.50
----------- ---------- ----------- -----------
Total 4,396,092 100% $20,729,499 100%
=========== ========== =========== ===========
</TABLE>
-18-
<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.
For information concerning the computation of net loss per share, see note 2
of notes to financial statements. Pro forma information gives effect to the
following recapitalization:
o conversion of the Series A, B, B-1 and C convertible preferred stock;
o the recording of a dividend to the holders of the Series B and C
convertible preferred stock due to a change in conversion ratios;
o the return and cancellation of shares of common stock and Series A
preferred stock held by certain officers of Digital Lava;
o 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
o the conversion of certain warrants exercisable for shares of common stock
into common stock.
<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
----------------- ----------------- ----------- -----------
<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>
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<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 the notes to the financial statements 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
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continue to account for 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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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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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.
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.
Digital Lava intends to use approximately $580,000 of the net proceeds of
this offering to pay consultants' fees and employee bonuses due upon completion
of this offering. In addition, during the two-year period following the closing
of this offering, Digital Lava is committed to pay approximately $1,100,000 in
salaries and consulting fees pursuant to certain employment and consulting
agreements.
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
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assurance that additional funds, if required, will be available to Digital Lava
on favorable terms, if at all.
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 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.
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. 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. However, should products or systems
maintained by third parties or our products and systems fail to be year 2000
compliant, despite the representations of third parties and the testing of our
products, we could incur significant expenses to remedy any problems and our
business could be seriously damaged.
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BUSINESS
Overview
Digital Lava is a provider of software products and services related to the
use of video for corporate training, communications, distance learning, research
and other applications. Digital Lava's 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 compact discs and digital video
discs, or stream the video information over intranets or the Internet.
VideoVisor allows end-users to access VideoCapsule files and manage, manipulate
and integrate video with other information on their desktop computers. 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.
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 software. Digital Lava believes that its
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 software applications 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 computer networks 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.
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
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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 streaming
technology, with a substantially greater amount of recorded media already stored
and available on the Internet.
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 compact discs. 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
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 productive user
experience.
Digital Lava's Solution
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Today, most computer video applications provide the user with a passive,
linear experience, similar to viewing a television program or videotape. Digital
Lava's 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.
With Digital Lava's 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 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 provider of software
applications related to the use of video and 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 believes that the fundamental
architecture of its products can be expanded to support additional features and
functions, including the synchronized deployment of additional data types and
enhanced video manipulation. 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 software
applications.
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 its 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
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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.
Enhance and Expand Internal Operations. Digital Lava intends to invest
substantially in operations and systems in anticipation of future growth. This
effort includes:
o improving its management information systems ;
o opening sales offices in multiple locations;
o integrating sales activities;
o investing in customer service;
o expanding its public relations, advertising, and trade show activities; and
o 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'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 compact
discs and digital video discs and streamed over 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.
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
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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 produced 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 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.
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.
Beginning in December 1998, Digital Lava began shipping VideoVisor Professional
to all customers that ordered VideoVisor software. Digital Lava has recorded
sales of approximately $40,000 for VideoVisor Professional through January 22,
1999.
Consulting, Programming and Other Services. Digital Lava provides a range
of consulting and programming services that principally relate to the creation
and maintenance of video content and applications based on Digital Lava's
technology. Digital Lava provides other general services to support its
customers in the deployment of its software products. Services are often bundled
with software license proposals to provide a complete solution to prospective
clients. Digital Lava also offers 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
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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 streaming media over the Internet and
intranets. As a NetShow independent software vendor, Digital Lava has the
opportunity to work with Microsoft to:
o raise Digital Lava's visibility through Microsoft press releases and
designation as a NetShow independent software vendor on Microsoft's NetShow
Web site;
o provide Digital Lava with technical assistance with regard to NetShow;
o assist Digital Lava in its marketing efforts, including invitations to
NetShow demonstrations at conferences and tradeshow exhibits; and
o 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 that is linked 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 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:
o raise the visibility of Digital Lava through press releases, promotional
mailings and through RealNetworks' Web site; and
o 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, which was
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.
Digital Lava also offers video hosting services to corporate and other
customers pursuant to a Web hosting service agreement with VStream, Inc.
Pursuant to such agreement, Digital Lava edits 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 streaming across the
Internet using either RealNetworks or Microsoft NetShow video servers.
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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 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 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 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
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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 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
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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.
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 Northwestern
University. Mr. Stigler is the brother of Dr. James Stigler.
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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 Worldwide 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 of the board 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 transactions. The Compensation Committee will recommend to
the board the compensation to be paid to
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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 1998 to Digital Lava's Chief Executive Officer and the other
executive officers whose 1998 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................. $190,000 -- -- --
Thomas Stigler
Vice President, Sales/Business Strategy. 177,501 -- -- --
Patricia Bodner
Vice President, Worldwide Marketing..... 132,917 -- -- --
Michael Goodell
Vice President, Consulting/Services..... 105,417 -- -- --
</TABLE>
Option Grants. No options were granted in 1998 to any of the officers named
in the above table.
Option Exercises and Option Values. The table sets forth certain
information with respect to stock options held by the above-named officers on
December 31, 1998. Such officers did not exercise any options in 1998. The value
of the options was based on the assumed initial offering price per share and the
exercise price of the options at December 31, 1998. Upon completion of the
offering, all of such options will vest and the exercise price will be reduced
to the initial public offering price per share. Pursuant to their employment
agreements, Mr. Sharfman and Mr. Stigler will each receive options to purchase
40,000 shares of common stock at the initial public offering price per share
following the completion of this offering.
<TABLE>
<CAPTION>
Number of Shares
of Stock Underlying Value of Unexercised In-
Unexercised Options the-Money Options
at December 31, 1998 at December 31, 1998 ($)
------------------------------- --------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Joshua Sharfman ..... -- -- -- --
Thomas Stigler ...... -- -- -- --
Patricia Bodner ..... 3,830 3,830 -- --
Michael Goodell ..... 8,207 8,207 -- --
</TABLE>
Employment and Consulting Agreements
Digital Lava has entered into employment agreements with Joshua Sharfman,
Chief Executive Officer, and President, upon completion of this offering, and
Thomas Stigler, Vice President of Sales and Business Strategy, which will
commence on the closing date of the offering and expire on the second
anniversary of such date. Pursuant to the terms of their employment agreements,
Mr. Sharfman and Mr. 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. Mr. Sharfman and Mr. Stigler
will be
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eligible to receive additional stock options, bonuses and a higher salary at the
discretion of the board of directors. In addition, the agreements provide that
if either Mr. Sharfman or Mr. Stigler 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, they will receive a
severance payment equal to their annual salary. Mr. Sharfman will receive 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. Mr.
Stigler will receive an identical severance payment 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 these agreements.
Digital Lava has entered into a consulting agreement with Roger Berman,
currently a part-time employee and director. 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. 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,
currently a part-time employee and Chairman of the Board. 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. At the closing of this offering, he will cease to be an employee of
Digital Lava.
Indemnification of Directors and Officers and Related Matters
The amended and restated certificate of incorporation 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 amended and restated certificate of incorporation 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:
o a breach of the director's duty of loyalty to Digital Lava or its
stockholders;
o acts or omissions not in good faith or that involve intentional misconduct
or knowing violation of law;
o a transaction from which the director derived an improper personal benefit;
or
o 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
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The board of directors has adopted Digital Lava's 1996 Incentive and
Non-Qualified Stock Option 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 of the board. 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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CERTAIN TRANSACTIONS
The law firm of Ehrenreich Eilenberg Krause & Zivian 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 Ehrenreich Eilenberg
Krause & Zivian 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
Ehrenreich Eilenberg Krause & Zivian 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 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. Prism will be paid upon
the consummation of this offering. 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 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
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<PAGE>
unaffiliated third parties. Digital Lava has adopted a policy, effective
following the consummation of this offering, that all future transactions
between it and its officers, directors and affiliates must (1) 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 (2) be on
terms no less favorable to Digital Lava than could be obtained from unrelated
third parties.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the common stock, as of December 31, 1998 by (1) each person known
by Digital Lava to be the beneficial owner of more than 5% of the outstanding
shares of common stock, (2) each director and executive officer of Digital Lava
and (3) all executive officers and directors of Digital Lava as a group.
<TABLE>
<CAPTION>
Percentage of Common Stock
Shares of Beneficially Owned
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
a group (8 persons)............................... 990,489(12) 47.0% 22.0%
</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. Unless otherwise indicated by footnote, and
subject to community property laws where applicable, 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 December 31, 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 December 31, 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, an affiliate
of Ehrenreich Eilenberg Krause & Zivian LLP.
(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 E&Z Investments.
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<PAGE>
(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 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.
The sale of the 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 such 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 their
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 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 December 31, 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.
Shares Number of Shares
Beneficially Shares Beneficially
Owned Prior to Being Owned After
Name of Beneficial Owner (1) Offering Offered Offering (2)
- ---------------------------- -------- ------- ------------
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
Norman Veitzer .................. 30,000 30,000 0
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<PAGE>
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
- ----------
(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
Prior to the sale of securities in 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:
o holders of an aggregate principal amount of $1,532,000 of such notes, 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, 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;
o 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;
o 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;
o 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;
o holders of outstanding warrants to acquire 107,689 shares of common stock
agreed to convert such warrants into 30,836 shares of common stock;
o 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
o 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.
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<PAGE>
All information set forth below gives effect to the amended and restated
certificate of incorporation to be filed prior to the sale of securities in 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 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 of the preferred stock, 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
Prior to the sale of securities in this 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.
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.
Description of Warrants
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<PAGE>
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 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 18 months after the date of this
prospectus, the warrants will be subject to redemption by Digital 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 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 in this offering.
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 amended and restated certificate of
incorporation 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.
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<PAGE>
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, 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.
Except as noted below, 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 securities, whether or not presently owned, for
a period of 12 months after the date of this prospectus without the prior
written consent of Digital Lava and the representative. The selling stockholders
and the holders of warrants to purchase 275,000 shares of common stock issued in
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connection with our December 1998 bridge financing have entered into similar
agreements with Digital Lava and the representative for nine month and six month
periods, respectively.
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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 Shares Number of Redeemable Common
Underwriters of Common Stock Stock Purchase 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. The underwriting agreement also
provides that the obligations of the several underwriters are subject to certain
specified conditions set forth in the underwriting agreement.
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.
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. 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 has been completed, 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.
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,
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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 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 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. The representative's warrants contain anti-dilution provisions providing
for adjustment of the number of securities issuable upon the exercise of the
warrants under certain circumstances. The representative's warrants grant to the
holders 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. In the event that the
representative elects not to exercise such 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 and may reclaim from an underwriter, or
dealer participating in the offering, for the account of other
-51-
<PAGE>
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 and the preceding 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 either paragraph is required, and, if they are undertaken, they may
be discontinued at any time.
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 representative. 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.
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.
-52-
<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 a
registration statement on Form SB-2 under the Securities Act with respect to the
securities offered in this offering. 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 in this offering, 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.
-53-
<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 26, 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 receivable ............................ -- (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 May 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 of the
promissory notes.
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
the 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 a 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 price 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 20,411 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. The Company believes that the
purchasers had access to and had an opportunity to review all relevant
information concerning the Company and sufficient knowledge and experience in
business and financial matters to evaluate the merits and risks of such an
investment. The Company believes that all of the investors were "sophisticated
investors."
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 dated September 18, 1998
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
4(ag)*** Registration Rights Agreement between the Company and United
Resources Partners dated September 18, 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 with Amendment No. 1 to SB-2 Registration Statement filed on January
12, 1999.
*** Filed with this Amendment No. 2 to SB-2 Registration Statement.
**** 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 26th
day of January, 1999.
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 January 26, 1999
/s/ Danny Gampe
- ---------------------------
Danny Gampe Chief Financial Officer January 26, 1999
(Principal Financial and
Accounting Officer)
*
- ---------------------------
Roger Berman Director January 26, 1999
*
- ---------------------------
Thomas Stigler Director January 26, 1999
*
- ---------------------------
Gerald Porter Director January 26, 1999
/s/ Joshua D.J. Sharfman
- ---------------------------
Joshua D.J. Sharfman Chief Executive Officer January 26, 1999
and Director (Principal
Executive Officer)
*By: /s/ Joshua D.J. Sharfman
---------------------------
Joshua D.J. Sharfman
Attorney-in-fact
II-9
EXHIBIT 3(e)
FORM OF
AMENDED AND RESTATED
BY-LAWS
-OF-
DIGITAL LAVA, INC.
(a Delaware corporation hereinafter called the "Corporation")
Effective as of January __, 1999
ARTICLE I
Offices
SECTION 1.01. Offices. The Corporation may have offices both within and
without the State of Delaware as the Board of Directors may from time to time
determine.
ARTICLE II
Meetings of Stockholders
SECTION 2.01. Place of Meetings. Meetings of stockholders may be held at
any place, either within or without the State of Delaware, designated by the
Board of Directors.
SECTION 2.02. Annual Meeting. The annual meeting of stockholders for
election of directors shall be held on such date and at such time as shall be
designated by the Board of Directors. Any other proper business may be
transacted at the annual meeting.
SECTION 2.03. Special Meetings. Stockholders are not permitted to call a
special meeting of stockholders or to require the Board of Directors or officers
of the Corporation to call such a special meeting. A special meeting of
stockholders may only be called by a majority of the Board of Directors or by
the chief executive officer. The business permitted to be conducted at a special
meeting of stockholders shall be limited to matters properly brought before the
meeting by or at the direction of the Board of Directors. Any action required or
permitted to be taken by the stockholders must be taken at a duly called and
convened annual meeting or special meeting of stockholders and cannot be taken
by consent in writing; provided, however, that the foregoing shall not apply
prior to the completion by the Corporation of an IPO (as defined in the
certificate of incorporation).
SECTION 2.04. Quorum. The holders of a majority of the shares entitled to
vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
SECTION 2.05. Organization. Meetings of stockholders shall be presided over
by the Chairman, if any, or in his absence (or election not to preside) by the
Vice Chairman, if any, or in his absence (or election not to preside) by the
President, or in his absence (or election not to preside) by a Vice President,
or in the absence of the foregoing persons by a chairman designated by the
<PAGE>
Board of Directors, or in the absence of such designation by a chairman chosen
at the meeting. The Secretary shall act as secretary of the meeting, but in his
absence (or election not to so act) the chairman of the meeting may appoint any
person to act as secretary of the meeting.
SECTION 2.06. Conduct of Meetings. The Board of Directors may adopt such
rules and regulations for the conduct of the meeting of stockholders as it shall
deem appropriate. Except to the extent inconsistent with such rules and
regulations as adopted by the Board of Directors, the chairman of any meeting of
stockholders shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts as, in the judgment of such
chairman, are appropriate for the proper conduct of the meeting. Such rules,
regulations or procedures, whether adopted by the Board of Directors or
prescribed by the chairman of the meeting, may include, without limitation, the
following: (i) the establishment of an agenda or order of business for the
meeting; (ii) rules and procedures for maintaining order at the meeting and the
safety of those present; (iii) limitations on attendance at or participation in
the meeting to stockholders of record of the Corporation, their duly authorized
and constituted proxies or such other persons as the chairman of the meeting
shall determine; (iv) restrictions on entry to the meeting after the time fixed
for the commencement thereof; and (v) limitations on the time allotted to
questions or comments by participants. Unless and to the extent determined by
the Board of Directors or the chairman of the meeting, meetings of stockholders
shall not be required to be held in accordance with the rules of parliamentary
procedure.
SECTION 2.07. Nomination of Directors. Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors; provided, however, that the following procedures shall not apply to
the nomination of persons for election as directors by vote of any class or
series of preferred stock of the Corporation. Nominations of persons for
election to the Board of Directors of the Corporation at the annual meeting may
be made at such meeting by or at the direction of the Board of Directors, by any
committee appointed by the Board of Directors or by any common stockholder of
the Corporation entitled to vote for the election of directors at the meeting
who complies with the notice procedures set forth in this Section 2.07. Such
nominations, other than those made by or at the direction of the Board of
Directors or by any committee appointed by the Board of Directors, shall be made
pursuant to timely notice in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 60 days nor
more than 90 days prior to the meeting; provided, however, that in the event
that less than 70 days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be timely
must be so received not later than the close of business on the fifteenth day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made, whichever first occurs. Such stockholder's
notice to the Secretary shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or re-election as a director, (i)
the name, age, business address and residence address of the person, (ii) the
principal occupation or employment of the person, (iii) the class, series and
number of shares of capital stock of the Corporation which are beneficially
owned by the person
2
<PAGE>
and (v) any other information relating to the person that is required to be
disclosed in solicitations for proxies for election of directors pursuant to the
Rules and Regulations of the Securities and Exchange Commission under Section 14
of the Securities Exchange Act of 1934, as amended; and (b) as to the
stockholder giving the notice (i) the name and record address of the
stockholder, (ii) the class, series and number of shares of capital stock of the
Corporation which are beneficially owned by the stockholder and (iii) a
description of all arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder. Such notice shall be accompanied by the executed consent of each
nominee to serve as a director if so elected. The Corporation may require any
proposed nominee to furnish such other information as may reasonably be required
by the Corporation to determine the eligibility of such proposed nominee to
serve as a director of the Corporation. No person shall be eligible for election
as a director of the Corporation by the holders of Common Stock of the
Corporation unless nominated in accordance with the procedures set forth herein.
The officer of the Corporation presiding at an annual meeting shall, if the
facts warrant, determine that a nomination was not made in accordance with the
foregoing procedure and, if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
SECTION 2.08. Advance Notification of Business to be Transacted at
Stockholder Meetings. To be properly brought before the annual or any special
meeting of stockholders, business must be either (a) specified in the notice of
meeting (or any supplement or amendment thereto) given by or at the direction of
the Board of Directors or any committee appointed by the Board of Directors, (b)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors, or (c) otherwise properly brought before an annual meeting
by a stockholder. In addition to any other applicable requirements, for business
to be properly brought before any annual meeting of stockholders by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 70 days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so received not later than the
close of business on the fifteenth day following the day on which such notice of
the date of the meeting was mailed or such public disclosure was made, whichever
first occurs. Such stockholder's notice to the Secretary shall set forth as to
each matter the stockholder proposes to bring before the meeting (i) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (ii) the name and record
address of the stockholder proposing such business, (iii) the class, series and
number of shares of capital stock of the Corporation which are beneficially
owned by the stockholder and (iv) any material interest of the stockholder in
such business.
No business shall be conducted at the annual or any special meeting of
stockholders unless it is properly brought before the meeting in accordance with
the procedures set forth in this Section
3
<PAGE>
2.08, provided, however, that nothing in this Section 2.08 shall be deemed to
preclude discussion by any stockholder of any business properly brought before
the meeting in accordance with the procedures set forth in this Section 2.08.
The officer of the Corporation presiding at the meeting shall, if the facts
warrant, determine that business was not properly brought before the meeting in
accordance with the provisions of this Section 2.08 and, if he should so
determine, he shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted.
SECTION 2.09. Compliance with Securities and Exchange Act of 1934.
Notwithstanding any other provision of these By-laws, the Corporation shall be
under no obligation to include any stockholder proposal in its proxy statement
materials or otherwise present any such proposal to stockholders at a special or
annual meeting of stockholders if the Board of Directors reasonably believes
that the proponents thereof have not complied with Sections 13 and 14 of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder, and the Corporation shall not be required to include in
its proxy statement material to stockholders any stockholder proposal not
required to be included in its proxy material to stockholders in accordance with
such Act, rules, or regulations
ARTICLE III
Directors
SECTION 3.01. Number of Directors. The number of directors which shall
constitute the entire Board of Directors shall be as set by the Board of
Directors from time to time, and shall be not less than one (1) nor more than
seven (7). No reduction in the number of directors constituting the entire Board
of Directors shall have the effect of removing any director before that
director's term of office expires.
SECTION 3.02. Term of Office. Subject to the provisions of the certificate
of incorporation, each director, including a director elected to fill a vacancy,
shall hold office until such director's successor is elected and qualified or
the earlier resignation or removal of such director.
SECTION 3.03. Meetings. The Board of Directors of the Corporation may hold
meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held without notice
at such time and at such place as may from time to time be determined by the
Board of Directors. Special meetings of the Board of Directors may be called by
the Chairman, the Vice Chairman, the Chief Executive Officer, the President or
the Secretary or by resolution of the Board of Directors. Unless waived, notice
of the time and place of special meetings shall be delivered to each director
either (i) personally (either orally or in writing), (ii) by telephone, (iii) by
telex, telecopy or other facsimile transmission, or (iv) by first-class mail,
postage prepaid, addressed to a director at that director's address as it is
shown on the records of the Corporation. If the notice is mailed, it shall be
deposited in the United States mail at least four
4
<PAGE>
days before the time of the holding of the meeting (ten days in the case of a
director whose address as shown on the records of the Corporation is outside of
the United State of America). If the notice to a director is delivered in any
other manner it shall be delivered (which shall for this purpose mean received
by the director) at least 24 hours before the time of the holding of the
meeting.
SECTION 3.04. Quorum. At all meetings of the Board of Directors, a majority
of the entire Board shall be necessary and sufficient to constitute a quorum for
the transaction of business.
SECTION 3.04. Organization. Meetings of the Board of Directors shall be
presided over by the Chairman, if any, or in his absence by the Vice Chairman,
if any, or in the absence of the foregoing persons by a chairman chosen at the
meeting.
SECTION 3.05. Meetings by Conference Telephone or Similar Device. Members
of the Board of Directors, or any committee designated by the Board of
Directors, may participate in a meeting of the Board of Directors, or any
committee, by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and such participation in a meeting shall constitute presence in person at the
meeting.
SECTION 3.06. Board Action by Written Consent Without a Meeting. Any action
required or permitted to be taken at any meeting of the Board of Directors, or
of any committee thereof, may be taken without a meeting if all members of the
board or committee, as the case may be, consent thereto in writing and the
writing or writings are filed with the minutes of proceedings of the board or
committee. Written consents representing actions taken by the board or committee
may be executed by telex, telecopy or other facsimile transmission, and such
facsimile shall be valid and binding to the same extent as if it were an
original.
ARTICLE IV
Officers
SECTION 4.01. General. The officers of the Corporation shall be chosen by
the Board of Directors and shall be a Chairman, a Vice Chairman, a Chief
Executive Officer, a President, a Chief Financial Officer, and a Secretary. The
Board of Directors, in its discretion, may also choose one or more Vice
Presidents, Assistant Secretaries, and other officers. Each such officer shall
hold office until his resignation or removal. The Board of Directors may remove
any officer with or without cause at any time, but such removal shall be without
prejudice to the contractual rights of such officer, if any, with the
Corporation.
SECTION 4.02. Powers and Duties of Officers. The chief executive officer of
the Corporation shall have such powers in the management of the Corporation as
may be prescribed in a resolution by the Board of Directors and, to the extent
not so provided, as generally pertain to such office. The chief executive
officer shall see that all orders and resolutions of the Board of Directors are
carried into effect.
5
<PAGE>
The other officers of the Corporation shall have such powers and duties in
the management of the Corporation as may be prescribed in a resolution by the
Board of Directors or delegated to them by the chief executive officer and, to
the extent not so provided or delegated, as generally pertain to their
respective offices, subject to the control of the Board of Directors and the
chief executive officer. Without limiting the foregoing, the Secretary shall
have the duty to record the proceedings of the meetings of the stockholders and
directors in a book to be kept for that purpose.
ARTICLE V
Miscellaneous
SECTION 5.1. Waivers of Notice. Whenever any notice is required by law, the
Certificate of Incorporation or these By-laws, to be given to any director,
member of a committee or stockholder, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, and, in the case of a waiver of notice of a meeting, whether or
not the business to be transacted at or the purposes of such meeting is set
forth in such waiver, shall be deemed equivalent thereto. The attendance of any
person at any meeting, in person or, in the case of the meeting of stockholders,
by proxy, shall constitute a waiver of notice of such meeting except where such
person attends such meeting for the express purpose of objecting at the
beginning of such meeting to the transaction of any business on the grounds that
such meeting is not duly called or convened.
SECTION 5.2. Fiscal Year. The fiscal year of the Corporation shall be fixed
from time to time by the Board of Directors.
SECTION 5.3. Seal. The corporate seal shall have inscribed thereon the name
of the Corporation and shall be in such form as may be approved from time to
time by the Board of Directors.
SECTION 5.4. Entire Board. As used in these By-laws, "entire Board of
Directors" means the total number of directors which the Corporation would have
if there were no vacancies in the Board of Directors.
6
EXHIBIT 4(ac)
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of September 18, 1998, between DIGITAL LAVA
INC., a Delaware corporation (the "Company"), and United Resources Partners (the
"Holder").
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 September 18, 1998, until 5:30
p.m., New York time, on September 17, 2008, 200,000 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 $0.45 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 September 18, 1998, until 5:30 p.m., New York time, on September 17,
2008.
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 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
7
<PAGE>
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 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.
8
<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. 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 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
<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 Exercise Price, 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 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.
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(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 (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
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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 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,
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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 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 (2(cent)) 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 (2(cent)) 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
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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 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
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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 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.
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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. 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
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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: /s/ Danny Gampe
---------------------------
Authorized Officer
ACCEPTED AND AGREED TO:
United Resources Partners
By: /s/ Dennis M. Quirk
-----------------------------
Name: Dennis M. Quirk
Title: President
Address: 26 Broadway, Suite 1607
New York, NY 10017
Social Security/Tax I.D. No.:
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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 SEPTEMBER 18, 1998
UNTIL
5:30 P.M., NEW YORK TIME, SEPTEMBER 17, 2008
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 from September 18, 1998, until 5:30
p.m. New York time on September 17, 2008 ("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.
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
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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 September 18, 1998
DIGITAL LAVA INC.
By: ____________________________
Authorized Officer
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[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 September 18, 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)
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[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)
21
EXHIBIT 4(ag)
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") dated as of September 18,
1998 is made by and among DIGITAL LAVA INC., a Delaware corporation (the
"Company"), United Resources Partners (the "Holder").
RECITALS
In connection with the issuance of certain of the Company's securities
pursuant to a Warrant Agreement between the Company and the Holder dated as of
the date hereof, which agreement among other things provides for the issuance to
the Holder of certain warrants (the "Warrants") to purchase shares of the
Company's common stock ("Common Stock"), the Company has agreed to grant to the
Holder 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 Holder 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
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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 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 the earlier of 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
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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
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 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
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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.
(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
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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 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
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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 (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
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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 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
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<PAGE>
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
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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.
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) 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.
(d) 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.
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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: ____________________________________
Authorized Officer
UNITED RESOURCES PARTNERS
By: /s/ Dennis M. Quirk
------------------------------------
Name: Dennis M. Quirk
Title: President
Address: 26 Broadway, Suite 1607
New York, NY 10004
Social Security/Tax I.D. No.: ___________
NO. OF UNITS OF SUBSCRIPTION: __
31
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 26, 1999
