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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
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[X] Annual Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 1998
[ ] Transition Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission file no.: 0-27878
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ADRENALIN INTERACTIVE, INC.
(Name of small business issuer in its charter)
DELAWARE 13-3779546
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
5301 BEETHOVEN STREET, SUITE 255, LOS ANGELES, CA 90066
(Address of principal executive offices) (Zip code)
ISSUER'S TELEPHONE NUMBER: (310) 821-7880
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the
Exchange Act:
Common Stock, par value $.01 per share, and Redeemable Warrants, entitling
the holder thereof the right to purchase one share of Common Stock
(Title of each class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No ____
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ ].
The issuer's revenues for its fiscal year ended June 30, 1998 were
$2,756,698.
The aggregate market value of shares of Common Stock held by
non-affiliates of the registrant as reported by the Nasdaq SmallCap Market on
September 15, 1998 was $5,282,141 (computed on the basis of $0.69 per share, the
approximate last reported sale price for shares of the Company's Common Stock on
the Nasdaq SmallCap Market as of such date).
As of September 15, 1998, the registrant had outstanding 8,750,271
shares of Common Stock and 2,930,624 Redeemable Warrants.
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PART I
ITEM 1. Description of Business.
GENERAL
The Company develops and sells or licenses toys and games delivered
over a wide range of consumer formats including electronic toys, video games,
CD-ROMs, interactive television software products and products for other
mediums.
The Company was incorporated in Delaware on May 17, 1994 as CD Kidz
Inc. On March 20, 1995, the Company's name was changed to Wanderlust
Interactive, Inc. On May 14, 1998, the Company's name was further changed to
Adrenalin Interactive, Inc. Unless the context otherwise requires, references to
the "Company" include CD Kidz Inc., Wanderlust Interactive, Inc. and the
Company's wholly-owned subsidiary, Western Technologies, Inc. ("Western").
MATERIAL DEVELOPMENTS DURING FISCAL 1996 AND 1997
In March 1996, the Company completed an initial public offering of its
Common Stock and the Redeemable Warrants, the net proceeds of which were used
principally to establish its New York headquarters and to produce two CD-ROM
games based upon the Pink Panther(TM) character, which games were completed in
September 1996 and September 1997, respectively. The Company initially marketed
such games through distributors in the United States and now licenses such games
for distribution by others both in the United States and in over fifteen foreign
countries.
In February 1997, the Company acquired all of the outstanding stock of
Western as well as certain assets and liabilities of Smith Engineering, a sole
proprietorship, from Jay Smith III, the Company's President, Chief Executive
Officer and Treasurer. Western designs and develops video and computer games and
electronic toys and electronic consumer products, mostly pursuant to funded
contracts with other name brand manufacturers.
MATERIAL DEVELOPMENTS DURING FISCAL 1998
After expending most of the funds raised in its initial public offering
to produce the two Pink Panther(TM) CD-ROM games during its fiscal years ended
June 30, 1996 and 1997, the Company realized that the development costs of such
CD-ROM games greatly exceeded both the short-term and long-term anticipated
revenue streams from such products and shifted its focus to pre-funded or
contract design and development work, such as that historically conducted by
Western. In September 1997, the Company substantially downsized its New York
office and shifted its headquarters to Western's offices located in Los Angeles.
In April 1998, the Company closed its New York office permanently, terminated
its New York office lease, subleased almost 50% of its Los Angeles office and
production space and consolidated its entire staff in its remaining Los Angeles
office and production space.
The Company made significant progress in bringing its expenses in line
with its revenues during its fiscal year ended June 30, 1998 ("Fiscal 1998") as
a result of its downsizing and change in focus, although the Company has not yet
attained profitability. During Fiscal 1998, the Company realized a loss of
$2,307,831. Of such loss, $931,014 was due to non-cash charges for depreciation
and amortization, $602,771 was due to non-cash charges for issuances of Common
Stock and warrants and options to purchase shares of Common Stock in exchange
for services and approximately $235,000 of non-recurring charges were due to the
Company's closure of its New York office.
During Fiscal 1998, the Company developed, or began developing, a
number of new games, toys and other miscellaneous products pursuant to funded
contracts with brand name manufacturers. In addition to payment for its
development work, the Company is entitled to receive bonus payments or royalties
for a majority of such products based upon the success of such products in the
marketplace. Such new products include the following:
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o TIGER WOODS PGA TOUR GOLF - The Company devoted a significant
amount of effort during Fiscal 1998 developing an interactive
video golf game pursuant to a funded development contract with
Electronic Arts. "Tiger Woods 99" is designed for use on Sony
PlayStations. Electronic Arts anticipates that the game will be
shipped commencing in the last calendar quarter of 1998. In
addition to milestone payments for its development work, the
Company is entitled to receive bonus payments based upon the
success of this product in the marketplace.
o TALK WITH ME BARBIE - During Fiscal 1998, the Company finalized
the development of a talking doll with interactive PC CD-ROM
capabilities allowing the doll's speech to be programmed. This
project was developed for and is currently being manufactured and
marketed by Mattel.
o INTERNET SPORTS GAMING - During Fiscal 1998, the Company
commenced developing proprietary software for use in interactive
games of skill and chance to be played on-line in games and
tournaments on the Internet pursuant to licenses of such
proprietary software which the Company anticipates marketing to
one or more offshore casino operators.
o BRUNSWICK BOWLING - During Fiscal 1998, the Company began
developing a second generation interactive video bowling game for
use on PCs and Sony PlayStations for ToHQ.
o LAUGH LICKS - The Company developed a candy dispensing novelty
item combining fun action features and innovative electronics
during Fiscal 1998. This product is being manufactured and
marketed by Target Games in various international markets.
O GAME OF OPERATION - During Fiscal 1998, the Company completed the
development of an electronic version of this classic board game
which the Company then sold to Hasbro Interactive.
o TRIVIAL PURSUIT - The Company commenced developing an interactive
TV version of this popular board game for Telia of Sweden during
Fiscal Year 1998, primarily for distribution to owners of new
digital TV systems.
o INTERNET TOYS - During Fiscal 1998, the Company developed
proprietary technology for linking toys and web sites on the
Internet in an easy and readily-accessible manner.
o TV MOUSE(TM) - The Company finalized its development of a
patented remote controller for use on PCs, interactive TV set-top
boxes and video game systems in Fiscal 1998. This product is
licensed to and being further developed into saleable products by
Reality Quest Corporation.
o THEME PARK ARCADE - During Fiscal 1998, the Company designed, and
anticipates being selected to develop and build, approximately 20
video arcade games for Universal Studios' theme park currently
being constructed in Japan.
o KISSIE KRISSIE DOLL - During Fiscal 1998, the Company developed a
doll which talks when it is kissed on its cheeks, forehead or
hands. This toy is licensed to Irwin Toys of Canada, primarily
for distribution in the United States and Canada.
o NASCAR SUPERSOUND SPEEDWAY - The Company created a slot car track
with sound effects in Fiscal 1998. This product is being
manufactured and marketed by Mattel.
o ELECTRONIC LEARNING AID TOY - During Fiscal 1998, the Company
began developing an electronic object recognition toy to serve as
a learning aid for toddlers and infants. When completed, this toy
will be manufactured and marketed by Educational Insights.
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BUSINESS STRATEGY
The Company's short-term strategy is to continue to principally work on
funded toy and game development projects. The Company hopes to create
longer-term revenues streams through the licensing of such products, the
continued licensing of the products and technology it has previously developed
or acquired and the adaptation of its existing and future products and
technology for licensing to new market segments. The Company believes this
strategy will enable it to expose its products and technology to larger markets
through the distribution and marketing capabilities of much larger name brand
manufacturers. Once the Company has established a more solid financial
foundation, it intends to attempt to increase its profit potential by investing
more of its own capital in the production and/or the joint venturing of future
products.
As a key part of its longer-term strategy, the Company also began
adapting its video game software technology during Fiscal 1998 for use in
interactive games of skill and chance played on-line in games and tournaments on
the Internet, where players can win cash prizes. During Fiscal 1998, the Company
entered into a non-binding agreement in principle with Netbet, Inc. ("NetBet")
to license the Company's technology and concepts to NetBet for a 50% share of
the net revenues generated by NetBet from games and tournaments utilizing such
technology and concepts. Netbet, which is a developer and licensor of Internet
gaming technology, has represented to the Company that it has an exclusive
agreement with Casinos of the South Pacific, an offshore on-line casino
operator, for 80% of the net revenues generated by such casino operator from
on-line gaming. Although the Company does not intend to get directly involved in
Internet gaming, the Company may well be indirectly affected by extensive local,
state, federal and foreign government legislation and regulation relating to the
ownership and operation of gaming facilities. Due to the relatively recent
development of casino wagering over the Internet, there is presently only
limited legislation and regulation that directly deals with on-line casino
wagering or gaming. However, the United States Senate recently passed, as an
amendment to an appropriations bill, legislation entitled the "Internet Gambling
Prohibition Act of 1997" (the "Proposed Law"). If enacted, the Proposed Law
would make it a crime for any person engaged in the business of betting or
wagering to engage in such business through the Internet or any other
interactive computer service in any state, the District of Columbia, Puerto Rico
or any other commonwealth, territory or possession of the United States. The
Proposed Law would also make it a crime for any person to make a bet or wager by
means of the Internet or any other interactive computer service in any such
jurisdiction. Furthermore, the Proposed Law would allow the United States
Attorney General or the attorney general (or other appropriate official) of any
such jurisdiction to institute civil proceedings against persons violating the
Proposed Law and to seek restraining orders, injunctions and other appropriate
actions to prevent persons from violating the Proposed Law. Finally, the
Proposed Law authorizes representatives of the United States government to
commence negotiations with foreign countries to adopt international agreements
that would enable the United States to enforce the Proposed Law against persons
who violate the Proposed Law from outside the United States. The Proposed Law
and/or any other legislation or regulation which prohibits or severely limits
the jurisdictions and/or manner in which on-line casinos are able to operate
could materially adversely affect the revenues that might otherwise be received
by the Company through the adaptation and licensing of its technology,
especially pursuant to revenue sharing agreements such as that proposed in the
Company's non-binding agreement in principle with NetBet.
As another key component of its longer-term growth strategy, the
Company intends to pursue one or more acquisitions of, or other business
combinations with, other companies. Execution of such acquisition growth
strategy will require the Company's management to, among other things: (i)
identify new markets or market segments in which the Company can successfully
compete; (ii) identify acquisition or business combination candidates who are
willing to enter into transactions at prices acceptable to the Company; (iii)
consummate any such identified acquisitions or other business combinations; and
(iv) obtain financing for any such future acquisitions or business combinations.
Certain risks are inherent in such a strategy, such as dilution of outstanding
equity securities, increased leverage and debt service requirements and the
difficulty in combining different company cultures and facilities, any of which
could materially adversely affect the Company's operating results or the market
price of the Common Stock prevailing from time to time. The success of any
completed acquisition or business combination will depend in part on the
Company's ability to effectively integrate the acquired or combining business,
which integration may involve unforeseen difficulties and may require a
disproportionate amount of management's attention and the Company's limited
financial and other resources.
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The Company is currently considering a few potential acquisition or
business combination candidates. However, no agreement, preliminary, definitive
or otherwise, with respect to any such potential acquisitions or business
combinations has been reached. From time to time, the Company has entered, and
in the future may continue to enter, into negotiations with respect to potential
acquisitions or business combinations, some of which may result in preliminary
agreements. In the course of the Company's negotiations and/or due diligence,
these negotiations and/or preliminary agreements may be abandoned or terminated.
No assurance can be given that the Company will complete any of the acquisitions
or business combinations currently under consideration, that additional suitable
acquisition or business combination candidates will be identified, that future
acquisitions or business combinations will be financed and made on acceptable
terms or that future acquisitions or business combinations, if completed, will
be successful.
As previously noted, the Company's business has changed significantly
since the Company's acquisition of Western, which has placed significant demands
on the Company's administrative, operational and financial resources. Any future
acquisition could place an additional strain on capacity, management and
operations.
MARKETING AND SALES
The Company relies primarily on Jay Smith III, its President, Chief
Executive Officer and Treasurer, and Michael Cartabiano, its Vice President and
Secretary, for sales and licensing of the Company's products and proposed
products to brand name manufacturers, distributors and licensees.
The Company relies on its contacts and relationships within the
industry to license its concepts and obtain development contracts. In addition,
it is constantly seeking new relationships and customers.
PRODUCT DEVELOPMENT
The development of the Company's products and product concepts is
generally performed in-house with the Company's full-time employees plus
occasional freelance artists, animators, writers or programmers. The Company
maintains a schedule and budgeting system designed to control development costs
and to meet deadlines.
The Company's product development capabilities include programming for
a variety of game systems including PCs, Sony PlayStations and Sega Saturn
systems. Artwork and graphics include two-dimensional animation for the Pink
Panther(TM) CD-ROM games developed by the Company and three-dimensional
animation and graphics for other games developed by the Company. Audio includes
sound effects, music and voiceover in a variety of formats. Producers direct the
design and development of each of the games and are involved in each step of
such development.
The Company also licenses the manufacturing and distribution of certain
its products to marketing firms, both domestic and international.
COMPETITION
The markets for the Company's products are characterized by intense
competition. The Company expects that companies which have developed similar
products, as well as other companies with the financial resources and expertise
that would enable them to attempt to develop competitive products, make it more
difficult for the Company to get contracts to develop such products. Many of the
Company's competitors such as Sega, Nintendo and Sony are well-established, have
much greater financial resources, much greater public and industry recognition
and much broader marketing capabilities than the Company. They also have the
ability to control the use of the Company's products on their proprietary
systems. The Company believes the principal competitive factors in its markets
are product quality, reliability, features, functions, creativeness,
performance, price, financial stability, product reputation, ease of use and
quality of support. A number of companies offer competitive products addressing
the Company's markets. There can be no assurance that the Company will be able
to compete successfully, or that competitors or others will not develop
technologies or products that render the Company's products or product concepts
obsolete or less marketable.
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INTELLECTUAL PROPERTY RIGHTS
The Company presently owns approximately 40 patents in various areas
ranging from circuit boards to toys. Some of the patents are mechanical design
patents, some are software or article patents and some are for basic technology
ranging from hardware to optical. The Company also has an aggregate of five
trademarks which are registered or in the process of being registered.
The Company has historically treated, and intends to continue to treat,
its products and product concepts and software as proprietary and will rely
primarily on a combination of trademark, copyright and trade secret laws and
employee and third-party nondisclosure agreements to protect its intellectual
property rights.
RESEARCH AND DEVELOPMENT
During the first quarter of Fiscal 1998, the Company spent $152,126 in
finalizing the development of the second of its Pink Panther(TM) CD-ROM games.
With the Company's shift in focus to pre-funded or contract design and
development work during fiscal 1998, the Company does not presently spend any
material amounts on research or development activities relating to new products
which it intends to own and market.
EMPLOYEES
As of June 30, 1998, the Company employed 20 people on a full-time
basis, including persons engaged in game design, writing, research, sound, art,
animation, computer programming, management and administration. At June 30,
1998, the Company also employed three persons as part-time employees. The
Company believes that its relations with employees are satisfactory.
ITEM 2. Description of Property.
The Company's presently leases approximately 13,140 square feet of
office and production space in Los Angeles, California pursuant to a
noncancellable lease expiring on January 31, 1999 at a current minimum monthly
rent equal to $14,600. In April 1998, the Company commenced subleasing almost
50% of such office and production space to two third-party sublessees through
January 31, 1999 for an aggregate of $6,427 in monthly rent. The Company's lease
provides for two one-year renewal options in favor of the Company at the
existing monthly rent plus a cost-of-living adjustment. The Company believes
that its present lease provides it with adequate space for the foreseeable
future; however, the Company may need to recapture all or a portion of its
subleased space commencing February 1, 1999 if the Company's business grows as
anticipated.
As noted above, the Company terminated its New York office lease as a
part of the down-sizing of its staff and facilities in or about April 1998 and
presently has no further liabilities in respect of such New York office lease.
ITEM 3. Legal Proceedings
The Company is not presently a party to any pending litigation.
ITEM 4. Submission of Matters to a Vote of Security Holders.
On May 12, 1998, the Company held its 1998 Annual Meeting of
Shareholders (the "1998 Annual Meeting"). Shareholders owning 3,924,205 shares
of the Company's issued and outstanding Common Stock as of the record date for
the 1998 Annual Meeting were present in person or by proxy at the 1998 Annual
Meeting. Such shareholders represented approximately 57.2% of the total shares
of the Company's Common Stock issued and outstanding as of such record date.
At the 1998 Annual Meeting, the following matters were acted upon:
(a) The Company's shareholders elected Jay Smith III, Thomas A. Schultz
and Robert A.D. Wilson as directors to hold office until the next annual meeting
of the Company's shareholders or until their resignation or
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removal in accordance with the Company's Bylaws or applicable law. The votes
cast in respect of such election of Directors were as follows:
<TABLE>
<CAPTION>
Votes
------------------------ Broker
Name For Against Non-Votes
---- ----- --------- ---------
<S> <C> <C> <C>
Jay Smith III 3,875,435 48,770 2,154,747
Thomas A. Schultz 3,875,435 48,770 2,154,747
Robert A.D. Wilson 3,875,435 48,770 2,154,747
</TABLE>
(b) The Company's shareholders also voted to approve the Board of
Directors' prior adoption of a proposal to change the Company's name from
Wanderlust Interactive, Inc. to Adrenalin Interactive, Inc. The votes on this
matter were 3,845,106 affirmative votes, 63,940 negative votes, 15,159
abstentions and 2,154,747 broker non-votes.
(c) The Company's shareholders also voted to approve the Board of
Directors' prior adoption of a proposal to amend the Company's Certificate of
Incorporation to increase the authorized number of shares of Common Stock from
10,000,000 shares to 20,000,000 shares and to effect a 3-for-1 reverse stock
split in respect of the Company's then issued and outstanding shares of Common
Stock. The votes on this matter were 3,792,375 affirmative votes, 115,900
negative votes, 15,930 abstentions and 2,154,747 broker non-votes.
Notwithstanding such vote, the Company's Board of Directors rescinded its prior
adoption of such 3-for-1 reverse stock split, effective as of the close of
business on May 20, 1998, inasmuch as the stated reason therefor set forth in
the Company's definitive proxy materials relating to the 1998 Annual Meeting
failed to materialize. As a result, no such 3-for-1 reverse stock split was
effected as a result of such vote, although the increase in the authorized
number of shares of Common Stock to 20,000,000 shares was effected.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) The Company's Common Stock and Redeemable Warrants are traded
on the Nasdaq SmallCap Market under the symbols "ADRN" and
"ADRNW", respectively.
The following table sets forth, for the Company's last two
fiscal years, the approximate high and low quarterly sales
prices for the Company's Common Stock and Redeemable Warrants
as reported by the Nasdaq SmallCap Market.
<TABLE>
<CAPTION>
Common Stock Redeemable Warrants
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Quarter Ended High Low High Low
------------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Fiscal 1997
September 30, 1996 $ 8.00 $ 6.00 $ 3.50 $ 2.25
December 31, 1996 7.00 4.06 2.75 0.75
March 31, 1997 5.50 2.31 1.25 0.25
June 30, 1997 2.44 0.63 0.38 0.06
Fiscal 1998
September 30, 1997 $ 1.19 $ 0.25 $ 0.25 $ 0.06
December 31, 1997 2.25 0.94 0.50 0.06
March 31, 1998 0.88 0.38 0.13 0.06
June 30, 1998 3.81 0.63 0.50 0.06
</TABLE>
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As noted above, the Company's Common Stock and Redeemable Warrants, each of
which Redeemable Warrants entitles the holder thereof the right to purchase one
share of Common Stock at a price equal to $7.00 per share and expires on March
20, 1999, are presently traded on the Nasdaq SmallCap Market. To maintain
inclusion on the Nasdaq SmallCap Market, the Company's Common Stock must
continue to be registered under Section 12(g) of the Exchange Act and the
Company must continue to have at least $2,000,000 in net tangible assets or
$500,000 in income in two of the last three years, a public float of at least
500,000 shares, $1,000,000 in market value of public float, a minimum bid price
of $1.00 per share, at least two market makers and at least 300 round-lot
stockholders.
On September 15, 1998, the last reported sale prices for the
Company's Common Stock on the Nasdaq SmallCap Market was approximately $0.69 per
share. If the Company's minimum bid price for its Common Stock remains under
$1.00 per share for 30 consecutive business days, Nasdaq will inform the Company
that it has 90 calendar days within which to regain compliance with such minimum
bid price requirement. To regain compliance, the minimum bid price for the
Company's Common Stock must remain at $1.00 or more for ten consecutive trading
days within such 90-day period. If the Company is unable to demonstrate
compliance with the minimum $1.00 bid price on or before the end of the such
90-day period, it would be required to submit to Nasdaq before the end of such
90-day period its proposals for achieving compliance. On the basis of the
information provided by the Company, Nasdaq would then determine whether or not
the Company may continue to be listed on the Nasdaq SmallCap Market. If the
Company is unable to satisfy the maintenance requirements for continued trading
on the Nasdaq SmallCap Market, of which there could be no assurance, it is
anticipated that the Company's Common Stock would be quoted in the
over-the-counter market National Quotation Bureau "pink sheets" or on the NASD's
OTC Electronic Bulletin Board. As a result, an investor may find it more
difficult to dispose of, or obtain, accurate quotations as to the market price
of the Company's Common Stock, which may materially adversely affect the
liquidity of the market for the Company's Common Stock. In addition, if the
Company's Common Stock is delisted from the Nasdaq SmallCap Market, it might be
subject to the low-priced security or so-called "penny stock" rules that impose
additional sales practice requirements on broker-dealers who sell such Common
Stock.
(b) On September 15, 1998, there were 148 holders of record of Common Stock
and 31 holders of record of Redeemable Warrants. The Company believes
that there are significantly more beneficial holders of its Common
Stock and Redeemable Warrants as almost 50% of its Common Stock and
virtually all of its Redeemable Warrants are held in "street" name.
(c) No cash dividends have been paid on the Company's Common Stock, and the
Company does not anticipate paying cash dividends on such Common Stock
in the foreseeable future.
(d) Recent Sales of Unregistered Securities.
1. See the Company's Quarterly Report on Form 10-QSB for its
third fiscal quarter ended March 31, 1998 (the "March 1998
Form 10-QSB") filed with the United States Securities and
Exchange Commission (the "SEC") on May 20, 1998 (pursuant to a
notification of late filing on Form 12b- 25) with respect to
the Company's sale of unregistered securities during the first
nine months of Fiscal 1998.
2. During the three-month period ended June 30, 1998, the Company
issued an aggregate of 199,620 shares of Common Stock to an
aggregate of five persons in exchange of the cancellation of
$102,500 principal amount of the Company's previously-issued
and outstanding convertible debentures plus $11,440 in accrued
but unpaid interest due thereon. Each of such five persons is
an "accredited investor" as defined in Rule 501(a) under the
Securities Act. No underwriter was employed in connection with
such issuances and no underwriting discounts or commissions
were paid in connection with such issuances. The issuances of
Common Stock to such five holders of the Company's
previously-issued and outstanding convertible debentures were
exempt from the registration requirements of the Securities
Act pursuant to Sections 3(a)(9) and/or 4(2) thereof.
3. During the three-month period ended June 30, 1998, the Company
successfully completed a private offering (first commenced in
October 1997) of a total of 1,200,000 shares of Common Stock
and warrants to purchase an additional 300,000 shares of
Common Stock (the "1997-98 Private Placement"). During such
three-month period, the Company issued a total of 250,000
shares of Common Stock and 62,500 warrants to purchase shares
of Common Stock to an
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aggregate of eight persons for total cash consideration equal
to $125,000. Each of the warrants is immediately exercisable
for a period of one year after its date of issuance at a price
equal to $1.25 per share of Common Stock covered thereby. Each
of such eight persons is an "accredited investor" as defined
in Rule 501(a) under the Securities Act. No underwriter was
employed in connection with the 1997-98 Private Placement. The
Company's issuance of its equity securities pursuant to the
1997-98 Private Placement was exempt from the registration
requirements of the Securities Act pursuant to Sections 4(2)
and/or 4(6) thereof.
4. Effective as of April 3, 1998, the Company issued an aggregate
of 335,500 shares of its Common Stock to 15 of the Company's
creditors at a price equal to $0.625 per share in cancellation
of an aggregate of approximately $209,688 owed by the Company
to such creditors for prior services rendered or products sold
to the Company. An aggregate of ten such creditors are
"accredited investors" as defined in Rule 501(a) of the
Securities Act. No underwriter was employed in connection with
such issuance and no underwriting discounts or commissions
were paid in connection therewith. The Company's issuance of
shares of its Common Stock to such 15 creditors was exempt
from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof.
5. Between April 3, 1998 and June 12, 1998, the Company issued
stock options to purchase an aggregate of 47,500 shares of
Common Stock to an aggregate of seven key employees pursuant
to the Company's 1995 Stock Option Plan. Each of such options
has a five-year term and vests approximately 33.4% as of the
date of grant, 33.3% as of the date which is one year after
the date of grant and 33.3% as of the date which is two years
after the date of grant. Options to purchase an aggregate of
37,500 such shares of Common Stock have an exercise price
equal to $0.625 per share and options to purchase an aggregate
of 10,000 shares of Common Stock have an exercise price equal
to approximately $1.09 per share. No underwriter was employed
in connection with the issuance of such stock options and no
underwriting discounts or commissions were paid in connection
therewith. The Company's issuance of such stock options to
such seven key employees was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2)
thereof and/or Rule 701 promulgated thereunder.
6. On May 12, 1998, the Company issued 220,000 shares of its
Common Stock at a deemed price equal to $0.625 per share to
Kayne International, Inc. ("Kayne"), a business consulting
company with which Thomas A. Schultz, a director of the
Company, is affiliated. The consideration for such shares was
the cancellation of indebtedness incurred by the Company to
Kayne for services rendered to the Company by Mr. Schultz on
behalf of Kayne pursuant to its consulting agreement with the
Company. On May 12, 1998, the Company also issued 25,000
shares of its Common Stock at a deemed price equal to $0.625
per share to Robert A.D. Wilson, a director of the Company, in
consideration of Mr. Wilson's agreement to provide six months
of consulting services to the Company pursuant to a consulting
agreement. On May 12, 1998, the Company also issued stock
options to purchase an aggregate of 50,000 shares of Common
Stock to each of Messrs. Schultz and Wilson in their
capacities as outside directors of the Company. Each of such
stock options has a five-year term, is exercisable at a price
equal to $0.625 per share of Common Stock covered thereby and
is 100% vested throughout the term of such options. No
underwriter was employed in connection with such issuances and
no underwriting discounts or commissions were paid in
connection with such issuances. The Company's issuances of its
equity securities to Kayne and Messrs. Schultz and Wilson were
exempt from the registration requirements of the Securities
Act pursuant to Section 4(2) thereof and/or Rule 701
promulgated thereunder.
7. Effective as of June 19, 1998, the Company issued an aggregate
of 71,352 shares of its Common Stock at a deemed price equal
to $1.00 per share to two persons in connection with the
settlement of a lawsuit filed in respect of a contract between
one of such persons and Jay Smith III d/b/a Smith Engineering.
The Company agreed to issue such 71,352 shares of its Common
Stock in connection with the settlement of such lawsuit
because of the fact that the benefits of the contract in
question had been received by the Company's subsidiary,
Western. No underwriter was employed in connection with such
issuance and no underwriting discounts or commissions were
-9-
<PAGE> 10
paid in connection therewith. The Company's issuance of such
shares of Common Stock to such two persons was exempt from the
registration requirements of the Securities Act pursuant to
Section 4(2) thereof.
8. Effective as of June 30, 1998, the Company successfully
completed a private offering of 625,000 shares of its Common
Stock to two offshore investors at a price equal to $0.80 per
share or an aggregate of $500,000. Each of such issuees was an
"accredited investor" as defined in Rule 501(a) under the
Securities Act. The Company did not employ any underwriter in
connection with such private placement . The Company's
issuance of such 625,000 shares of Common Stock to such two
offshore investors was exempt from the registration
requirements of the Securities Act pursuant to Sections 4(2)
and/or 4(6) thereof.
ITEM 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(a) Results of Operations.
During Fiscal 1998, the Company's revenues totaled $2,756,698,
an increase of $1,252,278, or approximately 83%, over the Company's revenues of
$1,504,420 for its fiscal year ended June 30, 1997 ("Fiscal 1997"). The Company
realized $1,806,497 in revenues from its toy and game development contracts
during Fiscal 1998 as compared to $613,887 in such revenues during Fiscal 1997,
which accounted for all of the Company's increase in total revenues during
Fiscal 1998. The Company's increased toy and game development contract revenues
are due to its ownership of Western for a full year and its shift in focus to
contract design and development work as opposed to production and sale of its
two Pink Panther(TM) CD-ROM games. Royalty income increased to $870,201 in
Fiscal 1998 as compared to $601,713 in Fiscal 1997. The Company experienced no
product sales in Fiscal 1998 as compared to $288,820 in product sales during
Fiscal 1997 as a result of the Company's decision to stop marketing its Pink
Panther(TM) games through distributors and to license such products for sale by
others in exchange for royalties.
The Company's expenses during Fiscal 1998 totaled $5,045,693
as compared to $5,990,816 during Fiscal 1997, a decrease of $954,123 or
approximately 16%. Although the Company's expenses related to its toy and game
development contracts increased to $1,533,917 during Fiscal 1998 as compared to
$716,280 in Fiscal 1997, such increase was more than offset by the reduction in
research and development expenses from $2,062,739 in Fiscal 1997 to $152,126 in
Fiscal 1998 and the elimination of product sale costs in Fiscal 1998 as compared
to $143,264 in Fiscal 1997 due to the completion of development of the two Pink
Panther (TM) games and the Company's decision to focus on contract development
work and to license rather than sell its two Pink Panther(TM) games. The
Company's selling, general and administrative expenses decreased slightly in
Fiscal 1998 to $2,367,973 from $2,413,834 in Fiscal 1997. Interest expense was
$60,663 in Fiscal 1998 as opposed to interest income of $37,086 in Fiscal 1997
and state income or franchise taxes were $18,836 in Fiscal 1998.
The Company's net loss of $2,307,831 for Fiscal 1998 was
approximately 49% less than its net loss of $4,486,396 for Fiscal 1997. Such
improvement was principally due to a combination of higher revenues and the
reduction in the Company's research and development costs. An aggregate of
$931,014 of such losses were the result of non-cash charges for depreciation and
amortization of intangibles, including amortization for the Company's patents
and patent licenses, the write-off of advance royalties and amortization of
goodwill as a result of the Company's acquisition of Western. Another $602,771
of such losses resulted from non-cash charges for the issuance of shares of
Common Stock and warrants and options to purchase shares of Common Stock in
exchange for consulting and capital raising services. Moreover, approximately
$235,000 of such losses were due to the one-time costs incurred by the Company
in downsizing and subsequently eliminating its New York staff, closing its New
York office, terminating of its New York lease and shifting its administrative
operations to Western's location in Los Angeles.
Due to its continued losses in Fiscal 1998, the Company had an
accumulated deficit of $9,151,051 at June 30, 1998 as compared to an accumulated
deficit of $6,843,220 at June 30, 1997.
-10-
<PAGE> 11
(b) Liquidity and Capital Resources.
During Fiscal 1998, the Company substantially improved its
balance sheet. During such year, the Company raised net proceeds of $832,925 in
two private placements of its equity securities and retired all of its remaining
$265,000 principal amount of convertible debentures (and all accrued but unpaid
interest due thereon), repaid another $60,547 in notes payable, paid $240,123 in
accounts payable and obtained another $276,626 worth of services rendered, all
through the issuance of additional shares of the Company's Common Stock. The
Company also issued 285,000 shares of Common Stock and 900,000 warrants to
purchase shares of Common Stock as partial consideration for capital raising
services provided by two financial consultants (See Item 5(d)(1)).
As a result of such efforts, the Company had cash and
subscriptions receivable (which were funded in July 1998) totaling $601,363 as
compared to cash and cash equivalents of $288,761 at the end of Fiscal 1997. The
Company also had positive working capital of $142,404 at June 30, 1998 as
opposed to a working capital deficit of $1,116,839 at June 30, 1997, an
improvement of $1,259,243 during Fiscal 1998. The Company's working capital
ratio of approximately 1.2-to-1 as of the end of Fiscal 1998 was also
significantly improved compared to its approximately 0.3-to-1 ratio as at the
end of Fiscal 1997.
As a result of continued losses and/or the Company's anticipated growth
during Fiscal 1999 as outlined below, the Company may require additional debt
and/or equity financing in order to accomplish its short-term or longer-term
business objectives. The Company has no preliminary or definitive agreement to
complete such additional financing with any other person or persons.
Accordingly, there can be no assurance that the Company will be able to raise
any such required additional capital. In addition, the Company's ability to
successfully complete any such future debt and/or equity financing will depend
upon its then current financial condition, results of operations and future
prospects as well as market conditions at the time such additional debt and/or
equity financing is consummated. Many of the factors which will influence the
Company's ability to conduct a future financing are outside of the control of
the Company. For these reasons, there can be no assurance that the Company will
successfully complete any equity and/or debt financing. In that event, the
Company may not have the ability to continue its ongoing business operations.
(c) Business Prospects for Fiscal 1999.
The Company anticipates that its revenues for its first
quarter of Fiscal 1999 will be significantly lower than its revenues for the
remainder of Fiscal 1999, primarily because the Company will have wound up a
number of its funded development contracts during such quarter and because its
royalty income typically bottoms out during such quarter.
The Company's management believes, however, that the Company's
revenues and gross profit margins will increase substantially during the last
three quarters of Fiscal 1999. The Company's optimism is based primarily upon
the fact that the Company may receive significant bonus payments based upon
sales of the Sony PlayStation version of "Tiger Woods 99" in the latter part of
Fiscal 1999 in addition to ongoing royalties in respect of its other products
and the fact that the Company believes that it will be awarded between four and
six new toy and game development contracts during Fiscal 1999 which will result
in significant revenues being realized during such year.
In this regard, Sega is expected to introduce its
Dreamcast(TM) system, the next generation of video game console, during calendar
1999. During Fiscal 1999, the Company anticipates participating in the creation
of video games for this new system, either as a first-party developer directly
for Sega and/or as a developer for third-party software publishers such as ToHQ
or Electronic Arts (for whom Western has developed a number of products in
recent years). Between 1992 and 1995, Western developed a number of video games
for Sega's prior generation Genesis(TM) video game console system.
The Company also intends to actively market a prototype of its
proposed interactive sports games of skill and chance for license to offshore
casino operators conducting on-line sports games and tournaments on the Internet
during the latter half of Fiscal 1999.
-11-
<PAGE> 12
The Company also recently signed a joint venture agreement
with MagniTech Studios to provide its proprietary technology and concepts in
connection with the creation, licensing, production and marketing of toys used
with interactive web sites on the Internet. The first of these toys is expected
to be introduced to the market in the second half of Fiscal 1999.
If the Company's business grows significantly during Fiscal
1999, the Company will need to increase its capital spending, primarily for new
computer hardware and software utilized by the Company's design and production
staff. The Company will also need to hire additional personnel and may need to
increase its office and production space by utilizing all or a significant
portion of the office space which it presently subleases out to two third
parties and which becomes available to it again commencing in February 1999.
(d) Year 2000 Compliance.
The Company is working to resolve the potential impact of the
year 2000 on the ability of the Company's computerized information systems to
accurately process information that may be date-sensitive. Any of the Company's
programs that recognize a date using "00" as the year 1900 rather than the year
2000 could result in errors or system failures. The Company utilizes a number of
computer programs across its entire operation. The Company has not completed its
assessment, but currently believes that costs of addressing this issue will not
have a material adverse impact on the Company's financial position. However, if
the Company and third parties upon which it relies are unable to address this
issue in a timely manner, it could result in a material financial risk to the
Company. In order to assure that this does not occur, the Company plans to
devote all resources required to resolve any significant year 2000 issues in a
timely manner.
SAFE HARBOR STATEMENT
Statements contained herein which are not historical facts,
including statements about the Company's confidence and business strategies and
its expectations about existing products and product development opportunities,
market and industry segment growth, demand for and acceptance of existing
products and product concepts, are forward looking statements that involve risks
and uncertainties. These include, but are not limited to, product demand and
market acceptance risks; the impact of competitive products and pricing; the
results of financing efforts; the loss of any significant customers; the effect
of the Company's accounting policies; the effects of economic conditions and
trade, legal, social and economic risks such as import, licensing and trade
restrictions; the results of the Company's execution of its business plan and
the impact on the Company of its relationships with its lenders, investors,
customers and vendors.
ITEM 7. Financial Statements.
The Company's financial statements listed below are included on pages
F-1 through F-21 following the signature page to this report:
TITLE OF DOCUMENT PAGE
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED BALANCE SHEET F-2
June 30, 1998
CONSOLIDATED STATEMENTS OF OPERATIONS F-3
Years Ended June 30, 1998 and 1997
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY F-4
Years Ended June 30, 1998 and 1997
CONSOLIDATED STATEMENTS OF CASH FLOWS F-6
Years Ended June 30, 1998 and 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
Years Ended June 30, 1998 and 1997
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
-12-
<PAGE> 13
(a) Information Relating to Executive Officers and Directors.
The following table sets forth certain information relating to the
Company's current executive officers and directors:
<TABLE>
<CAPTION>
POSITION(S) WITH
NAME AGE THE COMPANY
---- --- -----------------
<S> <C> <C>
Jay Smith III 58 President, Chief Executive
Officer, Treasurer and
Director
Michael Cartabiano 47 Vice President and
Secretary
Thomas A. Schultz 47 Director
Robert A.D. Wilson 47 Director
</TABLE>
JAY SMITH III. Mr. Smith has been a director of the Company since
February 1997. In May 1997, Mr. Smith was appointed President, Chief Executive
Officer and Treasurer of the Company. Mr. Smith also served as Secretary of the
Company from September 1997 to May 1998. Prior to the Company's acquisition of
Western, Mr. Smith served as the founder, President and sole shareholder of
Western. Mr. Smith was also the sole owner of Smith Engineering. Mr. Smith owned
and operated Western and Smith Engineering for approximately 17 years and 23
years, respectively, prior to the Company's acquisition of the stock of Western
and certain of the assets of Smith Engineering in February 1997. Mr. Smith has
over 30 years' experience in engineering, invention and research and development
in the electronic toy and game industry and mechanical and electronic consumer
products. Prior to establishing Western and Smith Engineering, Mr. Smith served
as a founding partner of California R&D Center, the Vice President of
Engineering of Innova, Inc., a toy and doll designer for Mattel Toys and a
member of the Space Program Technical staff at TRW, Inc. Mr. Smith holds a B.S.
Degree in Engineering Mechanics from Virginia Institute of Technology and an
M.S. Degree in Applied Mechanics with California Institute of Technology.
MICHAEL CARTABIANO. Mr. Cartabiano's association with Western began in
1994. In February 1997, Mr. Cartabiano was appointed to manage the Company's toy
and game group. Mr. Cartabiano was appointed as the Company's Vice President in
February 1998 and as the Company's Secretary in May 1998. Mr. Cartabiano has
approximately 25 years of experience in the consumer products industry having
previously held the position of Vice President of Design for Mattel Toys in El
Segundo, California from 1987 to 1993. Mr. Cartabiano has also held research and
development management positions at Tonka Toys in Minnetonka, Minnesota, Milton
Bradley Games in East Longmeadow, Massachusetts, and Hasbro Products in
Pawtucket, Rhode Island. Mr. Cartabiano earned his B.S. degree from the
University of Bridgeport in Connecticut in 1973.
THOMAS A. SCHULTZ. Mr. Schultz first became a director of the Company
in October 1997. Mr. Schultz, who is affiliated with Kayne International, Inc.,
a business consultant to the Company, has served as the President and Chief
Executive Officer of Vista Technologies, Inc., a public surgical center, since
February 1996. Mr. Schultz was also a founder and the Chairman/Chief Executive
Officer of Crystallume Inc., a public company, from February 1986 to January
1996. Mr. Schultz received his M.B.A. with distinction from Harvard Business
School and his B.E.S. (Summa cum laude) from Johns Hopkins University.
ROBERT A.D. WILSON. Mr. Wilson first became a director of the Company
in November 1997. Mr. Wilson has been Chairman and majority owner of Sound
Technology PLC, an electronics distribution company located in the United
Kingdom, since 1978. In addition, Mr. Wilson serves as Vice Chairman of Alesis
Studio Electronics, Inc., an international manufacturing and marketing company
for studio electronics located in California. Currently, Mr. Wilson is a
director of Business Link, a United Kingdom government sponsored initiative to
new and emerging industries, and is Chairman of the British Music Fairs Ltd., as
well as past President of the Music Industries Association.
-13-
<PAGE> 14
There are no family relationships among any of the Company's directors
or executive officers.
(b) Section 16(a) Reporting Delinquencies.
The following executive officers, directors and beneficial owners of
more than 10% of the Company's issued and outstanding Common Stock failed to
file on a timely basis one or more reports required to be filed by them under
Section 16(a) of the Exchange Act during or with respect to Fiscal 1998:
<TABLE>
<CAPTION>
NAME OF EXECUTIVE NUMBER OF
OFFICER, DIRECTOR OR NUMBER OF LATE TRANSACTIONS
10% BENEFICIAL OWNER CAPACITY OR CAPACITIES REPORTS FILED REPORTED LATE
- - - -------------------- ---------------------- ----------------- -------------
<S> <C> <C> <C>
Jay Smith III President, Chief Executive
Officer, Treasurer, Director
and 10% shareholder 2 2
Michael Cartabiano Vice President and Secretary 1 3
Thomas A. Schultz Director 2 2
Robert A.D. Wilson Director 4 3
</TABLE>
As of the date hereof, the Company is not aware of the continued
failure of any of the foregoing persons to file such required reports.
(c) Executive Officer and Director Compensation.
1. The following Summary Compensation Table sets forth the names,
positions and annual compensation paid by the Company for each of the Company's
fiscal years ended June 30, 1998, 1997 and 1996 to Jay Smith III, its President,
Chief Executive Officer and Treasurer, and Michael Cartabiano, its only other
executive officer or key employee whose aggregate annual compensation exceeded
$100,000 during Fiscal 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------------- -------------------
SECURITIES ALL OTHER
FISCAL SALARY BONUS UNDERLYING OPTIONS COMPENSATION
NAME AND POSITION(S) YEAR ($) ($) (#) ($)
- - - -------------------- ----- -------- ------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Jay Smith III, President, 1998 150,000 -0- 700,000 $23,461(1)
Chief Executive Officer, 1997 57,775(2) -0- -0- -0-(3)
Treasurer and Director 1996 n/a n/a n/a n/a
Michael Cartabiano, 1998 118,240 -0- -0- -0-(4)
Vice President and 1997 n/a n/a n/a n/a
Secretary 1996 n/a n/a n/a n/a
</TABLE>
- - - --------------------------
(1) Reflects legal fees and costs paid by the Company in respect of the
defense of a lawsuit against Mr. Smith d/b/a Smith Engineering, but
excludes $143,403 received by Mr. Smith pursuant to his license
agreement with Western (See Item 12(a)).
-14-
<PAGE> 15
(2) Reflects Mr. Smith's salary from February 1997 through June 30, 1997
after the Company's acquisition of Western (See Item 9(d)(2)).
(3) Excludes $69,928 received by Mr. Smith pursuant to his license
agreement with Western (See Item 12(a)).
(4) Excludes $55,200 received by Mr. Cartabiano pursuant to a
royalty-sharing arrangement with Western entered into prior to the
Company's acquisition of Western in February 1997 and subsequently
modified and supplemented (See Item 12(b)).
2. The following table sets forth certain information with respect to
all stock options granted by the Company during Fiscal 1998 to Messrs. Smith and
Cartabiano:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES EXERCISE
GRANTED IN FISCAL PRICE EXPIRATION
NAME (#) YEAR ($/SH) DATE
---- ---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Jay Smith III 700,000 74.4% $0.625 12/15/07
Michael Cartabiano 1,000 0.1% 0.625 12/15/02
175,000 18.6% 0.469 02/10/03
</TABLE>
3. The following table sets forth certain information with respect to
the exercise of stock options during Fiscal 1998 and the value of unexercised
stock options held by Messrs. Smith and Cartabiano at the end of Fiscal 1998:
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END (FYE) OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT FYE ($)
SHARES ACQUIRED AT FYE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) VALUE REALIZED UNEXERCISABLE UNEXERCISABLE (1)
- - - ---- -------------- -------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Jay Smith III None n/a 189,499/543,001 124,122/355,666
Michael Cartabiano None n/a 67,634/126,366 53,337/100,858
</TABLE>
- - - -----------------
(1) Represents the last reported sale price for the Company's Common Stock at
June 30, 1998 of approximately $1.28, as reported by the Nasdaq SmallCap Market,
less the applicable exercise prices for such options.
-15-
<PAGE> 16
4. The following table sets forth certain information with respect to
the compensation paid by the Company during Fiscal 1998 to each of Thomas A.
Schultz and Robert A.D. Wilson, the Company's two outside directors:
DIRECTOR COMPENSATION FOR LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF
ANNUAL SECURITIES
RETAINER MEETING CONSULTING FEES/ NUMBER OF UNDERLYING
NAME FEES ($) FEES($) OTHER FEES ($) SHARES (#) OPTIONS (#)
- - - ---- -------- ------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Thomas A. Schultz None None 163,000(1) None 50,000(2)
Robert A.D. Wilson None None 15,625(3) None 50,000(2)
</TABLE>
- - - ------------------
(1) Reflects consulting fees paid by the Company to Kayne, a business
consulting firm with which Mr. Schultz is affiliated, pursuant to
Kayne's consulting agreement with the Company, which consulting fees
include $25,500 in cash and $137,500 representing the issuance date
value of 220,000 shares of the Company's Common Stock sold to Kayne in
lieu of accrued but unpaid consulting fees due Kayne pursuant to such
consulting agreement (See Items 5(d)(6) and 12(d)).
(2) Each of these stock options has a term equal to five years expiring May
11, 2003, is exercisable at a price equal to $0.625 per share of Common
Stock covered thereby and is 100% vested throughout the term thereof
(See Items 5(d)(6) and 12(e)).
(3) Reflects the issuance date value of 25,000 shares of the Company's
Common Stock issued by the Company to Mr. Wilson in exchange for Mr.
Wilson's agreement to provide consulting services to the Company for a
period of six months ending October 10, 1998 (See Item 5(d)(6)).
(d) Executive Officer Employment Contracts.
1. On December 16, 1997, the Company entered into a three-year
employment agreement with Mr. Smith (the "Smith Employment Agreement"). The
Smith Employment Agreement provides that he will serve as President and Chief
Executive Officer of the Company and receive a base salary of $150,000 per year
for his services. Mr. Smith is also entitled to receive bonuses based upon the
Company's achievement of its goals as determined by the Company's Board of
Directors. The Smith Employment Agreement also provides that Mr. Smith will
devote all of his business time, attention and energy to the Company and will be
subject to a one-year covenant not to directly compete with the Company after
his relationship with the Company ends. Mr. Smith is also entitled to
participate in all group health and insurance programs and other fringe benefits
or retirement plans available to other employees of the Company.
The Smith Employment Agreement automatically terminates upon Mr.
Smith's death, permanent disability or involuntary termination for cause. If Mr.
Smith is terminated without cause (which is deemed to include Mr. Smith's
resignation after the Company: (a) reduces his monthly base compensation by more
than 25% other than as a result of a decrease in the compensation of all
executive officers of the Company based upon the Company's financial
performance; (b) significantly changes Mr. Smith's duties, responsibilities,
authority, powers or functions; (c) requires Mr. Smith to relocate to an office
more than 25 miles from the Company's current executive offices in Los Angeles;
or (d) fails to perform any of its material obligations to Mr. Smith), the
Company will be obligated to: (i) pay Mr. Smith a lump-sum payment equal to
$150,000; (ii) continue to provide Mr. Smith's other employment benefits at the
Company's expense 12 months; (iii) enter into a post-termination consulting
agreement with Mr. Smith pursuant to which Mr. Smith will be required to provide
no more than 10 hours of consulting services per week to the Company and will be
entitled to receive the sum of $150 for each hour actually worked; and (iv)
grant
-16-
<PAGE> 17
Mr. Smith a 120-day exclusive option to repurchase all of the stock of Western
for Western's then net book value as reflected on the Company's books and
records.
The Smith Employment Agreement also provided that Mr. Smith was to be
awarded stock options to purchase up to 700,000 shares of the Company's Common
Stock at an exercise price equal to $0.625 per share. Such options have a
10-year term and become exercisable at the rate of 58,333 shares at the end of
each calendar quarter of Mr. Smith's employment under the Smith Employment
Agreement from and after December 16, 1997.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of September 15, 1998, the number of
shares of the Company's Common Stock held of record or beneficially: (i) by each
person who held of record, or was known by the Company to own beneficially, more
than 5% of the outstanding shares of the Company's Common Stock; (ii) by each of
the Company's current executive officers and directors; and (iii) by all of the
Company's current executive officers and directors as a group:
<TABLE>
<CAPTION>
PERCENT OF
NAMES AND ADDRESS NUMBER OF OUTSTANDING SHARES
OF BENEFICIAL OWNER SHARES OWNED (1) OF COMMON STOCK(2)
------------------- ---------------- -------------------
<S> <C> <C>
Jay Smith III
5301 Beethoven St.
Los Angeles, CA 90066 980,294(3) 10.9%
Michael Cartabiano
5301 Beethoven St.
Los Angeles, CA 90066 64,300(4) 0.7%
Thomas A. Schultz
480 Cowper Street
Palo Alto, CA 94301 270,000(5) 3.1%
Robert A.D. Wilson
Letchworth Point
Dunhams Lane
Letchworth, Hertfordshire
SG6 1 ND England 192,532(6) 2.2%
All current executive officers
and directors as a group
(four persons) 1,507,126(7) 16.4%
</TABLE>
------------------------
(1) Except as otherwise indicated and subject to applicable
community property and similar statutes, the persons listed as
beneficial owners of the shares of Common Stock have sole
voting and dispositive power with respect of such shares.
(2) For purposes of computing the percentages, the number of
shares of Common Stock outstanding includes shares purchasable
within 60 days upon exercise of outstanding stock options, as
follows: Mr. Smith (247,832 shares), Mr. Cartabiano (64,300
shares), Mr. Schultz (50,000 shares), Mr. Wilson (50,000
shares) and all executive officers and directors as a group
(412,132 shares).
-17-
<PAGE> 18
(3) Includes 732,462 shares of Common Stock owned of record by a
family trust established for the benefit of Mr. Smith and his
spouse and 247,832 shares purchasable within 60 days upon
exercise of outstanding stock options.
(4) All of the shares of Common Stock beneficially owned by Mr.
Cartabiano are shares purchasable within 60 days upon exercise
of outstanding stock options.
(5) Includes 220,000 shares of Common Stock owned by Kayne
International, Inc., a business consultant to the Company with
which Mr. Schultz is affiliated, and 50,000 shares purchasable
within 60 days upon exercise of outstanding stock options.
(6) Includes 50,000 shares purchasable within 60 days upon
exercise of outstanding options.
(7) Includes 412,132 shares of Common Stock purchasable within 60
days upon exercise of outstanding stock options.
ITEM 12. Certain Relationships and Related Transactions.
(a) In February 1997, the Company acquired all of the issued and
outstanding capital stock of Western and certain of the assets and liabilities
of Smith Engineering from Jay Smith III, the Company's President, Chief
Executive Officer and Treasurer, in exchange of 800,000 shares of the Company's
Common Stock. As a part of such acquisition, Western entered into a license
agreement with Mr. Smith (the "Smith License Agreement") pursuant to which Mr.
Smith granted to Western the exclusive right to use and market patents and
license agreements owned by Mr. Smith and Smith Engineering. The Smith License
Agreement provides that 75% of the revenues of such patents and licenses are to
be retained by Western and 25% are to be retained by Mr. Smith until Mr. Smith
receives the aggregate sum of $2,000,000 from such patents and licenses, after
which time no further revenue is to inure to Mr. Smith and the patents and
licenses will be assigned to Western. During Fiscal 1998, Mr. Smith received an
aggregate of $143,303 in revenues pursuant to the Smith License Agreement.
During the Company's fiscal year ended June 30, 1997, Mr. Smith received an
aggregate of $69,928 in revenues pursuant to the Smith License Agreement for the
approximately five-month period subsequent to the date of the Company's
acquisition of Western.
(b) Michael Cartabiano, the Vice President and Secretary of the
Company, is entitled to share in certain royalties generated by the Company in
respect of certain products created by him pursuant to an arrangement entered
into between Mr. Cartabiano and Western prior to the Company's acquisition of
Western, which arrangement has been modified and supplemented subsequent to the
Company's acquisition of Western. During Fiscal 1998, Mr. Cartabiano received an
aggregate of $55,200 in revenues pursuant to such arrangement.
(c) Effective as of June 30, 1997, the Company entered into a
settlement agreement with Ms. Catherine Winchester, the Company's former
President (the "Winchester Settlement Agreement"). The Winchester Settlement
Agreement provided for the cancellation of Ms. Winchester's employment
agreement, dated November 7, 1995, with the Company and the cancellation of her
stock option agreement, dated January 20, 1997, with the Company to purchase
200,000 shares of the Company's Common Stock. Pursuant to the Winchester
Settlement Agreement and a related consulting agreement, the Company agreed to
retain Ms. Winchester as a consultant for a one-year period ended June 30, 1998
pursuant to which Ms. Winchester was to make herself available for up to 20
hours of consulting services per month and for which she was paid a fee of
$5,000 per month or an aggregate of $60,000. The Company further agreed to issue
50,000 shares of its Common Stock to Ms. Winchester in consideration of her
execution of the Winchester Settlement Agreement. Ms. Winchester is also
obligated not to disclose any confidential information of the Company, not to
acquire as her own any program, discovery, process or invention she made or
developed during her engagement as a consultant by the Company and not to
compete with the Company for a period of six months following the termination of
her consultancy with the Company pursuant to the Winchester Settlement Agreement
and the related consulting agreement. Except for such ongoing obligations, the
Winchester Settlement Agreement also provided for the mutual general releases of
the Company and Ms. Winchester.
-18-
<PAGE> 19
(d) On November 18, 1997, the Company entered into a consulting
agreement with Kayne International, Inc., a business consulting firm with which
Thomas A. Schultz, a director of the Company, is affiliated (the "Kayne
Consulting Agreement"). The Kayne Consulting Agreement, which was extended on
April 21, 1998 and August 31, 1998 and which presently expires on December 31,
1998, provides that the Company will pay Kayne the sum of $1,500 per day plus
expenses for the business consulting services rendered to the Company by Mr.
Schultz on behalf of Kayne. During the Fiscal 1998, the Company paid Kayne the
sum of $163,000 in fees for the consulting services performed by Mr. Schultz
under the Kayne Consulting Agreement (which sum includes the issuance date value
of an aggregate of 220,000 shares of the Company's Common Stock issued to Kayne
on May 12, 1998 at a price equal to $0.625 per share in lieu of previously
accrued but unpaid consulting fees due Kayne thereunder).
(e) On February 11, 1998, the Company issued stock options to purchase
up to 175,000 shares of the Company's Common Stock to Michael Cartabiano, the
Company's Vice President and Secretary, pursuant to the Company's 1995 Stock
Option Plan. The exercise price for such options is approximately $0.47 per
share. Such options have a term equal to five years from and after the date of
grant and vest as to 58,300 of the shares covered thereby on the date of grant,
58,300 of the shares covered thereby on the date which is one year after the
date of grant and 58,400 of the shares covered thereby on the date which is two
years after the date of grant.
ITEM 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Certificate of Incorporation, as amended, incorporated by
reference from Exhibit 3.1 to the Company's Registration
statement on Form SB-2, No. 333-00178 (the "1996 Registration
Statement").
3.2 Certificate of Amendment of Certificate of Incorporation,
filed with the Delaware Secretary of State on May 14, 1998,
incorporated by reference from Exhibit 3.1 to the Company's
Current Report on Form 8-K, dated June 3, 1998 (the "1998 Form
8-K").
3.3 Bylaws, as amended, incorporated by reference from Exhibit 3.2
to the 1996 Registration Statement.
4.1 Form of Underwriter's Warrant Agreement, including the form of
Underwriter's Warrant, incorporated by reference from Exhibit
4.1 to the 1996 Registration Statement.
4.2 Form of Warrant Agreement between the Company and the Warrant
Agent, including form of Redeemable Warrant, incorporated by
reference from Exhibit 4.2 to the 1996 Registration Statement
4.3 Form of Warrant issued to affiliates and transferees of
Mackenzie Shea, Inc. ("MSI"), incorporated by reference from
Exhibit 4.1 to the Company's March 1998 Form 10-QSB.
4.4 Form of Warrant issued in connection with a bridge financing
in 1995, incorporated by reference from Exhibit 4.4 to the
1996 Registration Statement.
4.5 Form of Incentive Stock Option Agreement issued pursuant to an
aggregate of 20 of the Company's executive officers and key
employees pursuant to the Company's 1995 Stock Option Plan,
incorporated by reference from Exhibit 4.2 to the Company's
March 1998 Form 10-QSB.
4.6 Form of Nonqualified Stock Option Agreement issued to an
aggregate of five of the Company's outside directors, business
consultants and other service providers, incorporated by
reference from Exhibit 4.3 to the Company's March 1998 Form
10-QSB.
-19-
<PAGE> 20
4.7 Form of Warrant issued to Lloyd Wade Securities, Inc. ("LWSI")
and three of its principals, incorporated by reference from
Exhibit 4.4 to the Company's March 1998 Form 10-QSB.
4.8 Form of Warrant Agreement and Warrant Certificate issued to
investors in the 1997-98 Private Placement, incorporated by
reference from Exhibit 4.2 to the Company's Registration
Statement on Form S-3, No. 333-60485 (the "1998 Registration
Statement").
4.9 Form of Warrant to Purchase Common Stock issued to affiliates
and transferees of MSI, incorporated by reference from Exhibit
4.3 to the Company's 1998 Registration Statement.
10.1 Agreement, dated October 1, 1997, as amended on July 10, 1998,
with MSI relating to business consulting services provided by
MSI to the Company.
10.2 Letter Agreement, dated November 18, 1997, as amended on April
21, 1998 and August 31, 1998, with Kayne relating to
management consulting services provided by Kayne to the
Company.
10.3 Employment Agreement, dated December 16, 1997, with Jay Smith
III, incorporated by reference from Exhibit 10.1 to the
Company's March 1998 Form 10-QSB.
10.4 Investment Banking Agreement, dated January 14, 1998, as
amended on June 29, 1998 , with LWSI.
10.5 Consulting Agreement, dated April 10, 1998, with Robert A.D.
Wilson relating to general consulting services provided by Mr.
Wilson to the Company.
10.6 Agreement for License to Share Revenue and Technology, dated
June 16, 1998, with Netbet, Inc.
10.7 Settlement Agreement and Mutual Release, dated June 17, 1998,
with Rogue Studios, Inc.
10.8 Optional Advance Note ("Variable Note") for $400,000 Plus
Interest, dated June 30, 1998, issued in favor of Bay Area
Financial Corporation.
10.9 License Agreement with MGM/UA Licensing and Merchandising, a
division of Metro-Goldwyn- Mayer Inc. ("MGM/UA"), dated May
25, 1995, as amended, incorporated by reference from Exhibit
10.2 to the 1996 Registration Statement.
10.10 Amendments to the License Agreement with MGM/UA, dated October
26, 1995, May 2, 1996 and May 31, 1996 , incorporated by
reference from Exhibit 10.3 of the Company's Form 10-KSB for
its fiscal year ended June 30, 1996 (the "1996 Form 10-KSB").
10.11 Form of Sublicense Agreement between the Company and its
international sublicensees, incorporated by reference from
Exhibit 10.10 of the Company's 1996 Form 10-KSB.
10.12 1995 Stock Option Plan, as amended, incorporated by reference
from Exhibit 10.4 to the 1996 Registration Statement.
10.13 Amendment No. 2 to 1995 Stock Option Plan, dated December 1,
1997.
10.14 1996 Stock Option Plan, incorporated by reference from Exhibit
A to the Company's definitive proxy materials in respect of
the Company's 1996 annual meeting of shareholders.
10.15 Amendment No. 2 to 1996 Stock Option Plan, dated December 1,
1997.
10.16 Acquisition Agreement among the Company, Western and Jay Smith
III d/b/a Smith Engineering, dated as of December 30, 1996,
incorporated by reference from Exhibit 7(c)(1) of the
Company's Current Report on Form 8-K, dated February 4, 1997
(the "1997 Form 8-K").
-20-
<PAGE> 21
10.17 License Agreement between Western and Jay Smith III, dated
February 4, 1997, incorporated by reference from Exhibit
7(c)(2) of the Company's 1997 Form 8-K.
10.18 Settlement Agreement, dated as of June 30, 1997, with Ms.
Catherine Winchester, incorporated by reference from Exhibit
10.12 to the Company's Form 10-KSB for its fiscal year ended
June 30, 1997 (the "1997 Form 10-KSB")
10.19 Consulting Agreement, dated as of July 1, 1997, with Ms.
Catherine Winchester, incorporated by reference from Exhibit
0.13 to the Company's 1997 Form 10-KSB.
10.20 Software Development and License Agreement, dated May 30,
1997, with Telia InfoMedia Television AB, incorporated by
reference from Exhibit 10.15 to the Company's 1997 Form
10-KSB.
10.21 Software Programming Services Agreement, dated April 11, 1997,
with ToHQ, Inc., incorporated by reference from Exhibit 10.16
to the Company's 1997 Form 10-KSB.
10.22 Consulting Agreement, dated June 1997, with Electronic Arts,
Inc., incorporated by reference from Exhibit 10.17 to the
Company's 1997 Form 10-KSB.
21 Subsidiaries of the Company, incorporated by reference from
Exhibit 21 to the Company's 1997 Form 10-KSB.
27 Financial Data Schedules.
(b) Reports on Form 8-K.
1. On June 3, 1998, the Company filed the 1998 Form 8-K with the SEC in
respect of the matters voted upon at the Company's 1998 Annual Meeting (See Item
4 above).
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: September 28, 1998
ADRENALIN INTERACTIVE, INC.
By: /s/ Jay Smith III
------------------------------------
Jay Smith III, President, Chief
Executive Officer and Treasurer
(principal executive, financial
and accounting officer)
-21-
<PAGE> 22
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Jay Smith III President, Chief Executive Officer, September 28, 1998
- - - ------------------------ Treasurer and Director
Jay Smith III
/s/ Michael Cartabiano Treasurer and Director September 28, 1998
- - - ------------------------
Michael Cartabiano
/s/ Thomas A. Schultz Director September 28, 1998
- - - ------------------------
Thomas A. Schultz
/s/ Robert A.D. Wilson Director September 28, 1998
- - - ------------------------
Robert A.D. Wilson
</TABLE>
-22-
<PAGE> 23
Independent Auditors' Report
Board of Directors
Adrenalin Interactive, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheet of Adrenalin
Interactive, Inc. (formerly Wanderlust Interactive, Inc.) and subsidiary
("Company") as of June 30, 1998, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for the years ended
June 30, 1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Adrenalin Interactive, Inc. and subsidiary as of June 30, 1998, and the
consolidated results of its operations and its consolidated cash flows for the
years ended June 30, 1998 and 1997, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations which raises substantial doubt as to the Company's ability to
continue as a going concern. Management's plans in regard to this is discussed
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Drucker, Math & Whitman, P.C.
- - - --------------------------------------
North Brunswick, New Jersey
Sept 22, 1998
F-1
<PAGE> 24
Adrenalin Interactive, Inc. and Subsidiary
Consolidated Balance Sheet
June 30, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 166,363
Common stock subscription receivable 435,000
Accounts receivable, net of allowance for
doubtful accounts of $45,750 180,704
Costs and estimated earnings in excess
of billings on uncompleted contracts 15,086
Prepaid expenses 74,774
----------
Total current assets 871,927
----------
Fixed assets, net 329,450
----------
Other assets:
Patents and licenses, net of accumulated
amortization of $779,479 2,621,880
Goodwill, net of accumulated amortization
of $59,523 1,621,149
License rights, advance royalty, net of
write-off of $200,000 100,000
Capitalized software 24,254
Security deposits and other 19,229
----------
4,386,512
----------
$5,587,889
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes and loans payable, current portion $ 88,000
Accounts payable and accrued liabilities 605,468
Billings in excess of costs and estimated
earnings on uncompleted contracts 36,055
----------
Total current liabilities 729,523
----------
Notes and loans payable, non-current portion 397,130
----------
Due to officer/shareholder 55,935
----------
Total liabilities 1,182,588
----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value;
authorized, 100,000 shares;
issued and outstanding, none -
Common stock, $.01 par value;
authorized, 20,000,000 shares;
issued and outstanding, 8,691,061 86,911
Additional paid-in capital 13,469,441
Accumulated deficit ( 9,151,051)
----------
Total shareholders' equity 4,405,301
----------
$5,587,889
==========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 25
Adrenalin Interactive, Inc. and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the year ended June 30,
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues:
Product sales $ - $ 288,820
Development contracts 1,886,497 613,887
Royalties 870,201 601,713
---------- ----------
2,756,698 1,504,420
---------- ----------
Expenses:
Cost of product sales - 143,264
Cost of development contracts 1,533,917 716,280
Research and development 152,126 2,062,739
Selling, general and administrative 2,367,973 2,413,834
Depreciation and amortization 931,014 691,785
Interest expense (income), net 60,663 ( 37,086)
---------- ----------
5,045,693 5,990,816
---------- ----------
Loss before income taxes ( 2,288,995) ( 4,486,396)
Income taxes 18,836 -
---------- ----------
Net loss ($2,307,831) ($4,486,396)
========== ==========
Per share information:
Basic:
Net loss per share ($ 0.37) ($ 1.07)
========== ==========
Weighted average shares outstanding 6,317,411 4,175,058
========== ==========
Diluted:
Net loss per share ($ 0.37) ($ 1.07)
========== ==========
Weighted average shares outstanding 6,317,411 4,175,058
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 26
Adrenalin Interactive, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
For the years ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
Common stock Additional Total
------------------- paid-in Accumulated shareholders'
Shares Amount capital deficit equity
--------- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances,
June 30, 1996 3,763,719 $37,637 $ 7,216,348 ($2,356,824) $4,897,161
February 1997,
issued for
acquisition
of Western 800,000 8,000 3,992,000 4,000,000
February 1997,
issued in settlement
of accounts payable 2,350 23 4,677 4,700
February 1997,
issued for services 8,000 80 15,920 16,000
May 1997, issued
in exchange for
convertible
debentures 404,159 4,042 238,458 242,500
May 1997, issued
for extension
of due date of
debentures 13,000 130 7,670 7,800
June 1997, issued
in connection with
contract settlement 50,000 500 29,500 30,000
Net loss for the
year ended
June 30, 1997 ( 4,486,396) ( 4,486,396)
--------- ------- ----------- ---------- ----------
Balances,
June 30, 1997 5,041,228 $50,412 $11,504,573 ($6,843,220) $4,711,765
========= ======= =========== ========== ==========
</TABLE>
(Continued)
F-4
<PAGE> 27
Adrenalin Interactive, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Common stock Additional Total
------------------- paid-in Accumulated shareholders'
Shares Amount capital deficit equity
--------- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances,
June 30, 1997 5,041,228 $50,412 $11,504,573 ($6,843,220) $4,711,765
Sept 1997, issued
in exchange for
convertible
debentures 135,415 1,354 79,896 81,250
October 1997,
issued for capital
raising services 285,000 2,850 168,165 171,000
(171,000) (171,000)
November 1997, issued
in exchange for
convertible
debentures 135,414 1,354 79,896 81,250
November 1997,
issued in settlement
of accounts payable 50,000 500 29,500 30,000
March 1998,
issued in settlement
of note payable 117,532 1,175 59,372 60,547
March 1998, issued
for services 150,000 1,500 75,751 77,251
May 1998, issued
for services 319,000 3,190 196,185 199,375
May 1998, issued
in exchange for
convertible
debentures 199,620 1,997 100,503 102,500
May 1998, issued
in settlement of
accounts payable 332,852 3,329 206,794 210,123
June 1998, issued
for services 100,000 1,000 99,000 100,000
Issued for cash,
common stock and
300,000 warrants 1,200,000 12,000 588,000 600,000
Costs related to
issuance of common
stock and warrants (202,075) (202,075)
Common stock
subscription
receivable 625,000 6,250 493,750 500,000
Costs related to
common stock
subscription
receivable ( 65,000) ( 65,000)
Issued 180,000 options
for services 226,146 226,146
Issued 900,000 warrants 396,808 396,808
for capital
raising services (396,808) ( 396,808)
Net loss for the year
ended June 30, 1998 (2,307,831) (2,307,831)
--------- ------- ----------- ---------- ----------
Balances,
June 30, 1998 8,691,061 $86,911 $13,469,441 ($9,151,051) $4,405,301
========= ======= =========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 28
Adrenalin Interactive, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the year ended June 30,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($2,307,831) ($4,486,396)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Write-off of fixed assets - 100,000
Write-off of license rights 100,000 100,000
Amortization 542,871 371,815
Depreciation 288,143 319,970
Loss on disposal of fixed assets 250,669 29,718
Allowance for doubtful accounts 22,250 -
Common stock issued for services 376,625 16,000
Common stock issued in connection
with contract settlement - 30,000
Options issued for services 226,146 -
Change in:
Accounts receivable 34,027 ( 68,641)
Costs and estimated earnings in
excess of billings on uncompleted
contracts 5,514 49,202
Prepaid expenses ( 50,274) 7,300
Other assets 36,722 52,937
Accounts payable and accrued
liabilities 101,363 ( 70,126)
Billings in excess of costs and
estimated earnings on uncompleted
contracts ( 94,230) ( 13,664)
---------- ----------
Net cash used in operating activities ( 468,005) ( 3,561,885)
---------- ----------
Cash flows from investing activities:
Purchase of fixed assets ( 22,463) ( 536,234)
Advances to subsidiary,
prior to acquisition - ( 387,500)
Capitalized software - ( 99,938)
Cash acquired from subsidiary - 13,908
---------- ----------
Net cash used in investing activities ( 22,463) ( 1,009,764)
---------- ----------
</TABLE>
(Continued)
F-6
<PAGE> 29
Adrenalin Interactive, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
For the year ended June 30,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Issuance of common stock and
warrants, net of costs of
issuance $ 397,927 $ -
Payments on notes and loans
payable ( 1,234,004) ( 56,548)
Proceeds from notes and loans 1,291,512 -
Payments on due to officer,
net of interest accrued ( 27,365) ( 36,700)
----------- -----------
Net cash provided by (used in)
financing activities 428,070 ( 93,248)
----------- -----------
Decrease in cash and cash equivalents ( 62,398) ( 4,664,897)
Cash and cash equivalents,
beginning 228,761 4,893,658
----------- -----------
Cash and cash equivalents, ending $ 166,363 $ 228,761
=========== ===========
Cash paid during the year for:
Interest $ 61,073 $ 61,075
=========== ===========
Income taxes $ 32,633 $ 800
=========== ===========
</TABLE>
Noncash investing and financing activities: See Note 21.
See notes to consolidated financial statements.
F-7
<PAGE> 30
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ACTIVITY:
BUSINESS ACTIVITY AND BASIS OF PRESENTATION:
The consolidated financial statements of Adrenalin Interactive,
Inc.(formerly Wanderlust Interactive, Inc.) and subsidiary ("Company")
include the accounts of Adrenalin Interactive, Inc.(formerly Wanderlust
Interactive, Inc.) ("Adrenalin"), its wholly-owned subsidiary, Western
Technologies, Inc. ("Western"), and certain assets and certain
liabilities of Smith Engineering ("SE"), which was a sole proprietorship
prior to the acquisition discussed in Note 3. Intercompany transactions
and balances have been eliminated. The Company is located in Los
Angeles, California.
Adrenalin is engaged in the creation, development, publishing, marketing
and selling of interactive multimedia software entertainment titles on
CD-ROM for personal computers.
Western is engaged in the invention and development (including
engineering and software development) of electronic designs, technology,
and software, principally for toys and electronic games. Western
licenses or sells inventions, designs, and software to independent
manufacturers and publishers. Such manufacturers and publishers
generally pay advance royalties or development fees and may pay
additional royalties based on products sold. Western also provides
product development services to manufacturers. SE is inactive at June
30, 1998.
The Company's customers are concentrated in the toy and electronic
entertainment industries. These industries are characterized by rapid
changes in technology and customer preferences.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
F-8
<PAGE> 31
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ACTIVITY
(CONTINUED):
CONCENTRATION OF CREDIT RISK:
Financial instruments which subject the Company to concentrations of
credit risk consist of temporary cash investments and accounts
receivable. The Company places its temporary cash investments with high
quality financial institutions. At times, the Company's cash balances
with these institutions exceed the current insured amount under the
Federal Deposit Insurance Corporation. Accounts receivable are primarily
from development contracts. The Company reviews its accounts receivable
monthly and provides allowances for potential uncollectible accounts.
FIXED ASSETS:
Fixed assets consist primarily of computers, leasehold improvements and
furniture, and are stated at cost. Amortization of leasehold
improvements is provided on a straight-line basis over the shorter of
the estimated useful lives of the improvements or the life of the lease.
Depreciation is provided on a straight-line basis over the estimated
useful lives of the related assets.
PATENTS AND LICENSES:
The Company amortizes patents and licenses over their estimated useful
lives. The Company revised its estimate of the useful lives during the
fiscal year ended June 30, 1998 from four years to eight years. For the
year ended June 30, 1998 the effect of applying the new estimated life
was to reduce amortization expense by $425,170, and to decrease net loss
by $425,170, and net loss per share by $0.07.
GOODWILL:
Goodwill represents the excess of cost over the fair value of assets
acquired and is amortized using the straight-line method over 40 years.
The Company assesses the recoverability of its goodwill, and whenever
continued adverse events or changes in circumstances indicate
impairment, a write-off will be recorded. Based on the relatively short
interval since the Company's business combination with Western, the
Company believes no material impairment of goodwill exists at June 30,
1998.
CAPITALIZED SOFTWARE:
Capitalized software consists of salaries and other costs incurred to
develop software from the time technical feasibility is established thru
the date the product is ready for sale. Amortization begins when the
software is available for general release and is calculated on a
product- by-product basis using the faster of the straight-line method
over the estimated useful life or based on expected units of sale.
Amortization expense was $75,684 for the year ended June 30, 1998 and
nil for the year ended June 30, 1997.
F-9
<PAGE> 32
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ACTIVITY
(CONTINUED):
DEVELOPMENT CONTRACT REVENUE AND COST RECOGNITION:
Revenues from fixed-price and modified fixed-price development contracts
are recognized on the percentage-of-completion method measured by the
percentage that costs incurred to date bear to total estimated costs.
A contract is considered complete when all costs, except insignificant
items, have been incurred.
Contract costs include all direct labor, subcontractor and other costs
and those indirect costs related to contract performance, such as
indirect salaries, employee benefits, insurance, and payroll taxes.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance,
customer acceptance of work done, technological developments and
estimated profitability may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenues recognized in excess of
amounts billed. The liability, "Billings in excess of costs and
estimated earnings on uncompleted contracts", represents billings in
excess of revenues recognized.
ROYALTY REVENUE:
Royalties earned by the Company as a result of development contracts are
generally reported by the licensees on a calendar quarter basis. The
Company recognizes such royalty revenue when received. Royalties earned
by the Company as a result of its publishing segment are recognized as
earned.
INCOME (LOSS) PER SHARE:
Basic income (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted income (loss) per
share is computed as above while giving effect to all potential common
shares (but not giving effect to securities that would have an
antidilutive effect, as would occur in loss years) that were outstanding
during the period.
F-10
<PAGE> 33
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
2. GOING CONCERN:
The accompanying consolidated financial statements have been prepared on
a going concern basis which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The
Company has suffered recurring losses from operations which raises
substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or the amount of liabilities that might be necessary should the
Company be unable to continue in existence. Continuation of the Company
as a going concern is dependent on achieving profitable operations.
Management's plans to achieve profitability include developing new
products, obtaining new customers, and continuation of a cost cutting
program started during fiscal year 1997. Management also plans to obtain
additional investment capital .
3. ACQUISITION:
On February 4, 1997, Adrenalin closed on an acquisition agreement
between Adrenalin, Western, SE and Mr. Jay Smith, III ("Mr. Smith"). The
agreement provided for the sale of 100% of the outstanding shares of
stock of Western and certain assets and certain liabilities of SE in
exchange for 800,000 shares of the Company's common stock. As part of
the acquisition, a license agreement was entered into between Western
and Mr. Smith in which Mr. Smith granted to Western the exclusive right
to use and market patents and license agreements owned by Mr. Smith. The
license agreement provides that 75% of the revenues from such patents
and licenses will be retained by Western and 25% will be retained by Mr.
Smith until Mr. Smith receives an aggregate revenue from such patents
and licenses of $2,000,000, at which time no further revenue will inure
to Mr. Smith.
The business combination has been accounted for using the purchase
method. The results of operations of Western for the period from
February 4, 1997 thru June 30, 1997 are included in the Company's
statements of operations and cash flows for the year ended June 30,
1997.
The cost of the acquired enterprise was $5,082,000. 800,000 shares of
common stock with an assigned value of $5 each were issued.
Acquired goodwill is being amortized over forty years using the
straight-line method.
F-11
<PAGE> 34
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
4. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
June 30, 1998
-------------
<S> <C>
Completed contracts $ 25,000
Contracts in progress 95,000
Other 106,454
-----------
226,454
Less allowance for doubtful accounts 45,750
-----------
$ 180,704
===========
</TABLE>
5. BILLINGS IN EXCESS OF COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED
CONTRACTS:
<TABLE>
<CAPTION>
June 30, 1998
-------------
<S> <C>
Costs incurred $ 980,632
Estimated earnings 560,399
----------
1,541,031
Less billings to date ( 1,562,000)
----------
($ 20,969)
===========
</TABLE>
Included in the accompanying consolidated balance sheet under the
following:
<TABLE>
<S> <C>
Costs and estimated earnings
in excess of billings on
uncompleted contracts $ 15,086
Billings in excess of costs
and estimated earnings on
uncompleted contracts ( 36,055)
----------
($ 20,969)
===========
</TABLE>
6. FIXED ASSETS, NET:
<TABLE>
<CAPTION>
June 30, 1998
-------------
<S> <C>
Computers $1,208,053
Furniture 102,046
Leasehold improvements 15,994
----------
1,326,093
Less accumulated depreciation
and amortization 996,643
----------
$ 329,450
==========
</TABLE>
F-12
<PAGE> 35
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
7. NOTES AND LOANS PAYABLE:
<TABLE>
<CAPTION>
June 30, 1998
-------------
<S> <C>
Unsecured note payable, due July, 1999.
Paid in monthly installments of $1,000
plus accrued interest at 12%. $ 13,130
Unsecured note payable, due January 30, 2000.
Interest only (at prime plus 3.5%) is payable
monthly. Prime was 8.5% at June 30, 1998.
Personally guaranteed by an officer/shareholder
and his wife and secured by a Second Trust Deed
on the officer/shareholder's residence. 396,000
Loan payable to financial institution, due
on demand. Interest accrues at 24%.
Secured by a blanket lien on all assets
of the Company. 76,000
--------
485,130
Current portion 88,000
--------
$397,130
========
</TABLE>
8. CONVERTIBLE DEBENTURES:
In May, 1995, the Company issued units consisting of convertible
debentures and common stock. An aggregate of $507,500 of debentures
payable and 465,374 shares of common stock were issued to various
investors in exchange for $1,015,000. The debentures bear interest at
the rate of 8% (payable annually), and were due in May, 1997. The
Company initially offered the debenture holders two options in lieu of
payment: 1) Conversion into shares of common stock at the rate of $0.60
per share or, 2) extend the due date for one year in exchange for 200
shares of common stock for each $1,000 so extended. As of June 30, 1997,
404,159 shares of common stock were issued in exchange for $242,500 of
convertible debentures, and 13,000 shares were issued to extend the due
date of $65,000 of convertible debentures. During the year ended June
30, 1998, 470,451 shares of common stock were issued in exchange for
$265,000 of convertible debentures, and accrued interest thereon. At
June 30, 1998, no convertible debentures were outstanding.
9. DUE TO OFFICER/SHAREHOLDER:
This loan is payable to Mr. Smith in the face amount of $53,347 plus
accumulated interest of $2,588. Interest accrues at 10% and is payable
annually. The principal is due in February, 2002.
F-13
<PAGE> 36
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
10. STOCK OPTIONS:
In the fiscal year ended June 30, 1995, the Company adopted the 1995
Stock Option Plan ("95 Plan"). In September, 1995, the Company amended
the 95 Plan. The 95 Plan provides for the granting of options to
purchase up to 360,000 shares of common stock at an exercise price equal
to the fair market value of the common stock (110% of fair market value
for a holder of in excess of 10%) on the date of the grant. No options
have been exercised to date.
95 Plan activity during the year ended June 30, 1997 follows:
<TABLE>
<CAPTION>
Average
Shares Price
------- -------
<S> <C> <C>
Outstanding at beginning of year 360,000 $3.03
Granted 164,509 2.22
Exercised - -
Forfeited 204,988 2.88
------- -----
Outstanding at end of year 319,521 $2.06
======= =====
Options exercisable at June 30, 1997 67,605 $1.99
======= =====
Weighted average remaining
contractual life, years 3.9
=======
</TABLE>
95 Plan activity during the year ended June 30, 1998 follows:
<TABLE>
<CAPTION>
Average
Shares Price
------- -------
<S> <C> <C>
Outstanding at beginning of year 319,521 $2.06
Granted 240,500 0.53
Exercised - -
Forfeited 315,021 2.08
------- -----
Outstanding at end of year 245,000 0.53
======= =====
Options exercisable at June 30, 1998 81,025 $0.53
======= =====
Weighted average remaining
contractual life, years 4.6
=======
</TABLE>
Options outstanding at June 30, 1998:
<TABLE>
<CAPTION>
Shares Price
------- -----
<S> <C>
175,000 $0.47
60,000 0.63
10,000 1.09
-------
245,000
=======
</TABLE>
F-14
<PAGE> 37
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
10. STOCK OPTIONS (CONTINUED):
In July, 1996, the Company adopted the 1996 Stock Option Plan ("96
Plan"). The 96 Plan provides for the granting of options to purchase up
to 360,000 shares of common stock at an exercise price equal to the fair
market value of the common stock (110% of fair market value for a holder
of in excess of 10%) on the date of the grant. No options have been
exercised to date.
96 Plan activity during the year ended June 30, 1997 follows:
<TABLE>
<CAPTION>
Average
Shares Price
------- -------
<S> <C> <C>
Outstanding at beginning of year - -
Granted 209,000 $ 2.72
Exercised - -
Forfeited 90,750 4.48
-------- ------
Outstanding at end of year 118,250 $ 1.36
======== ======
Options exercisable at June 30, 1997 15,312 $0.625
======== ======
Weighted average remaining
contractual life, years 4.4
========
</TABLE>
96 Plan activity during the year ended June 30, 1998 follows:
<TABLE>
<CAPTION>
Average
Shares Price
------- -------
<S> <C> <C>
Outstanding at beginning of year 118,250 $ 1.36
Granted - -
Exercised - -
Forfeited 77,750 1.75
-------- ------
Outstanding at end of year 40,500 $ 0.63
======== ======
Options exercisable at June 30, 1998 13,500 $ 0.63
======== ======
Weighted average remaining
contractual life, years 3.6
========
</TABLE>
Options outstanding at June 30, 1998:
<TABLE>
<CAPTION>
Shares Price
------ -----
<S> <C>
40,500 $ 0.63
======= ======
</TABLE>
During the fiscal year ended June 30, 1997, the Company granted non-plan
options as follows: 40,000 at exercise price of $5.00 plus 55,000 at
exercise price of $.625. During the fiscal year ended June 30, 1998, the
Company granted non-plan options as follows: 835,000 at exercise price
of $0.63 plus 25,000 at exercise price of $0.40. No options have been
exercised to date.
11. ACCOUNTING FOR STOCK BASED COMPENSATION:
During the year ending June 30, 1997, the Company adopted the
disclosure- only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). Accordingly, no compensation cost has been recognized in the
consolidated financial statements for the employee stock options issued.
F-15
<PAGE> 38
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
11. ACCOUNTING FOR STOCK BASED COMPENSATION (CONTINUED):
Had compensation cost for the Company's employee stock option plans been
recognized based on the fair value at the grant date for awards
consistent with the provisions of SFAS 123, the Company's net loss and
loss per share would have been as indicated below:
<TABLE>
<CAPTION>
Year ended Year ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Net loss - as reported $2,307,831 $4,486,396
Net loss - pro forma $2,445,099 $4,755,851
Loss per share - as reported $0.37 $1.07
Loss per share - pro forma $0.39 $1.13
</TABLE>
For the years ended June 30, 1998 and 1997, respectively, the fair value
of each option grant is estimated on the date of grant using the Black-
Scholes option-pricing model with the following weighted-average
assumptions used for grants: expected volatility of 209% and 120%; risk-
free interest rate of 6.0% and 6.0%; and expected lives of 6.4 and 4.5
years.
12. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS:
On June 30, 1997, the Company entered into a settlement agreement with a
former officer. The agreement provides for the cancellation of an
employment agreement and cancellation of options to purchase 200,000
shares of common stock. The former officer was issued 50,000 shares of
common stock which were valued at $30,000 and recorded as a charge in
the consolidated statement of operations. The Company also entered into
a one year consulting agreement with the former officer, providing for
compensation of $60,000.
In February, 1997, the Company entered into a three year employment
agreement with an officer providing for base salary of $150,000 per
year.
In May, 1995, the Company entered into a four year nonexclusive license
agreement with Metro-Goldwyn-Mayer Inc., ("MGM") which provides for use
of the "Pink Panther" character. The agreement was amended in May of
1996, and the Company paid $300,000 as a nonrefundable advance royalty,
to be applied to future royalties. The agreement provides for payment of
the greater of a percentage royalty on wholesale prices or an absolute
minimum per unit sold. The agreement also provides for the shipment of
minimum copies by certain due dates. Failure to ship such minimum copies
may cause termination of the agreement. The agreement grants MGM a right
of first negotiation and last refusal in regards to distribution of the
licensed products. MGM also has the right to approve, at its sole
discretion, the Company's software titles that contain the "Pink
Panther" character.
F-16
<PAGE> 39
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
12. COMMITMENTS AND CONTINGENCIES (CONTINUED):
COMMITMENTS (CONTINUED):
The Company wrote off $100,000 of the advance royalty in each of the
years ended June 30, 1998 and 1997, as a result of weaker than expected
sales of the licensed product.
The Company is obligated under a lease agreement for office space in Los
Angeles, California. Minimum monthly payments of $14,600 are due through
January 31, 1999. The lease provides for two one-year renewal options.
Future minimum rental commitments under the lease is $102,200 for the
year ended June 30, 1999. Rent expense for the fiscal years ended June
30, 1998 and 1997 was $208,566 and $151,813, respectively.
The Company leases computer equipment under several operating leases
that are substantially similar. These leases have expiration dates from
fiscal years ending 1999 to 2002. Future minimum lease payments are:
1999, $52,711; 2000, $11,012; 2001, $6,691; 2002,$3,387.
In October 1997, the Company entered into an agreement with a business
consulting firm. The agreement provides for a monthly fee of $10,000.
The Company may terminate the agreement upon 30 days written notice.
CONTINGENCIES:
In connection with the acquisition discussed in Note 3, the Company
acquired Western, certain assets and liabilities of SE, and certain
rights from Mr. Smith. Prior to the acquisition, SE entered into a
contract with GT Interactive Software Corp. ("GT") to produce a software
title named "Vampire". A dispute has arisen between GT and SE whereby
SE, having spent over $700,000 of its own funds on changing requirements
to met GT demands, seeks reimbursement of those funds and GT, having
failed to receive a complete project, is seeking the return of $645,000,
funds which GT advanced to SE. The acquisition agreement specifically
provides that the Company has no obligation with respect to GT. During
the fiscal year ended June 30, 1998, the Company (as the alleged
successor of SE) received a letter from GT requesting payment for the
Vampire project. The Company responded to GT stating it is not
responsible for any payment because the acquisition agreement does not
provide for the Company to acquire any of the rights to the Vampire
project, nor is the Company the successor to SE. In December, 1997 GT
filed and served a lawsuit against Mr. Smith and SE. No lawsuit has been
brought by GT against the Company to date. The Company believes it has
meritorious defenses against any claims, if a lawsuit against the
Company is commenced, and intends to vigorously defend itself. The
Company has agreed to pay the legal fees related to the lawsuit against
Mr. Smith and SE.
F-17
<PAGE> 40
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
12. COMMITMENTS AND CONTINGENCIES(CONTINUED):
CONTINGENCIES (CONTINUED):
The Company had entered into an agreement with BMG Music, d/b/a/ BMG
Entertainment ("BMG") to distribute certain of its software titles in
the United States ("BMG Agreement"). BMG and the Company reached a
settlement of this agreement on June 11, 1997 ("BMG Settlement") which
provided in pertinent part, that: (a) BMG agreed to pay the Company
$175,000 and (b) for the BMG Releasees (as such term is defined in the
BMG Settlement) to release the Company from any obligations to BMG. In
connection with the BMG Agreement, the Company acquired services from
Sonopress in the amount of $62,500. The Company believes Sonopress is
affiliated with BMG and the Company obtained a release against this
obligation pursuant to the BMG Settlement. On September 17, 1997, the
Company received a letter from Sonopress' counsel requesting payment of
$62,500. The Company believes, pursuant to the terms of the BMG
Settlement, that it is released from this obligation. To date, no
lawsuit has been brought by Sonopress against the Company. There is no
assurance that Sonopress may not have a valid claim against the Company.
The Company believes it has meritorious defenses, and if a lawsuit is
commenced, intends to vigorously defend itself.
In October 1995, Western entered into an agreement to develop software
for certain games ("Games") for Banpresto Co. Ltd. ("Banpresto"). This
agreement was related to an agreement Banpresto entered into with Sony
Interactive Entertainment, Inc. ("Sony") related to the Games. Computer
hardware and software ("Tools") were delivered by Sony to Western, for
use in developing the Games. Banpresto alleges it paid Sony for the
Tools. Western developed the Games, and Sony disapproved them. In
December 1996, Banpresto and Western agreed to terminate their prior
agreement. The terms of the settlement included a $200,000 payment to
Western from Banpresto, and the return of the Tools to Banpresto upon
written authorization from Sony. Since December of 1997, Banpresto has
threatened to sue Western for failure to return the Tools, and demanded
either the Tools, or $322,000, representing the cost of such Tools, per
Banpresto. Western responded to Banpresto stating that it is willing to
return the Tools, but may only do so with Sony's written authorization.
To date, no lawsuit has been brought against the Company. The Company
believes it has meritorious defenses, and if a lawsuit is commenced,
intends to vigorously defend itself.
On October 6, 1997, the Company entered into an agreement with an
investment banking firm. The agreement provided for the Company to pay a
retainer fee of 36,000 shares of common stock for the first quarter and
30,000 shares for each subsequent quarter. In November 1997, the Company
terminated the agreement. In June 1998, the investment banking firm sent
a letter demanding 30,000 shares of common stock pursuant to their
agreement. The Company responded stating that the investment banking
firm was not entitled to the common stock, and that the investment
banking firm misrepresented themselves to the Company.
F-18
<PAGE> 41
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
12. COMMITMENTS AND CONTINGENCIES(CONTINUED):
CONTINGENCIES (CONTINUED):
To date, no lawsuit has been brought against the Company. The Company
believes it has meritorious defenses, and if a lawsuit is commenced,
intends to vigorously defend itself.
13. INITIAL PUBLIC OFFERING:
In March and April, 1996, the Company closed an initial public offering
of common stock and redeemable warrants. A total of 1,395,000 shares of
common stock and 2,415,000 redeemable warrants were issued. The
redeemable warrants are exercisable at any time during a three year
period ending March 20, 1999 at an exercise price of $7.00 per share.
The redeemable warrants include an option whereby, under certain
conditions, the Company can redeem the warrants.
In connection with the initial public offering, the investment banker
received, for nominal consideration, five year warrants to purchase
130,000 shares of common stock and 210,000 redeemable warrants. These
warrants are exercisable at any time during a four year period ending
March 20, 2001 for $6.00 per share of common stock and $.30 per
redeemable warrant.
14. BRIDGE FINANCING:
On December 29, 1995 the Company completed a private offering of 343,746
shares of common stock and 515,624 redeemable warrants for an aggregate
consideration of $378,750. Persuant to their terms, the redeemable
warrants were automatically converted into an equal number of warrants
bearing the same rights as those discussed in Note 13, "Initial public
offering".
15. RELATED PARTY TRANSACTIONS:
During the year ended June 30, 1998, the Company incurred $45,830 of
legal fees and disbursements to a law firm. For the year ended June 30,
1997, legal fees and disbursements of $175,888 were incurred to the same
law firm. A partner in that firm was an officer/shareholder/director,
and is currently a shareholder.
In May, 1998, the Company issued 220,000 shares of common stock at a
deemed price of $.625 to a business consulting firm with which a
director of the Company is affiliated and 25,000 shares of common stock
to another director in consideration of consulting services.
F-19
<PAGE> 42
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
16. INCOME TAXES:
For income tax purposes, as of June 30, 1998 the Company has deferred
start-up costs and a net operating loss carryforward approximating the
financial accounting net loss since inception. The start-up costs are
being amortized over five years commencing during the third quarter of
fiscal 1997. The net operating loss carryforward will expire in 2012.
These items result in a deferred tax asset of approximately $3,000,000.
However, a valuation reserve has been recorded for the full amount due
to the uncertainty of realization of the deferred tax asset.
17. BUSINESS SEGMENT INFORMATION AND FOREIGN REVENUE:
The Company's operations have been classified into two business
segments: publishing and development contracts. Prior to the Company's
acquisition of Western, it operated as a publisher. For the fiscal year
ended June 30, 1997 information regarding development contracts is for
the five months ended June 30, 1997.
For the fiscal year ended June 30, 1997:
<TABLE>
<CAPTION>
Development
Publishing contracts Total
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 747,000 $ 757,000 $ 1,504,000
Operating loss 3,557,000 929,000 4,486,000
Total assets 1,063,000 5,360,000 6,423,000
Depreciation and
amortization 235,000 457,000 692,000
Capital expenditures 524,000 12,000 536,000
</TABLE>
For the fiscal year ended June 30, 1998:
<TABLE>
<CAPTION>
Development
Publishing contracts Total
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 460,000 $ 2,300,000 $ 2,760,000
Operating loss 1,620,000 670,000 2,290,000
Total assets 820,000 4,765,000 5,585,000
Depreciation and
amortization 305,000 625,000 930,000
Capital expenditures - 20,000 20,000
</TABLE>
Foreign royalties for the fiscal year ended June 30, 1998 and 1997 were
$518,000 and $458,000, respectively.
18. EMERGENCE FROM DEVELOPMENT STAGE:
During the third quarter of fiscal year end June 30, 1997, the Company
no longer considered itself to be in the development stage. Prior
thereto, the Company was considered to be in the development stage as
either planned principal operations had not commenced, or such
operations had commenced, but no significant revenue was derived
therefrom.
F-20
<PAGE> 43
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
19. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS:
The Company deals with a relatively small number of customers which
account for the majority of revenues and receivables.
<TABLE>
<CAPTION>
% of Revenues % of Receivables
Year ended June 30, As of June 30,
------------------- ----------------
1998 1997 1998
---- ---- ----
<S> <C> <C> <C>
Customer "A" 27% 10% 11%
Customer "B" 25% - 41%
Customer "C" - 35% -
Customer "D" - 11% -
</TABLE>
20. PRIVATE OFFERING AND WARRANTS ISSUED:
During the fiscal year ended June 30, 1998, the Company effected a
private offering of 1,200,000 shares of stock and 300,000 warrants for
aggregate consideration, (net of expenses) of $397,927. The warrants are
exercisable at $1.25 per share, and expire one year from the date of
issuance.
During the fiscal year ended June 30, 1998, the following warrants,
exercisable upon issuance, were issued for capital raising services:
50,000 exercisable at $1.25 per share, expiring January 14, 2001;
500,000 exercisable at $0.25 per share, expiring December 31, 2004;
350,000 exercisable at $0.625 per share, expiring December 31, 2004
These warrants were valued using the Black Scholes pricing model (see
Note 11 for assumptions) which resulted in a valuation of $396,808.
21. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During fiscal year ended June 30, 1997:
See Note 3 regarding acquisition.
See Note 8 regarding convertible debentures converted.
2,350 shares issued in settlement of $4,700 of accounts payable.
13,000 shares issued for extension of due date of debentures.
During fiscal year ended June 30, 1998:
See Note 8 regarding convertible debentures converted.
470,451 shares issued in exchange for $265,000 of convertible
debentures. 382,852 shares issued in settlement of $240,123 of accounts
payable. 117,532 shares issued in settlement of $60,547 of notes
payable. 569,000 shares issued for consulting services.
On June 30, 1998, subscription agreements for an aggregate of 625,000
shares of common stock were executed. Net proceeds were received in
July, 1998 in the amount of $435,000.
F-21
<PAGE> 44
Adrenalin Interactive, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1998 and 1997
22. PRO FORMA INFORMATION (UNAUDITED):
Supplemental pro forma information for the year ended June 30, 1997, as
if the acquisition had occurred at the beginning of the fiscal year:
<TABLE>
<S> <C>
Proforma revenue $3,092,000
Proforma net (loss) ($5,780,000)
Proforma (loss) per share ($1.24)
</TABLE>
F-22
<PAGE> 1
EXHIBIT 10.1
[MACKENZIE - SHEA - INC. LETTERHEAD]
AGREEMENT TO ENGAGE MACKENZIE SHEA, INC. ("MSI") AS BUSINESS CONSULTANTS
FOR WANDERLUST INTERACTIVE, INC. ("WANDERLUST")
On the basis of previous telephone conversations and meetings between
Wanderlust Interactive, Inc. ("Wanderlust") and Mackenzie Shea, Inc. ("MSI") as
well as other discussions, preliminary financial statements, initial reports
submitted by Wanderlust, and the representations that Wanderlust has made to
MSI describing Wanderlust and its principals, the present and proposed business
activities of Wanderlust, its operations, financial condition and capital
structure, and various agreements and documents related thereto, MSI submits to
Wanderlust a proposal for the terms pursuant to which MSI would be willing to
consult to Wanderlust Interactive, Inc. in its efforts to seek additional
business/business relationships that will be of benefit to Wanderlust.
I. ENGAGEMENT
Wanderlust hereby engages and retains MSI as an exclusive Business
Consultant for and on behalf of Wanderlust to perform the Services (as
that term is hereinafter defined) and MSI hereby accepts such appointment
on the terms and subject to the conditions hereinafter set forth and
agrees to use its best efforts in providing such Services.
II. INDEPENDENT CONTRACTOR
MSI shall be, and in all respects be deemed to be, an independent
contractor in the performance of its duties hereunder, any law of any
jurisdiction to the contrary notwithstanding. MSI shall not, by reason of
this Agreement or the performance of the Services be or be deemed to be,
an employee, agent, partner, co-venturer or controlling person of
Wanderlust, and MSI shall have no power to enter into any agreement on
behalf of or otherwise bind Wanderlust. MSI shall not have or be deemed to
have, fiduciary obligations or duties to Wanderlust and shall be free to
pursue, conduct and carry on for its own account (or for the account of
others) such activities, employments, ventures, businesses and other
pursuits as MSI in its sole, absolute and unfettered discretion may elect.
III. SERVICES
MSI agrees to provide the following hereafter collectively referred to as
the "Services".
A. Assist Wanderlust in efforts to seek additional business/business
relationships that will be of benefit to Wanderlust.
Initials
------------
Page 1
<PAGE> 2
Wanderlust Interactive, Inc.
10/1/97
B. Advise Wanderlust and/or any of its affiliates in its
negotiations with one or more individuals, firms or entities
(the "Candidate(s)") who may have an interest in providing
investment capital in the form of bridge financing, private
placement financing, media financing, or in pursuing a form of
Business Combination with Wanderlust. As used in this
Agreement, the term "Business Combination" shall be deemed to
mean any form of merger, acquisition, joint venture, licensing
agreement, product, sales and/or marketing, distribution,
combination and/or consolidation, etc. involving Wanderlust
and/or any of its affiliates and any other entity. As used
herein, the term "investment" shall include the contribution of
anything of value by a Candidate to Wanderlust, its
subsidiaries or affiliates. Wanderlust and MSI hereby confirm
their express written intent that MSI shall only be required to
devote such time to the performance of the Services as MSI
shall, in its discretion, deem necessary and proper to
discharge its responsibilities under this Agreement.
C. MSI will advise Wanderlust in seeking up to five hundred
thousand dollars ($500,000) in additional capital, in the form
of either debt or equity.
D. After Wanderlust has completed its initial round of financing,
MSI will advise Wanderlust in structuring and issuing an
additional three million to five million dollars ($3,000,000 -
$5,000,000) of corporate securities, in the form of either debt
or equity.
E. In conjunction with the Services, MSI agrees to:
1. make itself available to the officers of Wanderlust at
such mutually agreed upon place during normal business
hours for reasonable periods of time, subject to
reasonable advance notice and mutually convenient
scheduling, for the purpose of advising Wanderlust in
the preparation of such reports, summaries, corporate
and/or transaction profiles, due diligence packages
and/or other material and documentation
("Documentation") as shall be necessary, in the opinion
of MSI, to properly present Wanderlust to other
entities and individuals that could be of benefit to
Wanderlust.
2. make itself available for telephone conferences with
the principal financial sales and/or operating
officer(s) of Wanderlust during normal business hours.
3. advise Wanderlust's management in corporate finance,
structuring the nature, extent and other parameters of
any private or other offer(s) to be made to
Candidate(s).
4. advise Wanderlust's management in evaluating proposals
and participating in negotiations with Candidate(s).
5. advise Wanderlust regarding company operations,
staffing, strategy, and other issues related to
building shareholder value as Wanderlust may reasonably
request, consistent with the provisions of this
Agreement.
IV. EXPENSES
It is expressly agreed and understood that MSI's compensation as
provided in this Agreement does not include normal and reasonable
out-of-pocket expenses. The expenses described in this paragraph shall
be reimbursed by Wanderlust independent of any fees described in the
section below titled, "COMPENSATION".
A. "Normal and reasonable out-of-pocket expenses" shall include
but are not limited to: accounting, long distance
communication, express mail, outside consultants, travel
(including: airfare, hotel lodging and meals, transportation,
etc.), etc., and other costs involved in the execution of MSI's
Services under this Agreement.
B. It is also agreed that Wanderlust will pay all expenses
incurred in connection with the preparation and printing of any
Offering Memorandums, and any amendments thereto.
C. Wanderlust also agrees to pay its own and MSI's legal expenses.
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Wanderlust Interactive, Inc.
10/1/97
D. MSI shall not incur any expense in excess of $1,000.00 without
Wanderlust's prior consent, which consent shall not unreasonably be
withheld.
E. Wanderlust hereby agrees to compensate MSI promptly upon receipt of an
expense invoice from MSI. Whenever feasible, MSI will request advance
payment of approved expenses. The reimbursement for expenses shall not
be subject to any maximum allocation, and shall be fully reimbursed.
V. COMPENSATION
In consideration for the Services, Wanderlust agrees that MSI shall be
entitled to compensation and other consideration mutually understood, but
not limited to the following:
A. MSI will receive a non-refundable retainer of twenty thousand dollars
($20,000). Payment shall be made as operating funds become available
but no later than the first break of escrow of the first funds to be
received by Wanderlust through any financing.
B. Wanderlust agrees that it may be necessary to hire certain
professional individuals on a temporary or contract basis to execute
some of MSI's recommendations/advice and Wanderlust agrees that it may
be necessary to pay those individuals separately from this agreement
at agreed upon rates. The current market value of those services may
range from $1,500 to $2,500 per day depending on the expertise needed.
Payment shall be made as operating funds become available but no later
than the first break of escrow of the first funds to be received by
Wanderlust through any financing.
C. MSI will also receive a fee of two hundred and fifty thousand
(250,000) shares of Wanderlust's common stock and five hundred
thousand (500,000) Warrants to purchase an additional five hundred
thousand (500,000) shares of common stock at $0.25 per share (the
Execution Price) [These shares and warrants shall be referred to
collectively as the "Engagement Stock"].
1. The Engagement Stock shall be deemed earned and shall be
restricted stock subject to Federal Securities Rule 144.
2. MSI shall have "Piggyback Registration Rights" to register the
Engagement Stock as part of any registration filing by the
Company and "Demand Registration Rights" commencing nine (9)
months from the date of the signing of this agreement which shall
entitle MSI to demand the immediate registration of the
Engagement Stock at the sole discretion of MSI.
3. The Board of Directors of Wanderlust shall authorize that the
Engagement Stock shall be issued upon the signing of this
agreement, and shall be delivered immediately to MSI's counsel,
Boyd & Chang, LLP. However, in no event shall the Engagement
Stock be delivered later than seven (7) days from the date of the
signing of this agreement.
4. Should Wanderlust not complete a Bridge Loan financing (on terms
acceptable to Wanderlust) within sixty (60) days of the
completion of an Offering Memorandum approved by both MSI as well
as Wanderlust, then Wanderlust will have the right to cancel the
Warrants which comprise a portion of the Engagement Stock. The
need for Bridge Loan Financing is currently estimated at up to
five hundred thousand dollars ($500,000) in additional capital
but this figure is subject to change based on the company's
needs.
D. For market positioning, strategic planning, and other business
consulting work to be accomplished, a monthly fee of six thousand
dollars ($6,000), payable in advance on the first (1st) day of the
month, shall be paid by Wanderlust to MSI commencing upon the signing
of this Agreement. In this case, the first payment shall be made as
operating funds become available but no later than the first break of
escrow of the first funds to be received by Wanderlust through any
financing. All subsequent payments shall be made in advance on the
first (1st) day of the month.
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The monthly fees shall commence to accrue as of the signing of this
Agreement. Said monthly fee of six thousand dollars ($6,000) shall
continue for an additional twenty-four months (24), or shall end upon
proper termination of this Agreement according to the section below
titled, "TERM AND TERMINATION".
E. If, at any time during the term of this Agreement and for a period of
three years following the termination of this agreement, that
Wanderlust merges with, acquires assets or any other property, or
obtains any other financing from any of the entities, affiliations or
persons MSI, its employees or former employees, agents,
representatives advisors, or consultants introduces to Wanderlust,
Wanderlust will pay a finder's fee in cash equal to:
1. Four percent (4%) of the amount up to and including one million
dollars.
2. Three percent (3%) of the amount above one million dollars but
less than two million.
3. Two percent (2%) of the amount above two million dollars.
of the total gross proceeds of such transaction. If required by
applicable law, or at the election of MSI, the finder's fee will be
deemed to have been earned by and be paid to a placement agent
selected exclusively by MSI. Two entities are excluded from this
arrangement. Charles Lewis, Zytel and any affiliated companies; Mark
Lerner, Morgen Evan and any affiliated companies.
F. Wanderlust hereby irrevocably agrees not to circumvent, avoid, bypass,
or obviate, directly or indirectly, the intent of this Agreement, to
avoid payment of fees in any transaction with any corporation,
partnership or individual, introduced by MSI to Wanderlust, in
connection with any project, any loans or collateral, or other
transaction involving any products, transfers or services, or
addition, renewal extension, rollover, amendment, renegotiations, new
contracts, parallel contracts/agreements, or third party assignments
thereof.
G. Wanderlust shall keep MSI up to date and apprised of all business
market and legal developments related to the company and its
operations and management. Accordingly, Wanderlust shall provide MSI
with copies of all amendments, revisions and changes to its business
and marketing plans, bylaws, articles of incorporation private
placement memoranda, key contracts, employment and consulting
agreements and other operational agreements. Wanderlust shall promptly
notify MSI of the threat or filing of any suit, arbitration or
administrative action, injunction, lien, claim or complaint and
promptly forward a copy of all related documentation directly to MSI
or at MSI's option to MSI's counsel. Wanderlust shall promptly notify
MSI of all new contracts, agreements, joint ventures or filing with
any state, federal or local administrative agency, including without
limitation the SEC, NASD or any state agency, and shall provide all
related documents, including copies of the exact documents filed, to
MSI, including, without limitation, all annual reports, quarterly
reports and notices of change of events, and registration statements
filed with the SEC and any state agency, directly to MSI. Wanderlust
shall also provide directly to MSI current financial statements,
including balance sheets, check registers, check stubs, income
statements, cash flows and all other documents provided or generated
by Company in the normal course of its business and requested by MSI
from time to time. MSI shall keep all documents and information
confidential as described in the section below titled, "CONFIDENTIAL
DATA".
VI. REPRESENTATIONS, WARRANTIES AND COVENANTS
A. The execution, delivery and performance of this Agreement, in the time
and manner herein specified, will not conflict with, result in a
breach of, or constitute a default under any existing agreement,
indenture, or other instrument to which either Wanderlust or MSI is a
party or by which either entity may be bound or affected.
B. Both Wanderlust and MSI have full legal authority to enter into this
Agreement and to perform the same in the time and manner contemplated.
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C. This Agreement has been submitted to, ratified and approved by the
respective Board of Directors of Wanderlust and MSI and the
individuals whose signatures appear below are authorized to sign
this Agreement on behalf of their respective corporations.
D. Wanderlust will cooperate with MSI, and will promptly provide MSI
with all pertinent materials and requested information in order for
MSI to perform its Services pursuant to this Agreement.
E. When issued, the Shares of Wanderlust's Common Stock shall be duly
and validly issued, fully paid and non-assessable.
F. Wanderlust acknowledges and understands that MSI is neither a
broker/dealer nor a Registered Investment Advisor and Wanderlust
may be required to pay additional underwriting fees in connection
with any offerings, underwritings or financings to the appropriate
underwriter and/or funding entity in addition to any fees paid to
MSI.
G. Wanderlust hereby agrees to enter into an escrow agreement with an
escrow agent suitable to both MSI as well as Wanderlust (the
"Escrow Agent"), and agrees to abide by the terms of an escrow
agreement set forth by the Escrow Agent and MSI.
H. Wanderlust also agrees to enter into such additional agreements,
sign such additional documents and provide such additional
certifications and documentation as may be requested by MSI, the
Escrow Agent, the Placement Agent, or such other parties related to
the obtaining of capital for Wanderlust.
I. Until termination of the engagement, Wanderlust will notify MSI
promptly of the occurrence of any event, which might materially
affect the condition (financial or otherwise), or prospects of
Wanderlust.
J. Wanderlust and its President & CEO hereby agree that MSI and
Wanderlust shall mutually agree upon a Public/Investor Relations
Firm which shall perform; an analysis of Wanderlust's business and
industry, following with a comprehensive background report that
summarizes Wanderlust's corporate and financial profile that shall
be distributed to investment professionals and the press. Develop a
complete financial public relations program designed to enable
Wanderlust to establish all of its business objectives and broaden
recognition of Wanderlust in the financial community in the U.S.
and abroad; and establish a comprehensive mailing list for
Wanderlust, and maintain and update the list as necessary.
K. Wanderlust also agrees to provide on a monthly basis, a summary of
current shareholders of Company stock, and at such time, as
Company's stock is listed and/or trading on a recognized stock
exchange, company shall deliver monthly Depository Trust
Corporation (DTC) shareholder summary sheets, or other such
information as requested by MSI to be delivered to MSI within seven
(7) days.
VII. TERM AND TERMINATION
A. In no event shall any termination be effective until the expiration
of not less than ninety (90) days after the signing of this
agreement.
B. This Agreement shall be effective upon its execution and shall
remain in effect for two (2) years from the date of the closing on
any private placement.
C. After ninety (90) days from the date hereof, Wanderlust shall have
the right to terminate MSI's engagement hereunder by furnishing MSI
with a thirty (30) day advance written notice of such termination.
Upon receipt of such written notice, this Agreement will then
terminate on the last
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day of the next full calendar month. Notice of termination must be
received before the end of the last day of the calendar month in
order to terminate the agreement on the last day of the next full
calendar month.
D. However, no termination of this Agreement by Wanderlust shall in
any way affect the right of MSI to receive as a result of the
Services rendered hereunder:
1. reimbursement for billed, accrued and/or unbilled
disbursements and expenses which right the parties hereby
agree and consent is absolute
2. its fees, securities or Warrants on any transactions which
result in Wanderlust receiving benefits hereunder
3. the full amount of the fees or Warrants upon the closing of
a Business Combination between Wanderlust and any Candidate
4. MSI's monthly advisory fees through the date of
termination.
VIII. CONFIDENTIAL DATA
A. MSI shall not divulge to others any trade secret or confidential
information, knowledge, or data concerning or pertaining to the
business and affairs of Wanderlust, obtained by MSI as a result of
its engagement hereunder, unless authorized, in writing by
Wanderlust.
B. Wanderlust shall not divulge to others, any trade secret or
confidential information, knowledge, or data concerning or
pertaining to the business and affairs of MSI, obtained by
Wanderlust as a result of its engagement hereunder, unless
authorized, in writing by MSI.
C. MSI shall not be required in the performance of its duties to
divulge to Wanderlust or any officer, director, agent or employee
of Wanderlust, any secret or confidential information, knowledge,
or data concerning any other person, firm or entity (including,
but not limited to, any such persons, firm or entity which may be
a competitor or potential competitor of Wanderlust) which MSI may
have or be able to obtain otherwise than as a result of the
relationship established by this Agreement.
IX. COOPERATION WITH REGISTRATION OF SECURITIES
Upon request by MSI, Wanderlust will cooperate with, approve, cause its
counsel to execute and delivery opinions and execute as necessary, and in
a timely manner, any Registration Statements and documents customarily
utilized in connection therewith (including any and all amendments
thereto including post-effective amendments), standby or other
underwriting or selling agreements, instructions to its transfer agent,
sales or transfer documentation reasonably requested by MSI that shall be
necessary or required to implement MSI's or its assignees or investor's
sale, transfer, pledge or hypothecation of the shares under the 33 Act,
the securities or "blue sky" laws of the various states or the rules of
any other governmental or governing body have jurisdiction thereover.
X. OTHER MATERIAL TERMS AND CONDITIONS
A. BOARD MEMBERS. Wanderlust and its President & CEO hereby agree
that through 1998 MSI shall be entitled to appoint one (1) member
of the Board of Directors of Wanderlust and Wanderlust and its
President & CEO will exercise their best efforts to sponsor such
an appointment, which shall include casting all necessary votes in
their control for such appointment. Any such nomination and
appointment shall be independent of, and not in any way affected
by MSI's advisory role as otherwise provided herein.
B. INDEMNITY. Because MSI will be acting on Wanderlust's behalf, it
is MSI's practice to receive indemnification. A copy of MSI's
standard indemnification provisions (the "Indemnification
Provisions") is attached to this Agreement as Exhibit A and is
incorporated herein and made a
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part hereof. Wanderlust hereby indemnifies MSI according with the
provisions attached as Exhibit A.
C. PROVISIONS. Neither termination nor completion of the assignment
shall affect the provisions of this Agreement, and the
Indemnification Provisions, which are incorporated herein, which
shall remain operative and in full force and effect.
D. ADDITIONAL INSTRUMENTS. Each of the parties shall from time to
time, at the request of others, execute, acknowledge and deliver
to the other party any and all further instruments that may be
reasonably required to give full effect and force to the
provisions of this Agreement.
E. ENTIRE AGREEMENT. Each of the parties hereby covenants that this
Agreement is intended to and does contain and embody herein all of
the understandings and Agreements, both written and oral, of the
parties hereby with respect to the subject matter of this
Agreement, and that there exists no oral agreement or
understanding expressed or implied liability, whereby the
absolute, final and unconditional character and nature of this
Agreement shall be in any way invalidated, empowered or affected.
There are no representations, warranties or covenants other than
those set forth herein.
F. LAWS OF THE STATE OF CALIFORNIA. This Agreement shall be deemed to
be made in, governed by and interpreted under and construed in all
respects in accordance with the laws of the State of California,
irrespective of the country or place of domicile or residence of
either party. In the event of controversy arising out of the
interpretation, construction, performance or breach of this
Agreement, the parties hereby agree and consent to the
jurisdiction and venue of the District or County Court of San
Francisco County, California or the United States District Court
for the District of California, and further agree and consent that
personal service or process in any such action or proceeding
outside of the State of California and San Francisco County shall
be tantamount to service in person within San Francisco County,
California and shall confer personal jurisdiction and venue upon
either of said Courts.
G. ASSIGNMENTS. The benefits of the Agreement shall inure to the
respective successors and assigns of the parties hereto and of the
indemnified parties hereunder and their successors and assigns and
representatives, and the obligations and liabilities assumed in
this Agreement by the parties hereto shall be binding upon their
respective successors and assigns; provided that the rights and
obligations of Wanderlust under this Agreement may not be assigned
or delegated without the prior written consent of MSI, and any
such purported assignment shall be null and void. Notwithstanding
the foregoing, MSI may assign or delegate its obligations and
rights under this Agreement upon five (5) days written notice, to
other investment banking/business consulting firm of its choice in
its sole discretion with consent of Company, in Company's sole
discretion.
H. ORIGINALS. This Agreement may be executed in any number of
counterparts, each of which so executed shall be deemed an
original and constitute one and the same agreement. Facsimile
copies with signatures shall be given the same legal effect as an
original.
I. ADDRESSES OF PARTIES. Each party shall at all times keep the other
informed of its principal place of business if different from that
stated herein, and shall promptly notify the other of any change,
giving the address of the new place of business or residence.
J. NOTICES. All notices that are required to be or may be sent
pursuant to the provision of this Agreement shall be sent by
certified mail, return receipt requested, or by overnight package
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delivery service to each of the parties at the address appearing
herein, and shall count from the date of mailing or the validated
air bill.
K. MODIFICATION AND WAIVER. A modification or waiver of any of the
provisions of this Agreement shall be effective only if made in
writing and executed with the same formality as this Agreement.
The failure of any party to insist upon strict performance of any
of the provisions of this Agreement shall not be construed as a
waiver of any subsequent default of the same or similar nature or
of any other nature.
L. INJUNCTIVE RELIEF. solely by virtue of their respective execution
of this Agreement and in consideration for the mutual covenants of
each other, Wanderlust and MSI hereby agree, consent and
acknowledge that, in the event of the failure by Wanderlust to pay
the consideration to MSI or in the event of a breach of any other
material term, MSI will be without adequate remedy-at-law and shall
therefore, be entitled to immediately redress any material breach
of this Agreement by temporary or permanent injunctive or mandatory
relief obtained in an action or proceeding instituted in the
District or County Court of San Francisco County, State of
California or the United States District Court for the District of
California, without the necessity of proving damages and without
prejudice to any other remedies which MSI may have at law or in
equity. For the purposes of this Agreement Wanderlust hereby agrees
and consents that upon a material breach of this Agreement as
aforesaid, in addition to any other legal and/or equitable remedies
MSI may present a conformed copy of this Agreement to the aforesaid
courts and shall thereby be able to obtain a permanent injunction
enforcing this Agreement or barring enjoining or otherwise
prohibiting Wanderlust from circumventing the express written
intent of the parties as enumerated in this Agreement.
M. ATTORNEY'S FEES. If any arbitration, litigation, action, suit, or
other proceeding is instituted to remedy, prevent or obtain relief
from a breach of this Agreement, in relation to a breach of this
Agreement or pertaining to a declaration of rights under this
Agreement, the prevailing party will recover all such party's
attorneys' fees incurred in each and every such action, suit or
other proceeding, including any and all appeals or petitions
therefrom. As used in this Agreement, attorney's fees will be
deemed to be the full and actual cost of any legal services
actually performed in connection with the matters involved,
including those related to any appeal or the enforcement of any
judgment calculated on the basis of the usual fee charged by
attorneys performing such services, and will be not limited to
"reasonable attorneys' fees" as defined in any statute or rule of
court.
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If you are in agreement with the foregoing, please execute and return one copy
of this letter to the undersigned. Thank you. We look forward to working with
you.
Very truly yours, APPROVED AND AGREED:
MACKENZIE SHEA, INC. WANDERLUST INTERACTIVE, INC.
44 Montgomery Street, Wanderlust & Adrenaline Entertainment
Suite 2405, 5301 Beethoven Street
San Francisco, CA 94104 Suite 155
Los Angeles, CA 90066
/s/ ROBERT W. KENDRICK /s/ JAY SMITH
- - - ----------------------------- --------------------------------------
By: Robert W. Kendrick By: Jay Smith
Its President Its President
10/1/97 10/3/97
- - - ----------------------------- --------------------------------------
Date of execution Date of execution
Attachments: Exhibit A Indemnification Agreement:
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MACKENZIE SHEA, INC.
44 MONTGOMERY STREET, 24TH FLOOR
SAN FRANCISCO, CA 94104
AMENDMENT A
TO
AGREEMENT TO ENGAGE
MACKENZIE SHEA, INC. ("MSI") AS BUSINESS CONSULTANTS
FOR WANDERLUST INTERACTIVE, INC. ("WANDERLUST")
This agreement shall serve as Amendment A to the "Agreement to Engage Mackenzie
Shea, Inc. ("MSI") as Business consultants for Wanderlust Interactive, Inc.
("Wanderlust") [the "Agreement to Engage"] dated 10/1/97. This Amendment shall
be attached to the original "Agreement to Engage" as "Amendment A".
This Amendment A shall only amend Section V, Paragraphs C and D of the original
"Agreement to Engage". No other terms or conditions of the original "Agreement
to Engage" shall be altered or changed in any way as a result of this Amendment.
V. COMPENSATION
C. In addition to the Engagement Stock outlined in the "Agreement to
Engage", an additional three hundred and fifty thousand (350,000)
Warrants to purchase three hundred and fifty thousand (350,000)
common shares of Wanderlust at a price of sixty two and one half
cents ($0.625) per share shall be issued immediately upon the signing
of this Amendment A. Said Warrants shall be delivered immediately to
the offices of MSI's counsel, Boyd & Chang, LLP.
D. For market positioning, strategic planning and other business
consulting work to be accomplished, the current monthly fee of six
thousand dollars ($6,000) shall be changed to ten thousand dollars
($10,000) per month, commencing July 1, 1998. Effective on July 10,
1998, MSI shall also be entitled to a one-time payment of $12,000.
i) Said monthly fee of ten thousand dollars ($10,000) shall
continue as defined in the section of the original "Agreement to
Engage" titled, "TERM AND TERMINATION".
ii) At MSI's sole discretion, MSI may convert the fees due it to
equity securities at prevailing market price as of the day of
conversion.
(1) The resulting securities shall be restricted shares and MSI
shall have "Piggyback Registration Rights" to register the
shares as part of any registration filing by Wanderlust.
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If you are in agreement with the foregoing, please execute and return one copy
of this letter to the undersigned. Thank you. We are very pleased to continue
our relationship with you.
Very truly yours, APPROVED AND AGREED
MACKENZIE SHEA, INC. WANDERLUST INTERACTIVE, INC.
44 Montgomery Street, Wanderlust and Adrenalin Entertainment
Suite 2405, 5301 Beethoven Street,
San Francisco, CA 94104 Los Angeles, CA 90066
/s/ ROBERT W. KENDRICK /s/ JAY SMITH, III
- - - ------------------------- ---------------------------
By Robert W. Kendrick By Jay Smith, III
Its President Its President
7/10/98 7/10/98
- - - ------------------------- ---------------------------
Date of execution Date of execution
Amendment - Wanderlust Interactive, Inc.
4/6/98
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<PAGE> 1
EXHIBIT 10.2
November 18, 1997
Jay Smith
Wanderlust Interactive, Inc.
5301 Beethoven Street
Los Angeles, CA 90066
Dear Jay,
This letter confirms the previously negotiated agreement and understanding
between Wanderlust Interactive, Inc. ("Wlust") and Kayne International, Inc.
("Kayne"), as follows:
1) Wlust agrees to retain Kayne, and Kayne agrees to be retained by
Wlust to perform research and management advisory services as may be
reasonably requested by Wlust with respect to Company operations,
restructuring, and corporate finance over the period of September, 1, 1997
to March 1, 1998 ("Initial Engagement Period"). Wlust and Kayne may
mutually agree to extend the Agreement for additional periods. In absence
of such an agreement, this Agreement shall remain in effect until March 1,
1998.
2) Upon execution of this Agreement Wlust agrees to pay Kayne at a rate
of $1,500 per day for time charged under this contract, with payment in
advance in amounts as may be requested by Kayne and agreed to by Wlust.
The initial payment shall be $25,500 due upon execution of this Agreement
to cover 17 consulting days for services to be performed on Wlust's behalf
as requested by Wlust during the Initial Engagement Period. It is agreed
that as of the date of this Agreement, Kayne has performed 2 1/2 days of
consulting services which shall be counted against the initial 17 days.
3) Wlust agrees to reimburse Kayne for travel, office, and other
out-of-pocket expenses incurred on Wlust's behalf. Kayne agrees to spend
no more than $100 on out-of-pocket expenses without prior Wlust approval.
4) Kayne, in consideration of the remuneration stated above, agrees
to provide corporate research and management advisory services to Wlust
subject to the representations and warranties in this Agreement. Kayne and
its personnel shall comply with all applicable statutes, rules and
regulations governing all aspects of the services to be performed under
this Agreement. Wlust understands and acknowledges that Kayne cannot
guarantee that the services provided hereunder will achieve any particular
objective or fulfill any specified goals. Wlust further understands and
acknowledges that Kayne is not registered or licensed as an investment
advisor, securities broker, or financial planner.
<PAGE> 2
Other than the foregoing express warranties, Kayne makes no warranties
with respect to the quality of the services to be provided hereunder or
any results to be achieved, and hereby expressly disclaims the
existence of any such representations or warranties including without
limitation and implied warranties of fitness for a particular purpose.
Kayne shall have no liability for any indirect, incidental or
consequential damages suffered by Wlust as a result of, or any failure
on the part of Kayne in the performance of its duties hereunder.
5) Either party may terminate this Agreement upon 10 day written
notice, upon which Wlust shall pay Kayne any amounts due for work
performed and unreimbursed expenses outstanding after credit (if any)
for the initial payment. Any notice required to be given pursuant to
this Agreement shall be deemed given and serviced when such notice is
deposited in the United States Mail, first class, certified or
registered, and addressed to the principal offices of the parties as
they appear on this Agreement, unless a written change of address
notification has been sent and received.
6) Neither party may assign its rights or duties under this
Agreement without the express prior written consent of the other party.
This Agreement shall be interpreted and construed in accordance with
the laws of the State of California. The parties agree that
jurisdiction and venue of any dispute arising hereunder shall be in San
Francisco, California. In case of litigation regarding this Agreement,
losing party agrees to pay reasonable legal costs of the prevailing
party, including attorney's fees.
7) Each person executing this Agreement has the full right, power,
and authority to enter into this Agreement on behalf of their
respective organizations. This Agreement shall constitute the entire
agreement between the parties with respect to the subject matter
hereof. The parties hereto acknowledge and agree that there are no
conditions, covenants, agreements and understandings between or among
any of them with respect to the subject matter hereof except as set
forth in this Agreement.
Sincerely, ACCEPTED:
/s/ TOM SCHULTZ /s/ JAY SMITH
- - - --------------------------- ---------------------------
Tom Schultz Jay Smith
Kayne International, Inc. Wlust Communications, Inc.
2
<PAGE> 3
April 21, 1998
Jay Smith
Wanderlust Interactive, Inc.
5301 Beethoven Street
Los Angeles, CA 90066
Dear Jay,
This letter extends the agreement and understanding between Wanderlust
Interactive, Inc. ("Wlust") and Kayne International, Inc. ("Kayne") as defined
in the letter agreement of November 18, 1997 ("Agreement"), as follows:
1) Wlust and Kayne mutually agree to extend the Agreement for an
additional period beyond the Initial Engagement Period to September 1,
1998.
2) Wlust agrees to pay Kayne 120,000 common shares to cover unpaid
professional fees due for services performed on Wlust's behalf in lieu
of immediate cash payment. Wlust further agrees to cash reimbursement
of Kayne travel, office, and other out-of-pocket expenses incurred on
Wlust's behalf, of which $3,750 are due and payable immediately.
3) All other terms and conditions of the Agreement shall remain in
force without modification.
Sincerely, ACCEPTED:
/s/ TOM SCHULTZ /s/ JAY SMITH
- - - --------------------------- ---------------------------
Tom Schultz Jay Smith
Kayne International, Inc. Wlust Communications, Inc.
<PAGE> 4
AMENDMENT TO LETTER AGREEMENT
THIS AMENDMENT TO LETTER AGREEMENT ("Amendment") is deemed to have been
made and entered into as of August 31, 1998, between ADRENALIN INTERACTIVE,
INC., a Delaware Corporation formerly known as Wanderlust Interactive, Inc.
("Adrenalin"), and KAYNE INTERNATIONAL, INC. ("Kayne").
RECITALS
A. Adrenalin and Kayne are parties to that certain letter agreement,
dated November 18, 1997, as amended by that certain letter, dated April 21,
1998, relating to Kayne's rendition of consulting services to Adrenalin
(collectively the "Letter Agreement").
B. The parties hereto now desire to further extend the Letter Agreement
on the terms and conditions hereinafter set forth.
TERMS AND CONDITIONS
NOW, THEREFORE, the parties hereto agree as follows:
1. Extension of Agreement. The parties hereto agree that the term of the
Letter Agreement shall be further extended through and including December 31,
1998.
2. No Other Amendments. Except as extended hereby, the terms and
provisions of the Letter Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.
"Adrenalin" "Kayne"
ADRENALIN INTERACTIVE, INC. KAYNE INTERNATIONAL, INC.
By: /s/ Jay Smith By: /s/ Thomas A. Schultz
-------------------------- -----------------------------
Jay Smith Thomas A. Schultz
Executive Officer authorized representative
<PAGE> 1
EXHIBIT 10.4
INVESTMENT BANKING AGREEMENT
This Agreement is made as of January 14, 1998, by and between Wanderlust
Interactive, Inc., a Delaware corporation ("Contractor"), with its principal
offices at 5301 Beethoven Street, Los Angeles, CA 90066-7047, and Lloyd Wade
Securities, Inc., a Texas corporation, ("LDWD") with its principal offices at
5005 LBJ Freeway, Suite 630, Dallas, Texas 75244, USA.
WITNESSETH
WHEREAS, Contractor requires expertise in the area of investment banking
to support its business and growth; and
WHEREAS, LDWD has substantial contracts among the members of the
investment community, investment banking expertise, and desires to act as a
consultant to provide investment banking and advisory services;
NOW, THEREFORE, in consideration of the premises and the mutual promises
and covenants contained herein and subject specifically to the conditions
hereof, and intending to be legally bound thereby, the parties agree as follows:
1. CERTAIN DEFINITIONS--When used in this Agreement, the following terms shall
have the meanings set forth below:
1.1 Affiliate--any persons or entities controlled by a party.
1.2 Contractor--the Contractor who use the services of LDWD.
1.3 Contractor Clients--the Contractor's clients who use the services of
LDWD through the Contractor.
1.4 Contact Person--The person who shall be primarily responsible for
carrying out the duties of the parties hereunder. Contractor and LDWD
shall each appoint a Contact Person to be responsible for their respective
duties. In the event that one party gives notice to the other party in
writing that, in their reasonable opinion, the other party's Contact
Person is not able to fulfill their duties and responsibilities hereunder,
both parties shall mutually agree upon a replacement Contact Person within
10 days of the said notice.
1.5 Extraordinary Expenses--expenses that are beyond those expenses that
are usual, regular, or customary in the conduct of in-house activities in
fulfillment of the scope of this agreement.
Investment Banking Agreement -- Page 1 of 15 Pages -- Initialed
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<PAGE> 2
1.6 Equity - cash, securities or liquid assets, specifically excluding
real property.
1.7 Payment or Payable in kind - distribution of the proceeds of a
transaction in the same type and form as was given as valuable
consideration for the transaction.
2. CONTACT PERSONS. The Contact Person for Contractor is Mr. Jay Smith, III,
CEO, CFO. The Contact Person for LDWD is David Rutkoske, President.
3. SERVICES TO BE RENDERED BY LDWD. Services to be rendered, on a best efforts
basis, by LDWD are as follows:
3.1 Advice and Counsel. LDWD will provide advice and counsel regarding
Contractor's strategic business and financial plans, strategy and
negotiations with potential lenders/inventors, merger/acquisition
candidates, joint ventures, corporate partners and others involving
financial and financially related transactions.
3.2 Introductions to the Securities Brokerage Community. LDWD has a close
association with numerous broker/dealers and investment professionals
across the country and will enable contact between Contractor and/or
Contractor Clients to facilitate business transactions among them. LDWD
shall use their contacts in the brokerage community to assist Contractor in
establishing relationships with securities dealers and to provide the most
recent corporate information to interested securities dealers on a regular
and continuous basis. LDWD understands that this is in keeping with
Contractor's business objective to establish a nationwide network of
securities dealers who have an interest in Contractor's securities.
3.3 Market-making Intelligence. LDWD is a market-maker in numerous
securities and has access through its market-making facilities and
personnel to LDWD proprietary information. LDWD will monitor and react to
sensitive market information on a timely basis and provide advice, and
counsel and proprietary intelligence (including but not limited to
information on price, volume and the identification of market-makers,
buyers and sellers) to Contractor in a timely fashion with respect to
securities in which Contractor has and interest. Contractor understands
that this information is available from other sources but acknowledges that
LDWD can provide it in a more timely fashion and with substantial
value-added interpretation of such information. The foregoing
notwithstanding, no information will be provided to Contractor with respect
to the activities of any other LDWD customers or customer accounts without
such customer's prior consent.
3.4 Contractor and/or Contractor Client Transaction Due Diligence. LDWD
will undertake due diligence on all proposed financial transactions
affecting the Contractor, of which LDWD is notified in writing in advance,
including
Investment Banking Agreement -- Page 2 of 15 Pages -- Initialed
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<PAGE> 3
investigation and advice on the financial, valuation and stock price
implications thereof.
3.5 Additional Duties. Contractor and LDWD shall mutually agree upon any
additional duties which LDWD may provide for compensation paid or payable
by Contractor under this Agreement. Such additional agreement(s) may,
although there is no requirement to do so, be attached hereto and made a
part hereof by written amendments to be listed as "Exhibits" beginning with
"Exhibit A", and initialed by both parties.
3.6 Best Efforts. LDWD shall devote such time and best effort to the
affairs of the Contractor as is reasonable and adequate to render the
consulting services contemplated by this agreement. LDWD is not responsible
for the performance of any services which may be rendered hereunder without
the Contractor providing the necessary information in writing prior
thereto, nor shall LDWD include any services that constitute the rendering
of any legal opinions or performance of work that is in the ordinary
purview of the Certified Public Accountant. LDWD cannot guarantee results
on behalf of Contractor, but shall pursue all reasonable avenues available
through its network of financial contacts. At such time as an interest is
expressed by a third party in Contractor's needs, LDWD shall notify
Contractor and advise it as to the source of such interest and any terms
and conditions of such interest. The acceptance and consumption of any
transaction is subject to acceptance of the terms and conditions by
Contractor. It is understood that a portion of the compensation paid
hereunder is being paid by Contractor to have LDWD remain available to
assist it with transactions on an as needed basis.
4. COMPENSATION TO LDWD.
4.1 Initial Fee. Contractor shall pay LDWD an initial fee, according to
the "Addendum", of 100,000 (One Hundred Thousand) common stock shares and
50,000 (Fifty Thousand) common share warrants upon execution of this
agreement, the underlying shares to be registered with any current or next
offering (via piggyback registration rights which the Company will file
within 180 days) for LDWD's initial setup activities which are necessary
for LDWD to provide the services herein. These fees shall be considered in
arrears if not received by the tenth (10) business day following the due
date specified in the "Addendum". These shares are the same shares
mentioned in the Addendum.
4.2 Additional Fees. Contractor and LDWD shall mutually agree in writing
upon any additional fees which Contractor may pay in the future for
services rendered by LDWD under this Agreement. Such additional
agreement(s) may, although there is no requirement to do so, be attached
hereto and made a part hereof as Exhibits beginning with Exhibit A.
Investment Banking Agreement -- Page 3 of 15 Pages -- Initialed
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<PAGE> 4
4.3 Optional Form of Payment. LDWD may, at the time for each payment and at
its sole option, elect to receive all or a portion of said fees in the form of
securities, equity, or financing instruments issued by Contractor to LDWD on
terms agreed by Contractor in writing.
4.4 Extraordinary Expenses. Extraordinary expenses (those not defined in 4.7)
of LDWD shall be submitted in writing to Contractor for approval prior to
expenditure and shall be paid by Contractor, within ten (10) business days of
receipt of LDWD request for payment.
4.5 Finder Fees.
A. In the event LDWD mutually agrees with Contractor to introduce
Contractor or a Contractor affiliate to any third party funding
source(s), underwriter(s), merger partner(s), or joint venture(s)
who enters into a funding, underwriting, merger, joint venture or
similar agreement with Contractor or Contractor's affiliate,
Contractor hereby agrees to pay LDWD a minimum advisory fee of 5%
of the gross proceeds derived from such funding, underwriting,
merger, joint venture or similar agreement with Contractor or
Contractor's client, unless generally accepted industry standards
dictate otherwise, payable upon the commencement of such funding,
underwriting, merger, joint venture or similar agreement with
Contractor or Contractor's client. This provision shall survive this
agreement, even though the term of this agreement may have expired,
as pursuant to the section titled "Term of Agreement and
Termination". Said advisory fee will be payable only upon closing or
funding of said transaction or part thereof.
B. LDWD may, at its sole option, elect to receive all or a portion of
said advisory fee as payment in kind, i.e., prorated in the same
form and type of securities, equity, or financing instruments
issued to the funding source or underwriter by Contractor. In the
event the exercise of this option results in additional expense
over and above the expense of the funding and/or underwriting then
the additional expenses shall be borne by LDWD. In addition the
exercise of this option by LDWD shall not impede or otherwise have
a negative effect on the funding or underwriting.
4.6 Interest on Funds Due. Contractor shall pay interest on all payments in
arrears due LDWD, at the rate of 10% per annum.
4.7 Expenses. All expenses including, but not limited to, all registration
fees paid to the Securities and Exchange Commission, fees and expenses of
accountants, fees and expenses of legal counsel, printing and engraving
Investment Banking Agreement -- Page 4 of 15 Pages -- Initialed ______ ______
<PAGE> 5
expenses, postage and distribution fees, transfer agent fees, escrow fees,
NASD registration or exchange listing fees, (but not including
underwriting discounts and commissions relating to shares and warrants of
any holder being offered thereby and fees and expenses of any special
counsel of any selling shareholder) of any registration(s) made pursuant
to paragraph (4.1) hereof shall be borne and paid by the Contractor. These
expenses shall be approved in writing by contractors if they total an
amount above $4,000. Underwriting discounts and commissions shall be borne
pro rata by any selling shareholder in proportion to the number of shares
being offered by such selling shareholder.
5. INDEMNIFICATION. The Contractor agrees to indemnify and hold harmless
LDWD, each of its officers, directors, employees and each person, if any,
who controls LDWD against any and all liability, loss, and costs, expenses
or damages, including but not limited to, any and all expenses whatsoever
reasonably incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever or howsoever
caused by reason of any injury (whether to body, property, personal or
business character or reputation) sustained by any person or to any person
or property by reason of any act, neglect, default or omission, or any
untrue or alleged untrue statement of a material fact, or any
misrepresentation of any material fact or any breach of any material
warranty or covenant by the Contractor or any of its agents, employees, or
other representatives arising out of, or in relation to, this Agreement.
Nothing herein is intended to nor shall it relieve either party from
liability for its own act, omission or negligence. All remedies provided
by law or in equity shall be cumulative and not in the alternative.
LDWD agrees to indemnify and hold harmless Contractor, each of its
officers, directors, employees and each person, if any, who controls
Contractor against any and all liability, loss, and costs, expenses or
damages, including but not limited to, any and all expenses whatsoever
reasonably incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever or howsoever
caused by reason of any injury (whether to body, property, personal or
business character or reputation) sustained by any person or to any person
or property by reason of any act, neglect, default or omission, or any
untrue or alleged untrue statement of a material fact, or any
misrepresentation of any material fact or any breach of any material
warranty or covenant by LDWD or any of its agents, employees or other
representatives arising out of, or in relation to, this Agreement. Nothing
herein is intended to nor shall it relieve either party from liability for
its own act, omission or negligence. All remedies provided by law or in
equity shall be cumulative and not in the alternative.
6. CONTRACTOR REPRESENTATIONS. Contractor hereby represents, covenants and
warrants to LDWD as follows:
Investment Banking Agreement -- Page 5 of 15 Pages -- Initialed ______ ______
<PAGE> 6
6.1 Authorization. Both Contractor and LDWD and its signatories herein have
full power and authority to enter into this Agreement and to carry out the
transactions contemplated hereby.
6.2 No Violation. Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will violate any provision
of the charter or by-laws of Contractor, or violate any term of provision of
any other Agreement or any statute or law.
6.3 Agreement in Full Force and Effect. All contracts, Agreements, plans,
leases, policies and licenses referenced herein to which Contractor is a party
are valid and in full force and effect.
6.4 Litigation. Except as set forth below, there is no action, suit, inquiry,
proceeding or investigation by or before any court or governmental or other
regulatory or administrative agency or commission pending or, to the best
knowledge of Contractor threatened against or invoking Contractor, or which
questions or challenges the validity of this Agreement and its subject matter;
and Contractor does not know or have any reason to know of any valid basis for
any such action, proceeding or investigation. See Quarterly report.
6.5 Consents. No consent of any person, other than the signatories hereto, is
necessary to the consummation of the transactions contemplated hereby,
including, without limitation, consents from parties to loans, contracts, lease
or other Agreements and consents from governmental agencies, whether federal,
state, or local.
6.6 LDWD Reliance. LDWD has and will rely upon the documents, instruments and
written information furnished to LDWD by the Contractor's officers, or
designated employees.
A. Contractor's Material Representations. All representations and
statements provided about the Contractor are true and complete and
accurate to the best of Contractor's knowledge. Contractor agrees to
indemnify, hold harmless, and defend LDWD, its officers, directors,
agents and employees, at Contractor's expense for any proceeding or
suit which may raise out of any inaccuracy or incompleteness of any
such material or written information supplied to LDWD.
B. Contractor's Client and Other Material. Contractor warrants that all
representation and statements provided, other than about the
Contractor, are, to the best of its knowledge, true and complete and
accurate.
Investment Banking Agreement -- Page 6 of 15 Pages -- Initialed ______ ______
<PAGE> 7
6.7 Services NOT EXPRESSED OR IMPLIED.
A. LDWD has not agreed with Contractor, in this Agreement or any
other Agreement, verbal or written, to be a market-maker (but
may be a placement agent by other "Selling Agreement" from time
to time) in Contractor's securities or in any specific
securities or securities in which Contractor or Contractor's
Client has an interest; and,
B. Any payments made herein to LDWD are not, and shall not be
construed as, compensation to LDWD for the purposes of making a
market, to cover LDWD out-of-pocket expenses for making a
market, or for the submission by LDWD of an application to make
a market in any securities; and,
C. No payments made herein to LDWD are for the purpose of affecting
the price of any security or influencing any market-making
functions, including but not limited to bid/ask quotations,
initiation and termination of quotations, retail securities
activities, or for the submission of any application to make a
market.
7. CONFIDENTIALITY.
7.1 LDWD and Contractor each agree to provide reasonable security
measures to keep information confidential where release may be detrimental
to their respective business interests. LDWD and Contractor shall each
require their employees, agents, affiliates, subcontractors, other
licensees, and others who will have access to the information through LDWD
and Contractor respectively, to first enter into appropriate
non-disclosure Agreements requiring the confidentiality contemplated by
this Agreement in perpetuity.
7.2 LDWD will not, either during its engagement by the Contractor
pursuant to this agreement or at any time thereafter, disclose, use or
make known for its or another's benefit, any confidential information,
knowledge, or data of the Contractor or any of its affiliates in any way
acquired or used by LDWD during its engagement by the Contractor.
Confidential information, knowledge or data of the Contractor and its
affiliates shall not include any information which is or becomes generally
available to the public other than as a result of a disclosure by LDWD or
its representatives.
8. MISCELLANEOUS PROVISIONS.
8.1 Amendment and Modification. This Agreement may be amended, modified
and supplemented only by written Agreement of LDWD and Contractor.
Investment Banking Agreement -- Page 7 of 15 Pages -- Initialed
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<PAGE> 8
8.2 Waiver of Compliance. Any failure of LDWD, on the one hand, or Contractor,
on the other hand, to comply with any obligation, agreement or condition herein
may be expressly waived in writing, but such waiver or failure to insist upon
strict compliance with such obligation, covenant, agreement or condition shall
not operate as a waiver of, or estoppel with respect to, any subsequent or
other failure.
8.3 Expenses; Transfer Taxes, Etc. Whether or not the transaction, if any,
contemplated by this Agreement is consummated, LDWD agrees that all fees and
expenses incurred by LDWD, in connection with this Agreement shall be borne by
LDWD, and Contractor agrees that all fees and expenses incurred by Contractor
in connection with this Agreement shall be borned by Contractor, including,
without limitation, as to LDWD or Contractor, all fees of counsel and
accountants.
8.4 Other Business Opportunities. Except as expressly provided in this
Agreement, each party hereto shall have the right independently to engage in
and receive full benefits from business activities. In case of business
activities which would be competitive with the other party, notice shall be
given prior to this Agreement or, if such activities are proposed, within 15
days prior to engagement therein. The doctrines of "corporate opportunity" or
"business opportunity" shall not be applied to any other activity, venture, or
operation of either party.
8.5 Compliance with Regulatory Agencies. Each party agrees that all actions,
direct or indirect, taken by it and its respective agents, employees and
affiliates in connection with this Agreement and any financing or underwriting
hereunder shall conform to all applicable Federal and state securities laws.
8.6 Notices. Any notices to be given hereunder by any party to the other may be
effected by personal delivery in writing or by mail, registered or certified,
postage prepaid, with return receipt requested. Mailed notices shall be
addressed to the "Contact Person" at the addresses appearing in the introductory
paragraph of this Agreement, but any party may change his address by written
notice in accordance with this subsection. Notices delivered personally shall be
deemed communicated as of actual receipt; mailed notices shall be deemed
communicated as of five (5) days after mailing.
8.7 Assignment. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
right, interests or obligations hereunder shall be assigned by any of the
parties hereto without the prior written consent of the other parties, except
by operation of law.
8.8 Delegation. Neither party shall delegate the performance of its duties
under this Agreement without the prior written consent of the other party.
Investment Banking Agreement - Page 8 of 15 Pages - Initialed
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<PAGE> 9
8.9 Publicity. Neither LDWD nor Contractor shall make or issue, or cause
to be made or issued, any announcement or written statement concerning
this Agreement or the transaction contemplated hereby for dissemination to
the general public without the prior consent of the other party. This
provision shall not apply, however, to any announcement or written
statement required to be made by law or the regulations of any federal or
state governmental agency, except that the parties shall agree concerning
the timing and consent of such announcement before such announcement is
made.
8.10 Governing Law. This Agreement and the legal relations among the
parties hereto shall be governed by and construed in accordance with the
laws of the State of Texas, without regard to its conflict of law
doctrine. Contractor and LDWD agree that if action is instituted to
enforce or interpret any provision of this Agreement the jurisdiction and
venue shall be in Dallas County, Texas.
8.11 Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
8.12 Headings. The heading of the Sections of this Agreement are inserted
for convenience only and shall not constitute a part hereto or affect in
any way the meaning or interpretation of this Agreement.
8.13 Entire Agreement. This Agreement, including any Exhibits hereto, and
the other documents and certificates delivered pursuant to the terms
hereto, set forth the entire Agreement and understanding of the parties
hereto in respect of the subject matter contained herein, and superseded
all prior Agreements, promise, covenants, arrangements, communications,
representations or warranties, whether oral or written, by any officer,
employee or representative of any party hereto.
8.14 Third Parties. Except as specifically set forth or referred to
herein, nothing herein expressed or implied is intended or shall be
construed to confer upon or give to any person or corporation other than
the parties hereto and their successors or assigns, any rights or remedies
under or by reason of this Agreement.
8.15 Attorneys' Fees and Costs. If any action is necessary to enforce and
collect upon the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees and costs, in addition to any other
relief to which that party may be entitled. This provision shall be
construed as applicable to the entire Agreement.
8.16 Survivability. If any part of this Agreement is found, or deemed by a
court of competent jurisdiction to be invalid or unenforceable, that part
shall be severable from the remainder of this Agreement.
Investment Banking Agreement - Page 9 of 15 Pages - Initialed
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<PAGE> 10
8.17 Further Assurances. Each of the parties agrees that it shall from
time to time take such actions and execute such additional instruments as
may be reasonably necessary or convenient to implement and carry out the
intent and purpose of this Agreement.
8.18 Right to Data After Termination. After termination of this Agreement
each party shall be entitled to copies of all information acquired
hereunder as of the date of termination and not previously furnished to it.
8.19 Relationship of the Parties. Nothing contained in this Agreement
shall be deemed to cause either party to become the partner of the other,
the agent or legal representative of the other, nor create any fiduciary
relationship between them, except as otherwise expressly provided herein.
It is not the intention of the parties to create nor shall this Agreement
be construed to create any commercial relationship or other partnership.
Neither party shall have any authority to act for or to assume any
obligation or responsibility on behalf of the other party, except as
otherwise expressly provided herein. The rights, duties, obligations and
liabilities of the parties shall be several not Joint nor collective. Each
party shall be responsible only for its obligations as herein set out and
shall be liable only for its share of the costs and expenses as provided
herein.
8.20 No Authority to Obligate the Contractor. Without the consent of the
Board of Directors of the Contractor, LDWD shall have no authority to
take, nor shall it take, any action committing or obligating the
Contractor in any manner, and it shall not represent itself to others as
having such authority.
9. ARBITRATION. WITH RESPECT TO THE ARBITRATION OF ANY DISPUTE, THE
UNDERSIGNED HEREBY ACKNOWLEDGE AND AGREE THAT:
A. ARBITRATION IS FINAL AND BINDING ON THE PARTIES;
B. THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDY IN COURT,
INCLUDING THEIR RIGHT TO JURY TRIAL;
C. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED AND DIFFERENT
FROM COURT PROCEEDING;
D. THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR
LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR TO SEEK
MODIFICATION OF RULING BY THE ARBITRATORS IS STRICTLY LIMITED;
E. THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF
ARBITRATORS WHO WERE OR ARE AFFILIATED WITH THE SECURITIES
Investment Banking Agreement - Page 10 of 15 Pages - Initialed
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<PAGE> 11
INDUSTRY; AND
F. THIS ARBITRATION AGREEMENT IS SPECIFICALLY INTENDED TO INCLUDE ANY AND ALL
STATUTORY CLAIMS WHICH MIGHT BE ASSERTED BY ANY PARTY.
G. ALL DISPUTES, CONTROVERSIES, OR DIFFERENCES BETWEEN THE CONTRACTOR, LLOYD
WADE OR ANY OF THEIR OFFICERS, DIRECTORS, LEGAL REPRESENTATIVES, ATTORNEYS,
ACCOUNTANTS, AGENTS OR EMPLOYEES, OR ANY CUSTOMER OR OTHER PERSON OR
ENTITY, ARISING OUT OF, IN CONNECTION WITH OR AS A RESULT OF THIS
AGREEMENT, SHALL BE RESOLVED THROUGH ARBITRATION RATHER THAN THROUGH
LITIGATION.
H. THE UNDERSIGNED CONTRACTOR HEREBY AGREES TO SUBMIT THE DISPUTE FOR
RESOLUTION TO EITHER THE AMERICAN ARBITRATION ASSOCIATION, IN DALLAS,
TEXAS, OR THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., IN DALLAS,
TEXAS, WHICHEVER ASSOCIATION MAY ASSERT JURISDICTION OVER THE DISPUTE,
WITHIN FIVE (5) DAYS AFTER RECEIVING A WRITTEN REQUEST TO DO SO FROM ANY OF
THE AFORESAID PARTIES.
I. IF ANY PARTY FAILS TO SUBMIT THE DISPUTE TO ARBITRATION ON REQUEST, THEN
THE REQUESTING PARTY MAY ITSELF COMMENCE AN ARBITRATION PROCEEDING, BUT IS
UNDER NO OBLIGATION TO DO SO.
J. ANY HEARING SCHEDULED AFTER AN ARBITRATION IS INITIATED SHALL TAKE PLACE IN
DALLAS, DALLAS COUNTY, TEXAS AND THE FEDERAL ARBITRATION ACT SHALL GOVERN
THE PROCEEDING AND ALL ISSUES RAISED BY THIS AGREEMENT TO ARBITRATE.
K. IF ANY PARTY SHALL INSTITUTE ANY COURT PROCEEDING IN AN EFFORT TO RESIST
ARBITRATION AND BE UNSUCCESSFUL IN RESISTING ARBITRATION OR SHALL
UNSUCCESSFULLY CONTEST THE JURISDICTION OF ANY ARBITRATION FORUM LOCATED IN
DALLAS, DALLAS COUNTY, TEXAS, OVER ANY MATTER WHICH IS THE SUBJECT OF THIS
AGREEMENT, THE PREVAILING PARTY SHALL BE ENTITLED TO RECOVER FROM THE
LOSING PARTY ITS LEGAL FEES AND ANY OUT-OF-POCKET EXPENSES INCURRED IN
CONNECTION WITH THE DEFENSE OF SUCH LEGAL PROCEEDING OR ITS EFFORTS TO
ENFORCE ITS RIGHTS TO ARBITRATION AS PROVIDED FOR HEREIN.
L. EACH PARTY WILL SIGN ANY REQUIRED NASD UNIFORM SUBMISSION AGREEMENT OR THE
APPLICABLE PAPERWORK FOR THE AMERICAN ARBITRATION ASSOCIATION, AT THE TIME
ANY DISPUTE IS SUBMITTED FOR ARBITRATION WHICHEVER ONE IS APPLICABLE.
M. THE PARTIES SHALL ACCEPT THE DECISION OF ANY AWARD AS BEING
Investment Banking Agreement - Page 11 of 15 Pages - Initialed
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<PAGE> 12
FINAL AND CONCLUSIVE AND AGREE TO ABIDE THEREBY.
N. ANY DECISION MAY BE FILED WITH ANY COURT AS A BASIS FOR JUDGEMENT AND
EXECUTION FOR COLLECTION.
10. TERM OF AGREEMENT AND TERMINATION. This Agreement shall be effective upon
execution, shall continue for one year unless terminated sooner by LDWD or
contractor, upon giving to the other party 15 days written notice, after
which time this Agreement is terminated. However, this agreement cannot be
terminated by either party for 90 days. LDWD shall be entitled to the
finders fees described in this Agreement for funding or underwriting
commitments entered into by Contractor's client within one year after the
termination of this Agreement if said funding or underwriting was the
result of LDWD efforts prior to the termination of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
CONTRACTOR: Wanderlust Interactive, Inc.
By: /s/ JAY SMITH
------------------------------
Mr. Jay Smith, III, CEO, CFO
LDWD: LLOYD WADE SECURITIES, INC.
By: /s/ DAVID RUTKOSKE
------------------------------
David Rutkoske, President
Investment Banking Agreement -- Page 12 of 15 Pages -- Initialed
------ ------
<PAGE> 13
ADDENDUM
ADDENDUM TO INVESTMENT BANKING AGREEMENT
1. LOCKUP AND RESTRICTED SHARES. Contractors shall notify LDWD of all lockups
and restrictions on stocks, their ownership and their terms. LDWD shall
receive written notice of any changes hereto three business days before the
changes occur.
2. SALARY FREEZE. Contractor shall communicate to LDWD the salary and
compensation levels of all officers and directors and shall notify LDWD of
any changes prior to their occurrence.
3. DTC REPORTS. The Contractor shall provide DTC reports weekly to LDWD, when
available.
4. BROKERAGE SERVICES. Contractor, its officers, directors, and other
"insiders" shall each have an opportunity to open an account at LDWD and
have all of their shares of any public company deposited into such account,
so that LDWD may become these individuals primary broker as per paragraph 1
above.
5. CONSULTING RETAINER FEE. There shall be paid a 50,000 (Fifty Thousand)
shares retainer for twelve months, service payable with the signing of this
agreement. These shares shall be fully vested and carry the same
registration rights as the other shares.
6. SHARES. The stock shares granted to LDWD from Contractor, Pursuant to
paragraph 4.1 of the agreement are: (as of the date of this agreement)
amount of 100,000 (One Hundred Thousand) Shares of the Contractor's common
stock (hereinafter the "Shares"). LDWD's ownership interest in the shares
shall vest immediately and shall be paid immediately upon execution of this
Agreement.
7. WARRANTS. The warrants granted to LDWD from Contractor are:
50,000 (Fifty Thousand) Warrants on the Common Stock shares of the
Contractor, which shall vest immediately upon the execution of this
agreement. Each warrant shall entitle LDWD to purchase one common share at
a price of $1-1/4 per share, exercisable at anytime beginning on the date
of mutual execution of this Agreement. The warrant agreement shall include
mutually agreeable and commercially acceptable terms and conditions with
respect to the mechanics of exercise and adjustments resulting from changes
in the contractor's capital structure after the date of this Agreement.
The Warrants shall be subject to the following terms:
A. EXERCISE PRICE. The exercise price shall be fixed at $1-1/4. Each
warrant shall be convertible upon exercise into one share of common
stock.
B. TERM. The term shall be for a period of 3 years from the effective
date of this agreement.
8. PROVISIONS GOVERNING THE SHARES. The following provisions are applicable
to the Shares issued to LDWD pursuant to this agreement:
A. All shares and warrants shall be Rule 144 shares (subject to demand
registration rights within 180 days) and subject to piggyback
registration rights as selling shareholders with any public offering.
LDWD shall register all, a portion, or none of its shares along with
Contractor's shareholders. All costs of registration shall be borne by
Contractor.
Investment Banking Agreement - Page 13 of 15 Pages - Initialed _____ _____
<PAGE> 14
B. Any of the shares and warrants may be sold anytime and Contractor
agrees to deliver to LDWD such registered shares that are not
restricted, as defined or interpreted under Rule 144 of the
Securities Exchange Act of 1933, and are freely tradable.
C. Contractor shall provide at the time of exercise of this Agreement,
paperwork for LDWD to have (as Attached "Exhibits I, II and III").
I. "Stock Certificates" of ownership of all shares with duly noted
non-registration exemption statement, issued in various names.
II. "Registration Rights Agreement" to the above mentioned stock, and
III. "[Form of] Warrant Agreement" containing grant of warrants.
9. DATE OF PAYMENTS. The business advisory retainer fee and any other fees
resulting from this relationship shall be due immediately beginning with
the month of execution of this agreement. The consulting retainer fee shall
be due in advance on the first of each month and shall be considered in
arrears if not paid by the 10th of the month.
10. FINANCING FEE FORMULA. LDWD agrees to provide Contractor with a forum for
future financing with LDWD or other firms under the following formula of
fees to be paid to LDWD which will be delineated under a separate
"Placement Agent Selling Agreement":
A. 3% non-accountable expense allowance (with expenses enumerated).
B. 2% dealer reallowance (to be shared with other members of the
"Selling Group").
C. 10% sales concession or commission (to be paid as brokers' gross
commission).
D. Other fees and terms will be negotiated according to a written "term
sheet".
Notwithstanding anything in the Addendum or the Agreement to the contrary the
compensation referenced in this paragraph shall not be paid in addition to the
fees described in Paragraph 4.5 of this agreement, and it is expressly agreed
that any fees payable pursuant to said Paragraph 4.5 shall be offset against
any investment banking fees otherwise payable pursuant to this paragraph (and
vice versa), but will not apply to placement agent fees. LDWD shall not be paid
placement agent fees that may become due to other Broker Dealer for sales of
Securities.
11. TERMINATION. This agreement may be terminated by either party for any
reason by giving a 15 days notice, send by certified mail. Neither party may
terminate the agreement during the first 90 days of this agreement. All fees up
to the date of termination will be valid and payable to LDWD by Contractor. In
addition, if the agreement is terminated, LDWD shall return the common stock
paid as compensation for its services in proportion to the length of time left
of the 12 months term of this agreement. Notice of termination, by either
party, shall include confirmation of the amount of stock, if any, due to be
returned to Contractor. Once Contractor has send written notice of Contractor's
agreement with LDWD on the appropriate number of shares that LDWD is entitled
to and that Contractor will deliver, the shares shall be delivered within 15
days. Upon notice of termination, both LDWD and Contractor shall promptly
confirm receipt of notice in writing. Any dispute over the amount of stocks to
be returned must be settled within 15 days of notice of termination. The amount
of stock, if any, shall be calculated based on a 365 day calendar year. LDWD
agrees to allow Contractor to cancel the appropriate number of shares after
Contractor has received written confirmation of the amount of shares from LDWD.
LDWD also agrees to submit the appropriate certificates to the transfer agent
upon reception and no later than 15 days from the date of receipt of proper
notice of termination.
Investment Banking Agreement - Page 14 of 15 Pages - Initialed _____ _____
<PAGE> 15
EXHIBIT A
DUTIES OF LLOYD WADE SECURITIES, INC.
NO ADDITIONAL DUTIES OR FEES HAVE BEEN AGREED TO UNLESS THIS PAGE IS AMENDED AND
SIGNED BY BOTH PARTIES.
Investment Banking Agreement - Page 15 of 15 Pages - Initialed _____ _____
<PAGE> 16
ADDENDUM
This Addendum entered into this 29th day of June 1998, by and between
Adrenalin Interactive, Inc. (formerly Wunderlust Interactive, Inc.) ("Company")
and Lloyd Wade Securities, Inc. ("LDWD").
Whereas, the Company and LDWD entered into an Investment Banking
Agreement on January 14, 1998 ("Agreement").
Whereas, the Agreement provided that LDWD shall receive as compensation
for services, 150,000 shares of the Company's common stock, and 50,000 common
share warrants, and
Whereas, LDWD have rendered and will continue to render services in
excess of what was contemplated thereby entitling LDWD to additional fees.
NOW, THEREFORE, in consideration of the premises as set forth in this
Addendum and the Agreement the parties hereby agree as follows:
1. Pursuant to Section 4.2 of the Agreement the parties
agree that LDWD shall be paid additional fees in the
form of One Hundred Thousand (100,000) shares of the
Company's common stock.
2. The shares shall become payable immediately upon this
Addendum and shall be subject to the same turns and
conditions of the Agreement and "Addendum" with respect
to any shares issued thereto.
If the Company: Jay Smith
Adrenalin Interactive, Inc.
5301 Beethoven Street
Los Angeles, CA 90066-7047
If the LDWD: David L. Rutkoske, President
Lloyd Wade Securities, Inc.
5005 LBJ Freeway, Suite 630
Dallas, TX 75244
Either party may change its address for notice by giving notice to the
other party as set forth above.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective duly authorized officer, effective the day and
year first above written.
ADRENALIN INTERACTIVE, INC. LLOYD WADE SECURITIES, INC.
By: /s/ JAY SMITH By: /s/ DAVID RUTKOSKE
------------------------ -----------------------
<PAGE> 1
EXHIBIT 10.5
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT ("Agreement") is entered into as of April 10,
1998, by and between ROBERT A. D. WILSON, an individual ("Consultant"), and
WANDERLUST INTERACTIVE, INC., a Delaware corporation (collectively, with its
affiliates, the "Company").
RECITALS
WHEREAS, Company desires to engage Consultant to perform services on
behalf of Company; and
WHEREAS, Consultant has the ability and knowledge necessary for the
performance of such services; and
WHEREAS, Consultant and Company desire, pursuant to the terms of this
Agreement, to set forth the terms and conditions pursuant to which Consultant
will perform consulting services for and on behalf of Company;
TERMS AND CONDITIONS
NOW, THEREFORE, in consideration of the mutual promises contained
herein, and other good and adequate consideration, the receipt of which is
hereby acknowledged, the parties hereto hereby agree as follows:
ARTICLE I
SCOPE OF SERVICES
I.1 Consultant agrees to perform for Company general business consulting
services including, but not limited to, the following:
I.1.1 Management Compensation and Benefits. Consultant will assist
in the analysis and determination of management compensation
and benefits.
<PAGE> 2
I.1.2 Corporate Public Relations. Consultant will assist Company in
its public relations efforts and any and all related matters.
I.1.3 Strategic Positioning. Consultant will assist in the
positioning of Company, as necessary, to prepare for
fulfillment of Company's strategic objectives.
I.1.4 Raising of Capital. Consultant will assist Company in its
capital-raising efforts and any and all related matters.
I.2 Company acknowledges as follows:
I.2.1 No Guarantees. Consultant makes no guarantees, representations
or warranties as to the particular results from Consultant's
services or the response and timeliness of action by the
investment and brokerage community, including but not limited
to guarantees, representations or warranties as to future
stock price of the Company.
I.2.2 Administrative Functions Only. Consultant is not a
broker/dealer and will not engage in any services requiring
registration as such. Consultant's involvement in Company's
capital-related transactions is limited to administrative and
facilitating functions, but no broker/dealer functions.
I.2.3 Review Responsibility. Company understands that the accuracy
and completeness of documents prepared by Consultant, if any,
is dependent upon Company's alertness to assure that such
document contains all material facts which might be important
and that all such documents must not contain any
misrepresentation of a material fact nor omit information
necessary to make the statements therein not misleading. To
that end, Company agrees to review all materials for their
accuracy and completeness prior to any use thereof.
ARTICLE II
COMPENSATION FOR SERVICES
II.1 In consideration for entering into this Agreement and performing the
services described immediately above, Company agrees, in lieu of hourly
rates, to compensate Consultant by means of Company's issuance to
Consultant of an aggregate of 25,000 shares of Company's Common Stock,
which shares shall be deemed to have a fair market value as of the date
of this Agreement equal to $0.625 per share.
<PAGE> 3
ARTICLE III
TERM OF THE AGREEMENT
III.1 This Agreement shall commence on the date hereof and continue for a
period of six months thereafter. Notwithstanding the foregoing,
Consultant may terminate this Agreement immediately upon written notice
to Company upon the occurrence of any of the following: (a) Company
becomes insolvent or makes an assignment for the benefit of creditors;
and/or (b) Company breaches any of the material terms of this
Agreement.
ARTICLE IV
STATUS OF PARTIES
IV.1 Nothing contained in this Agreement shall be construed to imply that
either Consultant, Company or any employee, agent or other authorized
representative of either such party is a partner, joint venturer,
agent, officer or employee of the other party. Neither party hereto
shall have any authority to bind the other party in any respect
vis-a-vis any third party, it being intended that each shall remain an
independent contractor and responsible only for his or its own actions.
Company and Consultant are independent contractors, each responsible
for his or its own actions, costs and expenses. Neither Consultant nor
the Company shall have any right to, and shall not, commit other party
to any agreement, contract or undertaking or waive or compromise any of
such other party's rights against customers or other parties. All
consideration delivered to Consultant hereunder shall constitute
earnings from self-employment income and Company shall not withhold any
amounts as federal or state income tax withholding or as employee
contributions under the Federal Insurance Contribution Act (Social
Security) or any similar federal or state law applicable to employers
and employees.
ARTICLE V
CONFIDENTIALITY
V.1 Consultant agrees that he shall not at any time (during or after the
term of this Agreement) disclose or use, except in pursuit of the
business of Company with Company's permission, any Proprietary
Information of Company acquired during the term of this Agreement. For
purposes of this Agreement the phrase "Proprietary Information" means
all information which is known or intended to be known only to
Consultant or employees of Company, any document, record or other
information of Company or others in a confidential relationship with
-3-
<PAGE> 4
Company which relates to specific business matters such as patents,
patent applications, trade secrets, secret processes, proprietary
know-how, information of Company's business, and identity of suppliers
or customers or accounting procedures of Company. Consultant agrees not
to remove from the premises of Company except in the pursuit of
business of Company any document, record or other information of
Company. Consultant recognizes that all such documents, records or
other information, whether developed by Consultant or by someone else
for the Company are the exclusive property of Company.
ARTICLE VI
MISCELLANEOUS
VI.1 Waiver. No waiver of any breach or default of this Agreement by either
party shall be considered to be a waiver of any other breach or default
of this Agreement by such party.
VI.2 Severability. If any portion of this Agreement is found by a court of
competent jurisdiction to be void or unenforceable, that portion hereof
shall be deemed to be reformed to the extent necessary to cause such
portion to be enforceable and the same shall not affect the remainder
of this Agreement, which shall be given full force and effect without
regard to the invalid or unenforceable portions.
VI.3 Counterparts. This Agreement may be executed in several counterparts
and any and all such executed counterparts shall constitute one
agreement binding upon the parties hereto.
VI.4 Entire Agreement. This Agreement contains the entire understanding
between the parties hereto and replaces and supersedes all previous
Agreements between Consultant and Company with respect to the subject
matter hereof.
VI.5 No Amendment. This Agreement may not be changed, altered, amended, or
modified, except in a writing, duly executed by each of the parties
hereto.
VI.6 Assignment. This Agreement may not be assigned or transferred by either
party hereto without the prior written consent of the other party.
VI.7 Governing Law. This Agreement shall be governed by the laws of the
State of California without regard to any choice of law provisions
thereof.
-4-
<PAGE> 5
VI.8 Attorneys' Fees. Should any action be commenced between the parties to
this Agreement concerning the matters set forth in this Agreement or
the right and duties of either party in relation thereto, the
prevailing party in such action shall be entitled, in addition to such
other relief as may be granted, to a reasonable sum as and for his or
its attorneys' fees and costs.
VI.9 Arbitration and Venue. Any controversy arising out of or relating to
this Agreement or any modification or extension thereof, including any
claim for damages and/or rescission, shall be settled by arbitration in
Los Angeles County, California, in accordance with the then Commercial
Arbitration Rules of the American Arbitration Association before one
arbitrator. The arbitrator sitting in any such controversy shall have
no power to alter or modify any express provisions of this Agreement or
to render any award which by its terms effects any such alteration, or
modification. The parties consent to the jurisdiction of the Superior
Court of California, and of the United States District Court for the
Central District of California, for all purposes in connection with
such arbitration including the entry of judgment on any award. The
parties consent that any process or notice of motion or other
application to either of said courts, and any paper in connection with
such arbitration proceeding, may be served by certified mail or the
equivalent, return receipt requested, or by personal service or in such
other manner as may be permissible under the rules of the applicable
court or arbitration tribunal, provided a reasonable time for
appearance is allowed. The parties further agree that arbitration
proceedings must be instituted within one year after the claimed breach
occurred, and that such failure to institute arbitration proceedings
within such period shall constitute an absolute bar against the
institution of any such arbitration proceeding and a waiver of all
claims. This section shall survive the termination or expiration of
this Agreement.
VI.10 Facsimile Signature. Any signature on a facsimile copy of this
Agreement shall be binding and valid as if made on the original copy of
this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date first written above.
-5-
<PAGE> 6
"Consultant" "Company"
WANDERLUST INTERACTIVE, INC.
/s/ ROBERT A. D. WILSON By: /s/ JAY SMITH, III
- - - ---------------------------------- ---------------------------------
Robert A. D. Wilson Jay Smith, III
President and Chief Executive
Officer
-6-
<PAGE> 1
EXHIBIT 10.6
AGREEMENT FOR LICENSE TO SHARE REVENUE AND TECHNOLOGY
The parties agree to enter into a final license agreement based on the terms of
this agreement subject to review and approval of a final agreement by the Board
of Directors of both companies.
Item: Games of skill created by Adrenalin, to be played for cash prizes on an
Internet Gaming online casino. Described in Adrenalin brochure
Adrenalin Interactive
Will complete the game designs in a manner acceptable to Netbet
Will provide game software and graphics for testing on the COSP web site
Will provide game software and graphics to play on the COSP web site for
revenue generation
Netbet
Will provide information and guidance on interface to web site software
and cash transactions, and integration with operation
Will provide game design input on suitability for gaming use
Will use the games on licensed web sites for testing and revenue
generation
Terms
Adrenalin Interactive will license games to Netbet on non-exclusive basis
Netbet and Adrenalin will share 50/50 of net revenue. Advance royalties
to be determined
Netbet will sub-license games to COSP on a basis mutually acceptable to
Netbet and Adrenalin Interactive
The parties agree to execute mutual non-disclosure, non-circumvention agreements
for confidential information.
Both parties must give written approval on information contained in this
agreement prior to release to third parties.
Adrenalin Interactive Inc. Netbet Inc.
By: /s/ JAY SMITH By: /s/ D. E. WRIGHT
-------------------------------- ------------------------------------
Its: CEO Its: President
------------------------------- -----------------------------------
Date: June 16, 1998 Date: June 16, 1998
------------------------------ ----------------------------------
<PAGE> 1
EXHIBIT 10.7
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
PLEASE READ CAREFULLY
THIS DOCUMENT CONTAINS A RELEASE OF ALL
KNOWN AND UNKNOWN CLAIMS.
This Settlement Agreement and Mutual Release ("Agreement") is
entered into by and among plaintiff Rogue Studios, Inc. ("Rogue") and defendants
Jay Smith, III and Jay Smith, III dba Smith Engineering Company (together,
"Smith"). Rogue and Smith are hereinafter collectively referred to as the
"Parties".
RECITALS
A. On or about March 18, 1998, Rogue filed an action in the Los
Angeles County Superior Court against Smith alleging breach of contract,
tortious breach of contract, fraud, conversion, constructive trust and common
counts bearing Case No. SC 051 695 (the "Action").
B. It is the desire of the Parties to resolve all disputes
underlying or in any way connected with or related to the Action and to release
one another, their principals, agents, heirs, attorneys, representatives,
assigns, and insurance carriers, their agents and employees, from any and all
rights, claims, demands, and damages of any kind, known or unknown, existing or
arising in the future, resulting from or related to any and all liability
1
<PAGE> 2
in connection with any such disputes.
AGREEMENT
IN CONSIDERATION of the promises and covenants contained in this
Agreement, the Parties agree as follows:
1. Upon execution of the Agreement, Smith will cause 47,568
shares of the restricted Common Stock of Adrenalin Interactive, Inc. (formerly
known as Wanderlust Interactive, Inc.) ("Adrenalin") to be issued by Adrenalin
to Rogue and 23,784 shares of the restricted Common Stock of Adrenalin to be
issued by Adrenalin to Rogue's attorney in this Action, Michael Norman Saleman
("Mr. Saleman").
2. Upon execution of the Agreement and issuance of the aggregate
of 71,352 shares of Adrenalin's restricted Common Stock (collectively the
"Shares") to Rogue and to Mr. Saleman, Rogue will execute and deliver to Smith a
Request For Dismissal without prejudice of the Action. Smith will thereafter
cause the Request For Dismissal to be filed and each party will bear its own
costs and attorney's fees.
3. The certificates representing the Shares shall bear the
following legend on the face or backside thereof:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. THESE SECURITIES
HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED, SOLD
TRANSFERRED, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933 OR AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT."
2
<PAGE> 3
4. Following the issuance of the Shares to Rogue and Mr. Saleman,
Smith will make a good faith effort to cause the restrictions on the resale of
the Shares to be removed by means of the registration of the Shares under and
pursuant to the provisions of the Securities Act of 1933, as amended (the "1933
Act"), and all applicable state securities laws.
5. If, for any reason, Smith's effort to cause the Shares to be
registered for resale under the 1933 Act and all applicable state securities
laws fails, the Shares issued to Rogue and to Mr. Saleman will be returned to
Smith.
6. In the event of such failure to cause the Shares to be
registered for resale under the 1933 Act and all applicable state securities
laws, Smith will have ninety (90) days from such date to issue a cashiers check
payable to the order of Rogue and Mr. Saleman in the amount of $82,500 plus 10%
interest on such amount from such date until actually paid.
7. If Smith fails to cause the Shares to be registered for resale
under the 1933 Act and all applicable state securities laws and fails to pay the
$82,500 plus interest within the requisite time frame, Rogue shall have the
right to refile the Action against Smith.
8. If, at anytime before the expiration of thirty (30) days
following the effective date of the registration of the resale of the Shares
under the 1933 Act and all applicable state securities laws, Adrenalin files any
bankruptcy proceeding, Rogue shall have the right to return, and cause Saleman
to return, all, but not less than all, of the Shares and
3
<PAGE> 4
to refile the Action against Smith.
9. The statute of limitations with respect to any claim asserted
in the Action shall be tolled from the execution of the Agreement until the
earliest of the following contingent events:
(a) expiration of thirty (30) days following the effective
date of the registration for the resale of the Shares under the
1933 Act and all applicable state securities laws;
(b) payment of $82,500 plus 10% interest thereon is
made to Rogue; or
(c) Rogue refiles the Action against Smith as permitted by
the terms of this Agreement.
10. If and when Smith either causes the Shares issued to Rogue
and to Mr. Saleman to be registered for resale under the 1933 Act and all
applicable state securities laws or pays to Rogue the sum of $82,500 plus the
required interest, the dismissal of the Action will be deemed, and agreed to be,
a dismissal with prejudice. Such agreement will be confirmed by letter from Mr.
Saleman to counsel for Smith, Mr. Vincent Tricarico.
11. Except as to the rights and obligations provided herein, and
subject to the performance by the Parties of their respective obligations as
described in Paragraphs 1-10 above, the Parties hereby release and forever
discharge one another and their respective
4
<PAGE> 5
principals, agents, heirs, attorneys, representatives, assigns, and their
insurance carriers, their agents and employees, of and from any and all claims,
demands, sums of money, actions, rights, causes of action, obligations and
liabilities of every kind or nature whatsoever which they have had, or claim to
have had, or now have, or now claim to have, whether or not such claims arose
out of, or were, or are in any manner connected with the facts recited above or
referred to in the Action. Further, except as to the rights and obligations
provided herein, the Parties hereby release and discharge one another and their
respective principals, agents, heirs, attorneys, representatives, assigns, and
their insurance carriers, their agents and employees, from any and all claims,
demands, sums of money, actions, rights, causes of action, obligations and
liabilities of every kind or nature whatsoever which they hereafter may have or
claim to have had arising out of or in any manner connected with the facts
recited above or referred to in the Action, including, but not limited to, a
cause of action for declaratory relief, breach of contract, alter ego,
fraudulent conveyance, breach of the implied covenant of good faith and fair
dealing, negligent misrepresentation, conspiracy, fraud, deceit, intentional
infliction of emotional distress, negligent infliction of emotional distress,
breach of fiduciary duty, breach of statutory duties, malicious prosecution,
abuse of process, misuse of civil process, and all damages, general,
compensatory, punitive and/or exemplary which may arise therefrom.
12. The Parties hereby declare and represent that they understand
and agree that this settlement is a compromise of doubted and disputed claims,
and is not to be construed as an admission of liability on the part of any
person released hereby, and any
5
<PAGE> 6
liability is expressly denied.
13. In executing this Agreement, the Parties represent and
certify that they do so with full knowledge of any and all rights which they
have and that they do not rely, and have not relied, on any representations made
by the other Party, or a representative of the other Party, with regard to this
Agreement or the basis thereof. Each Party assumes the risk of any mistake of
fact on its part in connection with the true facts involved herein and with
regard to any facts which are now unknown by him/her. In this connection, all
rights under Section 1542 of the California Civil Code are hereby expressly
waived by the Parties. Such statute provides as follows:
"A general release does not extend to claims which
the creditor does not know of or suspect to exist
in his favor at the time of executing the release,
which if known by him must have materially
affected his settlement with the debtor."
14. Thus, notwithstanding the provisions of Section 1542, and for
the purpose of implementing a full and complete Agreement and discharge, the
Parties expressly acknowledge that this Agreement is intended to include in its
effect, without limitation, all claims which any party does not know or suspect
to exist in its favor at the time of the execution hereof, and that this
Agreement contemplates the extinguishment of any such claim or claims.
15. Other than the attorney fees of Mr. Saleman, the Parties
represent that they have not heretofore assigned or transferred, or purported to
assign or transfer, to any
6
<PAGE> 7
person or entity, any claim referred to in this Agreement or any portion thereof
or interest therein.
16. This Agreement is intended to formalize an agreement between
the Parties that was reached amicably. Each party acknowledges that there have
been no threats or duress leading to the execution of this Agreement.
Furthermore, each Party has had the opportunity to consult with counsel
concerning the scope and effect of this Agreement.
17. Should any litigation be brought to enforce the provisions of
this Agreement, or any rights or duties arising under this Agreement, the
prevailing party in such litigation shall be entitled to recover its attorneys'
fees and costs reasonably incurred in such litigation.
18. This Agreement is made and entered into in the State of
California, and shall in all respects be interpreted, enforced and governed
under the laws of the State of California. The language of all parts of this
Agreement shall in all cases be construed as a whole, according to its fair
meaning, and not strictly for or against any Party.
19. Should any provisions of this Agreement be declared or
determined by any Court to be illegal or invalid, the validity of the remaining
parts, terms or provisions shall not be affected thereby, and said illegal or
invalid part, term or provisions shall be deemed not to be a part of this
Agreement.
20. This Agreement sets forth the entire agreement between the
Parties hereto, and fully supersedes any and all prior agreements or
understandings between the Parties pertaining to the subject matter of this
Agreement.
7
<PAGE> 8
///
///
///
///
///
///
///
21. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which shall constitute one
and the same instrument.
DATED: June 17, 1998
ROGUE STUDIOS, INC.
By: /s/ KEVIN STURDIVANT
--------------------------------
Its: President
-------------------------------
DATED: June 17, 1998
JAY SMITH, III
By: /s/ JAY SMITH, III
--------------------------------
DATED: June 17, 1998
JAY SMITH, III DBA SMITH
ENGINEERING COMPANY
By: /s/ JAY SMITH, III
--------------------------------
Its: Sole Proprietor
-------------------------------
8
<PAGE> 9
APPROVED AS TO FORM AND CONTENT:
LAW OFFICES OF
MICHAEL NORMAN SALEMAN
By: /s/ MICHAEL NORMAN SALEMAN
-----------------------------
Michael Norman Saleman
Attorneys for Rogue Studios, Inc.
CLARK & TREVITHICK
By: /s/ VINCENT TRICARICO
-----------------------------
Vincent Tricarico
Attorneys for Jay Smith, III and
Jay Smith, III dba Smith Engineering
Company
9
<PAGE> 1
EXHIBIT 10.8
OPTIONAL ADVANCE NOTE
(Variable Note)
$400,000.00 Plus Interest Los Angeles, California
June 30, 1998
"THIS IS A VARIABLE RATE LOAN - BALLOON PAYMENT"
FOR VALUE RECEIVED, the undersigned hereby promises to pay to BAY AREA
FINANCIAL CORPORATION, or order, at 12400 Wilshire Boulevard, Suite 230, Los
Angeles, California the principal sum of $400,000.00, or so much thereof as
shall at any time be advanced by the Lender, plus interest on the unpaid
principal balance as provided below. All or any part of the principal on this
note may be borrowed, repaid and re-borrowed from time to time prior to
maturity. Loans hereunder may be made upon the oral or written request of any
person authorized in the resolution on file with BAY AREA FINANCIAL CORPORATION.
This is a variable interest rate note and the interest rate may increase or
decrease depending upon subsequent changes in the prime rate of interest. The
"prime rate of interest" is the prime rate announced as being charged by Wells
Fargo Bank of California, from time to time. Should at any time, Wells Fargo
Bank cease announcing a prime rate of interest then "prime rate of interest"
under this note shall mean whatever reference rate Wells Fargo Bank does
announce as being a substitute for its prime rate of interest. Interest on this
note shall be computed on the basis of a 360 day year for actual days elapsed.
This is a variable interest rate loan and the interest rate will increase
or decrease with changes in the prime loan rate. This interest rate will be 3.50
percentage points above the prime loan rate. The initial prime loan rate is
eight and one-half percent (8.50%) which is the published rate as of June 30,
1998; therefore, the initial interest rate is 12.00% per year. As the prime rate
of interest increases or decreases, the rate of interest hereunder shall
correspondingly increase or decrease so that the interest rate shall at all
times be equal to 3.50 percentage points higher than the prime rate on a daily
basis.
Interest will be payable in monthly installments which installments are due
on the day of each month commencing July 30, 1998 and continuing
thereafter until this note has been paid in full. Principal shall be payable in
full on December 30, 1999 ("the final maturity date"), together with (1) all
accrued and unpaid interest and (2) all sums which are owed to BAY AREA
FINANCIAL CORPORATION under the terms of this note including but not limited to
late charges, costs of any kind or nature, and/or advancements of any kind or
nature made by BAY AREA FINANCIAL CORPORATION for the protection of the liens on
the real property which is security for this note.
This note is secured by a guaranty of one (1) deed of trust of
<PAGE> 2
even date herewith to Job Insurance Agency, a California corporation, as
Trustee, and reference is made to such Deed of Trust for rights to acceleration
of the indebtedness evidenced by this note, including the following paragraph:
"If the Trustor shall sell, convey or alienate the property herein
described, or any interest therein, or shall be divested of his title
or any interest therein in any manner or way, whether voluntarily or
involuntarily, without the written consent of the Beneficiary being
first had and obtained, the Beneficiary shall have the right at its
option to declare any indebtedness or obligations secured hereby,
irrespective of the maturity date specified in any note evidencing the
same, immediately due and payable."
In the event of failure to pay principal or interest under this note
when due, or in the event of default under any agreement between the
undersigned and BAY AREA FINANCIAL CORPORATION may, at its election and without
notice to undersigned, declare the entire unpaid balance hereof together with
all accrued interest immediately due and payable.
Payments on this note shall be credited first to interest then due and
the remainder to principal. If this note is not paid when due, the undersigned
promises to pay all costs of collection and reasonable attorneys' fees incurred
by Bank whether or not suit is filed hereon.
If any installment of principal or interest hereunder is not paid when
due, the holder shall have the following rights in addition to the rights set
forth in the preceding paragraph: (a) the right to add unpaid interest to
principal and to have such amount thereafter bear interest as provided in this
note, and (b) if any installment is more than ten (10) days past due, the right
to collect a charge of six percent (6%) of the delinquent payment or fifteen
dollars ($15.00) whichever is greater. This charge is the result of a
reasonable endeavor by the undersigned and the holder to estimate the holder's
added costs and damages resulting from the undersigned's failure to timely make
payments under this note, hence the undersigned agrees that the charge shall be
presumed to be the amount of damage sustained by the holder since it is
extremely difficult to determine the actual amount necessary to reimburse the
holder for such damages. If this note is not paid when due, the undersigned
further promises to pay all costs of collection, foreclosure fees and
reasonable attorneys' fees incurred by the holder whether or not suit is filed
hereon.
In the event of a default under this note, including but not
2
<PAGE> 3
limited to: nonpayment of any installment of principal or interest within ten
(10) days of its designated due date; failure to pay insurance premiums or
property taxes; transfer of title, the remaining principal balance shall bear
interest at a rate of interest which shall be ten percent (10%) higher than the
aforementioned prime rate of interest until this note has been paid in full.
No transfer of an interest by the beneficiary in this Note shall be
effective unless notice of such transfer, including the name and address of the
transferee, has been provided to you. If such transferee does not provide you
with satisfactory evidence that it is not a foreign corporation or nonresident
alien, you shall have the right to withhold tax from the payments due to such
transferee as required under the Internal Revenue Code or applicable state law,
and the withholding of such interest shall not constitute a default under this
Note or the Deeds of Trust securing the same.
This note is secured by a guaranty of one (1) trust deed on the property
commonly known as 348 Bentel, Los Angeles, CA 90049.
The undersigned may prepay all or any part of this note at any time
without penalty or premium whatsoever by paying the balance owing plus all
accrued and unpaid interest thereon.
Presentment of payment, notice of dishonor, protest, and notice of protest
are expressly waived. No delay or omission by Bank to exercise any right
hereunder, whether before or after the happening of any event of default, shall
impair any such right or shall be construed as a waiver thereof or of any such
event of default. This note cannot be changed, modified, amended or terminated
orally.
Dated: June 30, 1998
BORROWERS GUARANTOR
ADRENALIN INTERACTIVE, INC. THE JAY AND SUSAN SMITH
A Delaware corporation LIVING TRUST DATED JUNE 27, 1995
By: /s/ JAY SMITH III /s/ JAY SMITH III
---------------------------- ---------------------------------
JAY SMITH III JAY SMITH III
President & Secretary Trustee
/s/ SUSAN S. SMITH
---------------------------------
SUSAN S. SMITH
Trustee
3
<PAGE> 1
EXHIBIT 10.13
AMENDMENT NO. 2 TO
WANDERLUST INTERACTIVE, INC.
1995 STOCK OPTION PLAN
------------------------------------
The following amendments were made to the Wanderlust Interactive, Inc.
1995 Stock Option Plan (the "Plan"), effective as of the date hereof:
1. Section 5(b). Section 5(b) of the Plan is deleted in its entirety.
2. First Paragraph of Section 7(c). The first paragraph of Section 7(c) of
the Plan is amended to read in its entirety as follows:
"(c) Payment for Delivery of Shares. Shares which are
subject to options shall be issued only upon receipt by the
Company of full payment of the purchase price for the Shares as
to which the option is exercised. The purchase price shall be
payable by the Participant to the Company either (i) in cash,
certified cash, bank draft or money order payable to the order of
the Company; or (ii) at the sole discretion of the Board, through
the delivery of Shares owned by the Participant for a period of
not less than six months and for which the Participant has good
title (free and clear of any liens and encumbrances) and which
have a fair market value equal to the purchase price; or (iii) by
a combination of cash and Shares as provided in (i) and (ii)
above."
3. Section 7(d). Section 7(d) of the Plan is amended to read in its
entirety as follows:
"(d) Vesting. The Board, in its sole discretion, may
impose such vesting requirements on options granted pursuant to
the Plan as it deems fit including, without limitation, providing
for the immediate vesting of any option granted under the Plan in
the event of (i) the sale of substantially all of the operating
assets of the Company; (ii) the sale of securities of the
1
<PAGE> 2
Company constituting a controlling interest of the Company; or (iii) a
consolidation or merger in which the Company is not the surviving
entity."
Except as provided herein, the Plan is in no other way modified and
shall continue in full force and affect.
The above referenced amendments to the Plan were duly adopted by
Wanderlust Interactive, Inc.'s Board of Directors by means of an Action by
Unanimous Written Consent of Board of Directors, dated December 1, 1997.
Dated: December 1, 1997
Wanderlust Interactive, Inc.
By: /s/ JAY SMITH III
---------------------------------
Jay Smith, III,
Chief Executive Officer,
Chief Financial Officer and
Secretary
2
<PAGE> 1
EXHIBIT 10.15
AMENDMENT NO. 2 TO
WANDERLUST INTERACTIVE, INC.
1996 STOCK OPTION PLAN
------------------------------------
The following amendments were made to the Wanderlust Interactive, Inc.
1996 Stock Option Plan (the "Plan"), effective as of the date hereof:
1. Section 5(b). Section 5(b) of the Plan is deleted in its entirety.
2. First Paragraph of Section 7(c). The first paragraph of Section 7(c) of
the Plan is amended to read in its entirety as follows:
"(c) Payment for Delivery of Shares. Shares which are
subject to options shall be issued only upon receipt by the
Company of full payment of the purchase price for the Shares as
to which the option is exercised. The purchase price shall be
payable by the Participant to the Company either (i) in cash,
certified cash, bank draft or money order payable to the order of
the Company; or (ii) at the sole discretion of the Board, through
the delivery of Shares owned by the Participant for a period of
not less than six months and for which the Participant has good
title (free and clear of any liens and encumbrances) and which
have a fair market value equal to the purchase price; or (iii) by
a combination of cash and Shares as provided in (i) and (ii)
above."
3. Section 7(d). Section 7(d) of the Plan is amended to read in its entirety as
follows:
"(d) Vesting. The Board, in its sole discretion, may
impose such vesting requirements on options granted pursuant to
the Plan as it deems fit including, without limitation, providing
for the immediate vesting of any option granted under the Plan in
the event of (i) the sale of substantially all of the operating
assets of the Company; (ii) the sale of securities of the
Company constituting a controlling interest of the Company; or (iii) a
consolidation or merger in which the Company is not the surviving
1
<PAGE> 2
entity."
Except as provided herein, the Plan is in no other way modified and
shall continue in full force and affect.
The above referenced amendments to the Plan were duly adopted by
Wanderlust Interactive, Inc.'s Board of Directors by means of an Action by
Unanimous Written Consent of Board of Directors, dated December 1, 1997.
Dated: December 1, 1997
Wanderlust Interactive, Inc.
By: /s/ JAY SMITH III
-----------------------------
Jay Smith, III,
Chief Executive Officer,
Chief Financial Officer and
Secretary
2
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<PERIOD-END> JUN-30-1998
<CASH> 166,366
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<RECEIVABLES> 226,454
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<COMMON> 86,911
<OTHER-SE> 4,318,390
<TOTAL-LIABILITY-AND-EQUITY> 5,587,889
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