UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ________.
Commission file number: 0-266932
--------
PHOTOLOFT.COM
-------------
(Name of Small Business Issuer in Its Charter)
Nevada 87-0431036
------ ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
300 Orchard City Drive, Suite 142, Campbell, California 95008
-------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Issuers Telephone Number: (408) 364-8777
---------------
Securities registered pursuant to Section 12(b) of the Act:
None
----
(Title or Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001
------------------------------
(Title or Class)
1
<PAGE>
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
(1) Yes [ X ] No [ ]
(2) Yes [ ] No [ X ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]
State issuer's revenues for its most recent fiscal year. $254,500
--------
As of March 15, 2000 the approximate aggregate market value of the outstanding
voting and non-voting common equity held by non-affiliates of the registrant was
$14,610,324 (based upon the closing price for shares of the registrant's common
stock as reported by OTC Bulletin Board on that date). Shares of common stock
held by each officer, director, and holder of 5% or more of the outstanding
common stock of the registrant have been excluded in that such persons may be
deemed to be affiliates of the registrant. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
As of March 15, 2000, the registrant had 12,881,875 shares of common stock,
$0.001 par value per share, outstanding.
Transitional Small Business Disclosure Format [ ] Yes; [ X ] No
2
<PAGE>
PHOTOLOFT.COM
FORM 10-KSB
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PART I.
- -------
<S> <C> <C>
ITEM 1. Description of Business 4
ITEM 2. Description of Property 24
ITEM 3. Legal Proceedings 24
ITEM 4. Submission Of Matters To A Vote Of Security Holders 25
PART II.
- --------
ITEM 5. Market For Common Equity and Related Stockholder Matters 26
ITEM 6. Management's Discussion and Analysis or Plan of Operation 30
ITEM 7. Financial Statements 41
ITEM 8. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure 41
PART III.
- ---------
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;ComplianceWithSection 16(a)
of the Exchange Act 42
ITEM 10. Executive Compensation 46
ITEM 11. Security Ownership Of Certain Beneficial Owners and Management 49
ITEM 12. Certain Relationships and Related Transactions 50
ITEM 13. Exhibits and Reports On Form 8-K 53
</TABLE>
3
<PAGE>
PART I
------
This Form 10-KSB contains forward-looking statements. These
forward-looking statements are subject to significant risks and uncertainties,
including information included under Items 1 and 6 of this Form 10-KSB, which
may cause actual results to differ materially from those discussed in such
forward-looking statements. The forward-looking statements within this Form
10-KSB are identified by words such as "believes," "anticipates," "expects,"
"intends," "may," "will" and other similar expressions regarding our intent,
belief and current expectations. However, these words are not the exclusive
means of identifying such statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances and statements made in the future tense are forward-looking
statements. Readers are cautioned that actual results may differ materially
from those projected in the forward-looking statements as a result of various
factors, many of which are beyond our control. We undertake no obligation to
publicly release the results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances occurring
subsequent to the filing of this Form 10-KSB with the Securities and Exchange
Commission. Readers are urged to carefully review and consider the various
disclosures made by us in this Form 10-KSB, including those set forth under
"Factors Affecting Our Operating Results, Business Prospects and Stock Price" in
Item 6.
ITEM 1. DESCRIPTION OF BUSINESS
PhotoLoft.com is a photo-sharing and digital imaging e-commerce
"community", meaning that individuals with access to the Internet can store,
view and share their personal photographic images on pages located on the World
Wide Web which we maintain and can be accessed from our web site at
www.photoloft.com. As a result, our web site is a "community" of pages on the
World Wide Web with images collected from around the world. Our primary focus
is a business-to-business model, whereby we make digital imaging available to
other businesses . In doing that, we also maintain pages on the World Wide Web
for other companies that wish to utilize our digital imaging capabilities.
Our viewing and printing technology allows users to access and print their
personal images quickly, easily and inexpensively. We organize the images on
our web site by areas of interest. For example, a visitor interested in forests
can access our web site and choose to view a selection of web pages that
includes images of forests. Visitors to the pages within our web site can
choose from over 90 categories in which to catalogue their images and view
others. This provides users with a quick reference point to access images of
interest to them. This also enhances our ability to attract advertisers to the
pages within our web site.
We generate advertising revenue when advertisers purchase space on the
pages within our web site to post their own images and messages advertising
their products or services. The organization of images on the pages within our
web site allows potential advertisers the opportunity to target their audience.
4
<PAGE>
We also offer an e-commerce program through which we market and sell a variety
of photo-personalized gifts, customized greeting cards, and prints in standard
photographic sizes as well as poster sizes.
BACKGROUND
Although our company was originally formed in November 1993, we adopted our
current business model, which is described in the previous paragraph, in June
1998. In that regard, we are very much like a start-up company and we have
received minimal revenues since the adoption of our new business model.
Under our previous business model, we operated under the corporate name,
AltaVista Technology, Inc. Alta Vista's business model was formed to take
advantage of the burgeoning need for fun and creative applications for the
Internet. The market place was rapidly leaving behind cumbersome computers that
required highly trained operators and was turning to PC-based computing that
allowed people with average computer skills to enter a new world. AltaVista
began developing imaging software that made computing even more fun, and the
various products that were designed and marketed brought images to life on the
computer. In 1995 AtlaVista introduced Howdy!, the world's first ever
multi-media e-mail tool. Still being shipped today, the software was an instant
success because it was engaging, fun and easy to use. As a component of this
product, AltaVista also established web pages via e-mail. Over the years,
AltaVista developed and marketed the following products:
Howdy! - an electronic postcard maker for Windows PCs
Howdios - additional postcards for Howdy! owners available on line
Webcannon! - a system allowing users to create web pages
Media Wrangler - a software tool allowing users to create emails which
include graphics and animation.
SmartNet Singles - thematic Internet access kits
Internet Suite - a suite of products designed to get users up and running
quickly and easily on the Internet.
As a software developer, AltaVista followed the traditional revenue model
of bundling its software with original equipment manufacturers. As that market
evolved into a non-revenue source, we began exploring new ways to bring products
to market at a profit. This coincided with the phenomenal growth of the
Internet and the evolution of Internet users who were rapidly beginning to
utilize the medium as a source of entertainment as well as information. The
expertise of AltaVista was clearly in Internet imaging technology and the
decision was made to aggregate images into a photo-sharing community.
In August 1998 we sold our URL, AltaVista.com, to Digital Equipment, now
Compaq Computer, and changed our name to PhotoLoft.com, Inc., a California
corporation. The official launch of our new web site was in February 1999, the
same month that Photoloft.com, Inc. entered into a reorganization with Data
Growth, Inc., a non-operating public company incorporated in Nevada. Under the
terms of the reorganization, Photoloft.com, Inc. shareholders received shares of
5
<PAGE>
Data Growth in exchange for their shares of common stock, Photoloft.com, Inc.
became a wholly-owned subsidiary of Data Growth, all of the executive officers
and directors of Data Growth resigned, the executive officers and directors of
Photoloft.com, Inc. became the executive officers and directors of Data Growth,
and Data Growth changed its name to PhotoLoft.com. See "Item 12. Certain
Relationships and Related Transactions." All of our business is currently
conducted through Photoloft.com, Inc. Our principal executive offices are
located at 300 Orchard City Drive, Suite 142, Campbell, California 95008
(telephone: 408-364-8777).
PHOTO PROCESSING TECHNOLOGY
The continuing evolution of the Internet as an entertainment medium coupled
with rapid advances in technology are working together to create a very
different photo processing model that the traditional chemical film based model.
Typically, photographers drop their used film at a photo processor, return at a
later date to retrieve it, make decisions for additional copies of certain
photographs and then return several days later to get those as well. Digital
photography, the Internet and advances in printing technology are changing that
model.
As prices have dropped, sales of digital cameras have increased
dramatically as they become more accessible to more people. A Lyra Research
Report issued in October 1999 estimated that worldwide sales of digital cameras
would reach over 18.7 million units by 2002, compared with approximately 5.67
million units in 1998. In Japan today, sales of digital cameras exceed those of
film-based cameras.
Developers of printers continue to focus on creating crisp, clear prints
delivered via the home printer at affordable prices. Companies like
Hewlett-Packard derive more revenue from ink sales than printer sales, and
printers that provide consumers with excellent images, using a lot of ink in the
process, help to drive the technology.
The pages within our web site allow visitors to place digital images
captured by their digital cameras onto the Internet so that others can view the
images by down-loading them from the pages within our web site. Additionally,
traditional film-based photos can easily be scanned onto the Internet. A
visitor can then choose to print the photos of choice from the comfort of his or
her own computer. This avoids getting unwanted photos, provides an excellent
storage place for the images, and ensures that photos can be found and reprinted
at any time. Using our software, the prints made will be to the highest
resolution of the printer, which typically provides photo-finish quality prints.
All printers shipped by Epson and Hewlett-Packard in the U.S. in 1999 have this
capability. The printer prices start at $250. In addition, users can designate
what standard photographic size they prefer, anything from wallet to 8"x10".
In addition, on-line proofing is becoming more popular as photo-finishers
are bowing to the digital age. Working with our customers Pakon and Canon
U.S.A., we have developed a DealerLoft product that allows photo-finishers to
scan the images into a temporary on-line storage location (hosted by
PhotoLoft.com). Customers have 30 days to move images into permanent
PhotoLoft.com files and can order prints directly from the Web site. At the
labs' and consumers' discretion, the prints are mailed to the consumer or picked
up at the lab.
6
<PAGE>
THE INTERNET
The move from a chemical-based photo solution to a digital one coincides
with the explosive growth of the Internet into a significant global medium for
entertainment, communications, news, information and commerce. Commercialization
of the Internet began in the mid-1980s, with e-mail providing the primary means
of communication. However, it was the Internet's World Wide Web, which provided
a means to link text and pictures, that has led to the blossoming of e-commerce
and sparked the explosive growth of the Internet in the 1990s. Today, according
to NewMedia, at least 100 million people in 135 countries send and receive
information, and purchase products and services, through the Internet.
While a number of factors have contributed to the continued growth of the
Internet, several specific trends have been particularly important. The first
has been the emergence of community web sites. Community sites provide a
platform for gathering the rapidly increasing volume of personalized content
created by Internet users. Online communities also provide a single online
destination where like-minded users can interact and quickly find pertinent
information, products and services related to their particular needs. Community
sites generally offer free services including access to e-mail accounts, chat
rooms, message boards, news and entertainment. Through these features,
community sites can provide Internet users with the same opportunities for
expression, interaction, sharing, support and recognition that they seek in the
everyday world. A successful community will accomplish these goals and create a
base of loyal members who will collaborate in the evolution of the site as their
needs and interests change and expand.
To date, advertisers on the Internet have typically used traditional
navigational sites and professionally created content sites to promote their
products and services online. However, online communities allow them to reach
highly targeted audiences within a more personalized context, thus providing the
opportunity to increase advertising efficiency and improve the likelihood of a
successful sale. Moreover, advertisers can track more accurately the
effectiveness of their advertising messages by receiving reports of the number
of end users exposed to their advertisements as well as the number of end users
who move directly to the web site being advertised.
OUR SOLUTION
For Internet consumers, PhotoLoft.com provides an online photo-sharing
community that continues to meet the evolving needs of the marketplace. It is
attractive to photographers of all types, from professional to neophyte, who
want to share their images, solicit comments on their photos, browse others'
pictures and participate in photo-personalized e-commerce or simply take
advantage of a convenient solution for purchasing digital imaging supplies. In
addition, our advanced viewing technology allows users to study photos from a
7
<PAGE>
number of different angles and our printing technology allows them to print
photo-finish quality prints from their home or office printers. For business
partners, PhotoLoft.com brings a unique solution to the questions of how to make
their sites more interesting and ultimately more appealing to their users. No
other photo-sharing web site on the Internet currently offers this broad
combination of products and services to meet all of these needs.
CONSUMERS
Our solution is timed to take advantage of the growing popularity of online
communities. Our web site offers an entry point to the Internet for users
interested in digital imaging. In addition, our efforts to develop an
entertaining community site are positioning us well to capture a share of the
next generation of Internet users who will be looking to the Internet for
reasons other than information. Internal statistics show that as an
entertainment medium and web site, we are not only successful at attracting
users, but we also keep them on the site for long periods of time and keep
members once they upload their images. These statistics have been supported by
the findings of PCData Online, which indicate that users spend an average of
three minutes viewing the pages within our web site. Sharing photos with family
and friends; being able to browse other photos and comment on them; and being
able to correspond with other photography buffs, all combine to make our web
site a popular community with a promising future with new members.
We have also developed a multi-faceted e-commerce solution that will appeal
to users looking for photo-personalized gifts and greeting cards. A primary
component of our e-commerce program is prints and reprints. As on-line proofing
becomes more popular, consumers are opting to choose which photos they want
prints of via the Internet. PhotoLoft.com facilitates the ordering, printing
and delivery of those prints. Another component of the e-commerce program is in
place today and offers customers a choice of 15 photo-personalized gift items.
For example, end users can purchase shirts, coffee mugs or puzzles with their
photographs printed on them. Yet another facet of our e-commerce program is
photo-personalized cards, which are greeting cards with particular photographs
printed on them which include personalized greetings drafted by the purchaser.
The unique design of this program allows PhotoLoft.com to generate advertising
revenue by displaying banner advertisements while customers create their
product, as well as e-commerce revenues once the end user purchases the product
using their credit card. The next component of the e-commerce solution will
include on-line sales of digital imaging products such as cameras, scanners and
printers and will be implemented over the next year. In addition, we will offer
printing paper and ink cartridges for sale at costs competitive with more
traditional retail outlets.
ADVERTISERS
PhotoLoft.com offers a highly focused web site, which is particularly
attractive to advertisers. Advertisers purchase space on the pages within our
web site to post their own images and messages advertising their products or
services. The fee for the advertisements is based upon the number of times a
particular advertisement is displayed to a visitor accessing our site and the
8
<PAGE>
aggregate number of visitors that are exposed to the advertisement. The
organization of images on the pages within our web site allows potential
advertisers the opportunity to target their audience. Through our 90 different
categories of photographs, advertisers can choose to target their audience as
much or little as possible. Combined with PhotoLoft.com's community, which
sponsors contests and provides information and news about digital imaging, the
web site is a very attractive option for advertisers that can choose traditional
banner advertising on ultra-targeted pages or sponsorships of the various
activities available at the site. Sponsorships tend to be long-term
relationships between companies with increased opportunities for revenue than
simple banner advertisements that involve the placement of a banner on the web
page being viewed by an end user.
BUSINESS PARTNERS
The PhotoLoft.com web site attracts users who are interested in photography
and would like to share that interest with others. As members join
PhotoLoft.com they upload images and return to our web site several times to
view the images as opposed to some online communities where it is easy to switch
to a competitive site. As discussed by PCData Online, statistics show that
PhotoLoft.com is a "sticky" site, in that it attracts users for an average of
three minutes per visit, a very important point for advertisers on the web site.
Examining photos takes more time than simply scanning most web sites. Also,
PhotoLoft.com users then zoom in on or pan the image they have chosen an average
of three times. This feature is very important because each time it is accessed
it increases the total amount of time a user is on the site. These two factors
combined have made PhotoLoft.com very attractive to other web sites and
businesses that are constantly looking for ways to increase the traffic on their
web sites, create "stickier" web sites and provide a more entertaining
experience. To meet this need, PhotoLoft.com developed strategies and
procedures for capitalizing on a number of co-branding and private label
opportunities.
The final component of the e-commerce solution involves
PhotoLoft.com-enabled e-commerce. This product is being developed on demand
from professional photographers, who will utilize PhotoLoft.com to display
photos taken for events. Potential customers can browse the photos in a
PhotoLoft.com album created by the photographer and then print directly from the
web site. The photographer will be reimbursed based upon the number of photos
printed. Targeted markets for this include sports photographers, wedding
photographers and event producers.
TECHNOLOGY
What makes our site truly useful to users is the technology. Our software
greatly simplifies the task of displaying images on the Internet. End users can
view small images of several photographs before deciding to enlarge a particular
photograph. End users can also compress the image and forward it to a friend.
We have also taken Internet digital imaging a step further with our advanced
viewing capabilities. Users can zoom in on or pan an image, allowing them to
observe even the tiniest details or enjoy the full panorama of a photo. This
9
<PAGE>
technology, which is compatible with all on-line auction sites, makes us
particularly popular with bidders closely scrutinizing their potential
purchases. In addition, to take full advantage of the digital revolution, we
allow users to print their pictures at home. This home photo processing is
comparable to the current photo finish quality, and is cost competitive with the
traditional model of film processing with the added advantages of allowing users
the convenience of printing only the photos they want, at the sizes they
designate from the comfort of their homes.
STRATEGY
In order to achieve our goal of becoming the most complete photo-sharing
e-commerce community on the Internet, we have implemented a multi-faceted
strategy to enhance the content and features available on our web site, increase
the amount of traffic on our site, expand advertising sales and sponsorships,
and develop a variety of e-commerce solutions.
ENHANCE OUR ONLINE COMMUNITY
We continue to evolve our site to offer the latest in technology as well as
the latest trends in Internet communities. Recently, we began to aggressively
upgrade the look and feel of our site, creating new and popular contests and
encouraging users to comment on photos using a "guest books" feature which
allows an end user to write comments about a given photo and post those comments
for others to read. We have also brought new users to the site through an
e-invitation e-mail program which allows end users to send emails to other users
inviting them to view photos at Photoloft.com
New developments trend into two distinct arenas: technology and
entertainment. Technically, we are working to add new features that enhance our
web site, such as advanced image editing which will allow users to manipulate
photographs to crop the images or eliminate red-eye, for example, and simplified
image uploading. We realize that to be successful, we must have an extremely
easy, user-friendly site. We recently instituted a "feedback" page on the site
that allows users to communicate their ideas easily and quickly with us. Many
of our new enhancements will be derived from this user interface. We are also
working to cut the costs of technology. As our web site continues to grow we
can achieve many cost efficiencies. For example, our engineers are working to
lower our operating by developing new technologies for image hosting. Finally,
we are devoted to Internet image hosting, and as that develops, we plan to
remain on the forefront of the technology.
Perhaps even more important is the entertainment component of the site. We
are constantly on the lookout for new ideas that will enhance the community
experience for our users. In the very near term we anticipate adding additional
contests, an automated address book for emailing purposes and private
communication between membersDuring the second quarter of 2000, we plan to
bring on e-marketing staff that will continue to develop member newsletters,
contests and digital imaging content to make our site even more interesting and
useful to members.
10
<PAGE>
TRAFFIC GENERATION
We have made a strategic decision to make traffic generation our top
priority. In order to accomplish this, we intend to enter into co-branding and
private label web site linking relationships with other companies. A co-branded
web site is composed of a collection of web pages within our web site that
include our Photoloft.com brand features as well as the brand features of the
company that contracts with us. This collection of pages is also linked to the
other company's web site. Thus, end users are exposed to the brand features of
two or more companies in equal amounts. On the other hand, a private label web
site is composed of a collection of web pages within our web site which includes
only the brand features of the company that contracts with us. As a result, end
users are not made aware of the fact that they are visiting a collection of web
pages within our web site. The only indication that we have any involvement
with a private label web site is the following statement, usually located
towards the bottom of a web page: "powered by PhotoLoft.com".
Currently, we have over 80 co-brands and private labels launched. We also
intend to develop co-branding relationships with original equipment
manufacturers of digital imaging equipment. We currently enjoy successful
partnerships with original equipment manufacturers of digital cameras, scanners,
printers and other digital photography equipment, including, Pakon, Canon
U.S.A., Epson, and Hewlett-Packard. Our partners ship copies of our software
with new equipment; advertise PhotoLoft.com on their boxes; feature our site in
box inserts and/or user guides; create links from their web sites; and/or upload
directly to PhotoLoft.com from their commercial scanners.
Typically original equipment manufacturer relationships are manifested as
co-branded web pages, whereby users on the original equipment manufacturer
partner's home page can click through to a page featuring the original equipment
manufacturer's branding along with PhotoLoft.com branding. As users browse
through the page and take advantage of all our unique features, they constantly
see both the brands of the original equipment manufacturer and PhotoLoft.com.
This is very popular with original equipment manufacturer's that understandably
are reluctant to send potential customers to another web site. PhotoLoft.com,
the original equipment manufacturer and the user are all winners: we grow our
user base and image bank; the original equipment manufacturer is perceived as
offering a value-added service; both companies share in the revenue generated by
advertising sales and e-commerce; and the user has an opportunity to join our
community. See "Marketing and Promotion--Co-Branding Agreements."
We are currently striving to increase the amount of private label
relationships we have. This concept was pioneered when we developed a private
label site for the Walt Disney Company in conjunction with Disney's launch of "A
Bug's Life." Under this concept, a partner company, such as Disney, can
commission us to create a collection of pages within our web site that is
branded exclusively for them, giving users the impression they have never left
the original site. As an added feature, the private label partner can specify
parameters for the pages, including content and advertising. The advantages of
a private label site are numerous for both the partner and us. The partner has
11
<PAGE>
total control over the site, including tight security, the chance to communicate
with visitors and reinforce its brand. We add to our image bank, enjoy
additional traffic and participate in revenues generated via e-commerce and
advertising sales.
Our private label program allows partners to choose how to feature
PhotoLoft.com or offer its services. That way, we are not a competitor, but a
value-added supplier and partner. As we add private label agreements,
PhotoLoft.com will quickly become the digital imaging host for the Internet.
See "Marketing and Promotion--Private Labeling Agreements."
ADVERTISING
As advertising costs continue to spiral upward, savvy advertisers are
constantly on the lookout for innovative ways to deliver their message to
increasingly targeted audiences. The Internet is an excellent medium for this
targeted advertising and our web site is an ideal program, acting as an
electronic alternative to printed photo magazines. Advertisers purchase space on
the pages within our web site to post their own images and messages advertising
their products or services. The fee for the advertisements is based upon the
number of times a particular advertisement is displayed to a visitor accessing
our site and the aggregate number of visitors that are exposed to the
advertisement. The organization of images on the pages within our web site
allows potential advertisers the opportunity to target their audience. For
example, a maker of hiking boots may wish to expose its advertisements to users
with an interest in forests. On our web site, it can accomplish this by
including its advertisements on pages which include images within the "forests"
category of our site.
Our unique design allows users to generate numerous impressions based on
just one picture. Users publishing complete albums create an exponential number
of impressions. Each additional impression allows an advertiser to display a
new image to our visitors and increases our revenue.
E-COMMERCE
E-commerce is a growing phenomenon of the Internet and we intend to take
advantage of this opportunity by offering convenience and quality to buyers. We
currently offer a wide selection of prints, photo-personalized greeting cards
and photo-personalized gifts., See "Products and Services--E-Commerce."
PRODUCTS AND SERVICES
OUR WEB SITE
Our web site at Photoloft.com was created to give our members a collection
of web pages on which to place and store their pictures; a way to categorize
their memories; and a mechanism for sharing their photos. Members can store
photos on pages within our web site; utilize the site's album metaphor to
organize the photos; and either view them on-line, through high quality output
devises such as television, or print them using our print technology.
12
<PAGE>
Once users arrive at our site, navigating the different pages is quite
simple. Immediately, users can opt to sign up, upload their photos or search
for a specific album. Following this lead navigation bar, users can scroll
through the 90 photographic categories ranging from animals to news to travel.
Views of photos are only a click away. Users choosing to upload a photo must
first join PhotoLoft.com by completing a very brief registration form and
agreeing to the site's terms and conditions. Once that is handled, users can
load their images three ways, via the digital camera, scanning or emailing the
image. They are automatically stored in an "album" which can be edited and
manipulated very easily at any time. In addition, our current relationships
with Pakon and Canon U.S.A. allow members to upload photos to PhotoLoft.com
utilizing local photo-finishers equipped with Pakon scanners or the Canon Hyper
Photo Network.
One of the unique and attractive features of our web site is the community
experience. The importance of community cannot be underestimated: Internet users
are looking for interaction and the "community" experience fulfills that need.
The longer users stay on the site, the more opportunity web sites have to raise
advertising and other revenue. Our site currently features 90 categories of
images that users can browse through. These categories represent the top
subjects that photographers typically photograph. In addition to giving users a
convenient way to view photos, the segmentation is attractive to potential
advertisers that can use the categories to target audiences. For example, pet
food ads can be featured on the "Pet" section of our site. The categories also
help draw viewers deeper into the site, increasing the number of impressions
received and the number of images served. This, in turn, makes our site
particularly attractive for advertisers, thereby increasing opportunities for
advertising revenues. See "Advertising."
Other features on our site that contribute to the community experience
include photo comments, photo sharing, and user participation via contests.
Using our Guest Books feature, users can comment on various images throughout
the site. Those comments can then be viewed by anyone accessing the photo.
This is a particularly popular feature for professional models, who use the site
to post their portfolios, and professional photographers. A unique component to
the Guest Books feature is an e-mail service that will alert users when comments
about their images have been received.
Our site provides an ideal vehicle for users to share images easily through
its e-invitation feature. Members simply e-mail their friends and family when
they post a photo or album they want to share. Rather than tie up the
recipient's computer with large e-mail files carrying photos, our system invites
the recipient to view the photo or album by using a link between the text of the
email and the web page continuing the image. This system is extremely easy and
popular; is very fast since it does not download actual photos to the
recipient's PC; it brings more users to our site; and generates revenue as those
new users can purchase prints, greeting cards or merchandise utilizing the
photo.
13
<PAGE>
Another important aspect of our community experience is the content and
other forms of entertainment on our site. Currently, our users can participate
in two contests on our site: "image of the week" and "album of the week." Users
are invited to submit their work for these contests and all interested users are
allowed to vote.
TECHNOLOGY
One of our competitive advantages is our unique advanced viewing and
printing technologies. They are both based on Hewlett-Packard's FlashPix
technology, but take the concept a step further, allowing for the simplicity of
viewing and ease of printing.
Our advanced viewing capability is unique to our site and allows users to
zoom in on or out of a photo and examine the details of an image. Conversely,
users can also pan an image to enjoy the full panorama of the photo. These
features are available directly from the user's browser, requiring no special
down loads or add-ons and are particularly popular with users of on-line auction
sites.
Our proprietary printing technology allows users to print to the highest
quality of their printer, giving them crisp, clear photos. Most technology only
allows users to print 72 dots per inch using the "screen print" feature on their
personal computers. With our technology and the appropriate printer, users can
easily print photos that rival those printed at the top photo finishers. Prices
for these printers start at approximately $250 and every Hewlett-Packard printer
shipped after 1998 has this ability. In addition, the technology allows users to
grab and print the identified image, rather than printing the entire page, and
gives users a variety of size options ranging from 8"x10" to wallet sizes. This
technology directly rivals the traditional photo processing model. It is
changing photo printing, allowing photographers to bypass the local photo
finishers.
Another advantage that we have is our experience in quickly and efficiently
creating and launching private labels and co-brands. Once a contract with the
customer is finalized, the implementation phase begins. Co-brands can be
launched within hours of receiving the appropriate artwork. Private labels take
longer depending upon the amount of customization negotiated; however, they are
typically launched within a week.
ADVERTISING
PhotoLoft.com offers a highly focused web site, which is particularly
attractive to advertisers. Advertisers purchase space on the pages within our
web site to post their own images and messages advertising their products or
services. The fee for the advertisements is based upon the number of times a
particular advertisement is displayed to a visitor accessing our site and the
aggregate number of visitors that are exposed to the advertisement. The
organization of images on the pages within our web site allows potential
advertisers the opportunity to target their audience. Through our 90 different
categories of photographs, advertisers can choose to target their audience as
much or little as possible. Combined with PhotoLoft.com's community, which
14
<PAGE>
sponsors contests and provides information and news about digital imaging, the
web site is a very attractive option for advertisers, that can choose
traditional banner advertising on ultra-targeted pages or sponsorships of the
various activities available at the site. Sponsorships tend to be long-term
relationships between companies with increased opportunities for revenue than
simple banner advertisements that involve the placement of a banner on the web
page being viewed by an end user.
E-COMMERCE
We have taken a multi-faceted approach to e-commerce and expect that it
will become an important revenue stream in the future. The first phase of our
e-commerce solution, photo-personalized gifts, is already in place. Users
currently have a choice of over 15 gift items, ranging from T-shirts to coffee
mugs, all emblazoned with the image of their choice. PhotoLoft.com is the
aggregator of vendors providing these services. As orders are received on the
PhotoLoft.com site, it is forwarded to the vendor, who is responsible for
fulfilling the item and shipping it to the customer. PhotoLoft.com is notified
when the item order is received, and when the item is shipped.
An important adjunct to the photo-personalized gifts are prints. With the
increasing popularity of on-line proofing coupled with PhotoLoft.com's exclusive
relationships with Canon U.S.A. and Pakon, prints and reprints are becoming an
increasingly important component of our e-commerce solution. Consumers seem to
be attracted by the ability to order prints only of photos they value, the
choice of ordering a range of sizes and infinite number of prints, and the
permanent storage of high-value images.
The next phase of our e-commerce solution is photo-personalized greeting
cards. Other sites offering online greeting cards have generated a significant
amount of traffic, and printed photo-personalized greeting cards have also
become quite popular. Our greeting card solution combines both of these
successful approaches into an easy Internet solution. Initially our members are
able to choose from over 220 exclusive card designs, ranging from birthdays to
bar mitzvahs, that can not only be photo-personalized, but also customized with
the greeting of the members' choice. The cards can be e-mailed or printed and
mailed. Because of our proprietary printing technology, the home printed
greeting cards will be of the same quality as those purchased in stores with the
added bonus of being photo-personalized. In addition, the user can provide us
with the appropriate address(s) and we will print and mail the card for them.
Addresses can be uploaded to PhotoLoft.com directly from the customers' Palm
Pilot or address book. Users can order up to 500 copies of a greeting card to be
printed and either mailed to them or distributed to a mailing list provided to
us. Adding to the convenience is a planned value-added service that will
trigger an e-mail reminder when an important "card giving" occasion, such as a
birthday or anniversary, is approaching.
We are also looking to develop and launch a wide array of consumables. By
simply clicking a mouse button, users will be able to order paper, ink, cameras,
scanners and other digital imaging and photo sharing equipment on our site. A
helpful reminder service will prompt users to periodically check their ink and
15
<PAGE>
paper volumes to ensure they have a continuous supply. Once ordered, the item
will be delivered to the address indicated within a specified time frame. We
expect to launch this service during 2000 and anticipate entering into resale
agreements with wholesalers of digital imaging products.
During the second quarter of 2000 we will expand our e-commerce
opportunities to professional photographers choosing to partner with us. Under
this scenario, professional photographers will upload photos from a specific
event to their album and utilize our e-invitation email system to notify
customers that the photos are available for viewing. Customers can then view
the photos, choose those they would like to purchase, indicate the size and
number they want and place the order, all on-line. This option is particularly
attractive to wedding and special event photographers. This component of our
service will have a "lock out" provision on the printing technology to deter
users from simply printing their own images.
PRODUCT DEVELOPMENT
Product development on our site continues at a rapid pace. We hired a site
producer in May 1999 and have identified and implemented 58 additional features
to our web site. These included advanced image editing like cropping, "red eye,"
spinning and introduction of additional contests, such as a Treasure Hunt; an
audio feature for slide shows; introduction of a newsletter focusing on digital
imaging and photography; customized album designs; and much more.
Due to the rapid acceptance and rising demand for the co-brands and private
labels, we have focused many of our resources on those products during the
latter half of 1999 and beginning of 2000. We are currently staffing up to
handle this demand.
We also introduced our DealerLoft product in February 2000 at the annual
PMA show in Los Vegas. This product provides professional photo-finishers with
a customized back-end Internet solution. Utilizing this model, photo-finishers
upload consumers' images into a temporary storage area hosted by PhotoLoft.com.
Customers are instructed where and how to find the images at the time they drop
off their film. From the comfort of their homes or offices, they can look up
their photos, choose which ones they want prints of, order the correct size and
number of prints and, pay on-line if they choose. The prints are either mailed
to the appropriate address or they can be picked up at the photo-finishers'
location. All photo-finishers can upload to PhotoLoft.com with the appropriate
software provided by us. In addition, photo-finishers utilizing the Pakon
scanner or Canon Hyper Photo System automatically upload into PhotoLoft.com.
MEMBERSHIP PLANS
We currently offer two membership plans. Our free membership allows
members to access up to 20 megabytes of storage, enough for approximately 200
photos. We also offer members a premium account at a price of $29.95 annually.
This service gives users an additional 30 megabytes of storage and merchandise
16
<PAGE>
discounts. The true benefit of the Premium Account to us is that it allows
co-brand partners to bundle the Premium Account with the other products creating
a perception of value for the consumer. See "Marketing and
Promotion--Co-Branding Agreements."
ADVERTISING
As advertising costs continue to spiral upward, savvy advertisers are
constantly on the lookout for innovative ways to deliver their message to
increasingly targeted audiences. The Internet is an excellent medium for this
targeted advertising and our web site is an ideal program, acting as an
electronic alternative to printed photo magazines. Our unique design allows
users to generate numerous impressions based on just one picture. Users
publishing complete albums create an exponential number of impressions. Each
impression allows advertisers to reach an increasingly targeted audience, an
advantage not lost upon cost-conscious advertisers looking for value. Also, the
unique nature of our site brings a virtually unlimited number of viewers to the
site each day to view the photos.
In addition, the community nature of our web site creates opportunities to
further segment the audience, giving advertisers an even more targeted buy.
Similar to the already successful community sites, our community encompasses 90
categories of popular targets ranging from astrology to zoos. Enthusiasts
simply post their photo albums to these communities, where they can share images
while seeing the latest from advertisers in that field.
We have entered into an agreement with Adsmart, an advertising
representation firm, to ensure that we maximize the opportunities available via
advertising sales. Adsmart is the industry's largest site-focused online
advertising representation firm. It has more than 175 premier web brands
totaling 1.2 billion impressions per month. The contract guarantees that 100%
of our inventory will be sold each month. The cost per thousand impressions is
based on a sliding scale. This number will increase as we continue to increase
the volume of traffic to our site. In addition, we can receive more revenue per
cost per thousand by providing numerous ultra-targeted channels, such as the
categories. Working with Adsmart, we have begun to target key affinity networks
that will utilize our site as an advertising venue.
Recognizing that the traditional banner advertising will, by definition,
eventually reach a cap, we are beginning to explore more creative advertising
sales opportunities. Our promotions are primarily taking the form of
sponsorship opportunities. Under this scenario, advertisers can "sponsor" a
contest or other form of entertainment on our web site. The advantages to the
sponsor are that it gets a more focused audience, since visitors want to
participate in the event the message can be more advertorial, usually carrying
more credibility with the target audience; and it is not competing with the
myriad of other messages typically found on web sites. The advantage to us is
that it allows us to work in conjunction with advertisers as business partners
to create venues that will enhance the community facet of our web site and,
ultimately, increase our membership. Sponsorships also have the potential to
generate more revenue than most banner ads. We are currently in the process of
bringing on additional staff to maximize our revenues generated by promotions
and advertising sales.
17
<PAGE>
Typical advertisers and sponsors on our site include Visa, Intel,
About.com, TravelNow, and Hewlett-Packard. Our contract with Adsmart will
increase the number of advertisers and allow us to target certain advertisers
that will benefit by the site's unique community set up.
MARKETING AND PROMOTION
We market our site through the following three primary channels:
1. links to other sites;
2. co-branding agreements; and
3. private labeling agreements.
LINKS TO OTHER WEB SITES
Web site partnering arrangements allow us to recruit members from the
broadest of populations. We already have agreements in place with Compaq
Computer, through the AltaVista search service, , and Tribal Voice, guaranteeing
exposure to approximately 30 million potential users per day, and we are
actively pursuing additional agreements with high traffic web sites. To that
end, we are actively utilizing banner swaps in our advertising program. Under
this scenario, we gain advertising space on targeted web sites in exchange for
running that web site's banner ads for free. This barter arrangement allows us
to advertise without incurring the expense that is usually associated with
Internet advertising.
CO-BRANDING AGREEMENTS
Co-branding agreements are particularly popular with original equipment
manufacturers. Typically these agreements call for a co-branded web page,
featuring the look and feel of our site along with the brand features of the
partner company. Usually this brand is found in the upper right corner of the
home page. The partner companies also advertise PhotoLoft.com through their
packaging by including our logo on the box, inserts in the packaging, and
mentions in the users' manuals or newsletters. The co-branded page is linked to
both our web site and the partner company's web site. As an added inducement to
utilize our site, all purchasers are offered premium accounts at no extra
charge. We share with our partners any revenues generated via advertising sales
and e-commerce from the co-branded page.
The original equipment manufacturer views adding our software to its
package of products as a value added benefit for the consumer. In addition,
depending upon the original equipment manufacturer partner, we can help to
increase sales. For example, Hewlett-Packard, can increase sales of ink as
consumers print high resolution photos--enabled by our proprietary printing
technology on their printers. Currently we have co-brand agreements in place
with Epson, Casio, Hewlett-Packard and others. We are actively engaged in
discussions to develop additional co-branding agreements with other web sites
and Internet companies.
18
<PAGE>
As our business development team grows, co-branding agreements are being
marketed to other sectors as well. A recently signed agreement is with PowWow,
a fully integrated instant messaging and online community with over four million
users, that was developed by Tribal Voice. Under terms of the arrangement,
PowWow users will be notified that they have received a free one-year premium
account with PhotoLoft.com. Announcements in the online newsletter will further
explain the program and a direct link from the PowWow web site will bring users
to our site. Tribal Voice was searching for a photo sharing solution for its
site, photos being a critical component in the success of a community site.
PhotoLoft.com was an excellent solution as our model of co-branded sites allowed
PowWow to keep its branding program intact while offering an additional value
added service to its users.
PRIVATE LABEL AGREEMENTS
Our unique web site architecture allows us to offer private label
agreements to partner companies. A private label web site is composed of a
collection of web pages within our web site which includes only the brand
features of the company that contracts with us. As a result, end users are not
made aware of the fact that they are visiting a collection of web pages within
our web site. The only indication that we have any involvement with a private
label web site is the following statement, usually located towards the bottom of
a web page: "powered by PhotoLoft.com". In these agreements, the partner company
pays an initial development fee and we share any advertising or e-commerce
revenue generated from the pages.
The most prominent example of a private label site was the one created by
PhotoLoft.com for the Walt Disney Company in conjunction with its launch of "A
Bug's Life." As our marketing efforts mature, we are finding more and more
opportunities to create private label sites. They are particularly appealing to
online portals that are reluctant to lose their branding but want a photo
sharing community as a component of their portfolio as well as home-building
pages, which offer photo-hosting as a competitive service.
OPERATIONS AND SYSTEMS
ADMINISTRATIVE OPERATIONS
To provide our members with the most efficient, flexible, and innovative
services possible, our administrative operations combine in-house and outsourced
services and functions. Our strategy is to keep our in-house staff small, with
a focus on core competencies in technical and research and development areas,
and to outsource other functions and projects on an as-needed basis. Internal
functions currently include account management, traffic management, and
managerial projects focusing on the development and management of business
partnerships with appropriate parties. At this point, outsourced functions
include e-commerce business services and maintenance of network hardware and
Internet connections.
19
<PAGE>
SYSTEMS
The equipment that supports our web site is located in a secured individual
cage space, meaning that the equipment is surrounded by a locked metal cage, at
the San Jose, California web site hosting facility operated by AboveNet
Communications, Inc. AboveNet is the architect of the global, one-hop Internet
Service ExchangeTM , a network delivering Internet connectivity and co-location
solutions for companies such as ours. We have a co-location agreement in place
with AboveNet. The agreement has a term of one year. AboveNet also provides our
web site with its connection to the Internet and also houses some of our
equipment.
Our web site is supported by on a series of Intel Pentium II Dual Processor
Servers. These servers share the obligation of supporting our web site in such
a manner that when one is overburdened, it shifts the excess obligation another
server. This provides substantial assurances that our web site will remain
accessible to users. Our site currently utilizes several Dual Processor Pentium
III 400s with three gigabytes of storage space to support the web site and Dual
Processor Pentium III 400's with one and a half terabytes of storage space to
support the images posted on our web site. Currently, there are two dual
Processor Pentium III 400s with 25 gigabytes of storage space to support our
database engine that catalogues photographs and maintains other data. The
combination of a database server, several image servers, and several web servers
is called a "pod", and we add pods as our community grows.
PhotoLoft.com's secure data management is through SQL Server version 7.0.
SQL Server Logs are generated every eight hours to facilitate database
reconstruction in the case of hardware or software failure. These files are
written to the hard disk and backed up to tape with a combination of third party
software and software developed in house. Currently, the average PhotoLoft.com
web site serves 11.14 images /sec. With the above referenced software and
hardware configurations, it has been determined that the current peak load
served is 2.36 images per second per image server. With eight image servers, the
site is capable of 18.88 images per second. To scale the system, additional web
servers and image servers are added as needed. To scale the database, a mirror
copy is made of the database server and dedicated to a particular account.
Since January 1998, our site has been available for use by end users
approximately 99.6% of the time. This service time excludes outages that were
due to "act of god" or catastrophic failure of the hosting service unrelated to
any specific PhotoLoft.com software or hardware issues.
COMPETITION
Competition in the Internet photo sharing and digital imaging arena is
intensifying. When we began development of our site in 1998 there were
virtually no competitors. By the time that our site was officially launched in
February 1999, several potential competitors had emerged and we are aware of new
companies planning to enter the market in the near future. As one of the first
20
<PAGE>
photo sharing communities in the marketplace, we have laid the groundwork for
many competitors to follow. In doing internal competitive analysis, it is clear
that competitors have mimicked our technology and marketing strategies in a
number of ways. However, to date, none of the competitors have successfully
duplicated the unique combinations of features and advanced technology that we
offer.
PhotoNet, PhotoHighway, PhotoPoint.com, Zing.com, and ClubPhoto are among
the first wave of companies engaged in activities similar to ours. These
companies allow users to upload their images and share them via e-mail, and some
offer online greeting cards and photo-personalized gifts. Some of these sites
have followed the online community business model. These companies are also
forging valuable marketing relationships and some enjoy significant financial
backing. However, they have not introduced advanced viewing and high resolution
printing capabilities comparable to ours. Also, at present, PhotoNet, which is
50% owned by Kodak, is primarily designed to help Kodak protect the traditional
chemical film based photography industry. But, we anticipate that this will
change in the future as the popularity of digital imaging increases.
There are many other smaller photo-sharing web sites in various stages of
development. In a recent competitive analysis, we identified at least 15
additional companies beginning to get into the photo sharing/digital imaging
Internet business. The barriers to entry for a photo storing web site are few.
However, to develop an interactive site with a large database of images that
also offers advanced technology is more costly and time consuming. A more real
threat could be traditional media companies, a number of which, including
Disney, CBS and NBC, have recently made significant acquisitions or investments
in Internet companies.
A number of other companies offering related services have also been
launched. For example, several new on-line fulfillment companies, such as
Ofoto, EZ Prints and Shutterfly, have received quite a bit of media attention.
As these companies actually provide printing for on-line photos, there current
activities complement our and all are seeking relationships with PhotoLoft.com.
They seem to believe that the combined model - of on-line hosting and albuming
and "in-house" printing - will be attractive to customers. At this stage, we
employ a number of fulfillment vendors. This allows us to provide customers
with the highest quality at the lowest cost.
We believe that the principal competitive factors in our market are
community development, technology, number of images in the database, rate of
adding members, and the ability to partner with companies that can bring large
groups of users who are already interested in digital imaging to our web site.
Certain of our current and many of our potential competitors have longer
operating histories, larger customer bases, greater brand recognition in other
business and Internet markets and significantly greater financial, marketing,
technical and other resources than us. In addition, other online services may
be acquired by, receive investments from or enter into other commercial
relationships with larger, well-established and well-financed companies as use
of the Internet and other online services increases. Therefore, certain of our
competitors with other revenue sources may be able to devote greater resources
21
<PAGE>
to marketing and promotional campaigns, adopt more aggressive pricing policies
and devote substantially more resources to web site and systems development than
us or may try to attract traffic by offering services for free. Increased
competition may result in reduced operating margins, loss of market share and
diminished value of our brand. See "Item 6. Management's Discussion and Analysis
or Plan of Operations-Factors Affecting Our Operating Results, Business
Prospects and Stock Prices--We May Not Be Able To Compete Successfully."
INTELLECTUAL PROPERTY
"Photoloft" and "HOWDY" are trademarks and service marks of PhotoLoft.com.
We have registered our trademark "Howdy" with, and our application for
registration of the mark "Photoloft" is currently pending before, the United
States Patent and Trademark Office.
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our future success and rely on a
combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect our proprietary rights in
products and services. We have entered into confidentiality and invention
assignment agreements with our employees and contractors, and nondisclosure
agreements with its suppliers and strategic partners in order to limit access to
and disclosure of its proprietary information. There can be no assurance that
these contractual arrangements or the other steps taken by us to protect our
intellectual property will prove sufficient to prevent misappropriation of our
technology or to deter independent third-party development of similar
technologies. While we intend to pursue registration of our trademarks and
service marks in the U.S. and internationally, effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which our services are made available online.
We also rely on certain technologies that we license from third parties,
such as the suppliers of key database technology, the operating system and
specific hardware components for our products and services. There can be no
assurance that these third-party technology licenses will continue to be
available to us on commercially reasonable terms. The loss of such technology
could require us to obtain substitute technology of lower quality or performance
standards or at greater cost, which could materially adversely affect our
business, results of operations and financial condition.
Although we do not believe that we infringe the proprietary rights of third
parties, there can be no assurance that third parties will not claim
infringement by us with respect to past, current or future technologies. We
expect that participants in our markets will be increasingly subject to
infringement claims as the number of services and competitors in our industry
segment grows. Any such claim, whether meritorious or not, could be
time-consuming, result in costly litigation, cause service upgrade delays or
require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements might not be available on terms acceptable to us or at all.
As a result, any such claim could have a material adverse effect upon our
business, results of operations and financial condition.
22
<PAGE>
GOVERNMENTAL REGULATION
Our company, operations and products and services are all subject to
regulations set forth by various federal, state and local regulatory agencies.
We take measures to ensure our compliance with all such regulations as
promulgated by these agencies from time to time. The Federal Communications
Commission sets certain standards and regulations regarding communications and
related equipment.
There are currently few laws and regulations directly applicable to the
Internet. It is possible that a number of laws and regulations may be adopted
with respect to the Internet covering issues such as user privacy, pricing,
content, copyrights, distribution, antitrust and characteristics and quality of
products and services. The growth of the market for online commerce may prompt
calls for more stringent consumer protection laws that may impose additional
burdens on those companies conducting business online. Tax authorities in a
number of states are currently reviewing the appropriate tax treatment of
companies engaged in online commerce, and new state tax regulations may subject
us to additional state sales and income taxes.
Several states have also proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also initiated
action against at least one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues, including some recently proposed changes, could create uncertainty in
the marketplace that could reduce demand for our products and services or
increase the cost of doing business as a result of litigation costs or increased
service delivery costs, or could in some other manner have a material adverse
effect on our business, results of operations and financial condition. In
addition, because our services are accessible worldwide and we facilitate sales
of goods to users worldwide, other jurisdictions may claim that we are required
to qualify to do business as a foreign corporation in a particular state or
foreign country. Our failure to qualify as a foreign corporation in a
jurisdiction where it is required to do so could subject us to taxes and
penalties for the failure to qualify and could result in our inability to
enforce contracts in such jurisdictions. Any such new legislation or regulation,
or the application of laws or regulations from jurisdictions whose laws do not
currently apply to our business, could have a material adverse effect on our
business, results of operations and financial condition.
EMPLOYEES
As of March 15, 2000, we had 29 full time employees, including 5 in
marketing and advertising sales and customer support; 3 in business development;
3 in administration; 1 in product development; 4 in site development; 2 in
technical support; 3 in quality assurance; and 8 in engineering. We recently
hired a senior executive for our product development efforts and have embarked
on an active search to hire up to 10 additional engineering and technical
support employees; 2 additional advertising sales and e-marketing employees; 3
additional business development experts; and 3 administration employees. In
23
<PAGE>
addition, we are researching out-sourcing options for customer service.
Although talented and qualified employees are difficult to find in the current
tight job market, we have experienced relative success in attracting and
retaining highly motivated and talented employees. Digital imaging is a growing
field and many employees working in the Internet arena are attracted to a
start-up company with a record of success in such a dynamic field.
We believe that our future success will depend in part on our continued
ability to attract, integrate, retain and motivate highly qualified technical
and managerial personnel, and upon the continued service of our senior
management and key technical personnel. The competition for qualified personnel
in our industry and graphical location is intense, and there can be no assurance
that we will be successful in attracting, integrating, retaining and motivating
a sufficient number of qualified personnel to conduct its business in the
future. From time to time, we also employ independent contractors to support
our research and development, marketing, sales and support and administrative
organizations. We have never had a work stoppage, and no employees are
represented under collective bargaining agreements. We consider our relations
with our employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
Our executive offices, comprising approximately 2,628 square feet, are
located at 300 Orchard City Drive, Suite 142, Campbell, California 95008. These
facilities are leased on a month-to-month basis, and the monthly rent is $5,519.
We also sublease approximately 1,430 square feet of space in another building
located in Campbell, California under a month-to-month sublease.
We maintain substantially all of our computer systems at AboveNet
Communications, Inc. See "Item 1. Description of Business--Operations and
Systems." Our operations are dependent in part on our ability to protect our
operating systems against physical damage from fire, floods, earthquakes, power
loss, telecommunications failures, break-ins or other similar events.
Furthermore, despite our implementation of network security measures, our
servers are also vulnerable to computer viruses, break-ins and similar
disruptive problems. The occurrence of any of these events could result in
interruptions, delays or cessations in service to our users which could have a
material adverse effect on our business, results of operations and financial
condition.
ITEM 3. LEGAL PROCEEDINGS
24
<PAGE>
On June 23, 1999 Hewlett-Packard, Co. filed an action against us in the
Santa Clara County Superior Court of California (Case Number CV 782769) alleging
trade secret misappropriation, unfair competition, and breach of contract
arising out of the activities of one of our employees. Hewlett-Packard seeks a
preliminary and permanent injunction enjoining us from directly or indirectly
using trade secrets of Hewlett-Packard and for damages. We are presently in
settlement negotiations with Hewlett-Packard with regard to this matter. We
believe that the outcome of this matter will be a non-monetary settlement. We
have a preexisting relationship with Hewlett-Packard with respect to the
development and use of certain aspects of our advanced viewing and printing
technologies. See "Item 1. Description of Business -- Products and Services."
On January 7, 2000 Gale Drive LLC filed an action against us in the Santa
Clara County Superior Court of California (Case Number CV 787055) alleging
breach of contract arising out of a lease agreement for office space located in
Campbell, California. We expect that our exposure in this matter will not
exceed $100,000, and we have accrued our estimated liability relating to this
matter. No further actions have been taken since the original filing of the
action.
In January 2000 we agreed to the terms of a binding settlement agreement
with a former employee who had filed an action against us stating various claims
arising out of the termination of his employment with us. Under the terms of
the settlement agreement, in which we admitted no wrongdoing, we paid $20,000
and allowed the employee to exercise options to purchase 32,500 shares of our
common stock at no cost.
To the best of our knowledge, there are presently no other pending legal
proceedings to which we or any of our subsidiaries is a party or to which any of
our property is subject and, to the best of its knowledge, no such actions
against us are contemplated or threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
25
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Our common stock has been trading on the National Association of Security
Dealers Over-The-Counter Market Bulletin Board since March 1, 1999 under the
symbol "LOFT". The following table sets forth the range of high and low bid
prices of the common stock for each calendar quarterly period since trading
commenced as reported by the National Quotation Bureau, Inc. Prices reported by
the National Quotation Bureau represent prices between dealers, do not include
retail markups, markdowns or commissions and do not represent actual
transactions. See also "Item 6. Management's Discussion and Analysis or Plan of
Operations-Factors Affecting Our Operating Results, Business Prospects and Stock
Prices-- Our Common Stock Price Is Likely To Be Highly Volatile."
<TABLE>
<CAPTION>
1999 High Low
- ---- ------ ------
<S> <C> <C>
First Quarter (March 1 to March 31) $7.375 $4.500
Second Quarter (April 1 to June 30) $5.500 $3.625
Third Quarter (July 1 to September 30) $5.375 $1.562
Fourth Quarter (October 1 to December 31) $2.937 $1.343
2000
- ----
First Quarter (January 1 to March 15) $3.625 $1.718
</TABLE>
As of March 15, 2000 there were approximately 311 holders of record of our
common stock, which figure does not take into account those stockholders whose
certificates are held in the name of broker-dealers or other nominees.
DIVIDEND POLICY
We have not declared or paid cash dividends or made distributions in
the past, and we do not anticipate that we will pay cash dividends or make
distributions in the foreseeable future. We currently intend to retain and
invest future earnings to finance our operations.
RECENT SALES OF UNREGISTERED SECURITIES
Transactions described in Items (1) through (4) below refer to the
securities of PhotoLoft.Com, Inc., a California corporation which was the
predecessor entity of the filer of this form, and transactions described in
26
<PAGE>
Items (5) through (15) below refer to the securities of Photoloft.com, a Nevada
corporation which is the filer of this form. Unless otherwise indicated,
information set forth below regarding shares of our common stock reflect the
1.5133753 for 1 conversion ratio applied to shares of Photoloft.com, Inc. common
stock at the time of the reorganization referred to in Item (5) below.
(1) From January 1999 to Decenber 1999 Photoloft.com issued options to
purchase the aggregate amount of 970,201 shares of common stock to 22 employees,
6 consultants and 5 directors pursuant to Photoloft.com's stock option plan
with exercise prices from $0.48 per share to $5.25 per share. These issuances
were made in reliance on Section 4(2) of the Securities Act of 1933 and/or
Rule 701 promulgated under the Securities Act of 1933 and were made without
general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate these
investments, and who represented to Photoloft.com that the shares were being
acquired for investment.
(2) In February, 1999 we issued the aggregate amount of 2,844,112
shares of common stock upon the exercise of options to purchase common stock
which were granted to 3 employees, 3 directors and 2 consultants of
Photoloft.com between 1993 and 1998. The issuances were made in reliance on
Section 4(2) of the Securities Act of 1933 and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to Photoloft.com that the shares were being acquired for
investment.
(3) In February 1999, we issued 5,650,207 shares of common stock in
exchange and upon the conversion of shares of issued and outstanding series A, B
and C preferred stock of Photoloft.com. The issuances were made in reliance on
Section 4(2) of the Securities Act of 1933 and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to Photoloft.com that the shares were being acquired for
investment.
(4) From February 1999 to June 1999, Photoloft.com issued 124,111
shares of common stock to 7 consultants of Photoloft.com in exchange for
services valued at $156,6000 The issuances were made in reliance on Section 4(2)
of the Securities Act of 1933 and were made without general solicitation
or advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to Photoloft.com that the shares were being acquired for investment.
(5) In March 1999, under the terms of the reorganization with Data
Growth, Inc., Photoloft.com issued the aggregate amount of 9,579,266 shares of
common stock to the shareholders of Photoloft.com in exchange for their shares
of common stock of Photoloft.com, Inc. The issuances were made in reliance on
Section 4(2) of the Securities Act of 1933 and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
27
<PAGE>
access to all relevant information necessary to evaluate these investments, and
who represented to Photoloft.com that the shares were being acquired for
investment.
(6) In March 1999, under the terms of the reorganization with Data
Growth, Inc., the holders of options to purchase common stock of Photoloft.com,
Inc. exchanged their options for options to purchase the aggregate amount of
2,795,734 shares of common stock of Photoloft.com. These issuances were made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Rule 701
promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to Photoloft.com that the shares were being acquired for
investment.
(7) In March 1999, pursuant to the terms of the reorganization with
Data Growth, Inc. Photoloft.com conducted a private offering of its common
stock. Pursuant to that offering, a total of 2,000,000 shares of common stock
were sold for total cash consideration of $1,000,000. The issuances were made in
reliance on Section 4(2) of the Securities Act of 1933 under the Securities Act
of 1933 and were made without general solicitation or advertising. The
purchasers were sophisticated investors with access to all relevant information
necessary to evaluate these investments, and who represented to Photoloft.com
that the shares were being acquired for investment.
(8) In March 1999, Photoloft.com issued 228,375 shares of common stock
upon the exercise of options to purchase common stock held by employees,
directors and consultants of Photoloft.com. These options were issued in 1999
and had exercise prices of $0.50 per share. These issuances were made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Rule 701
promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to Photoloft.com that the shares were being acquired for
investment.
(9) In March 1999, Photoloft.com issued 25,000 shares of common stock
to Baytree Capital Associates pursuant to the terms of a Letter Agreement with
Baytree Capital Associates for financial business consulting services. The
issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and was made
without general solicitation or advertising. The purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate the
investment, and who represented to Photoloft.com that the shares were being
acquired for investment.
(10) In September 1999, we issued warrants to purchase up to 350,000
shares of common stock to Xoom.com in consideration for services performed for
Photoloft.com by Xoom.com pursuant to a services agreement. The exercise price
for the warrants is $2.31 per share. The issuance was made in reliance on
Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated
under the Securities Act of 1933 and was made without general solicitation
or advertising. The purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate the investment, and who represented
to Photoloft.com that the shares were being acquired for investment.
(11) In November 1999, we issued warrants to purchase up to 500,000
shares of common stock at an exercise price of $1.01 to Asher Investment Group,
Inc. in partial consideration for services to be performed for us pursuant to a
financial management services agreement. The issuance was made in reliance on
Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated under
the Securities Act of 1933 and was made without general solicitation or
advertising. The purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate the investment, and who represented
to us that the shares were being acquired for investment.
(12) In November, 1999 we issued 58,700 shares of common stock to one
of our option holders upon the exercise of options to purchase common stock. The
issuance were made in reliance on Section 4(2) of the Securities Act of 1933
and/or Rule 701 promulgated under the Securities Act of 1933 and was made
without general solicitation or advertising. The purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate the
investment, and who represented to Photoloft.com that the shares were being
acquired for investment.
28
<PAGE>
(13) In December 1999, we issued options to purchase up to 288,000
shares of common stock to 1 officer with an exercise price of $1.50 per share.
The issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Rule 701 promulgated under the Securities Act of 1933 and was made
without general solicitation or advertising. The purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate the
investment, and who represented that the shares were being acquired for
investment.
(14) In December 1999, we issued 326,434 shares of common stock in
exchange for $500,000 and warrants to purchase up to 66,000 shares of common
stock with exercise prices of $1.5317 per share to three investors. The
issuances were made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and was made
without general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate the
investments, and who represented that the shares were being acquired for
investment.
(15) In March 2000, we issued options to purchase up to 378,344 shares
of our common stock to one of our officers pursuant to the terms of our
employment agreement with the officer. The exercise price for the options was
$3.44 per share, which was not less than the fair market value of the shares on
the date of grant. The issuance was made in reliance on Section 4(2) of the
Securities Act of 1933 and/or Rule 701 promulgated under the Securities Act of
1933 and was made without general solicitation or advertising. The purchaser
was a sophisticated investor with access to all relevant information necessary
to evaluate the investment, and who represented to us that the shares were being
acquired for investment.
(16) In March 2000, we issued 100 shares of preferred stock, designated
series A preferred stock, in exchange for $1,000,000 to investors in a private
placement. In connection with that offering, we also issued to the May Davis
Group, Inc., the placement agent for the offering warrants to purchase up to
175,000 shares of common stock at an exercise price of $3.30. The issuances were
made in reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation
D promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate the investments, and
who represented that the shares were being acquired for investment. In
connection with the offer and sale of the series A preferred stock, we have
agreed to file a registration statement under the Securities Act of 1933
covering the resale of shares of common stock that may be issued upon conversion
of such series A preferred stock. The holders of the series A preferred stock
have the right to convert such shares into common stock on or after the earlier
of (i) 90 days after the issuance of the series A preferred shares, (ii) five
days after receipt of a "no-review" status from the Securities and Exchange
Commission with respect to the aforementioned registration statement, or (iii)
the effective date of such registration statement. The conversion rate for the
series A preferred stock is based on the number of days from the issuance date
through the conversion date, and the conversion price, which is the lower of
$2.65 or 80% of the average market price for our common stock for the last five
trading days immediately preceding the date of conversion. Holders of the
series A preferred stock are entitled to certain cash payments in the event that
the aforementioned registration statement is not declared effective by the SEC
on or before the 120th day following the first issuance of the series A
preferred stock. The series A preferred stock will be automatically converted
into common stock on March 3, 2002 if not previously converted, and holders of
the series A preferred stock must approve any merger, sale of assets, or other
transaction that amounts to a sale of Photoloft.com. We are continuing to offer
the remaining 25 authorized shares of series A preferred stock on the same terms
and conditions as described above.
29
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and notes thereto appearing elsewhere in this Form 10-KSB. The
matters discussed in this 10-KSB contain forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below in "Factors Affecting
Our Operating Results, Business Prospects and Stock Price" as well as those
discussed in this section and elsewhere in this Form.
OVERVIEW
PhotoLoft.com is an Internet web site community that is changing data
imaging and photo processing. PhotoLoft.com is a growing photographic imaging
community on the Internet, and its unique software allows consumers to share and
print personal images quickly, easily and inexpensively. Users can create a
"virtual photo album," which is impossible to lose; instantly accessible and
easily reproducible; easily transported; easily displayed on high quality output
devices, such as television; and completely personalized. Members can
automatically invite others to view their albums via e-mail and give users the
opportunity to comment on other images. PhotoLoft.com is also taking advantage
of the rise in e-commerce, offering a wide array of gift items that have been
imprinted with a PhotoLoft.com image selected by the user. The pages within the
Photoloft.com web site have been carefully designed to be user friendly and the
community aspect of PhotoLoft.com makes for a highly entertaining experience for
visitors and members.
PhotoLoft.com was founded in 1993 as AltaVista Technology, Inc. In July
1998, the URL, AltaVista.com was sold to Digital Equipment, now Compaq Computer,
and we changed our name to Photoloft.com. Since then, we have continued to
upgrade the site, offering better and faster user components to PhotoLoft.com.
Through February 1999, revenues have been derived primarily through the sale of
advertising. With the latest release of PhotoLoft.com in February 1999, we
began focusing on increasing e-commerce sales and advertising sales.
Anticipated success in these areas will come from the increased membership base,
estimated to increase from 24,000 to 123,000 by the end of 1999, and increased
impressions per day, estimated to increase from 20,000 per day in 1998 to
500,000 per day by the end of 1999.
In 1998, PhotoLoft.com began developing a new product, ID4Life. Designed
as a preventative service to aid in finding missing persons, ID4Life has
developed as a different product than the rest of PhotoLoft.com. We are seeking
to sell ID4Life.
RESULTS OF OPERATIONS
30
<PAGE>
Revenues for fiscal 1999 were $254,500, a decrease of $419,800, or
approximately 61.3%, compared to $674,300 for fiscal 1998. Revenues decreased
primarily due to a change in Photoloft.com's operations from selling software to
selling advertising. This change did not occur until the latter half of 1998,
contemporaneously with the sale of the AltaVista URL to Compaq Computer. The
new business plan is focused on advertising sales and e-commerce revenues.
The gross profit for fiscal 1999 was $130,300, a decrease of $431,000, or
approximately 76.8%, compared to $561,300 for fiscal 1998. This decrease in
gross profit is due primarily to the transition of Photoloft.com's business from
software sales to advertising sales and the accompanying significant decrease in
revenues, resulting in an inability to cover the fixed cost component of the
cost of revenues during fiscal 1999.
Sales and marketing expenses for fiscal 1999 were $1,217,200, an increase
of $892,200, or approximately 274.5%, compared to $325,000 for fiscal 1998.
This increase reflects the planned aggressive growth phase of Photoloft.com's
new business model. Included in these costs are mainly advertising expenses.
General and administrative expenses for fiscal 1999 were $4,405,900, an
increase of $3,406,900, or approximately 341.0%, compared to $999,000 for fiscal
1998. This increase also reflects the planned aggressive growth phase of
Photoloft.com's new business model. Among these costs are accounting and legal,
including the costs associated with being a publicly traded company, rent,
depreciation, administrative personnel, and compensation relating to stock
option and warrant grants.
Loss from operations for fiscal 1999 was $5,492,800, an increase of
$4,730,100, or approximately 620.2%, compared to a loss from operations of
$762,700 for fiscal 1998. This increase is primarily due to the transition in
Photoloft.com's business strategy and the costs incurred to develop the
Photoloft.com web site.
Interest income for fiscal 1999 was $110,600, an increase of $33,700, or
approximately 43.8%, compared to $76,900 for fiscal 1998. Interest income
decreased due to the note receivable related to the sale of the AltaVista URL in
July 1998.
Net loss for fiscal 1999 was $4,752,100, a difference of $6,415,400 from
net income of $1,663,300 for fiscal 1998. The net income for fiscal 1998 is
primarily due to the sale of the Alta Vista URL to Compaq Computer, for which
Photoloft.com recorded other income of $3,100,000. The net loss for fiscal 1999
is primarily due to increases is selling, general and administrative expenses
resulting from the planned aggressive growth phase of Photoloft.com's new
business model.
INCOME TAXES
As of December 31, 1999, Photoloft.com had a gross deferred tax asset of
$974,100, principally arising from net operating loss carryforwards available to
offset future taxable income. As management cannot determine that it is more
likely than not that Photoloft.com will realize the benefit of these assets, a
100% valuation allowance has been established. See Note 9 of the financial
statements for a reconciliation between the statutory and effective tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during fiscal 1999 was $3,344,800, an
increase of $2,983,800, compared to $361,000 during fiscal 1998. The net cash
used in operating activities in fiscal 1999 primarily reflects the net effect of
the net loss for the period, offset by compensation relating to stock option and
warrant grants of $1,004,000, a decrease in deferred tax liabilities of
$747,200, and an increase in accounts payable of $777,300.
Net cash provided by investing activities during fiscal 1999 was
$1,793,400, an increase of $1,062,400 compared to $731,000 during fiscal 1998.
The net cash provided by investing activities in fiscal 1999 primarily reflects
$2,239,500 cash received from payments of principal on the note receivable
relating to the sale of the Alta Vista URL, offset by purchases of property and
equipment of $434,400.
Net cash provided by financing activities was $1,356,700 during fiscal
1999, primarily reflecting $1,400,700 cash received from the sale of stock and
exercise of stock options. No cash was provided by financing activities during
fiscal 1998.
31
<PAGE>
Our capital requirements are dependent on several factors, including market
acceptance of our services, the amount of resources devoted to investments in
Photoloft.com's web site, the resources devoted to marketing and selling
Photoloft.com's services and brand promotions and other factors. Fueling
Photoloft.com's need for cash currently is the development of rival technology
and new Internet sites and portals offering similar products. See "Item 1.
Description of Business-Competition." If we are to enjoy continued growth we
must work to stay at the forefront of technology and continue to grow in sales.
This will necessitate a substantial increase in capital expenditures. In
addition, PhotoLoft.com 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. At December 31,
1999, Photoloft.com had cash and cash equivalents totaling $175,300, resulting
principally from the sale of common stock in a private placement during March
1999, and negative working capital of $650,600.
We anticipate that we will require approximately $10.5 million in 2000 to
grow as contemplated. To continue functioning at our current level, we will need
approximately $4 million in 2000. We anticipate that 20% of our requirements
will come from cash from operations. We will seek the remainder from equity or
debt financing sources. In March 2000 we raised $1,000,000 in a private
placement financing, and are in the process of raising an addiional $250,000 in
connection with that same offering. We are actively seeking to raise additional
capital through debt or equity financing. We cannot assure you that we will be
able to obtain this additional financing. If financing is not available when
required or is not available on acceptable terms, we may be unable to develop or
enhance our products or services or take advantage of business opportunities or
respond to competitive pressures. In addition, our ability to meet our
obligations and continue our obligations could be adversely affected. The sale
of additional equity or convertible debt securities could result in additional
dilution to our stockholders. The incurrence of indebtedness would result in an
increase in our fixed obligations and could result in operating covenants that
would restrict its operations. There can be no assurance that financing will be
available in amounts or on terms acceptable to us, if at all. We note that our
independent certified public accountants modified their opinion to include an
explanatory paragraph relative to a going concern uncertainty.
If we are unsuccessful in generating resources from one or more of the
anticipated sources and unable to replace any shortfall with resources from
another source, we may be able to extend the period for which available
resources would be adequate by deferring the creation or satisfaction of various
commitments, deferring the introduction of various services or features or entry
into various markets and otherwise cutting back operations. Such a scaling back
of operations would involve two phases. The first phase would involve reducing
our current burn rate by approximately 15% by cutting back on business
development expenses and infrastructure. The second phase would involve
substantially reducing our e-commerce research and development efforts and
restructuring our approach to new business partnering deals. If we were unable
to generate required resources, our ability to meet our obligations and to
continue our operations will be adversely affected.
32
<PAGE>
In September 1999 we obtained a $750,000 line of credit with a financial
institution. Borrowings under the line bear interest at the rate of 28% per
annum. The line of credit expires in September 2000, but automatically renews
for a one year period unless either we or the financial institution notifies the
other party. At December 31, 1999, this line of credit has no outstanding
balance.
IMPACT OF THE YEAR 2000
In our previous filing, we have discussed the nature and progress of our
plans to deal with potential Year 2000 problems. These problems arise from the
fact that many currently installed computer systems and software products were
coded to accept or recognize only two digit entries in the date code field.
These systems may recognize a date using "00" as the year 1900 rather than the
year 2000. As a result, computer systems and/or software used by many companies
and governmental agencies needed to be upgraded to comply with Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities. Prior to December 31, 1999, we completed our
assessment of all material information technology and non-information technology
systems at our headquarters, as well as our review of Year 2000 compliance by
our key vendors, distributors and suppliers. To date, we have experienced no
significant disruptions in mission critical information technology and
non-information technology systems and we believe those systems successfully
responded to the Year 2000 date changes. We are not aware of any material
problems result from Year 2000 issues, either with our own internal systems or
the products and services of third parties. We will continue to monitor our
mission critical computer applications and those of our suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
SEASONALITY
We believe that we may experience seasonality in our business, with use of
the Internet in general and our Photoloft.com web site traffic being somewhat
lower during periods of the year. In particular, we believe that advertising
sales in traditional media, such as television and radio, generally are lower
in the first and third calendar quarters of each year due to the summer vacation
period and post-Winter holiday season slowdown. If similar seasonal patterns
emerge in Internet advertising, our advertising revenues and operating results
also may vary significantly based upon these same patterns. In addition, as
traditional retail sales are generally higher in the fourth calendar quarter of
each year during the winter holiday season, and subsequently lower in the first
calendar quarter of each year, we anticipate that e-commerce revenues may follow
a similar seasonal pattern and that our e-commerce revenues and operating
results also may vary significantly based upon these patterns.
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 1998 and 1999, inflation has
not had a significant effect on our results of operations since inception.
33
<PAGE>
FACTORS AFFECTING OUR OPERATING RESULTS, BUSINESS PROSPECTS AND STOCK PRICE
This report on Form 10-KSB contains forward-looking statements that involve
risks and uncertainties. The factors described below, among others, could cause
our actual results to differ materially from those anticipated.
We Are Much Like A Start Up Company And Have A Limited Operating History On
Which To Evaluate Our Potential For Future Success.
We launched our current business model in October, 1998 and therefore are
much like a start-up company. We have only a limited operating history upon
which you can evaluate our business and prospects. You must consider the risks
and uncertainties frequently encountered by early stage companies in new and
rapidly evolving markets, such as e-commerce. If we are unsuccessful in
addressing these risks and uncertainties, our business, results of operations
and financial condition will be materially and adversely affected.
We Expect Losses For The Foreseeable Future, And Our Operating Results May
Fluctuate From Quarter To Quarter.
Since 1997, we have incurred losses from operations, resulting primarily
from costs related to developing our web site, attracting users to our web site,
and establishing our brand. Because of our plans to invest heavily in marketing
and promotion, to hire additional employees, and to enhance our web site and
operating infrastructure, we expect to incur net losses for the foreseeable
future. We believe these expenditures are necessary to build and maintain the
technical infrastructure necessary to host multiple images and to strengthen our
brand recognition, attract more users to our web site and ultimately, generate
greater online revenues. If our revenue growth is slower than we anticipate or
our operating expenses exceed our expectations, our losses will be significantly
greater. We may never achieve profitability. We note that our independent
certified public accountants modified their opinion to include an explanatory
paragraph relative to a going concern uncertainty.
Our Future Revenues Are Unpredictable And Our Quarterly Operating Results May
Fluctuate Significantly.
Our revenues for the foreseeable future will remain primarily dependent on
the number of users that we are able to attract to our web site, and on
sponsorship and advertising revenues. We cannot forecast with any degree of
certainty the number of visitors to our web site or the amount of sponsorship
and advertising revenues.
We expect our operating results to fluctuate from quarter to quarter. We
believe that sponsorship and advertising sales in traditional media, such as
television and radio, generally are lower in the first and third calendar
quarters of each year. If similar seasonal and cyclical patterns emerge in
Internet sponsorship and advertising spending, these revenues may vary based on
these patterns. See "Seasonality."
34
<PAGE>
Other factors which may cause our operating results to fluctuate
significantly from quarter to quarter include:
- our ability to attract new and repeat visitors to our web site and
convert them into users;
- our ability to keep current with the evolving tastes of our target
market;
- our ability to manage the number of items listed on our services;
- the ability of our competitors to offer new or enhanced web site
features, products or services;
- the demand for sponsorship and advertising on our web site;
- the level of use of the Internet and online services;
- consumer confidence in the security of transactions over the Internet;
- unanticipated delays or cost increases with respect to product and
service introductions; and
- the costs, timing and impact of our marketing and promotion initiatives.
Because of these and other factors, we believe that quarter-to-quarter
comparisons of our results of operations are not good indicators of our future
performance. If our operating results fall below the expectations of securities
analysts and investors in some future periods, then our stock price may decline.
Your Holdings May Be Diluted In The Future.
We are authorized to issue up to 50,000,000 shares of common stock. To the
extent of such authorization, our Board of Directors will have the ability,
without seeking stockholder approval, to issue additional shares of common stock
in the future for such consideration as our Board of Directors may consider
sufficient. The issuance of additional common stock in the future will reduce
the proportionate ownership and voting power of our common stock held by
existing stockholders. We are also authorized to issue up to 500,000 shares of
preferred stock, the rights and preferences of which may be designated in series
by our Board of Directors. To the extent of such authorization, such
designations may be made without stockholder approval. We have designated 125
shares of our preferred stock as series A preferred stock and issued 100 of such
shares in a private placement financing in March 2000. The remaining 25 shares
are still being offered on the same terms and conditions. See "Item 5. Market
for Common Equity and Related Stockholder Matters -- Recent Sales of
Unregistered Securities." Such shares are convertible into common stock, and
such conversion will dilute the interests of our other shareholders. Holders of
the series A preferred stock must approve any merger, sale of assets, or other
transaction that amounts to a sale of Photoloft.com, and such approval rights
may have the effect of delaying a transaction that might otherwise be favorable
to other holders of our capital stock. The designation and issuance of
additional series of preferred stock in the future would create additional
securities that would have dividend and liquidation preferences over our common
stock.
35
<PAGE>
We May Fail To Establish An Effective Internal Advertising Sales Organization To
Attract Sponsorship And Advertising Revenues.
To date, we have relied principally on outside parties to develop
sponsorship and advertising opportunities. We believe that the growth of
sponsorship and advertising revenues will depend on our ability to establish an
aggressive and effective internal advertising sales organization. Our internal
sales team currently has only two members. We will need to increase this sales
force in the coming year in order to execute our business plan. Our ability to
increase our sales force involves a number of risks and uncertainties, including
competition and the length of time for new sales employees to become productive.
If we do not develop an effective internal sales force, our business will be
materially and adversely affected. See "Item 1. Description of
Business--Employees."
We Are Growing Rapidly, And Effectively Managing Our Growth May Be Difficult.
We are currently experiencing a period of significant expansion. In order
to execute our business plan, we must continue to grow significantly. This
growth will strain our personnel, management systems and resources. To manage
our growth, we must implement operational and financial systems and controls and
recruit, train and manage new employees. We cannot be certain that we will be
able to integrate new executives and other employees into our organization
effectively. If we do not manage growth effectively, our business, results of
operations and financial condition will be materially and adversely affected.
See "Item 1. Description of Business-Employees" and "Item 9. Directors,
Executive Officers, Promoters and Control Persons; Compliance With Section 16(a)
of the Exchange Act."
We Depend On Our Key Personnel To Operate Our Business, And We May Not Be Able
To Hire Enough Additional Management And Other Personnel As Our Business Grows.
Our performance is substantially dependent on the continued services and on
the performance of our executive officers and other key employees, particularly
Jack Marshall, our Chief Executive Officer, President and Treasurer. The loss of
the services of any of our executive officers could materially and adversely
affect our business. Additionally, we believe we will need to attract, retain
and motivate talented management and other highly skilled employees to be
successful. Competition for employees that possess knowledge of both the
Internet industry and our target market is intense. We may be unable to retain
our key employees or attract, assimilate and retain other highly qualified
employees in the future. See "Item 1. Description of Business-Employees" and
"Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act."
36
<PAGE>
We May Not Be Able To Compete Successfully.
The markets in which we are engaged are new, rapidly evolving and intensely
competitive, and we expect competition to intensify further in the future.
Barriers to entry are relatively low, and current and new competitors can launch
new sites at a relatively low cost. We currently or potentially compete with a
number of other companies, including a number of large online communities and
services that have expertise in developing online commerce, and a number of
other small services, including those that serve specialty markets. Competitive
pressures created by any one of these companies, or by our competitors
collectively, could have a material adverse effect on our business, results of
operations and financial condition. See "Item 1. Description of
Business--Competition."
We Will Need Further Capital.
We currently anticipate that our available funds will be sufficient to meet
our anticipated needs for working capital, capital expenditures and business
operation through the end of April 2000. Thereafter, we will need to raise
additional funds. If additional funds are raised through the issuance of equity
or convertible debt securities, the percentage ownership of our stockholders
will be reduced, stockholders may experience additional dilution and such
securities may have rights, preferences and privileges senior to those of our
common stock. We are currently negotiating with prospective investors with
respect to financing; however, to date , no definitive agreements have been
reached. There can be no assurance that additional financing will be available
on terms favorable to us or at all. If adequate funds are not available or are
not available on acceptable terms, we may not be able to fund expansion, take
advantage of unanticipated acquisition opportunities, develop or enhance
services or products or respond to competitive pressures. Such inability could
have a material adverse effect on our business, results of operations and
financial condition. See "Management's Discussion and Analysis or Plan of
Operation-Liquidity and Capital Resources."
We May Fail To Establish And Maintain Strategic Relationships With Other Web
Sites To Increase Numbers Of Web Site Users And Increase Our Revenues.
We intend to establish numerous strategic alliances with popular web sites
to increase the number of visitors to our web site. There is intense competition
for placement on these sites, and we may not be able to enter into these
relationships on commercially reasonable terms or at all. Even if we enter into
strategic alliances with other web sites, they themselves may not attract
significant numbers of users. Therefore, our site may not receive additional
users from these relationships. Moreover, we may have to pay significant fees to
establish these relationships. Our inability to enter into new distribution
relationships or strategic alliances and expand our existing ones could have a
material and adverse effect on our business.
We Would Lose Revenues And Incur Significant Costs If Our Systems Or Material
Third-Party Systems Are Not Year 2000-Compliant.
37
<PAGE>
To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues, nor have we experienced any significant
failures due to the Year 2000 date changes. However, we may fail to discover
Year 2000 compliance problems in our systems that will require substantial
revisions or replacements. In the event that the operational facilities that
support our business, or our web-hosting facilities, are not Year
2000-compliant, portions of our web site may become unavailable and we would be
unable to deliver services to our users. In addition, there can be no assurance
that third-party software, hardware or services incorporated into our material
systems will not need to be revised or replaced, which could be time-consuming
and expensive. Our inability to fix or replace third-party software, hardware or
services on a timely basis could result in lost revenues, increased operating
costs and other business interruptions, any of which could have a material and
adverse effect on our business, results of operations and financial condition.
Moreover, the failure to adequately address Year 2000 compliance issues in our
software, hardware or systems could result in claims of mismanagement,
misrepresentation or breach of contract and related litigation, which could be
costly and time-consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will be Year 2000 compliant. The failure by these entities
to be Year 2000 compliant could result in a systemic failure beyond our control,
including, for example, a prolonged Internet, telecommunications or electrical
failure, which could also prevent us from delivering our services to our users,
decrease the use of the Internet or prevent users from accessing our services,
any of which would have a material and adverse effect on our business, results
of operations and financial condition. See "Impact of the Year 2000."
Acquisitions May Disrupt Or Otherwise Have A Negative Impact On Our Business.
We may acquire or make investments in complementary businesses, products,
services or technologies on an opportunistic basis when we believe they will
assist us in carrying out our business strategy. Growth through acquisitions has
been a successful strategy used by other Internet companies. We do not have any
present understanding, nor are we having any discussions relating to any such
acquisition or investment. If we buy a company, then we could have difficulty in
assimilating that company's personnel and operations. In addition, the key
personnel of the acquired company may decide not to work for us. An acquisition
could distract our management and employees and increase our expenses.
Furthermore, we may have to incur debt or issue equity securities to pay for any
future acquisitions, the issuance of which could be dilutive to our existing
shareholders.
Unforeseen Developments May Occur With Respect To Digital Imaging Technology.
Digital imaging is a relatively new phenomenon and the slower than expected
acceptance of the new technology could affect our ability to grow as rapidly as
we need to in order to meet our financial targets. Digital camera manufacturers
have made great strides in the past two years improving the functionality of
their cameras and pricing them in a range that is attractive to many consumers.
38
<PAGE>
The continued refinement of the technology and commoditization of the price will
help to move acceptance of the technology along. Full acceptance of digital
imaging technology will require a move on the part of the photographic
population away from traditional chemical-based photo processing to the new
paradigm of home printed photos. The costs remain competitive for digital
imaging, however, there is no guarantee the general population will make this
shift rapidly, if at all.
We Are Dependent On The Continued Development Of The Internet Infrastructure.
Our industry is new and rapidly evolving. Our business would be adversely
affected if web usage and e-commerce does not continue to grow. Web usage may be
inhibited for a number of reasons, including:
- inadequate Internet infrastructure;
- security concerns;
- inconsistent quality of service; or
- unavailability of cost-effective, high-speed service.
If web usage grows, the Internet infrastructure may not be able to support
the demands placed on it by this growth, or its performance and reliability may
decline. In addition, web sites have experienced a variety of interruptions in
their service as a result of outages and other delays occurring throughout the
Internet network infrastructure. If these outages or delays frequently occur in
the future, web usage, including usage of our web site, could grow slowly or
decline.
Our Long-Term Success Depends On The Development Of The E-Commerce Market, Which
Is Uncertain.
Our future revenues and profits substantially depend upon the widespread
acceptance and use of the web as an effective medium of commerce by consumers.
Rapid growth in the use of the web and commercial online services is a recent
phenomenon. Demand for recently introduced services and products over the web
and online services is subject to a high level of uncertainty. The development
of the web and online services as a viable commercial marketplace is subject to
a number of factors, including the following:
- e-commerce is at an early stage and buyers may be unwilling to shift
their purchasing from traditional vendors to online vendors;
- insufficient availability of telecommunication services or changes in
telecommunication services could result in slower response times; and
39
<PAGE>
- adverse publicity and consumer concerns about the security of commerce
transactions on the Internet could discourage its acceptance and growth.
Adoption Of The Internet As An Advertising Medium Is Uncertain.
The growth of Internet sponsorships and advertising requires validation of
the Internet as an effective advertising medium. This validation has yet to
fully occur. In order for us to generate sponsorship and advertising revenues,
marketers must direct a significant portion of their budgets to the Internet
and, specifically, to our web site. To date, sales of Internet sponsorships and
advertising represent only a small percentage of total advertising sales. Our
business, financial condition and operating results would be adversely affected
if the market for Internet advertising fails to develop or develops slower than
expected. See "Item 1. Description of Business--Advertising."
We Face Risks Associated With Government Regulation Of And Legal Uncertainties
Surrounding The Internet.
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could increase our cost of doing business or
otherwise have a material and adverse effect on our business, results of
operations and financial condition. Laws and regulations directly applicable to
Internet communications, commerce and advertising are becoming more prevalent.
The law governing the Internet, however, remains largely unsettled, even in
areas where there has been some legislative action. It may take years to
determine whether and how existing laws governing intellectual property,
copyright, privacy, obscenity, libel and taxation apply to the Internet. In
addition, the growth and development of e-commerce may prompt calls for more
stringent consumer protection laws, both in the United States and abroad. See
"Item 1. Description of Business - Government Regulation."
Shares Eligible For Future Sale By Our Current Stockholders May Adversely Affect
Our Stock Price.
To date, we have had a very limited trading volume in our common stock.
See "Item 5. Market for Common Equity and Related Stockholder Matters." As long
this condition continues, the sale of a significant number of shares of common
stock at any particular time could be difficult to achieve at the market prices
prevailing immediately before such shares are offered. In addition, sales of
substantial amounts of common stock, including shares issued upon the exercise
of outstanding options and warrants, under Securities and Exchange Commission
Rule 144 or otherwise could adversely affect the prevailing market price of our
common stock and could impair our ability to raise capital at that time through
the sale of our securities.
Anti-Takeover Provisions And Our Right To Issue Preferred Stock Could Make A
Third-Party Acquisition Of Us Difficult.
40
<PAGE>
We are a Nevada corporation. Anti-takeover provisions of Nevada law could
make it more difficult for a third party to acquire control of us, even if such
change in control would be beneficial to stockholders. Our articles of
incorporation provide that our Board of Directors may issue preferred stock
without stockholder approval. The issuance of preferred stock could make it
more difficult for a third party to acquire us. All of the foregoing could
adversely affect prevailing market prices for our common stock.
Our Common Stock Price Is Likely To Be Highly Volatile.
The market price of our common stock is likely to be, highly volatile as
the stock market in general, and the market for Internet-related and technology
companies in particular, has been highly volatile. See "Item 5. Market for
Common Equity and Related Stockholder Matters." Investors may not be able to
resell their shares of our common stock following periods of volatility because
of the market's adverse reaction to volatility. The trading prices of many
technology and Internet-related companies' stocks have reached historical highs
within the last 52 weeks and have reflected valuations substantially above
historical levels. During the same period, these companies' stocks have also
been highly volatile and have recorded lows well below historical highs. We
cannot assure you that our stock will trade at the same levels of other Internet
stocks or that Internet stocks in general will sustain their current market
prices.
Factors that could cause such volatility may include, among other things:
- actual or anticipated fluctuations in our quarterly operating results;
- announcements of technological innovations;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet industry; and
- changes in the market valuations of other Internet companies.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this Item 7 are set forth at the pages
indicated in Item 13 below.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
41
<PAGE>
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors, Executive Officers And Key Employees
The following table sets forth certain information, as of March 15, 2000,
concerning our executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- --- -------------------------------------
<S> <C> <C>
Jack Marshall (1) (3) (4) 38 President, Treasurer, Chief Executive
Officer and Director
- ------------------------- --- -------------------------------------
Christopher McConn 40 Chief Technology Officer and Director
- ------------------------- --- -------------------------------------
Lisa Marshall (1) 41 Secretary
- ------------------------- --- -------------------------------------
Robert Free 43 Vice President of Production
- ------------------------- --- -------------------------------------
Kay Wolf Jones 36 Vice President of Marketing
- ------------------------- --- -------------------------------------
Patrick Dane (2) (3) (4) 50 Director
- ------------------------- --- -------------------------------------
John Marshall (1) (2) 69 Director
- ------------------------- --- -------------------------------------
<FN>
(1) John Marshall is the father of Jack and Lisa Marshall, who are brother
and sister.
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
(4) Member of the Finance Committee
</TABLE>
The following sets forth biographical information concerning our directors
and executive officers for at least the past five years:
JACK MARSHALL has been developing Internet applications since 1993. After
assignments at Texas Instruments and Honeywell, Mr. Marshall worked as a sales
manager for Teradyne, formerly MegaTest, a leading developer of high-end,
state-of-the-art semiconductor test equipment. Mr. Marshall founded Photoloft
in 1993 under the name AltaVista Technology. Inc. Mr. Marshall received his
bachelor's degree in electrical engineering and computer engineering from
Michigan State University and has taught electric circuit analysis at Highland
Community College in Illinois. He has also completed several masters level
courses in computer engineering at Santa Clara University.
CHRISTOPHER MCCONN has been the Chief Technology Officer of Photoloft.com
since February 1994. Prior to our adoption of the Photoloft.com business
strategy, he served as our webmaster and developed web-based multimedia and
imaging programs. He has extensive expertise in programming C++ and served as a
42
<PAGE>
consultant to Borland International, a leading producer of C++ and software
development tools from July 1995 to July 1996. In this role, Mr. McConn helped
develop the Object Windows Library, a foundation for PhotoLoft.com. Mr. McConn
received his bachelor's degree in electrical engineering from UC Davis in 1982.
Mr. McConn has over 13 years of industry experience including stints at Ford
Aerospace and Teradyne, where he oversaw the company's software QA development.
LISA MARSHALL has over 20 years of strategic and tactical communications
experience, focused primarily on investor relations, media communications and
marketing and brand development. Working in a number of diverse industries, she
helped spearheaded nationwide efforts to deregulate the airline, natural gas
transportation, and most recently, electric generation industries, working to
establish strong, deregulated competitors in the various marketplaces. In
addition, she handled the communications efforts of the Vastar Resources Initial
Public Offering, which was the largest to date on the New York Stock Exchange
when implemented in 1994. From 1985 to 1988 she served in various managerial
positions at Continental Airlines. From 1988 to 1993 she served in various
managerial positions at Tenneco Inc. From February 1993 to June 1997 she served
as director of Communications for ARCO/Vastar Resources. From July 1997 to
October 1998 she served as director of Communications for Southern Company. Ms.
Marshall earned her bachelor's degree from the University of Wyoming in American
Studies in 1980 and her bachelors degree from the University of Houston in
journalism in 1984.
ROBERT FREE has served as our Vice President of Production since May, 1999.
Previously, from 1998 to 1999, he served as Director of Engineering at
Integrated Software & Devices. Prior to that, from 1997 to 1998, he was an
architect, engineering manager and designer for award-winning three dimensional
web products at Live Picture. From 1996 to 1997, Mr. Free served as the founder
of Grafman providing corporate graphics, Internet site management and
award-winning three dimensional web content, where his works were published
internationally in several web design books. From 1995 to 1996, Mr. Free was
lead engineer for commercial web server software development at NetManage.
KAY WOLF JONES has served as our Vice President of Marketing since 1996.
Ms. Jones. From 1989 to 1996, she served in the marketing department of Konami,
a leader in the video game industry, and in 1994, she was named vice president
of marketing. Ms. Jones earned her bachelor of arts degree in advertising from
Michigan State in 1985.
PATRICK DANE has spent more than twenty years in the high technology
industry. He spent fifteen years in sales and marketing at Xerox where he was
responsible for bringing the "Alto" Computer Ethernet and File, Print &
Communication Servers out to the public from the Palo Alto Research Center in
1980. Additionally, he was the creator of the award winning slogan "Team Xerox"
and other pioneering efforts. As Vice President, Sales & Marketing at Dove
Computer Corp. he introduced the MacWorld World Class Award Winning Dove Fax
Modem. As a General Manager with Calera Recognition Systems from 1991 to 1992
Dane was responsible for bringing Fax Grabber to there tail and original
equipment manufacturer marketplace. While President and CEO of SoftNet in from
July 1992 to August 1993 he launched the category-leading Fax Works for Windows.
43
<PAGE>
Dane co-founded and ran Pipeline Communications which introduced online warranty
registration to the computer industry. This service is used by over seventy five
of the top PC manufacturers and ISV's in the marketplace today. In the spring
of1996, Dane founded Tuneup.com an online PC service center, Quarterdeck
Corporation acquired his "Pioneer" among the Internet subscription-based
businesses in May of 1997. In September1996, Dane and Mike Walter began
broadcasting a weekly radio show devoted to the Internet called, "Pat & Mike's
World Wide Web Radio Show". The show, sponsored by CompuServe, Yahoo! IZift
Davis, Hewlett-packard, Office Depot.com, McAfee and USA Today, has a growing
worldwide audience on the Internet and in twenty seven real radio markets. The
show was picked up for national syndication by Premiere Radio Networks in mid
1997. Mr. Dane graduated from Broom Comm College in 1969.
JOHN C. MARSHALL began his career in 1952 with Shell Oil Company, where he
held various management positions until 1975, when he was named General Manager
of Land Operations, North America. He left the company in 1979 to join Patrick
Petroleum as senior vice president. A year later he was named executive vice
president responsible for all operations, and all merger and acquisition
activity. After negotiating the sale of all PPC assets to General Electric, he
founded Kleenburn Energy in 1984 a privately held independent oil and gas
concern. Mr. Marshall earned his bachelor's degree in business from the
University of Wyoming in 1952.
BOARD OF DIRECTORS
All directors hold office until the next annual meeting of shareholders
following their election or until their successors have been elected and
qualified. Executive officers are appointed by and serve at the pleasure of the
Board of Directors. We may adopt provisions in our By-laws and/or Articles of
Incorporation to divide the board of directors into more than one class and to
elect each class for a certain term. These provisions may have the effect of
discouraging takeover attempts or delaying or preventing a change of control of
Photoloft.
BOARD COMMITTEES
The Compensation Committee of the Board of Directors determines the
salaries and incentive compensation of our officers and provides recommendations
for the salaries and incentive compensation of our other employees. The
compensation committee also administers our stock option plan. The current
members of the Compensation Committee are Messrs. Dane and John Marshall. Prior
to April 8, 1999, we did not have a Compensation Committee or any other
committee of the Board of Directors that performed any similar functions. See
"Compensation Committee Interlocks and Insider Participation."
The Audit Committee of the Board of Directors reviews, acts on and reports
to the Board of Directors with respect to various auditing and accounting
matters, including the selection of our independent auditors, the scope of the
annual audits, fees to be paid to the auditors, the performance of our
independent auditors and our accounting practices. The current members of the
audit committee are Messrs. Dane and Jack Marshall.
44
<PAGE>
The Finance Committee of the Board of Directors reviews, acts on and
reports to the Board of Directors with respect to various financing matters. The
current members of the audit committee are Messrs. Dane and Jack Marshall.
The Board of Directors does not have a nominating committee.
DIRECTORS' COMPENSATION
Directors who are also employees of Photoloft.com receive no compensation
for serving on the Board of Directors. With respect to directors who are not
employees, we intend to reimburse such directors for all travel and other
expenses incurred in connection with attending meetings of the Board of
Directors and any committees of the Board. Non-employee directors are also
eligible to receive and have received grants of non-qualified stock options
under our stock option plan, and we intend to establish a non-employee director
stock option plan which will provide for initial option grants of a fixed number
of shares of our common stock to non-employee directors and successive annual
option grants to such non-employee directors covering an additional fixed number
of shares to provide us with an effective way to recruit and retain qualified
individuals to serve as members of the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a Compensation Committee or other committee of the Board of
Directors performing similar functions during the fiscal years ending December
31, 1997 and 1998. Messrs. Jack Marshall and Chris McConn are each officers of
Photoloft.com and, as members of the Board of Directors, participated in
deliberations of the Board of Directors relating to the compensation of our
executive officers. The Board of Directors established a Compensation Committee
as of April 8, 1999. See "Board Committees."
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
certain officers, directors, and beneficial owners of more than ten percent of
our common stock to file reports of ownership and changes in their ownership of
our equity securities with the Securities and Exchange Commission and to provide
us with copies of such filings. Based solely on a review of the reports and
representations furnished to us during the last fiscal year, we believe that
each of these persons is in compliance with all applicable filing requirements
although each of these persons was late in filing their initial Form 3.
45
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth the compensation awarded or paid to, or
earned by, our Chief Executive Officer and all our other executive officers who
earned in excess of $100,000 in salary and bonus (collectively the "Named
Executives") for services rendered to us during the years ended December 31,
1998 and December 31, 1999:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE (1)(2)
ANNUAL COMPENSATION LONG-TERM COMPENSATION
NAME AND PRINCIPAL YEAR SALARY ($) NUMBER OF SECURITIES
POSITION UNDERLYING OPTIONS (#)
- ------------------------ ---- -------------------- -----------------------
<S> <C> <C> <C>
Jack Marshall, CEO, 1998 156,864 1,135,032
President and Treasurer
1999 120,000 0
Christopher E. McConn, 1998 127,229 454,013
Chief Technology Officer
1999 115,000 0
<FN>
(1) Information set forth herein includes services rendered by the Named
Executives while employed by Photoloft.com, Inc. prior to the reorganization
with Data Growth, Inc. and by Photoloft.com following the reorganization with
Data Growth, Inc
(2) The columns for "Bonus", "Other Annual Compensation", "Restricted Stock
Awards", "LTP Payouts" and "All other Compensation" have been omitted because
there is no compensation required to be reported.
</TABLE>
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1999
No option grants were made to either of the Named Executives during the
fiscal year 1999.
OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth certain information with respect to the
Named Executives concerning exercisable and unexercisable stock options held by
them as of December 31, 1999. None of these executive officers exercised options
to purchase common stock in 1999.
46
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE OPTION EXERCISES IN 1999 AND YEAR END OPTION VALUES
NAME Number of Unexercised Value of Unexercised In-the-
Options at Year End(#) Money Options at Year End (1)
-------------------------- ------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Jack Marshall 401,991 733,041 $ 510,529 $ 930,962
Christopher E. McConn 160,796 293,217 $ 204,211 $ 372,385
<FN>
(1) Based on a per share fair market value of our common stock equal to
$1.75 per share, the fair market value as determined by our Board of Directors
at December 31, 1999.
</TABLE>
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
On February 26, 1999 we entered into an employment agreement with Jack
Marshall. Under the executive employment agreement, Jack Marshall is to serve
as our Chief Executive Officer, President and Treasurer and perform such duties
as may be reasonably assigned to him by the Board of Directors. The executive
employment agreement provides for an annual base salary of $120,000 which shall
be reviewed at least annually. Under the executive employment agreement, the
executive is also eligible for annual bonus compensation in the minimum amount
of $60,000 if Photoloft reaches certain specific milestones. The executive
employment agreement also provides that Mr. Marshall is to receive options to
purchase between 378,344 and 1,135,031 shares of our common stock if traffic to
our web site reaches between 500,000 and 1,000,000 average hits per day in any
particular month. In March 2000, we issued options to purchase 378,344 shares
of our common stock pursuant to this provision. He is eligible to receive
vacation in accordance with Photoloft.com's policies. He is also eligible to
participate in the health, life insurance, medical, retirement and other
benefit programs which we may offer from time to time. He also is to receive a
car allowance of $500 per month.
The term of the executive employment agreement lasts until December 31,
2001 and continues thereafter on a year to year basis unless terminated pursuant
to the terms thereof. We may terminate him at any time with or without cause.
The term "cause" is defined in the executive employment agreement as: (i) the
willful neglect of duties reasonably assigned by the Board of Directors; (ii)
material breach of the agreement; or (iii) willful gross misconduct. If Mr.
Marshall is terminated without cause, he is to receive severance pay through
December 31, 2001 equal to: (i) the base salary; (ii) bonus compensation; (iii)
vested options to purchase common stock; (iv) health insurance; (v) car
allowance; and (vi) any unused vacation time. pre payment of all automobile
allowance for the remaining period of the term. If he resigns from his position
for good cause, including a substantial reduction in his position, duties or a
material breach of the agreement by us, he is to be deemed terminated without
cause and is eligible to receive severance.
STOCK OPTION PLAN
Our stock option plan was adopted by the Board of Directors, and ratified
and approved by our stockholders, as of the closing of the reorganization with
Data Growth, Inc. The Board of Directors amended the Plan in June 1999. The
47
<PAGE>
following description of our stock option plan is a summary and qualified in its
entirety by the text of the plan, which is filed as an exhibit to this
registration statement.
The purpose of the Plan is to enhance our profitability and stockholder
value by enabling us to offer stock based incentives to employees, directors and
consultants. The Plan authorizes the grant of options to purchase shares of
common stock to employees, directors and consultants of Photoloft and its
affiliates. Under the Plan, we may grant incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986 and non-qualified
stock options. Incentive stock options may only be granted our employees.
The number of shares available for options under the Plan is 3,800,000. The
Plan is administered by the Compensation Committee of the board. Subject to the
provisions of the Plan, the Compensation Committee has authority to determine
the employees, directors and consultants of Photoloft who are to be awarded
options and the terms of such awards, including the number of shares subject to
such option, the fair market value of the common stock subject to options, the
exercise price per share and other terms.
Incentive stock options must have an exercise price equal to at least 100%
of the fair market value of a share on the date of the award unless the grant is
to a stockholder holding more than 10% of our voting stock in which case it must
be 110% of the fair market value on the date of grant. Generally, they may not
have a duration of more than 10 years or five years if the grant is to a
stockholder holding more than 5% of our voting stock. Terms and conditions of
awards are set forth in written agreements between Photoloft.com and the
respective option holders. Awards under the Plan may not be made after the tenth
anniversary of the date of its adoption but awards granted before that date may
extend beyond that date.
If the employment with Photoloft of the holder of an incentive stock option
is terminated for any reason other than as a result of the holder's death or
disability or for "cause" as defined in the Plan, the holder may exercise the
option, to the extent exercisable on the date of termination of employment,
until the earlier of the option's specified expiration date and 90 days after
the date of termination. If an option holder dies or becomes disabled, both
incentive and non-qualified stock options may generally be exercised, to the
extent exercisable on the date of death or disability, by the option holder or
the option holder's survivors until the earlier of the option's specified
termination date and one year after the date of death or disability.
As of March 15, 2000, 225,000 shares had been issued as the result of the
exercise of options previously granted under the Plan, 3,592,141 shares were
subject to outstanding options and 121,500 shares were available for future
grants. The exercise prices of the outstanding options ranged from $0.48 to
approximately $5.25. The options under the Plan vest over varying lengths of
time pursuant to various option agreements that we have entered into with the
grantees of such options.
48
<PAGE>
We have not registered the Plan, or the shares subject to issuance
thereunder, pursuant to the Securities Act of 1933. Absent registration, such
shares, when issued upon exercise of options, would be "restricted securities"
as that term is defined in Rule 144 under the Securities Act of 1933.
Optionees have no rights as stockholders with respect to shares subject to
options prior to the issuance of shares pursuant to the exercise thereof.
Options issued to employees under the Plan shall expire no later than ten years
after the date of grant. An option becomes exercisable at such time and for
such amounts as determined at the discretion of the Board of Directors or the
Compensation Committee at the time of the grant of the option. An optionee may
exercise a part of the option from the date that part first becomes exercisable
until the option expires. The purchase price for shares to be issued to an
employee upon his exercise of an option is determined by the Board of Directors
or the Compensation Committee on the date the option is granted. The purchase
price is payable in full in cash, by promissory note, by net exercise or by
delivery of shares of our common stock when the option is exercised.
The Plan provides for adjustment as to the number and kinds of shares
covered by the outstanding options and the option price therefor to give effect
to any stock dividend, stock split, stock combination or other reorganization of
or by Photoloft.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 15, 2000, the ownership of our
common stock by each of our directors and executive officers, all of our
executive officers and directors as a group, and all persons known by us to
beneficially own more than 5% of our common stock.
Unless otherwise indicated in the footnotes to the table, the following
individuals have sole vesting and sole investment control with respect to the
shares they beneficially own and the address of each beneficial owner listed
below is c/o 300 Orchard City Drive, Suite 142, Campbell, California 95008.
The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rules, beneficial ownership includes any shares as to which
the individual has sole or shared voting or investment power and also any shares
that the individual has the right to acquire within 60 days after March 15,
2000. The inclusion herein of such shares, however, does not constitute an
admission that the named stockholder is a direct or indirect beneficial owner of
such shares. Unless otherwise indicated, each person named in the table has sole
voting and investment power (or shares such power with his or her spouse) with
respect to all shares of common stock listed as owned by such person. The total
number of outstanding shares of common stock at March 15, 2000 was 12,881,875.
49
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE PERCENT OF
BENEFICIAL OWNER OF BENEFICIAL CLASS (1)
OWNERSHIP (1)
EXECUTIVE OFFICERS AND DIRECTORS:
- ------------------------------------------ ------------------ -----------
<S> <C> <C>
Jack Marshall (2)(3) 3,033,817 22.0%
- ------------------------------------------ ------------------ -----------
Christopher McConn (4) 879,639 6.8%
- ------------------------------------------ ------------------ -----------
Lisa Marshall (2)(5) 327,735 2.2%
- ------------------------------------------ ------------------ -----------
Robert Free (6) 56,250 *
- ------------------------------------------ ------------------ -----------
Kay Wolf Jones (7) 342,540 2.6%
- ------------------------------------------ ------------------ -----------
Patrick Dane (8) 191,322 1.5%
- ------------------------------------------ ------------------ -----------
John Marshall (2)(9) 772,080 5.5%
- ------------------------------------------ ------------------ -----------
All directors and executive officers as a 5,603,383 40.0%
group (7 Persons) (3)(4)(5)(6)(7)(8)(9)
- ------------------------------------------ ------------------ -----------
OTHER 5% STOCKHOLDERS:
- ------------------------------------------ ------------------ -----------
George Perlegos 2,270,063 17.6%
- ------------------------------------------ ------------------ -----------
Keith Queeney 700,759 5.4%
- ------------------------------------------ ------------------ -----------
<FN>
* Less than one percent.
(1) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934. Under Rule 13d-3(d), shares not outstanding which are subject to options,
warrants, rights or conversion privileges exercisable within 60 days are deemed
outstanding for the purpose of calculating the number and percentage owned by
such person, but are not deemed outstanding for the purpose of calculating the
percentage owned by each other person listed.
(2) John Marshall is the father of Jack and Lisa Marshall, who are brother
and sister.
(3) Includes 916,539 shares of common stock subject to options that
are exercisable within 60 days of the date hereof.
(4) Includes 179,713 shares of common stock subject to options that are
exercisable within 60 days of the date hereof.
(5) Includes 14,675 shares of common stock subject to options that are
currently exercisable
(6) Includes 56,250 shares of common stock subject to options that are
currently exercisable.
(7) Includes 23,647 shares of common stock subject to options that are
currently exercisable.
(8) Includes 88,911 shares of common stock subject to options that are
currently exercisable.
(9) Includes 88,911 shares of common stock subject to options that are
currently exercisable.
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
50
<PAGE>
Unless otherwise indicated, information in this Item 12 regarding shares of
our common stock reflect the 1.5133753 for 1 conversion ratio applied to shares
of Photoloft.com, Inc., a California corporation, common stock at the time of
the reorganization referred to below.
ISSUANCES TO FOUNDER. Upon his founding of Photoloft.com, Inc. in November,
1993, we issued 756,688 shares of common stock to Jack Marshall in exchange for
$500.00. At that time, we also issued him options to purchase up to 1,152,493
shares of common stock which vested over a four year period and had an exercise
price of $0.001 per share. He exercised his options and elected to purchase
1,152,493 shares of common stock in February, 1999. During our offering of
preferred stock described below, he purchased 125,000 shares in exchange for
$25,000. He transferred 50,000 shares of common stock by gift in February 1999.
In March, 1999 his shares of Photoloft.com, Inc. common stock and his options to
purchase shares of Photoloft.com, Inc. common stock were converted into shares
of Photoloft.com common stock, and options to purchase Photoloft.com common
stock as a result of the reorganization with Data Growth, Inc
SERIES A PREFERRED OFFERING. From 1994 to 1998 we conducted a private
offering of Photoloft.com, Inc., a California corporation series A preferred
stock. As a result, we sold the aggregate amount of 2,275,625 shares of series
A preferred stock in exchange for $455,125. Under this offering, Messrs. John
Marshall, and Chris McConn, purchased 295,000 and 25,000 shares of stock,
respectively. As described above, Mr. Jack Marshall also participated in the
offering. Each outstanding share of series A preferred stock was converted into
1.5 shares of common stock of Photoloft.com, Inc. in February, 1999. Ms. Lisa
Marshall purchased 12,500 shares for $2,500.
SERIES B PREFERRED OFFERING. In August 1996, conducted a private offering
of Photoloft.com, Inc., a California corporation series B preferred stock. As a
result, we sold 150,000 shares of our series B preferred stock to Mr. Kris
Chellum for $45,000. Each outstanding share of series B preferred stock was
converted into 1.5 shares of common stock of in February, 1999.
1996 CONSULTING SERVICES. In 1996 we issued 53,472 shares of common stock
to Mr. Keith Queeney and Mr. Christopher McConn in exchange for services
provided to us.
SERIES C PREFERRED OFFERING. In October, 1997 we entered into an agreement
with Kremen, Father & Partners to provide us with financial consulting services
and assist us with obtaining financing. One of our former directors, Gary
Kremen, was a principal of Kremen, Father & Partners. In exchange for $59,500
worth of services, we issued, from 1997 to 1998, 63,384 shares of series C
preferred stock to Mr. Kremen. Each outstanding share of series C preferred
stock was converted into 1.5 shares of common stock in February, 1999.
Currently, we no longer contract with Kremen, Father & Partners for any
services.
51
<PAGE>
1998 CONSULTING SERVICES. In 1998 we issued 176,006 shares of common stock
to consultants and employees who provided services to us. Under this offering,
Ms. Lisa Marshall received 15,739 shares of common stock.
EXERCISED STOCK OPTIONS. In February, 1999 we issued the aggregate amount
of 2,844,112 shares of common stock upon the exercise of options to purchase
common stock which were granted to employees, directors and consultants of
Photoloft.com between 1993 and 1998. Under this issuance, Messrs. Jack Marshall
and Chris McConn exercised options to purchase 1,152,493 and 610,181 shares of
common stock, respectively.
STOCK OPTION PLAN. In 1998, we issued options to purchase the aggregate
amount of 2,675,572 shares of common stock to employees, directors and
consultants of Photoloft.com pursuant to Photoloft.com's stock option plan.
These options have an exercise price of $0.48 per share. Under this offering,
Messrs. Jack Marshall and Chris McConn received options to purchase up to
1,135,032 and 454,013 shares of common stock, respectively, with exercise prices
of $0.48 per share. These options vest in 48 monthly installments.
Additionally, from January to December 1999, we have issued options to purchase
the aggregate amount of 970,201 shares of common stock to employees, directors
and consultants of Photoloft.com pursuant to Photoloft.com's stock option plan.
These options were issued at their fair market value on the date of grant and
have exercise prices ranging from $0.48 to $5.25.
In addition to the above, in March 1999, we issued the aggregate amount of
228,375 shares of common stock upon the exercise of options to purchase common
stock which were granted to certain employees, directors, and consultants of
Photoloft.com in March 1999 under Photoloft.com's stock option plan. These
options had an exercise price of $0.50 per share. Under this offering, Mr. John
Marshall exercised options to purchase 13,500 shares of common stock.
REORGANIZATION. On March 1, 1999, Photoloft.com, Inc., a California
corporation entered into the reorganization with a non-operating public company,
Data Growth, Inc., a Nevada corporation incorporated in January, 1996. Under the
Reorganization Agreement, the Photoloft.com, Inc. stockholders received
1.5133753 shares of Data Growth common stock in exchange for each of their
shares of common stock. Additionally, the holders of options to purchase
shares of common stock of Photoloft.com, Inc. terminated their options and
received options to purchase shares of common stock of Data Growth. As a result
of the reorganization with Data Growth, Photoloft.com, Inc. became a
wholly-owned subsidiary of Data Growth. Data Growth adopted the Photoloft.com,
Inc. stock option plan. An aggregate of 9,579,266 shares of common stock and
options to purchase an aggregate of 2,795,734 shares of common stock were issued
to the former Photoloft.com, Inc. stockholders and option holders, respectively,
in the reorganization and the Photoloft.com, Inc. stockholders owned
approximately 77% of Data Growth immediately after the reorganization. As part
of the reorganization, all of the executive officers and directors of Data
Growth resigned and the executive officers and directors of Photoloft.com, Inc.
became the executive officers and directors of Data Growth which changed its
name to Photoloft.com
52
<PAGE>
BAYTREE CAPITAL ASSOCIATES, LLC. In February, 1999 Photoloft.com, Inc.
entered into an agreement with Baytree Capital Associates, LLC which we assumed
after the reorganization with Data Growth, Inc. Under the agreement, Baytree
provided financial consulting and assistance to Photoloft.com, Inc. which
including the structuring and negotiation of a loan, the identification of a
merger candidate and the assistance with the reorganization. For their
services, Baytree received 25,000 shares of our common stock and was paid
$10,000 in non-accountable expense reimbursements. In addition, Baytree has
been granted a 24 month right of first refusal with respect to any subsequent
financings. Baytree also has unlimited "piggyback" registration rights as to its
25,000 shares. Lynn Dixon, a shareholder of Data Growth was instrumental in
locating Data Growth as an entity to be used in the reorganization. Mr. Dixon
was also involved in the negotiation of the terms of the transaction.
OTHER RELATED TRANSACTIONS. In December 1999, we issued options to
purchase up to 288,000 shares of common stock to Lisa Marshall, our Secretary as
compensation for services rendered. The right to exercise these options vests
in 16 equal quarterly installments over 4 years. The exercise price for the
options is $1.50 per share, which was not less than the fair market value of the
shares underlying the options on the date of grant.
In December 1999, we issued 163,217 shares of common stock in exchange for
$250,000 and warrants to purchase up to 33,000 shares of common stock with
exercise prices of $1.5317 per share to Lisa Marshall, our Secretary. In
December 1999, we also issued 97,930 shares of common stock to John Marshall, a
member of our board of directors, in exchange for $150,000 and warrants to
purchase up to 20,000 shares of common stock with exercise prices of $1.5317 per
share.
In March 2000, we issued options to purchase up to 378,344 shares of common
Stock to Jack Marshall, pursuant to his employment agreement.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us and
our officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested outside directors on the Board of Directors, and
be on terms no less favorable to us than could be obtained from unaffiliated
third parties.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a)(1) Our audited financial statements, described as follows, are
included in this report following the signature page of this report.
Page
Financial Statements Number
--------------------- ------
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the Years Ended
53
<PAGE>
December 31, 1999 and 1998 F-4
Consolidated Statements of Shareholders' (Deficiency)
Equity for the Years Ended December 31, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999 and 1998 F-6
Notes to Financial Statements F-7
Schedules other than those listed above are omitted for the reason that they are
not required, are not applicable, or the required information is shown on the
financial statements or notes thereto.
(a)(2) The following exhibits are being filed herewith:
<TABLE>
<CAPTION>
Exhibit No. Exhibit Name
- ----------- ----------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Reorganization dated as of February 16, 1999 by
and among Data Growth, Inc. Gary B. Peterson and the Registrant
(Incorporated by Reference to Exhibit 2.1 of the Registrant's Registration
Statement on Form 10-SB (File No. 000-26957), as amended (the "Form
10-SB")).
3.1 Articles of Incorporation of the Registrant (Incorporated by Reference to
Exhibit 3.1 of the Form 10-SB).
3.2 Certificate of Amendment to the Articles of Incorporation of the
Registrant (Incorporated by Reference to Exhibit 3.2 of the Form 10-SB).
3.3 By-Laws of Registrant (Incorporated by Reference to Exhibit 3.3 of the
Form 10-SB).
3.4 Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock of the Registrant
54
<PAGE>
4.1 Sample Stock Certificate of the Registrant (Incorporated by Reference to
Exhibit 4.1 of the Form 10-SB).
4.2 See Exhibit Nos. 3.1, 3.2, 3.3, and 3.4.
10.1 Engagement letter dated October 24, 1997 between Gary Kremen and the
Registrant (Incorporated by Reference to Exhibit 10.9 of the Form 10-SB).
10.2 Distribution Agreement dated March, 1998 by and between Kuni Research
International Corporation and the Registrant (Incorporated by Reference to
Exhibit 10.11 of the Form 10-SB).
10.3 Lease Agreement dated July 8, 1998 by and between The Manufacturer's
Life Insurance Company, (U.S.A.) Company, Ltd., and the Registrant
(Incorporated by Reference to Exhibit 10.12 of the Form 10-SB).
10.4 Sublease Agreement dated September 1, 1998 by and between Surefire
Verification, Inc. and the Registrant (Incorporated by Reference to Exhibit
10.14 of the Form 10-SB).
10.5 Amendment to an Agreement with Infomedia, dated January 15, 1999
(Incorporated by Reference to Exhibit 10.16 of the Form 10-SB).
10.6 Sublease Agreement dated February 1, 1999 by and between Summit
Microelectronics and the Registrant (Incorporated by Reference to Exhibit
10.17 of the Form 10-SB).
10.7 Amendment No. 1 to Consulting Services Agreement, dated February 9,
1999 by and between Hewlett-Packard Company and the Registrant
(Incorporated by Reference to Exhibit 10.18 of the Form 10-SB).
10.8 Letter Agreement, dated February 10, 1999 by and between Bay Tree
Capital Associates, LLC and the Registrant (Incorporated by Reference to
Exhibit 10.19 of the Form 10-SB).
10.9 Employment Agreement dated February 26, 1999 by and between Mr.
Jack Marshall and the Registrant (Incorporated by Reference to Exhibit
10.20 of the Form 10-SB).
10.10 Stock Option Plan of the Registrant (Incorporated by Reference to Exhibit
10.21 of the Form 10-SB).
55
<PAGE>
10.11 Form of Stock Option Agreement issued under the Stock Option Plan of
the Registrant (Incorporated by Reference to Exhibit 10.22 of the Form
10-SB).
10.12 Stock Option Agreement dated July 1, 1999 by and between Chris
McConn and the Registrant (Incorporated by Reference to Exhibit 10.23
of the Form 10-SB).
10.13 Stock Option Agreement dated July 1, 1999 by and between Jack Marshall
and the Registrant (Incorporated by Reference to Exhibit 10.24 of the
Form 10-SB).
10.14 Internet Services and Co-Location Agreement, dated March 15, 1999 by
and between AboveNet Communications, Inc. and the Registrant
(Incorporated by Reference to Exhibit 10.27 of the Form 10-SB).
10.15 Representation Agreement, dated April 26, 1999, by and between
ADSmart Network and the Registrant (Incorporated by Reference to
Exhibit 10.29 of the Form 10-SB).
10.16 Agreement, dated July 31, 1998, by and between Digital Equipment
Corporation and the Registrant (Incorporated by Reference to Exhibit
10.32 of the Form 10-SB).
10.17 Consulting Services Agreement, dated October 22, 1998 by and between
Hewlett-Packard Company and the Registrant (Incorporated by Reference
to Exhibit 10.33 of the Form 10-SB).
10.18 Loan and Security Agreement, dated September 27, 1999 by and between
Aerofund Financial, Inc. and the Registrant (Incorporated by Reference to
Exhibit 10.34 of the Form 10-SB).
10.19 Subscription Agreement, dated December 1999, by and between John C.
Marshall, Martha Ann Marshall and the Registrant (Incorporated by
Reference to Exhibit 10.35 of the Form 10-SB).
10.20 Warrant Agreement dated December 1999, by and between John C.
Marshall, Martha Ann Marshall and the Registrant (Incorporated by
Reference to Exhibit 10.36 of the Form 10-SB).
10.21 Subscription Agreement, dated December 1999, by and between Barbara
Marshall and the Registrant (Incorporated by Reference to Exhibit 10.37
of the Form 10-SB).
56
<PAGE>
10.22 Warrant Agreement dated December 1999, by and between Barbara
Marshall and the Registrant (Incorporated by Reference to Exhibit 10.38
of the Form 10-SB).
10.23 Subscription Agreement, dated December 1999, by and between Lisa
Marshall, Don Welsh and the Registrant (Incorporated by Reference to
Exhibit 10.39 of the Form 10-SB).
10.24 Warrant Agreement dated December 1999, by and between Lisa Marshall,
Don Welsh and the Registrant (Incorporated by Reference to Exhibit
10.40 of the Form 10-SB).
10.25 Stock Option Agreement dated December 1999, by and between Lisa
Marshall, Don Welsh and the Registrant (Incorporated by Reference to
Exhibit 10.41 of the Form 10-SB).
10.26 Securities Purchase Agreement dated March 3, 2000 by and between the
purchasers of the Registrant's Series A Convertible Preferred Stock and
the Registrant.
10.27 Registration Rights Agreement dated March 3, 2000 by and between the
purchasers of the Registrant's Series A Convertible Preferred Stock and
the Registrant.
10.28 Placement Agency Agreement dated March 3, 2000 by and between May
Davis Group, Inc. and the Registrant.
10.29 Form of Warrant Agreement to Purchase Common Stock issued to May
Davis Group, Inc. as of March 3, 2000.
10.30 Financial Management Support Services Agreement dated November 29, 1999
by and between Asher Investment Group, Inc. and the Registrant.
21.1 Subsidiaries of the Company (Incorporated by Reference to Exhibit 21.1
of the Form 10-SB)
24 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
</TABLE>
(b) No reports on Form 8-K were filed during the quarter ended December
31, 1999.
57
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 30, 2000.
PHOTOLOFT.COM
/s/ Jack Marshall
-------------------
Jack Marshall
President
POWER OF ATTORNEY
Each person whose signature appears below authorizes Jack Marshall to
execute in the name of each such person who is then an officer or director of
the registrant and to file any amendments to this annual report on Form 10-KSB
necessary or advisable to enable the registrant to comply with the Exchange Act
of 1934 and any rules, regulations and requirements of the Securities and
Exchange Commission in respect thereof, which amendments may make such changes
in such report as such attorney-in-fact may deem appropriate.
In accordance with the Exchange Act of 1934, this report has been signed by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ---------------------------- --------------
<S> <C> <C>
/s/ Jack Marshall President, Director, March 30, 2000
- ----------------------------------------
Jack Marshall Chief Executive Officer and
Chief Financial Officer
(principal accounting officer)
/s/ Christopher McConn Chief Technology Officer and March 30, 2000
- ----------------------------------------
Christopher McConn Director
/s/ Patrick Dane Director March 30, 2000
- ----------------------------------------
Patrick Dane
/s/ John Marshall Director March 30, 2000
- ----------------------------------------
John Marshall
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F - 2
FINANCIAL STATEMENTS
Balance sheets F - 3
Statements of operations F - 4
Statements of shareholders' (deficiency) equity F - 5
Statements of cash flows F - 6
Notes to financial statements F - 7 - F - 22
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
PhotoLoft.com, Inc.
We have audited the accompanying balance sheets of PhotoLoft.com, Inc. (the
Company) as of December 31, 1999 and 1998, and the related statements of
operations, shareholders' (deficiency) equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
principles. Those standards require that we plan and perform our audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PhotoLoft.com, Inc. as of
December 31, 1999 and 1998, and the results of its operations and cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has an accumulated deficit of $4,651,600 as of
December 31, 1999 and incurred a net loss of $4,752,100 for the year ended
December 31, 1999. Additionally, the Company has negative working capital of
$650,600 as of December 31, 1999. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans
regarding those matters are also described in Note 1. The financial statements
do not include any adjustments relating to the recoverability and classification
of reported asset amounts or the amount and classification of liabilities that
might result from the outcome of this uncertainty.
/S/ BDO Seidman, LLP
San Jose, California
February 11, 2000, except for Note 12, for which the date is March 24, 2000.
F-2
<PAGE>
<TABLE>
<CAPTION>
PHOTOLOFT.COM
BALANCE SHEETS
December 31, 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (Note 7)
CURRENT ASSETS:
Cash and cash equivalents (Notes 10 and 11) $ 175,300 $ 370,000
Accounts receivable, net of allowance for doubtful accounts
of $16,900 and $16,500, respectively (Note 10) 60,100 -
Notes receivable, current portion (Notes 2 and 8) 250,000 658,000
Prepaid expenses and other current assets 49,500 -
Deferred income taxes (Note 9) - 183,100
- -------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 534,900 1,211,100
PROPERTY AND EQUIPMENT, net (Note 3) 418,000 65,700
NOTES RECEIVABLE, less current portion (Note 2) - 1,656,700
OTHER ASSETS 17,200 5,500
- -------------------------------------------------------------------------------------------
$ 970,100 $2,939,000
===========================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY EQUITY
- -------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Notes payable to bank (Note 7) $ - $ -
Accounts payable 906,800 129,500
Accrued expenses (Notes 4 and 12) 263,500 73,500
Deferred revenue 15,200 36,300
Deferred income taxes (Note 9) - 263,600
- -------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,185,500 502,900
DEFERRED INCOME TAXES (Note 9) - 666,700
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,185,500 1,169,600
- -------------------------------------------------------------------------------------------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS (Notes 5, 6, 10
and 12)
SHAREHOLDERS' (DEFICIENCY) EQUITY: (Notes 6, 8, 11 and 12)
Preferred stock, $0.001 par value; 500,000 shares authorized; - -
no shares issued and outstanding
Common stock, $0.001 par value; 50,000,000 shares authorized; 12,900 6,700
12,881,875 and 6,650,143 shares issued and outstanding,
respectively
Additional paid-in capital 4,904,500 648,200
Deferred compensation (481,200) -
(Accumulated deficit) Retained earnings (4,651,600) 1,114,500
- -------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' (DEFICIENCY) EQUITY (215,400) 1,769,400
- -------------------------------------------------------------------------------------------
$ 970,100 $2,939,000
===========================================================================================
See accompanying notes to financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
PHOTOLOFT.COM
STATEMENTS OF OPERATIONS
Years Ended December 31, 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES (Note 10) $ 254,500 $ 674,300
COST OF REVENUES 124,200 113,000
- -----------------------------------------------------------------------------------------------
GROSS PROFIT 130,300 561,300
- -----------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Sales and marketing 1,217,200 325,000
General and administrative 4,405,900 999,000
- -----------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 5,623,100 1,324,000
- -----------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (5,492,800) (762,700)
- -----------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Sale of trade name (Note 2) - 3,100,000
Loss on settlement of note receivable (Note 2) (108,100) -
Interest income 110,600 76,900
Interest expense (6,000) (500)
Other (1,200) (2,400)
- -----------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) (4,700) 3,174,000
- -----------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (5,497,500) 2,411,300
- -------------------------------------------------------------------- ------------ -----------
INCOME TAX (BENEFIT) EXPENSE (Note 9) (745,400) 748,000
- -----------------------------------------------------------------------------------------------
NET INCOME (LOSS) (4,752,100) 1,663,300
Deemed dividend on issuance of warrants 80,000 -
Deemed dividend on conversion of preferred stock into common stock 934,000 -
- -----------------------------------------------------------------------------------------------
Net income (loss) available to common shareholders $(5,766,100) $1,663,300
===============================================================================================
Basic earnings (loss) per share $ (0.49) $ 0.26
===============================================================================================
Diluted earnings (loss) per share $ (0.49) $ 0.18
===============================================================================================
Basic weighted-average common shares 11,658,200 6,488,300
outstanding
Stock options - 2,799,400
- -----------------------------------------------------------------------------------------------
Diluted weighted-average common shares outstanding 11,658,200 9,287,700
===============================================================================================
See accompanying notes to financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
PHOTOLOFT.COM
STATEMENTS OF SHAREHOLDERS' (DEFICIENCY) EQUITY
Paid-in Retained
Additional Earnings
Common Stock Paid-in Deferred Stock (Accumulated
------------------
Shares Amount Capital Compensation Deficit) Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1997 6,326,471 $ 6,400 $ 515,400 $ - $ (548,800) $ (27,000)
Issuance of stock for services 323,672 300 132,800 - - 133,100
Net income - - - - 1,663,300 1,663,300
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES, December 31, 1998 6,650,143 6,700 648,200 - 1,114,500 1,769,400
Exercise of stock options 3,131,187 3,100 142,100 - - 145,200
Issuance of common stock for services 124,111 100 156,500 - - 156,600
Deemed dividend on beneficial conversion of - - 934,000 - (934,000) -
preferred stock into common stock
Issuance of common stock in connection with reverse 625,000 600 4,900 - - 5,500
merger
Sale of common stock, net of stock issuance costs of 2,351,434 2,400 1,453,600 - - 1,456,000
approximately $56,500
Deemed dividend on issuance of warrants in - - 80,000 - (80,000) -
connection with sale of common stock
Deferred stock compensation - - 803,800 (803,800) - -
Amortization of deferred stock compensation - - - 322,600 - 322,600
Compensation associated with stock option grants - - 681,400 - - 681,400
Net loss - - - - (4,752,100) (4,752,100)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES, December 31, 1999 12,881,875 $12,900 $4,904,500 $ (481,200) $(4,651,600) $ (215,400)
=================================================================================================================================
See accompanying notes to financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
PHOTOLOFT.COM
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(4,752,100) $ 1,663,300
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 82,100 13,200
Allowance for doubtful accounts 16,900 (75,100)
Compensation relating to stock options and warrants issued 1,004,000 -
Gain on sale of trade name - (3,100,000)
Loss on settlement of note receivable 108,100 -
Accrued interest on note receivable (32,900) -
Issuance of stock for services 156,600 133,100
Changes in operating assets and liabilities:
Accounts receivable (77,000) 170,700
Prepaid expenses and other current assets (49,500) 6,600
Deferred income taxes (747,200) 747,200
Accounts payable 777,300 65,000
Accrued expenses 190,000 (21,300)
Deferred revenue (21,100) 36,300
- -------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (3,344,800) (361,000)
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal received under note receivable 2,239,500 785,300
Purchase of property and equipment (434,400) (51,100)
Other assets (11,700) (3,200)
NET CASH PROVIDED BY INVESTING ACTIVITIES 1,793,400 731,000
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on line of credit 409,700 -
Repayments on line of credit (409,700) -
Proceeds from issuances of stock 1,400,700 -
Payment of stock issuance costs (44,000) -
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,356,700 -
- -------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (194,700) 370,000
CASH AND CASH EQUIVALENTS, beginning of period 370,000 -
- -------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 175,300 $ 370,000
=======================================================================================================
See accompanying notes to financial statements.
</TABLE>
F-6
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
The Company
PhotoLoft.com, Inc. (formerly AltaVista Technology, Inc.) (the Company) a
California corporation, was incorporated on November 17, 1993. The Company
provides users with advanced, easy-to-use technology to instantly create,
share and print Internet photo albums.
On March 1, 1999, 100% of the Company's outstanding common stock was
acquired by PhotoLoft.com (formerly Data Growth, Inc., a publicly traded shell
corporation) (PhotoLoft), a Nevada Corporation, in exchange for 9,579,268 shares
of PhotoLoft's $.001 par value common stock. For accounting purposes, the
acquisition has been treated as the acquisition of PhotoLoft, with the Company
as the acquiror (reverse acquisition).
The shares held by the shareholders of PhotoLoft prior to the acquisition
(625,000 shares after reflecting a 2.46 to 1 reverse stock split effected by
PhotoLoft immediately prior to the acquisition) have been recognized as if they
were issued in connection with the acquisition of PhotoLoft by the Company.
Since PhotoLoft prior to the reverse acquisition was a public shell corporation
with no significant operations, pro forma information giving effect to the
acquisition is not presented. All shares and per share data prior to the
acquisition have been restated to reflect the stock issuance as a
recapitalization of the Company. The historical information prior to March 1,
1999 is that of the Company.
Basis of Presentation and Going Concern Uncertainty
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Company had an accumulated deficit of $4,651,600 as of December
31, 1999 and incurred a net loss of $4,752,100 for the year ended December 31,
1999. Additionally, the Company has negative working capital of $650,600 as of
December 31, 1999.
F-7
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
These conditions give rise to substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of reported asset
amounts or the amount and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to obtain
additional financing or refinancing as may be required and ultimately to attain
profitability. The Company is actively marketing its existing and new products,
which it believes will ultimately lead to profitable operations. Management is
also pursuing additional financing and has obtained additional financing of
$910,000 through the issuance of 100 shares of convertible preferred stock (Note
12).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments having original maturities
of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated economic useful lives of the assets,
generally ranging from three to five years.
Long-Lived Assets
The Company periodically reviews its long-lived assets and certain identifiable
Intangibles for impairment. When events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable, the Company
writes the asset down to its estimated fair value.
F-8
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents:
The carrying amount reported in the balance sheet for cash and cash equivalents
approximates fair value.
Accounts receivable
The carrying amount of accounts receivable approximates fair value because
of the short period of time to maturity.
Note receivable:
The fair value for the note receivable is estimated based on current
interest rates available to the Company for investments with similar terms and
remaining maturities.
Accounts payable and short-term debt:
The fair value of accounts payable and short-term debt approximates cost
because of the short period of time to maturity.
As of December 31, 1999 and 1998, the fair values of the Company's financial
instruments approximate their historical carrying amounts.
Revenue Recognition
The Company's revenues are derived principally from the sale of banner
advertisements and subscriptions for web hosting services. Advertising revenues
are recognized in the period in which the advertisement is delivered, provided
that collection of the resulting receivable is probable. Advertisers are charged
on a per impression or delivery basis up to a maximum as specified in the
contract. To date, the duration of the Company's advertising commitments has not
exceeded one year. When the Company guarantees a minimum number of impressions
or deliveries, revenue is recognized at the lesser of the ratio of impressions
delivered over total guaranteed impressions or the straight line basis over the
term of the contract. Product revenue is recognized upon shipment, provided no
significant obligations remain and collectibility is possible.
F-9
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
Periodically the Company will engage in barter transactions, which are the
exchange by the Company of advertising space on the Company's web sites for
reciprocal advertising space on other web sites. Revenues from these barter
transactions are recorded as advertising revenues at the lower of the estimated
fair value of the advertisements received or delivered and are recognized when
the advertisements are run on the Company's web sites. Barter expenses are
recorded when the Company's advertisements are run on the reciprocal web sites,
which is typically in the same period as when advertisements are run on the
Company' web sites. There was no barter revenue in the years ended December 31,
1999 and 1998.
Advertising
The cost of advertising is expensed as incurred. Advertising costs for the
years ended December 31, 1999 and 1998 aggregated $989,300 and $26,000,
respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes,
which requires an asset and liability approach. This approach results in the
recognition of deferred tax assets (future tax benefits) and liabilities for the
expected future tax consequences of temporary differences between the book
carrying amounts and the tax basis of assets and liabilities. The deferred tax
assets and liabilities represent the future tax return consequences of those
differences, which will either be deductible or taxable when the assets and
liabilities are recovered or settled. Future tax benefits are subject to a
valuation allowance when management believes it is more likely than not that the
deferred tax assets will not be realized.
F-10
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
New Accounting Pronouncement
In September 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 133 requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged assets or liabilities, that are attributable to the hedged
risk, or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standard to affect its financial statements.
Earnings Per Common Share
During 1998, the Company adopted the provisions of SFAS No. 128, Earnings
Per Share. SFAS No. 128 provides for the calculation of basic and diluted
earnings per share. Basic earnings per share includes no dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity. For the year ended December 31, 1999,
options to purchase 3,609,001 shares of common stock, respectively, were
excluded from computation of diluted earnings per share since their effect would
be antidilutive. For the year ended December 31, 1998, options to purchase
2,728,539 shares of common stock were excluded from the computation of diluted
earnings per share because the options' exercise price was greater than the
estimated average fair market value of the common shares.
F-11
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
2. SALE OF TRADE NAME
On July 31, 1998, the Company sold all its rights in and to the AltaVista mark
and the internet domain name "altavista.com" to Digital Equipment Corporation
for a total of $3,100,000, payable $350,000 in cash and $2,750,000 in a
promissory note. The note, payable in 12 quarterly installments commencing
October 1, 1998, bore interest at 7% annually.
In October 1999, Digital Equipment Corporation paid the Company $1,804,700
in full settlement of the note, at which time the Company recorded a loss of
$108,100.
3. PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
December 31, 1999 1998
- ------------------------------------------------
<S> <C> <C>
Office equipment $521,200 $90,500
Furniture and fixtures 13,000 9,300
- ------------------------------------------------
534,200 99,800
Less accumulated depreciation 116,200 34,100
- ------------------------------------------------
$418,000 $65,700
================================================
</TABLE>
4. ACCRUED EXPENSES
A summary of accrued expenses follows:
<TABLE>
<CAPTION>
December 31, 1999 1998
- ---------------------------------------------------------
<S> <C> <C>
Vacation $ 54,000 $24,900
Litigation Settlement (Notes 6 and 12) 111,900 -
Consulting fees 61,900 20,000
Salaries and wages 16,400 19,900
Other 19,300 8,700
- ---------------------------------------------------------
$263,500 $73,500
=========================================================
</TABLE>
F-12
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
5. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities and certain equipment under operating leases.
The facility leases require the Company to pay certain maintenance and operating
expenses, such as utilities, property taxes and insurance costs. Rent expense
related to these operating leases for the years ended December 31, 1999 and 1998
was $ 98,100 and $39,900, respectively.
A summary of the future minimum lease payments required under
non-cancelable operating leases with terms in excess of one year, follows:
<TABLE>
<CAPTION>
Years ending December 31, Amount
- --------------------------------------
<S> <C>
2000 $22,700
2001 17,400
2002 3,500
- --------------------------------------
Future minimum lease payments $43,600
======================================
</TABLE>
In October 1999, the Company terminated its office lease and sub-lease
agreements (Note 12). The facility lease now operates on a month-to-month basis.
Therefore, the monthly obligation related to the facility lease is not reflected
in the above minimum lease payment schedule.
In February 1999, the Company entered into an employment agreement with one
of its officers which provides for a severance payment of base salary and bonus
compensation through December 31, 2001, as well as immediate vesting of all
outstanding stock options if the officer is terminated without cause. The
employment agreement also provides that the officer receives bonus compensation
of at least $60,000 if the Company reaches certain specific milestones, and
options to purchase between 378,344 and 1,135,031 shares of common stock if
traffic to the Company's web site reaches an average of 500,000 to 1,000,000
hits per day in any particular month. The exercise price will be the closing
price on the first day following the month in which the milestone is met.
(Note 12)
In November 1999, the Company entered into an agreement to obtain financial
management services valued at a minimum of $5,000 per month through May 2000
(Note 8).
6. LEGAL MATTERS
In April 1999, a former employee and co-founder of ID 4 Life, a product of the
Company, filed an action against the Company arising out of the disputed
ownership of the ID4Life division of the Company and the termination of that
person's employment. In January 2000, in exchange for the release of all claims,
the Company paid $20,000 and allowed the former employee to exercise options to
purchase 32,500 shares of common stock at no cost.
F-13
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
In June 1999, a third party corporation filed an action against the Company
alleging trade secret misappropriations, unfair competition, and breach of
contract arising out of the activities of one of the Company's employees. The
Company is presently in settlement negotiations with the plaintiff, and it is
the opinion of management that the outcome of this matter will be a non-monetary
settlement and will not materially affect the consolidated operations or the
consolidated financial position of the Company.
7. DEBT AGREEMENTS
The Company maintains a $200,000 revolving line of credit with a bank that
is secured by all corporate assets, including accounts receivable, inventory and
intangible assets. The loan is limited to $100,000 until the Company fulfills
certain milestone covenants and pays an additional loan fee. The line of credit
accrues interest at 2% over the Lender's Prime Rate. Advances against the line
of credit are limited to 70% of eligible accounts receivable. As of December 31,
1999 and 1998, this line of credit had no outstanding balance.
In September 1999, the Company entered into a line of credit agreement with
a financial institution, which provides for borrowing of $750,000, bearing
interest at 28%. The line of credit expires September 2000, and is automatically
renewable unless written notice is given by either party. In September 1999, the
Company borrowed $409,700 under this line of credit, and repaid the entire
balance in October 1999.
8. SHAREHOLDERS' EQUITY
Preferred Stock
Upon the reverse acquisition and reorganization, the Company authorized 500,000
shares of Preferred Stock, which may be issued in one or more series. The
Preferred Stock can be issued with such rights, preferences, and designations as
determined by the board of directors.
Prior to the the reverse acquisition and reorganization, the Company had
authorized 5,000,000 shares of Preferred Stock to be issued in one or more
series. As of December 31, 1998, the Company had 2,489,009 Preferred shares
issued and outstanding, which were Series A, B and C. Each series of Preferred
Stock was identical in respect to rights and preferences, as follows:
Each share of Preferred Stock was entitled to receive cash dividends equal
to $.20 per share per annum, payable prior and in preference to any distribution
to the holders of Common Stock. The rights to such dividends were not
cumulative.
Each share of Preferred Stock was convertible into such number of Common
Stock as determined by dividing $.20 by the then applicable conversion price in
effect at the time of the conversion. Due to the conversion of the Company's
preferred stock into common stock and a 1.513 stock split in February 1999, as
well as the recapitalization of the Company in connection with the reverse
acquisition in March 1999, the statements of shareholders' equity and per share
data have been restated for all periods presented.
F-14
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
Common Stock
In February 1999, 2,844,112 stock options were exercised for common stock,
and 85,011 shares of common stock were issued for services. Also in February
1999, the Company converted its preferred stock into common stock on a 1 to 1.5
basis.
Immediately following these issuances of common stock and the conversion of
preferred stock into common stock, the Company did a 1 to 1.513 stock split in
anticipation of the Company entering into a reverse acquisition. On a
retroactive basis, the conversion and stock split resulted in the Company having
6,650,145 shares of common stock issued and outstanding as of December 31, 1998.
Immediately following the closing of the reverse acquisition, the Company
completed a Private Placement of 2,000,000 shares of common stock aggregating
$1,000,000. Additionally, the Company issued 25,000 shares of restricted common
stock as payment for a portion of the underwriter's commission and adopted the
1999 Stock Option Plan (the Plan). The Company then granted 225,000 options
under the Plan, which vested immediately and were exercised in March 1999.
In December 1999, the Company issued an aggregate of 326,434 shares of
common stock to three shareholders for proceeds of $500,000. Of this amount,
$250,000 was not paid until January 2000. This amount is classified as notes
receivable as of December 31, 1999. In connection with this issuance of stock,
the Company issued warrants to purchase an aggregate of 66,000 shares of common
stock. The Company recorded a deemed dividend of $80,000 for the value of these
warrants.
F-15
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
Stock Purchase Warrants
In September 1999, the Company issued warrants to purchase 350,000 shares
of common stock at an exercise price of $2.31 in connection with a services
agreement. 175,000 of these warrants vested immediately, resulting in deferred
compensation cost of $218,800, which is being amortized over the one year term
of the agreement.
In November 1999, the Company issued warrants to purchase 500,000 shares of
common stock at an exercise price of $1.01 in connection with a service
agreement (Note 5). These warrants vested immediately, resulting in deferred
compensation cost of $585,000, which is being amortized over the six month term
of the agreement.
As of December 31, 1999, the following common stock warrants were issued
and outstanding:
<TABLE>
<CAPTION>
Issued with respect to: Shares subject to warrant Exercise price Expiration Date
=====================================================================================
<S> <C> <C> <C>
Services agreement 350,000 $ 2.31 Sept. 2004
Services agreement 500,000 $ 1.01 Nov. 2004
Issuance of common stock 66,000 $ 1.53 Dec. 2004
=====================================================================================
</TABLE>
Stock Options
In March 1999, the Company adopted a stock option plan (the Plan) for its
employees, directors, and consultants. The Plan was amended in June 1999. The
number of shares authorized for options under the Plan is 3,800,000. As of
December 31, 1999, there were 148,499 options available for grant. Options are
exercisable as determined by the Board of Directors on the date of grant and
expire not more than ten years after the date of grant. The Company applies
Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to
Employees, and Related Interpretations in Accounting for Stock Options Issued to
Employees. Under APB Opinion No. 25, employee compensation cost is recognized
when the estimated fair value of the underlying stock on date of grant exceeds
the exercise price of the stock option. For stock options issued to
non-employees, the Company applies SFAS No. 123, Accounting for Stock-Based
Compensation, which requires the recognition of compensation cost based upon the
fair value of stock options at the grant date using the Black-Scholes option
pricing model.
F-16
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
A summary of the status of the Company's stock option plan as of December
31, 1999 and 1998 and changes during the years then ended (restated to reflect
the 1.513 stock split in February 1999), is presented in the following table:
<TABLE>
<CAPTION>
Options Outstanding
December 31, 1999 December 31, 1998
----------------------------------------------
Wtd.-Avg. Wtd.-Avg.
Exer. Exer.
Shares Price Shares Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning 5,557,518 $ 0.235 2,881,946 $ 0.001
Granted 1,486,576 $ 2.358 2,675,572 $ 0.480
Exercised (3,131,187) $ 0.046 - -
Canceled (271,407) $ 0.048 - -
- --------------------------------------------------------------------------------
Ending 3,641,501 $ 0.754 5,557,518 $ 0.235
================================================================================
Exercisable at year-end 1,685,534 3,194,588
========== =========
Wtd.-avg. fair value of options $ 1.875 $ 0.129
granted during the year ========== ==========
</TABLE>
Due to the 1.513 stock split, the effective exercise price of the stock
options originally granted at $0.75 was now $0.50; on March 1, 1999, the Company
adjusted the exercise price to $0.48.
In December 1999, the Company repriced certain options granted in 1999 to
$1.50, the market value of the Company's common stock on the date of the
repricing.
During the year ended December 31, 1999, the Company granted 605,295
options to non-employees, resulting in compensation expense of $631,800.
F-17
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding
as of December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------- -------------------
Wtd.-Avg.
Range of Number Remaining Wtd.-Avg. Number Wtd.-Avg.
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/98 Life Price at 12/31/99 Price
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
0.48 2,675,219 8.58 years $ 0.48 1,217,224 $ 0.48
1.50-$2.00 965,350 9.59 years $ 1.51 467,377 $ 1.51
5.50 932 9.50 years $ 5.50 932 $ 5.50
--------- ---------
3,641,501 1,685,534
========== =========
</TABLE>
While the Company continues to apply APB Opinion No. 25, SFAS No. 123,
Accounting for Stock-Based Compensation, requires the Company to provide pro
forma information regarding net income (loss) as if compensation cost for the
Company's stock option plans had been determined in accordance with the fair
value based method prescribed by SFAS No. 123. The Company estimates the fair
value of stock options at the grant date by using the minimum value method with
the following weighted-average assumptions used for the grants in 1999 and 1998,
respectively: dividend yield of 0; expected volatility of 79% and 0; risk-free
interest rate of 5.0% and 6.0%; and an expected life of five years for all plan
options.
F-18
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
Under the accounting provisions of SFAS No. 123, the Company's net (loss)
income available to common shareholders and net (loss) earnings per share would
have been reduced (increased) to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998
<S> <C> <C>
Net (loss) income available to common
shareholders:
As reported $(5,766,100) $1,663,300
Pro forma $(6,012,500) $1,317,800
- --------------------------------------- ------------ ----------
Basic (loss) earnings per share:
$ (0.49) $ 0.26
As reported
Pro forma $ (0.52) $ 0.20
- --------------------------------------- ------------ ----------
Diluted (loss) earnings per share:
$ (0.49) $ 0.18
As reported
Pro forma $ (0.52) $ 0.14
</TABLE>
9. INCOME TAXES
For the years ended December 31, 1999 and 1998, income tax (benefit) expense
comprises:
<TABLE>
<CAPTION>
1999 CURRENT DEFERRED TOTAL
- -----------------------------------------
<S> <C> <C> <C>
FEDERAL $ - $(628,600) $(628,600)
STATE 1,800 (118,600) (116,800)
- -----------------------------------------
$ 1,800 $(747,200) $(745,400)
=========================================
1998 Current Deferred Total
- -----------------------------------------
Federal $ - $ 628,600 $ 628,600
State 800 118,600 119,400
- -----------------------------------------
$ 800 $ 747,200 $ 748,000
=========================================
</TABLE>
F-19
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
The following summarizes the differences between the income tax expense
(benefit) and the amount computed by applying the Federal income tax rate of 34%
in 1999 and 1998 to income (loss) before income taxes:
<TABLE>
<CAPTION>
Years ended December 31, 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Federal income tax at statutory rate $(1,869,200) $ 819,800
State income taxes, net of federal benefit (319,300) 138,200
Compensation associated with warrant/stock
option grants 402,600 -
Increase (decrease) in valuation allowance 974,100 (211,200)
Other, net 66,400 1,200
- ------------------------------------------------------------------------------------
$ (745,400) $ 748,000
====================================================================================
</TABLE>
Deferred tax assets (liabilities) comprise the following:
<TABLE>
<CAPTION>
December 31, 1999 1998
- -----------------------------------------------------------
<S> <C> <C>
Loss carryforwards $ 952,300 $ 166,600
Reserves not currently deductible 6,700 16,500
Installment sale of trade name - (919,700)
Depreciation (6,400) (10,600)
Compensation and benefits 21,500 -
Valuation allowance (974,100) -
- -----------------------------------------------------------
Total deferred tax liabilities $ - $(747,200)
- -----------------------------------------------------------
</TABLE>
The Company has placed a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
As of December 31, 1999, the Company has net operating loss carryforwards
available to reduce future taxable income, if any, of approximately $2,540,000
and $1,447,000 for Federal and California state tax purposes, respectively. The
benefits from these carryforwards expire in various years through 2019.
Pursuant to the "change in ownership" provisions of the Tax Reform Act of
1986, utilization of the Company's net operating loss carryover may be limited,
if a cumulative change of ownership of more than 50% occurs within any
three-year period. The Company has not determined if such a change in ownership
has occurred.
F-20
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
10. CONCENTRATIONS
Major Customers
For the year ended December 31, 1999, three customers accounted for 24%,
14% and 14% of net revenues, respectively. As of December 31, 1999, these
customers accounted for 94.9% of total accounts receivable. During the year
ended December 31, 1998, the Company had no customers that comprised more than
10% of net revenues.
Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents. The Company
places its cash and cash equivalents with high quality financial institutions.
As of December 31, 1999, the Company had deposits at one financial institution
that aggregated $152,000, of which $100,000 is insured by the Federal Deposit
Insurance Corporation.
11. STATEMENT OF CASH FLOWS
During the year ended December 31, 1999, non-cash financing activities included
The issuance of 113,611 shares of common stock for services aggregating
approximately $156,600, the issuance of 25,000 shares of common stock for the
payment of stock issuance costs totaling $12,500, the issuance of 163,217 shares
of common stock for notes receivable of $250,000, and deemed dividends of
$1,014,000. During the year ended December 31, 1998, non-cash financing
activities included the issuance of 323,672 shares of common stock for services
aggregating approximately $133,100.
During the year ended December 31, 1999, the Company paid $7,100 for interest,
And $1,800 for income taxes. During 1998, the Company paid $2,800 for interest,
and $800 for income taxes.
12. SUBSEQUENT EVENTS
In January 2000, the lessor of the Company's facility filed an action against
the Company alleging a breach of a written lease agreement. The Company expects
that its exposure in this matter will not exceed $100,000 and has accrued its
estimated liability as of December 31, 1999.
F-21
<PAGE>
PHOTOLOFT.COM
NOTES TO FINANCIAL STATEMENTS
In March 2000, the Company granted an officer options to purchase 378,344 shares
of common stock at an exercise price of $3.44 as a bonus, pursuant to the
officer's employment agreement described in Note 5.
In March 2000, the Company obtained additional financing of $910,000, net
of issuance costs of $90,000, through the issuance of 100 shares of Series A
convertible preferred stock to investors. The Company also issued warrants to
purchase an aggregate of 175,000 shares of common stock with an exercise price
of $3.30, expiring March 2005. The preferred stock is convertible into shares of
the Company's common stock, based on the number of days from the issuance date
through the conversion date, and the conversion price, which is the lower of
$2.65 or 80% of the average market price for the Company's common stock for the
last five trading days immediately preceding the date of conversion.
F-22
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit No. Exhibit Name
- ----------- ----------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Reorganization dated as of February 16, 1999 by
and among Data Growth, Inc. Gary B. Peterson and the Registrant
(Incorporated by Reference to Exhibit 2.1 of the Registrant's Registration
Statement on Form 10-SB (File No. 000-26957), as amended (the "Form
10-SB")).
3.1 Articles of Incorporation of the Registrant (Incorporated by Reference to
Exhibit 3.1 of the Form 10-SB).
3.2 Certificate of Amendment to the Articles of Incorporation of the
Registrant (Incorporated by Reference to Exhibit 3.2 of the Form 10-SB).
3.3 By-Laws of Registrant (Incorporated by Reference to Exhibit 3.3 of the
Form 10-SB).
3.4 Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock of the Registrant
4.1 Sample Stock Certificate of the Registrant (Incorporated by Reference to
Exhibit 4.1 of the Form 10-SB).
4.2 See Exhibit Nos. 3.1, 3.2, 3.3, and 3.4.
10.1 Engagement letter dated October 24, 1997 between Gary Kremen and the
Registrant (Incorporated by Reference to Exhibit 10.9 of the Form 10-SB).
10.2 Distribution Agreement dated March, 1998 by and between Kuni Research
International Corporation and the Registrant (Incorporated by Reference to
Exhibit 10.11 of the Form 10-SB).
10.3 Lease Agreement dated July 8, 1998 by and between The Manufacturer's
Life Insurance Company, (U.S.A.) Company, Ltd., and the Registrant
(Incorporated by Reference to Exhibit 10.12 of the Form 10-SB).
10.4 Sublease Agreement dated September 1, 1998 by and between Surefire
Verification, Inc. and the Registrant (Incorporated by Reference to Exhibit
10.14 of the Form 10-SB).
62
<PAGE>
10.5 Amendment to an Agreement with Infomedia, dated January 15, 1999
(Incorporated by Reference to Exhibit 10.16 of the Form 10-SB).
10.6 Sublease Agreement dated February 1, 1999 by and between Summit
Microelectronics and the Registrant (Incorporated by Reference to Exhibit
10.17 of the Form 10-SB).
10.7 Amendment No. 1 to Consulting Services Agreement, dated February 9,
1999 by and between Hewlett-Packard Company and the Registrant
(Incorporated by Reference to Exhibit 10.18 of the Form 10-SB).
10.8 Letter Agreement, dated February 10, 1999 by and between Bay Tree
Capital Associates, LLC and the Registrant (Incorporated by Reference to
Exhibit 10.19 of the Form 10-SB).
10.9 Employment Agreement dated February 26, 1999 by and between Mr.
Jack Marshall and the Registrant (Incorporated by Reference to Exhibit
10.20 of the Form 10-SB).
10.10 Stock Option Plan of the Registrant (Incorporated by Reference to Exhibit
10.21 of the Form 10-SB).
10.11 Form of Stock Option Agreement issued under the Stock Option Plan of
the Registrant (Incorporated by Reference to Exhibit 10.22 of the Form
10-SB).
10.12 Stock Option Agreement dated July 1, 1999 by and between Chris
McConn and the Registrant (Incorporated by Reference to Exhibit 10.23
of the Form 10-SB).
10.13 Stock Option Agreement dated July 1, 1999 by and between Jack Marshall
and the Registrant (Incorporated by Reference to Exhibit 10.24 of the
Form 10-SB).
10.14 Internet Services and Co-Location Agreement, dated March 15, 1999 by
and between AboveNet Communications, Inc. and the Registrant
(Incorporated by Reference to Exhibit 10.27 of the Form 10-SB).
10.15 Representation Agreement, dated April 26, 1999, by and between
ADSmart Network and the Registrant (Incorporated by Reference to
Exhibit 10.29 of the Form 10-SB).
63
<PAGE>
10.16 Agreement, dated July 31, 1998, by and between Digital Equipment
Corporation and the Registrant (Incorporated by Reference to Exhibit
10.32 of the Form 10-SB).
10.17 Consulting Services Agreement, dated October 22, 1998 by and between
Hewlett-Packard Company and the Registrant (Incorporated by Reference
to Exhibit 10.33 of the Form 10-SB).
10.18 Loan and Security Agreement, dated September 27, 1999 by and between
Aerofund Financial, Inc. and the Registrant (Incorporated by Reference to
Exhibit 10.34 of the Form 10-SB).
10.19 Subscription Agreement, dated December 1999, by and between John C.
Marshall, Martha Ann Marshall and the Registrant (Incorporated by
Reference to Exhibit 10.35 of the Form 10-SB).
10.20 Warrant Agreement dated December 1999, by and between John C.
Marshall, Martha Ann Marshall and the Registrant (Incorporated by
Reference to Exhibit 10.36 of the Form 10-SB).
10.21 Subscription Agreement, dated December 1999, by and between Barbara
Marshall and the Registrant (Incorporated by Reference to Exhibit 10.37
of the Form 10-SB).
10.22 Warrant Agreement dated December 1999, by and between Barbara
Marshall and the Registrant (Incorporated by Reference to Exhibit 10.38
of the Form 10-SB).
10.23 Subscription Agreement, dated December 1999, by and between Lisa
Marshall, Don Welsh and the Registrant (Incorporated by Reference to
Exhibit 10.39 of the Form 10-SB).
10.24 Warrant Agreement dated December 1999, by and between Lisa Marshall,
Don Welsh and the Registrant (Incorporated by Reference to Exhibit
10.40 of the Form 10-SB).
10.25 Stock Option Agreement dated December 1999, by and between Lisa
Marshall, Don Welsh and the Registrant (Incorporated by Reference to
Exhibit 10.41 of the Form 10-SB).
10.26 Securities Purchase Agreement dated March 3, 2000 by and between the
purchasers of the Registrant's Series A Convertible Preferred Stock and
the Registrant.
64
<PAGE>
10.27 Registration Rights Agreement dated March 3, 2000 by and between the
purchasers of the Registrant's Series A Convertible Preferred Stock and
the Registrant.
10.28 Placement Agency Agreement dated March 3, 2000 by and between May
Davis Group, Inc. and the Registrant.
10.29 Form of Warrant Agreement to Purchase Common Stock issued to May
Davis Group, Inc. as of March 3, 2000.
10.30 Financial Management Support Services Agreement dated November 29, 1999
by and between Asher Investment Group, Inc. and the Registrant.
21.1 Subsidiaries of the Company (Incorporated by Reference to Exhibit 21.1
of the Form 10-SB)
24 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 3.4
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
PHOTOLOFT.COM
Photoloft.Com, (the "COMPANY"), a corporation organized and existing under
the General Corporation Law of the State of Nevada, does hereby certify that,
pursuant to authority conferred upon the Board of Directors of the Company by
the Certificate of Incorporation of the Company, and pursuant to the General
Corporation Law of' the State of Nevada, the Board of Directors of the Company
at a meeting duly held, adopted resolutions (i) authorizing a series of the
Company's authorized preferred stock, $.001 par value per share, and (ii)
providing for the designations, preferences and relative, participating,
optional or other fights, and the qualifications, limitations or restrictions
thereof, of 125 shares of Series A Convertible Preferred Stock of the Company,
as follows:
65
<PAGE>
RESOLVED, that the Company is authorized to issue 125 shares of Series A
Convertible Preferred Stock (the "SERIES A PREFERRED SHARES"), $.001 par value
per share, which shall have the following powers, designations, preferences and
other special rights:
(1) Dividends. The Series A Preferred Shares shall not bear any dividends.
---------
(2) Holder's Conversion of Series A. Preferred Shares.A holder of Series A
---------------------------------------------------------
Preferred Shares shall have the right, at such holder's option, to convert the
Series A Preferred Shares into shares of the Company's common stock, $.001 par
value per share (the "COMMON STOCK"), on the following terms and conditions:
(a) Conversion Right.Subject to the provisions of Sections 2(g), and 3(a)
------------------
below, at any time or times on or after the earlier of (i) 90 days after the
Issuance Date (as defined herein), (ii) 5 days after receiving a "no-review"
status from the U.S. Securities and Exchange Commission (the "SEC") in
connection with a registration statement ("REGISTRATION STATEMENT") covering the
resale of Common Stock issued upon conversion of the Series A Preferred Shares
and required to be filed by the Company pursuant to the Registration Rights
Agreement between the Company and its initial holder(s) of Series A Preferred
Shares (the "REGISTRATION RIGHTS AGREEMENT"), (iii) the date that the
Registration Statement is declared effective by the U.S. Securities and Exchange
Commission (the "SEC") any holder of Series A Preferred Shares shall be entitled
to convert any Series A Preferred Shares into fully paid and nonassessable
shares (rounded to the nearest whole share in accordance with Section 2(h)
below) of Common Stock, at the Conversion Rate (as defined below); provided,
however, that in no event other than upon a Mandatory Conversion pursuant to
Section 2(g) hereof, shall any holder(s) be entitled to convert Series A
Preferred Shares in excess of that number of Series A Preferred Shares which,
upon giving effect to such conversion, would cause the aggregate number of
shares of Common Stock beneficially owned by the holder and its affiliates to
exceed 4.9% of the outstanding shares of the Common Stock following such
conversion. For purposes of the foregoing proviso, the aggregate number of
shares of Common Stock beneficially owned by the holder(s) and its affiliates
shall include the number of shares of Common Stuck issuable upon conversion of
the Series A Preferred Shares with respect to which the determination of such
proviso is being made, but shall exclude the number of shares of Common Stock
which would be issuable upon (i) conversion of the remaining, non-converted
Series A Preferred Shares beneficially owned by the holder(s) and its affiliates
beneficially owned by the holder and its affiliates. Except as set forth in the
preceding sentence, for purposes of this paragraph, beneficial ownership shall
be calculated in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended,
66
<PAGE>
(b) Conversion Rate.The number of shares of Common Stock issuable upon
-----------------
conversion of each of the Series A Preferred Shares pursuant to Section (2)(a)
shall be determined according to the following formula (the "CONVERSION RATE");
(.05)(N/365)(10,000) + 10,000
-----------------------------
CONVERSION PRICE
For purposes of this Certificate of Designations, the following terms shall have
the following meanings:
(i) "CONVERSION PRICE" means as, of any Conversion Date (as defined below),
the lower of the Fixed Conversion Price and the Floating Conversion Price, each
in effect as of such date, if applicable, and subject to adjustment as provided
herein;
(ii) "FIXED CONVERSION PRICE" means 120% of the closing bid price (as
reported by Bloomberg) of the Company's common stock on the Closing Date,
subject to adjustment, as provided herein
(iii) "FLOATING CONVERSION PRICE" means, as of any date of determination,
the amount obtained by multiplying the Conversion Percentage in effect as of
such date by the Average Market Price for the Common Stock of the last five (5)
trading days immediately preceding the date of conversion;
67
<PAGE>
(iv) "CONVERSION PERCENTAGE" means 80% as adjusted as described herein;
(v) "AVERAGE MARKET PRICE" means, with respect to any security for any
period, that price which shall be computed as the arithmetic average of the
Closing Bid Prices (as defined below) for such security for each trading day in
such period;
(vi) "CLOSING BID PRICE" means, for any security as of any date, the last
closing bid price on the Nasdaq Small Cap (the "NASDAQ-SMALL CAP") as reported
by Bloomberg Financial Markets ("BLOOMBERG"), or, if the Nasdaq-NM is not the
principal trading market for such security, the last closing bid price of such
security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing sale price of such security in the over-the-counter
market on the pink sheets or bulletin board for such security as reported by
Bloomberg, or, if no closing sale price is reported for such security by
Bloomberg, the last closing trade price of such security as reported by
Bloomberg. If the Closing Bid Price cannot be calculated for such security on
such date on any of the foregoing bases, the Closing Bid Price of such security
on such date shall be the fair market value as reasonably determined in good
faith by the Board of Directors of the Company (all as appropriately adjusted
for any stock dividend, stock split or other similar transaction during such
period); and
(vii) "N" means the number of days from, but excluding, the Issuance Date
through and including the Conversion Date for the Series A Preferred Shares for
which conversion is being elected.
(viii) "ISSUANCE DATE" means the date of issuance of the Series A Preferred
Shares.
(c) Penalty - Registration Statement.If the Registration Statement is not
----------------------------------
declared effective by the SEC on or before the one hundred and twentieth (120th)
day following the Issuance Date (the "SCHEDULED EFFECTIVE DATE"), or if after
the Registration Statement has been declared effective by the SEC, sales cannot
be made pursuant to the Registration Statement (whether because of a failure to
keep the registration Statement effective, to disclose such information as is
necessary for sales to be made pursuant to the Registration Statement, to
register sufficient shares of Common Stock or otherwise), then, as partial
relief for the damages to any holder(s) by reason of any such delay in or
reduction of its ability to sell the underlying shares of Common Stock (which
remedy shall not be exclusive of any other remedies at law or in equity), the
Conversion Percentage and the Fixed Conversion Price shall be adjusted as
follows:
(i) the Company will pay as liquidated damages ( the "LIQUIDATED DAMAGES")
to the Buyer(s) a cash amount within three (3) business days of the end of the
month equal two percent (2%) per month of the Liquidation Value of the Series A
Preferred Shares outstanding as Liquidated Damages. (For example, if the
Registration Statement becomes effective one (l) month after the Scheduled
Effective Date, the Company will pay in cash to the Buyer(s) Twenty Five
Thousand ($25,000) dollars in Liquidated Damages (2.0% of 1,250,000); and
68
<PAGE>
(d) Adjustment to Conversion Price - Dilution and Other Events.In order to
-----------------------------------------------------------
prevent dilution of the rights granted under this Certificate of Designations,
the Conversion Price will be subject to adjustment from time to time as provided
in this Section 2(d).
(i) Adjustment of Fixed Conversion Price upon Subdivision or Combination of
-----------------------------------------------------------------------
Common Stock.If the Company at any time subdivides (by any stock split, stock
- --------------
dividend, re-capitalization or otherwise) one or more classes of its outstanding
shares of Common Stock into a greater number of shares, the Fixed Conversion
Price in effect immediately prior to such subdivision will be proportionately
reduced. If the Company at any time combines (by combination, reverse stock
split or otherwise) one or more classes of its outstanding shares of Common
Stock into a smaller number of shares, the Fixed Conversion Price in effect
immediately prior to such combination will be proportionately increased.
(ii) Reorganization, Reclassification, Consolidation, Merger, or Sale. UPON
----------------------------------------------------------------
any re-capitalization, reorganization reclassification, consolidation merger,
sale of a or substantially all of the Company's assets to another Person
(as defined below) or other similar transaction which is effected in such a way
that holders of Common Stock are entitled to receive (either directly or upon
subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock is (referred to herein as in "ORGANIC CHANGE"), all
Series A Preferred Shares than outstanding shall automatically be converted into
common Stock. For purposes of this Agreement, "PERSON" shall mean an individual,
a limited liability company, a partnership, a joint venture, a corporation, a
trust, an unincorporated organization and a government or any department or
agency thereof.
(iii) Notices.
--------
(A) Immediately upon any adjustment of the Conversion Price, the Company
will give written notice thereof to each holder of Series A Preferred Shares,
setting forth in reasonable detail and certifying the calculation of such
adjustment.
(B) The Company will give written notice to each holder of Series A
Preferred Shares at least twenty (20) days prior to the date on which the
Company closes its books or takes a record (I) with respect to any dividend or
distribution upon the Common Stock, (II) with respect to any pro rata
subscription offer to holders of Common Stock or (III) for determining rights to
vote with respect to any Organic Change, dissolution or liquidation.
(C) The Company will also give written notice to each holder of Series A
Preferred Shares at least twenty (20) days prior to the date on which any
Organic Change, dissolution or liquidation will take place.
(e) Purchase Rights.If at any time the Company grants, issues or sells any
----------------
Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "PURCHASE RIGHTS"), then the holder(s) of Series A Preferred
69
<PAGE>
Shares will be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which such holder could have acquired if
such holder(s) had held the number of shares of Common Stock acquirable upon
complete conversion of the Series A Preferred Shares immediately before the date
an which a record is taken for the grant issuance or sale of such Purchase
Rights, or, if no such record is taken, the date as of which the record
holder(s) of Common Stock are to be determined for the grant, issue or sale of
such Purchase Rights.
(f) Mechanics of Conversion.Subject to the Company's inability to fully
--------------------------
satisfy its obligations under a Conversion Notice (as defined below) as provided
for in Section 5 below:
(i) Holder(s) Delivery Requirements.To convert Series A Preferred Shares
----------------------------------
into full shares of Common Stock on any date (the "CONVERSION DATE"), the
holder(s) thereof shall (A) deliver or transmit by facsimile, for receipt on or
prior to 11:59 p.m., Eastern Standard Time, on such date, a copy of a fully
executed notice of conversion in the form attached hereto (the "CONVERSION
NOTICE") to the Company or its designated transfer agent (the "TRANSFER AGENT"),
and (B) surrender to a common carrier for delivery to the Company or the
Transfer Agent as soon as practicable following such date, the original
certificates representing the Series A Preferred Shares being converted (or an
indemnification undertaking with respect to such shares in the case of their
loss, theft or destruction) (the "PREFERRED STOCK CERTIFICATES") and the
originally executed Conversion Notice. Upon such conversion by any such
holder(s) the 5% per annum premium which has accrued shall be payable hereunder
shall be paid in cash or common stock (based upon the Conversion Price) at such
time at the election of each of the holder(s).
(ii) Company's Response. Upon receipt by the Company of a facsimile copy of
-------------------
a Conversion Notice, the Company shall immediately send, via Facsimile, a
confirmation of receipt of such Conversion Notice to such holder(s). Upon
receipt by the Company or the Transfer Agent of the Preferred Stock Certificates
to be converted pursuant to a Conversion Notice, together with the originally
executed Conversion Notice, the Company or the Transfer Agent (as applicable)
shall, within five (5) business days following the date of receipt, (A) issue
and surrender to a common carrier for overnight delivery to the address as
specified in the Conversion Notice, a certificate, registered in the name of the
holder(s) or its designee, for the number of shares of Common Stock to which the
holder(s) shall be entitled or {B) credit the aggregate number of shares of
Common Stock to which the holder shall be entitled to the holder(s) or its
designee's balance account at The Depository Trust Company.
(iii) Failure to Issue Unrestricted Stock. The Company's failure to issue
-----------------------------------
unrestricted free trading stock to the Investors upon conversion shall be
considered an Event of Default, which if not cured with ten (10) days, shall
entitle the Investor full repayment of the convertible then outstanding. The
Company acknowledges that failure to honor a Notice of Conversion shall cause
definable financial hardship on the Investor(s).
(iv) Dispute Resolution.In the case of a dispute as to the determination of
-------------------
the Average Market Price or the arithmetic calculation of the Conversion Rate,
the Company shall promptly issue to the holder the number of shares of Common
70
<PAGE>
Stock that is not disputed and shall submit the disputed determinations or
arithmetic calculations to the holder(s) via facsimile within three (3) business
days of receipt of such holder(s) Conversion Notice. If such holder(s) and the
Company are unable to agree upon the determination of the Average Market Price
or arithmetic calculation of the Conversion Rate within two (2) business days of
such disputed determination or arithmetic calculation being submitted to the
holder(s), then the Company shall within one (1) business day submit via
facsimile (A) the disputed determination of the Average Market Price to an
independent, reputable investment bank or (B) the disputed arithmetic
calculation of the Conversion Rate to its independent, outside accountant. The
Company shall cause the investment bank or the accountant, as the case may be,
to perform the determinations or calculations and notify the Company and the
holder(s) of the results no later than forty-eight (48) hours from the time it
receives the disputed determinations or calculations. Such investment bank's or
accountant's determination or calculation, as the ease may be, shall be binding
upon all parties absent manifest error.
(v) Record Holder(s).The person or persons entitled to receive the shares
------------------
of Common Stock issuable upon a conversion of Series A Preferred Shares shall be
treated for all purposes as the record holder(s) of such shares of Common Stock
on the Conversion Date.
(g) Mandatory Conversion.If any Series A Preferred Shares remain
----------------------
outstanding on MARCH 3, 2002, then all such Series A Preferred Shares shall be
converted as of such date in accordance with this Section 2 as if the holder(s)
of such Series A Preferred Shares had given the Conversion Notice on MARCH 3,
2002, and the Conversion Date had been fixed as of MARCH 3, 2002, for all
purposes of this Section 2, and all holders of Series A Preferred Shares shall
thereupon and with two (2) business days thereafter surrender all Preferred
Stock Certificates, duly endorsed for cancellation, to the Company or the
Transfer Agent. No person shall thereafter have any rights in respect of Series
A Preferred Shares, except the right to receive shares of Common Stock on
conversion thereof as provided in this Section 2.
(h) Fractional Shares.The Company shall not issue any fraction of a share
-------------------
of Common Stock upon any conversion. All shares of Common Stock (including
fractions thereof) issuable upon conversion of more than one share of the Series
A Preferred Shares by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of a fraction of
a share of Common Stock. If, after the aforementioned aggregation, the issuance
would result in the issuance of a fraction of it share of Common Stock, the
Company shall round such fraction of a share of Common Stock up or down to the
nearest whole share.
(3) Inability to Fully Convert.
------------------------------
(a) Holder(s) Option if Company Cannot Fully Convert.If at any time
-----------------------------------------------------
after the earlier to occur of (i) effectiveness of the Registration
Statement or (ii) ninety (90) days after the Scheduled Effective Date, upon
the Company's
71
<PAGE>
receipt of a Conversion Notice, the Company does not issue shares of Common
Stock which are registered for resale under the Registration Statement
within five (5) business days of the time required in accordance with
Section 2(t) hereof, for any reason or for no reason, including, without
limitation, because the Company (x) does not have a sufficient number of
shares of Common Stock authorized and available, (y) is otherwise
prohibited by applicable law or by the roles or regulations of any stock
exchange, inter-dealer quotation system or other self-regulatory
organization with jurisdiction over the Company or its Securities from
issuing all of the Common Stock which is to be issued to a holder(s) of
Series A Preferred Shares pursuant to a Conversion Notice or (z) fails to
have a sufficient number of shares of Common Stock registered and eligible
for resale under the Registration Statement, then the Company shall issue
as many shares of Common Stock as it is able to issue in accordance with
suck holder(s) Conversion Notice and pursuant to Section 2(f) above and,
with respect to the unconverted Series A Preferred Shares, the holder(s),
solely at such holder(s) option, can, in addition to any other remedies
such holder may have hereunder, under the Securities Purchase Agreement
(including indemnification under Section 8 thereof), under the Registration
Rights Agreement, at law or in equity, elect to:
II) REQUIRE THE COMPANY TO REDEEM FROM SUCH HOLDER(S) THOSE SERIES A PREFERRED
SHARES FOR WHICH THE COMPANY IS UNABLE TO ISSUE COMMON STOCK IN ACCORDANCE
WITH SUCH HOLDER'S CONVERSION NOTICE ("MANDATORY REDEMPTION") AT A PRICE
PER SERIES A PREFERRED SHARE (THE "MANDATORY REDEMPTION PRICE") EQUAL TO
THE GREATER OF X) 120% OF THE LIQUIDATION VALUE OF SUCH SHARE AND (Y) THE
REDEMPTION RATE AS OF SUCH CONVERSION DATE;
(ii) if the Company's inability to fully convert Series A Preferred Shares
is pursuant to Section 5(a)(z) above, require the Company to issue restricted
shares of Common Stock in accordance with such holder's Conversion Notice and
pursuant to Section 2if) above; or
(iii) void its Conversion Notice and retain or have returned, as the case
may be, the nonconverted Series A Preferred Shares that were to be converted
pursuant to such holder's Conversion Notice.
(4) Reissuance of Certificates. In the event of a conversion or redemption
-----------------------------
pursuant to this Certificate of Designations of less than all of the Series A
Preferred Shares represented by a particular Preferred Stock Certificate, the
Company shall promptly cause to be issued and delivered to the holder of such
Series A Preferred Shares a Preferred stock certificate representing the
remaining Series A Preferred Shares which have not been so converted or
redeemed.
(5) Reservation of Shares.The Company shall, so long as any of the Series A
----------------------
Preferred Shares are outstanding, reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of the Series A Preferred Shares, such number of Shares of Common
72
<PAGE>
Stock as shall from time to time be sufficient to affect the conversion of all
of the Series A Preferred Shares. If at any time, the Company does not have
available an amount of authorized and unissued shares of Common Stock necessary
to satisfy full conversion of all of the Series A Preferred Shares outstanding,
the Company shall call and hold a special shareholders meeting with thirty (30)
days of such occurrence, for the sole purpose of increasing the number of shares
authorized. Furthermore, management of the Company shall recommend to the
shareholders to vote in favor of increasing the number of common shares
authorized. Management shall also vote all of its Shares in favor of increasing
the number of shares of Common Stock authorized.
(6) Voting Rights,Holder(s) of Series A Preferred Shares shall have no
---------------
voting rights, except as required by law, including but not limited to the
General Corporation Law of the State of Nevada and as expressly provided in this
Certificate of Designations.
(7) Liquidation, Dissolution, Winding-Up.In the event of any voluntary or
--------------------------------------
involuntary liquidation, dissolution, or winding up of the Company, the
holder(s) of the Series A Preferred Shares shall be entitled to receive in cash
out of the assets of the Company, whether from capital or from earnings
available for distribution to its stockholders (the "PREFERRED FUNDS"), before
any amount shall be paid to the holders of any of the capital stock of the
Company of any class junior in rank to the Series A Preferred Shares in respect
of the preferences as to the distributions and payments on the liquidation,
dissolution and winding up of the Company, an amount per Series A Preferred
Share equal to the sum off (i) $ 10,000 and (ii) an amount equal to the product
of (.05) (N/365) ($10,000) (such sum being referred to as the "LIQUIDATION
VALUE"); provided that, if the Preferred Funds are insufficient to pay the full
amount due to the holders of Series A Preferred Shares and holder(s) of shares
of other classes or series of preferred stock of the Company that are of equal
rank with the Series A Preferred Shares as to payments of Preferred Funds (the
"PARI PASSU SHARES"), then each holder of Series A Preferred Shares and Pari
Passu Shares shall receive a percentage of the Preferred Funds equal to the full
amount of Preferred Funds payable to such holder as a liquidation preference, in
accordance with their respective Certificate of Designations, Preferences and
Rights as a percentage or the full amount of Preferred Funds payable to ail
holders of Series A Preferred Shares and Pari Passu Shares. The purchase or
redemption by the Company of stock of any class in any manner permitted by law,
shall not for the purposes hereof, be regarded as a liquidation, dissolution or
winding up of the Company. Neither the consolidation or merger of the Company
with or into any other Person, nor the sale or transfer by the Company of less
than substantially ail of its assets, shall, for the purposes hereof, be deemed
to be a liquidation, dissolution or winding up of the Company. No holder of
Series A Preferred Shares shall be entitled to receive any amounts with respect
thereto upon any liquidation, dissolution or winding up of the Company other
than the amounts provided for herein.
(10) Preferred Rate.All shares of Common Stock shall be of junior rank to
----------------
all Series A Preferred Shares in respect to the preferences as to distributions
and payments upon the liquidation, dissolution, and winding up of the Company.
The rights of the shares of Common Stock shall be subject to the Preferences and
relative rights of the Series A Preferred Shares. The Series A Preferred Shares
73
<PAGE>
shall be of greater than any Series of Common or Preferred Stock hereinafter
issued by the Company. Without the prior express written consent of the holders
of not less than two-thirds (2/3) of the then outstanding Series A Preferred
Shares, the Company shall not hereafter authorize or issue additional or other
capital stock that is of senior or equal rank to the Series A Preferred Shares
in respect of the preferences as to distributions and payments upon the
liquidation, dissolution and winding up of the Company. Without the prior
express written consent of the holders off not less than two-thirds (2/3) of the
then outstanding Series A Preferred Shares, the Company shall not hereafter
authorize or make any amendment to the Company's Certificate of Incorporation or
bylaws, or make any resolution of the board of directors with the Nevada
Secretary of State containing any provisions, which would adversely affect or
otherwise impair the rights or relative priority of the holders of the Series A
Preferred Shares relative to the holders of the Common Stock or the holders of
any other class of capital stock. In the event of the merger or consolidation of
the Company with or into another corporation, the Series A Preferred Shares
shall maintain their relative powers, designations, and preferences provided for
herein and no merger shall result inconsistent therewith.
(11) Restriction on Redemption and Dividends.
--------------------------------------------
(a) Restriction on Dividend.If any Series A Preferred Shares are
--------------------------
outstanding, without the prior express written consent of the holders of not
less than two-thirds (2/3) of the then outstanding Series A Preferred Shares,
the Company shall not directly or indirectly declare, pay or make any dividends
or other distributions upon any of the Common Stock so long as written notice
thereof has been given to holders of the Series A Preferred Shares at least 30
days prior to the earlier of (a) the record date taken for or (b) the payment of
any such dividend or other distribution. Notwithstanding the foregoing, this
Section 10(a) shall not prohibit the Company from declaring and paying a
dividend in cash with respect to the Common Stock so long as the Company: (i)
pays simultaneously to each holder of Series A Preferred Shares an amount in
cash equal to the amount such holder(s) would have received had all of such
holder(s) Series A Preferred Shares been converted to Common Stock pursuant to
Section 2 hereof one business day prior to the record date for any such
dividend, and (ii) after giving effect to the payment of any dividend and any
other payments required in connection therewith including to the holder(s) of
the Series A Preferred Shares under clause 10(a)(i) hereof, the Company has in
cash or cash equivalents an amount equal to the aggregate of: (A) all of its
liabilities reflected on its most recently available balance sheet, (B) the
amount of any indebtedness incurred by the Company or any of its subsidiaries
since its most recent balance sheet and (C) 125% of the amount payable to all
holder(s) of any shares of any class of preferred stock of the Company assuming
a liquidation of the Company as the date of its most recently available balance
sheet.
(b) Restriction on Redemption. If any Series A Preferred Shares are
----------------------------
outstanding, without the prior express written consent of the holders of not
less than two-thirds (2/3) of the then outstanding Series A Preferred Shares,
the Company shall not directly or indirectly redeem, purchase or otherwise
acquire from any person or entity' other than from a direct or indirect
wholly-owned subsidiary of the Company, or permit any subsidiary of the Company
to redeem, purchase or otherwise acquire from any person or entity other than
from the Company or another direct or indirect wholly-owned subsidiary of the
74
<PAGE>
Company, any of the Company's or any subsidiary's capital stock or other equity
securities (including, without limitation, warrants, options and other rights to
acquire such capital stock or other equity securities).
(12) Vote to Change the Terms of Series A Preferred Shares. The affirmative
------------------------------------------------------
vote at a meeting duly called for such purpose or the written consent without a
meeting, of the holders of not less than two-thirds (2/3) of the then
outstanding Series A Preferred Shares, shall be required for any change to this
Certificate of Designations or the Company's Certificate of Incorporation which
would amend, alter, change or repeal any of the powers, designations,
preferences and rights of the Series A Preferred Shares.
(13) Lost or Stolen Certificates. Upon receipt by the Company of evidence
------------------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates representing the Series A Preferred Shares, and, in
the case of loss, theft or destruction, of any indemnification undertaking by
the holder to the Company and, in the case of mutilation, upon surrender and
cancellation of the Preferred Stock Certificate(s), the Company shall execute
and deliver new preferred stock certificate(s) of like tenor and date; provided,
however, the Company shall not be obligated to re-issue preferred stock
certificates if the holder(s) contemporaneously requests the Company to convert
such Series A Preferred Shares into Common Stock.
(14) Withholding Tax Obligations Notwithstanding anything herein to the
------------------------------
contrary, to the extent that the Company receives advice in writing from its
counsel that there is a reasonable basis to believe that the Company is required
by applicable federal laws or regulations and delivers a copy of such written
advice to the holders of the Series A Preferred Shares so effected, the Company
may reasonably condition the making of any distribution (as such term is defined
under applicable federal tax law and regulations) in respect of any Series A
Preferred Shares on the holder of such Series A Preferred Shares depositing with
the Company an amount of cash sufficient to enable the Company to satisfy its
withholding tax obligations (the "WITHHOLDING TAX") with respect to such
distribution, Notwithstanding the foregoing or anything to the contrary, if any
holder of the Series A Preferred Shares so effected receives advice in writing
from its counsel that there is a reasonable basis to believe that the Company is
not so required by applicable federal laws or regulations and delivers a copy of
such written advice to the Company, the Company shall not be permitted to
condition the making of any such distribution in respect of any Series A
Preferred Share on the holder of such Series A Preferred Shares depositing with
the Company any Withholding Tax with respect to such distribution, provided,
---------
however,the Company may reasonably condition the making of any such distribution
- -------
in respect of any Series A Preferred Share on the holder of such Series A
Preferred Shares executing and delivering to the Company, at the election of the
holder, either: (i) if applicable, a property completed Internal Revenue Service
Form 4224, or (a) an indemnification agreement in reasonably acceptable form,
with respect to any federal tax liability, penalties and interest that may be
imposed upon the Company by the Internal Revenue Service as a result of the
Company's failure to withhold in connection with such distribution to such
holder. If the conditions in the preceding two sentences are fully satisfied,
the Company shall not be required to pay any additional damages set forth in
Section 2(f)(v) of this Certificate of Designations if its failure to timely
75
<PAGE>
deliver any Conversion Shares results solely from the holder(s) failure to
deposit any withholding tax hereunder or provide to the Company an executed
indemnification agreement in the form reasonably satisfactory to the Company.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
IN WITNESS WHEREOF, the Company has caused this Certificate of Designations to
be signed by Jack Marshall, its President, as of the 3rd day of March , 2000.
PHOTOLOFT.COM
By:
Name: Jack Marshall
Title: President
76
<PAGE>
EXHIBIT 10.26
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (the "Agreement"), dated as of March 3, 2000,
by and among Photoloft.Com, a Nevada corporation, with headquarters located at
300 Orchard City Drive, Suite 142, Campbell, California 95008 (the "Company"),
and the investor listed on the Schedule of Buyers attached hereto (individually,
a "Buyer" or collectively "Buyers").
WHEREAS:
A. The Company and the Buyer(s) are executing and delivering this Agreement
in reliance upon the exemption from securities registration pursuant to Section
4(2) and/or Regulation D ("Regulation D") at the sole election of Buyer(s) in
the event that a registration statement filed by the Company pursuant to Section
2(a) of the Registration Rights Agreement (described below) is not declared
effective by the Registration Deadline (as defined therein) as promulgated by
the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933; as amended (the "1933 Act") by the Registration Deadline (as defined in
the Registration Rights Agreement);
B. The Company has authorized the following new series of its Preferred
Stock, $.001 par value per share (the "Preferred Stock"): the Company's Series A
Convertible Preferred Stock (the "Series A Preferred Shares"), which shall be
convertible into shares of the Company's Common Stock, $.001 par value per share
(the "Common Stock") (as converted, the "Conversion Shares"), in accordance with
the terms of the Company Certificate of Designations, Preferences, and Rights of
the Series A Preferred Shares, substantially in the form attached hereto as
Exhibit "A" (the "Certificate of Designations");
C. The Buyer(s) wish to purchase, upon the terms and conditions stated in
this Agreement, an aggregate amount of up to 125 shares of Series A Preferred
Stock in the respective amounts set forth opposite each Buyer(s) name on the
Schedule of Buyers;
D. Contemporaneously with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement
substantially in the form attached hereto as Exhibit "B" (the "Registration
Rights Agreement") pursuant to which the Company has agreed to provide certain
registration rights under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws; and
NOW THEREFORE, the Company and the Buyer(s) hereby agree as follows:
1. PURCHASE AND SALE OF SERIES A PREFERRED STOCK.
-----------------------------------------------------
90
<PAGE>
a. Purchase of Series A Preferred Stock.Subject to the satisfaction (or
----------------------------------------
waiver) of the conditions set forth in Sections 6 and 7 below, the Company shall
issue and sell to the Buyer(s) and the Buyer(s) shall purchase from the Company
an aggregate principal amount of 125 shares of Series A Preferred Stock, in the
respective amounts set forth opposite each Buyer(s) name on the Schedule of
Buyers (the "Closing").
b. Closing Date.The date and time of the Closing (the "Closing Date") shall
-------------
be 10:00 a.m. Eastern Standard Time, within five (5) business days following the
date hereof, subject to notification of satisfaction (or waiver) of the
conditions to the Closing set forth in Sections 6 and 7 below (or such later
date as is mutually agreed to by the Company and the Buyer(s)). The Closing
shall occur on the Closing Date at the offices of Butler Gonzalez, LLP, 1000
Stuyvesant Avenue, Suite 6, Union, New Jersey 07083.
c. Form of Payment.On the Closing Date, (i) each Buyer shall pay the
------------------
Purchase Price to the Company for the Series A Preferred Shares to be issued and
sold to the Buyer(s) at the Closing, by wire transfer of immediately available
funds in accordance with the Company's written wire instructions, and (ii) the
Company shall deliver to each Buyer, certificates representing such Series A
Preferred Stock which Buyer(s) are then purchasing (as indicated opposite such
Buyer's name on the Schedule of Buyers), duly executed on behalf of the Company
and registered in the name of such Buyer or its designee (the "Certificates").
2. BUYER(S) REPRESENTATIONS AND WARRANTEES.
-------------------------------------------
Each Buyer represents and warrants with respect to only itself that:
a. Investment Purpose.Such Buyer (i) is acquiring the Series A Preferred
--------------------
Shares, (ii) upon conversion of the Series A Preferred Shares, will acquire the
Conversion Shares then issuable, for its own account for investment only and not
with a view towards, or for resale in connection with, the public sale or
distribution thereof, except pursuant to sales registered or exempted under the
1933 Act; provided, however, that by making the representations herein, such
Buyer does not agree to hold any Series A Preferred Shares and Conversion
Shares, for any minimum or other specific term and reserves the right to dispose
of Series A Preferred Shares, Conversion Shares at any time, subject to any
underwriter lock up, in accordance with or pursuant to a registration statement
or an exemption under the 1933 Act.
b. Accredited Investor Status.Such Buyer(s) are an "accredited investor" as
---------------------------
that term is defined in Rule 501(a)(3) of Regulation D.
c. Reliance on Exemptions.Such Buyer(s) understand that the Series A
-------------------------
Preferred Shares, the Conversion Shares are being offered and sold to it in
reliance on specific exemptions from the registration requirements of United
States federal and state securities laws and that the Company is relying in part
upon the truth and accuracy of, and such Buyer(s) compliance with, the
representations, warranties, agreements, acknowledgments and understandings of
such Buyer(s) set forth herein in order to determine the availability of such
exemptions and the eligibility of such Buyer to acquire such securities.
91
<PAGE>
d. Information. Such Buyer(s) and their advisors, if any, have been
------------
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Series A
Preferred Shares and the Conversion Shares which have been requested by such
Buyer(s). Such Buyer(s) and their advisors, if any, have been afforded the
opportunity to ask questions of the Company. Neither such inquiries nor any
other due diligence investigations conducted by such Buyer(s) or its advisors,
if any, or its representatives shall modify, amend or affect such Buyer(s) right
to rely on the Company's representations and warranties contained in Section 3
below. Such Buyer(s) understand that its investment in the Series A Preferred
Shares and the Conversion Shares involves a high degree of risk. Such Buyer(s)
have sought such accounting, legal and tax advice as it has considered necessary
to make an informed investment decision with respect to its acquisition of the
Series A Preferred Shares and the Conversion Shares.
e. No Governmental Review. Such Buyer(s) understand that no United States
------------------------
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Series A Preferred
Shares and the Conversion Shares or the fairness or suitability of the
investment in the Series A Preferred Shares and the Conversion Shares nor have
such authorities passed upon or endorsed the merits of the offering of the
Series A Preferred Shares and the Conversion Shares.
f. Transfer or Resale.Such Buyer(s) understand that except as provided in
--------------------
the Registration Rights Agreement: (i) the Series A Preferred Shares and the
Conversion Shares have not been and are not being registered under the 1933 Act
or any state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (a) subsequently registered thereunder, (b) such Buyer(s)
shall have delivered to the Company an opinion of counsel, in a generally
acceptable form, to the effect that such securities to be sold, assigned or
transferred may be sold, assigned or transferred pursuant to an exemption from
such registration, or (c) such Buyer(s) provide the Company with reasonable
assurance that such securities can be sold, assigned or transferred pursuant to
Rule 144 or promulgated under the 1933 Act (or a successor rule thereto); (ii)
any sale of such securities made in reliance on Rule 144 promulgated under the
1933 Act (or a successor rule thereto) .
g. Legends.Such Buyer(s) understand that the certificates or other instruments
--------
representing the Series A Preferred Shares, until such time as the sale of the
Conversion Shares have been registered under the 1933 Act as contemplated by the
Registration Rights Agreement, the stock certificates representing the
Conversion Shares shall bear a restrictive legend in substantially the following
form (and a stop-transfer order may be placed against transfer of such stock
certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS.
92
<PAGE>
THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE
OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT
OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO
RULE 144 UNDER SAID ACT.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Series A Preferred Shares
and the Conversion Shares upon which it is stamped, if, unless otherwise
required by state securities laws, (i) the sale of the Conversion Shares are
registered under the 1933 Act, (ii) in connection with a sale transaction, such
holder provides the Company with an opinion of counsel, in a generally
acceptable form, to the effect that a public sale, assignment or transfer of the
Series A Preferred Shares and the Conversion Shares may be made without
registration under the 1933 Act, or (iii) such holder provides the Company with
reasonable assurances that the Series A Preferred Shares and the Conversion
Shares can be sold pursuant to Rule 144 without any restriction as to the number
of securities acquired as of a particular date that can then be immediately
sold.
h. Authorization, Enforcement.This Agreement has been duly and validly
----------------------------
authorized, executed and delivered on behalf of such Buyer(s) and is a valid and
binding agreement of such Buyer(s) enforceable in accordance with its terms,
subject as enforceability to general principles of equity and to applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation and other
similar laws relating to, or affecting generally, the enforcement of applicable
creditors' rights and remedies.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
---------------------------------------------------
The Company represents and warrants to each of the Buyer(s) that:
a. Organization and Qualification. The Company and its subsidiaries are
---------------------------------
corporations duly organized and validly existing in good standing under the laws
of the jurisdiction in which they are incorporated, and have the requisite
corporate power to own their properties and to carry on their business as now
being conducted. Each of the Company and its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the nature of the business conducted by it makes such qualification
necessary, except to the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on the Company and its
subsidiaries taken as a whole.
93
<PAGE>
b. Authorization, Enforcement, Compliance with Other Instruments.(i) The
----------------------------------------------------------------
Company has the requisite corporate power and authority to enter into and
perform this Agreement, the Registration Rights Agreement and any related
agreements, and to issue the Series A Preferred Shares and the Conversion Shares
in accordance with the terms hereof and thereof, (ii) the execution and delivery
of this Agreement, the Registration Rights Agreement and any related agreements
by the Company and the consummation by it of the transactions contemplated
hereby and thereby, including without limitation the issuance of the Series A
Preferred Shares and the reservation for issuance and the issuance of the
Conversion Shares issuable upon conversion or exercise thereof, have been duly
authorized by the Company's Board of Directors and no further consent or
authorization is required by the Company, its Board of Directors or its
stockholders, (iii) this Agreement and the Registration Rights Agreement and any
related agreements have been duly executed and delivered by the Company, (iv)
this Agreement, the Registration Rights Agreement and any related agreements
constitute the valid and binding obligations of the Company enforceable against
the Company in accordance with their terms, except as such enforceability may be
limited by general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of creditors' rights and remedies, and (v)
prior to the Closing Date, the Certificate of Designations has been filed with
the Secretary of State of the State of Nevada and will be in full force and
effect, enforceable against the Company in accordance with its terms.
c. Capitalization. As of the date hereof, the authorized capital stock of
---------------
the Company consists of 50,000,000 shares of Common Stock, of which as of the
date hereof 12,555,441 shares were issued and outstanding, and no series of
preferred stock or debentures or notes were issued and outstanding. All of such
outstanding shares have been validly issued and are fully paid and
nonassessable. Except as disclosed in Schedule 3(c), no shares of Common Stock
or preferred stock are subject to preemptive rights or any other similar rights
or any liens or encumbrances suffered or permitted by the Company. Except as
disclosed in Schedule 3(c), as of the effective date of this Agreement, (i)
there are no outstanding options, warrants, scrip, fights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of its subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its subsidiaries or
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company or any of its subsidiaries, (ii) there
are no outstanding debt securities and (iii) there are no agreements or
arrangements under which the Company or any of its subsidiaries is obligated to
register the sale of any of their securities under the 1933 Act (except the
Registration Rights Agreement). There are no securities or instruments
containing anti-dilution or similar provisions that will be triggered by the
issuance of the Series A Preferred Shares and the Conversion Shares as
described in this Agreement. The Company has furnished to the Buyer true and
correct copies of the Company's Certificate of Incorporation, as amended and as
in effect on the date hereof (the "Certificate of Incorporation"), and the
Company's By-laws, as in effect on the date hereof (the "Bylaws"), and the terms
of all securities convertible into or exercisable for Common Stock and the
material rights of the holders thereof in respect thereto.
94
<PAGE>
d. Issuance of Securities.The Series A Preferred Shares are duly authorized
-----------------------
and, upon issuance in accordance with the terms hereof, shall be (i) validly
issued, fully paid and nonassessable, are free from all taxes, liens and charges
with respect to the issue thereof and are entitled to the rights and preferences
set forth in the Certificate of Designations in the Series A Preferred Shares.
The Conversion Shares issuable upon conversion of the Series A Preferred Shares
have been duly authorized and reserved for issuance. Upon conversion or exercise
in accordance with the Certificate of Designations, the Conversion Shares will
be validly issued, fully paid and nonassessable and free from all taxes, liens
and charges with respect to the issue thereof, with the holders being entitled
to all rights accorded to a holder of Common Stock.
e. No Conflicts.Except as disclosed in Schedule 3(e), the execution,
--------------
delivery and performance of this Agreement by the Company and the consummation
by the Company of the transactions contemplated hereby will not (i) result in a
violation of the Certificate of Incorporation, any Certificate of Designations,
Preferences, and Rights of any outstanding series of preferred stock of the
Company or By-laws or (ii) conflict with or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its subsidiaries is a party, or result in a violation of any law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations and the rules and regulations of the principal market or
exchange on which the Common Stock is traded or listed) applicable to the
Company or any of its subsidiaries or by which any property or asset of the
Company or any of its subsidiaries is bound or affected. Except as disclosed in
Schedule 3(e), neither the Company nor its subsidiaries is in violation of any
term of or in default under its Certificate of Incorporation or By-laws or their
organizational charter or by-laws, respectively, or any material contract,
agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or
order or any statute, rule or regulation applicable to the Company or its
subsidiaries. The business of the Company and its subsidiaries is not being
conducted, and shall not be conducted in violation of any law, ordinance,
regulation of any governmental entity. Except as specifically contemplated by
this Agreement and as required under the 1933 Act and any applicable state
securities laws, the Company is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental agency in order for it to execute, deliver or perform any of its
obligations under or contemplated by this Agreement or the Registration Rights
Agreement in accordance with the terms hereof or thereof Except as disclosed in
Schedule 3(e), all consents, authorizations, orders, filings and registrations
which the Company is required to obtain pursuant to the preceding sentence have
been obtained or effected on or prior to the date hereof. The Company and its
subsidiaries are unaware of any facts or circumstances , which might give rise
to any of the foregoing.
f. SEC Documents: Financial Statements. The Company has filed all
--------------------------------------
reports, schedules, forms, statements and other documents required to be filed
by it with the SEC pursuant to the reporting requirements of the Securities
95
<PAGE>
Exchange Act of 1934, as amended (the "1934 ACT") (all of the foregoing filed
prior to the date hereof and all exhibits included therein and financial
statements and schedules thereto and documents incorporated by reference
therein, being hereinafter referred to as the "SEC DOCUMENTS"). The Company has
delivered to the Buyer(s) or its representative true and complete copies of the
SEC Documents. As of their respective dates, the financial statements of the
Company included in the SEC documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have been
prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments
G. Absence of Certain Changes. Except as disclosed in Schedule 3 (g) there
-----------------------------
has been no material adverse change and no material adverse development since
September 30, 1999 in the business, properties, operations, financial condition,
results of operations or prospects of the Company or its subsidiaries. The
Company has not taken any steps, and does not currently expect to take any
steps, to seek protection pursuant to any bankruptcy law nor does the Company or
its subsidiaries have any knowledge or reason to believe that its creditors
intend to initiate involuntary bankruptcy proceedings.
H. Acknowledgment Regarding Buyer(s) Purchase of Series A Preferred
-----------------------------------------------------------------------
Shares.The Company acknowledges and agrees that the Buyer(s) are acting solely
in the capacity of an arm's length purchaser with respect to this Agreement and
the transactions contemplated hereby. The Company further acknowledges that the
Buyer(s) are not acting as a financial advisor or fiduciary of the Company (or
in any similar capacity) with respect to this Agreement and the transactions
contemplated hereby and any advice given by the Buyer(s) or any of their
respective representatives or agents in connection with this Agreement and the
transactions contemplated hereby is merely incidental to such Buyer(s) purchase
of the Series A Preferred Shares and the Conversion Shares. The Company further
represents to the Buyer(s) that the Company's decision to enter into this
Agreement has been based solely on the independent evaluation by the Company and
its representatives.
I. No General Solicitation.Neither the Company, nor any of its affiliates,
------------------------
nor any person acting on its or their behalf, has engaged in any form of general
solicitation or general advertising (within the meaning of Regulation D under
the 1933 Act) in connection with the offer or sale of the Series A Preferred
Shares and the Conversion Shares.
J. No Integrated Offering.Neither the Company, nor any of its affiliates,
------------------------
nor any person acting on its or their behalf has, directly or indirectly, made
any offers or sales of any security or solicited any offers to buy any security,
96
<PAGE>
under circumstances that would require registration of the Series A Preferred
Shares and the Conversion Shares under the 1933 Act or cause this offering of
Series A Preferred Shares and the Conversion Shares to be integrated with prior
offerings by the Company for purposes of the 1933 Act or any applicable
stockholder approval provisions.
4. COVENANTS.
----------
a. Best Efforts.Each party shall use its best efforts timely to satisfy
--------------
each of the conditions to be satisfied by it as provided in Sections 6 and 7 of
this Agreement.
b. Form D.The Company agrees to file a Form D with respect to the Series A
-------
Preferred Shares and the Conversion Shares as required under Regulation B and to
provide a copy thereof to the Buyer(s) promptly after such filing. The Company
shall, on or before the Closing Date, take such action as the Company shall
reasonably determine is necessary to qualify the Series A Preferred Shares and
the Conversion Shares for, or obtain exemption for the Series A Preferred Shares
and the Conversion Shares for, sale to the Buyer(s) at the Closing pursuant to
this Agreement under applicable securities or "Blue Sky" laws of the states of
the United States, and shall provide evidence of any such action so taken to the
Buyer(s) on or prior to the Closing Date.
c. Reporting Status.Until the earlier of (i) the date as of which the
------------------
Investors (as that term is defined in the Registration Rights Agreement) may
sell all of the Conversion Shares without restriction pursuant to Rule 144(k)
promulgated under the 1933 Act (or successor thereto), or (ii) the date on which
(A) the Investors shall have sold all the Conversion Shares and (B) none of the
Series A Preferred Shares are outstanding (the "Registration Period"), the
Company shall file all reports required to be flied with the SEC pursuant to the
1934 Act, and the Company shall not terminate its status as an issuer required
to file reports under the 1934 Act even if the 1934 Act or the rules and
regulations thereunder would otherwise permit such termination.
d. Use of Proceeds.The Company will use the proceeds from the sale of the
-----------------
Series A Preferred Shares for substantially the same purposes and in
substantially the same amounts as indicated in Schedule 4(t).
e. Financial Information.The Company agrees to send the following to
-----------------------
Buyer(s) during the Registration Period: (i) within five (5) days after the
filing thereof with the SEC, a copy of its Annual Reports on Form 10-K, its
Quarterly Reports on Form 10-Q, any Current Reports on Form 8-K and any
registration statements or amendments filed pursuant to the 1933 Act; (ii)
within one (1) day after release thereof, copies of all press releases issued by
the Company or any of its subsidiaries and (ii) copies of the same notices and
other information given to the stockholders of the Company generally,
contemporaneously with the giving thereof to the stockholders.
97
<PAGE>
f. Reservation of Shares.The Company shall take all action necessary to at
----------------------
all times have authorized, and reserved for the purpose of issuance, such number
of Shares of Common Stock as shall from time to time be sufficient to affect the
conversion of all of the Conversion Shares and the shares representing the
underlying warrants (the "Warrant Shares") then outstanding.
g. Listings.The Company shall promptly secure the listing of the Conversion
---------
Shares upon each national securities exchange or automated quotation system, if
any, upon which shares of Common Stock are then listed (subject to official
notice of issuance) and shall maintain, so long as any other shares of Common
Stock shall be so listed, such listing of all Conversion Shares from time to
time issuable under the terms of this Agreement and the Registration Rights
Agreement. The Company shall maintain the Common Stock's authorization for
quotation in the over-the counter market. The Company shall promptly provide to
each Buyer copies of any notices it receives regarding the continued eligibility
of the Common Stock for trading in the over-the-counter market.
h. Expenses.The Company shall pay all costs and expenses incurred by such
---------
party in connection with the negotiation, investigation, preparation, execution
and delivery of this Agreement and the Registration Rights Agreement. The costs
and expenses of the May Davis Group, Inc., and its counsel (counsel fees shall
not exceed $15,000) shall be paid for by the Company directly from the Escrow
Funds at Closing.
i. Authorized Shares of Common Stock, Reservation of Shares.The Company
------------------------------------------------------------
shall at all times, so long as any of the Series A Preferred Shares are
outstanding, reserve and keep available out of its authorized and unissued
Common Stock, solely for the purpose of effecting the conversion of the Series A
Preferred Shares such number of shares of Common Stock equal to or greater than
200% of the number of shares of Common Stock for which are issuable upon
conversion of all of the then outstanding Series A Preferred Shares which are
then outstanding or which could be issued at any time under this Agreement or
the Series A Preferred Shares.
j. Corporate Existence.So long as any Series A Preferred Shares remain
---------------------
outstanding, the Company shall not directly or indirectly consummate any merger,
reorganization, restructuring, consolidation, sale of all or substantially all
of the Company's assets or any similar transaction or related transactions (each
such transaction, a "Sale of the Company").
k. Transactions With Affiliates.So long as (i) any Series A Preferred
-------------------------------
Shares are outstanding or (ii) any Buyer owns Conversion Shares with a market
value equal to or greater than $250,000, the Company shall not, and shall cause
each of its subsidiaries not to, enter into, amend, modify or supplement, or
permit any subsidiary to enter into, amend, modify or supplement any agreement,
transaction, commitment, or arrangement with any of its or any subsidiary's
officers, directors, person who were officers or directors at any time during
the previous two years, stockholders who beneficially own 5% or more of the
Common Stock, or affiliates or with any individual related by blood, marriage,
or adoption to any such individual or with any entity in which any such entity
or individual owns a 5% or more beneficial interest (each a "Related Party"),
98
<PAGE>
except for (a) customary employment arrangements and benefit programs on
reasonable terms, (b) any agreement, transaction, commitment, or arrangement on
an arms-length basis on terms no less favorable than terms which would have been
obtainable from a person other than such Related Party, (c) any agreement
transaction, commitment, or arrangement which is approved by a majority of the
disinterested directors of the Company, for purposes hereof,, any director who
is also an officer of the Company or any subsidiary of the Company shall not be
disinterested director with respect to any such agreement, transaction,
commitment, or arrangement. "Affiliate" for purposes hereof means, with respect
to any person or entity, another person or entity that, directly or indirectly,
(i) has a 5% or more equity interest in that person or entity, (ii) has 5% or
more common ownership with that person or entity, (iii) controls that person or
entity, or (iv) share common control with that person or entity. "Control" or
"controls" for purposes hereof means that a person or entity has the power,
direct or indirect, to conduct or govern the policies of another person or
entity.
l. The Company covenants and agrees that in the event that the Company's
agency relationship with the transfer agent should be terminated for any reason
prior to a date which is two (2) years after the Closing Date, the Company shall
immediately appoint a new transfer agent and shall require that the transfer
agent execute and agree to be bound by the terms of the Irrevocable Instructions
to Transfer Agent.
5. TRANSFER AGENT INSTRUCTIONS.
------------------------------
The Company shall issue irrevocable instructions to its transfer agent to
issue certificates, registered in the name of the Buyer(s) or its respective
nominee(s), for the Conversion Shares in such amounts as specified from time to
time by the Buyer(s) to the Company upon conversion of the Series A Preferred
Shares (the "Irrevocable Transfer Agent Instructions"), except as provided in
Section 4(1) herein. Prior to registration of the Conversion Shares under the
1933 Act, all such certificates shall bear the restrictive legend specified in
Section 2(g) of this Agreement. The Company warrants that no instruction other
than the Irrevocable Transfer Agent Instructions referred to in this Section 5,
and stop transfer instructions to give effect to Section 2 hereof (in the case
of the Conversion Shares, prior to registration of such shares under the 1933
Act) will be given by the Company to its transfer agent and that the Series A
Preferred Shares and the Conversion Shares shall otherwise be freely
transferable on the books and records of the Company as and to the extent
provided in this Agreement and the Registration Rights Agreement. Nothing in
this Section 5 shall affect in any way the Buyer's obligations and agreement to
comply with all applicable securities laws upon resale of the Series A Preferred
Shares and the Conversion Shares. If the Buyer(s) provide the Company with an
opinion of counsel, reasonably satisfactory in form, and substance to the
Company, that registration of a resale by the Buyer(s) of any of the Series A
Preferred Shares and the Conversion Shares is not required under the 1933 Act,
the Company shall permit the transfer, and, in the case of the Conversion
Shares, promptly instruct its transfer agent to issue one or more certificates
99
<PAGE>
in such name and in such denominations as specified by the Buyer(s). The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Buyer(s) by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 5 will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5, that the Buyer(s) shall be
entitled, in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
-----------------------------------------------------
The obligation of the Company hereunder to issue and sell the Series A
Preferred Shares to the Buyer(s) at the Closing is subject to the satisfaction,
at or before the Closing Date, of each of the following conditions, provided
that these conditions are for the Company's sole benefit and may be waived by
the Company at any time in its sole discretion:
a. The Buyer(s) shall have executed this Agreement and the Registration
Rights Agreement and delivered the same to the Company.
b. The Certificate of Designations shall have been filed with the Secretary
of State of the State of Nevada.
c. The Buyer(s) shall have delivered to the Company the Purchase Price for
the Series A Preferred Shares being purchased by the Buyer(s) at the Closing by
wire transfer of immediately available funds pursuant to the wire instructions
provided by the Company.
d. The representations and warranties of the Buyer(s) shall be true and
correct in all material respects as of the date when made and as of the Closing
Date as though made at that time (except for representations and warranties that
speak as of a specific date), and the Buyer(s) shall have performed, satisfied
and complied in all material respects with the covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied
with by the Buyer(s) at or prior to the Closing Date.
7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
-------------------------------------------------------
The obligation of the Buyer(s) hereunder to purchase the Series A Preferred
Shares at the Closing is subject to the satisfaction, at or before the Closing
Date, of each of the following conditions, provided that these conditions are
for the Buyer(s) sole benefit and may be waived by the Buyer(s) at any time in
its sole discretion:
a. The Company shall have executed this Agreement and the Registration
Rights Agreement, and delivered the same to the Buyer(s).
100
<PAGE>
b. The representations and warranties of the Company shall be true and
correct in all material respects (except to the extent that any of such
representations and warranties is already qualified as to materiality in Section
3 above, in which case, such representations and warranties shall be true and
correct without further qualification) as of the date when made and as of the
Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied in ail material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the Closing Date. The Buyer(s)
shall have received a certificate, executed by the Chief Executive Officer of
the Company, dated as of the Closing Date, to the foregoing effect and as to
such other matters as may be reasonably requested by the Buyer(s) including,
without limitation an update as of the Closing Date regarding the representation
contained in Section 3(c) above.
c. The Buyer(s) shall have received the opinion of the Company's counsel
dated as of the Closing Date, in form, scope and substance reasonably
satisfactory to the Buyer(s) and in substantially the form attached hereto.
d. The Company shall have executed and delivered to the Buyer(s) the
Certificates (in such denominations as the Buyer(s) shall request) for the
Series A Preferred Shares being purchased by the Buyer(s) at the Closing.
e. The Board of Directors of the Company shall have adopted the resolutions
in substantially the form attached hereto.
f. As of the Closing Date, the Company shall as of the Closing Date have
reserved out of its authorized and unissued Common Stock, solely for the purpose
of effecting the conversion of the Series A Preferred Shares, such number of
shares of Common Stock equal to or greater than 200% of the number of shares of
Common Stock for which are issuable upon conversion of all of the Series A
Preferred Shares which could be issued at any time under this Agreement or the
Series A Preferred Shares.
g. The Irrevocable Transfer Agent Instructions, in form and substance
satisfactory to the Buyer(s), shall have been delivered to and acknowledged in
writing by the Company's transfer agent.
8. INDEMNIFICATION.
----------------
a. In consideration of the Buyer(s) execution and delivery of this
Agreement and acquiring the Series A Preferred Shares and the Conversion Shares
hereunder and in addition to all of the Company's other obligations under this
Agreement, the Company shall defend, protect, indemnify and hold harmless the
Buyer(s) and each other holder of the Series A Preferred Shares and the
Conversion Shares and all of their officers, directors, employees and agents
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "INDEMNITEES")
101
<PAGE>
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorneys' fees and disbursements (the "Indemnified Liabilities"), incurred by
the Indemnitees or any of them as a result of, or arising out of, or relating to
(a) any misrepresentation or breach of any representation or warranty made by
the Company in this Agreement, the Series A Preferred Shares or the Registration
Rights Agreement or any other certificate, instrument or document contemplated
hereby or thereby, (b) any breach of any covenant, agreement or obligation of
the Company contained in this Agreement, the Warrants, the Certificate of
Designations, or the Registration Rights Agreement or any other certificate,
instrument or document contemplated hereby or thereby, or (c) any cause of
action, suit or claim brought or made against such Indemnitee and arising out of
or resulting from the execution, delivery, performance or enforcement of this
Agreement or any other instrument, document or agreement executed pursuant
hereto by any of the Indemnities, any transaction financed or to be financed in
whole or in part, directly or indirectly, with the proceeds of the issuance of
the Series A Preferred Shares or the status of the Buyer(s) or holder of the
Series A Preferred Shares and the Conversion Shares as an investor in the
Company. To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution to
the payment and satisfaction of each of the Indemnified Liabilities, which is
permissible under applicable law.
b. In consideration of the Company's execution and delivery of this
Agreement and issuing the Series A Preferred Shares and the Conversion Shares
hereunder and in addition to all of the Buyer(s) other obligations under this
Agreement, the Buyer(s) shall defend, protect, indemnify and hold harmless the
Company all of their officers, directors, employees and agents (including,
without limitation, those retained in connection with the transactions
contemplated by this Agreement) (collectively, the "INDEMNITEES") from and
against any and all actions, causes of action, suits, claims, losses, costs,
penalties, fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Indemnitee is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys' fees
and disbursements (the "INDEMNIFIED LIABILITIES"), incurred by the Indemnitees
or any of them as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Buyer(s) in this Agreement, the Series A Preferred Shares or the Registration
Rights Agreement or any other certificate, instrument or document contemplated
hereby or thereby, (b) any breach of any covenant, agreement or obligation of
the Buyer(s) contained in this Agreement, the Warrants, the Certificate of
Designations, or the Registration Rights Agreement or any other certificate,
instrument or document contemplated hereby or thereby, or (c) any cause of
action, suit or claim brought or made against such Indemnitee and arising out of
or resulting from the execution, delivery, performance or enforcement of this
Agreement or any other instrument, document or agreement executed pursuant
hereto by any of the Indemnities, any transaction financed or to be financed in
whole or in part, directly or indirectly, with the proceeds of the issuance of
the Series A Preferred Shares or the status of the Company. To the extent that
the foregoing undertaking by the Buyer(s) may be unenforceable for any reason,
the Buyer(s) shall make the maximum contribution to the payment and satisfaction
of each of the Indemnified Liabilities, which is permissible under applicable
law.
102
<PAGE>
9. GOVERNING LAW: MISCELLANEOUS.
-------------------------------
a. Governing Law. This Agreement shall be governed by and interpreted in
---------------
accordance with the laws of the State of New York without regard to the
principles of conflict of laws. Accordingly, upon such breach, Buyer(s), at
their election and without limitation of its other remedies, shall be entitled
to pursue a claim for specific performance of this Agreement, and Company hereby
waives the right to assert any defense thereto that Purchaser has an adequate
remedy at law. Each of the parties consents to the jurisdiction of the federal
courts whose districts encompass any part of the City of New York or the state
courts of the State of New York a sitting in the City of New York in connection
with any dispute arising under this Agreement and hereby waives, to the maximum
extent permitted by law, any objection, including any objection based on forum
non conveniens, to bring any of such proceeding in such jurisdictions.
b. Counterparts. This Agreement may be executed in two or more identical
-------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party. In the event any signature page is delivered by
facsimile transmission, the party using such means of delivery shall cause four
(4) additional original executed signature pages to be physically delivered to
the other party within five (5) days of the execution and delivery hereof
c. Headings. The headings of this Agreement are for convenience of
--------
reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. Severability.If any provision of this Agreement shall be invalid or
-------------
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
e. Entire Agreement, Amendments, This Agreement supersedes all other prior
-----------------------------
oral or written agreements between the Buyer(s), the Company, their affiliates
and persons acting on their behalf with respect to the matters discussed herein,
and this Agreement and the instruments referenced herein contain the entire
understanding of the parties with respect to the matters covered herein and
therein and, except as specifically set forth herein or therein, neither the
Company nor any Buyer(s) make any representation, warranty, covenant or
undertaking with respect to such matters. No provision of this Agreement may be
waived or amended other than by an instrument in writing signed by the party to
be charged with enforcement.
f. Notices.Any notices, consents, waivers, or other communications required
--------
or permitted to be given under the terms of this Agreement must be in writing
and will be deemed to have been delivered (i) upon receipt, when delivered
103
<PAGE>
personally; (ii) upon receipt, when sent by facsimile, provided a copy is mailed
by U.S. certified mail, return receipt requested; (iii) three (3) days after
being sent by U.S. certified mail, return receipt requested, or (iv) one (1) day
after deposit with a nationally recognized overnight delivery service, in each
case properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:
If to the Company:
300 Orchard City Drive
Campbell, California 95008
Attn: Jack Marshall, President
Telephone: (415) 777-2180
Facsimile: (415) 777-2055
With copy to Company Counsel
Cathy Gawne, Esq.
Silicone Valley Law Group
152 North 3rd Street
San Jose, California 9122
If to the Transfer Agent:
Attn:
Telephone: ( )
Facsimile: ( )
If to the Buyer(s), to its address and facsimile number on the Schedule of
Buyers, with copies to the Buyer(s) counsel as set forth on the Schedule of
Buyers. Each party shall provide five (5) days' prior written notice to the
other party of any change in address or facsimile number.
g. Successors and Assigns.This Agreement shall be binding upon and inure to
-----------------------
the benefit of the parties and their respective successors and assigns. The
Company shall not assign this Agreement or any rights or obligations hereunder
without the prior written consent of the Buyer(s), if there are more than two
(2) Buyers the Company shall attain the written consent of those buyer(s) which
posses 2/3 of the outstanding shares. The Buyer(s) may assign their rights
hereunder without the consent of the Company, provided, however, that any such
assignment shall not release the Buyer(s) from their obligations hereunder
unless such obligations are assumed by such assignee and the Company has
consented to such assignment and assumption.
104
<PAGE>
h. No Third Party Beneficiaries.This Agreement is intended for the benefit
-----------------------------
of the parties hereto and their respective permitted successors and assign, and
is not for the benefit of, nor may any provision hereof be enforced by, any
other person.
i. Survival.Unless this Agreement is terminated under Section 9(i), the
---------
representations and warranties of the Company and the Buyer(s) contained in
Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and 9,
the indemnification provisions set forth in Section 8, shall survive for 1 year
after the Closing. The Buyer(s) shall be responsible only for its own
representations, warranties, agreements and covenants hereunder.
j. Publicity.The Company and the Buyer(s) shall have the right to approve
----------
before issuance any press releases or any other public statements with respect
to the transactions contemplated hereby, however if a disapproval is not issued
within one business day it will be assumed that the press release is approved;
provided, however, that the Company shall be entitled, without the prior
approval of the Buyer(s), to make any press release or other public disclosure
with respect to such transactions as is required by applicable law and
regulations (although the Buyer(s) shall be consulted by the Company in
connection with any such press release or other public disclosure prior to its
release and shall be provided with a copy thereof).
k. Further Assurances.Each party shall do and perform, or cause to be done
-------------------
and performed, all such further acts and things, and shall execute and deliver
all such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
1. Termination.In the event that the Closing shall not have occurred with
------------
respect to the Buyer(s) on or before five (5) business days from the date hereof
due to the Company's or the Buyer(s) failure to satisfy the conditions set forth
in Sections 6 and 7
above (and the non-breaching party's failure to waive such unsatisfied
condition(s)), the non-breaching party shall have the option to terminate this
Agreement with respect to such breaching party at the close of business on such
date without liability of any party to any other party- provided, however, that
if this Agreement is terminated pursuant to this Section 9(i), the Company shall
remain obligated to reimburse the Buyer(s) for the expenses described in Section
4(h) above.
m. Finder.The Company acknowledges that it has engaged The May Davis Group,
-------
Inc. as a placement agent in connection with the sale of the Series A Preferred
Shares. The Company shall be responsible for the payment of any placement agent
fees relating to or arising out of the transactions contemplated hereby.
n. No Strict Construction.The language used in this Agreement will be
-------------------------
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any party.
105
<PAGE>
IN WITNESS WHEREOF, the Buyer and the Company have caused this Securities
Purchase Agreement to be duly executed as of the date first written above.
"COMPANY"
PHOTOLOFT.COM
By:
Name: Jack Marshall
Its: President
"BUYER(S)"
By:
Name:
Title:
By:
Name:
Title:
By:
Name:
Title:
By:
Name:
Title:
106
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF BUYERS
Buyer's Name Address/Facsimile Number Number of Series A
of Buyer Preferred Shares
- ------------------------- ------------------------ ------------------
<S> <C> <C>
Dr. Michael Kesselbrenner 10 Devonshire Road 100,000
Livingston, NJ 07039
- ------------------------- ------------------------ ------------------
John Bolliger 1775 North Elk Road, 10,000
Pocatello ID
- ------------------------- ------------------------ ------------------
Rance Merkel 497 Claude Simmons Road, 50,000
Johnson City, TN 37604
- ------------------------- ------------------------ ------------------
Cranshire Capital 666 Dundee Road, Ste 200,000
By: Mitchel Kopin 1901, Northbrook, IL
60062
- ------------------------- ------------------------ ------------------
Michael Woelfel 401 10th Street 50,000
Suite 502
Huntington, WV 25701
- ------------------------- ------------------------ ------------------
Illinois Holding Co. 1610 5th Avenue 100,000
By: Daniel Churchill Moline, IL 51265
FEIN #36-3046673
- ------------------------- ------------------------ ------------------
Peter Che Nan Chen 34C College Road South 200,000
Sydney, 2066 Australia
- ------------------------- ------------------------ ------------------
Sui Wa Chau 7D Fly Dragon Terr 26-32 30,000
Tinhau Temple Road,
Hong Kong China
- ------------------------- ------------------------ ------------------
Wei Z. Yen 52 Ware Road 30,000
Upper Saddle River, NJ
07458
- ------------------------- ------------------------ ------------------
Shanji Xiong 829 Kristi Ln 10,000
Los Almos, NM 87544
- ------------------------- ------------------------ ------------------
Jeremy Dallow 39 Knutsen Drive 30,000
West Orange, NJ 07052
- ------------------------- ------------------------ ------------------
Steven Angel 340 East 34th Street 5,000
Apt.# 17H
New York, NY 10016
- ------------------------- ------------------------ ------------------
Cheryl Angel 32 Rainbow Ridge Drive 15,000
Livingston, NJ 07039
- ------------------------- ------------------------ ------------------
Allen B. Cohen 41 Christy Drive 50,000
Warren, NJ 07059
- ------------------------- ------------------------ ------------------
David Z. Lu 2321 Bobbyber Drive 20,000
Vienna, VA 22102
- ------------------------- ------------------------ ------------------
107
<PAGE>
Qilu Guan 104-25 hunan Road 50,000
Tiedong Dist Anshan,
China 114004
- ------------------------- ------------------------ ------------------
Jinsheng Yi 14 Lake Avenue Apt 1E 20,000
E. Brunswick, NJ 08816
- ------------------------- ------------------------ ------------------
William R. Evans 30,000
- ------------------------- ------------------------ ------------------
</TABLE>
108
<PAGE>
109
<PAGE>
110
<PAGE>
111
<PAGE>
112
<PAGE>
113
<PAGE>
EXHIBIT 10.27
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of March 3,
2000, by and among Photoloft.Com, a Nevada corporation, with headquarters at 300
Orchard City Drive, Campbell, California 95008 (the Company"), and the
undersigned buyer (the "Buyer").
WHEREAS:
A. In connection with the Securities Purchase Agreement by and among the
parties of even date herewith (the "Securities Purchase Agreement"), the Company
has agreed, upon the terms and subject to the conditions of the Securities
Purchase Agreement, (i) to issue and sell to the Buyer(s) shares of the
Company's Series A Preferred Stock (the "Preferred Stock"), which will be
convertible into shares of the Company's common stock, $.00l par value per share
(the "Common Stock") (as converted, the "Conversion Shares") in accordance with
the terms of the Company's Certificate of Designations, Preferences and Rights
of the stock (the "Certificate of Designations"); and
B. To induce the Buyer(s) to execute and deliver the Securities Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 Act"), and
applicable state securities laws:
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Buyer(s)
hereby agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the following
meanings:
a. "INVESTOR" means the Buyer and any transferee or assignee thereof to
whom the Buyer assigns its fights under this Agreement and who agrees to become
bound by the provisions of this Agreement in accordance with Section 9.
b. "PERSON" means a corporation, a limited liability company, an
association, a partnership, an organization, a business, an individual, a
governmental or political subdivision thereof or a governmental agency.
c. "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration
effected by preparing and filing one or more Registration Statements in
compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any
114
<PAGE>
successor rule providing for offering securities on a continuous basis ("Rule
415"), and the declaration or ordering of effectiveness of such Registration
Statement(s) by the United States Securities and Exchange Commission (the
"SEC").
d. "SECURITIES" means the Conversion Shares issued or issuable upon
conversion of the Preferred Stock and any shares of capital stock issued or
issuable with respect to the Conversion Shares or the Preferred Stock as a
result of any stock split, stock dividend, recapitalization, exchange or similar
event.
e. "REGISTRATION STATEMENT" means a registration statement of the Company
filed under the 1933 Act.
Capitalized terms used herein and not otherwise defined herein shall have
the respective meanings set for-the in the Securities Purchase Agreement.
2. REGISTRATION.
-------------
a. Mandatory Registration.The Company shall prepare and file with the SEC a
-----------------------
Registration Statement or Registration Statements (as is necessary) on Form S-1,
or SB-2, no later than 60 days from the Closing (or, if such forms are
unavailable for such a registration, on such other form as is available for such
a registration, subject to the consent of each Buyer and the provisions of
Section 2(c), which consent will not be unreasonably withheld), covering the
resale of all of the Registrable Securities, which Registration Statement(s)
shall state that, in accordance with Rule 416 promulgated under the 1933 Act,
such Registration Statement(s) also covers such indeterminate number of
additional shares of Common Stock as may become issuable to prevent dilution
resulting from stock splits, stock dividends or similar transactions.
Such Registration Statement shall initially register for resale at least
665,000 shares of Common Stock, subject to adjustment as provided in Section 3
(b), and such registered shares of Common Stock shall be allocated among the
Investors pro rata based on the total number of Registrable Securities issued or
issuable as of each date that a Registration Statement, as amended, relating to
the resale of the Registrable Securities is declared effective by the SEC. The
Company shall use its best efforts to have the Registration Statement declared
effective by the SEC within one hundred and twenty (120) days following THE
CLOSING DATE OR DAY OF FILING THE ISSUANCE DATE ( the "REGISTRATION DEADLINE" ).
The Company shall permit the registration statement to become effective within
five (5) business days after receipt of a "NO REVIEW" notice from the SEC. In
the event that the Registration Statement is not filed by the Company with the
SEC by the Filing Deadline the Company will pay as liquidated damages ( the
"LIQUIDATED DAMAGES") to the Buyer(s) a cash amount within three (3) business
days of the end of the month equal two percent (2%) per month of the
Liquidation Value of the Series A Preferred Shares outstanding as Liquidated
Damages. (For example, if the Registration Statement becomes effective one (l)
month after the Scheduled Effective Date, the Company will pay in cash to the
Buyer(s) Twenty Five Thousand ($25,000) dollars in Liquidated Damages per month
for every month the Registration Statement is not declared effective by the SEC
(2.0% of 1,250,000).
115
<PAGE>
b. Underwritten Offering.If any offering pursuant to a Registration
-----------------------
Statement pursuant to Section 2(a) involves an underwritten offering, the
Buyer(s) shall have the right to select one legal counsel and an investment
banker or bankers and manager or managers to administer their interest in the
offering, which investment banker or bankers or manager or managers shall be
reasonably satisfactory to the Company.
c. Piggy-Back Registrations. If at any time prior to the expiration of the
------------------------
Registration Period (as hereinafter defined) the Company proposes to file with
the SEC a Registration Statement relating to an offering for its own account or
the account of others under the I933 Act of any of its securities (other than on
Form S-4 or Form S-8 or their then equivalents relating to securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans) the Company shall promptly send to each Investor who is entitled
to registration rights under this Section 2(c) written notice of the Company's
intention to file a Registration Statement and of such Investor's rights under
this Section 2(c) and, if within twenty (20) days after receipt of such notice,
such Investor shall so request in writing, the Company shall include in such
Registration Statement all or any part of the Registrable Securities such
investor requests to be registered, subject to the priorities set forth in
Section 2(d) below. No right to registration of Registrable Securities under
this Section 2(c) shall be construed to limit any registration required under
Section 2(a). The obligations of the Company under this Section 2(c) may be
waived by Investors holding a majority of the Registrable Securities. If an
offering in connection with which an Investor is entitled to registration under
this Section 2(c) is an underwritten offering, then each Investor whose
Registrable Securities are included in such Registration Statement shall, unless
otherwise agreed by the Company, offer and sell such Registrable Securities in
an underwritten offering using the same underwriter or underwriters and, subject
to the provisions of this Agreement, on the same terms and conditions as other
shares of Common Stock included in such underwritten offering.
d. Priority in PiggyBack Registration Rights in connection with
-------------------------------------------------------------------
Registrations or Company Account.If the registration referred to in Section 2(c)
- ---------------------------------
is to be an underwritten public offering for the account of the Company and the
managing underwriter(s) advise the Company in writing, that in their reasonable
good Faith opinion, marketing or other factors dictate that a limitation on the
number of shares of Common Stock which may be included in the Registration
Statement is necessary to facilitate and not adversely affect the proposed
offering, then the Company shall include in such registration: (1) first, all
securities the Company proposes to sell for its own account, (2) second, up to
the full number of securities proposed to be registered for the account of the
holders of securities entitled to inclusion of their securities in the
Registration Statement by reason of demand registration rights, and (3) third,
the securities requested to be registered by the Investors and other holders of
securities entitled to participate in the registration, drawn from them pro rata
based on the number each has requested to be included in such registration.
116
<PAGE>
e. Non-eligibility for Form S-3.The Company is not eligible for the use of
-----------------------------
Form S-3. Therefore (i) the Company, with the consent of each Investor pursuant
to Section 2(a), shall register the sale of the Registrable Securities on all
other appropriate form, such as Form S-1 or Form SB-2 and (ii) the Company shall
undertake to register the Registrable Securities on Form S-3 as soon as such
form is available.
3. RELATED OBLIGATIONS.
---------------------
Whenever an Investor(s) has requested that any Registrable Securities be
registered pursuant to Section 2(c) or at such time as the Company is obligated
to file a Registration Statement with the SEC pursuant to Section 2(a), the
Company will use its best efforts to effect the registration of the Registrable
Securities in accordance with the intended method of disposition thereof and,
pursuant thereto, the Company shall have the following obligations:
a. The Company shall promptly prepare and file with the SEC a Registration
Statement with respect to the Registrable Securities (on or prior to the
sixtieth (60th ) day following the Issuance Date, for the registration of
Registrable Securities pursuant to Section 2(a)) and use its best efforts to
cause such Registration Statement(s) relating to Registrable Securities to
become effective as soon as possible after such filing (by the one hundred and
twentieth (120th) day following the Issuance Date in the case of a Registration
Statement filed with the SEC on Form S-1 or SB-2, pursuant to Section 2(a)), and
keep the Registration Statement(s) effective pursuant to Rule 415 at all times
until the earlier of (i) the date as of which the Investors may sell all of the
Registrable Securities without restriction pursuant to Rule 144(k) promulgated
under the 1933 Act (or successor thereto) or (ii) the date on which (A) the
Investors shall have sold all the Registrable Securities and (B) none of the
Preferred Stock or Warrants is outstanding (the "Registration Period"), which
Registration Statement(s) (including any amendments or supplements thereto and
prospectuses contained therein) shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein, or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to the Registration
Statement(s) and the prospectus(es) used in connection with tile Registration
Statement(s), which prospectus(es) are to be filed pursuant to Rule 424
promulgated under the 1933 Act, as may be necessary to keep the Registration
Statement(s) effective at ail times during the Registration Period, and, during
such period, comply with the provisions of the 1933 Act
with respect to the disposition of all Registrable Securities of the Company
covered by the Registration Statement(s) until such time as all of such
Registrable Securities shall have been disposed of in accordance wish the
intended methods of disposition by the seller or sellers thereof as set forth in
the Registration Statement(s). In the event the number of shares available under
a Registration Statement filed pursuant to this Agreement is insufficient to
cover all of the Registrable Securities, the Company shall amend the
Registration Statement, or file a new Registration Statement (on the short form
117
<PAGE>
available therefore, if applicable), or both, so as to cover all of the
Registrable Securities, in each case, as soon as practicable, but in any event
within fifteen (15) days after the necessity therefore arises (based on the
market price of the Common Stock and other relevant factors on which the Company
reasonably elects to rely). The Company shall use its best efforts to cause such
amendment and/or new Registration Statement to become effective as soon as
practicable following the filing thereof. For purposes of the foregoing
provision, the number of shares available under a Registration Statement shall
be deemed "insufficient to cover all of the Registrable Securities" if at any
time the number of Registrable Securities issued or issuable upon conversion of
the Preferred Stock is greater than the quotient determined by dividing (i) the
number of shares of Common Stock available for resale under such Registration
Statement by (ii) 2.0; provided that in the case of the initial registration of
the Registrable Securities pursuant to Section 2(a), the Company shall be
required to register solely for the purpose of effecting the conversion of the
Series A Preferred Shares such number of shares of Common Stock equal to or
greater than 200% of the number of shares of Common Stock for which are issuable
upon conversion of all of the then outstanding Series A Preferred Shares which
are then outstanding or which could be issued at any time under this Agreement
or the Series A Preferred Shares.
c. The Company shall furnish to each Investor whose Registrable Securities
are included in the Registration Statement(s) and its legal counsel without
charge (i) promptly after the same is prepared and filed with the SEC at least
one copy of the Registration Statement and any amendment thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits, the prospectus(es) included it such Registration
Statement(s) (including each preliminary prospectus ) and, with regards to the
Registration Statement, any correspondence by or on behalf of the Company to the
SEC or the staff of the SEC and any correspondence from the SEC or the staff of
the SEC to the Company or its representatives, (ii) upon the effectiveness of
any Registration Statement, ten (10) copies of the prospectus included in such
Registration Statement and all amendments and supplements thereto (or such other
number of copies as such investor may reasonably request) and (iii) such other
documents, including any preliminary prospectus, as such Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investor.
d. The Company shall use reasonable efforts to (i) register and qualify the
Registrable Securities covered by the Registration Statement(s) under such other
securities or "BLUE SKY" laws of such jurisdictions in the United States as any
Investor reasonably requests, (ii) prepare and file in those jurisdictions, such
amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain the
effectiveness thereof during the Registration Period, (iii) take such other
actions as may be necessary to maintain such registrations and qualifications in
effect at all times during the Registration Period, and (iv) take all other
actions reasonably necessary or advisable to quality the Registrable Securities
for sale in such jurisdictions; provided, however, that the Company shall not be
required in connection therewith or as a condition thereto to (a) qualify to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this Section 3(d), (b) subject itself to general taxation in any such
jurisdiction, or (c) file a general consent to service of process in any such
118
<PAGE>
jurisdiction. The Company shall promptly notify each Investor who holds
Registrable Securities of the receipt by the Company of any notification with
respect to the suspension of the registration or qualification of any of the
Registrable Securities for sale under the securities or "blue sky" laws of any
jurisdiction in the United States or its receipt of actual notice of the
initiation or threatening of any proceeding for such purpose.
e. in the event investors who hold a majority of the Registrable Securities
being offered in the offering select underwriters for the offering, the Company
shall enter into and perform its obligations under art underwriting agreement,
in usual and customary form, including, without limitation, customary
indemnification and contribution obligations, with the underwriters of such
offering.
f. As promptly as practicable after becoming aware of such event, the
Company shall notify each Investor in writing of the happening of any event, of
which the Company has knowledge, as a result of which the prospectus included in
a Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and promptly prepare a supplement or
amendment to the Registration Statement to correct such untrue statement or
omission, and deliver ten (10) copies of such supplement or amendment to each
Investor (or such other number of copies as such Investor may reasonably
request). The Company shall also promptly notify each Investor in writing (i)
when a prospectus or any prospectus supplement or post-effective amendment has
been filed, and when a Registration Statement or any post-effective amendment
has become effective (notification of such effectiveness shall be delivered to
each Investor by facsimile on the same day of such effectiveness and by
overnight mail) (ii) of any request by the SEC for amendments or supplements to
a Registration Statement or related prospectus or related information, (iii) of
the Company's reasonable determination that a post-effective amendment to a
Registration Statement would be appropriate.
g. The Company shall use its best efforts to prevent the issuance of any
stop order or other suspension of effectiveness of a Registration Statement, or
the suspension of the qualification of any of the Registrable Securities for
sale in any jurisdiction and, if such an order or suspension is issued, to
obtain the withdrawal of such order or suspension at the earliest possible
moment and to notify each Investor who holds Registrable Securities being sold
(and, in the event of an underwritten offering, the managing underwriters) of
the issuance of such order and the resolution thereof or its receipt of actual
notice of the initiation or threat of any proceeding for such purpose.
h. The Company shall permit each Investor a single firm of counsel or such
other counsel as thereafter designated as selling stockholders' counsel by the
Investors who hold a majority of the Registrable Securities being sold, to
review and comment upon the Registration Statement(s) and all amendments and
supplements thereto at least seven (7) days prior to their filing with the SEC,
and not file any document in a form to which such counsel reasonably objects.
The Company shall not submit a request for acceleration of the effectiveness of
119
<PAGE>
a Registration Statement(s) or any amendment or supplement thereto without the
prior approval of such counsel, which consent shall not be unreasonably
withheld.
i. At the request of the Investor(s) who hold a majority of the Registrable
Securities being sold, the Company shall furnish, on the date that Registrable
Securities are delivered to an underwriter, if any, for sale in connection with
the Registration Statement (i) if required by an underwriter, a letter, dated
such date, from the Company's independent certified public accountants in form
and substance as is customarily given by independent certified public
accountants to underwriters in an underwrite, eh public offering, addressed to
the underwriters, and (ii) an opinion, dated as of such date, of counsel
representing the Company for purposes of such Registration Statement, in form,
scope and substance as is customarily given in an underwritten public offering,
addressed to the underwriters and the Investor(s).
j. The Company shall make available for inspection by (i) any Investor,
(ii) any underwriter participating in any disposition pursuant to a Registration
Statement, (iii) one firm of attorneys and one firm of accountants or other
agents retained by the Investors, and (iv) one firm of attorneys retained by all
such underwriters (collectively, the "INSPECTORS") all pertinent financial and
other records, and pertinent corporate documents and properties of the Company
(collectively, the "RECORDS"), as shall be reasonably deemed necessary by each
Inspector to enable each Inspector to exercise its due diligence responsibility,
and cause the Company's officers, directors and employees to supply all
information which any Inspector may reasonably request for purposes of such due
diligence provided, however, that each Inspector shall hold in strict confidence
and shall not make any disclosure (except to an Investor) or use of any Record
or other information which the Company determines in good faith to be
confidential, and of which determination the Inspectors are so notified, unless
(a) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in any Registration Statement or is otherwise required
under the 1933 Act, (b) the release of such Records is ordered pursuant to a
final, non-appealable subpoena or order from a court or government body of
competent jurisdiction, or (c) the information in such Records has been made
generally available to the public other than by disclosure in violation of this
or any other agreement. Each Investor agrees that it shall, upon learning that
disclosure of such Records is sought in or by a court or governmental body of
competent jurisdiction or through other means, give prompt notice to the Company
and allow the Company, at its expense, to undertake appropriate action to
prevent disclosure of, or to obtain a protective order for, the Records deemed
confidential.
k. The Company shall hold in confidence and not make any disclosure of
information concerning an Investor provided to the Company unless (i) disclosure
of such information is necessary to comply with federal or state securities
laws, (ii) the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this or any other agreement. The
120
<PAGE>
Company agrees that it shall, upon learning that disclosure of such information
concerning an Investor is sought in or by a court or governmental body of
competent jurisdiction or through other means, give prompt written notice to
such Investor and allow such investor, at the Investor's expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.
1. The Company shall use its best efforts either to (i) cause all the
Registrable Securities covered by a Registration Statement to be listed on each
national securities exchange on which securities of the same class or series
issued by the Company are then listed, if any, if the listing of such
Registrable Securities is then permitted under the rules of such exchange, (ii)
to secure designation and quotation of ail the Registrable Securities covered by
the Registration Statement on the Nasdaq National Market System, (iii) if,
despite the Company's best efforts to satisfy the preceding clause (i) or (ii),
the Company is unsuccessful in satisfying the preceding clause (i) or (ii) to
secure the inclusion for quotation on the Bulletin for such Registrable
Securities or, (iv) if, despite the Company's best efforts to satisfy the
preceding clause (iii), the Company is unsuccessful in satisfying the preceding
clause (iii), to secure the inclusion for quotation on the over-the-counter
market for such Registrable Securities, and, without limiting the generality of
the foregoing, in the case of clause (iii) or (iv), to arrange for at least two
market makers to register with the National Association of Securities Dealers,
Inc. ("NASD") as such with respect to such Registrable Securities. The Company
shall pay all fees and expenses in connection with satisfying its obligation
under this Section 3(i).
m. The Company shall cooperate with the Investors who hold Registrable
Securities being offered and, to the extent applicable, any managing underwriter
or underwriters, to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legend) representing the Registrable
Securities to be offered pursuant to a Registration Statement and enable such
certificates to be in such denominations or amounts, as the case may be, as the
managing underwriter or underwriters, if any, or, if there is no managing
underwriter or underwriters, the Investors may reasonably request and registered
in such names as the managing underwriter or underwriters, if any, or the
Investors may request. Not later than the date on which any Registration
Statement registering the resale of Registrable Securities is declared
effective, the Company shall deliver to its transfer agent instructions,
accompanied by any reasonably required opinion of counsel, that permits sales
of unlegended securities in a timely fashion that complies with then mandated
securities settlement procedures for regular way market transactions.
n. The Company shall take all other reasonable actions necessary to
expedite and facilitate disposition by the Investors of Registrable Securities
pursuant to a Registration Statement.
o. The Company shall provide a transfer agent and registrar of all such
Registrable Securities not later than the effective date of such Registration
Statement.
p. If requested by the managing underwriters or an Investor, the Company
shall immediately incorporate in a prospectus supplement or post-effective
121
<PAGE>
amendment such information as the managing underwriters and the Investors agree
should be included therein relating to the sale and distribution of Registrable
Securities, including, without limitation, information with respect to the
number of Registrable Securities being sold to such underwriters, the purchase
price being paid therefore by such underwriters and with respect to any other
terms of the underwritten (or best efforts underwritten) offering of the
Registrable Securities to be sold in such offering; make all required filings of
such prospectus supplement or post-effective amendment as soon as notified of
the matters to be incorporated in such prospectus supplement or post-effective
amendment; and supplement or make amendments to any Registration Statement if
requested by a shareholder or any underwriter of such Registrable Securities.
q. The Company shall use its best efforts to cause the Registrable
Securities covered by the applicable Registration Statement to be registered
with or approved by such other governmental agencies or authorities as may be
necessary to consummate the disposition of such Registrable Securities.
r. The Company shall otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC in connection with any registration
hereunder.
4. OBLIGATIONS OF THE INVESTOR(S).
----------------------------------
a. At least seven (7) days prior to the first anticipated filing date of
the Registration Statement, the Company shall notify each Investor in writing of
the information the Company requires from each such Investor if such Investor
elects to have any of such Investor's Registrable Securities included in the
Registration Statement. It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this Agreement with respect
to the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request.
b. Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement(s) hereunder, unless such Investor has notified the Company in writing
of such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement.
c. In the event Investor(s) holding a majority of the Registrable
Securities being registered determine to engage the services of an underwriter,
each Investor agrees to enter into mid perform such Investor's 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 and take such other actions as are
reasonably required in order to expedite or facilitate the disposition of the
Registrable Securities, unless such Investor notifies the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement(s).
122
<PAGE>
d. Each Investor agrees that, upon receipt of any notice from the Company
of the happening of any event of the kind described in Section 3(g) or the first
sentence of 3(f), such Investor will immediately discontinue disposition of
Registrable Securities pursuant to the Registration Statement(s) covering such
Registrable Securities until such Investor's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(g) or the first
sentence of 3(f) and, if so directed by the Company, such Investor shall deliver
to the Company (at the expense of the Company) or destroy all copies in such
Investor's possession, of the prospectus covering such Registrable Securities
current at the time of receipt of such notice.
e. No Investor may participate in any underwritten registration hereunder
unless such Investor (i) agrees to sell such Investor's Registrable Securities
on the basis provided in any underwriting arrangements approved by the Investors
entitled hereunder to approve such arrangements, (ii) completes and executes ail
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements, and (iii) agrees to pay its pro rata share of all underwriting
discounts and commissions.
5. EXPENSES OF REGISTRATION.
---------------------------
All reasonable expenses, other than underwriting discounts and commissions,
incurred in connection with registrations, filings or qualifications pursuant to
Sections 2 and 3, including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees, and fees and disbursements of
counsel for the Company shall be borne by the Company.
6. INDEMNIFICATION
---------------
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. To the fullest extent permitted by law, the Company will, and hereby
does, indemnify, hold harmless and defend each Investor who holds such
Registrable Securities, the directors, officers, partners, employees, agents and
each Person, if any, who controls any Investor within the meaning of the 1933
Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), and any
underwriter (as defined in the 1933 Act) for the Investors, and the directors
and officers of, and each Person, if any, who controls, any such underwriter
within the meaning of the 1933 Act or the 1934 Act (each, an "Indemnified
Person"), against any losses, claims, damages, liabilities, judgments, fines,
penalties, charges, costs, attorneys' fees, amounts paid in settlement or
expenses, joint or several, (collectively, "Claims") incurred in investigating,
preparing or defending any action, claim, suit, inquiry, proceeding,
investigation or appeal taken from the foregoing by or before any court or
governmental, administrative or other regulatory agency, body or the SEC,
whether pending or threatened, whether or not an indemnified party is or may be
123
<PAGE>
a party thereto "Indemnified Damages"), to which any of them may become subject
insofar as such Claims (or actions or proceedings, whether commenced or
threatened, in respect thereof arise out of or are based upon: (i) any untrue
statement or alleged untrue statement of a material fact in a Registration
Statement or any post-effective amendment thereto or in any filing made in
connection with the qualification of the offering under the securities or other
"blue sky" laws of any jurisdiction in which Registrable Securities are offered
("Blue Sky Filing"), or the omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which the statements therein were made, not
misleading, (ii) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus if used. prior to the effective
date of such Registration Statement, or contained in the final prospectus (as
amended or supplemented, if the Company files any amendment thereof or
supplement thereto with the SEC) or the omission or alleged omission to state
therein any material fact necessary to make the statements made therein, in
light of the circumstances under which the statements therein were made, not
misleading, or (iii) any violation or alleged violation by the Company of the
1933 Act, the 1934 Act, any other law, including, without limitation, any state
securities law, or any rule or regulation thereunder relating to the offer or
sale of the Registrable Securities pursuant to a Registration Statement (the
matters in the foregoing clauses (i) through (iii) being, collectively,
"Violations"), Subject to the restrictions set forth in Section 6(d) with
respect to the number of legal counsel, the Company shall reimburse the
Investors and each such underwriter or controlling person, promptly as such
expenses are incurred and are due and payable, for any legal fees or other
reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(a): (i) shall
not apply to a Claim arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company by any Indemnified Person or underwriter for such Indemnified Person
expressly for use in connection with the preparation of the Registration
Statement or any such amendment thereof or supplement thereto, if such
prospectus was timely made available by the Company pursuant to Section 3(c);
(ii) with respect to any preliminary prospectus, shall not inure to the
benefit of any such person from whom the person asserting any such Claim
purchased the Registrable Securities that are the subject thereof (or to the
benefit of any person controlling such person) if the untrue statement or
mission of material fact contained in the preliminary prospectus was corrected
in the prospectus, as then amended or supplemented, if such prospectus was
timely made available by the Company pursuant to Section 3(c), and the
Indemnified Person was promptly advised in writing not to use the incorrect
prospectus prior to the use giving rise to a violation and such Indemnified
Person, notwithstanding such advice, used it; (iii) shall not be available to
the extent such Claim is based on a failure of the Investor to deliver or to
cause to be delivered the prospectus made available by the Company (i) and (iv)
shall not apply to amounts paid in settlement of any Claim if such settlement is
effected without the prior written consent of the Company, which consent shall
not be unreasonably withheld. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of the Indemnified
Person and shall survive the transfer of the Registrable Securities by the
Investors pursuant to Section 9.
124
<PAGE>
b. In connection with any Registration Statement in which an Investor is
participating, each such Investor agrees to severally and not jointly indemnify,
hold harmless and defend, to the same extent and in the same manner as is set
forth in Section 6(a), the Company, each of its directors, each of its officers
who signs the Registration Statement, each Person, if any, who controls the
Company within the meaning of the 1933 Act or the 1934 Act (collectively and
together with an Indemnified Person, an "INDEMNIFIED PARTY"), against any Claim
or Indemnified Damages to which any of them may become subject, under the 1933
Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages
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 to the Company by such Investor
expressly for use in connection with such Registration Statement; and, subject
to Section 6(d), such Investor will reimburse any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such Claim; provided, however, that the indemnity agreement contained in this
Section 6(b) and Section 7 shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of such
Investor, which consent shall not be unreasonably withheld; provided, further,
however, that the Investor shall be liable under this Section 6(b) for only that
amount of a Claim or Indemnified Damages as does not exceed the net proceeds to
such Investor as a result of the sale of Registrable Securities pursuant to such
Registration Statement. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Indemnified Party
and shall survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(b) with
respect to any preliminary prospectus shall not inure to the benefit of any
Indemnified Party if the untrue statement or omission of material fact contained
in the preliminary prospectus was corrected on a timely basis in the prospectus,
as then amended or supplemented.
c. The Company shall be entitled to receive indemnities from underwriters,
selling brokers, dealer managers and similar securities industry professionals
participating in any distribution, to the same extent as provided above, with
respect to information such persons so furnished in writing expressly for
inclusion in the Registration Statement.
d. Promptly after receipt by an Indemnified Person or Indemnified Party
under this Section 6 of notice of the commencement of any action or proceeding
(including any governmental action or proceeding) involving a Claim such
indemnified Person or Indemnified Party shall, 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 the 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 indemnifying party and the indemnified Person or
the indemnified Party, as the case may be; provided, however, that an
Indemnified Person or 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 retained by the indemnifying party, the
125
<PAGE>
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. The Company shall
pay reasonable fees for only one separate legal counsel for the Investors, and
such legal counsel shall be selected by the Investors holding a majority in
interest of the Registrable Securities included in the Registration Statement to
which the Claim relates. The Indemnified Party or Indemnified Person shall
cooperate fully with the indemnifying party in connection with any negotiation
or defense of any such action or claim by the indemnifying party and shall
furnish to the indemnifying party all information reasonably available to the
Indemnified Party or Indemnified Person, which relates to such action or claim.
The indemnifying party shall keep the Indemnified Party or Indemnified Person
fully apprised at all times as to the status of the defense or any settlement
negotiations with respect thereto. No indemnifying party shall be liable for any
settlement of any action, claim or proceeding effected without its written
consent, provided, however, that the indemnifying party shall not unreasonably
withhold, delay or condition its consent. No indemnifying party shall, without
the consent of the Indemnified Party or Indemnified Person, consent to entry of
any judgment or enter into any settlement or other compromise which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party or Indemnified Person of a release from ail liability
in respect to such claim or litigation. Following indemnification as provided
for hereunder, the indemnifying party shall be subrogated to all rights of the
Indemnified Party or Indemnified Person with respect to ail third parties, firms
or corporations relating to the matter for which indemnification has been made.
The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the indemnified Person or Indemnified
Party under this Section 6, except to the extent that the indemnifying party is
prejudiced in its ability to defend such action.
e. 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, as and when bills are received or Indemnified Damages are incurred.
f. The indemnity agreements contained herein shall be in addition to (i)
any cause of action or similar right of the Indemnified Party or Indemnified
Person against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.
7. 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 would otherwise be liable under Section
6 to the fullest extent permitted by law; provided, however, that: (i) no
contribution shall be made under circumstances where the maker would not have
been liable for indemnification under the fault standards set forth in Section
6; (ii) no seller of Registrable Securities guilty of fraudulent
126
<PAGE>
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any seller of Registrable Securities who was not
guilty of fraudulent misrepresentation; (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; and (III)
CONTRIBUTION BY THE COMPANY SHALL BE LIMITED AS TO THE PLACEMENT OF THE
SECURITIES.
8. REPORTS UNDER THE 1934 ACT.
-------------------------------
With a view to making available to the Investors the benefits of Rule 144
promulgated under the 1933 Act or any other similar rule or regulation of the
SEC that may at any time permit the investors to sell securities of the Company
to the public without registration ("RULE 144"), the Company agrees to:
a. make and keep public information available, as those terms are
understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other documents
required of the Company under the 1933 Act and the 1934 Act so long as the
Company remains subject to such requirements (it being understood that nothing
herein shall limit the Company's obligations under Section 4(c) of the
Securities Purchase Agreement) and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and
c. furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the 1933 Act and
the 1934 Act, (ii) 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 (iii)
such other information as may be reasonably requested to permit the investors to
sell such securities pursuant to Rule 144 without registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
-------------------------------------
The rights to have the Company register Registrable Securities pursuant to
this Agreement shall be automatically assignable by the Investor(s) to any
transferee of all or any portion of Registrable Securities if: (i) the
Investor(s) agrees in writing with the transferee or assignee to assign such
rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment; (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned;
(iii) immediately following such transfer or assignment the further disposition
of such securities by the transferee or assignee is restricted under the 1933
Act and applicable state securities laws; (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein; (v) such transfer shall have been made in
accordance with the applicable requirements of the Securities Purchase
127
<PAGE>
Agreement; (vi) such transferee shall be an "accredited investor" as that term
is defined in Rule 501 of Regulation D promulgated under the 1933 Act; and (vii)
in the event the assignment occurs subsequent to the date of effectiveness of
the Registration Statement required to be filed pursuant to Section 2(a), the
transferee agrees to pay all reasonable expenses of amending or supplementing
such Registration Statement to reflect such assignment.
10. AMENDMENT OF REGISTRATION RIGHTS.
-------------------------------------
Provisions of this Agreement may be amended and the observance thereof may
be waived (either generally or in a particular instance and either retroactively
or prospectively), only with the written consent of the Company and Investors
who hold two-thirds of the Registrable Securities. Any amendment or waiver
effected in accordance with this Section 10 shall be binding upon each Investor
and the Company.
11. MISCELLANEOUS.
---------------
a. A person or entity is deemed to be a holder of Registrable Securities
whenever such person or entity owns of record such Registrable Securities. If
the Company receives conflicting instructions, notices or elections from two or
more persons or entities with respect to the same Registrable Securities, the
Company shall act upon the basis of instructions, notice or election received
from the registered owner of such Registrable Securities.
b. Any notices consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile, provided a copy is mailed
by U.S. certified mail, return receipt requested; (iii) three (3) days after
being sent by U.S. certified mail, return receipt requested, or (d) one (1) day
after deposit with a nationally recognized overnight delivery, service, in each
case properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:
If to the Company:
Photoloft.Com Group.
300 Orchard City Drive
Campbell, California 95008
Facsimile: (408) 364-8778
With Copy to Company Counsel:
Cathy Gawne, Esq.
Silicone Valley Law Group
152 North 3rd Street
Suite 90
San Jose, California 95112
128
<PAGE>
If to a Buyer, to its address and facsimile number on the Schedule of
Buyers, with copies to such Buyer's counsel as set forth on the Schedule of
Buyers. Each party shall provide five (5) days' prior written notice to the
other party of any change in address or facsimile number.
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
d. This Agreement shall be governed by and interpreted in accordance with
the laws of the State of New York without regard to the principles of conflict
of laws. If any provision of this Agreement shall be invalid or unenforceable in
any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
e. This Agreement and the Securities Purchase Agreement constitute the
entire agreement among the parties hereto with respect to the subject matter
hereof and thereof. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein and therein. This
Agreement and the Securities Purchase Agreement supersede all prior agreements
and understandings among the parties hereto with respect to the subject matter
hereof and thereof.
f. Subject to the requirements of Section 9, this Agreement shall inure to
the benefit and of and be binding upon the permitted successors and assigns of
each of the parties hereto.
g. The headings in this Agreement are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more identical counterparts,
each of which shall be deemed an original but all of which shall constitute one
and the same agreement. This Agreement, once executed by a party, may be
delivered to the other party hereto by facsimile transmission of a copy of this
Agreement bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and performed,
all such further acts and things, and shall execute and deliver all such
other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
[REMAINDER OF PAGE INTENTIONALL LEFT BLANK]
129
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of day and year first above written.
COMPANY: BUYERS:
- -------- -------
PHOTOLOFT.COM
By: By:
Name: Jack Marshall Name: Its:
President Its:
130
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF BUYERS
Buyer's Name Address/Facsimile Number
of Buyer
- ------------------------- ------------------------
<S> <C>
Dr. Michael Kesselbrenner 10 Devonshire Road
Livingston, NJ 07039
- ------------------------- ------------------------
John Bolliger 1775 North Elk Road,
Pocatello ID
- ------------------------- ------------------------
Rance Merkel 497 Claude Simmons Road,
Johnson City, TN 37604
- ------------------------- ------------------------
Cranshire Capital 666 Dundee Road, Ste
By: Mitchel Kopin 1901, Northbrook, IL
60062
- ------------------------- ------------------------
Michael Woelfel 401 10th Street
Suite 502
Huntington, WV 25701
- ------------------------- ------------------------
Illinois Holding Co. 1610 5th Avenue
By: Daniel Churchill Moline, IL 51265
FEIN #36-3046673
- ------------------------- ------------------------
Peter Che Nan Chen 34C College Road South
Sydney, 2066 Australia
- ------------------------- ------------------------
Sui Wa Chau 7D Fly Dragon Terr 26-32
Tinhau Temple Road,
Hong Kong China
- ------------------------- ------------------------
Wei Z. Yen 52 Ware Road
Upper Saddle River, NJ
07458
- ------------------------- ------------------------
Shanji Xiong 829 Kristi Ln
Los Almos, NM 87544
- ------------------------- ------------------------
Jeremy Dallow 39 Knutsen Drive
West Orange, NJ 07052
- ------------------------- ------------------------
Steven Angel 340 East 34th Street
Apt.# 17H
New York, NY 10016
- ------------------------- ------------------------
Cheryl Angel 32 Rainbow Ridge Drive
Livingston, NJ 07039
- ------------------------- ------------------------
Allen B. Cohen 41 Christy Drive
Warren, NJ 07059
- ------------------------- ------------------------
David Z. Lu 2321 Bobbyber Drive
Vienna, VA 22102
- ------------------------- ------------------------
131
<PAGE>
Qilu Guan 104-25 hunan Road
Tiedong Dist Anshan,
China 114004
- ------------------------- ------------------------
Jinsheng Yi 14 Lake Avenue Apt 1E
E. Brunswick, NJ 08816
- ------------------------- ------------------------
William R. Evans
- ------------------------- ------------------------
</TABLE>
132
<PAGE>
EXHIBIT 10.28
PLACEMENT AGENCY AGREEMENT
THIS AGREEMENT ("AGREEMENT"), made as of the day of March 3, 2000, by and
between PHOTOLOFT.COM, a Nevada corporation ("COMPANY"), and MAY DAVIS GROUP,
INC., a Maryland corporation (the "AGENT").
WITNESSETH:
WHEREAS, the Company proposes to issue and sell its Series A Preferred
Stock (the "Securities") resulting in gross proceeds to the Company of up to
$1,250,000 (the "OFFERING") not involving a public offering without registration
under the Securities Act of 1933, as amended (the "ACT"), pursuant to exemptions
from the registration requirements of the Act under Regulation D promulgated
under the Act ("REGULATION D"), as described below; and
WHEREAS, the Agent has offered to assist the Company in placing $1,000,000
of the Securities on a "BEST EFFORTS BASIS" with respect to the Securities and
on a "BEST EFFORTS" basis with respect to sales of Securities thereafter up to
the Maximum Securities (as defined below), and the Company desires to secure the
services of the Agent on the terms and conditions hereinafter set forth;
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual promises,
conditions and covenants herein contained, the parties hereto do hereby agree as
follows:
1. Engagement of Agent.The Company hereby appoints the Agent as its
----------------------
exclusive placement agent for the Offering, to sell up to of $1,000,000 of
Securities (the "MAXIMUM SHARES") on a "BEST EFFORTS BASIS," resulting in gross
proceeds to the Company of up to $1,000,000 (the "MAXIMUM AMOUNT"). The Agent,
on the basis of the representations and warranties herein contained, but subject
to the terms and conditions herein set forth, accepts such appointment and
agrees to use its best efforts to find purchasers for the Securities. This
appointment shall be irrevocable for the period commencing as of the date hereof
and ending as further described in Section 5 herein, which period maybe extended
by the consent of the Company and the Agent (the "OFFERING PERIOD").
2. Representations and Warranties of the Company.In order to induce the
-------------------------------------------------
Agent to enter into this Agreement, the Company hereby represents and warrants
to and agrees with the Agent as follows:
2.1 Offering Documents.The Company and the Placement Agent have prepared a
-------------------
Securities Purchase Agreement, certain exhibits thereto and Registration Rights
Agreement, which documents have been or will be sent to proposed investors. In
133
<PAGE>
addition, proposed investors have received or will receive prior to closing
copies of the Company's REGISTRATION STATEMENT ON FORM and possibly other
documents that are to be filed with the SEC ("SEC DOCUMENTS"). The SEC Documents
were prepared in conformity with the requirements (to the extent applicable) of
the Securities and Exchange Act of 1934, as amended (the "ACT") and the rules
and regulations ("RULES AND REGULATIONS") of the Commission promulgated
thereunder. As used in this Agreement, the term "OFFERING DOCUMENTS" refers to
and means the SEC Documents, the Subscription Agreement and all amendments,
exhibits and supplements thereto, together with any other documents which are
provided to the Agent by, or approved for Agent's use by, the Company for the
purpose of this Offering.
2.2 Provision of Offering Documents.The Company shall deliver to the Agent,
--------------------------------
without charge, as many copies of the Offering Documents as the Agent may
reasonably require for the purposes contemplated by this Agreement. The Company
authorizes the Agent, in connection with the Offering of the Securities, to use
the Offering Documents as from time to time amended or supplemented in
connection with the offering and sale of the Securities and in accordance with
the applicable provisions of the Act and Regulation D. The Company consents to
the Agent's distribution of the Offering Documents to prospective subscribers as
a disclosure document about the Company, its business, prospects, financial
condition and other matters.
2.3 Accuracy of Offering Documents.The Offering Documents, at the time of
--------------------------------
delivery to subscribers for the Securities, conformed in all material respects
with the requirements, to the extent applicable, of the Act and the applicable
Rules and Regulations and did not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. On the Closing Date (as hereinafter
defined), the Offering Documents will contain all statements which are required
to be stated therein in accordance with the Act and the Rules and Regulations
for the purposes of the proposed Offering, and all statements of material fact
contained in the Offering memorandum will be true and correct, and the Offering
Documents will not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that the Company does not make any
-------------------
representations or warranties as to the information contained in or omitted from
the Offering Documents in reliance upon written information furnished on behalf
of the Agent specifically for use therein.
2.4 Duty to Amend.If during such period of time as in the opinion of the
----------------
Agent or its counsel any Offering Documents relating to this offering are
required to be delivered under the Act, any event occurs or any event known to
the Company relating to or affecting the Company shall occur as a result of
which the Offering Documents as then amended or supplemented would include an
untrue statement of a material fact, or omit to state any material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or if it is necessary at any time after
the date hereof to amend or supplement the Offering Documents to comply with the
Act or the applicable Rules and Regulations, the Company shall forthwith notify
the Agent thereof and shall prepare such further amendment or supplement to the
134
<PAGE>
Offering Documents as may be required and shall furnish and deliver to the Agent
and to others, whose names and addresses are designated by the Agent, all at the
cost of the Company, a reasonable number of copies of the amendment or
supplement or of the amended or supplemented Offering Documents which, as so
amended or supplemented, will not contain an untrue statement of a material fact
or omit to state any material fact necessary in order to make the Offering
Documents not misleading in the light of the circumstances when it is delivered
to a purchaser or prospective purchaser, and which will comply in all respects
with the requirements (to the extent applicable) of the Act and the applicable
Rules and Regulations.
2.5 Corporation Condition.The Company's condition is as described in its
-----------------------
Offering Documents, except for changes in the ordinary course of business and
normal year-end adjustments that are not in the aggregate materially adverse to
the Company. The Offering Documents, taken as a whole, present fairly the
business and financial position of the Company as of the Closing Date.
2.6 No Material Adverse Change.Except as may be reflected in or
------------------------------
contemplated by the Offering Documents, subsequent to the dates as of which
information is given in the Offering Documents, and prior to the Closing Date,
there shall not have been any material adverse change in the condition,
financial or otherwise, or in the results of operations of the Company or in its
business taken as a whole.
2.7 No Defaults.Except as disclosed in the Offering Documents or in writing
------------
to the Agent, the Company is not in default in any material respect in the
performance of any obligation, agreement or condition contained in any material
debenture, note or other evidence of indebtedness or any material indenture or
loan agreement of the Company. The execution and delivery of this Agreement, and
the consummation of the transactions herein contemplated, and compliance with
the terms of this Agreement will not conflict with or result in a breach of any
of the terms, conditions or provisions of, or constitute a default under, the
Articles of Incorporation or By-Laws of the Company (in any respect that is
material to the Company), any material note, indenture, mortgage, deed of trust,
or other agreement or instrument to which the Company is a party or by which the
Company or any property of the Company is bound, or to the Company's knowledge,
any existing law, order, rule, regulation, writ, injunction or decree of any
government, governmental instrumentality, agency or body, arbitration tribunal
or court, domestic or foreign, having jurisdiction over the Company or any
property of the Company. The consent, approval, authorization or order of any
court or governmental instrumentality, agency or body is not required for the
consummation of the transactions herein contemplated except such as may be
required under the Act or under the Blue Sky or securities taws of any state or
jurisdiction.
2.8 Incorporation and Standing.The Company is, and at the Closing Date will
---------------------------
be, duly formed and validly existing in good standing as a corporation under the
laws of the State of Nevada and with full power and authority (corporate and
other) to own its properties and conduct its business, present and proposed, as
described in the Offering Documents; the Company, has full power and authority
to enter into this Agreement; and the Company is duly qualified and in good
standing as a foreign entity in each jurisdiction in which the failure to so
qualify would have a material adverse effect on the Company or its properties.
135
<PAGE>
2.9 Legality of Outstanding Securities.Prior to the Closing Date, the
--------------------------------------
outstanding securities of the Company have been duly and validly authorized and
issued, fully paid and non-assessable and conform in all material respects to
the statements with regard thereto contained in the Offering Documents.
2.10 Legality of Securities.The Securities, when sold and delivered, will
------------------------
constitute legal, valid and binding obligations of the Company, enforceable in
accordance with the temps thereof, and shall be duly and validly issued and
outstanding, fully paid and nonassessable. The Securities to be delivered at the
Closing shall be duly and validly issued and outstanding, fully paid and
non-assessable.
2.11 Litigation.Except as set forth in the SEC Documents, there is now, and
-----------
at the Closing Date there will be, no action, suit or proceeding before any
court or governmental agency, authority or body pending or, to the knowledge of
the Company, threatened, which might result in judgments against the Company not
adequately covered by insurance or which collectively might result in any
material adverse change in the condition (financial or otherwise) or business of
the Company or which would materially adversely affect the properties or assets
of the Company.
2.12 Finders.The Company does not know of any outstanding claims for
--------
services in the nature of a finder's fee or origination fees with respect to the
sale of the Securities hereunder for which the Agent may be responsible, and the
Company will indemnify the Agent from any liability for such fees by any party
who has a claim for such compensation from the Company and for which person the
Agent is not legally responsible.
2.13 Tax Returns.The Company has filed all federal and state tax returns
-------------
which are required to be filed, and has paid all taxes shown on such returns and
on all assessments received by it to the extent such taxes have become due. All
taxes with respect to which the Company is obligated have been paid or adequate
accruals have been set up to cover any such unpaid taxes.
2.14 Authority.The execution and delivery by the Company of this Agreement
----------
have been duly authorized by all necessary action, and this Agreement is the
valid, binding and legally enforceable obligation of the Company subject to
standard qualifications as to the availability of equitable remedies, the effect
of bankruptcy and other laws relating to the protection of debtors and public
policy opinions promulgated by the Commission with respect to indemnification
against liabilities under the Act.
2.15 Actions by the Company.The Company will not take any action, which
--------------------------
will impair the effectiveness of the transactions contemplated by this
Agreement.
136
<PAGE>
3. ISSUE, SALE AND DELIVERY OF THE SECURITIES.
-------------------------------------------------
3.1 Deliveries of Securities.Certificates in such form that, subject to
---------------------------
applicable transfer restrictions as described in the Subscription Agreement,
they can be negotiated by the purchasers thereof (issued in such denominations
and in such names as the Agent may direct the Company to issue) for the
Securities, and warrants representing the Agent's warrant compensation described
in Section 3.6 below ("WARRANTS"), shall be delivered by the Company to counsel
to the Agent, with copies made available to the Agent for checking at least one
(1) full business day prior to the Closing Date, it being understood that the
directions from the Agent to the Company shall be given at least two (2) full
business days prior to the Closing Date. The certificates for the Securities and
the Warrants shall be delivered at the Closing and at each Subsequent Closing
(as defined hereinafter).
3.2 Escrow of Funds.Pursuant to the Escrow Agreement, a copy of which is
------------------
attached hereto as Exhibit "A" (the "ESCROW AGREEMENT"), executed by the
Company, the Agent and the escrow agent (the "ESCROW AGENT"), the subscribers
shall place all funds for purchase of Securities for each Closing in an escrow
account set up by the Company. The Company shall have the right to approve or
object the subscriptions of each subscriber, as described in the Subscription
Agreement. At such time as subscribers subscribing for the Shares delivered to
the Agent their signed subscription documents, those subscribers have been
approved by the Company and all other Closing conditions have been met, Escrow
Agent shall release the subscription funds to the Company and counsel to the
Agent shall release the certificates representing the Securities to the
subscribers (the "CLOSING"). In the event that the Initial Closing shall be for
an amount of Securities less than the Maximum Amount, the Offering may be
continued, and additional Closings may be held (each a "SUBSEQUENT CLOSING")
throughout the Offering Period.
3.3 Closing Date.The Initial Closing and any Subsequent Closing shall take
-------------
place at the offices of Butler Gonzalez, L.L.P., 1000 Stuyvessant Avenue, Suite
6, Union, New Jersey 07083 at such time and date ("CLOSING DATE") as will be
fixed either orally or in writing by notice to be given by the Agent to the
Company after consultation with the Company, such Closing Date to be not less
than one (1) full business day after the date on which such notice shall have
been given. The Closing Date may be changed by mutual agreement of the Agent and
the Company.
3.4 Agent's Compensation.The Company shall pay the Agent:
----------------------
(a) A commission of seven and one half percent (7 %) of the $1,000,000
proceeds of the Initial Offering and any subsequent Offerings in cash; and
(b) In addition to the fees and reimbursement of costs set forth in
Sections 3.4 and 3.5 of this Agreement, the Company, upon the Agent's placement
of the Maximum Shares of the Securities resulting in Maximum Amount of gross
proceeds to the Company, shall issue to the Agent May Davis Group, Inc. and it's
assignees, warrants to purchase shares of the Company's common stock, in an
amount equal to one hundred and seventy five (175,000) at a price of one
hundred and ten percent (110%) of the Closing Bid Price on the Closing Date. In
137
<PAGE>
the event the Agent is not successful in the placement of the Maximum Shares of
the Securities resulting in Maximum Amount of gross proceeds to the Company, the
Company shall issue Warrants to purchase shares of the Company's Common Stock on
a pro rata basis of 17,500 warrants for every $100,000 raised by the agent. The
Warrants shall have cashless exercise provisions. The term of the Warrant shall
be five years. The Warrant and the shares of common stock issuable upon exercise
of the Warrants shall have registration rights as described in the Registration
Rights Agreement, set forth as an exhibit to the Subscription Agreement; it
being understood that, if the SEC requires removal of the Warrants from any
registration statement in which the Warrants have a right by contract to be
included, the removal of the Warrants shall not constitute a breach of contract
by the Company, and the Company will use best efforts to include the Warrants
(or underlying shares) in a registration statement in a manner acceptable to the
SEC. It is specifically understood by the Company that the Company must register
the Warrants for the Agent in the same registration statement described in the
Registration Rights Agreements. The Company shall deliver the Warrants to the
Agent with in five (5) business days of the Agents conclusion of its duties as
the Placement Agent for the Offering.
3.5 Payment of Fees.The Escrow Agent shall be instructed to pay all fees
------------------
including, but not limited to the legal fees of Agent's counsel, BUTLER
GONZALEZ, LLP, which shall not exceed $15,000) and cost reimbursements and
Warrants pursuant to section 3.4 of this Agreement, directly to the Agent from
the proceeds of the Closing and all Subsequent Closing, simultaneous with the
transfer of proceeds to the Company.
4. OFFERING OF THE SECURITIES ON BEHALF OF THE COMPANY.
------------------------------------------------------------
4. 1 In offering the Securities for sale, the Agent shall offer them solely
as an agent for the Company, and such offer shall be made upon the terms and
subject to the conditions set forth in the Offering Documents. The Agent shall
commence making such offer as an agent for the Company as soon as possible
following delivery of the Offering Documents.
4.2 The Agent will not make offers to sell the Securities to, or solicit
offers to subscribe for any Securities from, persons or entities that are not
"accredited investors" as defined in Regulation D.
5. NON-CIRCUMVENTION.The Company hereby agrees as follows:
------------------
5.1 The Company agrees to maintain the confidentiality of the Agent's
clients, except as required by applicable law. Such clients shall be those
entities, which invest or have been offered an opportunity to invest by the
Agent in the Offering (the "CLIENTS"). For a period of two years from the
Closing, the Company will not solicit or enter into any financing transaction
with the Clients without the written consent of Agent and payment to Agent
compensation no less than the compensation to be paid to Agent hereunder for
raising a like amount.
5.2 In the event that Company breaches Section 5.1 of this Agreement,
Agent shall be entitled to receive compensation in the same proportion to the
financing done without Agent's participation as the compensation to Agent under
this Agreement bears to the financing raised in this Offering.
138
<PAGE>
6. COVENANTS OF THE COMPANY.The Company covenants and agrees with the
-------------------------
Agent that:
6.1 After the date hereof, the Company will not at any time, prepare and
distribute any amendment or supplement to the Offering Documents, of which
amendment or supplement the Agent shall not previously have been advised and the
Agent and its counsel furnished with a copy within a reasonable time period
prior to the proposed adoption thereof, or to which the Agent shall have
reasonable objected in writing on the ground that it is not in compliance with
the Act or the Rules and Regulations (if applicable).
6.2 The Company will pay, whether or not the transactions contemplated
hereunder are consummated or this Agreement is prevented from becoming effective
or is terminated, all costs and expenses incident to the performance of its
obligations under this Agreement, including all expenses incident to the
authorization of the Securities and their issue and delivery to the Agent, any
original issue taxes in connection therewith, all transfer taxes, if any,
incident to the initial sale of the Securities, the fees and expenses of the
Company's counsel (except as provided below} and accountants, the cost of
reproduction and furnishing to the Agent copies of the Offering Documents as
herein provided.
6.3 As a condition precedent to the Initial Closing, the Company will
deliver to the Agent a true and correct copy of the Articles of Incorporation of
the Company, and all amendments and certificates of designation of preferences
of preferred stock, including without limitation the certificate of designation
of preferences regarding the Securities, certified by the Secretary of State of
Delaware.
6.4 Prior to the Closing Date, the Company will cooperate with the Agent in
such investigation as it may make or cause to be made of all of the properties,
business and operations of the Company in connection with the Offering of the
Securities. The Company will make available to it in connection therewith such
information in its possession as the Agent may reasonably request and will make
available to the Agent such persons as the Agent shall deem reasonably necessary
and appropriate in order to verify or substantiate any such information so
supplied.
6.5 The Company shall be responsible for making any and all filings
required by the Blue Sky authorities and filings required by the laws of the
jurisdictions in which the subscribers who are accepted for purchase of
Securities are located, if any. Agent shall assist Company in this respect, but
such filings shall be the responsibility of Company.
6.6 Corporation Condition.The Company's condition is as described in its
-----------------------
Offering Documents, except for changes in the ordinary course of business and
normal year-end adjustments that are not individually or in file aggregate
materially adverse to the Company. The Offering Documents, taken as a whole,
139
<PAGE>
will present fairly the business and financial position of the Company as of
each Closing Date.
6.7 No Material Adverse Change.Except as may be reflected in or
------------------------------
contemplated by the Offering Documents, subsequent to the dates as of which
--
information is given in the Offering Documents, and prior to each Closing Date,
there shall not have been any material adverse change in the condition,
financial, or otherwise, or in the results of operations of the Company or in
its business taken as a whole.
7. INDEMNIFICATION.
----------------
7.1 The Company agrees to indemnify and hold harmless the Agent, each
person who controls the Agent within the meaning of Section 15 of the Act and
the Agent's employees, accountants, attorneys and agents (the "AGENT'S
INDEMNITEES") against any and all losses, claims, damages or liabilities, joint
or several, to which they or any of them may become subject under the Act or any
other statute or at common law for any legal or other expenses (including the
costs of any investigation and preparation) incurred by them in connection with
any litigation, whether or not resulting in any liability, but only insofar as
such losses, claims, damages, liabilities and litigation arise out of or are
based upon any untrue statement of material fact contained in the Offering
Documents or any amendment or supplement thereto or any application or other
document filed in any state or jurisdiction in order to qualify the Securities
under the Blue Sky or securities laws thereof, or the omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein, ,ruder the circumstances under which they were made, not
misleading, all as of the date of the Offering Documents or of such amendment as
the case may be; provided, however, that the indemnity agreement contained in
-----------------
this Section 7.1 shall not apply to amount paid in settlement of any such
litigation, if such settlements are made without the consent of the Company, nor
shall it apply to the Agent's Indemnitees in respect to any such losses, claims,
damages or liabilities arising out of or based upon any such untrue statement or
alleged untrue statement or any such omission or alleged omission, if such
statement or omission was made in reliance upon information furnished in writing
to the Company by the Agent specifically for use in connection with the
preparation of the Offering Documents or any such amendment or supplement
thereto or any application or other document filed in any state or jurisdiction
in order to qualify the Securities under the Blue Sky or securities law thereof
This indemnity agreement is in addition to any other liability which the Company
may otherwise have to the Agent's Indemnitees. The Agent's Indemnitees agree,
within ten (10) days after the receipt by them of written notice of the
commencement of any action against them in respect to which indemnity may be
sought from the Company under this Section 7. 1, to notify the Company in
writing of the commencement of such action; provided, however, that the failure
of the Agent's indemnitees to notify the Company' of any such action shall not
relieve the Company from any liability which it may have to the Agent's
Indemnitees on account of the indemnity agreement contained in this Section 7.1,
and further shall not relieve the Company from any other liability which it may
have to the Agent's Indenmitees, and if the Agent's Indemnitees shall notify the
Company of the commencement thereof, the Company shall be entitled to
participate in (and, to the extent that the Company shall wish, to direct) the
140
<PAGE>
defense thereof at its own expense, but such defense shall be conducted by
counsel of recognized standing and reasonably satisfactory to the Agent's
Indemnitees, defendant or defendants, in such litigation. The Company agrees to
notify the Agent's Indenmitees promptly of the commencement of any litigation or
proceedings against the Company or any of the Company's officers or directors of
which the Company may' be advised in connection with the issue and sale of any
of the Securities and to furnish to the Agent's Indemnitees, at their request,
to provide copies of all pleadings therein and to permit the Company's
Indemnitees to be observers therein and apprise the Agent's Indemnitees of all
developments therein, all at the Company's expense.
7.2 The Agent agrees, in the same manner and to the same extent as set
forth in Section 7.1 above, to indemnify and hold harmless the Company, and the
Company's and Company's employees, accountants, attorneys and agents (the
"COMPANY'S INDEMNITEES") with respect to (i) any statement in or omission from
the Offering Documents or any amendment or supplement thereto or any application
or other document filed in any state or jurisdiction in order to qualify the
Securities under the Blue Sky or securities laws thereof, or any information
furnished pursuant to Section 3.4 hereof, if such statement or omission was made
in reliance upon information furnished in writing to the Company by the Agent on
its behalf specifically for use in connection with the preparation thereof or
supplement thereto, or (ii) any untrue statement of a material fact made by the
Agent or its agents not based on statements in the Offering Documents or
authorized in writing by the Company, or with respect to any misleading
statement made by the Agent or its agents resulting from the omission of
material facts which misleading statement is not based upon the Offering
Documents, or information furnished in writing by the Company or, (iii) any
breach of any representation, warranty or covenant made by the Agent in this
Agreement. The Agent's liability hereunder shall be limited to the amount
received by it for acting as Agent in connection with the Offerings. The Agent
shah not be liable for amounts paid in settlement of any such litigation if such
settlement was effected without its consent. In case of the commencement of any
action in respect of which indemnity may be sought from the Agent, the Company's
Indemnitees shall have the same obligation to give notice as set forth in
Section 7.1 above, subject to the same loss of indemnity in the event such
notice is not given, and the Agent shall have the same right to participate in
(and, to the extent that it shall wish, to direct) the defense of such action at
its own expense, but such defense shall be conducted by counsel of recognized
standing reasonably satisfactory to the Company. The Agent agrees to notify the
Company's Indemnitees and, at their request, to provide copies of ail pleadings
therein and to permit the Company's Indemnitees to be observers therein and
apprise them of all the developments therein, all at the Agent's expense.
8. EFFECTIVENESS OF AGREEMENT.This Agreement shall become effective (i) at
---------------------------
9:00 A.M., Union, New Jersey time, on the date hereof or (ii) upon release by
the Agent of the Securities for offering after the date hereof, whichever shall
last occur. The Agent agrees to notify the Company immediately after the Agent
shall have taken any action by such release or otherwise wherein this Agreement
shall have become effective. This Agreement shall, nevertheless, become
effective at such time earlier than the time specified above after the date
hereof as the Agent may determine by notice to the Company.
141
<PAGE>
9. CONDITIONS OF THE AGENT'S OBLIGATIONS.The Agent's obligations to act as
--------------------------------------
agent of the Company hereunder and to find purchasers for the Securities shall
be subject to the accuracy, as of the Closing Date, of the representations and
warranties on the part of the Company herein contained, to the fulfillment of or
compliance by the Company with all covenants and conditions hereof, and to the
following additional conditions:
9.l Counsel to the Agent shall not have objected in writing or shall not
have failed to give his consent to the Offering Documents (which objection or
failure to give consent shall not have been done unreasonably).
9.2 The Agent shall not have disclosed to the Company that the Offering
Documents, or any amendment thereof or supplement thereto, contains an untrue
statement of fact, which, in the opinion of counsel to the Agent, is material,
or omits to state a fact, which, in the opinion of such counsel, is material and
is required to be stated therein, or is necessary to make the statements
therein, under the circumstances in which they were made, not misleading.
9.3 Between the date hereof and the Closing Date, the Company shall not
have sustained any loss on account of fire, explosion, flood, accident, calamity
or any other cause of such character as would materially adversely affect its
business or property considered as an entire entity, whether or not such loss is
covered by insurance.
9.4 Between the date hereof and the Closing Date, there shall be no
litigation instituted or threatened against the Company, and there shall be no
proceeding instituted or threatened against the Company before or by any federal
or state commission, regulatory body or administrative agency or other
governmental body, domestic or foreign, wherein an unfavorable ruling, decision
or finding would materially adversely affect the business, franchises, license,
permits, operations or financial condition or income o f the Company considered
as an entity.
9.5 Except as contemplated herein or as set forth in the Offering
Documents, during the period subsequent to the most recent financial statements
contained in the Offering Documents, if any, and prior to the Closing Date, the
Company (i) shall have conducted its business in the usual and ordinary manner
as the same is being conducted as of the date hereof and (ii) except in the
ordinary course of business, the Company shall not have incurred any liabilities
or obligations (direct or contingent) or disposed of any assets, or entered into
any material transaction or suffered or experienced any substantially adverse
change in its condition, financial or otherwise. At the Closing Date, the equity
account of the Company shall be substantially the same as reflected in the most
recent balance sheet contained in the Offering Documents without considering the
proceeds from the sale of the Securities other than as may be set forth in the
Offering Documents.
9.6 The authorization of the Securities by the Company and all proceedings
and other legal matters incident thereto and to this Agreement shall be
reasonably satisfactory in all respects to counsel to the Agent, who shall have
furnished the Agent on the Closing Date with such favorable opinion with respect
to the sufficiency of all corporate proceedings and other legal matters relating
142
<PAGE>
to this Agreement as the Agent may reasonably require, and the Company shall
have furnished such counsel such documents as he may have requested to enable
him to pass upon the matters referred to in this subparagraph.
9.7 The Company shall have furnished, to the Agent the opinion, dated the
Closing Date, addressed to the Agent, from counsel to the Company, as required
by the Subscription Agreement.
9.8 The Company shall have furnished to the Agent a certificate of the
Chief Executive Officer of the Company, dated as of the Closing Date, to the
effect that:
(i) the representations and warranties of the Company in this Agreement are
true and correct in all material respects at and as of the Closing Date (other
than representations and warranties which by their terms are specifically
limited to a date other than the Closing Date), and the Company has complied
with all the agreements and has satisfied all the conditions on its part to be
performed or satisfied at or prior to the Closing Date; and
(ii) the respective signers have each carefully examined the Offering
Documents, and any amendments and supplements thereto, and, to the best of their
knowledge, in the Offering memorandum, and any amendments and supplements
thereto, all statements contained in the Offering Documents are true and
correct, and neither the Offering Documents, nor any amendment or supplement
thereto, includes any 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 under the circumstances in which they were made not misleading, and
since the date hereof, there has occurred no event required to be set forth ii1
an amended or supplemented Offering Documents, which has not been set forth;
except as set forth in the Offering Documents, since the respective dates as of
which or the periods for which the information is given in the Offering
Documents and prior to the date of such certificate, (a) there has not been any
substantially adverse change, financial and otherwise, in the affairs of
condition in the Company, and (b) the Company has not incurred any material
liabilities, direct or contingent, or entered into any material transactions,
otherwise than in the ordinary course of business.
10. TERMINATION,
------------
10.1 This Agreement may be terminated by the Agent by notice, of five (5)
business days, to the Company in the event that the Company shall have failed or
been unable to comply with any of the terms, conditions or provisions of this
Agreement on the part of the Company to be performed, complied with or fulfilled
within the respective times, if any, herein provided for, unless compliance
therewith or performance or satisfaction thereof shall have been expressly
waived by the Agent in writing.
10.2 This Agreement may be terminated by the Company by notice, of five (5)
business days, to the Agent in the event that the Agent shall have failed or
been unable to comply with any of the terms, conditions or provisions of this
Agreement on the part of the Agent to be performed, complied with or fulfilled
143
<PAGE>
within the respective times, if any, herein provided for, unless compliance
therewith or performance or satisfaction thereof shall have been expressly
waived by the Company in writing.
10.3 This Agreement may be terminated by the Agent by notice to the Company
at any time, if, in the reasonable, good faith judgment of the Agent, payment
for and delivery of the Securities is rendered impracticable or inadvisable
because: (i) additional material governmental restrictions not in force and
effect on the date hereof shall have been imposed upon trading in securities
generally; (ii) a war or other national calamity shall have occurred; or (iii)
the condition of the market (either generally or with reference to the sale of
the Securities to be offered hereby) or the condition of any matter affecting
the Company or any other circumstance is such that it would be undesirable,
impracticable or inadvisable, in the judgment of the Agent, to proceed with this
Agreement or with the Offering.
10.4 Any termination of this Agreement pursuant to this Section shall be
without liability of any character (including, but not limited to, loss of
anticipated profits or consequential damages) on the part of any party thereto,
except that the Company shall remain obligated to pay the costs and expenses
provided to be paid by it specified in Sections 3, 5, and 6; and the Company and
the Agent shall be obligated to pay, respectively, all losses, claims, damages
or liabilities, joint or several, under Section 7.1 in the case of the Company
and Section 7.2 in the case of the Agent.
11. AGENT'S REPRESENTATIONS, WARRANTIES, AND COVENANTS.The Agent
-------------------------------------------------------
represents and warrants to and agrees with the Company that:
11.1 Agent is a corporation duly incorporated and existing under the laws
of the state of Maryland. Agent is registered with the Securities Exchange
Commission and the NASD.
11.2 Agent understands and acknowledges that the Securities are not being
registered under the Act, and that the Offering is to be conducted pursuant to
Regulation D. Accordingly, in conducting its activities under this Agreement,
Agent shall offer Securities only to "accredited investors," as defined in
Regulation D.
11.3 Neither the Agent nor any of its Affiliates will take any action,
which will impair the effectiveness of the transactions contemplated by this
Agreement.
11.4 All corporate actions by Agent required for the execution, delivery
and performance of this Agreement have been taken. The execution and delivery of
this Agreement by the Agent, the observance and performance thereof, and the
consummation of the transactions contemplated herein or in the Offering
Documents do not and will not constitute a material breach of, or a material
default under, any instrument or agreement by which the Agent is bound, and does
not and will not, to the best of the Agent's knowledge, contravene any existing
law, decree or order applicable to it. This Agreement constitutes a valid and
binding agreement of Agent, enforceable in accordance with its terms.
144
<PAGE>
11.5 Agent's representations and warranties under this Section shall be
true and correct as of the Closing, and shall survive the Closing for a period
of six months.
12. NOTICES.Except as otherwise expressly provided in this Agreement:
--------
12.1 Whenever notice is required by the provisions of this Agreement to be
given to the Company, such notice shall be in writing, addressed to the Company,
at:
If to Company:
Photoloft.com Group.
300 Orchard City Drive
Suite #142
Campbell, CA 95008
Attn: Chief Executive Officer
With Copies to Company Counsel:
Cathy Gawne, Esq.
Silicone Valley Law Group
152 North 3rd Street
San Jose, California 95112
12.2 Whenever notice is required by the provisions of this Agreement to be
given to the Agent, such notice shall be given in writing, addressed to the
Agent, at:
If to the Agent:
The May Davis Group, Inc.
1 World Trade Center
New York, New York 10048
Attn: Michael Jacobs
With copy to:
Butler Gonzalez, L.L.P.
1000 Stuyvesant Avenue
Suite #6
Union, New Jersey 07083
12.3 Any notice instructing the Escrow Agent to distribute monies or
Securities held in Escrow must be signed by authorized agents of both the
Company and the Agent in order to be valid.
145
<PAGE>
13. MISCELLANEOUS.
--------------
13.1 Benefit.This Agreement is made solely for the benefit of the Agent and
--------
the Company, their respective officers and directors and any controlling person
referred to in Section 15 of the Act and their respective successors and
assigns, and no other person may acquire or have any right under or by virtue of
this Agreement, including, without limitation, the holders of any Securities.
The term "SUCCESSOR" or the term "successors and assigns" as used in this
Agreement shall not include any purchasers, as such, of any of the Securities.
13.2 Survival.The respective indemnities, agreements, representations,
---------
warranties, covenants and other statements of the Company and the Agent, or the
officers, directors or controlling persons of the Company and the Agent as set
forth in or made pursuant to this Agreement and the indemnity agreements of the
Company and the Agent contained in Section 7 hereof shall survive and remain in
full force and effect, regardless of (i) any investigation made by or on behalf
of the Company or the Agent or any such officer, director or controlling person
of the Company or of the Agent; (ii) delivery of or payment for the Securities;
or (iii) the Closing Date, and any successor of the Company or the Agent or any
controlling person, officer or director thereof, as the case may be, shall be
entitled to the benefits hereof.
13.3 Governing Law.The validity, interpretation, and construction of this
---------------
Agreement will be governed by the Laws of the State of New York. The parties
further agree that any action between them shall be heard in New York County,
New York, and expressly consent to the jurisdiction and venue of the Supreme
Court of New York County, New York, and the United States District Court for the
Southern District of New York for the adjudication of any civil action asserted
pursuant to this Paragraph.
13.4 Counterparts.This Agreement may be executed in any number of
-------------
counterparts, each of which may be deemed an original and all of which together
will constitute one and the same instrument.
13.5 Confidential Information.All confidential financial or business
--------------------------
information (except publicly available or freely usable material otherwise
obtained from another source) respecting either party will be used solely by the
other party in connection with the within transactions, be revealed only to
employees or contractors of such other party who are necessary to the conduct of
such transactions, and be otherwise held in strict confidence.
13.6 Public Announcements.Prior to the Closing Date, neither party hereto
----------------------
will issue any public announcement concerning the within transactions without
the approval of the other party however if a disapproval is not issued within
one (1) business day it will be assumed that the public announcement is
approved.
13.7 Finders.The parties acknowledge that no person has acted as a finder
--------
in connection with the transactions contemplated herein and each will agree to
indemnify the other with respect to any other claim for a finder's fee in
connection with the offering.
146
<PAGE>
13.8 Financial Advisers.The parties acknowledge that the Company has or may
-------------------
retain financial and other advisors in connection with this transaction (the
"Advisors"), and the Company agrees to indemnify and hold the Placement Agent
harmless for any fees and expenses of the Advisors.
13.9 Recitals.The recitals to this Agreement are a material part hereof,
---------
and each recital is incorporated into this Agreement by reference and made a
part of this Agreement.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
147
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly caused this Agreement to
be executed as of the day and year first above written.
"THE COMPANY"
PHOTOLOFT.COM GROUP
By:
Name: Jack Marshall
Title: President
"THE AGENT"
THE MAY DAVIS GROUP, INC.
By:
Name: Michael Jacobs
Title:
148
<PAGE>
EXHIBIT 10.29
[FORM OF]
WARRANT AGREEMENT
TO PURCHASE COMMON STOCK OF
PHOTOLOFT.COM, INC.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT") OR THE SECURITIES LAWS OF ANY STATE
AND ARE BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THE SECURITIES ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD
EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND SUCH LAWS PURSUANT TO
REGISTRATION OR AN EXEMPTION THEREFROM.
This Warrant Agreement (the "Agreement") is entered into this ____ day of
March, 2000, by and between PhotoLoft.com, ("PhotoLoft") and ______________
("Holder"). For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:
1. Issuance of Warrants. PhotoLoft, subject to the terms and conditions
----------------------
hereinafter set forth, hereby issues to Holder warrants (the "Warrants") to
purchase _________________ (_________) shares of PhotoLoft common stock (the
"Shares"). The exercise price of the Shares shall be $_______ per share (the
"Exercise Price") subject to adjustment in accordance with Paragraph 5 of this
Agreement.
2. Term. The Warrants may be exercised at any time after the Effective Date
----
set forth on the signature page hereof and before the expiration of sixty (60)
months from the Effective Date.
3. Exercise.
--------
(a) Holder shall exercise the Warrants granted hereunder, in whole or
in part, by delivering to PhotoLoft at the office of PhotoLoft, or at such other
address as PhotoLoft may designate by notice in writing to the holder hereof,
the Notice of Exercise attached hereto as Exhibit A and incorporated herein by
---------
reference and a certified check or wire transfer in lawful money of the United
States for the Exercise Price for the entire amount of the number of Warrants
being exercised
(b) In lieu of exercising this Warrant in the manner provided above in
Section 3(a), the registered holder may elect to receive shares on a cashless
basis by surrender of this Warrant at the principal office of Photoloft together
with notice of such election in which event Photoloft shall issue to such Holder
a number of shares of Shares computed using the following formula:
149
<PAGE>
X = Y (A - B)
----------
A
Where X = The number of Shares to be issued to the registered holder.
Y = The number of Shares purchasable under this Warrant (at the
date of such calculation).
A = The average market value of one Share for the period of
five (5) trading days immediately preceding the date of exercise.
B = The Warrant Exercise Price (as adjusted to the date of such
calculation).
(c) Upon delivery of all of the items set forth in (a) or (b) above,
Holder shall be entitled to receive a certificate or certificates representing
the Shares. Such Shares shall be validly issued, fully paid and non-assessable.
If PhotoLoft shall fail for any reason or for no reason to issue to a Holder
within ten (10) business days after the time required under this section, a
certificate for the number of Shares to which the Holder is entitled upon the
holders exercise of this Warrant or a new Warrant for the number of Shares to
which such Holder is entitled, PhotoLoft shall, in addition to any other
remedies under this Agreement or otherwise available to such Holder including
indemnification pursuant to the Securities Purchase Agreement, pay as additional
damages in cash to such Holder for each day such issuance is not timely effected
after the tenth (10th) business day following the time required under this
section an amount equal to 0.1% of the product of (x) the number of Shares
represented by the new Warrant not issued to the Holder on a timely basis and to
which such Holder is entitled hereunder and (y) the Closing Bid Price (as
defined in the Certificate of Designation) of the Shares on the last possible
date which PhotoLoft could have issued such new Warrant or Shares to such Holder
without violating this section.
(d) Warrants shall be deemed to have been exercised immediately prior
to the close of business on the day of such delivery, and Holder shall be deemed
the holder of record of the Shares issuable upon such exercise at such time.
(e) Upon any partial exercise of the Warrants, at the request of
PhotoLoft, this Agreement shall be surrendered and a new Agreement evidencing
the right to purchase the number of Shares not purchased upon such exercise
shall be issued to Holder.
(f) No fractional Shares are to be issued upon the exercise of this
warrant, but rather the number of Shares issued upon exercise of this Warrant
shall be rounded up or down to the nearest whole number.
4. Representations and Warranties of PhotoLoft. PhotoLoft hereby covenants
--------------------------------------------
and agrees as follows:
150
<PAGE>
(a) This Warrant is, and any Warrants issued in substitution for or in
replacement of this Warrant will upon issuance be, duly authorized and validly
issued.
(b) All Warrants which may be issued upon the exercise of the
rights represented by this Warrant will, upon issuance, be validly issued, fully
paid and nonassessable and free from all taxes, liens and charges with respect
to the issue thereof.
5. Representations and Warranties of Holder. Holder hereby represents and
------------------------------------------
warrants to PhotoLoft as follows:
(a) Sophistication. Holder has (i) a preexisting personal or business
relationship with PhotoLoft or one or more of its officers, directors, or
control persons; or (ii) by reason of Holder's business or financial experience,
or by reason of the business or financial experience or of Holder's financial
advisor who is unaffiliated with and who is not compensated, directly or
indirectly, by PhotoLoft or any affiliate or selling agent of PhotoLoft, Holder
is capable of evaluating the risks and merits of this investment and of
protecting Holder's own interests in connection with this investment.
(b) Accredited Investor. Holder is an "accredited investor" as such
term is defined under Regulation D of the Securities Act of 1933, as amended
(the "Securities Act").
(c) Investment Intent. Holder is purchasing the Warrants, and will
purchase the Shares solely for his or her own account for investment. Holder
has no present intention to resell or distribute the Warrants or the Shares or
any portion thereof. The entire legal and beneficial interest of the Warrants
is being purchased, and will be held, for Holder's account only, and neither in
whole or in part for any other person.
(d) Information Concerning Company. Holder is aware of the business
affairs and financial condition of PhotoLoft and has acquired sufficient
information about PhotoLoft to make an informed and knowledgeable decision to
purchase the Warrants and the Shares.
(e) Economic Risk. Holder realizes that the purchase of the Warrants
and the Shares will be a highly speculative investment and involves a high
degree of risk. Holder is able, without impairing its financial condition, to
hold the Warrants and/or the Shares for an indefinite period of time and to
suffer a complete loss of its investment.
6. Anti-dilution Adjustments. The Warrants granted hereunder and the
--------------------------
Exercise Price thereof shall be subject to adjustment from time to time upon the
happening of certain events as set forth below.
(a) Stock Splits and Dividends. If outstanding shares of PhotoLoft
Common Stock shall be subdivided into a greater number of shares or a dividend
in Common Stock shall be paid in respect of Common Stock, the Exercise Price in
effect immediately prior to such subdivision or at the record date of such
151
<PAGE>
dividend shall simultaneously with the effectiveness of such subdivision or
immediately after the record date of such dividend be proportionately reduced.
If outstanding shares of Common Stock shall be combined into a smaller number of
shares, the Exercise Price in effect immediately prior to such combination
shall, simultaneously with the effectiveness of such combination, be
proportionately increased. When any adjustment is required to be made in the
Exercise Price, the number of Shares purchasable upon the exercise of the
Warrants shall be changed to the number determined by dividing (i) an amount
equal to the number of Shares issuable upon the exercise of the Warrants
immediately prior to such adjustment, multiplied by the Exercise Price in effect
immediately prior to such adjustment, by (ii) the Exercise Price in effect
immediately after such adjustment.
(b) Reclassification, Etc. Subject to Section 11, in case there occurs
any reclassification or change of the outstanding securities of PhotoLoft or any
reorganization of PhotoLoft (or any other corporation the stock or securities of
which are at the time receivable upon the exercise of the Warrants) or any
similar corporate reorganization on or after the date hereof, then and in each
such case Holder, upon the exercise hereof at any time after the consummation of
such reclassification, change, or reorganization shall be entitled to receive,
in lieu of the stock or other securities and property receivable upon the
exercise hereof prior to such consummation, the stock or other securities or
property to which Holder would have been entitled upon such consummation if
Holder had exercised the Warrants immediately prior thereto, all subject to
further adjustment pursuant to the provisions of this Section.
(c) Adjustment Certificate. When any adjustment is required to be made
in the Shares or the Exercise Price pursuant to this Section, PhotoLoft shall
promptly mail to Holder a certificate setting forth (i) a brief statement of the
facts requiring such adjustment, (ii) the Exercise Price after such adjustment
and (iii) the kind and amount of stock or other securities or property into
which the Warrants shall be exercisable after such adjustment.
7. Notices. PhotoLoft will give written notice to the holder of this
--------
Warrant at least twenty (20) days prior to the date on which any reorganization,
consolidation, merger, sale, dissolution, liquidation or other similar
transaction will take place.
8. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost,
------------------------------------------------
stolen, mutilated or destroyed, PhotoLoft shall, on receipt of indemnification
undertaking and upon a notarized affidavit stating the cause for a new issuance,
issue a new Warrant of like denomination and tenor as the Warrant so lost,
stolen, mutilated or destroyed.
9. Reservation of Shares. PhotoLoft shall at all times keep reserved a
-----------------------
sufficient number of authorized shares of Common Stock to provide for the
exercise of the Warrants in full.
10. Transferability. The Warrants issued hereunder and any and all Shares
---------------
issued upon exercise of the Warrants shall be transferable on the books of
PhotoLoft by the holder hereof in person or by duly authorized attorney subject
to any restrictions imposed by applicable federal or state securities laws. It
shall be a further condition to any transfer of the Warrants that the transferor
152
<PAGE>
(if any portion of the Warrants are retained) and the transferee shall receive
and accept new Warrants, of like tenor and date, executed by PhotoLoft, for the
portion so transferred and for any portion retained, and shall surrender this
Agreement executed.
11. Mandatory Conversion. Upon any recapitalization, reorganization,
---------------------
consolidation, merger, sale of the Company's assets, sale of substantially all
of the Company's assets or other similar transaction which is effected in such a
way that the holders of Shares are entitled to receive stock, securities or
assets, all Warrants than outstanding shall automatically be converted into
Common Stock.
12. Voting. Nothing contained in this Agreement shall be construed as
------
conferring upon Holder the right to vote or to receive dividends or to consent
or receive notice as a shareholder in respect to any meeting of shareholders for
the election of directors of PhotoLoft or for any other purpose not specified
herein.
13. Miscellaneous.
-------------
(a) Amendment. This Agreement may be amended by written agreement
between PhotoLoft and Holder.
(b) Notice. Any notice, demand or request required or permitted to be
given under this Agreement will be in writing and will be deemed sufficient when
delivered personally or sent by telegram or forty-eight (48) hours after being
deposited in the U.S. mail, as certified or registered mail, or with a
commercial courier service, with postage prepaid, and addressed, if to
PhotoLoft, at its principal place of business, attention the President, and if
to Holder, at Holder's address as shown on the stock records of PhotoLoft.
(c) Further Assurances. Both parties agree to execute any additional
documents and take any further actions necessary to carry out the purposes of
this Agreement.
(d) Severability. If any provision of this Agreement is held by any
court of competent jurisdiction to be illegal, unenforceable or void, such
provision will be enforced to the greatest extent possible and all other
provisions of this Agreement will continue in full force and effect.
(e) Governing Law. This Agreement will be interpreted and enforced in
accordance with New York law.
(f) Survival. The representations and warranties of the parties hereto
set forth in this Agreement shall survive the closing and consummation of the
transactions contemplated hereby for a period of three (3) years from the date
hereof.
(g) Entire Agreement; Successors and Assigns. This Agreement and the
documents and instruments attached hereto constitute the entire agreement
between Holder and PhotoLoft relative to the subject matter hereof. Any
previous agreements between the parties are superseded by this Agreement.
153
<PAGE>
Subject to any exceptions specifically set forth in this Agreement, the terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the respective executors, administrators, heirs, successors and assigns of
the parties.
(h) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(i) Headings. The headings of the Sections of this Agreement are for
convenience and shall not by themselves determine the interpretation of this
Agreement.
(j) Attorney Fees. If any action is brought to interpret or enforce
the terms of this Agreement, the prevailing party in such action shall be
entitled to recover its attorneys fees and costs incurred in connection with
such action.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed and delivered by their duly authorized officers as of March ___, 2000
(the "Effective Date").
PHOTOLOFT: PHOTOLOFT.COM
By:_______________________
Its:_______________________
Holder: _______________________
154
<PAGE>
WARRANT
NOTICE OF EXERCISE
--------------------
To: PhotoLoft.com, Inc.
(1) _________________ ("Holder") hereby elects to purchase
______________ shares of Common Stock of PhotoLoft.com, Inc. ("PhotoLoft")
pursuant to the terms of the Warrant Agreement dated March ____, 2000, and
executed by Holder and PhotoLoft, and tenders herewith payment of the purchase
price in full, together with all applicable transfer taxes, if any.
(2) Please issue a certificate or certificates representing said shares
in the name of Holder.
HOLDER: _______________________________
<PAGE>
EXHIBIT 10.30
LETTER OF APPOINTMENT
---------------------
August 24, 1999
Jack Marshall
Lisa Marshall
Suite 142
300 Orchard City Drive
Campbell, California 95008
Dear Jack:
This Letter of Appointment ("Agreement") confirms our conversations with
you. This Agreement appoints Asher Investment Group, Inc. ("Asher Group") as
financial advisor to provide financial management support to. Photoloft.com, or
any affiliated or successor business entities ("Photoloft.com" or the
"Company").
BACKGROUND
PhotoLoft.com is a leading digital imaging, sharing and e-commerce
community. The business model was adopted in June of 1998, and the site was
officially launched in February of 1999. At tile same time, the predecessor
company entered into a reorganization with Data Growth, Inc., which was
subsequently renamed PhototoLoft.com.
Today, PhotoLoft.com is building its user base and developing its advertising
and e-commerce business based on this user base.
SCOPE
Asher Group is being engaged by PhotoLoft.com to provide on a contract
outsource basis part-time financial management support. This includes assisting
with financial statement preparation, reporting, analysis, strategy preparation,
presentation and strengthening financial controls.
The financial management support to be performed by Asher Group will be
divided into the following stages:
Stage 1: Assessment. Asher Group will perform a review of
Photoloft.com's existing financial operations in light of the operational focus
and long term goals of the Company. This will include but not limited to
meeting with PhotoLoft.com.
<PAGE>
PhotoLoft.com
Jack Marshall and Lisa Marshall
11/23/99
management and reviewing relevant financial information, documents and materials
relating to PhotoLoft.com and to the industry of which PhotoLoft.com is a part.
Stage II. Implementing Financial Strategy. Upon completion of the
Assessment, Asher Group, working with PhotoLoft.com, will work to strength
financial statement preparation, financial reporting and financial analysis. It
will work with PhotoLoft.com to strength financial systems and controls. In
addition, Asher Group will work with PhotoLoft.com management on preparing a
more detailed financial strategy. This will include strengthening the annual
financial budgeting process as well as the longer term financial strategy of the
Company.
A precise timetable for the completion of Stages I and II is difficult to
forecast because many elements necessary to make such a forecast are not within
the control of Asher Group. However, Asher Group estimates that Stage I will
take approximately one to two months to complete, depending on the availability
of information and resolution of various issues. In addition, Asher Group
estimates that Stage II should take approximately one to two months to
implement. Stage II may begin prior to the completion of Stage I. During Stage
I, Asher Group shall not be obligated to devote more than 80 hours per month to
its obligation under this Agreement. During the first month following the
completion of Stage I, Asher Group shall not be obligated to devote more than 60
hours per month to its obligations hereunder. During the second month after the
completion of Stage I, Asher Group shall not be obligated to devote more than 40
hours per month to its obligations hereunder. Thereafter, Asher Group shall not
be obligated to devote more than 20 hours per month to its obligations
hereunder.
After the initial six months, Asher Group will continue to provide
part-time (not more than 20 hours per month) financial management support on an
ongoing basis to support the growth of PhotoLoft.com and continue the
development of a stronger and more effective financial infrastructure at
PhotoLoft.com during the term of this Assignment.
COMPENSATION FOR FINANCIAL, MANAGEMENT SUPPORT FOR PHOTOLOFT.COM
As compensation for the services of Asher Group, PhotoLoft.com will pay, or
cause to be paid, the following fees to Asher Group:
1. RETAINER: PhotoLoft.com will pay Asher Group a retainer of $5,000
per month. In addition, the retainer to Asher Group each month will
include 10,000 unrestricted shares of PhotoLoft.com, or the
equivalent amount adjusted for any stock split, free and clear of
any liens or other claims. The number of shares in any month, will
further be increased by any amount necessary to adjust the value of
the shares should the average daily closing price per share fall
below a $2.50 closing price during the preceding month. The monthly
Retainer Fee will be due at the beginning of each month and will
continue until the completion of this agreement. The first payment
will be due upon the signing of this Agreement. Such Retainer Fee
shall be deemed earned when due.
<PAGE>
PhotoLoft.com
Jack Marshall and Lisa Marshall
11/23/99
2. EXPENSES: Upon execution of this Agreement, Asher Group will be
reimbursed promptly upon submission for all documented out-of-pocket
expenses incurred for this engagement. Individual expenses in
excess of $1,000 will be reviewed with you in advance. Fees
required by financial institutions and investors and charges by
auditors, legal counsel or other advisers engaged by PhotoLoft.com
are not included in the fees of Asher Group. PhotoLoft.com will
send Asher Group an initial deposit of $2,500 against expenses. Any
amount not required to meet reimbursement claims will be returned to
PhotoLoft.com by Asher Group.
PhotoLoft.com will pay 2:0% monthly interest on all monies which have not
been paid within 30 days of the date of bills from Asher Group and will be
responsible for any legal fees incurred by Asher Group in collecting any
moneys owed to it under this Agreement.
Asher Group will have the right, at its sole discretion, to advertise its
role under this Agreement.
EXCLUSIVITY AND TERMINATION
Asher Group is appointed to provide financial management support for
PhotoLoft.com for a period of 6 months commencing from the date hereof. Upon
completion of this term, this Agreement may be terminated at any time
thereafter, upon the expiration of thirty days written notice of termination.
Upon termination, Asher Group shall be entitled to receive all compensation
accrued to the date of termination.
INSURANCE
PhotoLoft.com agrees to obtain and maintain during the term of this
Agreement and for any period thereafter during which it retains any indemnity
obligation hereunder, insurance of the type and in the amount necessary to cover
any and all indemnity obligations of PhotoLoft.com to Asher Group, its
directors, officer, employees, agents and counsel.
INDEMNITY
The attached indemnity is included herein by reference and is specifically
made part of this Agreement.
<PAGE>
PhotoLoft.com
Jack Marshall and Lisa Marshall
11/23/99
To acknowledge acceptance of the terms of this Agreement, please sign it
and return a copy to us. We look forward to the opportunity of working with you
and your colleagues.
With best wishes, we remain
Sincerely yours,
ASHER INVESTMENT GROUP, INC.
Rick Holman
Principal
AGREED AND ACCEPTED BY PHOTOLOFT.COM:
- -----------------------------------------
Name
- -----------------------------------------
Date
Enclosure
<PAGE>
PhotoLoft.com
Jack Marshall and Lisa Marshall
11/23/99
Attachment
INDEMNITY
---------
PHOTOLOFT.COM HEREBY AGREES:
(a) to indemnify and hold harmless Asher Group and Asher Group shareholders,
directors, officers, employees, agents and counsel (Asher Group and each
such other person being hereinafter referred to as an "Indemnified
Person") from and against any loss, damage, liability, claim or expense
(including attorney's fees) suffered or incurred by, or asserted
against, an Indemnified Person (including any amounts paid in settlement
of any action, suit, proceeding or claim brought or threatened to be
brought under the Federal or state securities laws, at common law or
otherwise) which arises in connection with or is based upon any actual
or proposed step or element of the engagement defined in the letter
Agreement to which this is attached (the "Transaction"); and
(b) to reimburse each Indemnified Person promptly for- any travel, legal or
other out-of-pocket expenses reasonably incurred by such Indemnified
Person in connection with investigating or defending any action, suit,
proceeding or claim ("Litigation") for which indemnification under the
preceding clause (a) may be sought (including the fees and disbursements
of counsel of such Indemnified Person's choice retained in connection
with investigation or defending against any Litigation);
provided however, there shall be excluded from such indemnification and
reimbursement any such loss, damage, liability, claim or expense which arises
primarily out of or is based primarily upon any action or, failure to act by
Asher Group (other than an action or failure to act undertaken at the request or
with the consent of the Company) which is held, by a final determination in the
Litigation giving rise to any such loss, damage, liability or claim suffered or
incurred by an Indemnified Person, to constitute gross negligence or willful
misconduct by Asher Group.
The foregoing indemnity and reimbursement agreement shall be in addition to
any other rights which any Indemnified Person may have at common law or
otherwise.
The rights to indemnification and reimbursement provided for in this
Section shall apply whether or not an Indemnified Person is named or threatened
to be named as a party in any action, suit, proceeding or claim brought or
threatened to be brought in respect of which such rights would apply had such
Indemnified Person been so named and/or shall survive any termination of the
engagement of Asher Group hereunder or the consummation or abandonment of any
effort associated with the Transaction.
In addition, in any legal action, arbitration, or other proceeding brought to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to
<PAGE>
PhotoLoft.com
Jack Marshall and Lisa Marshall
11/23/99
reasonable attorney's fees and any other costs incurred in that proceeding in
addition to any other relief to which it is entitled.
<PAGE>
PhotoLoft.com
Jack Marshall and Lisa Marshall
11/23/99
AMENDMENT TO LETTER OF APPOINTMENT
----------------------------------
December 1, 1999
Jack Marshall
PhotoLoft.com
Suite 142
300 Orchard City Drive
Campbell, California 95008
Dear Jack:
This Letter ("Amendment") amends the November 29,1999 Letter of Appointment
("Agreement") between Asher Investment Group, Inc. ("Asher Group") and
PhotoLoft.com or any affiliated business entities ("PhotoLoft"). Unless
specifically amended by this Amendment, the terms of the November 29, 1999
Agreement will remain unchanged.
The Section on SCOPE will be modified as follows:
In addition to assisting with financial statement preparation, reporting,
analysis, strategy preparation, presentation and strengthening financial
controls, during the period from November 29, 1999 through December of 1999,
Asher Group will provide bookkeeping services. These bookkeeping services will
include handling payable processing, payroll processing as well as preparing a
cash forecast.
The Section on COMPENSATION FOR FINANCIAL MANAGEMENT SUPPORT FOR PHOTOLOFT.COM,
point 1, Retainer, will be amended as follows:
1. RETAINER: The following terms:
PhotoLoft.com will pay Asher Group a retainer of $5,000 per month.
In addition, the retainer to Asher Group each month will include
10,000 unrestricted shares of PhotoLoft.com, or the equivalent
amount adjusted for any stock split, free and clear of any liens or
other claims. The number of shares in any month, will further be
increased by any amount necessary to adjust the value of the shares
should the average daily closing price per share fall below a $2.50
closing price during the preceding month.
Are changed to:
PhotoLoft.com will pay Asher Group a cash retainer of $5,000 per
month. For the first month, the cash retainer will be $15,000. In
addition, Asher Group is granted options as of November 1, 1999 to
acquire 500,000
<PAGE>
PhotoLoft.com
Jack Marshall and Lisa Marshall
11/23/99
shares of PhotoLoft at an exercise price of 85% of the $1.1875
PhotoLoft stock price on November 1, 1999 ("Options"). These Options
will be fully vested as of the date of the grant. These options will
be exercisable for a period of up to seven years from the date of
issuance. They shall be subject to no restrictions on exercise. If
during the period of the Agreement, an investment is made in
PhotoLoft which would convert into a lower stock price (adjusted for
any warrants issued to these investors as consideration for the
investment), PhotoLoft will cancel and replace these Options with a
grant of new options at an exercise price of 85% of the lower stock
price (reflecting the dilution by the warrants). These options will
also be fully vested as of the date of issuance. These options will
be consistent with and take account for any dilution as a result
of the issuance of the new stock. If options are issued to other
parties at a lower exercise price, then PhotoLoft will cancel and
replace these Options with new options with the same exercise price
as the other options issued to the other parties. These options will
be fully vested on date of issuance. These options will be
consistent with and take account for any dilution as a result of the
issuance of the new options to the other parties. There shall be no
other restrictions on these options. These Options shall be provided
to Asher Group within 15 days of the signing of this Amendment. Such
Retainer Fee shall be deemed earned upon the signing of this
Amendment.
To acknowledge acceptance of the terms of this Amendment to the Agreement,
please sign it and return a copy to us. We look forward to the opportunity of
working with you and your colleagues. With best wishes, we remain, sincerely
yours,
ASHER INVESTMENT GROUP, INC.
Rick Holman
Principal
AGREED AND ACCEPTED BY PHOTOLOFT.COM:
- -----------------------------------------
Name
- -----------------------------------------
Date
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 175300
<SECURITIES> 0
<RECEIVABLES> 77000
<ALLOWANCES> 16900
<INVENTORY> 0
<CURRENT-ASSETS> 534900
<PP&E> 534200
<DEPRECIATION> 116200
<TOTAL-ASSETS> 970100
<CURRENT-LIABILITIES> 1185500
<BONDS> 0
0
0
<COMMON> 12900
<OTHER-SE> (228300)
<TOTAL-LIABILITY-AND-EQUITY> 970100
<SALES> 254500
<TOTAL-REVENUES> 254500
<CGS> 124200
<TOTAL-COSTS> 5623100
<OTHER-EXPENSES> (1300)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6000
<INCOME-PRETAX> (5497500)
<INCOME-TAX> (745400)
<INCOME-CONTINUING> (4752100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4752100)
<EPS-BASIC> (.49)
<EPS-DILUTED> (.49)
</TABLE>
