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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 0-21510
Sanctuary Woods Multimedia Corporation
(Exact name of registrant as specified in its charter)
Delaware 75-2444-09
State or other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
1825 South Grant Street
San Mateo, California 94402
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 286-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not 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-K or any amendment to this Form 10-K. [x]
To the best of the Company's knowledge, the aggregate market value of the voting
shares held by non-affiliates of the registrant on June 27, 1997 (based on the
average over-the-counter bid and asked prices of such stock on such date) was
$4,471,327.
The number of shares of Common Stock of the registrant outstanding as of June
27, 1997, was 2,104,154.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 1997 Stockholders' Meeting
("Proxy Statement") are incorporated by reference into Part I Item 4 and Part
III as set forth herein. Only such portions of the Proxy Statement as are
specifically incorporated by reference are made a part of this Annual Report on
Form 10-K.
Except where the context otherwise requires, as used herein, the term "Company"
means Sanctuary Woods Multimedia Corporation and its subsidiaries. In addition,
this Annual Report on Form 10-K includes trade names and marks of companies
other than the Company.
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PART I
ITEM 1. BUSINESS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K of Sanctuary Woods Multimedia Corporation ("Sanctuary Woods" or
the "Company") contains forward-looking statements that are subject to risks and
uncertainties. Statements indicating that the Company "believes," "expects,"
"anticipates" or "estimates" are forward looking as are all other statements
regarding future financial results, market conditions, product offerings or
other events that have not yet occurred. There are many important factors that
could cause actual results or events to differ materially and/or adversely from
those anticipated by the forward looking statements contained in this Form 10-K.
Such factors include but are not limited to, the rate of growth of the consumer
software market, market acceptance of the Company's products or those of its
competitors, the timing of new product introductions, expenses relating to the
development and promotion of new product introductions, changes in pricing
policies by the Company or its competitors, projected and actual changes in
platforms and technologies, timely and successful adaptation to such platforms
or technologies, the accuracy of forecasts of consumer demand, product returns,
market seasonality, the timing of orders from major customers and order
cancellations, and changes or disruptions in the consumer software distribution
channels as well as those factors listed under Risk Factors elsewhere herein.
Actual events or the actual future results of the Company may differ materially
from any forward looking statement due to such risks and uncertainties. Other
factors, uncertainties and assumptions not specifically identified or disclosed
by the Company were also involved in the derivation of these forward looking
statements and the failure of such other assumptions to be realized may also
cause actual results to differ materially from those projected. The Company
assumes no obligation to update these forward looking statements to reflect
actual results or changes in factors or assumptions affecting such forward
looking statements.
FISCAL YEAR
Effective April 1, 1996, the Company changed its fiscal year from December 31 to
March 31. For comparison purposes, results for the year ended March 31, 1997 are
being compared with results for the year ended December 31, 1995. The Company
has not recast the prior year information presented herein to conform to the new
fiscal year end.
RECENT DEVELOPMENTS
Domestication into the State of Delaware. On April 15, 1997, the Company's
stockholders approved a special resolution authorizing the Company to change its
jurisdiction of incorporation from British Columbia, Canada to the state of
Delaware and adopt a Certificate of Incorporation and Bylaws under Delaware's
corporate legislation. The domestication became effective April 15, 1997.
Reverse Stock Split. On April 15, 1997, the Company's stockholders also approved
a one-for-twenty share consolidation of the Company's common stock and an
increase in the number of the Company's authorized shares of common stock to
50,000,000. All references in the accompanying consolidated financial statements
to share information, per share amounts, stock option data and market prices of
the Company's common stock have been restated to reflect such reverse stock
split.
Rights Offering. In April 1997, the Company completed a common stock rights
offering in which it issued approximately 932,500 shares of common stock at
$2.40 per share and received gross proceeds of $2,238,000.
Conversion of 8% Convertible Debentures into Series A Preferred Stock. In April
1997, the Company exchanged $5,302,000 in 8% convertible debentures for 99,993
shares of the Company's Series A Preferred Stock. The Series A Preferred Stock
has an aggregate liquidation preference of $5,302,000 and is convertible into
common stock at a rate of $2.40 per share (2,209,167 shares) and has voting
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privileges on an "as converted" basis. The Series A Preferred stock
automatically converts into common stock on July 1, 1999 or upon the occurrence
of either (i) the Company's obtaining equity financing of not less than
$2,000,000 at a price not less than $4.40 per share or (ii) the closing price of
the Company's common stock having been 250% of the conversion price of a share
of Series A Preferred Stock (currently $6.00) for any 21 trading days in any
consecutive 40 day trading period.
In addition, the Company issued to the debenture holders warrants to purchase an
additional 1,021,474 shares of the Company's common stock at an exercise price
of U.S. $3.00 per share and reduced the exercise price of 132,550 previously
issued warrants from $13.75 to $3.00 per share. The warrants must be exercised
if the closing price of the Company's common stock equals or exceeds 300% of the
exercise price ($9.00) for any 21 trading days in any consecutive 40 day trading
period. In consideration for the exchange, the Debenture Holders agreed to
retroactively forego interest ($225,445 at March 31, 1997, which was payable in
common stock) on the Convertible Debentures. The holders of common stock issued
upon conversion of preferred stock or exercise of warrants have certain rights
to have these shares registered.
Proposed Acquisition of Theatrix Interactive, Inc. On June 4, 1997, the Company
signed a definitive agreement to acquire 100% of the outstanding shares of
Theatrix Interactive, Inc. (Theatrix). The Company proposes to issue 3,102,528
shares of the Company's common stock in consideration for all the shares of
Theatrix capital stock and outstanding options and warrants. Up to an additional
500,000 shares of the Company's common stock are issuable fifteen (15) months
after the effective date of the merger if certain revenue goals are met with
respect to products acquired from Theatrix. In addition, Sanctuary Woods will
set aside 300,000 shares, under its 1996 Stock Option Plan, for issuance to
former Theatrix employees who become employees of Sanctuary Woods and will issue
a warrant to Kingdon Capital, a stockholder of Theatrix, to purchase 500,000
shares of common stock of the Company at $3.00 per share. Consummation of the
transaction is conditioned on the approval of the Theatrix stockholders and
certain regulatory approvals. The Company's management expects the transaction
to be consummated in the quarter ended September 30, 1997.
INTRODUCTION
The Company develops, publishes and markets interactive multimedia educational
software content (programs) for use in the K-12 school and home consumer
markets. The Company's products integrate digital graphics, text, sound,
animation and video and take advantage of the major advances in PC technology.
The Company's products are primarily developed for multimedia-equipped personal
computers (MPC) which include sound capabilities and a CD-ROM drive (desktop
systems). The Company believes that as more powerful personal computers become
less costly and more widely available to consumers and classrooms, demand for
multimedia products and content will continue to grow. Another category of
systems is the "set-top" system, designed primarily for connection to the
consumer's television (i.e. Sony Playstation, Sega Saturn). The Company has
developed for such systems in the past but has no current plans to do so in the
future.
The Company presently develops products for the Macintosh, Windows and Windows
95 platforms and numerous browsers. By developing products for multiple
platforms, the Company expects to reduce the risk of dependence on any one
platform, while enabling it to build the development tools that will keep it
technologically responsive as new technologies emerge. However, the
proliferation of inexpensive PC based multimedia computers have given Windows
based products more than an 80% market share. In addition, CD-ROM capacity
allows developers to produce "hybrid disks" which place both MacIntosh and PC
platforms on a single CD-ROM.
In the last several years the internet has provided another platform for
distribution of multimedia programs. Accordingly, the Company has begun to
develop specific content for the internet. The Company also believes that
broadband platforms will become increasingly attractive to the marketplace.
Broadband, which can generally be described as a digital communications medium
that allows for high band-width throughput, may take form in a number of
delivery systems including cable, fiber optics, and satellite. In anticipation
of this, the Company has formed and continues to form alliances with partners
involved in developing and distributing content appropriate for broadband
systems.
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CD-ROM. The Company's products are designed primarily for delivery on CD-ROM
because of the cost benefits available from the use of this medium as a mass
storage device, and the proliferation of this medium as the preferred consumer
platform. In addition, because the manufacturing technology is so well
developed, CD-ROMs can be purchased and replicated through numerous qualified
sources with short lead-times thereby reducing inventory risks. The Company
believes that the emergence of Digital Video Disk (DVD) technology will also
become a standard medium for the delivery of products in the future.
PRODUCTS
The Company's products are organized into families of like products under
differing brand names. The "Head Coach" brand of products uses sports themes to
help kids develop their reading and math skills. The Head Coach products
currently use professional team logos, statistics, and player likenesses through
licenses obtained from NFL Properties, NFL Players and Major League Baseball. In
the future, the Company intends to offer additional products under the Head
Coach brand. The Franklin brand of products contain the popular storybook turtle
"Franklin." These programs use animation and a curriculum-based approach to help
develop important learning skills. The Sanctuary Woods brand of products
contains some of the Company's older titles including those purchased from Magic
Quest in 1994.
HEAD COACH(TM)
NFL(TM) Math. This product allows kids ages 8 to 12 to guide their favorite
NFL(TM) team down the field by answering math questions that cover 23 different
math skills including basic computation, fractions and decimals, charts and word
problems. It features 3D photo-realistic animation, real teams, real players,
statistics, and workshops.
NFL(TM) Reading. This product allows kids ages 8 to 12 to practice reading
comprehension, spelling and vocabulary skills by teaming up with the pros. Kid's
read more than 1,800 articles packed with interesting facts about NFL teams and
players. With multi-player, multi-level capabilities, kids of different ages can
compete against one another on a level playing field.
Major League(TM) Math. This product allows kids ages 8 to 12 to guide their
favorite Major League Baseball(TM) team around the bases by answering math
questions that cover 25 different math skills such as basic computation,
percentages, prime numbers, geometric shapes and structures, powers and square
roots, volume and area. It features 3D photo-realistic animation, real teams,
statistics, and workshops.
Major League(TM) Reading. Kids can read more than 2,000 articles packed with
interesting facts about Major League teams and players and field 2,500 reading,
spelling and vocabulary questions. With multi-player, multi-level capabilities,
kids of different ages can compete against one another on a level playing field
with 3D photo-realistic animation.
FRANKLIN(TM)
Franklin Learns Math. This pre-school program for kids ages 4 to 7 combines
education and entertainment with the popular book character "Franklin" developed
by Kids Can Press Ltd. The program uses endearing characters, animation and a
curriculum-based approach to teach important learning skills, including pattern
and number recognition, telling time, counting, addition and subtraction.
Franklin's Activity Center. This fun-filled program for kids ages 4 to 9 finds
Franklin the Turtle in his room on a rainy day. There are 11 fun things to do
including jigsaw puzzles, matching games, card playing, and coloring. There are
even costumes in which to dress Franklin.
Franklin's Reading World. This pre-reading program for kids ages 4 to 7,
combines education and entertainment. This program uses endearing characters,
animation and a curriculum-based approach to teach important language skills
including reading comprehension, vocabulary and spelling. The diskette version
of this product is sold under the name, Franklin's Reading Fun.
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SANCTUARY WOODS(TM)
Ripley's: How Do You Spell Adventure. This program for kids ages 9 to 14
combines an amazing adventure game with unusual and outlandish content from the
Ripleys Believe It or Not archives. There are adventures in a jungle, a Chinese
temple and a bat cave through which kids develop their skills in reading,
spelling and vocabulary.
Travelrama. This multi-player board game helps players of all ages sharpen
geography, math and social studies skills as they use the Rand McNally road map
to scour the country in search of monuments, national parks, historical
locations and points of interest while picking up picture postcards along the
way. Multiple levels allow kids of different ages to compete against the
computer or each other.
Math Ace Grand Prix. This products allows kids, ages 8 to 14, to build an
on-screen racetrack by answering more than 3,000 math questions in this
multi-level game while learning 11 essential math concepts.
Word City Grand Prix. This program covers 7 essential language arts skills, from
alphabetization to parts of speech and allows kids, ages 7 to 14, to enter and
practice their own spelling words or create a custom dictionary. With fast-paced
arcade-style games and 3D-style graphics, learning becomes fun, especially when
kids get to drive in a Grand Prix race.
The Company also continues to sell many of its older award winning titles. These
titles are no longer sold into the consumer retail channel, but are distributed
as teacher's editions and "site-licenses" to schools and teachers throughout the
United States and Canada. These titles include Sitting on the Farm, The Cat Came
Back, Earth Treks, Ecology Treks, Time Treks, and Addison-Wesley's Real World
Math.
PRODUCT DEVELOPMENT
During 1996, the Company developed products in three studio locations: Victoria,
British Columbia; Toronto, Ontario; and San Mateo, California. The Victoria
Studio produced the Company's entertainment products, while the Toronto and San
Mateo studios developed the kids' products. In May 1996, the Company sold the
studio in Victoria, British Columbia pursuant to management's decision to
discontinue the development of entertainment titles. The Company closed its
Toronto office in January 1997 to consolidate its operations in California.
The Company maintains an internal product development team consisting of
producers, artists, programmers and engineers. Depending on the complexity of
the titles and the target player platforms, the elapsed development time per
title is typically 4 to 9 months.
In 1995 and prior, the Company entered into development agreements with
third-parties to develop programs to be published under the Company's name. The
Company ceased outside development of titles in January 1996.
During fiscal 1997 and calendar 1995 and 1994 respectively, the Company spent
$1,395,671, $4,495,963, and $5,056,661 on research and development. Research and
development expenditures in 1994 included $1.0 million allocated to in-process
research and development in connection with the Company's purchase of Magic
Quest, that was charged to operations in the June 1994 calendar quarter.
In 1995 and 1994, the Company developed products using outside developers. Such
product development was often associated with a royalty to the third party
developer based upon sales of the product developed. Payments made to the
developer in advance of release of the product were reported as prepaid and
deferred royalties. When royalties were earned, such prepaid and deferred
royalties were expensed. Prepaid and deferred amounts were also expensed based
on management's estimation of future product sales. In the fourth quarter of
1995, the Company expensed substantially all prepaid and deferred royalties
related to entertainment products, due to a strategic
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shift in the Company's focus to the children's home and education markets and a
net realizable value analysis of the recoverability of such prepaid and deferred
royalties. The Company currently has a prepaid and deferred royalty balance
corresponding to certain deferred royalty obligations related to education
products.
The Company from time to time may seek to expand its product lines and enhance
its market position by adding complementary products, technologies and
companies. Such expansion may take place through internal development, mergers
or acquisitions, licensing agreements, joint ventures, combinations with
strategic investors, or other similar arrangements.
LICENSING ARRANGEMENTS FOR INTERNAL PRODUCT DEVELOPMENT
The Company's product development strategy focuses on curriculum-based
educational content combined with major league sports themes and/or recognizable
licensed characters/products. The Company seeks opportunities to license the use
of recognizable characters and/or content libraries or to develop them jointly
with others. To date, the Company has entered into a number of such arrangements
including agreements with the NFL and Major League Baseball permitting the use
of their respective team names, logos, and other licensed properties. The
Company also has an agreement with Kids Can Press Ltd. to develop and publish
multiple titles based upon the "Franklin the Turtle" series of children's books.
The license agreements require the Company to pay certain advances and royalties
to the Licensor. Royalty obligations for products licensed under these
agreements are primarily based on (i) a percentage of the Company's net revenues
(ii) a fixed amount per unit of sales, or (iii) a percentage of net revenue less
the licensor's contribution to the finished product. The Company is required to
pay royalties within certain time periods and comply with various other
requirements in its license agreements. The Company's failure to comply could
result in the termination of such license agreements, and potentially the loss
of the right to distribute the products licensed. Termination of such license
agreements could materially adversely affect the Company's ability to sell such
products, and could materially adversely affect the Company's financial results.
In 1993, the Company entered into a licensing agreement with Ripley
Entertainment, Inc. ("Ripley"), the publisher of "Ripley's Believe It or Not,"
for certain rights to use Ripley's existing archive materials to develop and
market interactive multimedia products on CD-ROM and certain other electronic
media. The Company released two titles under this license, The Riddle of Master
Lu and How Do You Spell Adventure? In June 1996, in exchange for a $550,000
reduction in outstanding royalty obligations and other concessions, the Company
sold the license back to Ripley along with the publishing rights to The Riddle
of Master Lu and the development plans to one other title for this series.
DISTRIBUTION AND MARKETING
The Company sells its products through distributors, computer superstores,
electronic stores, mass merchandisers, discount warehouse stores, office stores
and educational dealers using its own in-house sales force, outside sales
representative and contracted sales agents. In addition, the Company also sells
its products directly to schools and consumers. International sales are derived
from licensing agreements with foreign distributors.
The Company targets its efforts in the following channels:
(i) Consumer retail. Store accounts are supplied through a variety of software
distributors and direct to certain accounts in the United States and Canada.
(ii) Education. The Company sells its products directly to schools and teachers
and indirectly through educational product dealers.
(iii) International. The Company has both exclusive and non-exclusive
republishing and distribution relationships in foreign territories.
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(iv) OEM. The Company has relationships with original equipment manufacturers
and software bundlers who bundle the Company's products with their own hardware
or third party software or other products.
(v) Direct. The Company has developed and continues to develop its own direct
mail-order distribution system. Product sales are made direct to the consumer
via catalog, targeted mailings, telephone, fax, and through the internet.
During the fiscal year ended March 31, 1997, the Company had sales to two
customers, Eidos Interactive and Navarre Corporation, that represented 18% and
16% of total net sales, respectively. During the three months ended March 31,
1996 the Company had sales to two customers that represented 22% and 16% of
total net sales. During the year ended December 31, 1995, the Company had sales
to two customers that represented 16% and 11% of total net sales. In 1994,
pursuant to a distribution agreement, the Company had sales to one customer
which represented 37% of total net sales.
Beginning in 1996, the Company began focusing its efforts on the development and
distribution of education titles for the education marketplace and began
allocating resources toward developing an educational sales strategy hiring an
educational sales staff and a VP of Education.
The Company also allocated resources to the development of its internet
web-site. The site located at www.ah-hah.com provides consumers with up-to-date
information on the Company and its products. In June 1997, the Company began
receiving customer orders at its web-site. The Company intends to devote
additional resources to increase the use of the web-site as an alternate
distribution channel. The Company has been and will continue to develop content
for the internet which plans to distribute on its own web site and others
through syndication.
There is intense competition for the limited shelf space and promotional
resources of software retailers and such competition is expected to increase as
the multimedia software market continues to develop. There can be no assurance
that the Company will be able to obtain shelf space for its products. As with
other companies in the industry, the Company has experienced difficulty in
maintaining its retail shelf presence as software titles have proliferated. The
Company has attempted to overcome this difficulty by maintaining strong
relationships with retail and wholesale buyers, and through a more targeted
approach to using its resources for channel marketing and promotions.
Nonetheless, there can be no assurance that the Company will be successful in
increasing or maintaining its shelf penetration or market share percentages.
Industry practice and competitive pressures generally require the Company to
accept returns of unsold product from wholesale distributors and retailers,
including product that is defective, shelf-worn or damaged. To mitigate exposure
to returns, the Company may choose to reduce the price of previously shipped
products to enable retailers to sell slow moving inventories. The Company
attempts to monitor and manage the volume of its sales to distributors and
retailers in order to avoid their overstocking of the Company's products,
however, the Company's distributors are not required to provide the Company with
this information. The Company recognizes revenue (net of an allowance for
product returns and price protection) from the sale of its products upon
shipment to its distributors, even though such products may be returned to the
Company. At the time of product shipment, the Company establishes reserves which
estimate the potential for future product returns and price protection
concessions based on seasonal terms of sale, distributor and retailer
inventories of the Company's products, as well as other factors. Actual product
returns or price protection concessions that exceed the Company's reserves could
materially adversely affect the Company's business, operating results and
financial condition in the quarter in which the products are shipped and in
subsequent quarters, and could increase the magnitude of quarterly fluctuations
in the Company's operating and financial results. For example, in the fourth
quarter of 1995, the Company established reserves that were significantly higher
than historical levels due to slower than expected sell through of its products,
including products that were shipped and for which the Company recognized
revenue in the third quarter of 1995. As a result, in the fourth quarter of
1995, the Company recorded product return and price protection reserves of
$5,475,002, and reported negative net revenues. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
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The rate of product returns or price protection could increase if general mass
merchant retailers become an increasing percentage of the Company's business or
other changes occur in the Company's distribution channels. Recent trends in the
distribution of software to mass merchandisers may put pressure on the Company's
margins and adversely affect the Company's financial results. In addition, it
may be difficult for the Company to estimate reserves accurately with respect to
newly introduced products or those products sold through new distribution
channels. The Company believes its success in the near term depends on the
successful introduction and market acceptance of its new products. If the
Company is not successful in introducing its new products, operating results
will be materially adversely affected.
The Company uses reasonable efforts to assess the creditworthiness of its
customers before orders are fulfilled or shipped. If the Company's assessment of
the creditworthiness of its customers receiving products on credit proves
incorrect, the Company could be required to significantly increase bad debt
reserves. There can be no assurance that such write-offs will not occur in the
future or that the amounts written off will not have a material adverse effect
on the Company's business, results of operations and financial condition. The
Company has experienced in the past, and continues to experience, significant
delays in the collection of certain of its accounts receivable. The existence of
overstock circumstances at distributor and retailer warehouses, or the lack of
significant new product releases, may cause delays in collecting amounts
otherwise owed to the Company by distributors or retailers.
The Company generates brand awareness and demand for its products through public
relations activities, advertising, product reviews, in-store promotions and
national and local trade shows. In addition, the Company devotes substantial
resources and attention to the packaging of its products, which it considers a
major marketing tool. The Company also employs certain full-time technical
support personnel to assist customers in the use of the Company's products.
COMPETITION IN THE EDUCATIONAL SOFTWARE MARKET
The educational software industry is intensely competitive, and market
acceptance for any of the Company's software products may be adversely affected
by competitors introducing similar products with greater consumer appeal. The
Company's products compete not only with CD-ROM programs but also with diskette
and, to some extent, cartridge-based video game products. As discussed above,
increased competition could result in loss of shelf space for, and reduction in
sell-through of, the Company's products at retail stores in addition to putting
significant downward pressure on pricing. Increased competition can also create
difficulty in attracting and maintaining key employees. Any of these events
could adversely affect the Company's operating results.
The Company competes against a large number of other companies of varying sizes
and resources including, among others, CUC International Inc., The Learning
Company Inc., Disney Co., Broderbund Software Inc., Creative Wonders Inc. and GT
Interactive Software Corp. Currently, the Company's competitors fall into three
general categories, (i) companies already producing computer games or other home
entertainment software, (ii) divisions of major corporations established to
pursue what is referred to as "the new media market," and (iii) small private
companies and even start-up companies whose names are not well-known but whose
founders or key personnel are recognized talents within the industry. In
addition, there has been significant consolidation of software publishers, with
large companies acquiring certain independent publishers, such as SoftKey's
acquisition of The Learning Company, and CUC International's acquisitions of
Sierra Online and Davidson & Associates. Many of the Company's competitors have
substantially greater financial, technical and marketing resources than the
Company. Such consolidation may further increase these competitors' resources.
Strong financial resources provide access to established distribution channels
and support a strong development budget. The Company is actively pursuing
strategies in order to increase its financial resources and market strength,
including strategic relationships, raising of additional capital, and mergers
and/or acquisitions. There can be no assurance, however, that the Company will
be successful in consummating any such relationships or activities, or that if
consummated, such relationships or activities will be successful.
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Among many key factors affecting the competitiveness of multimedia software are
product design and content, ease of operation, brand name recognition, access to
distribution channels and retail shelf space, quality and reliability, price and
quality of support service. The Company believes that its products compete
favorably in terms of design and content, ease of operation, quality, and
reliability and less favorably in terms of access to distribution and retail
shelf space, price, and support service. The Company lowered its price levels in
1996 to compete more effectively, and in February 1996 terminated a relationship
with a third party that was providing the Company with support services. While
the Company has made an effort to improve its competitive position, there can be
no assurance that it will be successful in this regard. The Company may take
further price reductions in the future, as may be warranted by market
conditions, product life cycle and sales levels.
MANUFACTURING
The Company contracts with a variety of third party vendors, primarily IPC
Communications located in San Jose, California, for the mass production,
packaging and order fulfillment services relating to its CD-ROM products. The
CD-ROM industry uses many of the same production facilities as the music CD
industry, and benefits from similar economies of scale. During 1997 and 1995,
the Company also utilized Softworld Services of Milpitas, California and
Certified Media, Inc. of San Jose, California for its manufacturing. Although
IPC Communications currently performs most of the Company's manufacturing
operations, the Company believes that it could enter into similar arrangements
with a number of other qualified suppliers without material expense or delay,
and may do so in the future. To date, the Company has not experienced any
material difficulties or delays in obtaining suppliers for the manufacture and
assembly of its products. Normal production runs take less than two weeks,
allowing the Company to maintain minimal backlogs.
To the extent that data is supplied from distributors and retailers, the Company
monitors its inventory levels and channel sell-through information to avoid
accumulating excess inventory. Product returns from distributors and retailers
can cause the Company to maintain excess inventory. The Company experienced an
unusually high level of product returns in the three month periods ended March
31 and June 30, 1996, and thus maintained higher than normal inventory levels.
The Company has greatly reduced its inventory levels and continues to maintain
them through focused sales strategies, liquidation, and destruction of certain
unsalable inventories.
PROPRIETARY RIGHTS
The Company regards software that it develops or licenses as proprietary and
relies on a combination of trade secret, trademark and copyright laws, license
agreements and confidentiality agreements to protect its rights in its products.
The Company has no patents and much of the technology used to develop the
Company's products is not proprietary. There can be no assurance that the
Company's competitors will not independently utilize existing technologies to
develop products that are substantially equivalent or superior to the Company's.
The Company has registered the trademark "Sanctuary Woods" and "Head Coach" in
the United States for the promotion of goods and services and computer
programming and the designing of computer programs, has registered certain
others of its trademarks in the United States, and has filed applications for
trademark registration for certain of its marks in a number of foreign
countries. The Company has also filed trademark applications in the United
States for various other trademarks, including its trees logo.
The Company owns copyrights in its various titles and has various applications
on file for U.S. registrations of its copyrights on certain products. However,
existing copyright laws afford only limited protection, and the laws of certain
countries in which the Company's products are or may be distributed do not
protect applicable intellectual property rights to the same extent as the laws
of the United States or Canada.
The Company believes that its products do not infringe on the proprietary rights
of any third party. However, as the number of software products increases and
their functionality overlaps, software developers may become subject to
infringement claims. In addition, the Company's products in
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<PAGE> 10
certain cases make use of the likenesses of individuals, which are licensed
where believed necessary by the Company. There can be no assurance that third
parties will not assert infringement claims against the Company with respect to
current or future products. In the event an infringement claim is asserted, the
Company may be faced with costly litigation or it may enter into license
arrangements with the party alleging infringement. There can be no assurance
that any such licenses will be available to the Company on commercially
reasonable terms.
PUBLISHER SERVICES DIVISION
In May 1996, the Company closed its Dallas studio and ceased operating its
publisher services business. The closure of this facility was completed on May
15, 1996.
EMPLOYEES
As of June 20, 1997, Sanctuary Woods had approximately 35 full-time employees.
The Company's future success depends in large part on the continued service of
its key technical and senior management personnel and on its ability to attract,
motivate and retain highly qualified employees. Competition for such employees
is intense, and the loss of the services of key personnel could have a material
adverse effect upon the Company's current operations and on new product
development efforts. None of the Company's employees is represented by a
collective bargaining agreement nor has the Company experienced a work stoppage.
ITEM 2. PROPERTIES
The Company leases approximately 7,500 square feet of office space in San Mateo,
California where the Company maintains its principal executive offices. The San
Mateo facility is subject to a lease which expires June 30, 1999. The Company
believes that its facilities provide suitable and adequate production capacity.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various claims, litigation and threatened litigation
in the normal course of operations. Management believes, based upon the advice
of counsel, that the ultimate resolution of such matters will not have a
material adverse effect on the Company's financial statements taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the year
ended March 31, 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was traded in the United States on the Nasdaq
National Market system until July 2, 1996 when it was delisted for failing to
maintain the minimum criteria for inclusion on such exchange. Since that date,
the Company's Common Stock has traded over-the-counter under the symbol "SWMC".
The Company's Common Stock was traded in Canada on the Vancouver Stock Exchange
until March 1997 when it was delisted at the Company's request in connection
with the Company's domestication to the state of Delaware.
The following tables set forth, for the periods indicated, closing prices for
the Company's Common Stock as reported by the Vancouver Stock Exchange, the
Nasdaq National Market and the OTC Bulletin Boards. The prices have been
adjusted to reflect the one-for-twenty share consolidation effected by the
Company on April 15, 1997.
VANCOUVER STOCK EXCHANGE
<TABLE>
<CAPTION>
FISCAL 1997 HIGH LOW
<S> <C> <C>
June 1996 CDN $42.00 CDN $16.00
September 1996 CDN $19.60 CDN $9.80
December 1996 CDN $16.00 CDN $4.40
March 1997 CDN $5.80 CDN $4.20
FISCAL 1996
June 1995 CDN $150.00 CDN $60.00
September 1995 CDN $205.00 CDN $125.00
December 1995 CDN $175.00 CDN $60.00
March 1996 CDN $ 85.00 CDN $11.40
</TABLE>
NASDAQ NATIONAL MARKET/SMALL CAP SYSTEMS
<TABLE>
<CAPTION>
FISCAL 1997 HIGH LOW
<S> <C> <C>
June 1996 $31.25 $12.50
FISCAL 1996
June 1995 $107.50 $45.00
September 1995 $157.50 $87.50
December 1995 $140.00 $40.00
March 1996 $65.00 $7.50
</TABLE>
OTC ELECTRONIC BULLETIN BOARD
<TABLE>
<CAPTION>
FISCAL 1997 HIGH LOW
<S> <C> <C>
September 1996 $15.00 $2.50
December 1996 $12.50 $1.25
March 1997 $15.00 $0.63
</TABLE>
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<PAGE> 12
The Company has not paid cash dividends and has no present plans to do so. There
were approximately 300 stockholders of record on June 15, 1997, excluding
stockholders whose stock is held in nominee or street name by brokers.
EXCHANGE RATE INFORMATION
Since June 1, 1970, the Government of Canada has permitted a floating exchange
rate to determine the value of the Canadian dollar against the U.S. dollar. The
high and low exchange rates, the average rates (average of the exchange rate on
the last day of each month during the period) and the end of the period rates
for United States dollars, expressed in Canadian dollars, for the years ended
December 31, 1993 through 1996, based on the New York buying rate for cable
transfers payable in Canadian dollars as certified for customs purposes by the
Federal Reserve Bank of New York, were as follows:
CDN DOLLARS PER U.S. $1.00
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
End of Period $ 1.3696 $ 1.3652 $ 1.4028
Average $ 1.3653 $ 1.3725 $ 1.3657
High $ 1.3860 $ 1.4235 $ 1.4074
Low $ 1.3306 $ 1.3282 $ 1.3102
</TABLE>
At March 31, 1997, the Company had either sold or terminated all of its assets
and operations in Canada.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
TRANSITION
PERIOD
YEAR ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
3/31/97 3/31/96 12/31/95(1) 12/31/94 (2) 12/31/93 12/31/92
<S> <C> <C> <C> <C> <C> <C>
Sales $ 4,749,351 $937,612 $10,981,097 $6,261,226 $ 1,424,971 $527,265
Cost of sales 1,512,871 924,210 12,575,831 3,057,368 994,153 303,083
Gross margin
(deficit) 3,236,480 13,402 (1,594,734) 3,203,858 430,818 224,182
Operating loss (4,071,238) (4,445,340) (18,684,569) (8,027,801) (4,436,009) (625,756)
Net loss (3,677,011) (4,514,171) (18,698,441) (7,404,436) (4,221,569) (586,392)
Net loss per share (3.30) (4.97) (22.16) (10.58) (9.15) (1.79)
Number of shares used
in computation 1,113,145 907,904 843,687 699,684 461,571 326,762
Working capital
(deficit) (966,479) (6,299,113) $(2,314,531) $ 6,363,968 $ 649,247 $ 981,644
Total assets 2,286,799 4,593,861 6,598,634 12,849,414 4,238,990 1,945,122
Current liabilities 2,532,745 8,914,312 6,354,655 2,095,651 669,675 99,671
Long-term obligations 5,302,000 547,781 601,359 770,000 970,000 55,232
Shareholders' equity
(deficit) (5,547,946) (4,868,232) (357,380) 9,983,763 2,599,315 1,790,219
</TABLE>
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<PAGE> 13
(1) See "Management Discussion and Analysis of Financial Condition and Results
of Operations" for a discussion of significant and material 1995 charges.
(2) Reflects acquisition of Magic Quest, Inc., effective June 30, 1994, and
resultant write-off of $1,034,958 of purchased in-process research and
development.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is engaged in the development, publication and sale of interactive
multimedia educational software products for the home and education markets.
In 1996, management discontinued the development of home entertainment products
and narrowed the Company's focus to the development and publication of
educational software products for the children's home and education markets, and
in fiscal 1996 released six new educational products: Major League Math(TM),
Franklin Learns Math(TM), How do you Spell Adventure?(TM), NFL(TM) Math and
NFL(TM) Reading and Major League Math(TM) Second Edition.
The Company also took various steps to restructure its operations, including
changing the Company's year end to March 31, installing new senior management,
substantially reducing head count from 148 employees at December 31, 1995 to 32
employees at March 31, 1997, closing the Company's Publisher Services division,
selling substantially all of the fixed assets of the Entertainment division and
eliminating the Company's outstanding debt. In addition, in April 1997, the
Company changed its jurisdiction of incorporation from British Columbia, Canada
to Delaware, U.S.A., effected a one-for-twenty share consolidation of its
outstanding Common Stock, exchanged $5.3 million in outstanding convertible
debentures for Series A Preferred Stock and warrants, cancelled the performance
shares and raised $2.2 million in a rights offering.
The Company sells its products in North America through distributors as well as
directly to schools and retailers, such as computer superstores, electronic
stores, mass merchandisers, discount warehouse stores and office stores, and
internationally through licensing arrangements with foreign distributors.
RESULTS OF OPERATIONS
Effective April 1, 1996, the Company changed its fiscal year from December 31 to
March 31. For comparison purposes, results for the year ended March 31, 1997 are
being compared with results for the year ended December 31, 1995. The Company
has not recast the prior year information presented herein to conform to the new
fiscal year end.
NET LOSS
For the fiscal year ended March 31, 1997, the Company incurred a net loss of
$3,677,011 and an operating loss of $4,071,238. This included a net gain of
$897,000 from the sale of the Company's studio in Victoria, British Columbia.
The net loss for the year included the following:
- - bad debt losses of $329,360 partly related to bankruptcy filings by two of
the Company's significant customers.
- - interest expense totaling $225,000 related to the September 1996 issuance of
convertible debentures. Pursuant to the conversion of the debentures into
Series A Preferred Stock in April 1997 and the issuance of additional
warrants to purchase common stock, the debenture holders have forgiven the
accrued interest.
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<PAGE> 14
- - expenses of approximately $390,000 related to the Company's domestication
into the State of Delaware from British Columbia, Canada, a reverse stock
split, conversion of subordinated debentures and related SEC filings (see
recent developments) in April 1997.
- - expenses of approximately $420,000 related to facility consolidation
including operating expenses from the Victoria studio up to its sale in May
1996 and costs related to the closure of the Toronto studio.
NET REVENUES
Net revenues in 1997 were $4.7 million including approximately $950,000 from the
sale of publication rights to certain entertainment titles. Sales to two of the
Company's customers, Eidos Interactive and Navarre Corporation, represented 18%
and 16% of net revenues, respectively. Net revenues in 1997 decreased
substantially from net revenues of $11.0 million in 1995 and $6.3 million in
1994, in part due to the fact that in 1996 the Company discontinued its
entertainment product line, which accounted for 60% of net revenues in 1995.
The Company intends to develop its internet web-site, www.ah-hah.com, as an
alternative distribution channel to increase sales. There is no assurance,
however, that the Company will be successful in developing its web-site as a
distribution channel, or that the web-site will generate significant sales. In
addition, retailers of the Company's products typically have a limited amount of
shelf space and promotional resources, and there is intense competition for high
quality and adequate levels of shelf space and promotional support from
retailers. Industry practice and competitive pressures generally require the
Company to accept returns of unsold product from wholesale distributors and
retailers. Alternatively, the Company may choose to reduce the price of
previously shipped products to encourage retailers to maintain the products on
the retailers' shelves. This competition has caused a downward pressure on the
prices of the Company's products and an adverse effect on the Company's gross
margins. The Company believes that competition for shelf space will become more
intense in the future and that the downward pressure on the Company's prices
will continue.
COST OF SALES
Cost of sales in 1997 were $1.5 million or 31% of net revenues as compared to
$12.6 million in 1995 and $3.1 million in 1994. Cost of sales decreased in 1997
due in part to lower sales as a result of the Company's focus on its educational
product lines. In addition, cost of sales were unusually high in 1995. In the
fourth quarter of 1995 the Company experienced an unusually high rate of return
for products sold primarily in the third quarter of 1995. As a result, the
Company reserved $5.5 million for returns and price protection, took a charge of
$4.3 million for unrecoverable royalty advances, and a charge of $1.0 million
for obsolete, slow-moving and non-salable inventory.
OPERATING EXPENSES
Research and Development. Research and development expenses were $1.4 million in
1997 or 29% of net revenue as compared to $4.5 million in 1995 and $5.1 million
in 1994. Research and development expenses decreased in 1997 primarily due to a
reduction in headcount and the sale of the Company's Victoria, British Columbia
studio associated with the narrowing of the Company's focus solely on education
products.
Marketing & Sales. Marketing and sales expenses were $3.1 million in 1997 or 63%
of net revenue as compared to $8.3 million in 1995 and $3.7 million in 1994. The
reduction in marketing and sales expenses in 1997 both in actual expense and as
a percentage of revenue was primarily due to the Company's lack of resources to
fund advertising and promotional activities and reduced headcount associated
with the narrowing of the Company's focus solely on education products.
Administration. Administrative expenses were $2.5 million in 1997 or 53% of net
revenue as compared to $3.5 million in 1995 and $1.9 million in 1994. Although
actual administrative expenses decreased in 1997 primarily as a result of the
Company's reduced headcount, administrative expenses as a percentage of net
revenue increased primarily due to nonrecurring expenses incurred by the
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<PAGE> 15
Company in connection with the Company's domestication into the State of
Delaware and in connection with the bankruptcy of two of the Company's
distributors.
Depreciation. Depreciation expenses were $354,823 in 1997 or 7% of net revenue
as compared to $852,211 in 1995 and $529,636 in 1994 . Depreciation expenses
decreased in 1997 primarily due to the Company's sale of its studio in Victoria,
British Columbia.
LIQUIDITY AND CAPITAL RESOURCES
The Company has had operating losses in each fiscal year since its inception and
as of March 31, 1997, had an accumulated deficit of $39.5 million and total
stockholders deficit of $5.5 million.
Operating activities in 1997 used $5.6 million in cash. The Company financed its
operating activities through the issuance of $5.3 million in convertible debt,
the receipt of $750,000 from the issuance of Common Stock on exercise of
warrants and the receipt of $1.9 million from the sale of the Company's studio
in Victoria, British Columbia. At March 31, 1997, cash was $101,932. On April
11, 1997, however, the Company closed a rights offering of its Common Stock in
which it raised $2.2 million.
The Company believes it must continue spending on the development and
acquisition of new products, the maintenance of adequate personnel, and on
distribution, sales and marketing efforts in order to operate its business. If
the Company's revenues are not sufficient to cover these expenditures, the
Company will likely experience ongoing losses and require additional capital
infusions.
In connection with the proposed acquisition of Theatrix Interactive, Inc., the
Company expects that its working capital requirements will substantially
increase. As a result, management believes that the Company's existing cash
resources, cash flows from operations and the cash resources acquired from
Theatrix will fund continuing operations only through August 31, 1997.
Current Status and Management's Plans
At June 20, 1997, the Company had cash of $930,000. Management believes that the
Company will need to raise significant additional working capital through debt
or equity financing to sustain its operations and fund its fiscal March 31, 1998
operating plan.
The Company plans to pursue various sources of additional funding including, but
not limited to, debt, equity, and strategic investors. The Company is also
actively exploring various business combinations (see note 2 regarding proposed
acquisition of Theatrix) and strategic relationships that may enhance the
Company's ability to develop, publish and distribute its products. No assurance
can be given that additional financing will be available or that, if available,
such financing will be obtainable on terms favorable to the Company.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared on the
going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The matters
discussed above, among others, may indicate that the Company will be unable to
continue as a going concern for a reasonable period of time.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
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 generate sufficient cash flow to meet
its obligations on a timely basis, to obtain additional financing or
refinancing, and ultimately to attain successful operations. Management is
continuing its efforts to obtain additional funds so that the Company can meet
its obligations and sustain its operations.
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<PAGE> 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
RISK FACTORS
RISKS RELATED TO BUSINESS AND OPERATIONS OF SANCTUARY WOODS
Continued Losses; Liquidity. The Company had operating losses and net losses in
each fiscal year since its inception and has suffered operating losses in each
of its last five quarters. In the three years ended March 31, 1997, December 31,
1995, and December 31, 1994, the Company reported operating losses of $4.1
million, $18.7 million and $8.0 million, respectively, and net losses in each of
these years of $3.7 million, $18.7 million and $7.4 million, respectively. The
losses were primarily due to low sales volumes and with respect to fiscal year
ended 1997 to expenses incurred by the Company in connection with steps taken by
Sanctuary Woods to reorganize or consolidate its operations, including moving
its jurisdiction of incorporation from British Columbia, Canada to Delaware,
USA, effecting a one-for-twenty share consolidation, exchanging outstanding
convertible debentures for equity and the cancellation of outstanding
Performance Shares in consideration for Common Stock of the Company. Losses were
also due to the write-off of certain significant assets as a result of the
Company's lack of capital resources and its reassessment of the future
salability of certain products. There is no assurance that the Company will
become profitable in the near future or at all.
Fluctuations in Operating Results; Seasonality. The Company has experienced, and
expects to continue to experience, significant fluctuations in operating results
due to a variety of factors, including the size and rate of growth of the
consumer and educational software market, market acceptance of the Company's
products and those of its competitors, development and promotional expenses
relating to the introduction of new products or new versions of existing
products, projected and actual changes in computing platforms, budgetary
constraints of school districts and other education providers, the timing and
success of product introductions, product returns, changes in pricing policies
by the Company and its competitors, difficulty in securing retail shelf space
for the Company's products, the accuracy of retailers' forecasts of consumer
demand, the timing of orders from major customers, order cancellations and
delays in shipment. In addition, the Company's business has been in the past and
is expected to continue to be subject to seasonal fluctuations as a result of
the purchasing cycle of consumers, school districts and dealers in educational
products. In response to competitive pressures, the Company may take certain
pricing or marketing actions that could materially adversely affect the
Company's business, operating results and financial condition. The Company may
be required to pay fees in advance to obtain licenses to intellectual properties
from third parties. A significant portion of the Company's operating expenses
are relatively fixed, and planned expenditures are based in part on sales
forecasts. If net sales do not meet the Company's forecasts, the Company's
business, operating results and financial condition could be materially
adversely affected.
Possible Write-offs from Product Returns, Price Protection; Bad Debts;
Collections. The Company recognizes revenue from the sale of its products upon
shipment to its distributors, retailers and end users (net of an allowance for
product returns and price protection), which is in accordance with industry
practice. There can be no assurance that the Company's reserves will be adequate
and if the Company's assessment of the creditworthiness of its customers
receiving products on credit proves incorrect, the Company could be required to
significantly increase the reserves previously established. In addition, the
Company has experienced in the past, and continues to experience, significant
delays in the collection of certain of its accounts receivable. Product returns
or price protection concessions that exceed the Company's reserves, or the
failure to collect accounts receivable in a timely manner could materially
adversely affect the Company's business operating results and financial
condition and could increase the magnitude of quarterly fluctuations in the
Company's operating and financial results.
Impact of Reorganization of Operations. The Company recently experienced a
period of reorganization, including moving its jurisdiction of incorporation
from British Columbia, Canada to Delaware, USA, effecting a one-for-twenty share
consolidation, exchanging outstanding convertible
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<PAGE> 17
debentures for equity and the cancellation of outstanding Performance Shares in
consideration for Common Stock of the Company, that has placed, and could
continue to place a significant strain on the Company's financial, management,
personnel and other resources. These changes or other future steps to reorganize
and reduce expenses could result in the delayed introduction of new products,
which could have a material adverse effect on the Company's financial condition
and results of operations.
Competition. The edutainment software industry is intensely competitive and
market acceptance for any of the Company's products may be adversely affected by
competitors introducing similar products with greater consumer demand. The
Company competes against a large number of other companies of varying sizes and
resources. Most of the Company's competitors have substantially greater
financial, technical and marketing resources, as well as greater name
recognition and better access to consumers. Existing competitors may continue to
broaden their product lines and potential competitors, including large computer
or software manufacturers, entertainment companies, diversified media companies,
and book publishers, may enter or increase their focus on the CD-ROM school and
home education markets, resulting in increased competition for the Company.
Retailers of the Company's products typically have a limited amount of shelf
space and promotional resources, and there is intense competition among consumer
software producers for high quality and adequate levels of shelf space and
promotional support from retailers. To the extent that the number of consumer
software products and computer platforms increases, this competition for shelf
space may intensify. Due to increased competition for limited shelf space,
retailers and distributors are increasingly in a better position to negotiate
favorable terms of sale, including price discounts and product return policies.
Retailers often require software publishers to pay fees in exchange for
preferred shelf space. There can be no assurance that retailers will continue to
purchase the Company's products or provide them with adequate levels of shelf
space. Increased competition could result in loss of shelf space for, and
reduction in sell-through of, the Company's products at retail stores and
significant price competition, any of which could adversely affect the Company's
business, operating results and financial condition. In addition, other types of
retail outlets and methods of product distribution, such as on-line services,
may become important in the future, and it may be important for the Company to
gain access to these channels of distribution. There can be no assurance that
the Company will gain such access or that the Company's access will be on terms
favorable to the Company.
Dependence on Key Personnel; Retention of Existing Employees; Hiring of New
Employees. The Company's success depends in large part on the continued service
of its key creative, technical, marketing, sales and management personnel and
its ability to continue to attract, motivate and retain highly qualified
employees. Because of the multifaceted nature of interactive media, key
personnel often require a unique combination of creative and technical talents.
Such personnel are in short supply, and the competition for their services is
intense. The process of recruiting key creative, technical and management
personnel with the requisite combination of skills and other attributes
necessary to execute the Company's strategy is often lengthy. The Company has
entered into at-will employment agreements with its management and other
personnel, who may generally terminate their employment at any time. The loss of
the services of key personnel or the Company's failure to attract additional
qualified employees could have a material adverse effect on the Company's
results of operations and research and development efforts. In particular, the
Company has recently reorganized its operations and has undergone a reduction in
force among its employees. Such reduction in force, combined with the Company's
disappointing operating performance, the price of the Company's stock, and the
availability of substantial alternative employment for talented employees of the
Company, may result in key employees and managers leaving the Company, which
could materially adversely impact the Company's ability to develop and sell its
products. The Company does not have key person insurance covering any of its
personnel.
Dependence on New Product Development; Product Delays. The success of the
Company depends on the continuous and timely introduction of successful new
products. In general, consumer preferences for edutainment software products are
difficult to predict and are often short-lived. The retail life of edutainment
software programs has become shorter, and may now last only 4 to 12 months (or
even less for unsuccessful products), while the Company typically requires 6 to
9 months or longer for the development of a new edutainment CD-ROM title. In
addition, some of the Company's edutainment CD-ROM products are seasonal,
especially the sports-based products. There can be no assurance that new
products introduced by the Company will achieve any significant
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<PAGE> 18
market acceptance or that, if such acceptance occurs, it will be sustained for
any significant period. If the Company does not timely introduce new products,
or if the Company does not correctly anticipate and respond to demand for its
products in a timely manner, the Company's business, operating results and
financial condition will be materially adversely affected.
A significant delay in the introduction of, or the presence of a defect in, one
or more products could have a material adverse affect on the Company's business,
operating results and financial condition, particularly in view of the
seasonality of the Company's business and certain of its products. Further,
delays in a product introduction near the end of a fiscal quarter may materially
adversely affect operating results for that quarter, as initial shipments of a
product may move from one quarter to the next and may represent a substantial
percentage of annual shipments of a product. The timing and success of software
development is unpredictable due to the technological complexity of software
products, inherent uncertainty in anticipating technological developments, the
need for coordinated efforts of numerous creative and technical personnel and
difficulties in identifying and eliminating errors prior to product release. In
the past, the Company has experienced delays in the introduction of certain new
products. There can be no assurance that new products will be introduced on
schedule or at all or that they will achieve market acceptance or generate
significant revenues.
Changing Product Platforms and Formats. The Company's software products are
intended to be played on machines built by other manufacturers. The operating
systems of machines currently being manufactured are characterized by several
competing and incompatible formats or "platforms," and new platforms will
probably be introduced in the future. The Company must continually anticipate
the emergence of, and adapt its products to, popular platforms for consumer
software. When the Company chooses a platform for its products, it must commit
substantial development time and investment in advance of shipments of products
on that platform. If the Company invests in a platform that does not achieve
significant market penetration, the Company's planned revenues from those
products will be adversely affect and it may not recover its development
investment. If the Company does not choose to develop for a platform that
achieves significant market success, the Company's revenues may also be
adversely affected. The Company is currently developing products only for
Windows and PC-based environments and Macintosh computers. The Company has
terminated virtually all current development for other platforms, such as CDX,
the Sony PlayStation and Sega. There can be no assurance that the Company has
chosen to support the platforms that ultimately will be successful.
Changes in Technology and Industry Standards. The edutainment software industry
is continually undergoing rapid changes, including evolving industry standards
and the introduction of new technologies, including audio and video enhancement
technologies such as DVD, MMX and 3D graphic accelerators, and operating system
upgrades. These evolving industry standards and new technologies can render the
Company's existing products obsolete or unmarketable and may require the Company
to expend substantial resources to develop products that incorporate
technological changes and evolving industry standards. There can be no assurance
that the Company will have the resources necessary to undertake such a
development effort, or if such development effort is undertaken that the Company
will be successful in introducing new products that keep pace with technological
changes or evolving industry standards, or satisfy evolving consumer
preferences. Failure to do so will have a material adverse effect on the
Company's business, operating results and financial condition.
Limited Protection of Intellectual Property and Proprietary Rights; Risk of
Litigation. The Company regards its software as proprietary and relies primarily
on a combination of trademark, copyright and trade secret laws, and employee and
third-party nondisclosure agreements and other methods to protect its
proprietary rights. However, the Company does not have signed license agreements
with its end-users and does not include in its products any mechanism to prevent
or inhibit unauthorized copying. Unauthorized parties may copy the Company's
products or reverse engineer or otherwise obtain and use information that the
Company regards as proprietary. If a significant amount of unauthorized copying
of the Company's products were to occur, the Company's business, operating
results and financial condition could be materially adversely affected. Further,
the laws of certain countries in which the Company's products are or may be
distributed do not protect applicable intellectual property rights to the same
extent as the laws of the United States. In addition, the Company holds no
patents, and although the Company has developed and continues to develop certain
proprietary software tools, the copyrights of which are owned by the Company,
most of the
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technology used to develop the Company's products is not proprietary. There can
be no assurance that the Company's competitors will not independently utilize
existing technologies to develop products that are substantially equivalent or
superior to the Company's also, as the number of software products in the
industry increases and the functionality of these products further overlaps,
software developers and publishers may increasingly become subject to
infringement claims. There can be no assurance that third parties will not
assert infringement claims against the Company in the future with respect to
current or future products.
As is common in the industry, from time to time the Company receives notices
from third parties claiming infringement of intellectual property or other
rights of such parties. The Company investigates these claims and responds as it
deems appropriate. There has been substantial litigation regarding copyright,
trademark and other intellectual property rights involving computer software
companies in general. The Company may also face suits as a result of employment
matters, publicity rights, governmental or regulatory investigations, or due to
claims of breach of the Company's obligations under various agreements to
publish or develop products, or for goods or services provided to the Company.
Adverse determinations in such claims or litigation could have a material
adverse effect on the Company's business, operating results and financial
condition. The Company may find it necessary or desirable in the future to
obtain licenses relating to one or more of its products or relating to current
or future technologies. There can be no assurance that the Company will be able
to obtain these licenses or other rights on commercially reasonable terms or at
all.
Relationship with Vendors. In the past the Company has experienced difficulty in
paying its vendors. If the Company experiences such difficulty in the future, it
may result in the loss of the availability of the services of such vendors,
which could hamper the Company's ability to manufacture and ship products, and
may ultimately result in the Company being sued for collection of such amounts
as may be owed to such vendors. If the Company is unable to produce its products
to fill orders, the Company's operating results and financial condition could be
materially adversely affected. In the event that suits by vendors are filed
against the Company, the Company may be required to incur unanticipated legal
expenses.
Market for Common Stock; Stock Price Volatility. The Company's Common Stock has
traded solely on the over-the-counter bulletin board since March 12, 1997, when
the Company's shares were delisted from the Vancouver Stock Exchange at the
Company's request. Shares traded over-the-counter are subject to wide
fluctuations between bid and ask prices. In addition, the Company's Common Stock
is thinly traded. Based upon these factors and historical trends in the market
for other software company stocks, the Company anticipates that the trading
price of its Common Stock may be subject to wide fluctuations in response to
quarterly variations in operating results, changes in actual earnings or in
earnings estimates by analysts, announcements of technological developments by
the Company or its competitors, general market conditions or other events
largely outside the Company's control.
Importance of International Sales. The development of products for foreign
markets requires substantial additional time, effort and expense because of the
large differences among countries' education requirements and cultures. The
Company expects that international sales will continue to represent a
significant percentage of net sales. International sales may be adversely
affected by the imposition of governmental controls, restrictions on export
technology, political instability, trade restrictions, changes in tariffs and
the difficulties associated with staffing and managing international operations,
lack of acceptance of localized products in foreign countries, longer accounts
receivable payment cycles, difficulties in collecting payment, reduced
protection for the Company's intellectual property rights and the burdens of
complying with a wide variety of foreign laws. In addition, international sales
may be adversely affected by the economic conditions in each country. There can
be no assurance that the Company will be able to maintain or increase
international market demand for the Company's products or that such factors will
not have a material adverse effect on the Company's future international revenue
and, consequently, the Company's business, operating results and financial
condition.
The Company's international revenue is currently denominated in a variety of
foreign currencies and the Company does not currently engage in any hedging
activities. Although exposure to currency fluctuations to date has been
insignificant, there can be no assurance that fluctuations in the currency
19
<PAGE> 20
exchange rates in the future will not have a material adverse effect on the
Company's business, operating results and financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report - Deloitte & Touche LLP 21
Independent Auditors' Report - Deloitte & Touche 22
Consolidated Balance Sheets:
March 31, 1997 and 1996 23
Consolidated Statements of Operations:
Years Ended March 31, 1997, December 31, 1995 and 1994
and the Three Month Period Ended March 31, 1996 24
Consolidated Statements of Stockholders' Equity:
Years Ended March 31, 1997, December 31, 1995 and 1994
and the Three Month Period Ended March 31, 1996 25
Consolidated Statements of Cash Flows:
Years Ended March 31, 1997, December 31, 1995 and 1994
and the Three Month Period Ended March 31, 1996 26
Notes to Consolidated Financial Statements 27
Consolidated Financial Statement Schedules
Supplemental Schedule II - Valuation and Qualifying Accounts
Years Ended March 31, 1997, December 31, 1995 and 1994
and the Three Month Period Ended March 31, 1996 38
</TABLE>
20
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Sanctuary Woods Multimedia Corporation:
We have audited the accompanying consolidated balance sheets of Sanctuary Woods
Multimedia Corporation as of March 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the year ended March 31, 1997, the three-month period ended March 31,
1996 and the year ended December 31, 1995. Our audits also included the
consolidated financial statement schedule for the year ended March 31, 1997, the
three-month period ended March 31, 1996 and the year ended December 31, 1995
appearing on page 38. These consolidated financial statements and the
consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the consolidated financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance 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 accompanying consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
March 31, 1997 and 1996, and the results of its operations and its cash flows
for the year ended March 31, 1997, the three-month period ended March 31, 1996
and the year ended December 31, 1995 in conformity with generally accepted
accounting principles. Also, in our opinion, the consolidated financial
statement schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has experienced recurring losses
from operations, has generated negative cash flows from operations and has
negative working capital and a stockholders' deficit at March 31, 1997. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans concerning these matters are also described in
Note 3. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
San Francisco, California
June 20, 1997
21
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Sanctuary Woods Multimedia Corporation
We have audited the consolidated statements of operations, stockholders' equity
and cash flows of Sanctuary Woods Multimedia Corporation and its subsidiaries
(the "Company") for the year ended December 31, 1994. Our audit also included
the 1994 consolidated financial statement schedule appearing on page 38. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the 1994 consolidated
financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit included 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 audit provides a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations of the Company and its cash flows
for the year ended December 31, 1994 in accordance with accounting principles
generally accepted in the United States. Also, in our opinion, the 1994
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Effective July 1, 1994, the Company changed its functional currency to United
States dollars from Canadian dollars and effective November 1, 1994, the Company
changes its reporting currency to United States dollars from Canadian dollars.
DELOITTE & TOUCHE
Chartered Accountants
Vancouver, British Columbia, Canada
February 23, 1995 (except for the second paragraph of Note 2 and the first
paragraph of Note 13 which are as of April 15, 1997, and the second
paragraph of Note 8 which is as of September 20, 1995)
22
<PAGE> 23
SANCTUARY WOODS MULTIMEDIA CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1997 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $101,932 $8,455
Accounts receivable 275,335 800,701
Inventories 656,415 1,384,840
Prepaid royalties 197,941 127,000
Prepaid expenses 244,136 294,203
Prepaid offering expenses 90,507
----------- -----------
Total current assets 1,566,266 2,615,199
PROPERTY AND EQUIPMENT 462,348 1,834,266
PREPAID ROYALTY OBLIGATIONS - 134,000
DEFERRED WARRANT EXPENSE & OTHER 258,185 10,396
----------- -----------
TOTAL ASSETS $ 2,286,799 $ 4,593,861
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $1,343,214 $ 3,087,886
Accrued expenses 579,297 1,388,359
Accrued interest 225,443 7,000
Royalty obligations 371,043 611,905
Current portion of capital lease obligations 13,748 28,715
Bank debt 2,226,781
Notes payable 1,563,666
----------- -----------
Total current liabilities 2,532,745 8,914,312
8% CONVERTIBLE SUBORDINATED DEBENTURES 5,302,000
LONG-TERM ROYALTY OBLIGATIONS 534,000
CAPITAL LEASE OBLIGATIONS 13,781
----------- -----------
Total liabilities 7,834,745 9,462,093
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, authorized 5,000,000, no
par value none issued or outstanding
Common Stock, authorized 50,000,000 shares,
no par value, issued and outstanding,
1,171,582 shares and 1,107,929 shares 34,755,092 31,763,839
Accumulated deficit (39,551,124) (35,874,113)
Accumulated translation adjustments (751,914) (757,958)
----------- -----------
Total stockholders' equity (deficit) (5,547,946) (4,868,232)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 2,286,799 $ 4,593,861
=========== ===========
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 24
SANCTUARY WOODS MULTIMEDIA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
SALES:
Consumer titles $ 2,698,535 $592,985 $ 8,733,313 $5,299,507
Licensing revenue 2,050,816 338,820 1,678,240 472,416
Publisher services 5,807 569,544 489,303
--------------- --------------- --------------- ---------------
Total sales 4,749,351 937,612 10,981,097 6,261,226
--------------- --------------- --------------- ---------------
COST OF SALES:
Consumer titles 1,512,871 759,288 11,413,590 2,401,565
Technology amortization 532,305 338,737
Publisher services 164,922 629,936 317,066
--------------- --------------- --------------- ---------------
Total cost of sales 1,512,871 924,210 12,575,831 3,057,368
--------------- --------------- --------------- ---------------
GROSS MARGIN (DEFICIT) 3,236,480 13,402 (1,594,734) 3,203,858
--------------- --------------- --------------- ---------------
OPERATING EXPENSES:
Research and development 1,395,671 1,261,391 4,495,963 5,056,661
Marketing and sales 3,061,491 1,789,866 8,263,739 3,722,789
Administration 2,495,733 1,196,553 3,477,922 1,922,573
Depreciation 354,823 210,932 852,211 529,636
--------------- --------------- --------------- ---------------
Total operating expenses 7,307,718 4,458,742 17,089,835 11,231,659
--------------- --------------- --------------- ---------------
OPERATING LOSS (4,071,238) (4,445,340) (18,684,569) (8,027,801)
--------------- --------------- --------------- ---------------
OTHER INCOME (EXPENSE):
Foreign exchange gain (loss) (5,095) (203) (4,307) 378,951
Interest income (expense), net (401,169) (68,628) (9,565) 244,414
Net gain on sale and disposal of assets 800,491
--------------- --------------- --------------- ---------------
Total other income (expense) 394,227 (68,831) (13,872) 623,365
--------------- --------------- --------------- ---------------
NET LOSS $ (3,677,011) $(4,514,171) $(18,698,441) $(7,404,436)
=============== =============== =============== ===============
NET LOSS PER SHARE ($3.30) ($4.97) ($22.16) ($10.58)
SHARES USED IN COMPUTATION 1,113,145 907,904 843,687 699,684
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 25
SANCTUARY WOODS MULTIMEDIA CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock Accumulated
------------------------ Accumulated Translation
Shares Amount Deficit Adjustments Total
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1993 710,804 $8,184,672 $ (5,257,065) $ (328,292) $ 2,599,315
Exercise of warrants 8,208 436,671 436,671
Exercise of stock options 22,688 685,007 685,007
Shares issued for cash 132,500 11,933,809 11,933,809
Shares issued on acquisition of subsidiary 105,313 1,838,791 1,838,791
Stock option compensation 317,305 317,305
Foreign currency translation adjustments (422,699) (422,699)
Net loss (7,404,436) (7,404,436)
------------------------------------------------------------------
Balances, December 31, 1994 979,513 23,396,255 (12,661,501) (750,991) 9,983,763
Exercise of warrants 400 22,905 22,905
Exercise of stock options 27,766 1,033,617 1,033,617
Shares issued for cash 100,000 7,168,868 7,168,868
Stock option compensation 132,543 132,543
Foreign currency translation adjustments (635) (635)
Net loss (18,698,441) (18,698,441)
------------------------------------------------------------------
Balances, December 31, 1995 1,107,679 31,754,188 (31,359,942) (751,626) (357,380)
Exercise of stock options, net of
issuance costs 250 (2,730) (2,730)
Stock option compensation 12,381 12,381
Foreign currency translation adjustments (6,332) (6,332)
Net loss (4,514,171) (4,514,171)
------------------------------------------------------------------
Balances, March 31, 1996 1,107,929 31,763,839 (35,874,113) (757,958) (4,868,232)
Exercise of warrants 75,000 750,000 750,000
Conversion of notes payable 156,379 1,562,501 1,562,501
Conversion of accounts payable and
royalty obligations 22,750 316,312 316,312
Cancellation of performance shares in
exchange for shares of common stock, net (190,476) (841) (841)
Stock option and warrant compensation 363,281 363,281
Foreign currency translation adjustments 6,044 6,044
Net loss (3,677,011) (3,677,011)
------------------------------------------------------------------
Balances, March 31, 1997 1,171,582 $ 34,755,092 $(39,551,124) $(751,914) $(5,547,946)
==================================================================
</TABLE>
See notes to consolidated financial statements.
25
<PAGE> 26
SANCTUARY WOODS MULTIMEDIA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994
--------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,677,011) $(4,514,171) $(18,698,441) $(7,404,436)
Depreciation and amortization 360,719 211,457 1,709,552 975,859
Stock option and warrant compensation 143,878 12,381 132,543 317,305
Sale of intellectual property
rights in consideration for a
reduction in royalty obligations (429,688)
Net gain on sale and disposal of assets (800,491)
Consolidation of facilities and other items 401,658
Write off of research and development
purchased 1,034,958
Changes in assets and liabilities:
Accounts receivable 525,366 507,902 1,609,655 (2,780,750)
Inventories 728,425 593,018 (1,277,633) (649,537)
Prepaid royalties, expenses and other (237,466) 450,997 2,651,411 (1,921,539)
Accounts payable and accrued expenses (2,208,297) 439,100 2,148,494 1,518,611
--------------- -------------- -------------- -------------
Net cash used in operating activities (5,594,565) (1,897,658) (11,724,419) (8,909,529)
--------------- -------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 1,919,500
Purchases of property and equipment (30,951) (79,267) (958,283) (1,817,911)
--------------- -------------- -------------- -------------
Net cash provided (used) in investing
activities 1,888,549 (79,267) (958,283) (1,817,911)
--------------- -------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes, debentures and
warrants 5,302,000 1,556,177
Proceeds from exercise of warrants 750,000
Common stock issued - net of issue costs (2,730) 8,225,390 13,055,487
Net (repayments) borrowings on bank debt (2,226,781) 426,781 1,800,000
Repayments on long-term debt (28,748) (76,032)
--------------- -------------- -------------- -------------
Net cash provided in financing activities 3,796,471 1,980,228 10,025,390 12,979,455
--------------- -------------- -------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 3,022 (6,332) (635) (363,294)
--------------- -------------- -------------- -------------
NET INCREASE (DECREASE) IN CASH 93,477 (3,029) (2,657,947) 1,888,721
CASH, BEGINNING OF PERIOD 8,455 11,484 2,669,431 780,710
--------------- -------------- -------------- -------------
CASH, END OF PERIOD $101,932 $8,455 $11,484 $2,669,431
=============== ============== ============== =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $91,833 $57,985 $73,972 $2,237
Income taxes 5,984 1,600
Supplemental disclosures of non-cash
financing and investing activities:
Conversion of notes payable into common stock 1,562,501
Reduction in royalty obligations in exchange
for issuance of common stock and sale of
intellectual property rights 549,688
Conversion of account payable into common stock 195,000
Capital lease obligations $49,985
Issuance of common stock on acquisition of
Magic Quest $1,838,791
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 27
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND CHANGE IN FISCAL YEAR-END
Sanctuary Woods Multimedia Corporation and its subsidiaries (the "Company")
develop, publish and market interactive multimedia educational software
products for use in the K-12 school and home consumer markets. Products are
sold primarily through distributors into retail outlets. Sales are also
made directly to schools, hardware manufacturers and bundlers (OEM), and to
international distributors. Revenue is also generated from licensing and
other activities related to the Company's products and intellectual
properties. Prior to 1996, the Company published interactive entertainment
products and provided interactive multimedia services to trade and textbook
publishers.
The Company changed its reporting and tax fiscal year to March 31 from
December 31 effective April 1, 1996. Accordingly, the accompanying
consolidated financial statements include the Company's fiscal years ended
December 31, 1994 and 1995, the three month transition period ended March
31, 1996 and the fiscal year ended March 31, 1997.
2. SUBSEQUENT EVENTS
Domestication into the State of Delaware. On April 15, 1997, the Company's
stockholders approved a special resolution authorizing the Company to
change its jurisdiction of incorporation from British Columbia, Canada to
the state of Delaware and the adoption by the Company of a Certificate of
Incorporation and Bylaws under Delaware's corporate legislation. The
domestication became effective April 16, 1997.
Reverse Stock Split. On April 15, 1997, the Company's stockholders approved
a one-for-twenty share consolidation of the Company's common stock and an
increase in the number of the Company's authorized shares of common stock
to 50,000,000. All references in the accompanying consolidated financial
statements to share information, per share amounts, stock option data and
market prices of the Company's common stock have been restated to reflect
such stock consolidation.
Rights Offering. In April 1997, the Company completed a stock rights
offering in which it issued approximately 932,500 shares at $2.40 per share
and received gross proceeds of $2,238,024.
Conversion of 8% Convertible Debentures into Series A Preferred Stock. In
April 1997, the Company exchanged $5,302,000 in 8% convertible debentures
(see Note 3) for 99,993 shares of the Company's Series A Preferred Stock.
The Series A Preferred Stock has an aggregate liquidation preference of
$5,302,000 and is convertible into common stock at a rate of $2.40 per
share (2,209,167 shares) and has voting privileges on an "as converted"
basis. The Series A Preferred automatically converts into common stock on
July 1, 1999 or upon the occurrence of either (i) the Company's obtaining
equity financing of not less than $2,000,000 at a price not less than $4.40
per share or (ii) the closing price of the Company's common stock having
been 250% of the conversion price of Series A Preferred Stock ($6.00) for
any 21 trading days in any consecutive 40 day trading period.
In addition, the Company issued to the debenture holders warrants to
purchase an additional 1,021,474 shares of the Company's common stock at an
exercise price of U.S. $3.00 per share and reduced the exercise price of
132,550 previously issued warrants from $13.75 to $3.00 per share. The
warrants must be exercised if the closing price of the Company's common
stock equals or exceeds 300% of the exercise price ($9.00) for any 21
trading days in any consecutive 40 day trading period. In consideration for
the exchange, the Debenture Holders agreed to retroactively forgo interest
($225,445 at March 31, 1997, which was payable in common stock) on the
Convertible Debentures. The holders of common stock issued upon conversion
of preferred stock or exercise of warrants have certain rights to have
these shares registered.
27
<PAGE> 28
Proposed Acquisition of Theatrix Interactive, Inc. On June 4, 1997, the
Company signed a definitive agreement to acquire 100% of the outstanding
shares of Theatrix Interactive, Inc. (Theatrix). The Company will issue
3,102,528 shares of the Company's common stock in consideration for all the
shares of Theatrix capital stock. Up to an additional 500,000 shares of the
Company's common stock are issuable one year after the effective date of
the merger if certain revenue goals are met with respect to products
acquired from Theatrix. In addition, Sanctuary Woods will set aside 300,000
shares, pursuant to the its 1996 Stock Option Plan, for issuance to former
Theatrix employees who become employees of Sanctuary Woods and isssue a
warrant to Kingdon Capital, a shareholder of Theatrix, Inc. to purchase
500,000 Sanctuary Woods common shares at $3.00 per share. Consummation of
the transaction is conditioned on the approval of the Theatrix stockholders
and certain regulatory approvals. The Company's management expects the
transaction to be consummated in the quarter ended September 30, 1997.
3. GOING CONCERN UNCERTAINTY
The Company incurred net losses of $3,677,011, $4,514,171 and $18,698,441
in the fiscal year ended March 31, 1997, the three months ended March 31,
1996 and the year ended December 31, 1995, respectively. Net cash used by
operating activities was $5,594,565, $1,897,658 and $11,724,419 in the same
periods respectively. At March 31, 1997 working capital deficit was
$966,479 and stockholder's deficit was $5,547,946.
Calendar 1995 Operations
Sales in the fourth quarter 1995 were significantly below expectations and
the Company experienced significantly higher than expected returns. In
light of its operating and financial situation in the fourth quarter of
1995, the Company accelerated write-offs of certain prepaid and deferred
royalties and made additional provisions for returns, price protection and
inventory obsolescence.
The Company's 1995 net loss included certain significant adjustments
recorded in the fourth quarter related to these matters as follows:
<TABLE>
<S> <C>
Estimated sales returns and price protection $ 5,475,002
Write-offs of unrecoverable prepaid and deferred 4,260,532
royalties
Provision for inventory obsolesence 1,033,389
Write-offs of licenses and other intangibles 235,000
------------
Total $ 11,003,923
============
</TABLE>
Calendar 1996 Operations
Beginning in 1996, the Company commenced reorganization of its operations.
A major part of that reorganization involved ceasing publication of new
entertainment titles and eliminating the Publisher Services Division. Costs
incurred from reorganization, including severance, site closure and
consolidation, significantly contributed to the net loss in the three
months ended March 31, 1996. Additionally, there were charges taken against
accounts receivable and inventories. These charges (mostly for
entertainment titles) resulted from a review of product inventories in the
distribution channel and the price relief required to sell them through to
the consumer and an evaluation of the salability of inventories on hand.
The amount of these expenses included the following:
<TABLE>
<S> <C>
Closure of Publisher Services Division $ 437,000
Severance expenses 210,000
Consolidation of facilites and related items 358,000
Estimated sales returns and price protection 426,000
Provision for inventory obsolescence 250,000
----------
Total $1,681,000
==========
</TABLE>
28
<PAGE> 29
Revenues and expenses for the fiscal year ended March 31, 1997 included the
following items related to entertainment operations and products:
<TABLE>
<S> <C>
Revenues -
Sale of rights to certain entertainment products $580,000
========
Expenses -
Victoria studio operating expenses (studio sold in May 1996) $250,000
Consolidation of facilites and related items 47,500
Estimated sales returns and price protection 150,000
Provision for inventory obsolescence 100,000
--------
Total 547,500
========
Other income - net gain on sale and disposal of assets $875,161
========
</TABLE>
1996 - 1997 Management Actions
During 1996 and early 1997, the Company instituted measures to improve
operations and cash flows. Specific items accomplished through June 20,
1997 included the following:
- Appointment of a new Chairperson, President and Chief Executive
Officer, Vice President of Marketing and Controller.
- Reduction of head count by approximately 70% from December 31, 1995
levels and elimination of many part-time, temporary and contract
positions.
- Ceasing publication of new entertainment titles.
- Closure of the Publisher Services Division.
- Sale of substantially all of the fixed assets of the Entertainment
Division. This included the sale of the studio in Victoria, British
Columbia during May 1996 for $1,900,000, of which $500,000 was used to
reduce bank borrowings. The gain on the sale of the studio, included
in other income in the fiscal year ended March 31, 1997 totaled
$897,260.
- Repayment of the Company's bank borrowings which reached a peak of
$2,572,000 in January 1996.
- Termination of all software development projects through outside
developers.
- Sale in June 1996 of certain entertainment product rights to one of
its licensors in consideration for a $429,688 reduction in royalty
obligations. Such sale was included as licensing revenue in the fiscal
year ended March 31, 1997. The transaction also encompassed the
issuance of 8,750 shares of the Company's common stock in
consideration of an additional $120,000 reduction in royalty
obligations.
- Sale of other entertainment product rights (included in licensing
revenue) for $150,000 in the fiscal year ended March 31, 1997.
29
<PAGE> 30
March 1996 Financing
In February and March 1996, the Company privately placed for cash
$1,500,000 principal amount of 10% convertible notes. These notes included
$100,000 principal amount of notes sold to two of the Company's officers.
In June 1996, all of the notes, plus accrued interest, were converted into
156,379 shares of common stock, the holders of which have certain
registration rights. In connection with the issuance of the notes, warrants
were issued to purchase 93,750 shares of common stock at an exercise price
of $10.00 per share. In June 1996, certain of the convertible note holders
exercised, for $750,000 in cash, warrants to purchase 75,000 shares of
stock. The holders of these shares have certain registration rights.
Bank Line of Credit
In March 1997 the Company paid in full all amounts due under a bank line of
credit which expired April 3, 1997. The outstanding loan balance was
$2,226,781 at March 31, 1996.
8% Convertible Debentures
In September 1996, the Company privately placed for cash $5,302,000 in 8%
convertible subordinated debentures due July 31, 1999. The debentures were
convertible into shares of the Company's common stock at the rate of one
share for each $11.00 of principal (482,000 shares) plus accrued interest.
In addition, the Company issued to each purchaser of the debentures a
warrant to purchase one share of common stock for each $40.00 invested or
132,550 shares. Each warrant was exercisable at a price of $13.75 per share
until September 1999 (see subsequent events in note 2).
Current Status and Management's Plans
At June 20, 1997, the Company had cash of $930,000. Management believes
that the Company will need to raise significant working capital through
additional debt or equity financing to sustain its operations and fund its
fiscal March 31, 1998 operating plan.
The Company plans to pursue various sources of additional funding
including, but not limited to, debt, equity, and strategic investors. The
Company is also actively exploring various business combinations (see note
2 regarding proposed acquisition of Theatrix, Inc.) and strategic
relationships that may enhance the Company's ability to develop, publish
and distribute its products. No assurance can be given that additional
financing will be available or that, if available, such financing will be
obtainable on terms favorable to the Company.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared on
the going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The matters
discussed above, among others, may indicate that the Company will be unable
to continue as a going concern for a reasonable period of time.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or the amounts 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 generate
sufficient cash flow to meet its obligations on a timely basis, to obtain
additional financing or refinancing, and ultimately to attain successful
operations. Management is continuing its efforts to obtain additional funds
so that the Company can meet its obligations and sustain its operations.
4. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles of the
United States of America (U.S. GAAP).
30
<PAGE> 31
a. Consolidation - The consolidated financial statements include the
accounts of Sanctuary Woods Multimedia Corporation (a Canadian
corporation, reincorporated into the State of Delaware in April 1997)
and its wholly-owned subsidiaries, Magic Quest Inc. (California,
U.S.A.) and Sanctuary Woods Multimedia Inc. (Nevada, U.S.A.). All
intercompany balances and transactions are eliminated in
consolidation.
b. Foreign Currency Translation - The consolidated financial statements
are stated in U.S. dollars. Assets and liabilities of foreign
operations that have a different functional currency are translated
into their U.S. dollar equivalents based on the rate of exchange as of
the balance sheet dates. Revenue and expense accounts are translated
based on average rates of exchange during the period. Gains or losses
resulting from foreign currency translation are reported as a separate
component of stockholders' equity. Foreign currency transaction gains
and losses are included in the statements of operations. As of March
31, 1997, the Company had no significant foreign accounts or
operations.
c. Use of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amount of assets and liabilities, the 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.
d. Inventories consist of finished goods and raw materials and are stated
at the lower of cost (first-in, first-out) or market (net realizable
value). The Company estimates the net realizable value of inventories
based on anticipated future revenues. It is reasonably possible that
such estimates of anticipated future revenues could be significantly
reduced from time to time due to competitive products and pricing
pressures. In the event that inventory cannot be sold above its
estimated net realizable value, the Company could incur significant
additional write-offs.
e. Prepaid and Deferred Royalties represent prepayments made and current
guaranteed minimum payments to be made under licensing and development
agreements. Prepaid and deferred royalties are expensed as cost of
goods sold based on actual net product sales and are classified as
current or noncurrent based upon estimated product sales within the
next year. Management estimates the future value of prepaid and
deferred royalties quarterly and any amounts that management deems
unlikely to be recouped through anticipated product sales are charged
to cost of goods sold.
Royalty Obligations represent guaranteed minimum royalty payments to
be made pursuant to contractual license agreements. Generally,
royalties are calculated based on a percentage of sales ranging from
5% to 35%. Royalty expense was $147,218 for the fiscal year ended
March 31, 1997, $94,340 in the three months ended March 31, 1996 and
$7,233,046 and $330,185 in the years ended December 31, 1995 and 1994
respectively. The 1995 royalty expense includes write-offs of prepaid
and deferred royalties totalling $4,260,532 (see Note 3).
f. Property and Equipment are recorded at cost and depreciation is
provided using the declining balance method over the following useful
lives:
<TABLE>
<S> <C>
Computer equipment 3 years
Computer software 3 years
Furniture and equipment 5 years
</TABLE>
Leasehold improvements are amortized using the straight-line method
over the term of the lease.
g. Technology Amortization represents the amortization of the cost of
technology acquired through the 1994 acquistion of Magic Quest Inc.
and relates to products for which technological feasibility had been
established. Amortization of the deferred development expenditures
commenced in 1994 upon release of such products and is included in
cost of
31
<PAGE> 32
sales. Amounts were amortized using the straight-line method and were
fully amortized as of December 31, 1995. In addition, $1,034,958 of
the Magic Quest purchase price was allocated to in process research
and development and charged to operations in 1994.
h. Research and Development Expenses - Software development costs
incurred prior to achieving technological feasibility are treated as
research and development expenses and are expensed as incurred. All
software development costs incurred by the Company have been expensed.
The establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized software development costs
requires considerable judgment by management with respect to certain
factors affecting the Company's products, including, but not limited
to, anticipated future gross revenues, estimated economic life and
changes in software and hardware technologies. Amounts that could have
been capitalized after consideration of the above factors were
immaterial and therefore no costs have been capitalized.
i. Licenses and Other Intangibles - The Company capitalizes costs
relating to the acquisition of licenses, copyrights and trademarks.
These costs are capitalized until the related products are available
for sale, at which time they are amortized against income using the
straight-line method over management's estimate of the economic lives
of the underlying assets, generally one to two years. In the fourth
quarter of 1995, such estimates of the economic lives were
significantly reduced and $235,000 of licenses and other intangibles
were written-off.
j. Revenue Recognition - Revenue from product sales is recognized when
products are shipped. The Company provides estimated reserves for
future returns and price protection. It is reasonably possible that
actual future returns and price protection allowances could exceed
such estimates. As a result, the Company's reserves could be
significantly increased in the near term.
Certain revenue from sales and licensing agreements is recognized when
the Company fulfills its obligations under the related agreements.
These include the Company's delivery of software and associated
documentation to the licensee in reproducible form. Royalty income
from subsequent product sales during the licensing period is recorded
in the period the products are sold by the licensee. Revenue from
publisher services was recognized when earned.
k. Income taxes are recorded using the asset and liability approach as
defined by Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes".
l. Net income (loss) per share. Primary earnings per share equals net
income (loss) divided by the weighted average number of shares
outstanding after giving effect to dilutive stock options and
warrants. Fully diluted earnings per share is not presented because
such amounts would be anti-dilutive.
m. Stock-based compensation. The Company accounts for stock based awards
to employees using the intrinsic value method in accordance with APB
No. 25, Accounting For Stock Issued To Employees.
The Black-Scholes model used by the Company to calculate option values
pursuant to SFAS No. 123, as well as other currently accepted option
valuation models, was developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions,
which significantly differ from the Company's stock option awards.
These models also incorporate highly subjective assumptions, including
future stock price volatility and expected time until exercise, which
greatly affect the calculated values. Under the Black-Scholes pricing
model, stocks with high volatility provide option holders with a
greater economic "upside" potential and, accordingly, result in a high
option valuation. Thus management believes that the Black-Scholes
model does not necessarily provide a reliable single measure of the
fair value of the Company's option awards.
32
<PAGE> 33
As allowed under the provisions of SFAS No. 123, the Company provides
proforma disclosures (see Note 9) of net income (loss) and earnings
(loss) per share as if the accounting provisions of SFAS No. 123 had
been adopted.
n. New accounting standards. In February 1997, The Financial Accounting
Standards Board issued Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128). The Company is required to adopt SFAS
128 in the December 31, 1997 quarter and will at that time restate
earnings per share (EPS) data for prior periods to conform with SFAS
128. Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a
dual presentation of basic and diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income (loss) available to
common shareholders by the weighted average of common shares
outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
If SFAS 128 had been in effect during the fiscal year ended March 31,
1997, basic and diluted would not have been significantly different
than EPS currently reported for the periods.
5. ACCOUNTS RECEIVABLE
The Company allows customers to exchange and/or return products. In order
to promote sell-through and limit product returns, the Company also
provides "price protection" on slow moving products. In addition, the
Company's products are sold with a ninety-day warranty against defects. The
Company has recorded reserves for sales returns and allowances and price
protection based on historical experience and management's current
estimates of potential returns and allowances and necessary price
protection.
Accounts receivable consisted of:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Accounts receivable $ 1,210,365 $ 4,814,104
Less allowances for:
Doubtful accounts (123,424) (207,352)
Sales returns and allowances (811,606) (3,806,051)
----------- -----------
Accounts receivable - net $ 275,335 $ 800,701
=========== ===========
</TABLE>
As a result of reduced fourth quarter 1995 sales and significantly
increased requests for returns in the three months ended March 31, 1996,
the Company provided $5,475,002 for returns and price protection during the
fourth quarter of 1995. These reserves related primarily to products sold
during the third quarter of 1995 (see Note 3).
33
<PAGE> 34
6. INVENTORIES
Inventories consisted of:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Finished goods $ 488,824 $ 1,967,558
Raw materials 339,491 866,957
----------- -----------
828,315 2,834,515
Less allowance for obsolete,
slow-moving and non-salable
inventories (171,900) (1,449,675)
----------- -----------
Inventories, net $ 656,415 $ 1,384,840
=========== ===========
</TABLE>
Inventory write-downs were $250,000 for the three months ended March 31,
1996, and $150,000, $1,083,389 and $298,723 for the years ended March 31,
1997 and December 31, 1995 and 1994 respectively.
7. PROPERTY AND EQUIPMENT
Property and equipment consisted of:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Computer equipment $ 695,459 $ 2,318,965
Computer software 98,612 477,188
Furniture and equipment 146,455 504,287
Leasehold improvements 66,346 243,659
----------- -----------
Total 1,006,872 3,544,099
Less accumulated depreciation (544,524) (1,709,833)
----------- -----------
Property and equipment, net $ 462,348 $ 1,834,266
=========== ===========
</TABLE>
As discussed in Note 3, in May 1996 the Company sold its Victoria, British
Columbia studio. At March 31, 1996, net property and equipment included
approximately $1,000,000 related to such operations.
8. COMMON STOCK, OPTIONS AND WARRANTS
STOCK OPTIONS - Stock options for employees, officers, independent
contractors and directors are granted by the Board of Directors.
Prior to August 1995, options were granted at a discount of 10-15% to fair
market value. Under the provisions of APB 25, the Company recognized as
compensation cost an amount equal to the difference between the fair market
value of the stock and the exercise price of the option at the date of
grant or repricing. The related cost was amortized to expense over the
option vesting period. Compensation expense was $12,381 for the three
months ended March 31, 1996 and $0, $132,543 and $317,305 for the years
ended March 31, 1997, December 31, 1995 and 1994, respectively.
In August 1995, the Company adopted a fixed option plan allowing the
Company to grant options for up to 98,500 shares of common stock. Under the
plan, all options have been granted at an exercise price of each option
equal to the market price of the Company's stock on the date of grant. The
options generally vest over a three-year period and expire five years from
the date of grant.
Option activity is summarized as follows:
34
<PAGE> 35
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------------
WEIGHTED AVG.
NUMBER PRICE PER
OF SHARES SHARE
<S> <C> <C>
Outstanding at December 31, 1993 61,051 $ 36.61
Granted (at a weighted fair value of $24.38) 54,800 46.19
Exercised (22,688) 29.94
Canceled (6,041) 80.70
----------
Outstanding at December 31, 1994 87,122 40.87
Granted (at a weighted fair value of $59.98) 82,025 93.73
Exercised (27,766) 37.21
Canceled (14,239) 45.34
----------
Outstanding at December 31, 1995 127,142 75.13
Granted (at a weighted fair value of $9.10) 20,200 20.07
Exercised (250) 38.24
Canceled (42,743) 92.83
----------
Outstanding at March 31, 1996 104,349 57.56
Granted (at a weighted fair value of $7.84) 93,638 17.33
Canceled (127,287) 43.65
----------
Outstanding at March 31, 1997 70,700 29.20
==========
Shares available for grant at March 31, 1997 129,300
==========
</TABLE>
The following table summarizes information about fixed stock options
outstanding at March 31, 1997:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------------------------------- ------------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of Outstanding at Remaining Exercise Exercisable at Exercise
Exercise Prices March 31, 1997 Life (in years) Price March 31, 1997 Price
--------------- -------------- --------------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$ 10.00 - $10.60 1,500 4.38 $ 10.20 125 $ 10.60
17.50 - 17.50 54,700 3.90 17.50 33,760 17.50
38.10 - 115.00 14,500 2.36 75.29 14,500 75.29
------ ------
$ 10.00 -$115.00 70,700 48,385
====== ======
</TABLE>
On May 31, 1996, the Company repriced 41,338 options (originally granted at
a weighted average exercise prices of $27.50 to $122.50) to $17.50 per
share, which was the fair market value as of that date.
In April 1997, the Company's shareholders ratified a fixed option plan
(1996 Stock Option Plan) allowing the Company to grant options for up to
400,000 additional shares of common stock. Under the plan, the Company
intends that the exercise price of each option shall equal the market price
of the Company's stock on the date of grant. The options generally vest
over a three-year period and expire ten years from the date of grant.
STOCK WARRANTS - Warrants to purchase 264,831 shares of common stock at
$3.20 to $102.50 per share were outstanding at March 31, 1997 (see notes 2,
3, and 13).
35
<PAGE> 36
9. SFAS NO. 123 PRO FORMA DISCLOSURES
The Company applies APB No. 25 in accounting for its stock options. Had
compensation cost been recognized under the fair value method, the
Company's net loss and loss per share would have been changed to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended Three Months Year Ended
March 31, 1997 March 31, 1996 December 31, 1995
-------------- -------------- -----------------
<S> <C> <C> <C> <C>
Net loss As reported $(3,677,011) $(4,514,171) $(18,698,441)
Pro forma (4,240,297) (4,836,135) (19,286,849)
Net loss per share As reported $(3.30) $(4.97) $(22.16)
Pro forma (3.81) (5.40) (24.00)
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model (multiple award approach) with
the following weighted-average assumptions:
<TABLE>
<CAPTION>
Year Ended Three Months Year Ended
March 31, 1997 March 31, 1996 December 31, 1995
-------------- -------------- -----------------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Volatility 80% 98% 89%
Risk free interest rate 5.25% 5.75% 5.31%
Expected term - yrs 4.00 4.72 4.72
</TABLE>
10. INCOME TAXES
Deferred income taxes, which result from temporary differences in the
recognition of revenue and expense for tax and financial reporting
purposes, relate approximately to:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Reserves and accruals $ 784,000 $ 2,327,000
Deferred development
expenditures 321,000 321,000
Depreciation and amortization (84,000) (84,000)
Operating loss carryforwards 14,000,000 11,530,000
Tax credits 220,000 239,000
Valuation allowance (15,241,000) (14,333,000)
------------ ------------
Net deferred taxes $ 0 $ 0
============ ============
</TABLE>
The Company has recorded a 100% valuation allowance against the deferred
tax assets reflecting the uncertainty of their future realization.
At March 31, 1997 the Company had approximately $16,800,000, $17,500,000,
and $9,000,000 of net operating loss carryforwards to reduce future taxable
income for foreign, federal and state purposes, respectively. If not
utilized, these carryforwards expire beginning in the year 2000.
36
<PAGE> 37
11. MAJOR CUSTOMERS
During the fiscal year ended March 31, 1997, the Company had sales to two
customers that represented 18% and 16% of total net sales. During the three
months ended March 31, 1996 the Company had sales to two customers that
represented 22% and 16% of total net sales. During the year ended December
31, 1995, the Company had sales to two customers that represented 16% and
11% of total net sales. In 1994, pursuant to a distribution agreement, the
Company had sales to one customer which represented 37% of total net sales.
12. COMMITMENTS AND CONTINGENCIES
The Company is a party to various claims, litigation and threatened
litigation in the normal course of operations. Management believes, based
upon the advice of counsel, that the ultimate resolution of such matters
will not have a material adverse effect on the Company's financial
statements taken as a whole.
Lease Obligations - The Company leases its facilities and certain
equipment under noncancellable operating lease agreements. The future
minimum annual lease payments are as follows:
<TABLE>
<CAPTION>
Fiscal year ending March 31,:
<S> <C>
1998 $ 343,836
1999 246,039
2000 43,426
------
Total $ 633,301
=========
</TABLE>
Rent expense under operating leases totalled $134,188 in the three months
ended March 31, 1996 and $258,565, $494,711 and $360,500 in the years ended
March 31, 1997 and December 31, 1995 and 1994, respectively.
The Company also leases certain equipment under a capital lease. Current
lease payments due during the fiscal year ending March 31, 1998 total
$13,781.
Benefit Plans. In August 1996, the Company established a 401(k) retirement
savings plan for its employees. Each participant may elect to contribute a
percentage of his or her salary to the plan, subject to IRS limitations.
The Company, at its discretion, may make contributions to the plan. There
were no such contributions made in the fiscal year ended March 31, 1997.
13. CANCELLATION OF PERFORMANCE SHARES
In October 1991, in connection with the sale of 90,000 common shares to the
Company's founders and principal stockholders, the Company issued 200,000
common "performance" shares (the "Performance Shares") at CDN $0.20 per
share to certain of these individuals. In July 1996, a total of 60,000 of
these shares were sold and transferred to certain members of current
management at their then estimated fair market value of $.60 per
performance share.
In March 1997, all of the Performance Shareholders surrendered their shares
for cancellation. In exchange, the Company issued these holders 9,524
shares of common stock and warrants to purchase 30,009 shares of common
stock at $3.20 per share through March 31, 1998 and $3.40 per share
thereafter until March 6, 1999. Pursuant to the transaction, the Company
recorded an expense of $12,000.
37
<PAGE> 38
SANCTUARY WOODS MULTIMEDIA CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged Balance at
Beginning To Write-offs/ End
of Period Expense Returns Other Of Period
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1997
Allowance For Doubtful Accounts $ 207,352 $ 329,360 $ (413,288) $ 123,424
Sales Returns & Allowances 3,806,051 1,972,658 (4,967,103) 811,606
Inventory Obsolescence 1,449,675 150,000 (1,427,775) 171,900
THREE MONTHS ENDED MARCH 31, 1996
Allowance For Doubtful Accounts $ 200,000 $ 16,071 $ (8,719) $ 207,352
Sales Returns & Allowances 5,428,236 623,385 (2,245,570) 3,806,051
Inventory Obsolescence 1,518,000 250,000 (318,325) 1,449,675
YEAR ENDED DECEMBER 31, 1995
Allowance For Doubtful Accounts $ 217,000 $ 118,968 $ (135,968) $ 200,000
Sales Returns & Allowances 414,275 8,168,460 (3,396,414) $(a)241,915 5,428,236
Inventory Obsolescence 298,723 1,083,389 (132,255) (a)268,143 1,518,000
YEAR ENDED DECEMBER 31, 1994
Allowance For Doubtful Accounts $ 65,000 $ 203,035 $ (88,517) $ (a)37,482 $ 217,000
Sales Returns & Allowances 242,018 459,814 (330,270) (a)42,713 414,275
Inventory Obsolescence 0 298,723 0 298,723
</TABLE>
- --------
(a) Consolidation of reserve accounts
38
<PAGE> 39
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEMS 10 THROUGH 13 INCLUSIVE
These items have been omitted in accordance with instructions to Form 10-K
Annual Report. With respect to the Company's 1997 Annual Meeting of
Stockholders, the registrant will file with the Securities and Exchange
Commission a definitive proxy statement pursuant to Regulation 14A no later than
120 days after the end of the fiscal year covered by this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
Attached to this Report at pages 21 through 37:
Independent Auditors' Report - Deloitte & Touche LLP
Independent Auditors' Report - Deloitte & Touche
Consolidated Balance Sheets:
March 31, 1997 and 1996
Consolidated Statements of Operations:
Years Ended March 31, 1997, December 31, 1995 and 1994
and the Three Month Period Ended March 31, 1996
Consolidated Statements of Stockholders' Equity:
Years Ended March 31, 1997, December 31, 1995 and 1994
and the Three Month Period Ended March 31, 1996
Consolidated Statements of Cash Flows:
Years Ended March 31, 1997, December 31, 1995 and 1994
and the Three Month Period Ended March 31, 1996
Notes to Consolidated Financial Statements
(a) (2) Consolidated Financial Statement Schedules
Supplemental Schedule II - Valuation of Qualifying Accounts, Years
Ended March 31, 1997, December 31, 1995, and 1994 and three month
transition period ended March 31, 1996.
39
<PAGE> 40
(a) (3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
2.1 Certificate of Domestication (Incorporated by reference to
Exhibit 2.1 to Registrant's Form 8-B filed May 2, 1997).
3.1 Certificate of Incorporation (Incorporated by reference to
Exhibit 3.1 to Registrant's Form 8-B filed May 2, 1997).
3.2 Amended and Restated Certificate of Incorporation (Incorporated by
reference to Exhibit 3.2 to Registrant's Form 8-B filed
May 2, 1997).
3.3 Bylaws (Incorporated by reference to Exhibit 3.3 to Registrant's
Form 8-B filed May 2, 1997).
4.1 Specimen Common Stock Certificate (Incorporated by reference to
Exhibit 4.1 to Registrant's Form 8-B filed May 2, 1997).
10.9 Sub-Lease dated November 23, 1994 between the Registrant and Heublein,
Inc., for premises located at 1825 South Grant Street, San Mateo,
California 94402 (Incorporated herein by reference to Exhibit 10.36
to Registrant's Report on Form 10-K filed March 31, 1995).
10.13 Form of Warrant to Purchase Common Stock issued by the Company to the
placement agent in connection with the July 1995 private placement
(Incorporated herein by reference to Exhibit 7.5 of Registrant's
Report on Form 8-K dated February 14, 1995).
10.18 Amendment to Loan Agreement between Sanctuary Woods Multimedia, Inc.
and a bank, dated April 2, 1996 and related warrant (Incorporated
herein by reference to Exhibit 10.18 of Registrant's Report on
Form 10-K/A-1 filed April 15, 1996).
10.20 Warrant granted in connection with Second Amendment to Loan Agreement
between the Registrant and Imperial Bank (Incorporated herein by
reference to Exhibit 10.20 of Registrant's Report on Form 10-Q
filed June 19, 1996).
10.21 Agreement with Strategic Marketing Partners dated May 13, 1996
(Incorporated herein by reference to Exhibit 10.21 of Registrant's
Report on Form 10-Q filed June 19, 1996).
10.23 Amendment 1 to License Agreement between Ripley Entertainment and the
Registrant (effective August 1, 1996) (Incorporated herein by
reference to Exhibit 10.23 of Registrant's Report on Form 10-Q
filed August 14, 1996).
10.25 Form of Indemnification Agreement Executed by Registrant and its
officers and directors (Incorporated by reference to Exhibit 3.3 to
Registrant's Form 8-B filed on May 2, 1997).
</TABLE>
40
<PAGE> 41
<TABLE>
<S> <C>
10.26 Agreement and Plan of Reorganization among Registrant, Teacher
Acquisition Corporation and Theatrix Interactive, Incorporated dated
June 4, 1997.
10.27 Republishing and Distribution Agreement between Sanctuary Woods
Multimedia, Inc. a wholly-owned subsidiary of Registrant and Virgin
Sound and Vision, Inc. dated June 12, 1997 (PORTIONS OMITTED -
CONFIDENTIAL TREATMENT REQUESTED).
10.28 Form of Warrant to Purchase Common Stock issued by the Company to the
holders of Series A Preferred Stock.
10.28A Form of Warrant to Purchase Common Stock issued by the Company to the
holders of Series A Preferred Stock.
10.29 Form of Warrant to Purchase Common Stock issued by the Company to
certain individuals and employees pursuant to the cancellation of
their performance shares.
21.1 List of Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Deloitte & Touche, Chartered Accountants (Canada).
27.0 Financial Data Schedule.
(b) Reports on Form 8-K: none
</TABLE>
41
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SANCTUARY WOODS MULTIMEDIA CORPORATION
By: /s/ CHARLOTTE J. WALKER
Charlotte J. Walker
President and Chief Executive Officer
Dated: June 30, 1997
KNOW ALL WOMEN AND MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Charlotte J. Walker and Peter C. Nichter,
jointly and severally, hers or his attorneys-in-fact, and each with power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or her or his substitute or substitutes, may do or cause to
be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below 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/ CHARLOTTE J. WALKER Chairman of the Board June 30, 1997
Charlotte Walker President and Chief Executive Officer
(Principal Executive Officer)
/s/ PETER C. NICHTER Director, Finance and Operations June 30, 1997
Peter C. Nichter (Principal Financial and Accounting
Officer)
/s/ N. JOHN CAMPBELL Director June 30, 1997
N. John Campbell
/s/ LAWRENCE LENIHAN Director June 30, 1997
Lawrence Lenihan
/s/ ERIK JANSEN Director June 30, 1997
Erik Jansen
</TABLE>
S-1
<PAGE> 43
LIST OF ATTACHED EXHIBITS
<TABLE>
<S> <C>
10.26 Agreement and Plan of Reorganization among Registrant, Teacher
Acquisition Corporation and Theatrix Interactive, Incorporated dated
June 4, 1996.
10.27 Republishing and Distribution Agreement between Sanctuary Woods
Multimedia, Inc. a wholly-owned subsidiary of Registrant and
Virgin Sound and Vision, Inc. dated June 12, 1997 (PORTIONS OMITTED -
CONFIDENTIAL TREATMENT REQUESTED)
10.28 Form of Warrant to Purchase Common Stock issued by the Company to the
holders of Series A Preferred Stock.
10.28A Form of Warrant to Purchase Common Stock issued by the Company to the
holders of Series A Preferred Stock.
10.29 Form of Warrant to Purchase Common Stock issued by the Company to
certain individuals and employees pursuant to the cancellation of
their performance shares.
21.1 List of Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Deloitte & Touche, Chartered Accountants (Canada).
27.0 Financial Data Schedule.
42
</TABLE>
<PAGE> 1
EXHIBIT 10.26
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
SANCTUARY WOODS MULTIMEDIA CORPORATION
TEACHER ACQUISITION CORPORATION
AND
THEATRIX INTERACTIVE, INCORPORATED
DATED AS OF JUNE 4, 1997
<PAGE> 2
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<S> <C>
Exhibit A Form of Kingdon Capital Warrant
Exhibit B Form of Certificate of Merger
Exhibit C Form of Extension to Employment Agreement with Joyce Hakansson
Exhibit D Company Products
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
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<S> <C> <C>
ARTICLE I
THE MERGER...............................................................................2
1.1 The Merger........................................................................2
1.2 Effective Time....................................................................2
1.3 Effect of the Merger..............................................................2
1.4 Certificate of Incorporation; Bylaws..............................................2
1.5 Directors and Officers............................................................2
1.6 Effect on Capital Stock...........................................................3
1.7 Contingent Payment of Shares......................................................6
1.8 Dissenting Shares................................................................10
1.9 Surrender of Certificates........................................................10
1.10 No Further Ownership Rights in Company Capital Stock.............................12
1.11 Lost, Stolen or Destroyed Certificates...........................................12
1.12 Tax Consequences.................................................................12
1.13 Taking of Necessary Action; Further Action.......................................12
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY...........................................13
2.1 Organization, Standing and Power.................................................13
2.2 Company Capital Structure........................................................13
2.3 Subsidiaries.....................................................................14
2.4 Authority........................................................................14
2.5 Company Financial Statements.....................................................15
2.6 No Undisclosed Liabilities.......................................................15
2.7 No Changes.......................................................................15
2.8 Tax and Other Returns and Reports................................................17
2.9 Restrictions on Business Activities..............................................19
2.10 Title to Properties; Absence of Liens and Encumbrances...........................19
2.11 Intellectual Property............................................................20
2.12 Agreements, Contracts and Commitments............................................21
2.13 Interested Party Transactions....................................................22
2.14 Compliance with Laws.............................................................22
2.15 Litigation.......................................................................23
2.16 Insurance........................................................................23
2.17 Minute Books.....................................................................23
2.18 Environmental Matters............................................................23
2.19 Brokers' and Finders' Fees; Third Party Expenses.................................23
2.20 Employee Matters and Benefit Plans...............................................24
2.21 Affiliates.......................................................................27
2.22 Representations Complete.........................................................27
</TABLE>
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
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<S> <C> <C>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB.................................27
3.1 Organization, Standing and Power.................................................27
3.2 Authority........................................................................27
3.3 Capital Structure................................................................28
3.4 SEC Documents; Parent Financial Statements.......................................29
3.5 No Material Adverse Change.......................................................29
3.6 Litigation.......................................................................30
3.7 Intellectual Property............................................................30
3.8 Restrictions on Business Activities..............................................31
3.9 Brokers or Finders; Professional Fees............................................31
3.10 Conduct in the Ordinary Course...................................................31
3.11 Third Party Consents.............................................................31
3.12 Representations Complete.........................................................31
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME.....................................................32
4.1 Conduct of Business of the Company...............................................32
ARTICLE V
ADDITIONAL AGREEMENTS...................................................................34
5.1 No Solicitation..................................................................34
5.2 Securities Act Exemption.........................................................35
5.3 Stock Restrictions...............................................................35
5.4 Filing of Permit Application.....................................................36
5.5 Access to Information............................................................36
5.6 Public Disclosure................................................................36
5.7 Reasonable Efforts...............................................................36
5.8 Notification of Certain Matters..................................................37
5.9 Additional Documents and Further Assurances......................................37
5.10 Form S-8.........................................................................37
5.11 Legal Requirements...............................................................37
5.12 Third Party Consents.............................................................37
5.13 Board of Directors of the Combined Company.......................................37
5.14 Bridge Financing.................................................................38
</TABLE>
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
5.15 Stock Options....................................................................38
5.16 Indemnification..................................................................38
5.17 Certain Benefit Plans............................................................38
5.18 Stockholder Solicitation Materials...............................................38
5.19 List of Stockholders, Optionholders and Warrantholders...........................39
ARTICLE VI
DOCUMENTS TO BE DELIVERED...............................................................39
6.1 Documents to Be Delivered by the Company at Closing..............................39
6.2 Documents to be Delivered by the Parent and Merger Sub at Closing................39
ARTICLE VII
CONDITIONS TO THE MERGER................................................................40
7.1 Conditions to Obligations of Each Party to Effect the Merger.....................40
7.2 Additional Conditions to Obligations of the Company..............................40
7.3 Additional Conditions to the Obligations of Parent and Merger Sub................41
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW......................................42
8.1 Survival of Representations and Warranties.......................................42
8.2 Escrow Arrangements..............................................................42
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER.......................................................49
9.1 Termination......................................................................49
9.2 Effect of Termination............................................................50
9.3 Amendment........................................................................50
9.4 Extension; Waiver................................................................51
9.5 Company Payments.................................................................51
</TABLE>
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
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<S> <C> <C>
ARTICLE X
GENERAL PROVISIONS..............................................................................51
10.1 Notices..........................................................................51
10.2 Expenses.........................................................................53
10.3 Interpretation...................................................................53
10.4 Counterparts.....................................................................53
10.5 Entire Agreement; Assignment.....................................................53
10.6 Severability.....................................................................53
10.7 Other Remedies...................................................................53
10.8 Governing Law....................................................................54
10.9 Rules of Construction............................................................54
10.10 Specific Performance.............................................................54
</TABLE>
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<PAGE> 7
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and
entered into as of June 4, 1997 by and among Sanctuary Woods Multimedia
Corporation, a Delaware corporation ("Parent"); Teacher Acquisition Corporation,
a Delaware corporation and a wholly-owned subsidiary of Parent ("Merger Sub");
Theatrix Interactive, Incorporated, a Delaware corporation (the "Company"); Mark
Kingdon as Securityholder Agent; and First Trust of California, National
Association as Escrow Agent.
RECITALS
A. The Boards of Directors of each of the Company, Parent and Merger Sub
believe it is in the best interests of each company and their respective
stockholders that Parent acquire the Company through the statutory merger of
Merger Sub with and into the Company (the "Merger") and, in furtherance thereof,
have approved the Merger.
B. Pursuant to the Merger, among other things, and subject to the terms
and conditions of this Agreement, all of the issued and outstanding shares of
capital stock of the Company ("Company Capital Stock") and all outstanding
options, warrants and other rights to acquire or receive shares of Company
Capital Stock shall be converted into the right to receive shares of Common
Stock of Parent ("Parent Common Stock") or options, warrants and other rights to
acquire shares of Common Stock of Parent.
C. A portion of the shares of Parent Common Stock otherwise issuable by
Parent in connection with the Merger shall be placed in escrow by Parent, the
release of which amount shall be contingent upon certain events and conditions,
all as set forth in Article VIII hereof.
D. Up to 500,000 additional shares of Parent Common Stock shall be
issued contingent upon certain events and conditions, all as set forth in
Article I hereof.
E. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code")
F. The Company, Parent and Merger Sub desire to make certain
representations and warranties and other agreements in connection with the
Merger.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
intending to be legally bound hereby the parties agree as follows:
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<PAGE> 8
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the Delaware General Corporation Law ("Delaware Law"),
Merger Sub shall be merged with and into the Company, the separate corporate
existence of Merger Sub shall cease and the Company shall continue as the
surviving corporation and as a wholly-owned subsidiary of Parent. The Company as
the surviving corporation after the Merger is hereinafter sometimes referred to
as the "Surviving Corporation".
1.2 Effective Time. Unless this Agreement is earlier terminated pursuant
to Section 9.1, the closing of the Merger (the "Closing") will take place as
promptly as practicable, but no later than five (5) business days, following
satisfaction or waiver of the conditions set forth in Article VII, at the
offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto,
California, unless another place or time is agreed to by Parent and the Company.
The date upon which the Closing actually occurs is herein referred to as the
"Closing Date". On the Closing Date, the parties hereto shall cause the Merger
to be consummated by filing a Certificate of Merger (or like instrument) with
the Secretary of State of the State of Delaware (the "Certificate of Merger"),
in accordance with the relevant provisions of applicable law (the time of
acceptance by the Secretary of State of Delaware of such filing being referred
to herein as the "Effective Time").
1.3 Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of Delaware Law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time, all the property, rights, privileges, powers and franchises of
the Company and Merger Sub shall vest in the Surviving Corporation, and all
debts, liabilities and duties of the Company and Merger Sub shall become the
debts, liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
(a) At the Effective Time, the Certificate of Incorporation of
Merger Sub, as in effect immediately prior to the date of this Agreement, shall
be the Certificate of Incorporation of the Surviving Corporation until
thereafter amended as provided by law and such Certificate of Incorporation;
provided, however, that Article I of the Certificate of Incorporation of the
Surviving Corporation shall be amended to read as follows: "The name of the
corporation is Theatrix Interactive, Incorporated".
(b) The Bylaws of Merger Sub, as in effect immediately prior to
the Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
1.5 Directors and Officers. The director(s) of Merger Sub immediately
prior to the Effective Time shall be the initial director(s) of the Surviving
Corporation, each to hold office in
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<PAGE> 9
accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation. The officers of Merger Sub immediately prior to the Effective Time
shall be the initial officers of the Surviving Corporation, each to hold office
in accordance with the Bylaws of the Surviving Corporation.
1.6 Effect on Capital Stock. Subject to the terms and conditions of this
Agreement, as of the Effective Time, by virtue of the Merger and without any
action on the part of the Parent, the Merger Sub, the Company or the holder of
any shares of the Parent Common Stock or the Company Capital Stock, the
following shall occur:
(a) Aggregate Shares of Parent Common Stock. The aggregate number
of shares of Parent Common Stock to be issued in the Merger pursuant to this
Section 1.6 shall be 3,102,528 (the "Aggregate Shares of Parent Common Stock").
The aggregate shares of Parent Common Stock to be issued to the holders of
Company Common Stock (defined below) issued and outstanding immediately prior to
the Effective Time and to holders of Company Options (as defined below) and
Company Warrants (as defined below), when such are exercised pursuant to Section
1.6(g) below, shall be 142,080 (the "Aggregate Common Shares"), the aggregate
shares of Parent Common Stock to be issued to the holders of Company Series A
(defined below issued and outstanding immediately prior to the Effective Time
shall be 614,979 (the "Aggregate Series A Shares") the aggregate shares of
Parent Common Stock to be issued to the holders of Company Series B (defined
below) issued and outstanding immediately prior to the Effective Time shall be
882,640 (the "Aggregate Series B Shares"), and the aggregate shares of Parent
Common Stock to be issued to the holders of Company Series C (defined below)
issued and outstanding immediately prior to the Effective Time shall be
1,462,829 (the "Aggregate Series C Shares").
(b) Conversion of Company Common Stock. Each share of Common
Stock of the Company ("Company Common Stock") issued and outstanding immediately
prior to the Effective Time (other than any shares of Company Capital Stock to
be canceled pursuant to Section 1.6(f) and any Dissenting Shares (as defined and
to the extent provided in Section 1.8(a))), will be canceled and extinguished
and will be converted automatically into the right to receive a number of shares
of Parent Common Stock as is calculated by multiplying such share by a fraction
the numerator of which is the Aggregate Common Shares and the denominator of
which is (A) the number of shares of Company Common Stock issued and outstanding
immediately prior to the Effective Time plus (B) the number of shares of Company
Common Stock issuable upon exercise of any Company Option or Company Warrant
issued and outstanding immediately prior to the Effective Time (the "Common
Exchange Ratio").
(c) Conversion of Company Series A Preferred Stock. Each share of
Series A Preferred Stock of the Company ("Company Series A") issued and
outstanding immediately prior to the Effective Time (other than any shares of
Company Capital Stock to be cancelled pursuant to Section 1.6(f) and any
Dissenting Shares (as defined and to the extent provided in Section 1.8(a))),
will be cancelled and extinguished and will be converted automatically into the
right to receive a number of shares of Parent Common Stock as is calculated by
multiplying such share by a fraction the numerator of which is the Aggregate
Series A Shares and the denominator of which is the number of
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<PAGE> 10
shares of Company Series A issued and outstanding immediately prior to the
Effective Time (the "Series A Exchange Ratio").
(d) Conversion of Company Series B Preferred Stock. Each share of
Series B Preferred Stock of the Company ("Company Series B") issued and
outstanding immediately prior to the Effective Time (other than any shares of
Company Capital Stock to be cancelled pursuant to Section 1.6(f) and any
Dissenting Shares (as defined and to the extent provided in Section 1.8(a))),
will be cancelled and extinguished and will be converted automatically into the
right to receive a number of shares of Parent Common Stock as is calculated by
multiplying such share by a fraction the numerator of which is the Aggregate
Series B Shares and the denominator of which is the number of shares of Company
Series B issued and outstanding immediately prior to the Effective Time (the
"Series B Exchange Ratio").
(e) Conversion of Company Series C Preferred Stock. Each share of
Series C Preferred Stock of the Company ("Company Series C") issued and
outstanding immediately prior to the Effective Time (other than any shares of
Company Capital Stock to be cancelled pursuant to Section 1.6(f) and any
Dissenting Shares (as defined and to the extent provided in Section 1.8(a))),
will be cancelled and extinguished and will be converted automatically into the
right to receive a number of shares of Parent Common Stock as is calculated by
multiplying such share by a fraction the numerator of which is the Aggregate
Series C Shares and the denominator of which is the number of shares of Company
Series C issued and outstanding immediately prior to the Effective Time (the
"Series C Exchange Ratio").
(f) Cancellation of Parent-Owned and Company-Owned Stock. Each
share of Company Capital Stock owned by Merger Sub, Parent, the Company or any
direct or indirect wholly-owned subsidiary of Parent or of the Company
immediately prior to the Effective Time shall be canceled and extinguished
without any conversion thereof.
(g) Stock Options and Warrants. At the Effective Time, all
options and stock purchase rights to purchase Company Common Stock (each a
"Company Option") then outstanding under the Company's 1995 Stock Option Plan
(the "Option Plan") or otherwise, whether vested or unvested, and all warrants
to purchase Company Common Stock then outstanding (each a "Company Warrant")
shall be, in connection with the Merger, assumed by Parent in accordance with
provisions described below.
(i) Each Company Option and Company Warrant so assumed by
Parent under this Agreement shall continue to have, and be subject to, the same
terms and conditions set forth in (i) with respect to Company Options, the
Option Plan and/or as provided in the respective option agreements governing
such Company Option immediately prior to the Effective Time, and (ii) with
respect to Company Warrants, such Warrant and/or as provided in the respective
warrant agreements governing such Company Warrant immediately prior to the
Effective Time, except that (A) such Company Option or Company Warrant shall be
exercisable for that number of whole shares of Parent Common Stock equal to the
product of the number of shares of Company Common Stock that were issuable upon
exercise of such Company Option or Company Warrant immediately prior to
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<PAGE> 11
the Effective Time multiplied by the Common Exchange Ratio, rounded down to the
nearest whole number of shares of Parent Common Stock and (B) the per share
exercise price for the shares of Parent Common Stock issuable upon exercise of
such assumed Company Option or Company Warrant shall be equal to the quotient
determined by dividing the exercise price per share of Company Common Stock at
which such Company Option or Company Warrant was exercisable immediately prior
to the Effective Time by the Common Exchange Ratio, rounded up to the nearest
whole cent.
(ii) It is the intention of the parties that the Company
Options assumed by Parent qualify following the Effective Time as incentive
stock options as defined in Section 422 of the Code, to the extent the Company
Options qualified as incentive stock options immediately prior to the Effective
Time.
(iii) Promptly following the Effective Time, Parent will
issue to each holder of an outstanding Company Option or Company Warrant a
document evidencing the foregoing assumption of such Company Option or Company
Warrant by Parent.
(iv) At the Effective Time, the Company shall assign to
Parent any and all rights of repurchase pertaining to shares of Company Common
Stock issued upon exercise of stock options or warrants, pursuant to stock
purchase or warrant purchase agreements, or otherwise.
(h) Capital Stock of Merger Sub. Each share of Common Stock of
Merger Sub issued and outstanding immediately prior to the Effective Time shall
be converted into and exchanged for one validly issued, fully paid and
nonassessable share of Common Stock of the Surviving Corporation. Each stock
certificate of Merger Sub evidencing ownership of any such shares shall continue
to evidence ownership of such shares of capital stock of the Surviving
Corporation.
(i) Adjustments to Exchange Ratios and Aggregate Shares. The
Common Exchange Ratio, Series A Exchange Ratio, Series B Exchange Ratio and
Series C Exchange Ratio shall be adjusted to reflect fully the effect of any
stock split, reverse split, stock dividend (including any dividend or
distribution of securities convertible into Parent Common Stock or Company
Capital Stock), reorganization, recapitalization or other like change with
respect to Parent Common Stock or Company Capital Stock occurring after the date
hereof and prior to the Effective Time. The Aggregate Common Shares, Aggregate
Series A Shares, Aggregate Series B Shares and Aggregate Series C Shares shall
be adjusted to reflect fully the effect of any exercise, cancellation or
repurchase of any Company Option or the exercise or cancellation of any Company
Warrant occurring after the date hereof and prior to the Effective Time.
(j) Fractional Shares. No fraction of a share of Parent Common
Stock will be issued, but in lieu thereof, each holder of shares of Company
Capital Stock who would otherwise be entitled to a fraction of a share of Parent
Common Stock (after aggregating all fractional shares of Parent Common Stock to
be received by such holder) shall be entitled to receive, without any
interest, from Parent an amount of cash (rounded to the nearest whole cent)
equal to the product of (i) such fraction, multiplied by (ii) $2.40.
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(k) Escrow Amount. The "Escrow Amount" shall be a number of
shares of Parent Common Stock equal to .10 multiplied by the aggregate shares of
Parent Common Stock issued pursuant to this Section 1.6.
1.7 Contingent Payment of Shares.6Effect on Capital Stock. In addition
to the shares of Parent Common Stock to which the holders of Company Capital
Stock are entitled pursuant to Section 1.6, the holders of Company Common Stock,
Company Series A, Company Series B and Company Series C shall be entitled to
receive additional shares of Parent Common Stock as provided in this Section
1.7.
(a) Definitions. For purposes of this Section 1.7 the following
terms shall have the meanings indicated below:
(i) "Company Net Revenues" shall mean actual gross
revenues of Parent and its consolidated subsidiaries for the Contingent Payment
Period attributable to all revenues from the sale, distribution, licensing or
use of the Company Products (as defined below) or the intellectual property
related thereto (including, but not limited to, television or other revenues)
and royalty revenues which are the result of Company agreements in effect as of
the Effective Time or which become in effect in connection with such Company
Products, less actual returns, price markdowns and other discounts customarily
taken with respect to such Company Products for the period beginning ninety (90)
days after the Effective Time and ending ninety (90) days after the end of the
Contingent Payment Period.
(ii) "Company Net Revenue Fraction" shall mean a fraction
the numerator of which is the amount of Company Net Revenues recognized during
the Contingent Payment Period in excess of $2,000,000 and the denominator of
which is 2,000,000.
(iii) "Company Products" shall mean products of the
Company currently available and in development as of the date of this Agreement
as set forth on Exhibit D.
(iv) "Contingent Payment Period" shall mean the one-year
period immediately after the Effective Time.
(v) "Contingent Shares" shall mean 500,000 shares of the
Parent's Common Stock (as adjusted for any reclassification, recapitalization,
split, combination, stock dividend or the like).
(vi) "Record Holder" shall mean a person who is a holder
of record of Company Capital Stock (other than any shares of Company Capital
Stock to be cancelled pursuant to Section 1.6(f) and any Dissenting Shares (as
defined and to the extent provided in Section 1.8(a))), immediately prior to the
Effective Time.
(b) Payable Contingent Shares. Subject to the provisions of this
Section 1.7, as promptly as practicable after the end of the Contingent Payment
Period, but in no event later than 90 days after the end of the Contingent
Payment Period, Parent shall first determine the aggregate
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number of shares of Parent Common Stock, if any, to be issued or delivered
pursuant to this Section 1.7 by multiplying the Contingent Shares by the Company
Net Revenue Fraction (the "Payable Contingent Shares"); provided, however, that
the number of Payable Contingent Shares issuable pursuant to this Section 1.7
shall not exceed 500,000 (as adjusted for any reclassification,
recapitalization, split, combination, stock dividend or the like).
The aggregate shares of Payable Contingent Shares to be issued to the
holders of the Company Common Stock shall be the product of the Payable
Contingent Shares multiplied by a fraction the numerator of which is the
Aggregate Common Shares (as defined in Section 1.6) and the denominator of which
is the Aggregate Shares of Parent Common Stock (the "Common Payable Shares").
The aggregate shares of Payable Contingent Shares to be issued to the holders of
the Company Series A shall be the product of the Payable Contingent Shares
multiplied by a fraction the numerator of which is the Aggregate Series A Shares
(as defined in Section 1.6) and the denominator of which is the Aggregate Shares
of Parent Common Stock (the "Series A Payable Shares"). The aggregate shares of
Payable Contingent Shares to be issued to the holders of the Company Series B
shall be the product of the Payable Contingent Shares multiplied by a fraction
the numerator of which is the Aggregate Series B Shares (as defined in Section
1.6) and the denominator of which is the Aggregate Shares of Parent Common Stock
(the "Series B Payable Shares"). The aggregate shares of Payable Contingent
Shares to be issued to the holders of the Company Series C shall be the product
of the Payable Contingent Shares multiplied by a fraction the numerator of which
is the Aggregate Series C Shares (as defined in Section 1.6) and the denominator
of which is the Aggregate Shares of Parent Common Stock (the "Series C Payable
Shares").
Parent shall then determine the number of Payable Contingent Shares to
be issued to each Record Holder as follows:
(i) Each share of Company Common Stock issued and
outstanding immediately prior to the Effective Time (other than any shares of
Company Capital Stock to be cancelled pursuant to Section 1.6(f) and any
Dissenting Shares (as defined and to the extent provided in Section 1.8(a))),
shall have the right to receive a number of Payable Contingent Shares equal to
the quotient of the Common Payable Shares divided by the number of shares of
Company Common Stock issued and outstanding immediately prior to the Effective
Time.
(ii) Each share of Company Series A issued and outstanding
immediately prior to the Effective Time (other than any shares of Company
Capital Stock to be cancelled pursuant to Section 1.6(f) and any Dissenting
Shares (as defined and to the extent provided in Section 1.8(a))), shall have
the right to receive a number of Payable Contingent Shares equal to the quotient
of the Series A Payable Shares divided by the the number of shares of Company
Series A issued and outstanding immediately prior to the Effective Time.
(iii) Each share of Company Series B issued and
outstanding immediately prior to the Effective Time (other than any shares of
Company Capital Stock to be cancelled pursuant to Section 1.6(f) and any
Dissenting Shares (as defined and to the extent provided in Section 1.8(a))),
shall have the right to receive a number of Payable Contingent Shares equal to
the quotient of the
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<PAGE> 14
Series B Payable Shares divided by the the number of shares
of Company Series B issued and outstanding immediately prior to the Effective
Time.
(iv) Each share of Company Series C issued and outstanding
immediately prior to the Effective Time (other than any shares of Company
Capital Stock to be cancelled pursuant to Section 1.6(f) and any Dissenting
Shares (as defined and to the extent provided in Section 1.8(a))), shall have
the right to receive a number of Payable Contingent Shares equal to the quotient
of the Series C Payable Shares divided by the the number of shares of Company
Series C issued and outstanding immediately prior to the Effective Time.
(c) Certificates. As promptly as practicable after the completion
of the calculations described in Section 1.7(b) hereof, Parent shall deliver to
each Record Holder, at the address of such Record Holder as it appeared on the
stock records of the Company at the Effective Time or such other address as such
Record Holder shall provide to Parent by written notice, a certificate
representing the number of whole shares of Parent Common Stock payable to such
Record Holder. A letter from the principal accounting officer of Parent shall
accompany the stock certificate, or if no shares of Parent Common Stock are to
be delivered, shall be sent alone, describing the calculations made in
determining the number of shares of Parent Common Stock to be delivered to each
Record Holder. Unless and until a certificate shall be so delivered, no
dividends payable to holders of record of shares of Parent Common Stock shall be
paid to the holder of such certificate, but there shall be paid to the record
holder of the certificate for the shares of Parent Common Stock issued pursuant
to this Section 1.7 (i) upon such delivery, the amount, without interest,
equivalent to the dividends with a record date and a payment date subsequent to
the end of the Contingent Payment Period with respect to which the shares of
Parent Common Stock are being paid and prior to the date of delivery; and (ii)
after such delivery, the amount, without interest, of any dividends with a
record date prior to delivery and a payment date subsequent to delivery, such
amount to be paid on such payment date, provided that, with respect to both (i)
and (ii) above, such record holder shall not be entitled to receive any
dividends with a record date prior to the end of the Contingent Payment Period
with respect to which the shares of Parent Common Stock are being paid.
(d) Fractional Shares. No fractional shares of Parent Common
Stock and no scrip or certificate therefor shall be issued or delivered pursuant
to this Section 1.7. Should any holder of Company Capital Stock be entitled to a
fractional share interest in Parent Common Stock pursuant to this Section 1.7,
Parent shall pay to such holder in lieu of such fractional share interest a
dollar amount equal to such fraction multiplied by the last sale price of a
share of Parent Common Stock on the over-the-counter market or, if shares of the
Parent Common Stock are listed for trading on any national exchange, on such
exchange, on the day three trading days prior to the day such payment is to be
made, rounded to the nearest cent.
(e) Legends. Certificates representing shares of Parent Common
Stock delivered pursuant to this Section 1.7 to the Company Affiliates shall
bear the legend referred to in Section 5.3 hereof.
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(f) Adjustments. If between the Effective Time and the date of
payment of any shares pursuant to this Section 1.7, the outstanding shares of
Parent Common Stock shall be changed into a different number of shares by reason
of any reclassification, recapitalization, split-up, combination or exchange of
shares or if stock dividend thereon shall be declared with a record date within
said period, the number of shares to be issued or delivered pursuant to this
Section 1.7 shall be correspondingly adjusted.
(g) Assignability.The right of each Record Holder to receive
shares of Parent Common Stock pursuant to this Section 1.7 may not be assigned
or transferred in any manner whatsoever except by operation of law, by will or
the laws of descent, or to the spouse, children, grandchildren or spouse of such
children or grandchildren of any Record Holder or to trusts for the benefit of
any Record Holder or such persons where the Record Holder is a natural person.
.
(h) Arbitration. Any dispute, controversy or claim arising in
connection with the provisions of this Section 1.7 or the actions,
determinations or calculations contemplated thereby shall be settled by
arbitration by three arbitrators to be appointed as follows: Parent and the
Record Holder or a majority of the Record Holders as a group shall each shall
select one arbitrator, and the two arbitrators so selected shall select a third
arbitrator, each of which arbitrators shall be independent and have at least ten
years relevant experience. The arbitrators shall set a limited time period and
establish procedures designed to reduce the cost and time for discovery while
allowing the parties an opportunity, adequate in the sole judgment of the
arbitrators, to discover relevant information from the opposing parties about
the subject matter of the dispute. The arbitrators shall rule upon motions to
compel or limit discovery and shall have the authority to impose sanctions,
including attorneys fees and costs, to the same extent as a court of competent
law or equity, should the arbitrators determine that discovery was sought
without substantial justification or that discovery was refused or objected to
without substantial justification. The decision of a majority of the three
arbitrators as to the validity and amount of any claim shall be binding and
conclusive upon the parties to this Agreement. Such decision shall be written
and shall be supported by written findings of fact and conclusions which shall
set forth the award, judgment, decree or order awarded by the arbitrators. The
expense of the arbitration shall be borne as determined by the arbitrators. Any
such arbitration shall be held in San Mateo County, California and shall be
conducted by, and under the rules then in effect, of Judicial Arbitration and
Mediation Services, Inc.
(i) Disputed Amounts. In the event that the payment of a portion
of the shares of Parent Common Stock to be paid pursuant to this Section 1.7 is
in dispute, the undisputed portion of the shares shall be promptly paid in
accordance with the provisions of this Section 1.7 and the disputed portion
shall be paid upon resolution of the dispute.
(j) Payment of Contingent Shares in the Event of a Merger or
Consolidation. Notwithstanding any provision of this Section 1.7, if, prior to
the end of the Contingent Payment Period, a merger or consolidation of the
Parent with or into any other corporation or corporations shall have occurred in
which the stockholders of Parent immediately prior to such merger or
consolidation shall own less than fifty percent (50%) of the voting securities
of the surviving corporation immediately after such merger or consolidation,
then as soon as practicable after the
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consummation of such merger or consolidation but in no event more than thirty
(30) days thereafter, Parent, the surviving corporation or surviving
corporation's parent shall issue all of the Contingent Shares (or the maximum
number of securities into which the Contingent Shares were converted as a result
of the merger or consolidation) in the same proportions set forth in Section
1.7(b) irrespective of the Net Revenue Fraction.
1.8 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the
contrary, any shares of Company Capital Stock held by a holder who has demanded
and perfected dissenters' rights for such shares in accordance with Delaware Law
and who, as of the Effective Time, has not effectively withdrawn or lost such
dissenters' rights ("Dissenting Shares"), shall not be converted into or
represent a right to receive Parent Common Stock pursuant to Section 1.6 and
Section 1.7, but the holder thereof shall only be entitled to such rights as are
granted by Delaware Law.
(b) Notwithstanding the provisions of subsection (a), if any
holder of shares of Company Capital Stock who demands appraisal of such shares
under Delaware Law shall effectively withdraw or lose (through failure to
perfect or otherwise) the right to appraisal, then, as of the later of the
Effective Time or the occurrence of such event, such holder's shares shall
automatically be converted into and represent only the right to receive Parent
Common Stock and fractional shares as provided in Section 1.6 and Section 1.7,
without interest thereon, upon surrender of the certificate representing such
shares of Company Capital Stock.
(c) The Company shall give Parent (i) prompt notice of any
written demands for appraisal of any shares of Company Capital Stock,
withdrawals of such demands, and any other instruments served pursuant to
Delaware Law and received by the Company and (ii) the opportunity to participate
in all negotiations and proceedings with respect to demands for appraisal under
Delaware Law. The Company shall not, except with the prior written consent of
Parent, voluntarily make any payment with respect to any demands for appraisal
of Company Capital Stock or offer to settle or settle any such demands.
1.9 Surrender of Certificates.
(a) Exchange Agent. First National Bank of Boston shall act as
exchange agent (the "Exchange Agent") in the Merger.
(b) Parent to Provide Common Stock. Promptly after the Effective
Time, but in any event within 10 days, Parent shall make available to the
Exchange Agent for exchange in accordance with this Article I, the aggregate
number of shares of Parent Common Stock issued pursuant to Section 1.6 in
exchange for outstanding shares of Company Capital Stock; provided that, on
behalf of the holders of Company Capital Stock, Parent shall deposit into an
escrow account a number of shares of Parent Common Stock equal to the Escrow
Amount out of the aggregate number of shares of Parent Common Stock otherwise
issuable pursuant to Section 1.6. The portion of the Escrow Amount contributed
on behalf of each holder of Company Capital Stock shall be in
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proportion to the aggregate number of shares of Parent Common Stock which such
holder would otherwise be entitled to receive under Section 1.6 by virtue of
ownership of outstanding shares of Company Capital Stock immediately prior to
the Effective Time.
(c) Exchange Procedures. Promptly after the Effective Time, the
Surviving Corporation shall cause to be mailed to each holder of record of a
certificate or certificates (the "Certificates") which immediately prior to the
Effective Time represented outstanding shares of Company Capital Stock whose
shares were converted into the right to receive shares of Parent Common Stock
pursuant to Section 1.6, (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Exchange Agent and shall be
in such form and have such other provisions as Parent may reasonably specify)
and (ii) instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing shares of Parent Common Stock. Upon
surrender of a Certificate for cancellation to the Exchange Agent or to such
other agent or agents as may be appointed by Parent, together with such letter
of transmittal, duly completed and validly executed in accordance with the
instructions thereto, the holder of such Certificate shall be entitled to
receive in exchange therefor a certificate representing the number of whole
shares of Parent Common Stock (less the number of shares of Parent Common Stock,
if any, to be deposited in the Escrow Fund (as defined in Section 8.2) on such
holder's behalf pursuant to Article VIII hereof), plus cash in lieu of
fractional shares in accordance with Section 1.6, to which such holder is
entitled pursuant to Section 1.6, and the Certificate so surrendered shall
forthwith be canceled. As soon as practicable after the Effective Time, and
subject to and in accordance with the provisions of Article VIII hereof, Parent
shall cause to be distributed to the Escrow Agent (as defined in Article VIII) a
certificate or certificates representing that number of shares of Parent Common
Stock equal to the Escrow Amount which shall be registered in the name of the
Escrow Agent. Such shares shall be beneficially owned by the holders on whose
behalf such shares were deposited in the Escrow Fund and shall be available to
compensate Parent as provided in Article VIII. Until so surrendered, each
outstanding Certificate that, prior to the Effective Time, represented shares of
Company Capital Stock will be deemed from and after the Effective Time, for all
corporate purposes, evidence of the ownership of the number of full shares of
Parent Common Stock into which such shares of Company Capital Stock shall have
been so converted and the right to receive an amount in cash in lieu of the
issuance of any fractional share in accordance with Section 1.6.
(d) Distributions With Respect to Unexchanged Shares. No
dividends or other distributions declared or made after the Effective Time with
respect to Parent Common Stock with a record date after the Effective Time will
be paid to the holder of any unsurrendered Certificate with respect to the
shares of Parent Common Stock represented thereby until the holder of record of
such Certificate shall surrender such Certificate in accordance with Section
1.9(c). Subject to applicable law, following surrender of any such Certificate
and in addition to shares and/or cash entitled to such holder under Section
1.9(c), there shall be paid to the record holder of the certificates
representing whole shares of Parent Common Stock issued in exchange therefor,
without interest, at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Time theretofore paid
with respect to such whole shares of Parent Common Stock.
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<PAGE> 18
(e) Transfers of Ownership. If any certificate for shares of
Parent Common Stock is to be issued in a name other than that in which the
certificate surrendered in exchange therefor is registered, it will be a
condition of the issuance thereof that the certificate so surrendered will be
properly endorsed and otherwise in proper form for transfer and that the person
requesting such exchange will have paid to Parent or any agent designated by it
any transfer or other taxes required by reason of the issuance of a certificate
for shares of Parent Common Stock in any name other than that of the registered
holder of the certificate surrendered, or established to the satisfaction of
Parent or any agent designated by it that such tax has been paid or is not
payable.
(f) No Liability. Notwithstanding anything to the contrary in
this Section 1.9, none of the Exchange Agent, the Surviving Corporation or any
party hereto shall be liable to a holder of shares of Parent Common Stock or
Company Capital Stock for any amount properly paid to a public official pursuant
to any applicable abandoned property, escheat or similar law.
1.10 No Further Ownership Rights in Company Capital Stock. All shares of
Parent Common Stock issued upon the surrender for exchange of shares of Company
Capital Stock in accordance with the terms hereof (including any cash paid in
respect thereof) shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Company Capital Stock, and there shall be no
further registration of transfers on the records of the Surviving Corporation of
shares of Company Capital Stock which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented to the
Surviving Corporation for any reason, they shall be canceled and exchanged as
provided in this Article I.
1.11 Lost, Stolen or Destroyed Certificates. In the event any
certificate evidencing shares of Company Capital Stock shall have been lost,
stolen or destroyed, the Exchange Agent shall issue in exchange for such lost,
stolen or destroyed certificate, upon the making of an affidavit of that fact by
the holder thereof, such shares of Parent Common Stock and cash for fractional
share, if any, as may be required pursuant to Section 1.6; provided, however,
that Parent may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate to
deliver a bond in such sum as it may reasonably direct as indemnity against any
claim that may be made against Parent or the Exchange Agent with respect to the
certificate alleged to have been lost, stolen or destroyed.
1.12 Tax Consequences. It is intended by the parties hereto that the
Merger shall constitute a reorganization within the meaning of Section 368(a) of
the Code.
1.13 Taking of Necessary Action; Further Action. If, at any time after
the Effective Time, any such further action is necessary or desirable to carry
out the purposes of this Agreement and to vest the Surviving Corporation with
full right, title and possession to all assets, property, rights, privileges,
powers and franchises of the Company and Merger Sub, the officers and directors
of the Company and Merger Sub are fully authorized in the names of their
respective corporations or otherwise to take, and will take, all such lawful and
necessary action.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Merger Sub,
subject to such exceptions as are clearly disclosed in the disclosure letter
supplied by the Company to Parent (the "Company Schedules") and dated as of the
date hereof, as follows:
2.1 Organization, Standing and Power. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. The Company has the corporate power to own its properties and to carry
on its business as now being conducted. The Company is duly qualified to do
business and in good standing as a foreign corporation in each jurisdiction in
which the failure to be so qualified would have a material adverse effect on the
assets (including intangible assets), financial condition, results of
operations, business or prospects (hereinafter referred to as a "Material
Adverse Effect") of the Company. The Company has delivered a true and correct
copy of its Certificate of Incorporation and Bylaws, each as amended to date, to
Parent.
2.2 Company Capital Structure.
(a) The authorized capital stock of the Company consists of
50,000,000 shares of authorized Common Stock, $.001 par value, of which
6,160,372 shares are issued and outstanding and 25,000,000 shares of authorized
Preferred Stock, $.001 par value. The authorized Preferred Stock consists of
10,344,401 shares designated as Series A Preferred Stock, all of which are
issued and outstanding and 8,888,446 shares designated as Series B Preferred
Stock, of which 8,768,134 shares are issued and outstanding, and immediately
prior to the Closing, will also consist of 1,000,000 shares designated as Series
C Preferred Stock, all of which will be issued and outstanding. The Company
Capital Stock is held of record by the persons, with the addresses of record and
in the amounts set forth on Schedule 2.2(a). All outstanding shares of Company
Capital Stock are duly authorized, validly issued, fully paid and non-assessable
and not subject to preemptive rights created by statute, the Certificate of
Incorporation or Bylaws of the Company or any agreement to which the Company is
a party or by which it is bound.
(b) The Company has reserved 2,227,065 shares of Common Stock
for issuance to employees and consultants pursuant to the Option Plan, of which
551,906 shares are subject to outstanding, unexercised options and 694,596
shares remain available for future grant. Schedule 2.2(b) sets forth for each
outstanding Company Option the name of the holder of such option, the state in
which each such holder is domiciled, the number of shares of Common Stock
subject to such option, the exercise price of such option, including the extent
vested to date and whether the exercisability of such option will be accelerated
and become exercisable by the transactions contemplated by this Agreement.
Except as described in Schedule 2.2(b), there are no options, warrants, calls,
rights, commitments or agreements of any character, written or oral, to which
the Company is a party or by which it is bound obligating the Company to issue,
deliver, sell,
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repurchase or redeem, or cause to be issued, delivered, sold, repurchased or
redeemed, any shares of the capital stock of the Company. Except as described in
Schedule 2.2(b), there are no options, warrants, calls, rights, commitments or
agreements of any character, written or oral, to which the Company is a party or
by which it is bound obligating the Company to grant, extend, accelerate the
vesting of, change the price of, otherwise amend or enter into any such option,
warrant, call, right, commitment or agreement. The holders of Company Options or
any other options or rights set forth in Schedule 2.2(b) have been or will be
given, or shall have properly waived, any required notice prior to the Merger.
As a result of the Merger, Parent will be the record and sole beneficial owner
of all Company Capital Stock and rights to acquire or receive Company Capital
Stock.
2.3 Subsidiaries. The Company does not have and has never had any
subsidiaries or affiliated companies and does not otherwise own and has never
otherwise owned any shares of capital stock or any interest in, or controlled,
directly or indirectly, any other corporation, partnership, association, joint
venture or other business entity.
2.4 Authority. Subject only to the requisite approval of the Merger by
the stockholders of the Company, the Company has all requisite corporate power
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The vote required of the stockholders of the Company to
duly approve the Merger is a majority of the outstanding shares of Company
Common Stock voting as a separate class, and a majority of the outstanding
shares of Series A Preferred, Series B Preferred and Series C Preferred, voting
together as a separate class (in each case with each share of Series A
Preferred, Series B Preferred and Series C Preferred being entitled to a number
of votes equal to the number of whole shares of Common Stock into which such
share of Series A Preferred, Series B Preferred and Series C Preferred could be
converted on the record date for the vote). The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on the part of the Company,
subject only to the approval of the Merger by the stockholders of the Company.
The Company's Board of Directors has approved the Merger and this Agreement.
This Agreement has been duly executed and delivered by the Company and
constitutes the valid and binding obligation of the Company, enforceable in
accordance with its terms subject to applicable bankruptcy, insolvency,
reorganization, liquidation, moratorium or other similar laws relating or
affecting the rights of creditors generally and the effect or availability of
rules of law governing specific performance, injunctive relief and other
equitable remedies. Except as set forth on Schedule 2.4, subject only to the
approval of the Merger by the stockholders of the Company, the execution and
delivery of this Agreement and the related agreements attached as exhibits
hereto by the Company do not, and, as of the Effective Time, the performance and
consummation of the transactions contemplated hereby and thereby will not,
conflict with, or result in any violation of, or default under, (with or without
notice or lapse of time, or both), or give rise to a right of termination,
cancellation, forfeiture, or acceleration of any obligation or loss of any
benefit under, or result in the creation of a lien or encumbrance on any of the
properties or assets of Company (any such event, a "Conflict") pursuant to (i)
any provision of the Certificate of Incorporation or Bylaws of the Company or
(ii) any mortgage, indenture, lease, contract or other agreement or instrument,
permit, concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company or its properties or
assets other than any such conflict, violation or default which would not have a
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Material Adverse Effect on the Company. No consent, waiver, approval, order or
authorization of, or registration, declaration or filing with any third party
(so as not to trigger any Conflict) or, to the Company's knowledge, with any
court, administrative agency or commission or other federal, state, county,
local or foreign governmental authority, instrumentality, agency or commission
("Governmental Entity"), is required by or with respect to the Company in
connection with the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby, except for (i) the filing of the
Certificate of Merger with the Delaware Secretary of State and the filing of
other appropriate documents with the relevant authorities of other jurisdictions
in which the Company is qualified to do business, (ii) such filings and
proceedings as shall be necessary or appropriate to enable the shares of Parent
Common Stock to be issued, as contemplated by this Agreement, pursuant to an
exemption from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to a qualification permit from the
California Department of Corporations following a hearing held pursuant to
Section 25142 of the California Corporations Code and such other consents,
waivers, approvals, orders, authorizations, registrations, declarations and
filings as may be required under applicable federal and state securities laws
and (iii) such other consents, waivers, authorizations, filings, approvals and
registrations which are set forth on Schedule 2.4.
2.5 Company Financial Statements. Schedule 2.5 sets forth the Company's
unaudited balance sheet as of May 4, 1997 and the related unaudited statements
of operations and cash flows for the ten-month period then ended and the
Company's audited balance sheet as of June 30, 1996 (the "Balance Sheet") and
the related audited statements of operations and cash flows for the twelve-month
period then ended (collectively, the "Company Financials"). The Company
Financials have been prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a basis consistent throughout the periods
indicated and consistent with each other subject, in the case of the unaudited
Company Financials to normal year-end closing and audit adjustments and the
absence of footnotes related thereto (which are not material, either
individually or in the aggregate). The Company Financials present fairly the
financial condition and operating results of the Company as of the dates and
during the periods indicated therein, subject, in the case of the unaudited
financial statements, to normal year-end adjustments, which will not be material
in amount or significance.
2.6 No Undisclosed Liabilities. Except as set forth in Schedule 2.6, the
Company does not have any liability, indebtedness, obligation, expense, claim,
deficiency, guaranty or endorsement of any type, whether accrued, absolute,
contingent, matured or unmatured whether or not required to be reflected in a
balance sheet in accordance with generally accepted accounting principles, which
individually exceed $10,000 or in the aggregate exceed $25,000, and (i) has not
been reflected in the Balance Sheet, or (ii) has not arisen in the ordinary
course of the Company's business since May 4, 1997 consistent in nature and
amount with past practices.
2.7 No Changes. Except as set forth in Schedule 2.7, since May 4, 1997,
there has not been, occurred or arisen any:
(a) transaction by the Company except in the ordinary course of
business as conducted on that date and consistent with past practices;
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(b) amendments or changes to the Certificate of Incorporation or
Bylaws of the Company except in connection with effecting the Bridge Financing
described in Section 5.14;
(c) capital expenditure or commitment by the Company of $15,000
in any individual case or $25,000 in the aggregate not otherwise disclosed in
writing to Parent;
(d) destruction of, damage to or loss of any material assets,
business or customer of the Company (whether or not covered by insurance);
(e) strike, work stoppage, or claim of wrongful discharge or
other unlawful labor practice or action;
(f) change in accounting methods or practices (including any
change in depreciation or amortization policies or rates) by the Company;
(g) revaluation by the Company of any of its assets, including
without limitation, writing down the value of inventory or writing off notes or
accounts receivable other than in the ordinary course of business;
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the capital stock of the Company, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
capital stock except repurchases of unvested capital stock under the Company's
Option Plan;
(i) increase in the salary or other compensation payable or to
become payable by the Company to any of its officers, directors, employees or
advisors, or the declaration, payment or commitment or obligation of any kind
for the payment, by the Company, of a bonus or other additional salary or
compensation to any such person, except, in each case, to employees who are not
officers or directors of the Company in the ordinary course of business and
except as otherwise contemplated by this Agreement;
(j) sale, lease, license or other disposition of any of the
assets or properties of the Company, except in the ordinary course of business
as conducted on that date and consistent with past practices;
(k) transfer to any person or entity any rights to the Company
Intellectual Property Rights (as defined in Section 2.11 below);
(l) amendment or termination of any material contract, agreement
or license to which the Company is a party or by which it is bound, except in
connection with the Series C Preferred Stock financing of the Company, which
amendments or terminations have been specifically disclosed to Parent;
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(m) loan by the Company to any person or entity or incurring by
the Company of any indebtedness, guaranteeing by the Company of any
indebtedness, issuance or sale of any debt securities of the Company or
guaranteeing of any debt securities of others, except for (i) the issuance or
sale of any promissory notes or convertible securities to Kingdon Capital in
connection with effecting the Bridge Financing described in Section 5.14 below
or (ii) advances to employees for travel and business expenses in the ordinary
course of business, consistent with past practices;
(n) waiver or release of any right or claim of the Company,
including any write-off or other compromise of any account receivable of the
Company;
(o) commencement or notice or threat of commencement of any
lawsuit or proceeding against or investigation of the Company or its affairs;
(p) notice of any claim of ownership by a third party of the
Company's Intellectual Property Rights or of infringement by the Company of any
third party's intellectual property rights;
(q) issuance or sale by the Company of any of its shares of
capital stock, or securities exchangeable, convertible or exercisable therefor,
or of any other of its securities, except (i) to Kingdon Capital in connection
with effecting the Bridge Financing described in Section 5.14 below, or (ii) to
employees in connection with the issuance or exercise of any stock options under
the Company's Option Plan;
(r) change in pricing or royalties set or charged by the Company
to its customers or licensees or in pricing or royalties set or charged by
persons who have licensed intellectual property to the Company;
(s) any agreements pursuant to which any other party is granting
marketing, distribution or similar rights of any type or scope with respect to
any products of the Company;
(t) event or condition of any character that has or reasonably
would be expected to have a Material Adverse Effect on the Company; or
(u) agreement by the Company or any officer or employees thereof
to do any of the things described in the preceding clauses (a) through (r)
(other than as contemplated in the negotiations with Parent and its
representatives regarding the transactions, including but not limited to
payments of severance to employees of the Company, contemplated by this
Agreement).
2.8 Tax and Other Returns and Reports.
(a) Definition of Taxes. For the purposes of this Agreement,
"Tax" or, collectively, "Taxes", means any and all federal, state, local and
foreign taxes, assessments and other governmental charges, duties, impositions
and liabilities, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, excise and
property taxes, together with all
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interest, penalties and additions imposed with respect to such amounts and any
obligations under any agreements or arrangements with any other person with
respect to such amounts and including any liability for taxes of a predecessor
entity.
(b) Tax Returns and Audits. Except as set forth in Schedule 2.8:
(i) The Company as of the Effective Time will have
prepared and filed all required federal, state, local and foreign returns,
estimates, information statements and reports ("Returns") relating to any and
all Taxes concerning or attributable to the Company or its operations, and such
Returns have been completed in accordance with applicable law.
(ii) The Company as of the Effective Time: (A) will have
paid or accrued all Taxes it is required to pay or accrue and (B) will have
withheld with respect to its employees all federal and state income taxes, FICA,
FUTA and other Taxes required to be withheld.
(iii) The Company is not currently delinquent in the
payment of any Tax and has not been delinquent in the payment of any Tax during
the three (3) years preceding the date of this Agreement nor is there any Tax
deficiency outstanding, proposed or assessed against the Company, nor has the
Company executed any waiver of any statute of limitations on or extending the
period for the assessment or collection of any Tax.
(iv) No audit or other examination of any Return of the
Company is presently in progress, nor has the Company been notified of any
request for such an audit or other examination.
(v) The Company does not have any liabilities for unpaid
federal, state, local and foreign Taxes which have not been accrued or reserved
against in accordance with GAAP on the Balance Sheet, whether asserted or
unasserted, contingent or otherwise, and the Company has no knowledge of any
basis for the assertion of any such liability attributable to the Company, its
assets or operations.
(vi) The Company has provided to Parent copies of all
federal and state income and all state sales and use Tax Returns for all periods
since June 30, 1994.
(vii) There are (and as of immediately following the
Closing there will be) no liens, pledges, charges, claims, security interests or
other encumbrances of any sort ("Liens") on the assets of the Company relating
to or attributable to Taxes, other than Liens for Taxes not yet due and payable.
(viii) None of the Company's assets is treated as
"tax-exempt use property" within the meaning of Section 168(h) of the Code.
(ix) As of the Effective Time, there will not be any
contract, agreement, plan or arrangement, including but not limited to the
provisions of this Agreement, covering any
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employee or former employee of the Company that, individually or collectively,
could give rise to the payment of any amount that would not be deductible
pursuant to Section 280G or 162 of the Code.
(x) The Company has not filed any consent agreement under
Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply
to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of
the Code) owned by the Company.
(xi) The Company is not a party to a tax sharing or
allocation agreement nor does the Company owe any amount under any such
agreement.
(xii) The Company is not, and has not been at any time, a
"United States real property holding corporation" within the meaning of Section
897(c)(2) of the Code.
2.9 Restrictions on Business Activities. Except as set forth on Schedule
2.9, there is no agreement (noncompete or otherwise), judgment, injunction,
order or decree to which the Company is a party or otherwise binding upon the
Company which has or reasonably would be expected to have the effect of
prohibiting or materially impairing any business practice of the Company, any
acquisition of property (tangible or intangible) by the Company or the conduct
of business by the Company. Without limiting the foregoing, the Company has not
entered into any agreement under which the Company is restricted from selling,
licensing or otherwise distributing any of its products to any class of
customers, in any geographic area, during any period of time or in any segment
of the market.
2.10 Title to Properties; Absence of Liens and Encumbrances.
(a) The Company owns no real property, nor has it ever owned any
real property. Schedule 2.10(a) sets forth a list of all real property currently
leased by the Company, the name of the lessor and the date of the lease and each
amendment thereto. All such current leases are in full force and effect, are
valid and effective in accordance with their respective terms, and there is not,
under any of such leases, any material existing default or event of default (or
event which with notice or lapse of time, or both, would constitute a material
default).
(b) To its knowledge, the Company has good and valid title to,
or, in the case of leased properties and assets, valid leasehold interests in,
all of its tangible properties and tangible assets, real, personal and mixed,
used or held for use in its business, free and clear of any Liens (as defined in
Section 2.8(b)(vii)), except as reflected in the Company Financials or in
Schedule 2.10(b) and except for liens for Taxes not yet due and payable and such
imperfections of title and encumbrances, if any, which are not material in
character, amount or extent, and which do not materially detract from the value,
or materially interfere with the present use, of the property subject thereto or
affected thereby.
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2.11 Intellectual Property.
(a) To its knowledge, the Company owns, or is licensed or
otherwise possesses valid rights to use all patents that are used in the
business of the Company as currently conducted. The Company owns or is licensed
or otherwise possesses valid rights to use (i) all copyrights, and any
applications therefor, technology, know-how, computer software programs or
applications (in both source code and object code form), and tangible or
intangible proprietary information or material that are used in the business of
the Company as currently conducted by the Company, and (ii) all trademarks,
tradenames and service marks and any applications therefor which are material to
the business of the Company as currently conducted (all of the foregoing,
including the patents, are collectively referred to as the "Company Intellectual
Property Rights").
(b) Schedule 2.11(a) sets forth a complete list of all patents,
registered and material unregistered trademarks, registered copyrights, trade
names and service marks, and any applications therefor, included in the Company
Intellectual Property Rights, and specifies, where applicable, the jurisdictions
in which each such Company Intellectual Property Right has been issued or
registered or in which an application for such issuance and registration has
been filed, including the respective registration or application numbers and the
names of all registered owners. Schedule 2.11(b) sets forth a complete list of
all material licenses, sublicenses and other agreements to which the Company is
a party and pursuant to which the Company or any other person is authorized to
use any Company Intellectual Property Right (excluding object code end-user
licenses granted to end-users in the ordinary course of business that permit use
of software products without a right to modify, distribute or sublicense the
same ("End-User Licenses")) or trade secret of the Company, and includes the
identity of all parties thereto. The execution and delivery of this Agreement by
the Company, and the consummation of the transactions contemplated hereby, will
neither cause the Company to be in violation or default under any such license,
sublicense or agreement, nor entitle any other party to any such license,
sublicense or agreement to terminate or modify such license, sublicense or
agreement.
(c) No claims with respect to the Company Intellectual Property
Rights have been asserted to the Company or are, to the Company's knowledge,
threatened by any person, nor, to the Company's knowledge, are there any valid
grounds for any bona fide claims (i) to the effect that the manufacture, sale,
licensing or use of any of the products of the Company infringes on any
copyright, patent, trademark, service mark, trade secret or other proprietary
right, (ii) against the use by the Company of any trademarks, service marks,
trade names, trade secrets, copyrights, patents, technology, know-how or
computer software programs and applications used in the Company's business as
currently conducted, or (iii) challenging the ownership by the Company, validity
or effectiveness of any of the Company Intellectual Property Rights. All
registered trademarks, service marks and copyrights held by the Company are
valid and subsisting. To the Company's knowledge, the business of the Company as
currently conducted has not and does not infringe on any proprietary right of
any third party. To the Company's knowledge, there is no unauthorized use,
infringement or misappropriation of any of the Company Intellectual Property
Rights by any third party, including any employee or former employee of the
Company. No Company Intellectual Property Right or product of the Company or any
of its subsidiaries is subject to any outstanding decree, order, judgment, or
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<PAGE> 27
stipulation restricting in any manner the licensing thereof by the Company. Each
employee of and consultant to the Company has executed a proprietary information
and inventions agreement substantially in the Company's standard form.
2.12 Agreements, Contracts and Commitments. Except as set forth on
Schedule 2.12(a), the Company does not have, is not a party to nor is it bound
by:
(i) any collective bargaining agreements,
(ii) any agreements or arrangements that contain any
severance pay or post-employment liabilities or obligations,
(iii) any bonus, deferred compensation, pension, profit
sharing or retirement plans, or any other employee benefit plans or
arrangements,
(iv) any employment or consulting agreement with an
employee or individual consultant or salesperson, or consulting or sales
agreement, under which a firm or other organization provides services to the
Company, and which, in each case, involves payments by or to the Company in
excess of $15,000 annually,
(v) any agreement or plan, including, without limitation,
any stock option plan, stock appreciation rights plan or stock purchase plan,
any of the benefits of which will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which will
be calculated on the basis of any of the transactions contemplated by this
Agreement,
(vi) any fidelity or surety bond or completion bond,
(vii) any lease of personal property having a value
individually in excess of $15,000,
(viii) any agreement of indemnification or guaranty,
(ix) any agreement containing any covenant limiting the
freedom of the Company to engage in any line of business or to compete with any
person,
(x) any agreement relating to capital expenditures and
involving future payments in excess of $15,000,
(xi) any agreement relating to the disposition or
acquisition of assets or any interest in any business enterprise outside the
ordinary course of the Company's business,
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<PAGE> 28
(xii) any mortgages, indentures, loans or credit
agreements, security agreements or other agreements or instruments relating to
the borrowing of money or extension of credit, including guaranties referred to
in clause (viii) hereof,
(xiii) any construction contracts,
(xiv) any distribution, joint marketing or development
agreement,
(xv) any agreement pursuant to which the Company has
granted or may grant in the future, to any party a source-code license or option
or other right to use or acquire source-code, or
(xvi) any other agreement that involves payment by the
Company of $15,000 or more or which is not cancelable without penalty within
thirty (30) days.
Except for such alleged material breaches, violations and defaults, and
events that would constitute a material breach, violation or default with the
lapse of time, giving of notice, or both, as are all noted in Schedule 2.12(a),
the Company has not materially breached, violated or defaulted under, or
received notice that it has materially breached, violated or defaulted under,
any of the terms or conditions of any agreement, contract or commitment required
to be set forth on Schedule 2.11(b) or Schedule 2.12(a). Each agreement,
contract or commitment listed on Schedule 2.12(b) is in full force and effect
and, except as otherwise disclosed in Schedule 2.12(b), is not subject to any
default thereunder of which the Company has knowledge by any party obligated to
the Company pursuant thereto.
2.13 Interested Party Transactions. Except as set forth on Schedule
2.13, to the Company's knowledge, no officer or director of the Company (nor any
ancestor, sibling, descendant or spouse of any of such persons, or any trust,
partnership or corporation in which any of such persons has or has had an
economic interest), has or has had, directly or indirectly, (i) an economic
interest in any entity which furnished or sold, or furnishes or sells, services
or products that the Company furnishes or sells, or proposes to furnish or sell,
or (ii) an economic interest in any entity that purchases from or sells or
furnishes to, the Company, any goods or services or (iii) a beneficial interest
in any contract or agreement set forth in Schedule 2.11(b) or Schedule 2.12(a)
or (b); provided, that (x) ownership of no more than one percent (1%) of the
outstanding voting stock of a publicly traded corporation and no more than ten
percent (10%) of the outstanding equity of any other entity shall not be deemed
an "economic interest in any entity" for purposes of this Section 2.13 and (y)
this Section 2.13 shall only apply if the terms and conditions applicable to the
subject relationship are materially less favorable to the Company than the terms
and conditions that could be obtained in an arm's-length relationship.
2.14 Compliance with Laws. The Company has complied with, is not in
violation of, and has not received any notices of violation with respect to, any
foreign, federal, state or local statute, law or regulation of which it should
reasonably be aware of, except where any such non-compliance or violation would
not have a Material Adverse Effect on the Company.
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<PAGE> 29
2.15 Litigation. Except as set forth in Schedule 2.15, there is no
action, suit or proceeding of any nature pending or, to the Company's knowledge,
threatened against the Company, its properties or any of its officers or
directors, in their respective capacities as such. Except as set forth in
Schedule 2.15, to the Company's knowledge, there is no investigation pending or
threatened against the Company, its properties or any of its officers or
directors by or before any Governmental Entity. Schedule 2.15 sets forth, with
respect to any pending or known threatened action, suit, proceeding or
investigation, the forum, the parties thereto, the subject matter thereof and
the amount of damages claimed or other remedy requested. No Governmental Entity
has at any time challenged or questioned in writing to the Company the legal
right of the Company to manufacture, offer or sell any of its products in the
present manner or style thereof.
2.16 Insurance. With respect to the insurance policies and fidelity
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of the Company, there is no claim by the
Company pending under any of such policies or bonds as to which coverage has
been questioned, denied or disputed by the underwriters of such policies or
bonds. All premiums due and payable under all such policies and bonds have been
paid and the Company is otherwise in compliance with the material terms of such
policies and bonds. The Company has no knowledge of any threatened termination
of, or premium increase with respect to, any of such policies.
2.17 Minute Books. The minute books of the Company made available upon
request to counsel for Parent are the only minute books of the Company from the
date of the Company's reincorporation into the State of Delaware and contain
true and correct copies of all resolutions adopted by the Company's Board of
Directors (or committees thereof) and stockholders for such period.
2.18 Environmental Matters. Except for failures which will not have a
Material Adverse Effect on the Company, the Company has met, and continues to
meet, all applicable local, state, federal and national environmental
regulations and has disposed of its waste products and effluents and/or has
caused others to dispose of such waste products and effluents in accordance with
all applicable local, state, federal and national environmental regulations.
2.19 Brokers' and Finders' Fees; Third Party Expenses. Except as set
forth on Schedule 2.19, the Company has not incurred, nor will it incur,
directly or indirectly, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with this Agreement or any
transaction contemplated hereby. Schedule 2.19 sets forth the Company's current
reasonable estimate of all legal, accounting, financial advisory, consulting and
all other fees and expenses of third parties ("Third Party Expenses") expected
to be incurred by the Company in connection with the negotiation and
effectuation of the terms and conditions of this Agreement and the transactions
contemplated hereby.
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2.20 Employee Matters and Benefit Plans.
(a) Definitions. With the exception of the definition of
"Affiliate" set forth in Section 2.20(a)(i) below (which definition shall only
apply to this Section 2.20), for purposes of this Agreement, the following terms
shall have the meanings set forth below:
(i) "Affiliate" shall mean any person or entity under
common control with the Company within the meaning of Section 414(b), (c), (m)
or (o) of the Code and the regulations thereunder;
(ii) "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended;
(iii) "Company Employee Plan" shall refer to any plan,
program, policy, practice, contract, agreement or other arrangement providing
for compensation, severance, termination pay, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or remuneration
of any kind, whether formal or informal, funded or unfunded, including without
limitation, each "employee benefit plan", within the meaning of Section 3(3) of
ERISA which is or has been maintained, contributed to, or required to be
contributed to, by the Company or any Affiliate for the benefit of any
"Employee" (as defined below), and pursuant to which the Company or any
Affiliate has or may have any material liability contingent or otherwise;
(iv) "Employee" shall mean any current, former, or retired
employee, officer, or director of the Company or any Affiliate;
(v) "Employee Agreement" shall refer to each management,
employment, severance, consulting, relocation, repatriation, expatriation, visa,
work permit or similar agreement or contract between the Company or any
Affiliate and any Employee or consultant;
(vi) "IRS" shall mean the Internal Revenue Service;
(vii) "Multiemployer Plan" shall mean any "Pension Plan"
(as defined below) which is a "multiemployer plan", as defined in Section 3(37)
of ERISA; and
(viii) "Pension Plan" shall refer to each Company Employee
Plan which is an "employee pension benefit plan", within the meaning of Section
3(2) of ERISA.
(b) Schedule. Schedule 2.20(b) contains an accurate and complete
list of each Company Employee Plan and each Employee Agreement, together with a
schedule of all liabilities, whether or not accrued, under each such Company
Employee Plan or Employee Agreement. The Company does not have any stated plan
or commitment to establish any new Company Employee Plan or Employee Agreement,
to modify any Company Employee Plan or Employee Agreement (except to the extent
required by law or to conform any such Company Employee Plan or Employee
Agreement to the requirements of any applicable law, in each case as previously
disclosed to Parent in
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<PAGE> 31
writing, or as required by this Agreement), or to enter into any Company
Employee Plan or Employee Agreement.
(c) Documents. The Company has provided to Parent (i) correct and
complete copies of all documents embodying or relating to each Company Employee
Plan and each Employee Agreement including all amendments thereto; (ii) the
three most recent annual reports (Series 5500 and all schedules thereto), if
any, required under ERISA or the Code in connection with each Company Employee
Plan or related trust; (iii) if the Company Employee Plan is funded, the most
recent annual and periodic accounting of Company Employee Plan assets; (iv) the
most recent summary plan description together with the most recent summary of
material modifications, if any, required under ERISA with respect to each
Company Employee Plan; (v) all IRS determination letters and rulings relating to
Company Employee Plans and copies of all applications and correspondence to or
from the IRS or the Department of Labor ("DOL") with respect to any Company
Employee Plan; (vi) all communications material to any Employee or Employees
relating to any Company Employee Plan and any proposed Company Employee Plans,
in each case, relating to any amendments, terminations, establishments,
increases or decreases in benefits, acceleration of payments or vesting
schedules or other events which would result in any material liability to the
Company; and (vii) all registration statements and prospectuses prepared in
connection with each Company Employee Plan.
(d) Employee Plan Compliance. Except as set forth on Schedule
2.20(d), (i) the Company has performed all obligations required to be performed
by it under each Company Employee Plan and each Company Employee Plan has been
established and maintained in accordance with its terms and in compliance with
all applicable laws, statutes, orders, rules and regulations, including but not
limited to ERISA or the Code; (ii) no "prohibited transaction", within the
meaning of Section 4975 of the Code or Section 406 of ERISA, has occurred with
respect to any Company Employee Plan; (iii) there are no actions, suits or
claims pending, or, to the knowledge of the Company, threatened or anticipated
(other than routine claims for benefits) against any Company Employee Plan or
against the assets of any Company Employee Plan; and (iv) each Company Employee
Plan can be amended, terminated or otherwise discontinued after the Effective
Time in accordance with its terms, without liability to the Company, Parent or
any of its Affiliates (other than ordinary administration expenses typically
incurred in a termination event); (v) there are no inquiries or proceedings
pending or, to the knowledge of the Company or any affiliates, threatened by the
IRS or DOL with respect to any Company Employee Plan; and (vi) neither the
Company nor any Affiliate is subject to any penalty or tax with respect to any
Company Employee Plan under Section 402(i) of ERISA or Section 4975 through 4980
of the Code.
(e) Pension Plans. The Company does not now, nor has it ever,
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA, Title
IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has the Company contributed
to or been requested to contribute to any Multiemployer Plan.
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<PAGE> 32
(g) No Post-Employment Obligations. Except as set forth in
Schedule 2.20(g), no Company Employee Plan and no agreement with any employee
provides, or has any liability to provide, life insurance, medical or other
employee welfare benefits to any Employee upon his or her retirement or
termination of employment for any reason, except as may be required by statute,
and the Company has never represented, promised or contracted (whether in oral
or written form) to any Employee (either individually or to Employees as a
group) that such Employee(s) would be provided with life insurance, medical or
other employee welfare benefits upon their retirement or termination of
employment, except to the extent required by statute.
(h) Effect of Transaction.
(i) Except as provided in Section 1.6 of this Agreement or
as set forth on Schedule 2.20(h)(i), the execution of this Agreement and the
consummation of the transactions contemplated hereby will not (either alone or
upon the occurrence of any additional or subsequent events) constitute an event
under any Company Employee Plan, Employee Agreement, trust or loan that will or
may result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any Employee.
(ii) Except as set forth on Schedule 2.20(h)(ii), no
payment or benefit which will or may be made by the Company or Parent or any of
their respective affiliates with respect to any Employee will be characterized
as an "excess parachute payment", within the meaning of Section 280G(b)(1) of
the Code.
(i) Employment Matters. The Company (i) is in material compliance
with all applicable foreign, federal, state and local laws, rules and
regulations respecting employment, employment practices, immigration or other
laws governing the employment of foreign nationals, terms and conditions of
employment and wages and hours, in each case, with respect to Employees; (ii)
has withheld all amounts required by law or by agreement to be withheld from the
wages, salaries and other payments to Employees; (iii) is not liable for any
arrears of wages or any taxes or any penalty for failure to comply with any of
the foregoing; and (iv) is not liable for any payment to any trust or other fund
or to any governmental or administrative authority, with respect to unemployment
compensation benefits, social security or other benefits or obligations for
Employees (other than routine payments to be made in the normal course of
business and consistent with past practice).
(j) Labor. No work stoppage or labor strike against the Company
is pending or, to the knowledge of the Company, threatened. Except as set forth
in Schedule 2.20(j), the Company is not involved in or, to the knowledge of the
Company, threatened with, any labor dispute, grievance, or litigation relating
to labor, safety or discrimination matters involving any Employee, including,
without limitation, charges of unfair labor practices or discrimination
complaints, which, if adversely determined, would, individually or in the
aggregate, result in liability to the Company. The Company has not engaged in
any unfair labor practices within the meaning of the National Labor Relations
Act which would, individually or in the aggregate, directly or indirectly result
in a liability to the Company. Except as set forth in Schedule 2.20(j), the
Company is not presently, nor has it been
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<PAGE> 33
in the past, a party to, or bound by, any collective bargaining agreement or
union contract with respect to Employees and no collective bargaining agreement
is being negotiated by the Company.
2.21 Affiliates. Schedule 2.21 sets forth those persons who, in the
Company's reasonable judgment, are "affiliates" of the Company within the
meaning of Rule 145 (each such person an "Affiliate") promulgated under the
Securities Act ("Rule 145").
2.22 Representations Complete. None of the representations or warranties
made by the Company in this Agreement (as modified by the Company Schedules),
nor any statement made in any schedule or certificate furnished by the Company
pursuant to this Agreement, contains as of the date of this Agreement, any
untrue statement of a material fact, or omits to state, as of the date of this
Agreement, any material fact necessary in order to make the statements contained
herein or therein, in the light of the circumstances under which made, not
misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to the Company and the
stockholders of the Company as follows:
3.1 Organization, Standing and Power. Each of Parent and Merger Sub is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. Each of Parent and Merger Sub has the corporate power
to own its properties and to carry on its business as now being conducted and is
duly qualified to do business and is in good standing in each jurisdiction in
which the failure to be so qualified would have a Material Adverse Effect on the
Parent or the Merger Sub. Parent and Merger Sub have each delivered a true and
correct copy of their respective Certificates of Incorporation and Bylaws, as
amended to date, to the Company.
3.2 Authority.
(a) Parent and Merger Sub have all requisite corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Parent and Merger
Sub, and do not require the consent of the stockholders of the Parent. This
Agreement has been duly executed and delivered by Parent and Merger Sub and
constitutes the valid and binding obligations of Parent and Merger Sub,
enforceable in accordance with its terms subject to applicable bankruptcy,
insolvency, reorganization, liquidation, moratorium or other similar laws
relating or affecting the rights of creditors generally and the effect or
availability of rules of law governing specific performance, injunctive relief
and other equitable remedies.
(b) Subject to satisfaction of the conditions set forth in
Article VII hereto, and except as set forth on Schedule 3.2, the execution and
delivery of this Agreement and the related
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<PAGE> 34
agreements by each of the Parent and Merger Sub do not, and as of the Effective
Time the performance and consummation of the transactions contemplated hereby
and thereby will not, conflict with, or result in any violation of, or default
under (with or without notice or lapse of time, or both), or give rise to a
right of termination, cancellation, forfeiture, or acceleration of any
obligation or loss of any benefit under or result in the creation of a lien or
encumbrance on any of the properties or assets of Parent or Merger Sub (any such
event, a "Parent Conflict") pursuant to (i) any provision of the Certificate of
Incorporation or Bylaws of the Parent or Merger Sub or (ii) any mortgage,
indenture, lease, contract or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Parent or Merger Sub or their respective properties
or assets other than any such conflict, violation or default which would not
have a Material Adverse Effect on the Parent or Merger Sub. No consent, waiver,
approval, order or authorization of, or registration, declaration or filing with
any third party (so as not to trigger any Parent Conflict) or, to the Parent's
knowledge, with any Governmental Entity, is required by or with respect to the
Company in connection with the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby, except for (i) the filing
of the Certificate of Merger with the Delaware Secretary of State and the filing
of other appropriate documents with the relevant authorities of other
jurisdictions in which the Company is qualified to do business, (ii) such
filings and proceedings as shall be necessary or appropriate to enable the
shares of Parent Common Stock to be issued, as contemplated by this Agreement,
pursuant to an exemption from the registration requirements of the Securities
Act, pursuant to a qualification permit from the California Department of
Corporations following a hearing held pursuant to Section 25142 of the
California Corporations Code and such other consents, waivers, approvals,
orders, authorizations, registrations, declarations and filings as may be
required under applicable federal and state securities laws, and (iii) such
other consents, waivers, authorizations, filings, approvals and registrations
which are set forth on Schedule 3.2.
3.3 Capital Structure.
(a) The authorized stock of Parent consists of 50,000,000 shares
of Common Stock, $.001 par value, of which 2,104,154 shares were issued and
outstanding as of June 4, 1997 and 5,000,000 shares of Preferred Stock, $.001
par value, 100,000 shares of which are designated Series A Preferred Stock, of
which 97,919 are issued and outstanding as of June 4, 1997. The authorized
capital stock of Merger Sub consists of 1,000 shares of Common Stock, 1,000
shares of which, as of the date hereof, are issued and outstanding and are held
by Parent. All outstanding shares of the capital stock of Parent and Merger Sub
are duly authorized, validly issued, fully paid and non-assessable and are not
subject to preemptive rights created by statute, the Certificate of
Incorporation or Bylaws of either Parent or Merger Sub or any agreement to which
either Parent or Merger Sub is a party or by which either is bound.
(b) The Parent has reserved 400,000 shares of Common Stock for
issuance to employees and consultants pursuant to the Parent's 1996 Stock Plan,
of which 51,350 shares are subject to outstanding, unexercised options and
348,650 shares remain available for future grant. The Parent has reserved
200,000 shares of Common Stock for issuance to employees and consultants
pursuant to the Parent's 1995 Stock Plan, of which 56,250 shares are subject to
outstanding,
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unexercised options and 143,750 shares remain available for future grant. In
addition, the Parent has reserved 12,350 shares for issuance pursuant to
outstanding unexercised options issued outside of the Company's 1996 or 1996
stock plans. Except as described in Schedule 3.3(b), there are no options,
warrants, calls, rights, commitments or agreements of any character, written or
oral, to which the Parent is a party or by which it is bound obligating the
Parent to issue, deliver, sell, repurchase or redeem, or cause to be issued,
delivered, sold, repurchased or redeemed, any shares of the capital stock of the
Parent. Schedule 3.3(b) sets forth for each outstanding Parent stock option (a
"Parent Option") the name of the holder of such option, the number of shares of
Common Stock subject to such option and the exercise price of such option.
Except as described in Schedule 3.3(b), there are no options, warrants, calls,
rights, commitments or agreements of any character, written or oral, to which
the Parent is a party or by which it is bound obligating the Parent to grant,
extend, accelerate the vesting of, change the price of, otherwise amend or enter
into any such option, warrant, call, right, commitment or agreement. The holders
of Parent Options or any other options or rights set forth in Schedule 3.3(b)
have been or will be given, or shall have properly waived, any required notice
prior to the Merger.
(c) The shares of Parent Common Stock to be issued pursuant to
the Merger, when issued, sold and delivered in accordance with the terms hereof
for the consideration described herein, will be duly authorized, validly issued,
fully paid, non-assessable and will be issued in compliance with all applicable
securities laws and will be free and clear of any liens, claims, encumbrances or
restrictions other than liens or encumbrances created by or imposed upon the
holders thereof.
3.4 SEC Documents; Parent Financial Statements. Parent has furnished or
made available to the Company true and complete copies of all reports filed by
it with the U.S. Securities and Exchange Commission (the "SEC") under the
Exchange Act for all periods subsequent to December 31, 1994, all in the form so
filed (all of the foregoing being collectively referred to as the "SEC
Documents"). As of their respective filing dates, the SEC Documents complied in
all material respects with the requirements of the Exchange Act, and none of the
SEC Documents contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances in which they were made,
not misleading, except to the extent corrected by a document subsequently filed
with the SEC. Parent has made all filings required under the rules and
regulations promulgated by the SEC. The financial statements of Parent,
including the notes thereto, included in the SEC Documents (the "Parent
Financial Statements") comply as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles consistently applied (except as may be indicated
in the notes thereto) and present fairly the consolidated financial position of
Parent at the dates thereof and of its operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to normal audit
adjustments). There has been no change in Parent accounting policies except as
described in the notes to the Parent Financial Statements.
3.5 No Material Adverse Change. Since the date of the balance sheet
included in the Parent's most recently filed report on Form 10-Q, Parent has
conducted its business in the ordinary
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course and there has not occurred: (a) any material adverse change in the
financial condition, liabilities, assets or business of Parent; (b) any
amendment or change in the Certificate of Incorporation or Bylaws of Parent; or
(c) any damage to, destruction or loss of any assets of the Parent, (whether or
not covered by insurance) that materially and adversely affects the financial
condition or business of Parent.
3.6 Litigation. There is no action, suit, proceeding, claim, arbitration
or investigation pending, or as to which Parent has received any notice of
assertion against Parent which in any manner challenges or seeks to prevent,
enjoin, alter or materially delay any of the transactions contemplated by this
Agreement. Except as set forth in the SEC Documents or in Schedule 3.6, Parent
is not aware of any other pending or threatened action, suit, proceeding,
investigation or claim, or any reasonable basis therefor, that individually or
in the aggregate would reasonably be expected to have a Material Adverse Effect
on Parent.
3.7 Intellectual Property.
(a) To its knowledge, the Parent owns, or is licensed or
otherwise possesses valid rights to use all patents that are used in the
business of the Parent as currently conducted. The Parent owns or is licensed or
otherwise possesses valid rights to use all trademarks, trade names, service
marks, copyrights, and any applications therefor, technology, know-how, computer
software programs or applications (in both source code and object code form),
and tangible or intangible proprietary information or material that are used in
the business of the Parent as currently conducted (all of the foregoing,
including the patents, are collectively referred to as the "Parent Intellectual
Property Rights").
(b) Schedule 3.7(a) sets forth a complete list of all patents,
registered and material unregistered trademarks, registered copyrights, trade
names and service marks, and any applications therefor, included in the Parent
Intellectual Property Rights, and specifies, where applicable, the jurisdictions
in which each such Parent Intellectual Property Right has been issued or
registered or in which an application for such issuance and registration has
been filed, including the respective registration or application numbers and the
names of all registered owners. Schedule 3.7(b) sets forth a complete list of
all material licenses, sublicenses and other agreements to which the Parent is a
party and pursuant to which the Parent or any other person is authorized to use
any Parent Intellectual Property Right (excluding End-User Licenses) or trade
secret of the Parent, and includes the identity of all parties thereto. The
execution and delivery of this Agreement by the Parent, and the consummation of
the transactions contemplated hereby, will neither cause the Parent to be in
violation or default under any such license, sublicense or agreement, nor
entitle any other party to any such license, sublicense or agreement to
terminate or modify such license, sublicense or agreement.
(c) No claims with respect to the Parent Intellectual Property
Rights have been asserted to Parent or are, to the Parent's knowledge,
threatened by any person, nor, to the Parent's knowledge, are there any valid
grounds for any bona fide claims (i) to the effect that the manufacture, sale,
licensing or use of any of the products of the Parent infringes on any
copyright, patent, trademark, service mark, trade secret or other proprietary
right, (ii) against the use by the Parent of
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any trademarks, service marks, trade names, trade secrets, copyrights, patents,
technology, know-how or computer software programs and applications used in the
Parent's business as currently conducted, or (iii) challenging the ownership by
the Parent, validity or effectiveness of any of the Parent Intellectual Property
Rights. All registered trademarks, service marks and copyrights held by the
Parent are valid and subsisting. To Parent's knowledge, the business of the
Parent as currently conducted has not and does not infringe on any proprietary
right of any third party. To the Parent's knowledge, there is no unauthorized
use, infringement or misappropriation of any of the Parent Intellectual Property
Rights by any third party, including any employee or former employee of the
Parent. No Parent Intellectual Property Right or product of the Parent or any of
its subsidiaries is subject to any outstanding decree, order, judgment, or
stipulation restricting in any manner the licensing thereof by the Parent. Each
employee of and consultant to the Parent has executed a proprietary information
and inventions agreement substantially in the Parent's standard form.
3.8 Restrictions on Business Activities.There is no agreement, judgment,
injunction, order or decree binding upon Parent that has or could reasonably
have the effect of prohibiting or significantly impairing any business practice
of Parent, any acquisition of property by Parent, or the continuation of the
business of Parent as currently conducted or as currently proposed to be
conducted.
3.9 Brokers or Finders; Professional Fees. No third party shall be
entitled to receive any brokerage commissions, finder's fees, or similar
compensation in connection with the transactions contemplated by this Agreement
based on any arrangement or agreement made by or on behalf of Parent or Merger
Sub.
3.10 Conduct in the Ordinary Course. Since April 15, 1997, there has not
occurred any amendments or changes in the Certificate of Incorporation or Bylaws
of Parent or any agreement or arrangement made by Parent to do the same.
3.11 Third Party Consents. Except as set forth in Schedule 3.11, no
consent or approval is needed from any third party in order to enable Parent and
Merger Sub to effect the Merger or any of the transactions contemplated hereby.
3.12 Representations Complete. None of the representations or warranties
made by the Parent or Merger Sub (as modified by the Parent Schedules), nor any
statement made in any schedule or certificate furnished by the Parent or Merger
Sub pursuant to this Agreement, or furnished in or in connection with documents
mailed or delivered to the stockholders of the Company in connection with
soliciting their consent to this Agreement and the Merger (to the extent
prepared by the Parent or Merger Sub), contains or will contain, as of the date
of this Agreement, or if made after the date of this Agreement, on the date such
representation, warranty, or statement is first made, any untrue statement of a
material fact, or omits or will omit to state, as of the date of this Agreement,
or if made after the date of this Agreement, the date such representation,
warranty, or statement is first made, any material fact necessary in order to
make the statements contained herein or therein, in the light of the
circumstances under which made, not misleading.
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ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of the Company. During the period from the date
of this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, the Company agrees (except to the extent that
Parent shall otherwise consent in writing and except with respect to the
termination of employees and the combination of the Company's operations with
that of the Parent and other substantial cost reduction measures all as
discussed with or approved by Parent) to carry on its business in the usual,
regular and ordinary course in substantially the same manner as heretofore
conducted, to pay its debts and Taxes when due, to pay or perform other
obligations when due, and, to the extent consistent with such business, to use
all reasonable efforts consistent with past practice and policies to preserve
intact its present business organization, keep available the services of its
present officers and key employees and preserve their relationships with
customers, suppliers, distributors, licensors, licensees, and others having
business dealings with it, all with the goal of preserving unimpaired its
goodwill and ongoing businesses at the Effective Time. The Company shall
promptly notify Parent of any event not previously discussed with or approved by
Parent which materially adversely effects the Company or its business. Except as
expressly contemplated by this Agreement or disclosed in Schedule 4.1 or
necessary to effect the Bridge Financing described in Section 5.14, the Company
shall not, without the prior written consent of Parent:
(a) Enter into any commitment or transaction not in the ordinary
course of business.
(b) Transfer to any person or entity any rights to the Company
Intellectual Property Rights, except licenses in the ordinary course of
business;
(c) Enter into or amend any agreements pursuant to which any
other party is granted marketing, distribution or similar rights of any type or
scope with respect to any products of the Company;
(d) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of the agreements set
forth or described in the Company Schedules;
(e) Commence any litigation;
(f) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of capital stock of the Company, or repurchase,
redeem or otherwise acquire, directly or indirectly, any shares of its capital
stock (or options, warrants or other rights exercisable therefor), except upon
termination of employment at cost;
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(g) Except for the issuance of shares of Company Capital Stock
(i) upon exercise or conversion of presently outstanding Company Options or
Company Preferred Stock or warrants, or (ii) to Kingdon Capital with respect to
the Bridge Financing pursuant to Section 5.16 below, issue, grant, deliver or
sell or authorize or propose the issuance, grant, delivery or sale of, or
purchase or propose the purchase of, any shares of Company Capital Stock or
securities convertible into, or subscriptions, rights, warrants or options to
acquire, or other agreements or commitments of any character obligating it to
issue any such shares or other convertible securities, without the prior written
consent of Parent;
(h) Cause or permit any amendments to its Certificate of
Incorporation or Bylaws, except as necessary to effect the sale of Series C
Preferred Stock to Kingdon Capital or to revise existing liquidation preferences
or as otherwise contemplated hereby;
(i) Acquire or agree to acquire by merging or consolidating with,
or by purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets in an amount in excess of $5,000 in the case of a single transaction or
in excess of $15,000 in the aggregate in any 30-day period;
(j) Sell, lease, license or otherwise dispose of any of its
properties or assets, except in the ordinary course of business;
(k) Incur any indebtedness for borrowed money or guarantee any
such indebtedness or issue or sell any debt securities of the Company or
guarantee any debt securities of others except in connection with the Bridge
Financing pursuant to Section 5.16;
(l) Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee except payments made pursuant to written
agreements outstanding on the date hereof, or as set forth in the Company
Schedules;
(m) Except as set forth in the Company Schedules, adopt or amend
any employee benefit plan, or enter into any employment contract, extend
employment offers, pay or agree to pay any special bonus or special remuneration
to any director or employee, or increase the salaries or wage rates of its
employees, without the prior written consent of Parent;
(n) Revalue any of its assets, including without limitation
writing down the value of inventory or writing off notes or accounts receivable
other than in the ordinary course of business;
(o) Pay, discharge or satisfy, in an amount in excess of $5,000
(in any one case) or $15,000 (in the aggregate), any claim, liability or
obligation (absolute, accrued, asserted or unasserted, contingent or otherwise),
other than the payment, discharge or satisfaction in the ordinary course of
business of liabilities reflected or reserved against in the Company Financial
Statements (or the notes thereto) or identified in the Company Schedules or that
arose in the ordinary course of
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business subsequent to May 4, 1997 or expenses consistent with the provisions of
this Agreement incurred in connection with any transaction contemplated hereby;
(p) Make or change any material election in respect of Taxes,
adopt or change any accounting method in respect of Taxes, enter into any
closing agreement, settle any claim or assessment in respect of Taxes, or
consent to any extension or waiver of the limitation period applicable to any
claim or assessment in respect of Taxes; or
(q) Enter into any strategic alliance, joint development or joint
marketing agreement; or
(r) Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) through (q) above, or any other action that
would prevent the Company from performing or cause the Company not to perform
its covenants hereunder.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 No Solicitation. From and after the date of this Agreement until the
earlier of the Effective Time or termination of this Agreement pursuant to its
terms, the Company and its subsidiaries will not, and will instruct their
respective directors, officers, employees, representatives, investment bankers,
agents and affiliates not to, directly or indirectly, (i) solicit or knowingly
encourage submission of, any proposals or offers by any person, entity or group
(other than Parent and its affiliates, agents and representatives), or (ii)
participate in any discussions or negotiations with, or disclose any non-public
information concerning the Company or any of its subsidiaries to, or afford an
access to the properties, books or records of the Company or any of it
subsidiaries to, or otherwise assist or facilitate, or enter into any agreement
or understanding with, any person, entity or group (other than the Parent and
its affiliates, agents and representatives), in connection with any Acquisition
Proposal with respect to the Company. Notwithstanding the immediately preceding
sentence, if (i) an unsolicited Acquisition Proposal shall be received by the
Board of Directors of the Company, then, to the extent the Board of Directors of
the Company believes in good faith (after consultation with its financial
advisor) that such Acquisition Proposal would, if consummated, result in a
transaction more favorable to the Company's stockholders from a financial point
of view than the transaction contemplated by this Agreement (any such more
favorable Acquisition Proposal being referred to in this Agreement as a
"Superior Proposal") and (ii) the Board of Directors of the Company determines
in good faith after consultation with outside legal counsel that it is so
necessary for the Board of Directors of the Company to comply with its fiduciary
duties to stockholders under applicable law, then the Company and its officers,
directors, employees, investment bankers, financial advisors, attorneys,
accountants and other representatives retained by it may engage in discussions
or negotiations with a third party who has initiated such Superior Proposal and
make disclosures to the Company's stockholders to the extent such actions are
consistent with the fiduciary obligations of the Company's Board of Directors,
and such actions shall not be considered a breach of this Section 5.1
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or any other provision of this Agreement. For the purposes of this Agreement, an
"Acquisition Proposal" with respect to an entity means any proposal or offer
relating to (i) any merger, consolidation, sale of substantial assets or similar
transactions involving the entity or any subsidiaries of the entity (other than
sales of assets or inventory in the ordinary course of business or as permitted
under the terms of this Agreement), (ii) sale of 15% or more of the outstanding
shares of capital stock of the entity (including without limitation by way of a
tender offer or an exchange offer), excluding the sale of Capital Stock of the
Company to Kingdon Capital as described in Section 5.14, (iii) the acquisition
by any person of beneficial ownership or a right to acquire beneficial ownership
of, or the formation of any "group" (as defined under Section 13(d) of the
Exchange Act and the rules and regulations thereunder) which beneficially owns,
or has the right to acquire beneficial ownership of, 15% or more of the then
outstanding shares of capital stock of the entity (except for acquisitions for
passive investment purposes only in circumstances where the person or group
qualifies for and files a Schedule 13G with respect thereto and excluding the
sale of Capital Stock of the Company to Kingdon Capital as described in Section
5.14); or (iv) any public announcement of a proposal, plan or intention to do
any of the foregoing or any agreement to engage in any of the foregoing. The
Company will immediately cease any and all existing activities, discussions or
negotiations with any parties conducted heretofore with respect to any of the
foregoing. The Company will (i) notify Parent as promptly as practicable, if any
inquiry or proposal is made or any information or access is requested in writing
in connection with an Acquisition Proposal or potential Acquisition Proposal and
(ii) as promptly as practicable notify Parent of the significant terms and
conditions of any such acquisition proposal. In addition, subject to the other
provisions of this section, from and after the date of this Agreement until the
earlier of the Effective Time in termination of this Agreement pursuant to its
terms, the Company and its subsidiaries will not, and will instruct their
respective directors, officers, employees, representatives, investment bankers,
agents and affiliates not to, directly or indirectly, make or authorize any
public statement, recommendation or solicitation in support of any Acquisition
Proposal made by any person, entity or group (other than the Parent).
5.2 Securities Act Exemption. The Parent Common Stock to be issued
pursuant to this Agreement initially will not be registered under the Securities
Act, in reliance on the exemption set forth in Section 3(a)(10) thereof.
5.3 Stock Restrictions. In addition to any legend imposed by applicable
state securities laws or by any contract which continues in effect after the
Effective Time, the certificates representing the shares of Parent Common Stock
issued to the Affiliates of the Company pursuant to this Agreement shall bear a
restrictive legend (and stop transfer orders shall be placed against the
transfer thereof with Parent=s transfer agent), stating substantially as
follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE
ISSUED IN A TRANSACTION TO WHICH RULE 145 APPLIES AND
MAY ONLY BE TRANSFERRED IN CONFORMITY WITH RULE 145(d)
OR IN ACCORDANCE WITH A WRITTEN OPINION OF COUNSEL,
REASONABLY ACCEPTABLE TO THE ISSUER IN FORM AND
SUBSTANCE,
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THAT SUCH TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED.
5.4 Filing of Permit Application. Within ten (10) days of the date
hereof, Parent will (a) file with the California Department of Corporations an
Application for Qualification by Permit of the Parent Common Stock to be issued
to the holders of Company Capital Stock entitled thereto pursuant to Article I
hereof, (b) request that a fairness hearing pursuant to Section 25142 of the
California Corporations Code be held in connection therewith and (c) use
reasonable efforts to obtain such permit. The Company shall furnish to Parent
all information concerning the Company and the Company's stockholders as may be
necessary or reasonably requested in connection with any action to be taken
pursuant to this Section 5.4, and shall cooperate, and use reasonable efforts to
obtain the cooperation of the Company's stockholders, in any proceedings before
the California Department of Corporations conducted pursuant hereto.
5.5 Access to Information. Subject to any applicable contractual
confidentiality obligations (which the Company shall use its best efforts to
cause to be waived) and subject to the terms of the Confidentiality Agreement,
dated May 6, 1997, entered into by the the Company and Parent, each of the
Company and Parent shall afford the other and its accountants, counsel and other
representatives, reasonable access during normal business hours during the
period prior to the Effective Time to (a) all of its properties, books,
contracts, agreements and records, and (b) all other information concerning the
business, properties and personnel (subject to restrictions imposed by
applicable law) of it as the other may reasonably request. In addition, the
Company shall provide to Parent on a weekly basis a report detailing the
Company's cash receipts and disbursements for the prior week. No information or
knowledge obtained in any investigation pursuant to this Section 5.5 shall
affect or be deemed to modify any representation or warranty contained herein or
the conditions to the obligations of the parties to consummate the Merger.
5.6 Public Disclosure. Unless otherwise required by law (including,
without limitation, securities laws), prior to the Effective Time, no disclosure
(whether or not in response to an inquiry) of the subject matter of this
Agreement shall be made by any party hereto unless approved by Parent and the
Company prior to release, provided that such approval shall not be unreasonably
withheld.
5.7 Reasonable Efforts. Subject to the terms and conditions provided in
this Agreement, each of the parties hereto shall use its reasonable efforts to
take promptly, or cause to be taken, all actions, and to do promptly, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
hereby to obtain all necessary waivers, consents and approvals and to effect all
necessary registrations and filings and to remove any injunctions or other
impediments or delays, legal or otherwise, in order to consummate and make
effective the transactions contemplated by this Agreement for the purpose of
securing to the parties hereto the benefits contemplated by this Agreement;
provided that Parent shall not be required to agree to any divestiture by Parent
or the Company or any of Parent's subsidiaries or affiliates of shares of
capital stock or of any business, assets or property of Parent or its
subsidiaries or affiliates or the Company or its affiliates, or the imposition
of any material limitation
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on the ability of any of them to conduct their businesses or to own or exercise
control of such assets, properties and stock.
5.8 Notification of Certain Matters. The Company shall use reasonable
efforts to give prompt notice to Parent, and Parent shall use reasonable efforts
to give prompt notice to the Company, of (i) the occurrence or non-occurrence of
any event, the occurrence or non-occurrence of which is likely to cause any
representation or warranty of the Company or Parent and Merger Sub,
respectively, contained in this Agreement to be untrue or inaccurate in any
material respect at or prior to the Effective Time except as contemplated by
their Agreement (including the Company Schedules) and (ii) any failure of the
Company or Parent, as the case may be, to comply with or satisfy in any material
respect any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any notice pursuant to
this Section 5.8 shall not limit or otherwise affect any remedies available to
the party receiving such notice.
5.9 Additional Documents and Further Assurances. Each party hereto, at
the request of the other party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
5.10 Form S-8. Parent shall file a registration statement on Form S-8
for the shares of Parent Common Stock issuable with respect to assumed Company
Options as soon as practicable after the Closing Date.
5.11 Legal Requirements. Each of Parent, Merger Sub and Company will
take all reasonable actions necessary or desirable to comply promptly with all
legal requirements which may be imposed on them with respect to the consummation
of the transaction contemplated by this Agreement (including furnishing all
information required in connection with approvals by or filings with any
Governmental Entity) and will promptly cooperate with and furnish information to
any party hereto necessary in connection with any such filings with or
investigations by any Governmental Entity, and any other such requirements
imposed upon any of them or their respective subsidiaries in connection with a
consummation of the transaction contemplated by this Agreement. Parent shall
take such steps as may be necessary to comply with the securities and blue sky
laws of all jurisdictions which are applicable to the issuance of the Parent
Common Stock pursuant hereto. The Company shall use its reasonable efforts to
assist Parent as may be necessary to comply with the securities and blue sky
laws of all jurisdictions which are applicable in connection with the issuance
of Parent Common Stock pursuant hereto.
5.12 Third Party Consents. As soon as practical following the date
hereof Parent and Company will each use its commercially reasonable efforts to
obtain all material consents, waivers and approvals under any of its or its
subsidiaries agreements, contracts, licenses or leases required to be obtained
in connection with the consummation of the transactions contemplated hereby.
5.13 Board of Directors of the Combined Company. The Board of Directors
of Parent will take all actions necessary to cause the Board of Directors of
Parent, immediately after the Effective
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Time, to consist of seven persons, four of whom shall have served on the Board
of Directors of Parent immediately prior to the Effective Time and three of whom
shall be Joyce Hakansson, Michael Markbreiter and Robert T. Wall.
5.14 Bridge Financing. Prior to the Effective Time, Kingdon Capital or
an entity affiliated therewith shall have contributed $2,000,000 to the Company
through the purchase of Capital Stock of the Company or securities convertible
into or exchangeable for Capital Stock of the Company, which Capital Stock or
securities convertible into or exchangeable for such Capital Stock shall be
converted at the Effective Time into Parent Common Stock pursuant to Section
1.6. In addition, Parent shall issue to Kingdon a warrant to purchase 500,000
shares of Parent Common Stock on terms and conditions set forth in Exhibit A
attached hereto.
5.15 Stock Options. At the Effective Time, Parent will reserve 300,000
shares of Parent Common Stock for issuance to employees of the Company who
become employees of the Surviving Corporation or of Parent pursuant to Parent's
1996 Stock Plan.
5.16 Indemnification. From and after the Effective Time, Parent and the
Surviving Corporation jointly and severally shall, indemnify, defend and hold
harmless each person who is now, or has been at any time prior to the date of
this Agreement or who becomes prior to the Effective Time, an officer, director
or an employee of the Company (the "Indemnified Parties") in respect of acts or
omissions occurring on or prior to the Effective Time to the extent provided
under the Company's Certificate of Incorporation and Bylaws and Indemnification
Agreements in effect on the date hereof; provided that such indemnification
shall be subject to any limitation imposed from time to time under applicable
law and provided further that it is understood that the foregoing undertaking
shall not grant to any such officers, directors or employees or other person
rights of indemnity against either Parent or the Surviving Corporation more
extensive than those such persons may currently have against the Company. The
provisions of this Section 5.16 are intended to be for the benefit of, and shall
be enforceable by, each Indemnified Party, his or her heirs and representatives.
5.17 Certain Benefit Plans. Parent shall take such reasonable actions as
are necessary to allow eligible employees of the Company to participate in the
benefit programs of Parent, or alternative benefits programs substantially
comparable to those applicable to employees of Parent on similar terms, as soon
as practicable after the Effective Time. For purposes of satisfying the terms
and conditions of such programs, Parent shall give full credit for eligibility,
vesting or benefit accrual for each participant's period of service with the
Company.
5.18 Stockholder Solicitation Materials. The Company shall use its best
efforts to ensure that any documents mailed, delivered or otherwise furnished to
the Company's stockholders in connection with soliciting their consent to this
Agreement and the Merger to the extent prepared by the Company do not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements contained therein, in the light of the
circumstances under which made, not misleading.
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5.19 List of Stockholders, Optionholders and Warrantholders. Immediately
prior to the Effective Time, the Company shall deliver to Parent the information
set forth in Schedules 2.2(a) and (b) current as of immediately prior to the
Effective Time.
ARTICLE VI
DOCUMENTS TO BE DELIVERED
6.1 Documents to Be Delivered by the Company at ClosingVI.2Documents to
Be Delivered by the Company at Closing. At the Closing, the Company shall
deliver or shall cause to be delivered, the following documents to Parent and
Merger Sub:
(a) Tax Opinion. A written opinion from Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, counsel to the Company, addressed to the
Company to the effect that the Merger will constitute a reorganization within
the meaning of Section 368(a) of the Code. The parties to this Agreement agree
to make reasonable representations as requested by such counsel for the purpose
of rendering such opinion.
(b) Third Party Consents. Evidence satisfactory to Parent and
Merger Sub that the Company has obtained the consents, approvals and waivers set
forth in Schedule 2.4.
(c) Legal Opinion. A legal opinion from Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, counsel to the Company, in form and
substance reasonably satisfactory to Parent and its counsel.
(d) Certificate of Merger. An executed Certificate of Merger in
the form of Exhibit B.
6.2 Documents to be Delivered by the Parent and Merger Sub at Closing.
At the Closing, the Parent and Merger Sub shall deliver or shall cause to be
delivered, the following documents to the Company:
(a) Legal Opinion. A legal opinion from Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Counsel to Parent, in form and substance
reasonably satisfactory to the Company and its counsel.
(b) Tax Opinion. A written opinion from Wilson Sonsini Goodrich &
Rosati, Professional Corporation, counsel to Parent, addressed to Parent to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code. The parties to this Agreement agree to make
reasonable representations as requested by such counsel for the purpose of
rendering such opinion.
(c) Certificate of Merger. An executed Certificate of Merger in
the form of Exhibit B.
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(d) Third Party Consents. Evidence satisfactory to the Company
that the Parent has obtained the consents, approvals and waivers set forth in
Schedules 3.2 and 3.11.
ARTICLE VII
CONDITIONS TO THE MERGER
7.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing of the following
conditions:
(a) Stockholder Approval. This Agreement and the Merger shall
have been approved and adopted by the stockholders of the Company by the
requisite vote under applicable law and the Company's Certificate of
Incorporation.
(b) No Injunctions or Restraints; Illegality. No temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger shall be in effect.
(c) Tax Opinions. Parent and Company shall each have received
written opinions from their respective counsel, Wilson Sonsini Goodrich &
Rosati, Professional Corporation, and Gunderson Dettmer Stough Villeneuve
Franklin and Hachigian LLP, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code. The parties to
this Agreement agree to make reasonable representations as requested by such
counsel for the purpose of rendering such opinions.
(d) Permit. Parent shall have received a permit from the
California Department of Corporations for the issuance of Parent Common Stock
pursuant to Article I hereof, and the requirements of all other state securities
or "blue sky" laws applicable to the transactions contemplated by this Agreement
shall have been fulfilled.
7.2 Additional Conditions to Obligations of the Company.2Additional
Conditions to Obligations of the Company. The obligations of the Company to
consummate the Merger and the transactions contemplated by this Agreement shall
be subject to the satisfaction at or prior to the Closing of each of the
following conditions, any of which may be waived, in writing, exclusively by the
Company:
(a) Representations and Warranties. The representations and
warranties of Parent and Merger Sub contained in this Agreement shall be true
and correct in all material respects on and as of the date of this Agreement,
except for changes contemplated by this Agreement and except for such breaches,
inaccuracies or omissions of such representations and warranties which have
neither had nor reasonably would be expected to have a Material Adverse Effect
on Parent; and the Company
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shall have received a certificate to such effect signed on behalf of Parent by a
duly authorized officer of Parent.
(b) Agreements and Covenants. Parent and Merger Sub shall have
performed or complied (which performance or compliance shall be subject to
Parent's or Merger Sub's ability to cure as provided in Section 9.1(e) below) in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by them on or prior to the Effective
Time, and the Company shall have received a certificate to such effect signed by
a duly authorized officer of Parent.
(c) Board of Directors of Combined Company. The Board of
Directors of Parent will take all actions necessary to cause the Board of
Directors of Parent, immediately after the Effective Time, to consist of seven
persons, four of whom shall have served on the Board of Directors of Parent
immediately prior to the Effective Time and three of whom shall be Joyce
Hakansson, Michael Markbreiter and Robert T. Wall.
7.3 Additional Conditions to the Obligations of Parent and Merger Sub.
The obligations of Parent and Merger Sub to consummate the Merger and the
transactions contemplated by this Agreement shall be subject to the satisfaction
at or prior to the Closing of each of the following conditions, any of which may
be waived, in writing, exclusively by Parent:
(a) Representations and Warranties. The representations and
warranties of the Company contained in this Agreement shall be true and correct
in all material respects on and as of the date of the Agreement, except for
changes contemplated by this Agreement (including the Company Schedules) and
except for such breaches, inaccuracies or omissions of such representations and
warranties which have neither had nor reasonably would be expected to have a
Material Adverse Effect on the Company or Parent; and Parent and Merger Sub
shall have received a certificate to such effect signed on behalf of the Company
by a duly authorized officer of the Company;
(b) Agreements and Covenants. The Company shall have performed or
complied (which performance or compliance shall be subject to the Company's
ability to cure as provided in Section 9.1(d) below) in all material respects
with all agreements and covenants required by this Agreement to be performed or
complied with by it on or prior to the Closing Date, and Parent and Merger Sub
shall have received a certificate to such effect signed by a duly authorized
officer of the Company;
(c) Continuity of Interest. The Company shall have delivered to
Parent an executed Continuity of Interest Certificate Agreement from the holders
of a majority of the outstanding shares of Company Capital Stock in the form
approved by tax counsel to the parties.
(d) Dissenters' Rights. Holders of not more than 8% of the
outstanding shares of Company Capital Stock shall have exercised, nor shall they
have any continued right to exercise, appraisal, dissenters' or similar rights
under applicable law with respect to their shares by virtue of the Merger.
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(e) Employment Agreement. Joyce Hakansson shall have entered into
an agreement to extend the employment agreement between her and the Company on
the terms and conditions set forth in Exhibit C.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW
8.1 Survival of Representations and Warranties. All of the
representations and warranties by the Company in this Agreement or in any
instrument delivered at the Closing pursuant to this Agreement (each as modified
by the Company Schedules) as of the date of this Agreement and all the
representations and warranties by Parent and Merger Sub in this Agreement or in
any instrument delivered at the Closing pursuant to this Agreement shall survive
the Merger and shall continue for the periods following the Closing Date set
forth in Section 8.2(b). No other representations or warranties shall survive
the Merger.
8.2 Escrow Arrangements
(a) Escrow Fund. At the Effective Time, the Company's
stockholders will be deemed to have received and deposited with the Escrow Agent
(as defined below) the Escrow Amount (plus any additional shares as may be
issued upon any stock split, stock dividend or recapitalization effected by
Parent after the Effective Time) without any act of any stockholder. As soon as
practicable after the Effective Time but within five (5) days thereafter, the
Escrow Amount, without any act of any stockholder, will be deposited with an
institution acceptable to Parent and the Securityholder Agent (as defined in
Section 8.2(g) below)) as Escrow Agent (the "Escrow Agent"), such deposit to
constitute an escrow fund (the "Escrow Fund") to be governed by the terms set
forth herein and at Parent's cost and expense. The portion of the Escrow Amount
contributed on behalf of each stockholder shall be in proportion to the
aggregate Parent Common Stock which such holder would otherwise be entitled
under Section 1.6. Any shares of Parent Common Stock contributed to the Escrow
Fund shall (to the extent feasible at the Effective Time) not be subject to any
right of repurchase in favor of the Surviving Corporation. No portion of the
Escrow Amount shall be contributed in respect of any Company Options. The Escrow
Fund shall be available to compensate the Parent and its affiliates (including
the Surviving Corporation) for any claims, losses, liabilities, damages,
deficiencies, costs and expenses, including reasonable attorneys' fees and
expenses and expenses of investigation and defense incurred by Parent, its
officers, directors or affiliates (including the Surviving Corporation) directly
or indirectly as a result of (i) any inaccuracy or breach of a representation or
warranty of the Company contained herein, or in any certificate, instrument,
schedule or document delivered by the Company in connection with this Agreement
or the Merger, (ii) any failure by the Company to perform or comply with any
covenant contained herein, (iii) the infringement by the business of the Company
as currently conducted or by any of the Company Intellectual Property Rights on
any proprietary right of any third party, or (iv) for any untrue statement of a
material fact or omission to state any material fact necessary in order to make
the statements, in the light of the circumstances under which made, not
misleading in any documents
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mailed, delivered or otherwise furnished to the stockholders of the Company in
connection with soliciting their consent to this Agreement and the Merger, to
the extent prepared by the Company (hereinafter individually a "Loss" and
collectively "Losses"). Parent may not receive any shares from the Escrow Fund
unless and until Officer's Certificates (as defined in paragraph (d) below)
identifying Losses, the aggregate amount of which exceed $50,000, have been
delivered to the Escrow Agent as provided in paragraph (d) and either there is
no objection thereto or any objection has been resolved in accordance with the
provisions of this Article VIII; in such case, Parent may recover from the
Escrow Fund any Losses so identified in accordance with the provisions of this
Section 8.2. The Escrow Fund shall be the sole source of damages to Parent
arising from any claim hereunder (other than for damages due to fraud or willful
misrepresentation). The limitation in the immediately preceding sentence shall
not limit the liability of the Company for any breach of any representation,
warranty or covenant if the Merger does not close.
(b) Escrow Period; Distribution upon Termination of Escrow
Period. Subject to the following requirements, the Escrow Fund shall be in
existence immediately following the Effective Time and shall terminate at 5:00
p.m., California time on the date that is one year following the Closing Date,
both such dates to be certified to the Escrow Agent in an Officer's Certificate
(the "Escrow Period") immediately following the Effective Time. Such amount (or
some portion thereof) that is necessary in the reasonable judgment of Parent,
subject to the objection of the Securityholder Agent and the subsequent
arbitration of the matter in the manner provided in Section 8.2(f) hereof, to
satisfy any unsatisfied claims concerning facts and circumstances existing prior
to the termination of such Escrow Period as are specified in any Officer's
Certificate delivered to the Escrow Agent prior to termination of such Escrow
Period, may be retained in the Escrow Fund after termination of the Escrow
Period. As soon as all such claims have been resolved as evidenced by the
written memorandum of the Securityholder Agent and Parent, the Escrow Agent
shall deliver to the stockholders the remaining portion of the Escrow Fund that
is not required to satisfy such claims. If no Officer's Certificate pertaining
to unsatisfied claims is delivered to the Escrow Agent prior to the termination
of the Escrow Period, upon termination of the Escrow Period, the Escrow Agent,
without further authorization or instruction, shall distribute the remainder of
the Escrow Fund to the stockholders in accordance with the provisions of this
Section 8.2(b). Deliveries of Escrow Amounts to the Shareholders pursuant to
this Section 8.2(b) shall be made in proportion to their respective original
contributions to the Escrow Fund (as set forth in Schedule I delivered to the
Escrow Agent immediately upon the formation of the Escrow Fund).
(c) Protection of Escrow Fund.
(i) The Escrow Agent shall hold and safeguard the
Escrow Fund during the Escrow Period, shall treat such fund as a trust fund in
accordance with the terms of this Agreement and not as the property of Parent
and shall hold and dispose of the Escrow Fund only in accordance with the terms
hereof.
(ii) Any shares of Parent Common Stock or other
equity securities issued or distributed by Parent (including shares issued upon
a stock split) ("New Shares") in respect of Parent Common Stock in the Escrow
Fund which have not been released from the Escrow Fund
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shall be deposited with the Escrow Agent and added to the Escrow Fund and become
a part thereof. New Shares issued in respect of shares of Parent Common Stock
which have been released from the Escrow Fund shall not be added to the Escrow
Fund but shall be distributed to the recordholders thereof. Cash dividends on
Parent Common Stock held in the Escrow Fund shall not be added to the Escrow
Fund but shall be distributed to the recordholders thereof.
(iii) Except as otherwise provided in this Article
VIII, each stockholder shall have all indicia of ownership, including, without
limitation, voting rights with respect to the shares of Parent Common Stock
contributed to the Escrow Fund by such stockholder (and on any voting securities
added to the Escrow Fund in respect of such shares of Parent Common Stock) and
rights to receive distributions thereon.
(d) Claims Upon Escrow Fund.
(i) Upon receipt by the Escrow Agent at any time on
or before the last day of the Escrow Period of a certificate signed by any
officer of Parent (an "Officer's Certificate") (A) stating that Parent has paid
or properly accrued or reasonably anticipates that it will have to pay or accrue
Losses, and (B) specifying in reasonable detail the individual items of Losses
included in the amount so stated, the date each such item was paid or properly
accrued, or the basis for such anticipated liability, and the nature of the
misrepresentation, breach of warranty or covenant to which such item is related,
the Escrow Agent shall, subject to the provisions of Section 8.2(e) hereof,
deliver to Parent out of the Escrow Fund, as promptly as practicable, shares of
Parent Common Stock held in the Escrow Fund in an amount equal to such Losses.
(ii) For the purposes of determining the number of
shares of Parent Common Stock to be delivered to Parent out of the Escrow Fund
pursuant to Section 8.2(d)(i) hereof, each the share of Parent Common Stock
shall be valued at $2.40.
(e) Objections to Claims. At the time of delivery of any
Officer's Certificate to the Escrow Agent, a duplicate copy of such certificate
shall be delivered to the Securityholder Agent and for a period of thirty (30)
days after receipt of such Officer's Certificate, the Escrow Agent shall make no
delivery to Parent of any Escrow Amounts pursuant to Section 8.2(d) hereof
unless the Escrow Agent shall have received written authorization from the
Securityholder Agent to make such delivery. After the expiration of such thirty
(30) day period, the Escrow Agent shall make delivery of shares of Parent Common
Stock from the Escrow Fund in accordance with Section 8.2(d) hereof, provided
that no such payment or delivery may be made if the Securityholder Agent shall
object in a written statement to the claim made in the Officer's Certificate,
and such statement shall have been delivered to the Escrow Agent prior to the
expiration of such thirty (30) day period.
(f) Resolution of Conflicts; Arbitration.
(i) In case the Securityholder Agent shall so
object in writing to any claim or claims made in any Officer's Certificate, the
Securityholder Agent and Parent shall attempt in good faith for thirty (30) days
to agree upon the rights of the respective parties with
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respect to each of such claims. If the Securityholder Agent and Parent should so
agree, a memorandum setting forth such agreement shall be prepared and signed by
both parties and shall be furnished to the Escrow Agent. The Escrow Agent shall
be entitled to rely on any such memorandum and distribute shares of Parent
Common Stock from the Escrow Fund in accordance with the terms thereof.
(ii) If no such agreement can be reached after such
good faith negotiation, either Parent or the Securityholder Agent may demand
arbitration of the matter unless the amount of the damage or loss is at issue in
pending litigation with a third party, in which event arbitration shall not be
commenced until such amount is ascertained or both parties agree to arbitration;
and in either such event the matter shall be settled by arbitration conducted by
three arbitrators. Parent and the Securityholder Agent shall each select one
arbitrator, and the two arbitrators so selected shall select a third arbitrator,
each of which arbitrators shall be independent and have at least ten years
relevant experience. The arbitrators shall set a limited time period and
establish procedures designed to reduce the cost and time for discovery while
allowing the parties an opportunity, adequate in the sole judgment of the
arbitrators, to discover relevant information from the opposing parties about
the subject matter of the dispute. The arbitrators shall rule upon motions to
compel or limit discovery and shall have the authority to impose sanctions,
including attorneys fees and costs, to the same extent as a court of competent
law or equity, should the arbitrators determine that discovery was sought
without substantial justification or that discovery was refused or objected to
without substantial justification. The decision of a majority of the three
arbitrators as to the validity and amount of any claim in such Officer's
Certificate shall be binding and conclusive upon the parties to this Agreement,
and notwithstanding anything in Section 8.2(e) hereof, the Escrow Agent shall be
entitled to act in accordance with such decision and make or withhold payments
out of the Escrow Fund in accordance therewith. Such decision shall be written
and shall be supported by written findings of fact and conclusions which shall
set forth the award, judgment, decree or order awarded by the arbitrators.
(iii) Any such arbitration shall be held in San
Mateo County, California and shall be conducted by, and under the rules then in
effect, of the Judicial Arbitration and Mediation Services, Inc. For purposes of
this Section 8.2(f), in any arbitration hereunder in which any claim or the
amount is at issue, Parent shall be deemed to be the Prevailing Party in the
event that the arbitrators award Parent any part of the disputed amount plus any
amounts not in dispute; otherwise, the Parent shall be deemed to be the
Non-Prevailing Party. The Non-Prevailing Party to an arbitration shall pay its
own expenses, the fees of each arbitrator, the administrative costs of the
arbitration, and the expenses, including without limitation, reasonable
attorneys' fees and costs, incurred by the other party to the arbitration.
Judgment upon any award rendered by the arbitrators may be entered in any court
having jurisdiction; provided, however, that in no event will the Non-Prevailing
Party be required to pay any legal fees and costs of the Prevailing Party in an
amount in excess of one-third (a) of the disputed amount. The Securityholder
Agent may pay such amounts (including without limitation unreimbursed expenses
of counsel for the stockholders and Parent, arbitrator fees and administrative
costs) by distributing shares of Parent Common Stock from the Escrow Fund with
respect to which Parent has not made a claim; provided, however, that no shares
of Parent Common Stock may be distributed from the Escrow Fund prior to the
termination of the
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Escrow Period and such shares may be distributed only to the extent that
such shares are not required to satisfy any claim for Losses.
(g) Securityholder Agent; Power of Attorney.
(i) In the event that the Merger is approved by the
stockholders of the Company, effective upon such vote, and without further act
of any stockholder, Michael Markbreiter shall be appointed as agent and
attorney-in-fact (the "Securityholder Agent") for each stockholder of the
Company (except such stockholders, if any, as shall have perfected their
appraisal or dissenters' rights under Delaware Law), for and on behalf of
stockholders, to give and receive notices and communications, to authorize
delivery to Parent of shares of Parent Common Stock from the Escrow Fund in
satisfaction of claims by Parent, to object to such deliveries, to agree to,
negotiate, enter into settlements and compromises of, and demand arbitration and
comply with orders of courts and awards of arbitrators with respect to such
claims, and to take all actions necessary or appropriate in the judgment of
Securityholder Agent for the accomplishment of the foregoing. Such agency may be
changed by the stockholders of the Company from time to time upon prior written
notice to Parent and Escrow Agent; provided that the Securityholder Agent may
not be removed unless holders of a majority-in-interest of the Escrow Fund agree
to such removal and to the identity of the substituted agent. Any vacancy in the
position of Securityholder Agent may be filled by approval of the holders of a
majority in interest of the Escrow Fund. No bond shall be required of the
Securityholder Agent, and the Securityholder Agent shall not receive
compensation for his or her services. Notices or communications to or from the
Securityholder Agent shall constitute notice to or from each of the
stockholders.
(ii) The Securityholder Agent shall not be liable
for any act done or omitted hereunder as Securityholder Agent while acting in
good faith and in a manner that is not grossly negligent.
(h) Actions of the Securityholder Agent. A decision, act, consent
or instruction of the Securityholder Agent shall constitute a decision of all
the stockholders for whom a portion of the Escrow Amount otherwise issuable to
them is deposited in the Escrow Fund and shall be final, binding and conclusive
upon each of such stockholders, and the Escrow Agent and Parent may rely upon
any such decision, act, consent or instruction of the Securityholder Agent as
being the decision, act, consent or instruction of each and every such
stockholder of the Company. The Escrow Agent and Parent are hereby relieved from
any liability to any stockholder of the Company for any acts done by them in
reliance on such decision, act, consent or instruction of the Securityholder
Agent.
(i) Third-Party Claims. In the event Parent becomes aware of a
third-party claim, which Parent believes may result in a demand against the
Escrow Fund, Parent shall notify the Securityholder Agent of such claim, and the
Securityholder Agent, as representative for the stockholders, shall be entitled,
at the expense of the stockholders, to participate in any defense of such claim.
Parent shall have the right in its sole discretion to settle any such claim;
provided, however, that except with the consent of the Securityholder Agent, no
settlement of any such claim with third-party claimants shall alone be
determinative of the amount of any claim against the Escrow
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Fund. In the event that the Securityholder Agent has consented to any such
settlement and acknowledged that the claim is a valid claim against the Escrow
Fund, the Securityholder Agent shall have no power or authority to object under
any provision of this Article VIII to the amount of any claim by Parent against
the Escrow Fund with respect to such settlement amount.
(j) Escrow Agent's Duties.
(i) The Escrow Agent shall be obligated only for
the performance of such duties as are specifically set forth in this Article
VIII, and as set forth in any additional written escrow instructions which the
Escrow Agent may receive after the date of this Agreement which are signed by an
officer of Parent and the Securityholder Agent and approved by the Escrow Agent,
and may rely and shall be protected in relying or refraining from acting on any
Officer's Certificate, memorandum, instruction or other instrument reasonably
believed to be genuine and to have been signed or presented by the proper party
or parties. The Escrow Agent shall not be liable for any act done or omitted
hereunder as Escrow Agent while acting in good faith and in the exercise of
reasonable judgment, and any act done or omitted pursuant to the advice of
counsel shall be conclusive evidence of such good faith.
(ii) The Escrow Agent is hereby expressly
authorized to disregard any and all warnings given by any of the parties hereto
or by any other person, excepting only orders or process of courts of law, and
is hereby expressly authorized to comply with and obey orders, judgments or
decrees of any court. In case the Escrow Agent obeys or complies with any such
order, judgment or decree of any court, the Escrow Agent shall not be liable to
any of the parties hereto or to any other person by reason of such compliance,
notwithstanding any such order, judgment or decree being subsequently reversed,
modified, annulled, set aside, vacated or found to have been entered without
jurisdiction.
(iii) The Escrow Agent shall not be liable in any
respect on account of the identity, authority or rights of the parties executing
or delivering or purporting to execute or deliver this Agreement or any
documents or papers deposited or called for hereunder.
(iv) The Escrow Agent shall not be liable for the
expiration of any rights under any statute of limitations with respect to this
Agreement or any documents deposited with the Escrow Agent.
(v) In performing any duties under the Agreement,
the Escrow Agent shall not be liable to any party for damages, losses, or
expenses, except for gross negligence or willful misconduct on the part of the
Escrow Agent. The Escrow Agent shall not incur any such liability for (A) any
act or failure to act made or omitted in good faith, or (B) any action taken or
omitted in reliance upon any instrument, including any written statement or
affidavit provided for in this Agreement that the Escrow Agent shall in good
faith believe to be genuine, nor will the Escrow Agent be liable or responsible
for forgeries, fraud, impersonations, or determining the scope of any
representative authority. In addition, the Escrow Agent may consult with legal
counsel in connection with Escrow Agent's duties under this Agreement and shall
be fully protected in any act taken,
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suffered, or permitted by him/her in good faith in accordance with the advice of
counsel. The Escrow Agent is not responsible for determining and verifying the
authority of any person acting or purporting to act on behalf of any party to
this Agreement.
(vi) If any controversy arises between the parties
to this Agreement, or with any other party, concerning the subject matter of
this Agreement, its terms or conditions, the Escrow Agent will not be required
to determine the controversy or to take any action regarding it. The Escrow
Agent may hold all documents and shares of Parent Common Stock and may wait for
settlement of any such controversy by final appropriate legal proceedings or
other means as, in the Escrow Agent's discretion, may be required, despite what
may be set forth elsewhere in this Agreement. In such event, the Escrow Agent
will not be liable for damage.
Furthermore, the Escrow Agent may at its option, file an
action of interpleader requiring the parties to answer and litigate any claims
and rights among themselves. The Escrow Agent is authorized to deposit with the
clerk of the court all documents and shares of Parent Common Stock held in
escrow, except all costs, expenses, charges and reasonable attorney fees
incurred by the Escrow Agent due to the interpleader. The parties jointly and
severally agree to immediately pay the Escrow Agent, to the extent not
previously reimbursed, such amounts so incurred by the Escrow Agent upon the
Escrow Agent's demand therefor, which demand may be made at any time before or
after completion of such action of interpleader. Upon initiating such action,
the Escrow Agent shall be fully released and discharged of and from all
obligations and liability imposed by the terms of this Agreement.
(vii) Parent and the Surviving Corporation agree
jointly and severally to indemnify and hold the Escrow Agent harmless against
any and all losses, claims, damages, liabilities, and expenses, including
reasonable costs of investigation, counsel fees, and disbursements that may be
imposed on Escrow Agent or incurred by Escrow Agent in connection with the
performance of his/her duties under this Agreement, including but not limited to
any litigation arising from this Agreement or involving its subject matter;
provided, however, that in the event the Escrow Agent shall be the Prevailing
Party in connection with any claim or action initiated by a stockholder or
stockholders, then such stockholder or stockholders shall be responsible for the
indemnification of the Escrow Agent to the full extent provided by this
paragraph.
(viii) The Escrow Agent may resign at any time upon
giving at least thirty (30) days written notice to Parent and the Securityholder
Agent; provided, however, that no such resignation shall become effective until
the appointment of a successor escrow agent which shall be accomplished as
follows: Parent and the Securityholder Agent shall use their best efforts to
mutually agree on a successor escrow agent within thirty (30) days after
receiving such notice. If Parent and the Securityholder Agent fail to agree upon
a successor escrow agent within such time, the Escrow Agent shall have the right
to appoint a successor escrow agent authorized to do business in the state of
California. In addition, any company into which the Escrow Agent is merged or
with which it is consolidated, or any company to which the Escrow Agent
transfers a substantial amount of its Global Escrow business, shall be the
successor to the Escrow Agent without the execution or filing of any paper or
any further act on the part of any of the parties, anything herein to the
contrary
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notwithstanding. The successor escrow agent shall deliver notification of such
appointment to Parent and Securityholder Agent and it shall, without further
acts, be vested with all the estates, properties, rights, powers, and duties of
the predecessor escrow agent as if originally named as escrow agent. Thereafter,
the predecessor escrow agent shall be discharged from any further duties and
liability under this Agreement.
(k) Fees. All fees of the Escrow Agent for performance of its
duties hereunder shall be paid by Parent in accordance with the fee schedule
attached as Schedule 8.2(k). It is understood that the fees and usual charges
agreed upon for services of the Escrow Agent shall be considered compensation
for ordinary services as contemplated by this Agreement. In the event that the
conditions of this Agreement are not promptly fulfilled, or if the Escrow Agent
renders any service not provided for in this Agreement, or if the parties
request a substantial modification of its terms, or if any controversy arises,
or if the Escrow Agent is made a party to, or intervenes in, any litigation
pertaining to this escrow or its subject matter, the Escrow Agent shall be
reasonably compensated for such extraordinary services and reimbursed for all
costs, attorney's fees, and expenses occasioned thereby. Parent promises to pay
these sums upon demand.
(l) Consequential Damages. In no event shall the Escrow Agent be
liable for special, indirect or consequential loss or damage of any kind
whatsoever (including but not limited to lost profits), even if the Escrow Agent
has been advised of the likelihood of such loss or damage and regardless of the
form of action.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
9.1 Termination. Except as provided in Section 9.2 below,
this Agreement may be terminated and the Merger abandoned at any time prior to
the Effective Time:
(a) by mutual written consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not
occurred by August 15, 1997 (provided that the right to terminate this Agreement
under this clause 9.1(b)(i) shall not be available to any party whose willful
failure to fulfill any obligation hereunder has been the cause of, or resulted
in, the failure of the Effective Time to occur on or before such date); (ii)
there shall be a final nonappealable order of a federal or state court in effect
preventing consummation of the Merger; or (iii) there shall be any statute,
rule, regulation or order enacted, promulgated or issued or deemed applicable to
the Merger by any Governmental Entity that would make consummation of the Merger
illegal;
(c) by Parent if there shall be any action taken, or any statute,
rule, regulation or order enacted, promulgated or issued or deemed applicable to
the Merger, by any Governmental Entity, which would: (i) prohibit Parent's or
the Company's ownership or operation of any portion of
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the business of the Company or (ii) compel Parent or the Company to dispose of
or hold separate, as a result of the Merger, any portion of the business or
assets of the Company or Parent; in either case, the unavailability of which
assets or business would have a Material Adverse Effect on Parent or would
reasonably be expected to have a Material Adverse Effect on Parent's ability to
realize the benefits expected from the Merger;
(d) by Parent if it is not in material breach of its obligations
under this Agreement and there has been a breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of the
Company and as a result of such breach the conditions set forth in Section
7.3(a) or 7.3(b), as the case may be, would not then be satisfied; provided,
however, that if such breach is curable by the Company within fifteen (15) days
through the exercise of its reasonable best efforts, then for so long as the
Company continues to exercise such reasonable best efforts Parent may not
terminate this Agreement under this Section 9.1(d) unless such breach is not
cured within fifteen (15) days (but no cure period shall be required for a
breach which by its nature cannot be cured);
(e) by the Company if it is not in material breach of its
obligations under this Agreement and there has been a breach of any
representation, warranty, covenant or agreement contained in this Agreement on
the part of Parent or Merger Sub and as a result of such breach the conditions
set forth in Section 7.2(a) or 7.2(b), as the case may be, would not then be
satisfied; provided, however, that if such breach is curable by Parent or Merger
Sub within fifteen (15) days through the exercise of its reasonable best
efforts, then for so long as Parent or Merger Sub continues to exercise such
reasonable best efforts the Company may not terminate this Agreement under this
Section 9.1(e) unless such breach is not cured within fifteen (15) days (but no
cure period shall be required for a breach which by its nature cannot be cured);
or
(f) by Parent, if the Board of Directors of the Company
recommends to the stockholders of the Company an acquisition with any Company
other than the Parent or a subsidiary of Parent, or if the Board of Directors of
the Company shall have withheld, withdrawn or modified in a manner adverse to
the Parent its recommendation in favor of adoption and approval of this
Agreement and approval of the Merger.
Where action is taken to terminate this Agreement pursuant to
Section 9.1, it shall be sufficient for such action to be authorized by the
Board of Directors (as applicable) of the party taking such action.
9.2 Effect of Termination. In the event of termination of this
Agreement as provided in Section 9.1, this Agreement shall forthwith become void
and, there shall be no liability or obligation on the part of Parent, Merger Sub
or the Company, or their respective officers, directors or stockholders,
provided that the provisions of this Article IX shall remain in full force and
effect and survive any termination of this Agreement.
9.3 Amendment. Except as is otherwise required by applicable law, prior
to the Closing, this Agreement may be amended by the parties hereto at any time
by execution of an instrument in
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writing signed by Parent and by the Company. Except as is otherwise required by
applicable law, after the Closing, this Agreement may be amended by the parties
hereto at any time by execution of an instrument in writing signed by Parent and
by Kingdon Capital or by all of the stockholders in the case of an amendment to
Article VIII.
9.4 Extension; Waiver. At any time prior to the Effective Time, Parent
and Merger Sub, on the one hand, and the Company, on the other, may, to the
extent legally allowed, (i) extend the time for the performance of any of the
obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
9.5 Company Payments. If (x) the Board of the Directors of the Company
shall have withheld, withdrawn or modified in a manner adverse to Parent its
recommendation in favor of adoption and approval of this Agreement and approval
of the Merger or (y) the Board of Directors of the Company recommends an
Acquisition Proposal (including a Superior Proposal) with any company other than
Parent or a subsidiary thereof or (z) the stockholders of the Company fail to
approve this Agreement and the Merger, the Company shall pay Parent an amount
equal to $600,000 within one business day following the earlier to occur of (A)
termination of this Agreement pursuant to Section 9.1 hereof and (B) the failure
to obtain the required vote upon a vote taken at a meeting of stockholders duly
convened therefor or any adjournment thereof of the Company.
ARTICLE X
GENERAL PROVISIONS
10.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by a nationally
recognized commercial delivery service, or mailed by registered or certified
mail (return receipt requested) or sent via facsimile (with acknowledgment of
complete transmission) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) if to Parent or Merger Sub, to:
Sanctuary Woods Multimedia Corporation
1825 South Grant Street
San Mateo, CA 94402
Attention: Charlotte J. Walker
Telephone No.: (415) 286-6000
Facsimile No.: (415) 286-6010
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with a copy to:
Wilson, Sonsini, Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304
Attention: Alisande M. Rozynko
Telephone No.: (415) 493-9300
Facsimile No.: (415) 493-6811
(b) if to the Company, to:
Theatrix Interactive, Incorporated
1250 45th Street
Emeryville, CA 94608
Attention: Robert T. Wall
Telephone No.: (510) 658-2800
Facsimile No.: (510) 658-2828
with a copy to:
Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP
155 Constitution Drive
Menlo Park, California 94025
Attention: Steven M. Spurlock
Telephone No.: (415) 321-2400
Facsimile No.: (415) 321-2800
(c) if to the Securityholder Agent:
Mark Kingdon
Kingdon Capital
152 West 57th Street
New York, New York 10019
(d) if to the Escrow Agent:
First Trust of California, National Association
Global Escrow Depository Services #SANF 0527
One California Street, 4th Floor
San Francisco, California 94111
Attention: Barbara Wise
Telephone No.: (415) 273-4530
Facsimile No.: (415) 273-4593
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<PAGE> 59
10.2 Expenses. Whether or not the Merger is consummated, all fees and
expenses incurred in connection with the Merger including, without limitation,
all legal, accounting, financial advisory, consulting and all other fees and
expenses of third parties ("Third Party Expenses") incurred by a party in
connection with the negotiation and effectuation of the terms and conditions of
this Agreement and the transactions contemplated hereby, shall be the obligation
of the respective party incurring such fees and expenses; provided, however,
that Parent shall pay at the Closing (i) the reasonable fees, not to exceed
$75,000, of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
counsel to the Company, and shall reimburse the reasonable out of pocket
expenses of such counsel incurred in connection with the transactions
contemplated by this Agreement, and (ii) the investment banking fees of
Montgomery Securities of $200,000 plus a warrant to purchase 100,000 shares of
Parent Common Stock at an exercise price of $3.00 per share on terms mutually
acceptable to Parent and Montgomery Securities.
10.3 Interpretation. The words "include," "includes" and "including"
when used herein shall be deemed in each case to be followed by the words
"without limitation." The word "agreement" when used herein shall be deemed in
each case to mean any contract, commitment or other agreement, whether oral or
written, that is legally binding. The table of contents and headings contained
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement.
10.4 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
10.5 Entire Agreement; Assignment. This Agreement, the schedules and
exhibits hereto, and the documents and instruments and other agreements among
the parties hereto referenced herein: (a) constitute the entire agreement among
the parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof; (b) are not intended to confer upon any
other person any rights or remedies hereunder; and (c) shall not be assigned by
operation of law or otherwise except as otherwise specifically provided.
10.6 Severability. In the event that any provision of this Agreement or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
10.7 Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other
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<PAGE> 60
remedy conferred hereby, or by law or equity upon such party, and the exercise
by a party of any one remedy will not preclude the exercise of any other remedy.
10.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Each of the parties hereto agrees that process may be served upon them in any
manner authorized by the laws of the State of California for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction and such process.
10.9 Rules of Construction. The Company and Parent hereto agree that
they have been represented by counsel during the negotiation and execution of
this Agreement and, therefore, waive the application of any law, regulation,
holding or rule of construction providing that ambiguities in an agreement or
other document will be construed against the party drafting such agreement or
document.
10.10 Specific Performance. The parties hereto agree that irreparable
damage will occur in the event that any of the provisions of this Agreement are
not performed in accordance with their specific terms or are otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at law or in equity.
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<PAGE> 61
IN WITNESS WHEREOF, Parent, Merger Sub, the Company, the Securityholder
Agent, and the Escrow Agent have caused this Agreement to be signed as of the
date first written above.
THEATRIX INTERACTIVE, SANCTUARY WOODS MULTIMEDIA
INCORPORATED CORPORATION
By:/s/ ROBERT T. WALL By:
---------------------------------- -------------------------------------
Robert T. Wall Charlotte J. Walker
President and Chief President and Chief Executive Officer
Executive Officer
SECURITYHOLDER AGENT: TEACHER ACQUISITION
(as to the provisions of CORPORATION
Article VIII only)
By: By:
---------------------------------- -------------------------------------
Name: Charlotte J. Walker
Title: President and Chief Executive Officer
ESCROW AGENT
(as to the provisions of
Article VIII only)
First Trust of California
By:
----------------------------------
Barbara L. Wise
Vice President
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<PAGE> 62
IN WITNESS WHEREOF, Parent, Merger Sub, the Company, the Securityholder
Agent, and the Escrow Agent have caused this Agreement to be signed as of the
date first written above.
THEATRIX INTERACTIVE, SANCTUARY WOODS MULTIMEDIA
INCORPORATED CORPORATION
By: By:/s/ CHARLOTTE J. WALKER
---------------------------------- -------------------------------------
Robert T. Wall Charlotte J. Walker
President and Chief President and Chief Executive Officer
Executive Officer
SECURITYHOLDER AGENT: TEACHER ACQUISITION
(as to the provisions of CORPORATION
Article VIII only)
By: By:/s/ CHARLOTTE J. WALKER
---------------------------------- -------------------------------------
Name: Charlotte J. Walker
Title: President and Chief Executive Officer
ESCROW AGENT
(as to the provisions of
Article VIII only)
First Trust of California
By:
----------------------------------
Barbara L. Wise
Vice President
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<PAGE> 63
IN WITNESS WHEREOF, Parent, Merger Sub, the Company, the Securityholder
Agent, and the Escrow Agent have caused this Agreement to be signed as of the
date first written above.
THEATRIX INTERACTIVE, SANCTUARY WOODS MULTIMEDIA
INCORPORATED CORPORATION
By: By:
---------------------------------- -------------------------------------
Robert T. Wall Charlotte J. Walker
President and Chief President and Chief Executive Officer
Executive Officer
SECURITYHOLDER AGENT: TEACHER ACQUISITION
(as to the provisions of CORPORATION
Article VIII only)
By:/s/ MARK KIAMDON By:
---------------------------------- -------------------------------------
Name: Mark Kiamdon Charlotte J. Walker
Title: President and Chief Executive Officer
ESCROW AGENT
(as to the provisions of
Article VIII only)
First Trust of California
By:
----------------------------------
Barbara L. Wise
Vice President
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<PAGE> 64
IN WITNESS WHEREOF, Parent, Merger Sub, the Company, the Securityholder
Agent, and the Escrow Agent have caused this Agreement to be signed as of the
date first written above.
THEATRIX INTERACTIVE, SANCTUARY WOODS MULTIMEDIA
INCORPORATED CORPORATION
By: By:
---------------------------------- -------------------------------------
Robert T. Wall Charlotte J. Walker
President and Chief President and Chief Executive Officer
Executive Officer
SECURITYHOLDER AGENT: TEACHER ACQUISITION
(as to the provisions of CORPORATION
Article VIII only)
By:/s/ By:
---------------------------------- -------------------------------------
Name: Charlotte J. Walker
Title: President and Chief Executive Officer
ESCROW AGENT
(as to the provisions of
Article VIII only)
First Trust of California
By:/s/ BARBARA L. WISE
----------------------------------
Barbara L. Wise
Vice President
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<PAGE> 65
EXHIBIT A
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT
WITH RESPECT TO SUCH SECURITIES, OR DELIVERY OF AN OPINION OF COUNSEL IN FORM
AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES THAT SUCH OFFER,
SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE ACT.
Warrant to Purchase
500,000 Shares
of Common Stock
Dated _____, 1997
WARRANT TO PURCHASE COMMON STOCK
of
SANCTUARY WOODS MULTIMEDIA CORPORATION
Void after September 18, 1999
This certifies that, for value received, Kingdon Capital or its registered
assigns ("Holder") is entitled, subject to the terms set forth below, to
purchase from SANCTUARY WOODS MULTIMEDIA CORPORATION (the "Company"), a Delaware
corporation, (500,000) shares of the Common Stock of the Company, as constituted
on the date hereof (the "Warrant Issue Date"), upon surrender hereof, at the
principal office of the Company referred to below, with the subscription form
attached hereto duly executed, and simultaneous payment therefor in lawful money
of the United States or otherwise as hereinafter provided, at the Exercise Price
as set forth in Section 2 below. The number, character and Exercise Price of
such shares of Common Stock are subject to adjustment as provided below.
1. Term of Warrant. Subject to the terms and conditions set forth herein,
this Warrant shall be exercisable, in whole or in part, during the term
commencing on the Warrant Issue Date and ending at 5:00 p.m., Pacific Standard
Time, on September 18, 1999 (the "Term"), and shall be void thereafter.
2. Exercise Price. The Exercise Price at which this Warrant may be
exercised shall be US$3.00 per share of Common Stock as adjusted from time to
time pursuant to Section 10 hereof (the "Exercise Price").
3. Exercise of Warrant.
(a) This Warrant is exercisable by the Holder in whole or in part,
but not for less than one hundred thousand (100,000) shares at a time (or if the
maximum number of shares purchasable upon exercise of this Warrant is less than
100,000, this Warrant shall be exercisable for such lesser number of shares
which may then constitute the maximum number purchasable), at any time, or from
time to time, during the term hereof as described in Section 1 above, by the
surrender of this Warrant and the Notice
<PAGE> 66
of Exercise annexed hereto duly completed and executed on behalf of the Holder,
at the office of the Company (or such other office or agency of the Company as
it may designate by notice in writing to the Holder at the address of the Holder
appearing on the books of the Company), upon payment (i) in cash or by check
acceptable to the Company, (ii) by cancellation by the Holder of indebtedness of
the Company to the Holder, or (iii) by a combination of (i) and (ii), of the
Exercise Price multiplied by the number of shares being purchased.
(b) If at any time during the term of this Warrant the Company
recognizes combined net revenues ("Combined Net Revenues") in any four
consecutive quarters of U.S. $10,000,000 or more, the Holder of this Warrant
shall immediately exercise this Warrant for one-half of the total shares of
Common Stock which, upon the issuance of this Warrant, the Holder is entitled to
purchase hereunder, or, if this Warrant is exercisable for less than one-half of
such total, then the Holder of this Warrant shall exercise this Warrant for 100%
of the shares the Holder is entitled to purchase hereunder. For purposes of this
Section 3(b), Combined Net Revenues shall consist of revenues recognized from
the sale or licensing of software products of the Company or any affiliate of
the Company. Notwithstanding the foregoing, 80% of Combined Net Revenues shall
consist of revenues recognized from the sale or licensing of software products
developed by the Company or any affiliate of the Company ("Internally
Developed"). Software products licensed by the Company or any affiliate of the
Company from a third party (a "Software License") or acquired by the Company or
any affiliate of the Company through a merger, purchase of assets, consolidation
or similar transaction (a "Software Acquisition") shall be deemed to be
Internally Developed six months from the date of such Software License or
Software Acquisition. For the purposes of this Section 3(b), the software
products acquired from Virgin Sound and Vision pursuant to the Distribution
Agreement between the Company and Virgin Sound and Vision dated March 25, 1997,
shall be deemed to be Internally Produced six months from the date of such
Distribution Agreement.
(c) The Holder of this Warrant will be required to immediately
exercise this Warrant in full if the last sale price of the Common Stock of the
Company as reported on the over-the-counter market or electronic bulletin board
or on any national exchange or market on which the Common Stock of the Company
is then traded exceeds US$9.00 for a period of 21 trading days in any 40
consecutive trading days.
(d) This Warrant shall be deemed to have been exercised immediately
prior to the close of business on the date of its surrender for exercise as
provided above, and the person entitled to receive the shares of Common Stock
issuable upon such exercise shall be treated for all purposes as the holder of
record of such shares as of the close of business on such date. As promptly as
practicable on or after such date and in any event within ten (10) days
thereafter, the Company at its expense shall issue and deliver to the person or
persons entitled to receive the same a certificate or certificates for the
number of shares issuable upon such exercise. In the event that this Warrant is
exercised in part, the Company at its expense will execute and deliver a new
Warrant of like tenor exercisable for the remaining number of shares for which
this Warrant may then be exercised.
4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional share shall be issued upon the exercise of this Warrant.
In lieu of any fractional share to which the Holder
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would otherwise be entitled, the Company shall make a cash payment equal to the
Exercise Price multiplied by such fraction.
5. Replacement of Warrant. On receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction, or mutilation of this Warrant
and, in the case of loss, theft, or destruction, on delivery of an indemnity
agreement reasonably satisfactory in form and substance to the Company or, in
the case of mutilation, on surrender and cancellation of this Warrant, the
Company at its expense shall execute and deliver, in lieu of this Warrant, a new
warrant of like tenor and amount.
6. Rights of Stockholders. Subject to Sections 8 and 10 of this Warrant,
the Holder shall not be entitled to vote or receive dividends or be deemed the
holder of Common Stock or any other securities of the Company that may at any
time be issuable on the exercise hereof for any purpose, nor shall anything
contained herein be construed to confer upon the Holder, as such, any of the
rights of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issuance of stock, reclassification of stock, change of par
value, or change of stock to no par value, consolidation, merger, conveyance, or
otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until the Warrant shall have been exercised and
the shares of Common Stock purchasable upon the exercise hereof (the "Warrant
Shares") shall have been issued, as provided herein.
7. Compliance with Securities Laws. This Warrant may not be transferred or
assigned in whole or in part without compliance with all applicable federal and
state securities laws by the transferor and the transferee (including the
delivery of investment representation letters and legal opinions reasonably
satisfactory to the Company, if such are requested by the Company).
(a) The Holder of this Warrant, by acceptance thereof, acknowledges
that this Warrant and the shares of Common Stock to be issued upon exercise
hereof are being acquired solely for the Holder's own account and not as a
nominee for any other party, and for investment, and that the Holder will not
offer, sell or otherwise dispose of this Warrant or any shares of Common Stock
to be issued upon exercise hereof except under circumstances that will not
result in a violation of any federal securities laws, including without
limitation the Securities Act of 1933, as amended (the "Act"), any state
securities laws or any applicable securities law of foreign jurisdictions,
or any rules or regulations promulgated thereunder. Upon exercise of this
Warrant, the Holder shall, if requested by the Company, confirm in writing in a
form satisfactory to the Company, that the shares of Common Stock so purchased
are being acquired solely for the Holder's own account and not as a nominee for
any other party, for investment, and not with a view toward distribution or
resale.
(b) Without in any way limiting the representations set forth in (a)
above, the Holder further agrees not to make any disposition of all or any
portion of this Warrant or any Warrant Shares unless and until the transferee
has agreed in writing for the benefit of the Company to be bound by this Section
7, and:
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<PAGE> 68
(i) the Holder shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed statement of
the circumstances surrounding the proposed disposition, and (ii) if reasonably
requested by the Company, the Holder shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration of such securities under the Act.
(c) This Warrant and all shares issuable hereunder shall bear the
following legends:
(i) "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES, OR DELIVERY OF
AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE
SECURITIES THAT SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN
COMPLIANCE WITH THE ACT."
(ii) Any legend required by applicable state law.
8. Reservation of Stock. The Company covenants that during the term this
Warrant is exercisable, the Company will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Common Stock upon the exercise of this Warrant and, from time to time, will
take all steps necessary to provide sufficient reserves of shares of the Common
Stock issuable upon the exercise of the Warrant. The Company further covenants
that all shares that may be issued upon the exercise of rights represented by
this Warrant and payment of the Exercise Price, all as set forth herein, will be
free from all taxes, liens, and charges in respect of the issue thereof (other
than taxes in respect of any transfer occurring contemporaneously or otherwise
specified herein). The Company agrees that its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates for
shares of Common Stock upon the exercise of this Warrant.
9. Amendments and Waivers. Any term of this Warrant may be amended and the
observance of any term of this Warrant may be waived (either generally or in a
particular instance and either retroactively or prospectively) only with the
written consent of the Company and the Holder. No waivers of or exceptions to
any term, condition or provision of this Warrant, in any one or more instances,
shall be deemed to be, or construed as, a further or continuing waiver of any
such term, condition or provision.
10. Adjustments. The Exercise Price and the number of shares purchasable
hereunder are subject to adjustment from time to time as follows:
(a) Reclassification, etc. If the Company at any time while this
Warrant, or any portion thereof, remains outstanding and unexpired shall, by
reclassification of securities or otherwise, change any of the securities as to
which purchase rights under this Warrant exist into the same or a different
number of securities of any other class or classes, this Warrant shall
thereafter represent the right to acquire such number and kind of securities as
would have been issuable as the result of such change
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<PAGE> 69
with respect to the securities which were subject to the purchase rights under
this Warrant immediately prior to such reclassification or other change and the
Exercise Price therefor shall be appropriately adjusted, all subject to further
adjustment as provided in this Section 10.
(b) Split, Subdivision or Combination of Shares. If the Company at
any time while this Warrant, or any portion hereof, remains outstanding and
unexpired shall split, subdivide or combine the securities as to which purchase
rights under this Warrant exist, into a different number of securities of the
same class, the Exercise Price for such securities shall be proportionately
decreased and the number of securities issuable upon exercise proportionately
increased in the case of a split or subdivision or the Exercise Price of such
securities shall be proportionately increased and the number of securities
issuable upon exercise proportionately decreased in the case of a combination.
If any time, while this Warrant, or any portion thereof, is outstanding and
unexpired there shall be (i) a merger or consolidation of the Company with or
into another corporation in which the Company is not the surviving entity, or a
reverse triangular merger in which the Company is the surviving entity but the
shares of the Company's capital stock outstanding immediately prior to the
merger are converted by virtue of the merger into other property, whether in the
form of securities, cash or otherwise, or (ii) a sale or transfer of
substantially all of the Company's assets to any other person, then, as a part
of such merger, consolidation, sale or transfer, lawful provision shall be made
so that the Holder shall thereafter be entitled to receive upon exercise of this
Warrant, during the period specified herein and upon payment of the Exercise
Price then in effect, the number of shares of stock or other securities or
property of the successor corporation resulting from such merger, consolidation
sale or transfer which a holder of the shares deliverable upon exercise of this
Warrant would have been entitled to receive in such consolidation, merger, sale
or transfer if this Warrant had been exercised immediately before such merger,
consolidation, sale or transfer, all subject to further adjustment as provided
in this Section 10; and, in any such case, appropriate adjustment (as determined
by the Board of Directors) shall be made in the application of the provisions
herein set forth with respect to the rights and interests thereafter of the
Holder to the end that the provisions set forth herein (including provisions
with respect to changes in and other adjustments of (i) the number of shares the
Holder is entitled to purchase, and (ii) the Exercise Price) shall thereafter be
applicable, as nearly as possible, in relation to any shares of Common Stock or
other securities or other property thereafter deliverable upon the exercise of
this Warrant.
(c) Adjustments for Dividends in Stock or Other Securities or Property.
If, while this Warrant, or any portion hereof, remains outstanding and unexpired
the holders of the securities as to which purchase rights under this Warrant
exist at the time shall have received, or, on or after the record date fixed for
the determination of eligible Stockholders, shall have become entitled to
receive, without payment therefor, other or additional stock or other securities
or property (other than cash) of the Company by way of dividend, then and in
each case, this Warrant shall represent the right to acquire, in addition to the
number of shares of the security receivable upon the exercise of this Warrant,
and without payment of any additional consideration thereof, the amount of such
other or additional stock or other securities or property (other than cash) of
the Company which such holder would hold on the date of such exercise had it
been the holder of record of the security receivable upon exercise of this
Warrant on the date hereof and had thereafter, during the period from the date
hereof to and including the date of
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<PAGE> 70
such exercise, retained such shares and/or all other additional stock available
by it as aforesaid during such period, giving effect to all adjustments called
for during such period by the provisions of this Section 10.
(d) Certificate as to Adjustments. Upon the occurrence of each adjustment
or readjustment pursuant to this Section 10, the Company at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and furnish to each holder of this Warrant a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Company shall, upon the written
request, at any time, of any such holder, furnish or cause to be furnished to
such holder a like certificate setting forth: (i) such adjustments and
readjustments; (ii) the Exercise Price at the time in effect; and (iii) the
number of shares and the amount, if any, of other property which at the time
would be received upon the exercise of the Warrant.
(e) No Impairment. The Company will not, by any voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all times in good
faith assist in the carrying out of all of the provisions of this Section 10 and
in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the holders of this Warrant against impairment.
11. Successors and Assigns. The terms and provisions of this Warrant shall
inure to the benefit of and be binding upon the Company and Holder and their
respective permitted successors and assigns.
12. Attorneys' Fees. If any action of law or equity is necessary to
enforce or interpret the terms of this Warrant, the prevailing party shall be
entitled to its reasonable attorneys' fees, costs and disbursements in addition
to any other relief to which it may be entitled.
13. Governing Law. This Warrant shall be governed by the laws of the State
of California.
14. Notices. All notices required under this Warrant and shall be deemed
to have been given or made for all purposes (i) upon personal delivery, (ii)
upon confirmation receipt that the communication was successfully sent to the
applicable number if sent by facsimile; (iii) one day after being sent, when
sent by professional overnight courier service, or (iv) five days after posting
when sent by registered or certified mail to either party hereto at the address
set forth below or at such other address as either party may designate by notice
pursuant to this Section 14.
If to the Company: Sanctuary Woods Multimedia Corporation
1825 South Grant Street
San Mateo, CA 94402
Attn: President
with a copy to: Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attn: Judith O'Brien
-6-
<PAGE> 71
If to the Holder: Kingdon Capital
Address
Attn: Michael Markbreiter
15. Captions. The Section and subsection headings of this Warrant are
inserted for convenience only and shall not constitute a part of this Warrant in
construing or interpreting any provision hereof.
IN WITNESS HEREOF, SANCTUARY WOODS MULTIMEDIA CORPORATION has caused this
Warrant to be executed by its officers thereunto duly authorized.
Dated: ____________________, 1997
SANCTUARY WOODS MULTIMEDIA
CORPORATION
By:___________________________________
-7-
<PAGE> 72
NOTICE OF EXERCISE
To: SANCTUARY WOODS MULTIMEDIA CORPORATION
(1) The undersigned hereby elects to:
Purchase __________ shares of Common Stock of SANCTUARY WOODS
MULTIMEDIA CORPORATION, pursuant to the terms of the attached Warrant and
tenders herewith payment of the purchase price for such shares in full;
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of Common Stock are being acquired solely for the
account of the undersigned and not as a nominee for any other party, and for
investment, and that the undersigned will not offer, sell, or otherwise dispose
of any such shares of Common Stock except under circumstances that will not
result in a violation of any federal securities laws, including without
limitation the Securities Act of 1933, as amended, any state securities laws or
any applicable securities laws of foreign jurisdictions, including without
limitation, British Columbia, Canada, or any rules or regulations promulgated
thereunder.
Kingdon Capital
_________________________ By:___________________________________
[Date]
Title:________________________________
-8-
<PAGE> 73
EXHIBIT B
CERTIFICATE OF MERGER
OF
TEACHER ACQUISITION CORPORATION
INTO
THEATRIX INTERACTIVE, INCORPORATED
(UNDER SECTION 252 OF THE GENERAL
CORPORATION LAW OF THE STATE OF DELAWARE)
THEATRIX INTERACTIVE, INCORPORATED HEREBY CERTIFIES THAT:
(1) The name and state of incorporation of each of the constituent
corporations are:
(a) Theatrix Interactive, Incorporated, a Delaware corporation, and
(b) Teacher Acquisition Corporation, a Delaware corporation.
(2) An agreement of merger has been approved, adopted, certified,
executed and acknowledged by Theatrix Interactive, Incorporated and by Teacher
Acquisition Corporation in accordance with the provisions of subsection (c) of
Section 252 of the General Corporation Law of the State of Delaware.
(3) The name of the surviving corporation is Theatrix Interactive,
Incorporated.
(4) The Certificate of Incorporation of Theatrix Interactive,
Incorporated shall be the Certificate of Incorporation of the surviving
corporation.
(5) The surviving corporation is a corporation of the State of Delaware.
(6) The executed agreement of merger is on file at the principal place of
business of Theatrix Interactive, Incorporated at 1825 S. Grant Street, San
Mateo, CA 94402.
(7) A copy of the agreement of merger will be furnished by Theatrix
Interactive, Incorporated on request and without cost, to any stockholder of
Theatrix Interactive, Incorporated or Teacher Acquisition Corporation.
(8) The authorized capital stock of Theatrix Interactive, Incorporated
is shares or Common Stock, $ par value.
------- ------
IN WITNESS WHEREOF, Theatrix Interactive, Incorporated has caused this
certificate to be signed by Teacher Acquisition Corporation, its authorized
officers, on the day of , 1997.
---- ---------
Teacher Acquisition Corporation Theatrix Interactive, Incorporated
- ------------------------------- -----------------------------------
BY: Charlotte J. Walker BY: Robert T. Wall
TITLE: President TITLE: President
<PAGE> 74
EXHIBIT C
EMPLOYMENT CONTINUATION AGREEMENT
This Employment Continuation Agreement ("Agreement") between Joyce
Hakansson (the "Executive") and Sanctuary Woods Multimedia Corporation (the
"Company") is entered into as of , 1997.
----------------
WHEREAS, the Executive and Berkeley Learning Technologies, Inc.
("Berkeley") entered into a "Founder Employment Agreement" (the "Berkeley
Agreement") as of December 15, 1994;
WHEREAS, Berkeley was a predecessor corporation of Theatrix
Interactive, Incorporated ("Theatrix");
WHEREAS, Theatrix and the Company have entered into an Agreement and
Plan of Reorganization (the "Merger") pursuant to which Theatrix shall become a
wholly-owned subsidiary of the Company;
WHEREAS, upon the consummation of the Merger (the "Closing"), the
Company wishes to retain the Executive as an employee on terms and conditions
comparable to those set forth in the Berkeley Agreement, and the Executive
wishes to provide services to the Company on such terms and conditions;
NOW, THEREFORE, in consideration of the foregoing recitals and the
respective covenants and agreements hereinbelow, the parties agree as follows:
1. Continuation of Berkeley Agreement. The Company shall employ
the Executive and the Executive shall render services to the Company on the
terms and conditions set forth in Sections 1, 2, 4, 6 and 7 of the Berkeley
Agreement, which agreement is attached hereto as Exhibit A and which sections
thereof are incorporated herein by this reference.
2. Termination of Berkeley Agreement. Sections 3 and 5 of the
Berkeley Agreement are hereby terminated in their entirety and shall have no
further force and effect.
3. Compensation. The Company shall pay the Executive as
compensation for her services a base salary at the annualized rate of $180,000,
along with such performance bonus amounts as the Board of Directors of the
Company (the "Board") shall authorize, in its discretion, from time to time.
Such salary shall be paid periodically in accordance with normal Company
payroll practices.
4. Negotiation of New Employment Contract. The Company and
Executive agree to negotiate in good faith a new employment contract to be
entered into by the Company and the Executive within sixty (60) days after the
date of the Agreement and Plan of Reorganization between the Company, Teacher
Acquisition Corporation, a Delaware corporation and wholly-owned
<PAGE> 75
subsidiary of the Company and Theatrix Interactive, Inc., a Delaware
corporation, in form and substance mutually acceptable to parties thereto.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and year
first above written.
COMPANY: SANCTUARY WOODS MULTIMEDIA CORPORATION
By:___________________________________
Title:________________________________
EXECUTIVE: ______________________________________
Joyce Hakansson
DATE:_________________
<PAGE> 76
EXHIBIT D
List of "Company Products" for purposes of Section 1.7(a)(iii):
AMAZON (A.K.A. CUBE HEADS)
As described in Offering Memorandum.
BIG SCIENCE COMICS
Released Theatrix title.
BUILD-A-BOOK WITH ROBERTO
Released Theatrix title.
BUMPTZ SCIENCE CARNIVAL
Released Theatrix title.
BURBANK
As described in Offering Memorandum.
CONCEPT X
An activity-based program in the subject area of history. Could fit into Heads
series or other formats.
DAVE'S
A tool, probably Web-intensive, that conceptually mixes aspects of Gotham and
Hollywood and allows kids to program characters and place them in various
situations.
FLATBUSH
As described in Offering Memorandum.
GOTHAM
As described in Offering Memorandum.
HOLLYWOOD
Released Theatrix title.
HOLLYWOOD HIGH
Released Theatrix title.
HOLLYWOOD DELUXE
As described in Offering Memorandum.
JUILLIARD MUSIC ADVENTURE
Released Theatrix title.
MATH HEALTH
Released Theatrix title.
SEATTLE
As described in Offering Memorandum.
<PAGE> 77
SNOOTZ MATH TREK
Released Theatrix title.
VEGAS (A.K.A. WORD HEADS)
As described in Offering Memorandum.
DERIVATIVES OF THEATRIX TITLES/PROJECTS
Any derivatives, upgrades, revisions, extensions, or sequels of Theatrix
titles, series, or in-process projects listed above.
<PAGE> 78
SCHEDULE 8.2(k)
FIRST TRUST OF CALIFORNIA, NATIONAL ASSOCIATION Esc-4
GLOBAL ESCROW DEPOSITORY SERVICES
FEE SCHEDULE
FOR HOLDING (DEPOSITORY) ESCROWS
I. ACCEPTANCE FEE:
Covers the escrow agent's examination of governing instruments and all
supporting documentation as well as set up of required records and accounts.
Payable at opening.
Consideration Fees
$0 - 499,999 $500
$500,000 - 999,999 $1,000
$1.0 - 2.49 million $2,000
$2.5 - 4.9 million $3,000
$5.0 - 9.99 million $4,000
$10 million and above $5,000
Plus $0.10 per $1,000
over $10 million
II. ANNUAL ADMINISTRATION FEE: $1,000
Covers ordinary escrow agent services, such as maintenance of records,
examination of notices to determine compliance with the governing instrument,
and preparation and distribution of accounting statements. Payable annually in
advance.
III. INSTRUMENT PROCESSING FEES:
First Bank System Investments No Charge
Outside Investments 50 Basis Pts. of Income earned
(minimum $250)
IV. ACTIVITY FEES:
Deposits and/or Disbursements (per transaction) $20
Wire transfers (incoming or outgoing) $25
(Note: Deposits & Disbursement charges are waived
if utilizing wire transfers)
Off-site Closing (CA) $500
Out-of-State Closing At Cost
V. OUT-OF-POCKET EXPENSES Billed at Cost
Expenses including but not limited to stationery, postage,
telephone, insurance, shipping, Telex/Telegram, services of
outside counsel and agents. (Plus indirect out-of-pocket
at 3% of annual administration fees.)
VI. EXTRAORDINARY SERVICES AND EXPENSES:
Charges for performing other escrow services not specifically
covered in this schedule will be determined by an appraisal
of the services rendered.
All Escrow Fees are Non-Proratable and Non-Refundable
The fees shown in this schedule may be increased upon thirty (30) days notice.
June 1996
<PAGE> 1
EXHIBIT 10.27
REPUBLISHING AND DISTRIBUTION AGREEMENT
This Agreement is made the 12th day of June, 1997, by and between VIRGIN
SOUND AND VISION, INC., a corporation organized and existing under the laws of
the State of California, located at 127 North Robertson Blvd., Los Angeles,
California 90048 ("VSV"), and SANCTUARY WOODS MULTIMEDIA, INC., a corporation
organized and existing under the law of the State of Nevada, located at 1825
South Grant Street, San Mateo, California 94402 ("SW").
RECITALS
1. VSV has expended considerable time, effort, and resources to develop
and/or publish certain interactive multimedia products on CD-ROM and the user
documentation related thereto, as more specifically identified in Exhibit A
hereto (collectively "the Products");
2. SW desires to act as a republisher and distributor of the Products
worldwide, and represents to VSV that SW has sufficient expertise, resources,
and personnel to perform its obligations under this Agreement; and
3. VSV desires to have SW republish and distribute the Products worldwide
upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto agree as follows:
AGREEMENT
A. DEFINITIONS
1. "Confidential Information" shall mean any information, idea,
technology, know-how, inventions, algorithms, data, process, technique, program,
computer software, computer code and related documentation, work-in-process,
future development, engineering, manufacturing, marketing, business, technical,
financial or personal matter of either party, its research, development, present
or future products, sales, customers, employees, opportunities, markets, or
business, whether in oral, written, graphic or electronic form, that is treated
as confidential by such party and identified as such at the time of disclosure.
2. "Documentation" shall mean any instructions, specifications, manuals,
hint sheets and other written materials developed by or on behalf of VSV
relating to the use, operation, or support of the Products.
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<PAGE> 2
3. "Products" shall mean (a) copies of the Products purchased from VSV "as
is" for distribution in the Territory in existing packaging; and (b) copies of
the Products manufactured by SW from a gold master copy furnished by VSV, for
distribution in the Territory in a form the same as that published by VSV,
except that the packaging may be modified as further provided below.
4. "Net Revenues" shall be defined as all money received by SW relating to
the Products, less returns, price mark-downs and sales taxes.
5. "Cost of Goods" shall mean the actual direct cost of manufacturing the
Products, including the costs of disk replication, assembly and packaging, which
shall not be greater than the costs incurred by VSV or the cost VSV could
reasonably expect to obtain elsewhere.
6. "Proprietary Rights" shall mean all rights of VSV in the Products
including, without limitation, copyright, patent, design patent, trademark,
trade secret, and publicity rights, arising under applicable law and
international conventions.
7. All references to the "sale" or "sell" in relation to the Products
shall mean the sale, lease or license of the media on which the Products are
embodied.
8. "Territory" shall be worldwide.
9. "OEM Sales" shall mean the distribution of one or more of the Products
bundled with third party hardware and/or software and sold by such third party
as a unit for a single price.
10. "Name" and "Logo" shall mean the name and logo(s) used by VSV as
provided by VSV to SW as may be changed by VSV from time to time.
B. GRANT OF LICENSE
1. Distribution License. Subject to the terms of this Agreement, VSV
grants to SW and SW accepts, for the term of this Agreement, the exclusive
rights to market, distribute, import and export, advertise and sell the Products
in the Territory through any and all channels of distribution, including on-line
distribution, except for OEM and international sales and other channels of
distribution, where VSV has a pre-existing contractual relationship.
Territories, OEM and other distribution relationships currently held and
retained by VSV are listed in Exhibit D. Upon expiration of VSV's contractual
commitments in those territories and relationships shown in Exhibit D, SW upon
the approval of VSV, which approval
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<PAGE> 3
will not be unreasonably withheld, shall extend those contracts or establish new
relationships.
2. Republishing License. Upon mutual agreement of the parties, or when VSV
exhausts the materials required to build the Products, SW shall have the
exclusive rights to republish the Products at SW's own cost and in accordance
with this Agreement subject to the exceptions set forth in Section B.1. above.
Subject to VSV's prior written approval as to form and content, which shall not
be unreasonably withheld, any republished versions of the Products may be
modified to identify Sanctuary Woods as the publisher and distributor of the
Products on the CD-ROM and packaging ("Republished Versions"). Republished
versions of the Products may not otherwise be re-compiled or abridged, or sold
as part of a compilation or bundling or OEM arrangement, except as pre-approved
by VSV. Such approval shall not be unreasonably withheld.
3. Right of First Refusal. SW shall have a last matching right to acquire
all of VSV's Proprietary Rights to any of the Products, if VSV offers to sell
the same to a third party, covered in this Agreement, as shown in Exhibit A, at
any time during the term of this Agreement, provided that if SW and VSV fail to
close the transaction within thirty (30) days of the date that SW is offered the
Proprietary Rights, VSV shall be entitled to sell to a third party.
4. Trademarks. SW specifically understands and agrees that no rights are
granted herein with respect to the trade mark(s), logo(s) or copyrights owned by
or licensed to VSV other than those specifically set forth above in the
Products, it being understood that all rights in and to said Products are
reserved exclusively to VSV for use and/or licensing as it deems appropriate to
third party(s) of its choice.
5. Name/Logo. The Products shall also include the Name and/or Logo. SW
shall utilize the Name and/or Logo on such Products as VSV shall direct. VSV
shall have the right to approve all uses of the Name and/or Logo. The parties
agree that, notwithstanding anything to the contrary contained elsewhere in this
Agreement, SW's use of the Name and/or Logo shall be on a non-exclusive basis
and shall to the benefit of VSV and/or third party as licenses the same to VSV.
6. Further Assurance. SW shall comply with all requirements of licensors
of the products and shall enter into all necessary agreements to ensure that in
granting the license set out in Section B.1. VSV is not in breach of any
contractual obligation and SW hereby indemnifies VSV against all costs, damages
and other costs incurred as a result of SW's failure to comply with given
requirements.
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<PAGE> 4
C. DISTRIBUTION, PROMOTION AND PAYMENTS
1. Distribution. SW shall be entitled to distribute such Products "as is"
as Products according to the terms and conditions set forth in this Agreement.
Such Products shall be distributed by SW without any changes, except that SW may
add, by sticker or otherwise, an indication that SW is the distributor of the
Product as shown in Exhibit E. VSV must review and approve all pricing on a
deal-by-deal basis, such approval not to be unreasonably withheld.
2. Product Orders. SW shall order units of the Products through the use of
SW's standard purchase order. VSV shall fulfill such orders within ten (10) days
of the date of the purchase order, and shall ship such orders in accordance with
the provisions of Section C.6. In the event of any discrepancy between the terms
of such purchase order and this agreement, the terms of this Agreement shall
apply.
3. Promotion
SW shall:
(a) at all times use its best endeavors actively to promote and increase sales
of the Products in the Territory and shall not do anything that may prevent
sales or interfere with the development of sales of the Products in the
Territory. In particular, but without limiting the generality of this
sub-section SW shall:
(i) employ a sufficient number of adequately trained sales staff,
demonstrators and other necessary sales personnel;
(ii) establish and maintain adequate sales systems;
(iii) distribute promotional literature about the Products;
(iv) attend and present the Products at relevant trade exhibitions and other
industry events where the Products are displayed and will report to VSV before
and after such exhibitions and events with regard to planned promotions and the
results of such efforts;
(v) subject to section 3 (b), ensure adequate press and magazine editorial
coverage, and design and produce all sales and marketing materials, including
sales collateral, point of purchase materials, and advertising.
(vi) be responsible for disk and packaging replication, assembly warehousing and
inventory management; as per B.2., when VSV exhausts its supply of inventory.
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<PAGE> 5
(vii) deal with all aspects of relationships with retailers and distributors
from that point forward that SW has placed an order or taken a re-order for a
Product.
(viii) bill, collect payments and manage returns from that point forward that SW
has placed an order or taken a re-order for a Product.
(ix) be responsible for all end user advertising, trade advertising, marketing
and coop advertising and distributor rebates and incentive programs.
(b) consult with and obtain the approval of VSV before advertising or publishing
promotional material for the Products and obverse all reasonable directions and
instructions given to it by VSV in relation to the promotion and advertisement
of the Products. This shall not entitle VSV to exercise any control over the
SW's conditions of sale but SW shall consult with VSV in respect of the same.
4. Payments. (a) For Products Supplied by VSV. SW shall pay VSV a royalty
on each Product as follows:
[ * ]
(b) On any Republished Versions of the Products, the royalty rates set
forth above shall be reduced by the Cost of Goods for each copy of the Product
manufactured by SW. At the time SW makes a payment to VSV in respect of Net
Revenues, SW shall provide VSV with a detailed accounting of the cost of goods.
5. Third party royalties. All third party royalties payable under any
publishing licenses to which VSV is a party in relation to the manufacturing and
sales of the Products shall be paid by VSV. Notwithstanding the foregoing, by
mutual agreement of the parties and the relevant licensors, SW may assume the
publishing licenses from VSV, and in such case, SW's royalty payments as set
forth in Section C.3 above shall be reduced by the royalty amount previously
paid by VSV.
6. Shipping. SW shall be responsible for all shipping charges, and all
copies of the Products shall be shipped F.O.B. VSV's facility as notified to SW
from time to time, with risk of loss passing to SW upon shipment in respect of
which SW shall maintain, through the term of this agreement, adequate insurance
coverage. SW
- --------
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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<PAGE> 6
will set-up a direct relationship with VSV's fulfillment agent to place orders
for shipment to designated customer accounts.
7. Existing Inventory in Channel; Future Returns. VSV will be responsible
for all existing channel inventory and will also be responsible for all future
returns and price markdowns on Products currently in the channel. At the point
that SW is responsible for placing units of the Products or processing
re-orders, those units will become an SW SKU at the distributor and/or the
retailer and SW will henceforth handle the returns or price markdowns of those
units of the Products it has placed.
8. Royalty Statements, Payment and Audits. Statements setting forth the
number of units of each Product sold and the Net Revenues received, shall be
sent to VSV monthly within thirty (30) days of the end of each calendar month.
Royalty payments for Products sold by SW shall be made within sixty (60) days of
the date of the first royalty statement, and 45 days from the date of each
subsequent royalty statements. VSV shall have the right, upon reasonable
request, and no more often than once in each calendar year, to review those
records of SW necessary to verify the royalties paid. Any such audit will be
conducted at VSV's expense and at such times and in such a manner as to not
unreasonably interfere with SW's normal operations; provided, however, that if
any such audit reveals an error of at least 5% in the payment of royalties, then
SW shall pay the costs of the audit. If a deficiency is shown by such audit, SW
shall immediately pay that deficiency. Non-payment of any deficiency within
thirty (30) business days of the date on which SW receives notice of such
deficiency shall constitute a material breach of this Agreement.
9. Trademarks. Subject to VSV's prior approval, VSV grants to SW the right
to use all trademarks, trade names and service marks associated with the
Products in its marketing and distribution efforts.
10. SW obligations:
(a) SW shall not use, or knowingly, permit the use of and will exercise due care
that its customers likewise will refrain from the use of, the Products as a
premium, except with the prior written consent of VSV, which consent VSV may
grant or withhold in its unfettered discretion and shall be entitled to
distribute a commercially reasonable number of units of the Products
royalty-free for the sole purpose of promoting and marketing the Virgin Sound
and Vision brand name and the Products, provided that the packaging for such
Products shall be clearly labeled "NOT FOR RESALE". For the purposes of this
subsection, the term "premium" shall be defined as including, but not
necessarily limited to, combination sales, free or self-liquidating offered to
the public in conjunction with the sale or promotion of a product or service, or
any similar scheme or device, the prime intent of which is to
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<PAGE> 7
use the Products in such a way to promote, publicize and/or sell the products,
services or business image of the user of such item;
(b) comply with all laws, rules and regulations existing in the Territory from
time to time concerning the products and shall keep VSV informed of any relevant
changes therein, and in particular but without limitation, shall at its own
expense obtain all necessary permissions, consent and licenses to enable SW to
reproduce market and sell the Products in the Territory and shall obtain any
other governmental or other permission, consent or license or make any
registration necessary for the full and legal operation of this Agreement;
(c) keep full and proper books of accounts and records showing clearly all
equities, quotations, transactions and proceedings relating to the Products and
permit VSV to have full access to such books and records (which VSV may copy)
and to SW's property, staff, customer and other personnel in relation to the
Products;
(d) observe all reasonable directions and instructions given to it by VSV in
relation to the sale, distribution and marketing of the Products.
11. Quality of the Products
The quality and style of the cartons and containers containing the Products
shall be subject to VSV's approval. To this end SW shall, before selling or
distributing any of the Products, furnish to VSV free of cost each for its
written approval, (24) production samples of each Product together with their
cartons and containers, including packaging and wrapping material. In addition
VSV shall have the right to purchase any and all Products as packaged by or the
SW in any quantity at Licensee's best standard wholesale price. After samples of
Products have been approved pursuant to this clause, SW shall not depart
therefrom in any material respect without VSV's prior written consent failing
which VSV shall have the right to withdraw its approval of such samples.
12. Distribution: Sublicense/Manufacture
(a) SW shall sell the Products either to jobbers, wholesalers, distributors, or
retailers for sale or resale and distribution directly to the public. If SW
sells or distributes the Products at a special price, directly or indirectly, to
itself including, without limitation, any subsidiary or parent of SW or to any
other person, firm or corporation affiliated with SW or its officers, directors
or major stockholders, for ultimate sale to unrelated third parties, SW shall
pay royalties with respect to such sales or distribution based on the price of
the ultimate sale to the unaffiliated third party (e.g. distributor or
retailer).
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(b) In the event SW is not the manufacturer of the Products, SW shall, subject
to the prior written approval of VSV (which approval shall not be unreasonably
withheld), be entitled to utilize a third party in connection with the
manufacture and production of the Products provided that such party shall
execute an agreement in a form acceptable to VSV. In such event, SW shall remain
primarily obligated under all the provisions of this Agreement. In no event
shall any sublicense agreement include the right to grant any further
sublicenses.
D. TRAINING AND SUPPORT
1. Training of Support. VSV will provide initial training for SW's
customer support personnel in the proper use and support of the Products. VSV's
obligation to provide support shall terminate within thirty days of the date of
the this agreement.
2. Customer Support. SW shall use usual and reasonable support services
for the Products, as specified on Exhibit C. If requested by VSV, SW will also
offer customer support for the Additional Products set forth in Exhibit B, for a
fee of $2,500 per month for a period of six months. Upon mutual agreement, SW
will continue to provide customer support to the Additional Products beyond the
six-month period at a reduced rate commensurate with the decline in call volume.
VSV represents that the current volume of telephone calls received for customer
support for its Products and Additional Products is approximately 50 calls per
week.
E. LIMITED WARRANTY
1. For units of the Products provided by VSV to SW, VSV warrants that the
media on which the Products are furnished will be free from defects in materials
and workmanship under normal use for a period of three months from the date of
delivery to SW. Except for the foregoing warranty as to the media on which the
Products are furnished, the Products and licensed Products are provided "as is"
without warranty of any kind, either express or implied. VSV does not warrant
that the functions contained in the Products or licensed Products will be
uninterrupted or error free. VSV disclaims all other warranties, either express
or implied, including the warranties of merchantability and fitness for a
particular purpose.
2. If the media on which the Product or Licensed Product is furnished does
not comply with the warranty, the sole and exclusive remedy will be to return
the media to VSV during the warranty period set forth in Section E.1, and VSV
will provide a replacement in exchange for the defective media.
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F. LIMITED LIABILITY
1. EXCEPT FOR VSV'S OBLIGATIONS UNDER THE INDEMNIFICATION PROVISIONS OF
THIS AGREEMENT, VSV WILL NOT BE LIABLE UNDER THIS AGREEMENT OR UNDER ANY
CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY, FOR
ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING DAMAGES
FOR LOSS OF BUSINESS OR LOSS OF PROFITS) TO SW OR END-USER, EVEN IF SW OR ITS
REPRESENTATIVES HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
2. NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT OR OTHERWISE, VSV WILL
NOT BE LIABLE UNDER THIS AGREEMENT OR UNDER ANY CONTRACT, NEGLIGENCE, STRICT
LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR LOSS OF DATA OR THE COST OF
PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR SERVICES TO SW OR END-USER, EVEN
IF SW OR ITS REPRESENTATIVES HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES.
G. PROPRIETARY RIGHTS; CONFIDENTIAL INFORMATION
1. Except as specifically provided in this Agreement, VSV does not grant
to SW any Proprietary Rights relating to the Products or to any other materials
furnished thereunder except as specified herein. VSV and its Licensors are, and
at all times shall remain, the sole owner of the Products and Licensed Products
provided or created in connection with this Agreement.
2. In the event that a third party is or potentially may be copying any
Product or documentation, infringing or registering VSV's proprietary rights in
the Products, SW shall promptly inform VSV in writing, stating the full facts of
the third party's actions. SW agrees to cooperate fully with VSV if VSV takes
any action against the third party, including, without limitation, suing to
enjoin the third party's actions.
3. In the event that one party ("Disclosing Party") discloses any
Confidential Information to other party, its officers, employees, agents,
representatives ("Receiving Party"), the Receiving Party shall hold in
confidence such Confidential Information and shall use such Confidential
Information only during the term of this Agreement and only as directed by the
Disclosing Party. The Receiving Party may disclose such Confidential Information
to its employees with a need to know, provided that such employees are bound in
writing to maintain the confidentiality of such Confidential Information. The
Receiving Party's non-disclosure obligation shall not apply to information the
Receiving Party can document (a) has entered the public domain and is generally
available to the public as a result of no act or
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omission of the Receiving Party or its employees or agents, (b) is lawfully
received by the Receiving Party from third parties without restriction and
without breach of any duty of nondisclosure by any such third party, or (c) is
developed independently by the Receiving Party without reference to the
Confidential Information.
H. TERM AND TERMINATION
1. This Agreement shall be in effect from the Effective Date and will
continue for a period of twenty-four (24) months, unless terminated earlier
pursuant to this Section. However, this Agreement may be terminated at an
earlier date under the terms of this Section H. Upon expiration of the term, the
parties may, by mutual agreement, renew the Agreement for additional one-year
increments. Further, the term of this Agreement will automatically renew for
each Product for an additional period of twenty-four (24) months should SW sell
a minimum of 12,500 units of said Product during the original or any renewal
term.
2. This Agreement may be terminated by either Party upon thirty (30) days'
written notice for breach of a material term of this Agreement relating to such
Product or all Products, unless such breach has been cured within said thirty
(30) day period, in which case, the notice of termination shall be a nullity.
3. Either party may terminate this Agreement immediately on written notice
if (a) the other party files for or is adjudged insolvent or bankrupt or
circumstances arise that would entitle a court to make such a finding, or all or
a substantial portion of the assets are transferred to an assignee for the
benefit of creditors, receiver or trustee in bankruptcy or (b) the other party
ceases to conduct its business or otherwise terminates its business operations
or if the controlling ownership of the other party has changed by merger,
acquisition or sale of all or substantially all of that party's assets, business
or stock. In the case of VSV, should (a) or (b) occur, this Agreement shall be
immediately transferred to and honored by VSV's parent, Virgin Communications,
Ltd., and therefore this item shall apply only if Virgin Communications, Ltd. is
subject to (a) or (b).
4. Upon termination or expiration of this Agreement, SW shall have a
period of ninety (90) days from the date of termination to sell off any copies
of any Products in its inventory or in transit from VSV to SW on the date of
termination.
5. Termination or expiration of this Agreement shall not affect those
provisions which, by their nature, extend beyond the date of termination or
expiration of this Agreement.
K. INFRINGEMENT INDEMNIFICATION
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1. VSV shall defend, indemnify and hold harmless SW from any costs or
damages arising from any claim that the Products infringing the copyright,
patent, design patent, trademark, trade secret, or publicity rights, of any
third party. VSV shall have sole control of the defense of such action and all
negotiations for its compromise or settlement. In the event that the Products
become, or in the opinion of the VSV is likely to become, subject to a claim of
infringement of any copyright, patent, design patent, trademark, trade secret,
and publicity rights VSV shall, at VSV's option and expense, either:
(a) Procure, for SW and its customers, the right to continue marketing,
promoting, distributing and replicating the Products; or,
(b) Replace the Products with similar non-infringing Products or modify
the Products so that they becomes non-infringing, provided that the Products, as
modified, are functionally equivalent to the Products purchased pursuant to this
Agreement.
2. The foregoing states the entire liability and obligation of VSV to SW
or its customers with respect to infringement of any copyright, patent, design
patent, trademark, trade secret, and publicity rights by the Products, or any
component thereof, and SW's and its customers' exclusive remedy as to VSV.
3. VSV will not be liable for any claim of infringement based on (a) the
use of a Product in combination with any other products if such infringement
would have been avoided by the use of the Product without such other products.
4. VSV shall not be obligated to indemnify SW under this section unless
(a) SW promptly notifies VSV in writing of any claim to which the indemnity
obligations might apply, (b) VSV has the sole control of the defense and/or
settlement of such claim, and (c) SW cooperates fully with VSV in defending or
settling any such claim.
L. GENERAL PROVISIONS
1. Notices. Any notice under this Agreement must be written, in English,
and sent to the address of such party specified at the beginning of this
Agreement (or to such other address as either party may specify by notice given
to the other party). Any notice will be deemed to have been effective (a) seven
(7) days following mailing by registered or certified airmail; (b) two (2) days
after dispatch by courier; or (c) upon receipt by personal delivery, which may
be by cable, telegram, facsimile or telex.
2. Governing Law and Legal Actions. This Agreement shall be governed
exclusively by the laws of the State of California and the United States of
America,
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without regard to conflicts of laws provisions thereof and shall not be subject
to the U.N. Convention on Contracts for the International Sale of Goods. The
exclusive jurisdiction and venue for actions related to the subject matter
hereof shall be the California state and U.S. federal courts having within their
jurisdiction, the State of California.
3. Attorneys' Fees. In any action or proceeding to enforce rights under
this Agreement, the prevailing party shall be entitled to recover costs and
attorneys' fees.
4. Force Majeure. If the performance of this Agreement or any obligation
under it (except payment of monies due) is prevented, restricted or interfered
with by reason of acts of God, acts of government, or any other cause not within
the control of either party, the party so affected shall be excused from such
performance, but only for so long as and to the extent that such a force
prevents, restricts or interferes with that party's performance. Notwithstanding
the foregoing, either party may terminate this Agreement immediately upon
written notice if the Force Majeure circumstances continue for more than sixty
(60) days.
5. Assignment. Neither party may assign, in whole or in part, this
Agreement or its rights and obligations under it except that VSV may assign this
agreement to a parent or subsidiary or to a parent or subsidiary of such parent
or subsidiary or to any other affiliated company. Any attempted assignment to
any other party shall be void and of no effect.
6. Non-waiver. Failure to enforce any rights under this Agreement,
irrespective of the duration of such failure, shall not constitute a waiver of
those or any other rights.
7. Integration; Modifications. This Agreement, including the attached
Exhibits, constitutes the final, complete and exclusive Agreement between SW and
VSV with regard to his subject matter hereof and supersedes all prior
agreements, proposals and understandings, oral or written, and all negotiations,
conversations, and discussions, relating to the subject matter of this
Agreement.
8. Severance. If any provision(s) of this Agreement are held to be void or
unenforceable, such provision(s) shall be excluded from this Agreement and the
balance of the Agreement shall be enforceable in accordance with its terms. Any
invalid provision shall be replaced by the lawful provision most nearly
embodying the original intention of the parties by way of amendment.
9. Arbitration. Any dispute or controversy arising out of or in connection
with this Agreement shall be finally settled by binding arbitration. The
arbitration shall be held in San Francisco, California and conducted in
accordance with the
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Commercial Arbitration Rules of the American Arbitration Association, before a
single arbitrator selected in accordance therewith. Judgment upon the award
rendered may be entered in any court having jurisdiction, or application may be
made to such court for a judicial acceptance of the award and an order of
enforcement.
IN WITNESS WHEREOF, the parties hereto, by their authorized
representatives, have affixed their signatures as of the date first set forth
above.
VIRGIN SOUND AND VISION, INC.
by John Owen, President
Signature: ------------------------------
Title: ----------------------------------
Date: -----------------------------------
SANCTUARY WOODS MULTIMEDIA, INC.
by Charlotte Walker, President & CEO
Signature: ------------------------------
Title: ----------------------------------
Date: -----------------------------------
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EXHIBIT A
(PRODUCTS)
Future Releases
TerraTopia
One Small Square: Seashore (School Edition, Lab Pack, School Pack)
Current Titles
Get Ready for School Charlie Brown (School Edition, Lab Pack, School Pack)
Snoopy's Campfire Stories (School Edition, Lab Pack, School Pack)
Peanuts bundle (Get Ready for School Charlie Brown & Snoopy's Campfire
Stories)
One Small Square: Backyard (School Edition, Lab Pack, School Pack)
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EXHIBIT B
(ADDITIONAL PRODUCTS)
Jonny Quest: Cover-up at Roswell
Wiggins in Storyland
One Tribe: The Ultimate Multimedia Atlas
Paperopolis
Dinonauts
Frantic Factory
One World
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EXHIBIT C
(SUPPORT SERVICES)
SW will provide a "hot-line" service during normal business hours for answering
end-user questions by telephone and will employ persons trained and able to
answer such questions. Such "hot-line" service shall be provided to all
end-users in the Territory, whether or not the Products were originally
distributed by SW. All "hot-line" services shall be provided by SW without
charge (other than telephone charges) to the caller.
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EXHIBIT D
(TERRITORIES AND OEM RELATIONSHIPS RETAINED BY VSV)
(to be completed by VSV)
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<PAGE> 18
EXHIBIT E
(FORM OF STICKER)
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<PAGE> 1
Exhibit 10.28
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT
WITH RESPECT TO SUCH SECURITIES, OR DELIVERY OF AN OPINION OF COUNSEL IN FORM
AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES THAT SUCH OFFER,
SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE ACT.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A HOLD PERIOD EXPIRING
AT MIDNIGHT ON APRIL 17, 1998, AND MAY NOT BE TRADED IN BRITISH COLUMBIA, CANADA
UNTIL THE EXPIRY OF THE HOLD PERIOD EXCEPT AS PERMITTED BY THE BRITISH COLUMBIA
SECURITIES ACT AND REGULATIONS MADE UNDER SUCH ACT.
Warrant to Purchase
FIELD (1) Shares
of Common Stock
Dated April 18, 1997
WARRANT TO PURCHASE COMMON STOCK
of
SANCTUARY WOODS MULTIMEDIA CORPORATION
Void after September 18, 1999
This certifies that, for value received, FIELD(2) or its registered
assigns ("Holder") is entitled, subject to the terms set forth below, to
purchase from SANCTUARY WOODS MULTIMEDIA CORPORATION (the "Company"), a Delaware
corporation, FIELD(4) (FIELD(1)) shares of the Common Stock of the Company, as
constituted on the date hereof (the "Warrant Issue Date"), upon surrender
hereof, at the principal office of the Company referred to below, with the
subscription form attached hereto duly executed, and simultaneous payment
therefor in lawful money of the United States or otherwise as hereinafter
provided, at the Exercise Price as set forth in Section 2 below. The number,
character and Exercise Price of such shares of Common Stock are subject to
adjustment as provided below.
1. Term of Warrant. Subject to the terms and conditions set forth herein,
this Warrant shall be exercisable, in whole or in part, during the term
commencing on the Warrant Issue Date and ending at 5:00 p.m., Pacific Standard
Time, on September 18, 1999 (the "Term"), and shall be void thereafter.
2. Exercise Price. The Exercise Price at which this Warrant may be
exercised shall be US$3.00 per share of Common Stock as adjusted from time to
time pursuant to Section 10 hereof (the "Exercise Price").
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<PAGE> 2
3. Exercise of Warrant.
(a) This Warrant is exercisable by the Holder in whole or in part,
but not for less than one hundred thousand (100,000) shares at a time (or if the
maximum number of shares purchasable upon exercise of this Warrant is less than
100,000, this Warrant shall be exercisable for such lesser number of shares
which may then constitute the maximum number purchasable), at any time, or from
time to time, during the term hereof as described in Section 1 above, by the
surrender of this Warrant and the Notice of Exercise annexed hereto duly
completed and executed on behalf of the Holder, at the office of the Company (or
such other office or agency of the Company as it may designate by notice in
writing to the Holder at the address of the Holder appearing on the books of the
Company), upon payment (i) in cash or by check acceptable to the Company, (ii)
by cancellation by the Holder of indebtedness of the Company to the Holder, or
(iii) by a combination of (i) and (ii), of the Exercise Price multiplied by the
number of shares being purchased.
(b) If the Company recognizes combined net revenues ("Combined Net
Revenues") in any four consecutive quarters of U.S. $10,000,000 or more, the
Holder of this Warrant shall immediately exercise this Warrant for one-half of
the total shares of Common Stock which, upon the issuance of this Warrant, the
Holder is entitled to purchase hereunder, or, if this Warrant is exercisable for
less than one-half of such total, then the Holder of this Warrant shall exercise
this Warrant for 100% of the shares the Holder is entitled to purchase
hereunder. For purposes of this Section 3(b), Combined Net Revenues shall
consist of revenues recognized from the sale or licensing of software products
of the Company or any affiliate of the Company. Notwithstanding the foregoing,
80% of Combined Net Revenues shall consist of revenues recognized from the sale
or licensing of software products developed by the Company or any affiliate of
the Company ("Internally Developed"). Software products licensed by the Company
or any affiliate of the Company from a third party (a "Software License") or
acquired by the Company or any affiliate of the Company through a merger,
purchase of assets, consolidation or similar transaction (a "Software
Acquisition") shall be deemed to be Internally Developed six months from the
date of such Software License or Software Acquisition. For the purposes of this
Section 3(b), the software products acquired from Virgin Sound and Vision
pursuant to the Distribution Agreement between the Company and Virgin Sound and
Vision dated March 25, 1997, shall be deemed to be Internally Produced six
months from the date of such Distribution Agreement.
(c) The Holder of this Warrant will be required to immediately
exercise this Warrant in full if the last sale price of the Common Stock of the
Company as reported on the NASDAQ Bulletin Board or on any national exchange or
market on which the Common Stock of the Company is then traded exceeds US$9.00
for a period of 21 trading days in any 40 consecutive trading days.
(d) This Warrant shall be deemed to have been exercised immediately
prior to the close of business on the date of its surrender for exercise as
provided above, and the person entitled to receive the shares of Common Stock
issuable upon such exercise shall be treated for all purposes as the holder of
record of such shares as of the close of business on such date. As promptly as
practicable on or after such date and in any event within ten (10) days
thereafter, the Company at its expense shall issue and deliver to the person or
persons entitled to receive the same a certificate or certificates for the
number of shares issuable upon such exercise. In the event that this Warrant is
exercised in part, the Company
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<PAGE> 3
at its expense will execute and deliver a new Warrant of like tenor exercisable
for the remaining number of shares for which this Warrant may then be exercised.
4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional share shall be issued upon the exercise of this Warrant.
In lieu of any fractional share to which the Holder would otherwise be entitled,
the Company shall make a cash payment equal to the Exercise Price multiplied by
such fraction.
5. Replacement of Warrant. On receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction, or mutilation of this Warrant
and, in the case of loss, theft, or destruction, on delivery of an indemnity
agreement reasonably satisfactory in form and substance to the Company or, in
the case of mutilation, on surrender and cancellation of this Warrant, the
Company at its expense shall execute and deliver, in lieu of this Warrant, a new
warrant of like tenor and amount.
6. Rights of Stockholders. Subject to Sections 8 and 10 of this Warrant,
the Holder shall not be entitled to vote or receive dividends or be deemed the
holder of Common Stock or any other securities of the Company that may at any
time be issuable on the exercise hereof for any purpose, nor shall anything
contained herein be construed to confer upon the Holder, as such, any of the
rights of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issuance of stock, reclassification of stock, change of par
value, or change of stock to no par value, consolidation, merger, conveyance, or
otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until the Warrant shall have been exercised and
the shares of Common Stock purchasable upon the exercise hereof (the "Warrant
Shares") shall have been issued, as provided herein.
7. Compliance with Securities Laws. This Warrant may not be transferred or
assigned in whole or in part without compliance with all applicable federal and
state securities laws by the transferor and the transferee (including the
delivery of investment representation letters and legal opinions reasonably
satisfactory to the Company, if such are requested by the Company).
(a) The Holder of this Warrant, by acceptance thereof, acknowledges
that this Warrant and the shares of Common Stock to be issued upon exercise
hereof are being acquired solely for the Holder's own account and not as a
nominee for any other party, and for investment, and that the Holder will not
offer, sell or otherwise dispose of this Warrant or any shares of Common Stock
to be issued upon exercise hereof except under circumstances that will not
result in a violation of any federal securities laws, including without
limitation the Securities Act of 1933, as amended (the "Act"), any state
securities laws or any applicable securities law of foreign jurisdictions,
including without limitation, British Columbia, Canada, or any rules or
regulations promulgated thereunder. Upon exercise of this Warrant, the Holder
shall, if requested by the Company, confirm in writing in a form satisfactory to
the Company, that the shares of Common Stock so purchased are being acquired
solely for the Holder's own account and not as a nominee for any other party,
for investment, and not with a view toward distribution or resale.
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<PAGE> 4
(b) Without in any way limiting the representations set forth in (a)
above, the Holder further agrees not to make any disposition of all or any
portion of this Warrant or any Warrant Shares unless and until the transferee
has agreed in writing for the benefit of the Company to be bound by this Section
7, and:
(i) the Holder shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed statement of
the circumstances surrounding the proposed disposition, and (ii) if reasonably
requested by the Company, the Holder shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration of such securities under the Act.
(c) This Warrant and all shares issuable hereunder shall bear the
following legends:
(i) "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES, OR DELIVERY OF
AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE
SECURITIES THAT SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN
COMPLIANCE WITH THE ACT."
(ii) THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
A HOLD PERIOD EXPIRING AT MIDNIGHT ON APRIL 17, 1998, AND MAY NOT BE TRADED IN
BRITISH COLUMBIA, CANADA UNTIL THE EXPIRY OF THE HOLD PERIOD EXCEPT AS PERMITTED
BY THE BRITISH COLUMBIA SECURITIES ACT AND REGULATIONS MADE UNDER SUCH ACT.
(iii) Any legend required by applicable state law.
8. Reservation of Stock. The Company covenants that during the Term this
Warrant is exercisable, the Company will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Common Stock upon the exercise of this Warrant and, from time to time, will
take all steps necessary to provide sufficient reserves of shares of the Common
Stock issuable upon the exercise of the Warrant. The Company further covenants
that all shares that may be issued upon the exercise of rights represented by
this Warrant and payment of the Exercise Price, all as set forth herein, will be
free from all taxes, liens, and charges in respect of the issue thereof (other
than taxes in respect of any transfer occurring contemporaneously or otherwise
specified herein). The Company agrees that its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates for
shares of Common Stock upon the exercise of this Warrant.
9. Amendments and Waivers. Any term of this Warrant may be amended and the
observance of any term of this Warrant may be waived (either generally or in a
particular instance and either retroactively or prospectively) only with the
written consent of the Company and the Holder. No waivers
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<PAGE> 5
of or exceptions to any term, condition or provision of this Warrant, in any one
or more instances, shall be deemed to be, or construed as, a further or
continuing waiver of any such term, condition or provision.
10. Adjustments. The Exercise Price and the number of shares purchasable
hereunder are subject to adjustment from time to time as follows:
(a) Reclassification, etc. If the Company at any time while this
Warrant, or any portion thereof, remains outstanding and unexpired shall, by
reclassification of securities or otherwise, change any of the securities as to
which purchase rights under this Warrant exist into the same or a different
number of securities of any other class or classes, this Warrant shall
thereafter represent the right to acquire such number and kind of securities as
would have been issuable as the result of such change with respect to the
securities which were subject to the purchase rights under this Warrant
immediately prior to such reclassification or other change and the Exercise
Price therefor shall be appropriately adjusted, all subject to further
adjustment as provided in this Section 10.
(b) Split, Subdivision or Combination of Shares. If the Company at
any time while this Warrant, or any portion hereof, remains outstanding and
unexpired shall split, subdivide or combine the securities as to which purchase
rights under this Warrant exist, into a different number of securities of the
same class, the Exercise Price for such securities shall be proportionately
decreased and the number of securities issuable upon exercise proportionately
increased in the case of a split or subdivision or the Exercise Price of such
securities shall be proportionately increased and the number of securities
issuable upon exercise proportionately decreased in the case of a combination.
If any time, while this Warrant, or any portion thereof, is outstanding and
unexpired there shall be (i) a merger or consolidation of the Company with or
into another corporation in which the Company is not the surviving entity, or a
reverse triangular merger in which the Company is the surviving entity but the
shares of the Company's capital stock outstanding immediately prior to the
merger are converted by virtue of the merger into other property, whether in the
form of securities, cash or otherwise, or (ii) a sale or transfer of
substantially all of the Company's assets to any other person, then, as a part
of such merger, consolidation, sale or transfer, lawful provision shall be made
so that the Holder shall thereafter be entitled to receive upon exercise of this
Warrant, during the period specified herein and upon payment of the Exercise
Price then in effect, the number of shares of stock or other securities or
property of the successor corporation resulting from such merger, consolidation
sale or transfer which a holder of the shares deliverable upon exercise of this
Warrant would have been entitled to receive in such consolidation, merger, sale
or transfer if this Warrant had been exercised immediately before such merger,
consolidation, sale or transfer, all subject to further adjustment as provided
in this Section 10; and, in any such case, appropriate adjustment (as determined
by the Board of Directors) shall be made in the application of the provisions
herein set forth with respect to the rights and interests thereafter of the
Holder to the end that the provisions set forth herein (including provisions
with respect to changes in and other adjustments of (i) the number of shares the
Holder is entitled to purchase, and (ii) the Exercise Price) shall thereafter be
applicable, as nearly as possible, in relation to any shares of Common Stock or
other securities or other property thereafter deliverable upon the exercise of
this Warrant.
(c) Adjustments for Dividends in Stock or Other Securities or
Property. If, while this Warrant, or any portion hereof, remains outstanding and
unexpired the holders of the securities as to
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<PAGE> 6
which purchase rights under this Warrant exist at the time shall have received,
or, on or after the record date fixed for the determination of eligible
Stockholders, shall have become entitled to receive, without payment therefor,
other or additional stock or other securities or property (other than cash) of
the Company by way of dividend, then and in each case, this Warrant shall
represent the right to acquire, in addition to the number of shares of the
security receivable upon the exercise of this Warrant, and without payment of
any additional consideration thereof, the amount of such other or additional
stock or other securities or property (other than cash) of the Company which
such holder would hold on the date of such exercise had it been the holder of
record of the security receivable upon exercise of this Warrant on the date
hereof and had thereafter, during the period from the date hereof to and
including the date of such exercise, retained such shares and/or all other
additional stock available by it as aforesaid during such period, giving effect
to all adjustments called for during such period by the provisions of this
Section 10.
(d) Certificate as to Adjustments. Upon the occurrence of each adjustment
or readjustment pursuant to this Section 10, the Company at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and furnish to each holder of this Warrant a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Company shall, upon the written
request, at any time, of any such holder, furnish or cause to be furnished to
such holder a like certificate setting forth: (i) such adjustments and
readjustments; (ii) the Exercise Price at the time in effect; and (iii) the
number of shares and the amount, if any, of other property which at the time
would be received upon the exercise of the Warrant.
(e) No Impairment. The Company will not, by any voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all times in good
faith assist in the carrying out of all of the provisions of this Section 10 and
in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the holders of this Warrant against impairment.
11. Successors and Assigns. The terms and provisions of this Warrant shall
inure to the benefit of and be binding upon the Company and Holder and their
respective permitted successors and assigns.
12. Attorneys' Fees. If any action of law or equity is necessary to
enforce or interpret the terms of this Warrant, the prevailing party shall be
entitled to its reasonable attorneys' fees, costs and disbursements in addition
to any other relief to which it may be entitled.
13. Governing Law. This Warrant shall be governed by the laws of the State
of California.
14. Notices. All notices required under this Warrant and shall be deemed
to have been given or made for all purposes (i) upon personal delivery, (ii)
upon confirmation receipt that the communication was successfully sent to the
applicable number if sent by facsimile; (iii) one day after being sent, when
sent by professional overnight courier service, or (iv) five days after posting
when sent by registered or certified mail to either party hereto at the address
set forth below or at such other address as either party may designate by notice
pursuant to this Section 14.
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If to the Company: Sanctuary Woods Multimedia Corporation
1825 South Grant Street
San Mateo, CA 94402
Attn: President
with a copy to: Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attn: Judith O'Brien
If to the Holder: FIELD(2)
FIELD(3)
15. Captions. The Section and subsection headings of this Warrant are
inserted for convenience only and shall not constitute a part of this Warrant in
construing or interpreting any provision hereof.
IN WITNESS HEREOF, SANCTUARY WOODS MULTIMEDIA CORPORATION has caused this
Warrant to be executed by its officers thereunto duly authorized.
Dated: ____________________, 1997
SANCTUARY WOODS MULTIMEDIA
CORPORATION
By:___________________________________
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NOTICE OF EXERCISE
To: SANCTUARY WOODS MULTIMEDIA CORPORATION
(1) The undersigned hereby elects to:
Purchase ________ shares of Common Stock of SANCTUARY WOODS
MULTIMEDIA CORPORATION, pursuant to the terms of the attached Warrant and
tenders herewith payment of the purchase price for such shares in full;
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of Common Stock are being acquired solely for
the account of the undersigned and not as a nominee for any other party,
and for investment, and that the undersigned will not offer, sell, or
otherwise dispose of any such shares of Common Stock except under
circumstances that will not result in a violation of any federal
securities laws, including without limitation the Securities Act of 1933,
as amended, any state securities laws or any applicable securities laws of
foreign jurisdictions, including without limitation, British Columbia,
Canada, or any rules or regulations promulgated thereunder.
FIELD(2)
_________________________________ By:___________________________________
[Date]
Title:________________________________
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<PAGE> 1
Exhibit 10.28A
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT
WITH RESPECT TO SUCH SECURITIES, OR DELIVERY OF AN OPINION OF COUNSEL IN FORM
AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES THAT SUCH OFFER,
SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE ACT.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A HOLD PERIOD EXPIRING
AT MIDNIGHT ON APRIL 17, 1998, AND MAY NOT BE TRADED IN BRITISH COLUMBIA, CANADA
UNTIL THE EXPIRY OF THE HOLD PERIOD EXCEPT AS PERMITTED BY THE BRITISH COLUMBIA
SECURITIES ACT AND REGULATIONS MADE UNDER SUCH ACT.
Warrant to Purchase
FIELD (1) Shares
of Common Stock
WARRANT TO PURCHASE COMMON STOCK
of
SANCTUARY WOODS MULTIMEDIA CORPORATION
Void after September 18, 1999
This certifies that, for value received, FIELD (2) or its registered
assigns ("Holder") is entitled, subject to the terms set forth below, to
purchase from SANCTUARY WOODS MULTIMEDIA CORPORATION (the "Company"), a Delaware
corporation, FIELD (4) (FIELD(1)) shares of the Common Stock of the Company, as
constituted on the date hereof (the "Warrant Issue Date"), upon surrender
hereof, at the principal office of the Company referred to below, with the
subscription form attached hereto duly executed, and simultaneous payment
therefor in lawful money of the United States or otherwise as hereinafter
provided, at the Exercise Price as set forth in Section 2 below. The number,
character and Exercise Price of such shares of Common Stock are subject to
adjustment as provided below.
1. Term of Warrant. Subject to the terms and conditions set forth
herein, this Warrant shall be exercisable, in whole or in part, during the
term commencing on the Warrant Issue Date and ending at 5:00 p.m., Pacific
Standard Time, on September 18, 1999 (the "Term"), and shall be void
thereafter.
2. Exercise Price. The Exercise Price at which this Warrant may be
exercised shall be US$3.00 per share of Common Stock as adjusted from time
to time pursuant to Section 10 hereof (the "Exercise Price").
<PAGE> 2
3. Exercise of Warrant.
a. This Warrant is exercisable by the Holder in whole or in part,
but not for less than one hundred thousand (100,000) shares at a
time (or if the maximum number of shares purchasable upon exercise
of this Warrant is less than 100,000, this Warrant shall be
exercisable for such lesser number of shares which may then
constitute the maximum number purchasable), at any time, or from
time to time, during the term hereof as described in Section 1
above, by the surrender of this Warrant and the Notice of Exercise
annexed hereto duly completed and executed on behalf of the Holder,
at the office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the Holder at
the address of the Holder appearing on the books of the Company),
upon payment (i) in cash or by check acceptable to the Company, (ii)
by cancellation by the Holder of indebtedness of the Company to the
Holder, or (iii) by a combination of (i) and (ii), of the Exercise
Price multiplied by the number of shares being purchased.
b. The Holder of this Warrant will be required to immediately
exercise this Warrant in full if the closing trading price of the
Common Stock of the Company as reported on the NASD Bulletin Board
or on any national exchange or market on which the Common Stock of
the Company is then traded exceeds US$9.00 for a period of 21
trading days in any 40 consecutive trading days.
c. This Warrant shall be deemed to have been exercised
immediately prior to the close of business on the date of its
surrender for exercise as provided above, and the person entitled to
receive the shares of Common Stock issuable upon such exercise shall
be treated for all purposes as the holder of record of such shares
as of the close of business on such date. As promptly as practicable
on or after such date and in any event within ten (10) days
thereafter, the Company at its expense shall issue and deliver to
the person or persons entitled to receive the same a certificate or
certificates for the number of shares issuable upon such exercise.
In the event that this Warrant is exercised in part, the Company at
its expense will execute and deliver a new Warrant of like tenor
exercisable for the remaining number of shares for which this
Warrant may then be exercised.
4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional share shall be issued upon the exercise of this
Warrant. In lieu of any fractional share to which the Holder would
otherwise be entitled, the Company shall make a cash payment equal to the
Exercise Price multiplied by such fraction.
5. Replacement of Warrant. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation
of this Warrant and, in the case of loss, theft, or destruction, on
delivery of an indemnity agreement reasonably satisfactory in form and
substance to the Company or, in the case of mutilation, on surrender and
cancellation of
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<PAGE> 3
this Warrant, the Company at its expense shall execute and deliver, in
lieu of this Warrant, a new warrant of like tenor and amount.
6. Rights of Stockholders. Subject to Sections 8 and 10 of this
Warrant, the Holder shall not be entitled to vote or receive dividends or
be deemed the holder of Common Stock or any other securities of the
Company that may at any time be issuable on the exercise hereof for any
purpose, nor shall anything contained herein be construed to confer upon
the Holder, as such, any of the rights of a stockholder of the Company or
any right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action (whether upon any recapitalization,
issuance of stock, reclassification of stock, change of par value, or
change of stock to no par value, consolidation, merger, conveyance, or
otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until the Warrant shall have been
exercised and the shares of Common Stock purchasable upon the exercise
hereof (the "Warrant Shares") shall have been issued, as provided herein.
7. Compliance with Securities Laws. This Warrant may not be transferred
or assigned in whole or in part without compliance with all applicable
federal and state securities laws by the transferor and the transferee
(including the delivery of investment representation letters and legal
opinions reasonably satisfactory to the Company, if such are requested by
the Company).
a. The Holder of this Warrant, by acceptance thereof,
acknowledges that this Warrant and the shares of Common Stock to be
issued upon exercise hereof are being acquired solely for the
Holder's own account and not as a nominee for any other party, and
for investment, and that the Holder will not offer, sell or
otherwise dispose of this Warrant or any shares of Common Stock to
be issued upon exercise hereof except under circumstances that will
not result in a violation of any federal securities laws, including
without limitation the Securities Act of 1933, as amended (the
"Act"), any state securities laws or any applicable securities law
of foreign jurisdictions, including without limitation, British
Columbia, Canada, or any rules or regulations promulgated
thereunder. Upon exercise of this Warrant, the Holder shall, if
requested by the Company, confirm in writing in a form satisfactory
to the Company, that the shares of Common Stock so purchased are
being acquired solely for the Holder's own account and not as a
nominee for any other party, for investment, and not with a view
toward distribution or resale.
b. Without in any way limiting the representations set forth in
(a) above, the Holder further agrees not to make any disposition of
all or any portion of this Warrant or any Warrant Shares unless and
until the transferee has agreed in writing for the benefit of the
Company to be bound by this Section 7, and:
(1) the Holder shall have notified the Company of the
proposed disposition and shall have furnished the
Company with a detailed statement of the circumstances
surrounding the proposed disposition,
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<PAGE> 4
and (ii) if reasonably requested by the Company, the
Holder shall have furnished the Company with an opinion
of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such
securities under the Act.
c. This Warrant and all shares issuable hereunder shall bear the
following legends:
(1) "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT")
AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION
STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES, OR
DELIVERY OF AN OPINION OF COUNSEL IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER OF THESE SECURITIES THAT SUCH
OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN
COMPLIANCE WITH THE ACT."
(2) THE SHARES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO A HOLD PERIOD EXPIRING AT MIDNIGHT ON APRIL
17, 1998, AND MAY NOT BE TRADED IN BRITISH COLUMBIA,
CANADA UNTIL THE EXPIRY OF THE HOLD PERIOD EXCEPT AS
PERMITTED BY THE BRITISH COLUMBIA SECURITIES ACT AND
REGULATIONS MADE UNDER SUCH ACT.
(3) Any legend required by applicable state law.
8. Reservation of Stock. The Company covenants that during the Term
this Warrant is exercisable, the Company will reserve from its authorized
and unissued Common Stock a sufficient number of shares to provide for the
issuance of Common Stock upon the exercise of this Warrant and, from time
to time, will take all steps necessary to provide sufficient reserves of
shares of the Common Stock issuable upon the exercise of the Warrant. The
Company further covenants that all shares that may be issued upon the
exercise of rights represented by this Warrant and payment of the Exercise
Price, all as set forth herein, will be free from all taxes, liens, and
charges in respect of the issue thereof (other than taxes in respect of
any transfer occurring contemporaneously or otherwise specified herein).
The Company agrees that its issuance of this Warrant shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of
Common Stock upon the exercise of this Warrant.
9. Amendments and Waivers. Any term of this Warrant may be amended
and the observance of any term of this Warrant may be waived (either
generally or in a particular
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<PAGE> 5
instance and either retroactively or prospectively) only with the written
consent of the Company and the Holder. No waivers of or exceptions to any
term, condition or provision of this Warrant, in any one or more
instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such term, condition or provision.
10. Adjustments. The Exercise Price and the number of shares
purchasable hereunder are subject to adjustment from time to time as
follows:
a. Reclassification, etc. If the Company at any time while this
Warrant, or any portion thereof, remains outstanding and unexpired
shall, by reclassification of securities or otherwise, change any of
the securities as to which purchase rights under this Warrant exist
into the same or a different number of securities of any other class
or classes, this Warrant shall thereafter represent the right to
acquire such number and kind of securities as would have been
issuable as the result of such change with respect to the securities
which were subject to the purchase rights under this Warrant
immediately prior to such reclassification or other change and the
Exercise Price therefor shall be appropriately adjusted, all subject
to further adjustment as provided in this Section 10.
b. Split, Subdivision or Combination of Shares. If the Company
at any time while this Warrant, or any portion hereof, remains
outstanding and unexpired shall split, subdivide or combine the
securities as to which purchase rights under this Warrant exist,
into a different number of securities of the same class, the
Exercise Price for such securities shall be proportionately
decreased and the number of securities issuable upon exercise
proportionately increased in the case of a split or subdivision or
the Exercise Price of such securities shall be proportionately
increased and the number of securities issuable upon exercise
proportionately decreased in the case of a combination. If any time,
while this Warrant, or any portion thereof, is outstanding and
unexpired there shall be (i) a merger or consolidation of the
Company with or into another corporation in which the Company is not
the surviving entity, or a reverse triangular merger in which the
Company is the surviving entity but the shares of the Company's
capital stock outstanding immediately prior to the merger are
converted by virtue of the merger into other property, whether in
the form of securities, cash or otherwise, or (ii) a sale or
transfer of substantially all of the Company's assets to any other
person, then, as a part of such merger, consolidation, sale or
transfer, lawful provision shall be made so that the Holder shall
thereafter be entitled to receive upon exercise of this Warrant,
during the period specified herein and upon payment of the Exercise
Price then in effect, the number of shares of stock or other
securities or property of the successor corporation resulting from
such merger, consolidation sale or transfer which a holder of the
shares deliverable upon exercise of this Warrant would have been
entitled to receive in such consolidation, merger, sale or transfer
if this Warrant had been exercised immediately before such merger,
consolidation, sale or transfer, all subject to further adjustment
as provided in this Section 10; and, in any such case, appropriate
adjustment (as determined by the Board of Directors) shall be
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<PAGE> 6
made in the application of the provisions herein set forth with
respect to the rights and interests thereafter of the Holder to the
end that the provisions set forth herein (including provisions with
respect to changes in and other adjustments of (i) the number of
shares the Holder is entitled to purchase, and (ii) the Exercise
Price) shall thereafter be applicable, as nearly as possible, in
relation to any shares of Common Stock or other securities or other
property thereafter deliverable upon the exercise of this Warrant.
c. Adjustments for Dividends in Stock or Other Securities or
Property. If while this Warrant, or any portion hereof, remains
outstanding and unexpired the holders of the securities as to which
purchase rights under this Warrant exist at the time shall have
received, or, on or after the record date fixed for the
determination of eligible Stockholders, shall have become entitled
to receive, without payment therefor, other or additional stock or
other securities or property (other than cash) of the Company by way
of dividend, then and in each case, this Warrant shall represent the
right to acquire, in addition to the number of shares of the
security receivable upon the exercise of this Warrant, and without
payment of any additional consideration thereof, the amount of such
other or additional stock or other securities or property (other
than cash) of the Company which such holder would hold on the date
of such exercise had it been the holder of record of the security
receivable upon exercise of this Warrant on the date hereof and had
thereafter, during the period from the date hereof to and including
the date of such exercise, retained such shares and/or all other
additional stock available by it as aforesaid during such period,
giving effect to all adjustments called for during such period by
the provisions of this Section 10.
d. Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment pursuant to this Section 10, the Company
at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each
holder of this Warrant a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Company shall, upon the
written request, at any time, of any such holder, furnish or cause
to be furnished to such holder a like certificate setting forth: (i)
such adjustments and readjustments; (ii) the Exercise Price at the
time in effect; and (iii) the number of shares and the amount, if
any, of other property which at the time would be received upon the
exercise of the Warrant.
e. No Impairment. The Company will not, by any voluntary action,
avoid or seek to avoid the observance or performance of any of the
terms to be observed or performed hereunder by the Company, but will
at all times in good faith assist in the carrying out of all of the
provisions of this Section 10 and in the taking of all such action
as may be necessary or appropriate in order to protect the rights of
the holders of this Warrant against impairment.
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<PAGE> 7
11. Successors and Assigns. The terms and provisions of this Warrant
shall inure to the benefit of and be binding upon the Company and Holder
and their respective permitted successors and assigns.
12. Attorneys' Fees. If any action of law or equity is necessary to
enforce or interpret the terms of this Warrant, the prevailing party shall
be entitled to its reasonable attorneys' fees, costs and disbursements in
addition to any other relief to which it may be entitled.
13. Governing Law. This Warrant shall be governed by the laws of the
State of California.
14. Notices. All notices required under this Warrant and shall be
deemed to have been given or made for all purposes (i) upon personal
delivery, (ii) upon confirmation receipt that the communication was
successfully sent to the applicable number if sent by facsimile; (iii) one
day after being sent, when sent by professional overnight courier service,
or (iv) five days after posting when sent by registered or certified mail
to either party hereto at the address set forth below or at such other
address as either party may designate by notice pursuant to this Section
14.
If to the Company: Sanctuary Woods Multimedia Corporation
1825 South Grant Street
San Mateo, CA 94402
Attn: President
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attn: Judith O'Brien
If to the Holder: FIELD(2)
FIELD(3)
15. Captions. The Section and subsection headings of this Warrant are
inserted for convenience only and shall not constitute a part of this
Warrant in construing or interpreting any provision hereof.
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<PAGE> 8
IN WITNESS HEREOF, SANCTUARY WOODS MULTIMEDIA CORPORATION has caused this
Warrant to be executed by its officers thereunto duly authorized.
Dated: ____________________, 1997
SANCTUARY WOODS MULTIMEDIA
CORPORATION
By:___________________________________
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<PAGE> 9
NOTICE OF EXERCISE
To: SANCTUARY WOODS MULTIMEDIA CORPORATION
(1) The undersigned hereby elects to:
Purchase ________ shares of Common Stock of SANCTUARY WOODS
MULTIMEDIA CORPORATION, pursuant to the terms of the attached Warrant and
tenders herewith payment of the purchase price for such shares in full;
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of Common Stock are being acquired solely for the
account of the undersigned and not as a nominee for any other party, and for
investment, and that the undersigned will not offer, sell, or otherwise dispose
of any such shares of Common Stock except under circumstances that will not
result in a violation of any federal securities laws, including without
limitation the Securities Act of 1933, as amended, any state securities laws or
any applicable securities laws of foreign jurisdictions, including without
limitation, British Columbia, Canada, or any rules or regulations promulgated
thereunder.
FIELD(2)
__________________________________ By:___________________________________
[Date]
Title:________________________________
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<PAGE> 1
EXHIBIT 10.29
COMMON SHARE VOID AFTER
WITHOUT PAR VALUE MARCH 6, 1997
SHARE PURCHASE WARRANT
SANCTUARY WOODS MULTIMEDIA CORPORATION
(the "Company")
This is to certify that, for value received, __________ (the "Warrant Holder")
of 1825 South Grant Street, San Mateo, California 94402 has the right to
purchase from the Company, upon and subject to the terms and conditions
hereinafter referred to, ________ common shares without par value (the "Shares")
in the capital of the Company. The Shares may be purchased at a price of $0.21
(Canadian) per Share at any time up to 5:00 p.m. local time in Vancouver, B.C.
on March 6, 1998, and thereafter at a price of $0.23 (Canadian) per Share at any
time up to 5:00 p.m. local time in Vancouver, B.C. on March 6, 1999. The right
to purchase the Shares may be exercised in whole or in part, by the Warrant
Holder only, at the prices set forth above (the "Exercise Price") within the
times set forth above by:
(a) completing and executing the Subscription Form attached hereto for the
Shares which the Warrant Holder wishes to purchase, in the manner therein
indicated;
(b) surrendering this Warrant Certificate, together with the complete
Subscription Form, to Montreal Trust Company of Canada, (the "Transfer
Agent") at 510 Burrard Street, Vancouver, British Columbia; and;
(c) paying the appropriate Exercise Price, in Canadian funds, for the number
of the Shares of the Company subscribed for, either by certified cheque or
bank draft (drawn on a Canadian Chartered Bank) or money order payable to
the Company in Vancouver, British Columbia.
Upon surrender and payment, the Company shall issue to the Warrant Holder or to
such other person or persons as the Warrant Holder may direct, the number of the
Shares subscribed for and will deliver to the Warrant Holder, at the address set
forth on the subscription form, a certificate or certificates evidencing the
number of the Shares subscribed for. If the
<PAGE> 2
Warrant Holder subscribes for a number of Shares which is less than the number
of Shares permitted by this warrant, the Company shall forthwith cause to be
delivered to the Warrant Holder a further Warrant Certificate in respect of the
balance of Shares referred to in this Warrant Certificate not then being
subscribed for.
In the event of any subdivision of the common shares of the Company (as such
common shares are constituted on the date hereof) into a greater number of
common shares while this warrant is outstanding, the number of Shares
represented by this warrant shall thereafter be deemed to be subdivided in like
manner and the Exercise Price adjusted accordingly, and any subscription by the
Warrant Holder for Shares hereunder shall be deemed to be a subscription for
common shares of the Company as subdivided.
In the event of any consolidation of the common shares of the Company (as such
common shares are constituted on the date hereof) into a lesser number of common
shares while this warrant is outstanding, the number of Shares represented by
this warrant shall thereafter be deemed to be consolidated in like manner and
the Exercise Price adjusted accordingly, and any subscription by the Warrant
Holder for Shares hereunder shall be deemed to be a subscription for common
shares of the Company as consolidated.
In the event of any capital reorganization or reclassification of the common
shares of the Company or the merger or amalgamation of the Company with another
corporation at any time while this warrant is outstanding, the Company shall
thereafter deliver at the time of purchase of the Shares hereunder the number of
common shares the Warrant Holder would have been entitled to receive in respect
of the number of the Shares so purchased had the right to purchase been
exercised before such capital reorganization or reclassification of the common
shares of the Company or the merger or amalgamation of the Company with another
corporation.
If at any time while this, or any replacement, warrant is outstanding:
(a) the Company proposes to pay any dividend of any kind upon its common
shares or make any distribution to the holders of its common shares;
(b) the Company proposes to offer for subscription pro rata to the holders of
its common shares any additional shares of stock of
<PAGE> 3
any class or other rights;
(c) the Company proposes any capital reorganization or classification of its
common shares or the merger or amalgamation of the Company with another
corporation; or
(d) there is a voluntary or involuntary dissolution, liquidation or winding-up
of the Company;
The Company shall give to the Warrant Holder at least seven days prior written
notice (the "Notice") of the date on which the books of the Company are to close
or a record is to be taken for such dividend, distribution or subscription
rights, or for determining rights to vote with respect to such reorganization,
reclassification, consolidation, merger, amalgamation, dissolution, liquidation
or winding-up. The Notice shall specify, in the case of any such dividend,
distribution or subscription rights, the date on which holders of common shares
of the company will be entitled to exchange their common shares for securities
or other property sale, dissolution, liquidation or winding-up, as the case may
be. Each Notice shall be delivered by hand, addressed to the Warrant Holder set
forth above or at such other address as the Warrant Holder may from time to time
specify to the Company in writing.
The holding of this Warrant Certificate or the Warrants represented hereby does
not constitute the Warrant Holder a member of the Company.
Nothing contained herein confers any right upon the Warrant Holder or any other
person to subscribe for or purchase any Shares of the Company at any time
subsequent to 5:00 p.m. local time in Vancouver, B.C. on March 6, 1999 and from
and after such time, this Warrant and all rights hereunder will be void.
The Warrants represented by this Warrant Certificate are non-transferable.
Time will be of the essence hereof.
This Warrant Certificate is not valid for any purpose until it has been signed
by the Company.
<PAGE> 4
IN WITNESS WHEREOF, the Company has caused its common seal to be hereto affixed
and this warrant certificate to be signed by one of its directors as of the 6th
day of March, 1997.
SANCTUARY WOODS MULTIMEDIA CORPORATION
PER:
- --------------------------------------
Charlotte Walker, President
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Magic Quest, Inc., a California corporation
Sanctuary Woods Multimedia, Inc., a Nevada corporation
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-96212 on Form S-8 and Registration Statement No. 33-95464 on Form S-3 of
Sanctuary Woods Multimedia Corporation (the "Company") of our report dated June
20, 1997, which includes a going concern uncertainty explanatory paragraph,
appearing in this Annual Report on Form 10-K of the Company for the year ended
March 31, 1997.
DELOITTE & TOUCHE LLP
San Francisco, California
June 27, 1997
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-96212 on Form S-8 and Registration Statement No. 33-95464 on Form S-3 of
Sanctuary Woods Multimedia Corporation of our report dated February 23, 1995
(except for the second paragraph of Note 2 and the first paragraph of Note 13
which are as of April 15, 1997, and the second paragraph of Note 8 which is as
of September 20, 1995), which includes an explanatory paragraph referring to the
Company's change in functional and reporting currency to United States dollars
from Canadian dollars, appearing in this Annual Report on Form 10-K of Sanctuary
Woods Multimedia Corporation for the year ended March 31, 1997.
DELOITTE & TOUCHE
Chartered Accountants
Vancouver, Canada
June 27 , 1997
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<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 101,932
<SECURITIES> 0
<RECEIVABLES> 1,210,365
<ALLOWANCES> 123,424
<INVENTORY> 656,415
<CURRENT-ASSETS> 1,566,266
<PP&E> 1,006,872
<DEPRECIATION> 544,524
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<CURRENT-LIABILITIES> 2,532,745
<BONDS> 0
0
0
<COMMON> 34,755,092
<OTHER-SE> (751,914)
<TOTAL-LIABILITY-AND-EQUITY> 2,286,799
<SALES> 4,749,351
<TOTAL-REVENUES> 4,749,351
<CGS> 1,512,871
<TOTAL-COSTS> 1,512,871
<OTHER-EXPENSES> 7,307,718
<LOSS-PROVISION> 329,359
<INTEREST-EXPENSE> 336,633
<INCOME-PRETAX> (3,671,027)
<INCOME-TAX> 5,984
<INCOME-CONTINUING> 3,677,011
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,677,011)
<EPS-PRIMARY> (3.30)
<EPS-DILUTED> (3.30)
</TABLE>
