-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CbHFQDo3FB+mAK0COaKS4k8mzHQbD1KtuTcKXiX9xlzqdN2pnNnyQlIrd70wdlRH zhiSFUQAVUJWImftqpZvLA== 0000892569-97-002838.txt : 19971015 0000892569-97-002838.hdr.sgml : 19971015 ACCESSION NUMBER: 0000892569-97-002838 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 23 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19971014 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRAPHIX ZONE INC /DE/ CENTRAL INDEX KEY: 0001015446 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 330697932 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-28676 FILM NUMBER: 97695499 BUSINESS ADDRESS: STREET 1: 42 CORPORATE PARK STE 200 CITY: IRVINE STATE: CA ZIP: 92714 BUSINESS PHONE: 7148333838 MAIL ADDRESS: STREET 1: 42 CORPORATE PARK STREET 2: SUITE 200 CITY: IRVINE STATE: CA ZIP: 92714 10-K405 1 FORM 10-K405 FOR THE YEAR ENDED JUNE 30, 1997 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM --------------- TO --------------- COMMISSION FILE NUMBER 0-28676 GRAPHIX ZONE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 33-0697932 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2915 DAIMLER STREET, SANTA ANA, CALIFORNIA 92705 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 833-3838 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes [X] No [ ] Indicated by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Based on the last sale price, the aggregate market value of the voting stock held by non-affiliates of the Registrant on September 29, 1997 was $1,911,480. As of September 29, 1997, 15,929,004 shares of the Registrant's only class of Common Stock, $.01 par value per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement prepared in connection with the Annual Meeting of Stockholders to be held in 1997 are incorporated by reference into Part III in this Report on Form 10-K. ================================================================================ 2 TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business............................................................. 1 Item 2. Properties........................................................... 7 Item 3. Legal Proceedings.................................................... 7 Item 4. Submission of Matters to a Vote of Security Holders.................. 7 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder 8 Matters.............................................................. Item 6. Selected Consolidated Financial Data................................. 11 Item 7. Management's Discussion and Analysis of Financial Condition and 11 Results of Operations................................................ Item 7A. Quantitative and Qualitative Disclosures About Market Risk........... 17 Item 8. Financial Statements and Supplementary Data.......................... 17 Item 9. Changes in and Disagreements with Accountants on Accounting and 46 Financial Disclosure................................................. PART III Item 10. Directors and Executive Officers of the Registrant................... 46 Item 11. Executive Compensation............................................... 46 Item 12. Security Ownership of Certain Beneficial Owners and Management....... 46 Item 13. Certain Relationships and Related Transactions....................... 46 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 46 SIGNATURES......................................................................... 51
i 3 PART I ITEM 1. BUSINESS OVERVIEW Background Graphix Zone, Inc., a Delaware corporation (the "Company"), was incorporated on January 17, 1996 for the purpose of acquiring GZ Multimedia, Inc. (formerly Graphix Zone, Inc.), a California corporation ("GZ-CA"), and StarPress, Inc., a Colorado corporation ("StarPress"). Both GZ-CA and StarPress were publishers of entertainment-oriented interactive multimedia software. On June 28, 1996, the Company acquired GZ-CA and StarPress in reverse triangular mergers and the companies became wholly-owned subsidiaries of the Company (the "Reorganization"). Upon the consummation of the Reorganization, the stockholder interests in the Company of the former StarPress shareholders were larger than those of the former GZ-CA shareholders, and therefore, StarPress was deemed to be the acquiring entity for financial accounting purposes. Accordingly, the historical financial statements presented herein, prior to the effective date of the Reorganization, are the financial statements of StarPress. The historical shares of StarPress presented therein have been adjusted to reflect a .14666 for 1 stock exchange in connection with the Reorganization. All references to the "Company" prior to June 28, 1996 relate to StarPress. Following the consummation of the Reorganization, the Company's principal business was developing, producing and marketing CD-ROM and on-line interactive entertainment products for the personal computer industry. In addition, following the Reorganization, the Company operated certain other businesses, including developing and operating WILMA, an Internet site for live music venues and developing and marketing certain Internet access and exploration products. Current Status of Company/Restructuring Plan In March 1997, the Company hired a new executive management team for the purpose of evaluating the business and financial condition of the Company and, if necessary, restructuring the Company. The management team reviewed the Company's history of operating losses, current financial condition, current strategic position within the entertainment software industry, competitors in such industry and capital requirements for new product development. Based upon its review, the management team reached the following conclusions with respect to the Company's primary businesses and its financial condition: - Entertainment Software Products. During the fiscal year ended June 30, 1997 ("Fiscal 1997"), the Company earned approximately 61% of its net revenues from the sale of two entertainment software products which were licensed to the Company under a license agreement with Sony Interactive Entertainment, Inc. ("Sony"). The Company's license agreement with Sony expired on September 1, 1997, and after such date, the Company no longer had the right to sell products under such license other than liquidating its inventory of Sony products during the 6 month period following September 1, 1997. In addition, the Company does not have the resources necessary to develop new entertainment software products which would produce sufficient revenues to allow the Company to profitably operate in the entertainment software industry. - Interactive Music. The Company has not been able to obtain the interest of music or computer retailers and consumers for its interactive music products, and therefore, the Company has not been able to develop a market which can support this business. - Internet Access and Accessories. The Company has not been able to maintain the profitability of its Internet access products due to the large number of competitive products which are available, including free promotional programs provided by large Internet access providers to their customers. - World Wide Web Content. The Company does not have the resources necessary to develop World Wide Web content which would produce sufficient revenues to support this business. - General Financial Condition. The Company is insolvent and does not have the funds necessary to continue its current operations. 1 4 Based upon their conclusions, the management team decided that it was in the best interests of the Company and its stockholders and creditors to attempt to restructure the Company, and in June 1997, proposed to the Board of Directors of the Company a restructuring plan (as described below, the "Restructuring Plan"), which included terminating the Company's existing business operations. On June 3, 1997, the Board of Directors adopted the Restructuring Plan. By June 24, 1997, the Company had taken steps to cease its principal business operations and had terminated all employees other than Mr. David Hirschhorn, the Chairman of the Board, President, Chief Executive Officer and Chief Financial Officer of the Company. As approved by the Board of Directors, the Restructuring Plan contained the following elements: - Business -- Divest or dispose of the Company's existing businesses related to the personal computer industry and explore opportunities to enter into new businesses and industries. - Senior Secured Debt -- Renegotiate the terms of the Company's senior secured loan and the related collateral agreements to extend the term of the loan, reduce the interest rate thereof and provide for later payments of amounts due thereunder and to reduce the senior lender's warrant position in the Company. - Outstanding Unsecured Debt -- Pay to unsecured creditors of the Company $0.30 for each $1.00 of debt outstanding. - Outstanding Convertible Preferred Stock -- Exchange outstanding shares of the Company's Series B and Series C Convertible Preferred Stock, each $.01 par value per share (collectively, "Preferred Stock"), for shares of the Company's common stock, $.01 par value per share ("Common Stock"), at an exchange price of approximately $0.75 per share. - Additional Capital -- Evaluate alternative methods for raising additional funds for the Company. Since July 1997, the Company's business activities have consisted of licensing and attempting to enter into licenses for certain of the entertainment software products held in its library, divesting or disposing of its businesses and products related to the personal computer industry, and attempting to restructure its debt obligations, equity structure and business operations. The Common Stock was delisted from The Nasdaq Stock Market, Inc. ("Nasdaq") SmallCap Market on June 19, 1997 because the Company no longer complied with the criteria established by Nasdaq for continuation of listing. On July 14, 1997, the Company received a Notice of Default and Demand for Payment from its senior secured lender, Madeleine L.L.C. ("Madeleine"), based upon the Company's failure to make certain interest payments when due under the terms of the loan agreement, as amended (the "Amended Loan Agreement"), between the Company and Madeleine. The notice stated that the Company was in default under the terms of the Amended Loan Agreement and demanded that all pastdue amounts be paid by July 18, 1997. The Company did not pay the past-due amounts by the July 18, 1997 deadline. On August 29, 1997, the Company received a second Notice of Default and Demand for Payment (the "August Notice") from Madeleine. The August Notice stated that in the event that the Company failed to pay all past due amounts by September 5, 1997, Madeleine would exercise its rights to declare all obligations under the Amended Loan Agreement immediately due and payable. The Company did not pay the past due amounts by the September 5, 1997 deadline. As of October 13, 1997, Madeleine has not declared all obligations under the Amended Loan Agreement immediately due and payable. The Company has had preliminary oral discussions with Madeleine concerning obtaining a waiver of existing defaults of the Company under the terms of the Amended Loan Agreement and renegotiating the terms of the Amended Loan Agreement and the related collateral agreements. Madeleine has indicated to the Company that if the Company is able to reach agreements with its unsecured creditors regarding the repayment of their debt at a reduced basis and with its preferred stockholders regarding the conversion of their shares of Preferred Stock into shares of Common Stock, the senior lender may be willing to waive the existing defaults under the Amended Loan Agreement, extend the term of its loan, reduce the interest rate charged to the Company thereunder and reduce its current warrant position of approximately 25% of the restructured Company, determined on a fully-diluted basis. The amount of the reductions relating to interest rate and warrant position are still subject to negotiation. To the extent that the Restructuring Plan is unsuccessful, Madeleine has indicated that it will foreclose upon its interest and liquidate all of the assets of the Company. 2 5 The Company is negotiating with its unsecured creditors to pay $.30 for each $1.00 of debt outstanding. In order for the Restructuring Plan to proceed, the unsecured creditors (a) holding approximately 90% of the aggregate dollar amount of the Company's unsecured debt and (b) comprising over 65% of the number of the unsecured creditors must agree to the repayment plan. The Company does not intend to negotiate different payment terms with any of its current unsecured creditors. If all of the Company's unsecured creditors agree to the repayment plan, the Company estimates that its total payments to creditors would be approximately $1,800,000. The Company also is negotiating exchange agreements with its holders of Series B Convertible Preferred Stock, $.01 par value per share ("Series B Stock"), and Series C Convertible Preferred Stock, $.01 par value per share ("Series C Stock"), pursuant to which all outstanding shares of Preferred Stock would be converted into shares of Common Stock at an exchange price of approximately $0.75 per share. The Company has entered into exchange agreements with several, but not all, of the holders of Series B Stock and has not entered into exchange agreements with the holders of Series C Stock. As of September 29, 1997, the outstanding shares of Preferred Stock of the Company consisted of the following: 1,806 shares of Series B Stock and 1,185,185 shares of Series C Stock. The Company estimates that under the terms of the Restructuring Plan, such outstanding shares of Preferred Stock will be converted into approximately 8 million shares of Common Stock. As of September 29, 1997, the Company has approximately 15,929,000 shares of Common Stock outstanding, and after effecting the exchange of shares of Preferred Stock described above, the Company will have approximately 23,929,000 shares of Common Stock outstanding. In order to facilitate the Restructuring Plan, management must raise a minimum of $3,000,000 in new capital. There is no assurance that management will be successful in attracting new capital given the Company's financial history and current financial position. Forward-Looking Statements This Annual Report on Form 10-K includes a number of forward-looking statements that are subject to certain risks and uncertainties that could cause the Company's actual results and financial position to be affected negatively as events unfold. These events include, but are not limited to, the risk that the Restructuring Plan is not successful and, even if successful, the risks inherent in starting a new business venture. The Company will not update or revise any such forward-looking statements to reflect events or circumstances that may arise after this Report is filed and that may have an effect on the Company's overall performance. A more thorough discussion of these factors is presented in this Item 1 under the caption "Risk Factors," below, and elsewhere in this Annual Report on Form 10-K. RISK FACTORS Success of Restructuring/Going Concern The Company is in default under the terms of its loan agreements with its senior secured lender and is in default under other agreements with numerous other creditors. From a financial viewpoint, the Company is insolvent. The Company's future will depend significantly on its ability to successfully complete the Restructuring Plan. If the Company fails to complete any step in its Restructuring Plan, it is likely that the Company's senior secured lender will foreclose on all of the assets of the Company and pursue the dissolution of the Company. Based upon the current assets of the Company, there would be insufficient assets to satisfy the secured lender's claims and, accordingly, there would be no assets remaining to satisfy the unsecured creditors' claims. There can be no assurance that the Company will successfully complete its restructuring or that the senior secured lender will not foreclose on the assets of the Company at any time or that the Company will continue as a going concern. No Current Operations; No Current Business Arrangements Since July 1997, the Company's business activities have consisted of licensing and attempting to enter into licenses for certain of the entertainment software products held in its library, divesting or disposing of its businesses and products related to the personal computer industry, and attempting to restructure its debt 3 6 obligations, equity structure and business operations. After October 31, 1997, the Company intends to cease its efforts to enter into new licenses for entertainment software products in its library. The Company is considering several strategic business alternatives in industries which the Company has not operated in the past, including but not limited to, the financial service industry. The Company has no understandings, commitments, agreements or arrangements (collectively, "arrangements") with respect to the business alternatives being considered. Accordingly, the Company has no operating history or current business arrangements upon which an evaluation of the Company and its prospects can be based. There can be no assurance that the Company will be able to begin operating a new business or that the Company will attain profitability. Employees; Financial and Management Controls Since June 24, 1997, the Company has had only one employee, Mr. David Hirschhorn, Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer and Treasurer, and several non-employee consultants. As the Company begins operations in new businesses, the Company's success will depend significantly upon its ability to attract and retain skilled employees and to develop financial and management controls, reporting systems and procedures. There can be no assurance that the Company will be able to attract and retain skilled employees or develop such controls, systems or procedures effectively or on a timely basis. Dilution to Stockholders If the Company successfully completes the proposed exchange of outstanding shares of Preferred Stock of the Company for shares of Common Stock, the number of outstanding shares of Common Stock will increase by approximately 50%. As a result, the holders of Common Stock will incur substantial dilution. In addition, the Company is evaluating alternatives for raising additional funds for the Company and certain of these alternatives may result in additional dilution of the holders of Common Stock. PRIOR BUSINESS Prior to June 1997, the principal business operations of the Company consisted of developing, producing and marketing interactive entertainment and multimedia products for the personal computer industry. The Company developed, produced and marketed (collectively, "developed") products in four primary categories: (a) entertainment software (b) interactive music, (c) Internet access and accessories and (d) World Wide Web content. Entertainment Software During Fiscal 1997, sales of two personal computer entertainment software products made up approximately 61% of the Company's net revenues. The rights to sell these two products, Wheel of Fortune and Jeopardy!, were licensed to the Company under the terms of a license agreement with Sony (the "Sony License"). During Fiscal 1997, the Company attempted to negotiate a new license with Sony, but Sony would not enter into a new license agreement. The Sony License expired on September 1, 1997 (the "Expiration Date"). Under the terms of the Sony License, following the Expiration Date, the Company is not allowed to sell Wheel of Fortune and Jeopardy! other than in connection with liquidating its existing inventory of such products during the 6 month period following the Expiration Date. During Fiscal 1997, the Company sold a variety of other personal computer entertainment software products including: The Guided Tour of Multimedia, Lights! Camera! Interaction! and Travis Jett's Real Extreme CD-Room, both based on the America's Funniest Home Videos Television show; Nixon, based upon the Oliver Stone film; and The Crow, based upon the film The Crow. The Company also published and distributed titles featuring household names such as MTV's Beavis and Butthead, CNN, Highlights, the Improv and Playboy. On February 24, 1997, the Company entered into an agreement with Inscape, a Delaware general partnership among Home Box Office and corporations owned by Warner Music Group, Inc. ("WMG") and 4 7 Nash New Media, Inc., and WMG (collectively, "Inscape"), to purchase certain assets from and assume certain liabilities of Inscape. The purchased assets consisted of all rights, title and interest in twelve existing personal computer game products and seven personal computer game products in development; all rights, title and interest in the Inscape name; certain furniture and equipment; and certain leases and other agreements. The liabilities assumed consisted of accrued compensation costs associated with those Inscape employees offered employment with the Company. In exchange for the Inscape assets, the Company issued to Inscape 948,148 shares of the Company's Series C Stock, which had a stated liquidation value of $3,200,000 but which the Company valued at $2,193,066 due to the restricted nature of the securities. On February 26, 1997, the Company entered into an agreement with Trimark Holdings, Inc. and its subsidiary, Trimark Interactive, Inc. ("Trimark"), to purchase certain assets from and assume certain liabilities of Trimark. The purchased assets consisted of all rights, title and interest in seven existing personal computer game products and three personal computer game products in development, related inventories and certain other agreements. The liabilities assumed consisted primarily of liabilities related to the products in development. In exchange for the Trimark assets, the Company issued to Trimark 237,037 shares of the Company's Series C Stock, which had a stated liquidation value of $800,000 but which the Company valued at $548,267 due to the restricted nature of the securities. Interactive Music The Company was one of the first companies to develop interactive music products. In June 1994, the Company released its initial interactive music product, Prince Interactive, featuring the artist formerly known as Prince. During the fiscal year ended June 30, 1995 ("Fiscal 1995"), the Company released its second interactive music product, Highway 61 Interactive, featuring Bob Dylan. During the fiscal year ended June 30, 1996 ("Fiscal 1996"), the Company did not release any new interactive music products. During Fiscal 1997, the Company released three interactive music products: Willie, based on the work of country western star Willie Nelson; Living Jazz, the first of a proposed series of interactive jazz products to be developed jointly with Herbie Hancock; and Under the Covers, a historical music product which explored the rock scene of the 1960's through the lens of photographer Henry Diltz. The three titles released in Fiscal 1997 had limited financial success due to a lack of retailer and consumer interest. Internet Access and Accessories During Fiscal 1996, the Company developed an Internet access product named ExpressNet Suite which was a collection of internet software that included Netscape Navigator 2.0, Internet Phone and other third party modules and which linked with Earthlink, Inc. as the Internet service provider. The ExpressNet Suite had limited financial success. During Fiscal 1997, the Company developed a second edition of ExpressNet Suite. In addition, during Fiscal 1997, the Company developed a similar line of Internet access and exploration products under the name SmartNet which linked with Concentric as the Internet service provider. The Internet products released in Fiscal 1997 had little financial success due to the large number of competitive products available, including free promotional programs provided by large Internet access providers to their customers. World Wide Web Content In April 1996, StarPress acquired WILMA, an Internet site for live music venues, in exchange for an aggregate purchase price of $220,876, consisting of shares of Common Stock of StarPress and a promissory note. StarPress intended to develop WILMA into a "virtual world" where artists, music bands, music fans and other music oriented people could interact and exchange information about music clubs and other secondary concert venues. Additionally, StarPress intended to sell tickets and other products through WILMA. During the second quarter of Fiscal 1997, the Company decided that the large amount of capital projected to be needed by WILMA for its operations made the project unfeasible. During the fourth quarter of Fiscal 1997, the Company entered into an agreement with the founders of WILMA to sell WILMA to such founders in exchange for $5,000. 5 8 Distribution The Company used independent distributors to distribute its products to computer and software outlets, music stores, large merchandisers and other retail stores. Competition The Company's competition in its primary business industry, entertainment software development, can be grouped into four categories: (a) large software developers such as Davidson, Broderbund, Electronic Arts, The Learning Company and GT Interactive Software; (b) small software publisher/developers such as 7th Level and Interplay Productions; (c) large entertainment companies, such as The Walt Disney Company and Sony; and (d) small to medium sized independent publisher developers who specialize in particular niches (the "Niche Category"). The Company is considered to fall in the Niche Category. Companies in the Niche Category typically do not have the capital required to compete with the larger software companies and have less market acceptance because they compete in niche markets and, as a result, are not as well known. In addition, as compared to prior years, market conditions are requiring software developers to produce higher-quality products at a lower cost, and therefore, companies in the Niche Category, which sell a smaller number of products, are making less money on an overall basis. During the calendar year ended December 31, 1996, on an industry-wide basis, more software titles were published than in the previous year and the average revenue per software title decreased. Accordingly, the software market is becoming more competitive for consumer dollars spent on software and less profitable on a per software product basis. Research and Development During Fiscal 1997, Fiscal 1996 and Fiscal 1995, the Company spent $3,703,775, $2,008,614 and $2,032,059, respectively, on expenditures for research and development. The Company's research and development activities primarily are directed towards developing new entertainment software products. The Company believes that success in the entertainment software industry is directly dependent upon the ability to finance research and development costs in an effort to develop new entertainment software products. The Company does not have the financial resources necessary to finance research and development activities in the future. Intellectual Property The Company relied on copyright and trademark protection and non-disclosure agreements to protect its intellectual property. The Company holds no patents or patent applications in connection with its products. The Company's logo and the name "Graphix Zone" have been registered as service marks with the United States Patent and Trademark Office. The Company claims copyright protection for all of its multimedia and CD-ROM materials. From time to time, the Company licensed from third parties video, audio and related content which it used in the production of software products. Significant Customers During Fiscal 1997, the Company's sales to Tech Data Corporation and Navarre Corporation represented approximately 26% and 15% of the Company's total net revenues. Since July 1997, the Company's primary software sales related activity has consisted of licensing two interactive pc-games to a game distributor. Because the Company is terminating its software business operations, software sales will terminate in the year ending June 30, 1998 ("Fiscal 1998"), and during Fiscal 1998 the Company does not expect to obtain any new software customers. EMPLOYEES As of September 29, 1997, the Company had one full-time employee. 6 9 ITEM 2. PROPERTIES In June 1997, the Company entered into a lease for a 3,000 square foot facility in Santa Ana, California consisting of office and warehouse space. The Company leases the facility from Daimler Commerce Partners, L.P. (the "Partnership"), an affiliated partnership. The general partner of the Partnership is Conifer Investments, Inc. ("Conifer"). The sole shareholders of Conifer are Thomas C.K. Yuen and Misako Yuen, as co-trustees of the Thomas Yuen Family Trust (the "Trust"), and the executive officers of Conifer include Mr. and Mrs. Yuen. Mr. and Mrs. Yuen, as co-trustees of the Trust, also beneficially own as of September 29, 1997, 1.4% of the Company's outstanding Common Stock. Until June 1997, Mr. Yuen was a director of the Company. The lease term commenced on June 23, 1997 and can be terminated by the lessor at any time upon 30 days notice. The monthly lease payment under the lease is $2,550, approximately $.85 per square foot, which management believes is below the per square foot market rate for comparable space. During Fiscal 1997, the Company leased approximately 17,000 square feet of office, multimedia production, showroom and theater space in two separate buildings in Irvine, California. Both leases expired on June 30, 1997 and were not renewed. The Company subleases approximately 12,100 square feet of office space in San Francisco, California, which location formerly was used as the principal executive offices of StarPress. The Company has assigned its sublease to a third party, but remains liable as a guarantor of the sublease, in the event of default by the assignee, until December 1997. In management's opinion, the Company's current facilities are adequate for its current level of operations as well as the Company's anticipated level of operations. However, the monthly lease rate for the Company's facility in Santa Ana, California is below market and the lessor has the right to terminate the lease at any time upon 30 days notice. No assurances can be made that the lease for the Santa Ana, California facility will not be terminated or that the lease payment will not be increased. In addition, no assurances can be made that should either of such events occur, the Company will be able to locate a comparable facility at a comparable lease rate. ITEM 3. LEGAL PROCEEDINGS The Company may from time to time be involved in routine legal matters incidental to its business. In the opinion of management, the resolution of such matters will not have a material adverse effect on its consolidated financial condition or results of operations. Set forth below is a summary of certain material legal proceedings to which the Company and/or any of its subsidiaries is a party. The Company and Tunes Network, Inc. (formerly Surf Communications, Inc.) ("Tunes") currently are involved in an arbitration pending in the San Francisco, California office of the American Arbitration Association. The arbitration was instituted in April 1997. The arbitration relates to claims made by Tunes against the Company in the amount of $322,000, plus unspecified additional royalties, interest and attorneys' fees, allegedly owed under an agreement entered into between the Company and Tunes as of November 5, 1996 (the "November 5th Agreement"). The November 5th Agreement relates to services to be performed by Tunes in connection with creating and maintaining an Internet website for the Company. Although the Company cannot predict the likely outcome of this arbitration at this time, management intends to vigorously defend this arbitration and believes that the final outcome will not have a material adverse effect on the Company's consolidated financial condition, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS In April 1997, the Company solicited the votes of the six holders of its Series B Convertible Preferred Stock (the "Series B Preferred") to amend the Certificate of Designations of the Series B Preferred to establish a $1.00 conversion price floor. For the proposed amendment to become effective, a vote of the holders of (a) the Series B Preferred, voting as a class, and (b) the Common Stock and Series C Preferred Stock, voting together as one class, must be obtained. In light of the Restructuring, the Company has not pursued obtaining this vote. See "Item 1. Business -- Current Status of the Company/Restructuring Plan." 7 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION During Fiscal 1996, the Common Stock of GZ-CA was listed on the Nasdaq ("Nasdaq") SmallCap Market under the symbol "GZON" and the Common Stock of StarPress was quoted on the OTC Electronic Bulletin Board under the symbol "GTBR." During the period beginning July 1, 1996 and continuing through June 19, 1997, the Common Stock was listed on the Nasdaq SmallCap Market under the symbol "GZON." On June 19, 1997, the Common Stock was delisted from the Nasdaq SmallCap Market because the Company no longer complied with the criteria established by Nasdaq for continuation of listing. Following its delisting from the Nasdaq SmallCap Market and continuing through the end of Fiscal 1997, the Common Stock has been quoted on the OTC Electronic Bulletin Board under the symbol "GZON." The table below sets forth the range of high and low bid information for the periods indicated as reported by (a) the Nasdaq SmallCap Market with respect to the Company for the first three quarters of Fiscal 1997 and GZ-CA for all four quarters of Fiscal 1996, (b) the OTC Electronic Bulletin Board and the Nasdaq SmallCap Market with respect to the Company for the fourth quarter of Fiscal 1997 and (c) the OTC Electronic Bulletin Board with respect to StarPress for all four quarters of Fiscal 1996. These quotations reflect interdealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
HIGH BID LOW BID -------- ------- COMPANY -- FISCAL 1997 First quarter.......................................... $ 6.875 $3.000 Second quarter......................................... 4.000 1.875 Third quarter.......................................... 3.500 1.500 Fourth quarter......................................... 1.500 0.031 GZ-CA FISCAL 1996 First quarter.......................................... $ 11.750 $4.875 Second quarter......................................... 8.625 4.375 Third quarter.......................................... 6.750 4.750 Fourth quarter......................................... 8.000 4.750 STARPRESS FISCAL 1996 First quarter.......................................... $ 9.375 $3.409 Second quarter......................................... 7.671 3.146 Third quarter.......................................... 6.392 3.835 Fourth quarter......................................... 5.966 4.262
HOLDERS As of September 29, 1997, there were 166 holders of record of the Company's Common Stock. DIVIDENDS The Company has never paid cash dividends on its Common Stock following a philosophy of retaining earnings in order to finance the expansion and development of its business. Currently, the Company is prohibited from making cash dividend payments under the terms of the Amended Loan Agreement, the Company's senior credit facility. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," herein and "Item 8. Financial Statements and Supplementary Data -- Notes to Consolidated Financial Statements -- Note 6." 8 11 SALES OF UNREGISTERED SECURITIES During Fiscal 1997, the Company sold the following unregistered securities, which previously have not been reported in a Quarterly Report on Form 10-Q for the Company, pursuant to exemptions under the Securities Act of 1933, as amended (the "Act"): 1. On December 12, 1996, the Company issued a warrant to purchase 100,000 shares of Common Stock to Silicon Valley Bank, which the Company believed to be an "accredited investor" as defined in the Act, in exchange for the agreement by Silicon Valley Bank to forbear until December 31, 1997 from taking any legal actions to foreclose on the assets of the Company in connection with the Company's defaults under a loan agreement with Silicon Valley Bank. The warrant may be exercised at a price per share equal to the lowest price at which the Company sells securities in the two equity placements immediately prior to the time of exercise of the warrant. No underwriter was involved in the transaction. The above-referenced securities were issued in reliance on the private offering exemption set forth in Section 4(2) of the Act on the basis that they were issued under circumstances not involving a public offering. 2. On December 24, 1996, the Company issued 43,542 shares of Common Stock to Cruttenden Roth Incorporated ("Cruttenden") and David J. Hirschhorn (who was not an officer or director of the Company at the time of such issuance), both of which the Company believed to be accredited investors, in exchange for investment banking services, having a value of $130,625 as determined by the Company, performed for the Company. Other than Cruttenden and Mr. Hirschhorn in their capacities as the recipients of the shares of stock, no underwriter was involved in the transaction. The above-referenced securities were issued in reliance on the private offering exemption set forth in Section 4(2) of the Act on the basis that they were issued under circumstances not involving a public offering. 3. On December 24, 1996, the Company issued 24,348 shares of Common Stock with a fair market value of $70,000 on the date of issuance to Ronald S. Posner, the Company's Chairman of the Board and Chief Executive Officer at the time of issuance, as payment for accrued compensation in the amount of $70,000. No underwriter was involved in the transaction. The above-referenced securities were issued in reliance on the private offering exemption set forth in Section 4(2) of the Act on the basis that they were issued under circumstances not involving a public offering. 4. On January 31, 1997, the Company entered into a loan agreement in the original principal amount of $3,740,000 (the "Madeleine Loan Agreement") with, and issued a warrant to purchase 300,000 shares of Common Stock to, Madeleine L.L.C. ("Madeleine"), which the Company believed to be an accredited investor. The warrant may be exercised at a price per share equal to the lower of $2.68 per share or the fair market value of the Common Stock which shall be determined based on the average of the last sales prices for the Common Stock over the 7 trading days immediately preceding the date of exercise (the "Fair Market Value Calculation"). No underwriter was involved in the transaction. The above-referenced securities were issued in reliance on the private offering exemption set forth in Section 4(2) of the Act on the basis that they were issued under circumstances not involving a public offering. 5. On February 3, 1997, the Company issued a convertible promissory note in the original principal amount of $200,000 (the "Note") to Middlefield Ventures, Inc. ("Middlefield"), which the Company believed to be an accredited investor. In connection with the issuance of the Note, the Company issued to Intel Corporation ("Intel"), an affiliate of Middlefield, which the Company believed to be an accredited investor, a warrant (the "Warrant") to purchase 613,718 shares of Common Stock at an exercise price of $3.46 per share. At the option of Middlefield, the Note may be converted into shares of Common Stock under the terms of the Warrant. Pursuant to the terms of the Warrant, shares vest as Middlefield converts amounts under the Note or as Intel provides certain marketing funds to the Company. No underwriter was involved in the transaction. The above-referenced securities were issued in reliance on the private offering exemption set forth in Section 4(2) of the Act on the basis that they were issued under circumstances not involving a public offering. 6. On March 17, 1997, the Company issued to David J. Hirschhorn, the Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer, Treasurer and a director of the Company, an 9 12 option to purchase 2,500,000 shares of Common Stock at an exercise price of $2.00 per share. The option was issued to Mr. Hirschhorn in connection with his employment with the Company. The option vests over a period of four years. The option may be exercised as to the vested portions at any time after the date of vesting until the date that is five years from the individual vesting dates. No underwriter was involved in the transaction. The above-referenced securities were issued in reliance on the private offering exemption set forth in Section 4(2) of the Act on the basis that they were issued under circumstances not involving a public offering. 7. On June 5, 1997, the Company issued to Madeleine a warrant to purchase 25% of the Common Stock of the Company, determined on a fully diluted basis, in connection with amending the Madeleine Loan Agreement to provide for an additional loan in the principal amount of $1,300,000 under the terms of the Madeleine Loan. The warrant may be exercised at a price per share equal to the lowest of (i) $0.2366 per share, (ii) the lower of $1.00 per share or the fair market value (determined based on the Fair Market Value Calculation) of the Common Stock as of the effective date that the Company files a registration statement on Form S-4, or such other form, with the U.S. Securities and Exchange Commission, in connection with a merger or consolidation involving the Company, or (iii) the fair market value (determined based on the Fair Market Value Calculation) of the Common Stock as of the date that the warrant is exercised. No underwriter was involved in the transaction. The above-referenced securities were issued in reliance on the private offering exemption set forth in Section 4(2) of the Act on the basis that they were issued under circumstances not involving a public offering. 8. During the period from August 1996 to December 1996, in order to attract and retain certain consultants, the Company granted options to purchase 30,000 shares of Common Stock to 6 persons. The options may be exercised at prices ranging from $3.00 to $4.13 share. No underwriter was involved in the transactions. The above-referenced securities were issued in reliance on the private offering exemption set forth in Section 4(2) of the Act on the basis that they were issued under circumstances not involving a public offering. 9. During the period from August to October 1996, the Company issued 9,134 shares of Common Stock to 3 individuals/entities which the Company believed to be accredited investors in connection with the exercise of options. The aggregate proceeds paid to the Company in connection with the exercise of the options were $9,243. No underwriter was involved in the transactions. The above-referenced securities were issued in reliance on the private offering exemption set forth in Section 4(2) of the Act on the basis that they were issued under circumstances not involving a public offering. 10 13 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected financial data for the Company and should be read in connection with the Consolidated Financial Statements, related notes and other financial information appearing elsewhere in this report.
FISCAL YEAR ENDED JUNE 30, --------------------------------------------- 1997 1996 1995 1994 1993 -------- ------- ------- ------ ----- (IN THOUSANDS, EXCEPT PER SHARE DATA)(1) Statement of Operations Data: Net revenues............................. $ 7,709 $ 7,182 $ 2,171 $ 244 $ -- Gross margin............................. 1,713 3,986 333 77 -- Net loss................................. $ 16,831 $23,519 $10,916 $2,773 $ 839 -------- ------- ------- ------ ----- Per Share Data: Net loss................................. $ 1.61 $ 5.05 $ 7.76 $ 3.15 $3.04 Weighted average shares outstanding...... 11,044 4,661 1,407 881 276 -------- ------- ------- ------ ----- Balance Sheet Data: Long-term obligations.................... $ 51 $ 189 $ -- $ -- $ -- Mandatory Redeemable Series C Preferred Stock................................. $ 2,881 $ -- $ -- $ -- $ -- Working capital (deficit)................ $ (9,133) $ (20) $ (277) $ 296 $(696) Total Assets............................. 1,752 8,529 3,771 3,852 126 Shareholders' equity (deficit)........... $(11,789) $ 2,049 $ 939 $3,039 $(591)
- --------------- (1) The Company was formed for the purpose of acquiring GZ-CA and StarPress. On June 28, 1996 (the "Effective Date"), the Company acquired GZ-CA and StarPress in reverse triangular mergers and the companies became wholly-owned subsidiaries of the Company (the "Reorganization"). Upon the consummation of the Reorganization, the stockholder interests in the Company of the former StarPress shareholders were larger than those of the former GZ-CA shareholders, and therefore, StarPress was deemed to be the acquiring entity for financial accounting purposes. Accordingly, the historical financial information presented herein, prior to the Effective Date, is the financial information of StarPress. The historical shares of StarPress presented herein have been adjusted to reflect a .14666 for 1 stock exchange in connection with the Reorganization. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CURRENT STATUS OF COMPANY Until June 1997, the principal business operations of the Company consisted of developing, producing and marketing interactive entertainment and multimedia products for the personal computer industry. During the third quarter of Fiscal 1997, the Company hired a new executive management team to evaluate the current business and operations and financial condition of the Company and, if necessary, restructure the Company (the "Restructuring"). On June 3, 1997, the Board of Directors of the Company adopted the restructuring plan proposed by the management team, which included terminating the Company's existing business operations. By June 24, 1997, the Company had taken steps to cease its principal business operations and had terminated all employees other than Mr. David Hirschhorn, the Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer and Treasurer of the Company. On each of July 14, 1997 and August 29, 1997, the Company received a Notice of Default and Demand for Payment from its senior secured lender based on the Company's failure to make certain interest payments when due. As of October 13, 1997, the Company has not paid the past-due amounts and the senior secured lender has not foreclosed on the senior secured loan. Since July 1997, the Company's business activities have consisted of licensing and attempting to enter into licenses for certain of the entertainment software products held in its library, divesting or disposing of its businesses and products related to the personal computer industry, and attempting to restructure its debt 11 14 obligations, equity structure and business operations. After October 31, 1997, the Company intends to cease its efforts to enter into new licenses for entertainment software products in its library. RESULTS OF OPERATIONS The following table sets forth certain items in the Company's Consolidated Statements of Operations expressed in percentage relationship to, and as compared with, prior periods.
FISCAL FISCAL FISCAL 1997 1996 1995 ------ ------ ------ Net revenues..................................... 100.0% 100.0% 100.0% Cost of revenues................................. 77.8 44.5 84.7 ------ ------ ------ Gross margin..................................... 22.2 55.5 15.3 Research and development expense................. 48.0 28.0 93.6 Sales and marketing expense...................... 52.5 41.4 115.0 General and administrative expense............... 87.6 36.3 144.6 Restructuring charge............................. 23.3 26.4 -- Acquired in-process technology................... 21.1 249.7 129.4 ------ ------ ------ Operating loss................................... (210.3) (326.3) (467.3) Interest expense, net............................ 7.7 1.1 35.4 ------ ------ ------ Net loss......................................... (218.3)% (327.4)% (502.7)% ====== ====== ======
Net revenues Net revenues for Fiscal 1997 increased by $526,854 to $7,708,900 from $7,182,046 in Fiscal 1996. The increase in net revenues of 7.3% from Fiscal 1996 to Fiscal 1997 is primarily due to the Company releasing ten new titles during Fiscal 1997, offset by significantly lower revenues in the fourth quarter of Fiscal 1997 as a result of the Company implementing the Restructuring. Net revenues for Fiscal 1996 increased $5,010,742 to $7,182,046 from $2,171,334 in Fiscal 1995. The increase in net revenues of 230.8% from Fiscal 1995 to Fiscal 1996 is primarily due to the acquisition of StarPress Multimedia, Inc. in June 1995 and the acquisition of certain products from Sony Interactive Entertainment, Inc. in November 1995. Both acquisitions increased the Company's catalog of products and corresponding revenues. Approximately 41% of the Company's net revenues for Fiscal 1997 were derived from two customers. During Fiscal 1997, Tech Data Corporation and Navarre Corporation individually accounted for 26% and 15% of net revenues, respectively. Approximately 66% of the Company's net revenues for Fiscal 1996 were derived from three customers. During Fiscal 1996, GT Interactive, Tech Data Corporation and Navarre Corporation individually accounted for 27%, 24% and 15% of net revenues, respectively. Approximately 58% of the Company's net revenues for Fiscal 1995 were derived from three customers. During Fiscal 1995, Tech Data Corporation, Ingram Micro and Kenyon Capital Ltd. individually accounted for 36%, 12% and 10% of net revenues, respectively. Gross Margin Gross margin as a percentage of net revenues decreased to 22.2% in Fiscal 1997 from 55.5% in Fiscal 1996. The decrease in gross margin percentage is primarily a result of the Company recording several charges to cost of revenues in the third and fourth quarters of Fiscal 1997 related to the decrease in the net realizable value of certain assets of the Company. These charges include write-downs of approximately $1,516,000 for excess and obsolete inventory as well as approximately $771,000 related to prepaid and guaranteed royalties and acquired capitalized software development costs. Gross margin as a percentage of net revenues increased to 55.5% in Fiscal 1996 from 15.3% in Fiscal 1995. The increase in gross margin percentage from Fiscal 1995 to Fiscal 1996 is primarily a result of Fiscal 1995 cost of revenues including approximately $608,000 of amortization and write-offs of product development costs. These charges represented a significantly larger proportional share of net revenues in Fiscal 1995 than similar charges included in Fiscal 1996 cost of revenues. 12 15 Additionally, during Fiscal 1996 the Company was able to decrease per unit product costs as it gained experience in the procurement of product components. Research and Development Expenses Research and development expenses increased by $1,695,161 to $3,703,775 in Fiscal 1997 from $2,008,614 in Fiscal 1996 and represented 48.0% and 28.0% of net revenues in Fiscal 1997 and Fiscal 1996, respectively. The increase in research and development expenses from Fiscal 1996 to Fiscal 1997 is primarily a result of the Company developing ten new titles during Fiscal 1997 as well as assuming on-going development activities in connection with its purchase of assets from Inscape and Trimark. Research and development expenses decreased by $23,445 to $2,008,614 in Fiscal 1996 from $2,032,059 in Fiscal 1995 and represented 28.0% and 93.6% of net revenues in Fiscal 1996 and 1995, respectively. The decrease in research and development expenses as a percentage of net revenues from Fiscal 1995 to Fiscal 1996 is primarily a result of the Company not directly incurring research and development costs and instead shifting all research and development activities to GZ-CA in the third and fourth quarters of Fiscal 1996 in anticipation of the Reorganization. As previously discussed, for financial statement reporting purposes, the expenses incurred by GZ-CA are not reflected in the Company's results of operations for Fiscal 1996. Sales and Marketing Expenses Selling and marketing expenses during Fiscal 1997 increased to $4,049,633 from $2,973,569 in Fiscal 1996 and $2,498,488 in Fiscal 1995, representing 52.5%, 41.4% and 115.0% of net revenues during such years. The increase in sales and marketing expenses was primarily related to increases in personnel as well as increased participation in cooperative advertising and marketing programs to further penetrate and promote products in traditional and alternative channels. The increase in sales and marketing expenses, as a percentage of net revenues, from Fiscal 1996 to Fiscal 1997 is primarily a result of significantly lower sales in the fourth quarter of Fiscal 1997 as a result of the Company implementing the Restructuring. The decrease in sales and marketing expenses, as a percentage of net revenues, from Fiscal 1995 to Fiscal 1996 was primarily due to significant increases in revenues and only moderate increases in selling and marketing expenses. General and Administrative Expenses General and administrative expenses increased by $4,142,326 to $6,748,996 in Fiscal 1997 from $2,606,670 in Fiscal 1996. The increase in general and administrative expenses from Fiscal 1996 to Fiscal 1997 is due in part to the Company recording a charge in the third quarter of Fiscal 1997 of approximately $1,253,000 related to impairment of property and equipment, intangible assets and other long term assets and recording in the third and fourth quarters of Fiscal 1997 approximately $1,147,000 of additional bad debt reserves. In addition, the comparative increase is due in part to the curtailment of certain administrative functions and personnel in the third quarter of Fiscal 1996 in anticipation of the Reorganization. General and administrative expenses during Fiscal 1996 decreased to $2,606,670 from $3,139,507 during Fiscal 1995. The decrease is primarily a result of the curtailment of certain administrative functions and decrease in personnel in anticipation of the Reorganization. Additionally, certain recurring administrative costs including facility rents for vacated facilities for the second half of Fiscal 1996 were reserved for and included in the restructuring charge discussed below rather than being included in general and administrative expenses. General and administrative expenses increased as a percentage of net revenues to 87.6% in Fiscal 1997 from 36.3% in Fiscal 1996 but decreased from 144.6% of net revenues in Fiscal 1995. The increase as a percentage of net revenues in Fiscal 1997 as compared to Fiscal 1996 is primarily a result of the aforementioned charges recorded in the third and fourth quarters of Fiscal 1997 and significantly lower sales in the fourth quarter of Fiscal 1997 as a result of the Company implementing the Restructuring. The decrease as a percentage of net revenues in Fiscal 1996 compared to Fiscal 1995 is primarily a result of a significant increase in revenues and a moderate decrease in general and administrative expenses resulting from the curtailment of certain administrative functions and personnel in the third quarter of Fiscal 1996 in anticipation of the Reorganization. 13 16 Restructuring Charges In June 1997, the Company began implementing the Restructuring. In connection with the Restructuring, the Company recorded a charge of approximately $2,063,000, primarily related to the write-down of property and equipment, goodwill and intangibles related to the Inscape and Trimark asset purchases and severance costs related to terminating all but one of the employees of the Company. During the second quarter of Fiscal 1996, in anticipation of the Reorganization, the Company implemented a restructuring plan to enhance overall competitiveness, productivity and efficiency through the reduction of overhead costs. The total estimated cost of the charge to operations during Fiscal 1996 related to such plan was $1,900,000. The charge principally reflects severance costs resulting from a reduction of a significant portion of the Company's work force, write-down of excess furniture and equipment and office facilities and write-offs of assembled work force and goodwill arising from the Company's acquisition of StarPress Multimedia, Inc. in June 1995. During Fiscal 1997, the Company reversed approximately $267,000 of the accrued restructuring charge recorded in Fiscal 1996, primarily related to facility and equipment leases for its San Francisco, California facility, which leases were subsequently sub-leased. Acquired in-process technology As a result of the Company's acquisition of certain assets from Inscape and Trimark in February 1997, and the acquisitions of GZ-CA in June 1996 and StarPress Multimedia, Inc. in June 1995, the Company wrote-off $1,628,000, $17,935,000 and $2,810,000 of acquired research and development costs in Fiscal 1997, 1996 and 1995, respectively. These costs are considered non-recurring expenses. Interest expense Interest expense increased $511,910 to $592,966 in Fiscal 1997 from $81,056 in Fiscal 1996. The increase in interest expense is primarily related to the Company's borrowings under the Madeleine Loan Agreement (hereinafter defined). Interest expense decreased $702,451 to $81,056 in Fiscal 1996 from $783,507 in Fiscal 1995. The decrease in interest expense was primarily related to the Company's payment of certain notes payable and conversion of certain debentures and notes payable to Common Stock in the latter part of Fiscal 1995 and first quarter of Fiscal 1996. NEW ACCOUNTING STANDARDS Earnings Per Share In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This statement is effective for both interim and annual periods ending after December 15, 1997, and replaces the presentation of "primary" earnings per share with "basic" earnings per share and the presentation of "fully diluted" earnings per share with "diluted" earnings per share. Earlier application is not permitted. When adopted, all previously reported earnings per share amounts must be restated based on the provisions of the new standard. Application of SFAS No. 128 is not expected to have a material impact on the Company's loss per share. Reporting Comprehensive Income In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This statement is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting of comprehensive income and its components in annual financial statements. Reclassification or restatement of comparative financial statements of financial information for earlier periods is required upon adoption of SFAS No. 130. Application of SFAS No. 130 is not expected to have a material impact on the Company's consolidated results of operations or loss per share data as currently reported. 14 17 Disclosure about Segments of an Enterprise In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 establishes standards for reporting financial and descriptive information about an enterprise's operating segments in its annual financial statements and selected segment information in interim financial reports. Reclassification or restatement of comparative financial statements or financial information for earlier periods is required upon adoption of SFAS No. 131. Application of SFAS No. 131 is not expected to have a material impact on the Company's consolidated results of operations or earnings per share data as currently reported. LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of liquidity is cash on-hand. At June 30, 1997, the balance of cash and cash equivalents was $726,443, the net working capital deficiency was ($9,133,497) and net stockholders' deficiency was ($11,789,259). At June 30, 1996, the balance of cash and cash equivalents was $1,288,196, the net working capital deficiency was ($19,631) and net shareholders' equity was $2,048,729. The decrease in the balance of cash and cash equivalents from Fiscal 1996 to Fiscal 1997 was primarily due to the use in Fiscal 1997 of cash and cash equivalents to fund operations and make debt payments, as partially offset by net proceeds of $2,355,948 raised by the Company in private placements (described below) and net proceeds of $4,710,000 received from the Amended Loan Agreement (hereinafter defined). Cash used in operating activities during Fiscal 1997, Fiscal 1996 and Fiscal 1995 were $6,331,949, $7,082,940 and $4,979,232, respectively. During the period from September 25, 1996 to February 7, 1997, the Company issued 3,025 shares of Series A Convertible Preferred Stock, $.01 par value per share and a stated liquidation value of $1,000 per share (the "Series A Preferred"), at a price of $1,000 per share to a number of accredited investors in a series of private placements. The cash proceeds to the Company from such issuances, net of offering expenses, were $2,355,948. The proceeds from the Company's private placements were used as working capital to fund the development of products and the operations of the Company. On January 31, 1997, the Company entered into a loan agreement with Madeleine L.L.C. ("Madeleine") in the principal amount of $3,740,000 with an initial interest rate equal to the prime rate, as announced by Citibank, N.A., plus 4.25% and, commencing on July 31, 1997, increasing to a rate equal to such prime rate plus 6.25% (the "Madeleine Loan Agreement"). The Madeleine Loan Agreement is secured by all of the Company's assets and matures on January 30, 1998. The initial loan proceeds, net of $280,000 of fees to Madeleine, were $3,460,000 and were used to satisfy existing trade debt and royalties and to provide working capital to the Company. The Madeleine Loan Agreement has numerous negative covenants which restrict the ability of the Company to effect certain transactions without Madeleine's written consent. Among those negative covenants is a prohibition on declaring or paying any cash dividends. On February 3, 1997, in connection with a production and development agreement entered into with Intel Corporation ("Intel"), the Company entered into a Convertible Promissory Note with Middlefield Ventures, Inc. ("Middlefield"), an affiliate of Intel, in the principal amount of $200,000, bearing interest at the rate of 8% per annum. The Promissory Note matures on February 3, 2000. Commencing on January 1, 1998 and on the first day of each calendar quarter thereafter, the Company must pay one-eighth of the principal amount and all accrued and unpaid interest. The Company expects to repay the Promissory Note in the fiscal year ending June 30, 1998 and, therefore, the Promissory Note is classified as a current liability on the Company's balance sheet as of June 30, 1997. In connection with the Promissory Note, the Company issued to Intel a warrant (the "Intel Warrant") to purchase 613,718 shares of Common Stock at an exercise price of $3.46 per share. Pursuant to the terms of the Intel Warrant, shares subject to the Intel Warrant vest as Middlefield cancels amounts under the Promissory Note or as Intel provides certain marketing funds to the Company. On June 5, 1997, the Company entered into an amendment to the Madeleine Loan Agreement which provided for an additional loan in the principal amount of $1,300,000 with the same interest rate and maturity date as the Madeleine Loan Agreement (the "Amendment"). The loan proceeds from the Amendment, net of 15 18 $50,000 of fees to Madeleine, were $1,250,000 and are being used to sustain administrative operations as the Company continues to implement the Restructuring. Pursuant to the terms of the Amendment, Madeleine waived certain events of default under the Madeleine Loan Agreement and certain exceptions to the representations and warranties contained in the Madeleine Loan Agreement, which events of default and exceptions were outstanding on June 5, 1997. The Madeleine Loan Agreement and the Amendment are hereafter collectively referred to as the "Amended Loan Agreement." As a condition subsequent to the Amendment, the Company entered into a loan transaction with Mr. David Hirschhorn pursuant to which Mr. Hirschhorn loaned $250,000 to the Company on similar terms as set forth in the Amendment. In connection with such loan, the Company agreed to issue to Mr. Hirschhorn a warrant to purchase shares of Common Stock on terms and conditions to be agreed to between the Company and Mr. Hirschhorn. On July 14, 1997, the Company received a Notice of Default and Demand for Payment from Madeleine with respect to the Amended Loan Agreement based upon the Company's failure to make certain interest payments when due. The notice stated that the Company was in default under the terms of the Amended Loan Agreement and demanded that all past due amounts be paid to Madeleine by July 18, 1997. The Company did not pay to Madeleine the past due amounts by July 18, 1997. On August 29, 1997, the Company received a second Notice of Default and Demand for Payment (the "August Notice") from Madeleine. The August Notice stated that in the event that the Company failed to pay all past due amounts by September 5, 1997, Madeleine would exercise its rights to declare all obligations under the Amended Loan Agreement immediately due and payable. The Company did not pay the past due amounts by the September 5, 1997. As of September 29, 1997, Madeleine has not declared the obligations under the Amended Loan Agreement immediately due and payable. The Company currently is negotiating with Madeleine to obtain a waiver of defaults under the Amended Loan Agreement and to amend the terms of the Amended Loan Agreement to extend its term, reduce the interest rate thereof and provide for later payments of amounts thereunder. The Company does not have the necessary funds to pay its secured and unsecured debt obligations and, as noted above, is in default under the Amended Loan Agreement as well as in default under various other credit agreements. As part of the Restructuring, the Company is in the process of negotiating settlements with all trade creditors and debtors related to its prior business activities pursuant to which the Company would pay to such creditors and debtors $.30 for each $1.00 of debt. The Company is in default under agreements with many of these creditors and debtors. The Company's obligations to such trade creditors and debtors were approximately $6,000,000 as of June 30, 1997. In concert with settlement negotiations, the Company is investigating various sources of capital in an effort to raise funds for the Company to be used to satisfy its existing obligations. In addition, the Company is exploring opportunities to enter different businesses and industries. The Company's short-term liquidity is principally contingent on its ability to (a) raise funds through private and/or public debt and equity placements, (b) reach settlements with its trade creditors and debtors, and (c) obtain from Madeleine a waiver of defaults under the Amended Loan Agreement. The Company's immediate liquidity needs include paying existing trade debt and amounts past due under the Amended Loan Agreement and obtaining sufficient working capital to sustain its Restructuring efforts and service the debt payments under the Amended Loan Agreement. Long-term liquidity needs include repayment of borrowings under the Amended Loan Agreement which matures on January 30, 1998, and working capital needs for continuing operations. There can be no assurances that the Company will be able obtain the necessary capital to satisfy its existing debt obligations and continue as a going concern. To the extent that the Company is unable to complete any step of its Restructuring Plan, it is likely that the Company's senior secured lender will foreclose on all of the assets of the Company and pursue the dissolution of the Company. FORWARD-LOOKING STATEMENTS Included in "Item 1. Business," herein, this "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Report are certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends that such forward-looking statements 16 19 shall be protected by the safe harbors provided for in such sections. Such statements are subject to risks and uncertainties that could cause actual results to vary materially from those projected in the forward-looking statements. It is uncertain whether the Company will be able to effect the Restructuring. If the Company does effect the Restructuring and pursues other business interests, the Company may experience significant fluctuations in future operating results due to a number of economic, competitive and other factors. These factors and others could cause operating results to vary significantly from those in prior periods. The Company's actual results could differ materially from the results anticipated in these forward-looking statements as a result of the factors set forth in "Item 1. Business -- Risk Factors." ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE ---- Independent Auditors' Reports......................................................... 18 Consolidated Balance Sheets as of June 30, 1997 and 1996.............................. 20 Consolidated Statements of Operations for the Years Ended June 30, 1997, 1996 and 1995................................................................................ 21 Consolidated Statements of Stockholders' Equity (Deficiency) for the Years Ended June 30, 1997, 1996 and 1995............................................................. 22 Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1996 and 1995................................................................................ 23 Notes to Consolidated Financial Statements............................................ 25 Schedule II -- Valuation and Qualifying Accounts...................................... S-1
17 20 INDEPENDENT AUDITORS' REPORT The Board of Directors Graphix Zone, Inc.: We have audited the accompanying consolidated balance sheets of Graphix Zone, Inc. and subsidiaries as of June 30, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity (deficiency) and cash flows for the years then ended. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule for the years ended June 30, 1997 and 1996 as listed in the accompanying index. These consolidated financial statements and financial schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance 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 financial position of Graphix Zone, Inc. and subsidiaries as of June 30, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for the years ended June 30, 1997 and 1996, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. The accompanying consolidated financial statements and financial statement schedule have been prepared assuming that the Company will continue as a going concern. As discussed in note 17 to the consolidated financial statements, the Company has suffered recurring losses from operations, has a net capital deficiency and does not have the necessary funds to pay its secured and unsecured debt obligations. In addition, the Company has received two Notices of Default from its senior secured lender and has taken steps to cease its principal business operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in note 17. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG Peat Marwick LLP Orange County, California October 8, 1997 18 21 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders StarPress, Inc. We have audited the accompanying consolidated statements of operations, stockholders' equity, and cash flows of StarPress, Inc. (formerly known as Great Bear Technology Incorporated) for the year ended June 30, 1995. Our audit also included the financial statement schedule for the year ended June 30, 1995 listed in the Index at Item 14. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations, stockholders' equity and cash flows of StarPress, Inc. for the year ended June 30, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for the year ended June 30, 1995, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying consolidated financial statements have been prepared assuming that StarPress Inc. will continue as a going concern. The Company has incurred operating losses since its inception. This condition raises substantial doubt about its ability to continue as a going concern. In addition, the Company has recorded capitalized product development costs and intangible assets in its consolidated balance sheet at June 30, 1995. The Company must generate substantial revenue and net income in future periods to realize the carrying value of these assets. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties. /s/ Ernst and Young LLP Walnut Creek, California August 18, 1995 19 22 GRAPHIX ZONE, INC. CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1997 AND 1996 ASSETS
1997 1996 ------------ ------------ Cash and cash equivalents....................................... $ 726,443 $ 1,288,196 Accounts receivable, net of allowance for doubtful accounts of $1,397,270 in 1997 and $640,194 in 1996....................... 387,707 3,867,268 Inventories..................................................... 34,001 833,700 Deferred loan fees.............................................. 238,333 -- Prepaid expenses and other current assets....................... 88,630 281,883 ------------ ------------ Total current assets.................................. 1,475,114 6,271,047 Property and equipment, net..................................... 250,000 653,833 Intangible assets, net.......................................... -- 850,186 Other assets, net............................................... 26,570 753,619 ------------ ------------ $ 1,751,684 $ 8,528,685 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Notes payable................................................... $ 4,561,895 $ 750,000 Accounts payable................................................ 2,852,819 2,542,806 Accrued royalties............................................... 1,609,730 977,764 Accrued liabilities............................................. 1,509,167 1,159,946 Accrued restructuring charge.................................... 75,000 573,461 Deferred revenue................................................ -- 286,701 ------------ ------------ Total current liabilities............................. 10,608,611 6,290,678 Other liabilities............................................... 51,147 189,278 ------------ ------------ Total liabilities..................................... 10,659,758 6,479,956 Mandatory Redeemable Series C Convertible Preferred Stock, 1,300,000 shares authorized, 1,185,185 issued and outstanding at June 30, 1997 (Liquidation preference $4,000,000).......... 2,881,185 -- Stockholders' equity (deficiency) Preferred stock, $.01 par value, 25,000,000 shares authorized -- all classes: Series B Convertible Preferred Stock, $.01 par value, 3,500 shares authorized, 2,255 issued and outstanding at June 30, 1997................................................. 1,585,948 -- Common stock, $.01 par value, 100,000,000 shares authorized, 12,745,503 and 10,608,748 issued and outstanding at June 30, 1997 and 1996, respectively............................ 127,455 106,087 Additional paid-in capital.................................... 41,469,405 40,083,684 Accumulated deficit........................................... (54,972,067) (38,141,042) ------------ ------------ Net stockholders' equity (deficiency)................. (11,789,259) 2,048,729 ------------ ------------ Commitments and contingencies................................... Going concern................................................... Subsequent events............................................... $ 1,751,684 $ 8,528,685 ============ ============
See accompanying Notes to Consolidated Financial Statements 20 23 GRAPHIX ZONE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1997 1996 1995 ------------ ------------ ------------ Net revenues..................................... $ 7,708,900 $ 7,182,046 $ 2,171,334 Cost of revenues................................. 5,995,565 3,195,934 1,838,699 ------------ ------------ ------------ Gross margin..................................... 1,713,335 3,986,112 332,635 ------------ ------------ ------------ Operating expenses: Research and development....................... 3,703,775 2,008,614 2,032,059 Sales and marketing............................ 4,049,633 2,973,569 2,498,488 General and administrative..................... 6,748,996 2,606,670 3,139,507 Restructuring charge........................... 1,795,638 1,900,000 -- Acquired in-process technology................. 1,628,000 17,934,863 2,810,000 ------------ ------------ ------------ Total operating expenses............... 17,926,042 27,423,716 10,480,054 ------------ ------------ ------------ Operating loss................................... (16,212,707) (23,437,604) (10,147,419) Interest expense, net............................ (592,966) (81,056) (783,507) Other income (expense), net...................... (25,352) -- 14,529 ------------ ------------ ------------ Net loss......................................... $(16,831,025) $(23,518,660) $(10,916,397) ============ ============ ============ Loss per share of common stock................... $ (1.61) $ (5.05) $ (7.76) ============ ============ ============ Weighted average common shares................... 11,043,679 4,661,401 1,406,688 ============ ============ ============
See accompanying Notes to Consolidated Financial Statements 21 24 GRAPHIX ZONE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) YEARS ENDED JUNE 30, 1997, 1996 AND 1995
PREFERRED STOCK --------------------------- SERIES COMMON STOCK SERIES A B ------------------------ ------------------- ----- SHARES AMOUNT SHARES AMOUNT SHARES ---------- ----------- ------ ---------- ----- Balance, June 30, 1994............................................. 1,340,942 $ 6,744,939 -- $ -- -- Common Stock issued for acquisition of StarPress Multimedia, Inc.............................................................. 1,935,539 1,649,682 -- -- -- Common Stock issued in private placement, net...................... 381,316 3,081,451 -- -- -- Detachable warrants issued in connection with convertible debentures and notes payable..................................... -- 1,059,796 -- -- -- Common Stock issued upon conversion of debentures.................. 319,132 2,200,278 -- -- -- Common stock issued upon exercise of warrants...................... 301,753 20,575 -- -- -- Common Stock issued for services................................... 43,118 158,500 -- -- -- Stock option compensation.......................................... -- 720,351 -- -- -- Notes receivable for purchase of common stock...................... -- (73,782) -- -- -- Net loss........................................................... -- -- -- -- -- ---------- ---------- ------ --------- ----- Balance, June 30, 1995............................................. 4,321,800 15,561,790 -- -- -- Common stock issued upon conversion of debentures.................. 24,932 195,180 -- -- -- Common stock issued upon exercise of warrants...................... 52,995 3,613 -- -- -- Common stock issued upon exercise of options....................... 300,260 134,879 -- -- -- Common stock issued for acquisition of assets...................... 172,059 292,852 -- -- -- Stock option compensation.......................................... -- 195,682 -- -- -- Common stock issued in satisfaction of obligations................. 85,159 80,000 -- -- -- Common stock issued for services................................... 125,000 618,750 -- -- -- Common stock issued for acquisition of GZ-CA....................... 5,526,543 23,107,025 -- -- -- Issuance of GZ-DE Common Stock -- (40,083,684) -- -- -- Net loss........................................................... -- -- -- -- -- ---------- ---------- ------ --------- ----- Balance, June 30, 1996............................................. 10,608,748 106,087 -- -- -- Common stock issued upon exercise of options....................... 52,850 529 -- -- -- Common stock issued for services................................... 67,890 679 -- -- -- Issuance of Series A convertible preferred stock................... -- -- 3,025 2,355,948 -- Exchange of Series A for Series B convertible preferred stock...... -- -- (3,025) (2,355,948) 3,025 Conversion of Series B preferred stock to common stock............. 2,023,515 20,235 -- -- (770) Accretion of discount on Series C Convertible Preferred Stock...... -- -- -- -- -- Redemption of common stock from merger dissenters.................. (7,500) (75) -- -- -- Common stock warrants issued in connection with notes payable...... -- -- -- -- -- Convertible preferred stock dividends.............................. -- -- -- -- -- Discount on issuance of Series A preferred stock................... -- -- -- (603,792) -- Amortization of discount on Series A Convertible Preferred Stock... -- -- -- 603,792 -- Net loss........................................................... -- -- -- -- -- ---------- ---------- ------ --------- ----- Balance, June 30, 1997............................................. 12,745,503 $ 127,455 -- $ -- 2,255 ========== ========== ====== ========= ===== NET ADDITIONAL STOCKHOLDERS' PAID IN ACCUMULATED EQUITY AMOUNT CAPITAL DEFICIT (DEFICIENCY) ---------- ------------ ----------- ------------ Balance, June 30, 1994............................................. $ -- $ -- $(3,705,985) $ 3,038,954 Common Stock issued for acquisition of StarPress Multimedia, Inc.............................................................. -- -- -- 1,649,682 Common Stock issued in private placement, net...................... -- -- -- 3,081,451 Detachable warrants issued in connection with convertible debentures and notes payable..................................... -- -- -- 1,059,796 Common Stock issued upon conversion of debentures.................. -- -- -- 2,200,278 Common stock issued upon exercise of warrants...................... -- -- -- 20,575 Common Stock issued for services................................... -- -- -- 158,500 Stock option compensation.......................................... -- -- -- 720,351 Notes receivable for purchase of common stock...................... -- -- -- (73,782) Net loss........................................................... -- -- (10,916,397) (10,916,397) --------- ----------- ----------- ----------- Balance, June 30, 1995............................................. -- -- (14,622,382) 939,408 Common stock issued upon conversion of debentures.................. -- -- -- 195,180 Common stock issued upon exercise of warrants...................... -- -- -- 3,613 Common stock issued upon exercise of options....................... -- -- -- 134,879 Common stock issued for acquisition of assets...................... -- -- -- 292,852 Stock option compensation.......................................... -- -- -- 195,682 Common stock issued in satisfaction of obligations................. -- -- -- 80,000 Common stock issued for services................................... -- -- -- 618,750 Common stock issued for acquisition of GZ-CA....................... -- -- -- 23,107,025 Issuance of GZ-DE Common Stock -- 40,083,684 -- -- Net loss........................................................... -- -- (23,518,660) (23,518,660) --------- ----------- ----------- ----------- Balance, June 30, 1996............................................. -- 40,083,684 (38,141,042) 2,048,729 Common stock issued upon exercise of options....................... -- 13,403 -- 13,932 Common stock issued for services................................... -- 199,946 -- 200,625 Issuance of Series A convertible preferred stock................... -- -- -- 2,355,948 Exchange of Series A for Series B convertible preferred stock...... 2,355,948 -- -- -- Conversion of Series B preferred stock to common stock............. (770,000) 749,765 -- -- Accretion of discount on Series C Convertible Preferred Stock...... -- (139,852) -- (139,852) Redemption of common stock from merger dissenters.................. -- (74,987) -- (75,062) Common stock warrants issued in connection with notes payable...... -- 809,805 -- 809,805 Convertible preferred stock dividends.............................. -- (172,359) -- (172,359) Discount on issuance of Series A preferred stock................... -- 603,792 -- -- Amortization of discount on Series A Convertible Preferred Stock... -- (603,792) -- -- Net loss........................................................... -- -- (16,831,025) (16,831,025) --------- ----------- ----------- ----------- Balance, June 30, 1997............................................. $1,585,948 $ 41,469,405 (54,972,067) $(11,789,259) ========= =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements 22 25 GRAPHIX ZONE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1997 1996 1995 ------------ ------------ ------------ Cash flows from operating activities: Net loss................................................. $(16,831,025) $(23,518,660) $(10,916,397) Net Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.......................... 1,064,342 349,769 95,067 Impairment of intangibles and other long-term assets... 1,101,000 -- 1,680,046 Acquired in-process technology......................... 1,628,000 17,934,863 2,810,000 Provision for sales returns and doubtful accounts...... 1,727,000 221,000 398,000 Provision for inventory reserve........................ 1,537,603 90,000 -- Write-down of excess furniture and equipment........... 252,000 -- -- Amortization of discount on convertible debentures..... -- -- 579,122 Stock option and warrant compensation expense.......... -- 195,682 853,851 Restructuring charge................................... 1,795,638 1,900,000 -- Changes in operating assets and liabilities: Decrease (increase) in accounts receivable........... 1,752,561 (3,926,851) (619,476) Decrease (increase) in inventories................... (737,904) 251,246 (4,447) Decrease in prepaid expenses and other current assets............................................ 208,747 424,507 71,981 Decrease (increase) in other assets.................. 143,149 (59,679) 54,691 Increase (decrease) in accounts payable.............. 310,013 (162,490) (593,782) Increase in accrued royalties........................ 631,966 360,857 -- Increase (decrease) in accrued liabilities........... 199,633 (612,483) 594,842 Decrease in accrued restructuring.................... (827,961) (484,031) -- Increase (decrease) in deferred revenue.............. (286,701) (46,670) 17,270 ------------ ------------ ------------ Net cash used in operating activities............. (6,331,949) (7,082,940) (4,979,232) Cash flows from investing activities: Purchase of property and equipment....................... (684,622) (42,000) (226,727) Proceeds from sale of property and equipment............. -- 97,360 -- Acquisition of StarPress Multimedia, Inc................. -- -- (337,000) Acquisition of DMT assets................................ -- (20,890) -- Net cash acquired from purchase of GZ-CA................. -- 6,854,357 -- ------------ ------------ ------------ Net cash provided by (used in) investing activities...................................... (684,622) 6,888,827 (563,727) Cash flows from financing activities: Release of restricted cash from escrow................... -- -- 592,700 Proceeds from convertible notes payable.................. -- -- 2,766,537 Proceeds from notes payable to related parties........... -- -- 300,000 Payments for redemption of common stock.................. (75,062) -- -- Payments on notes payable to related parties............. -- -- (222,000) Proceeds from notes payable.............................. 4,910,000 -- 265,000 Payments on notes payable................................ (750,000) (575,285) (243,000) Proceeds from exercise of stock options.................. 13,932 134,879 -- Proceeds from exercise of warrants....................... -- 3,613 20,575 Proceeds from convertible preferred stock issuances, net.................................................... 2,355,948 -- -- Proceeds from common stock issuances, net................ -- -- 3,081,451 ------------ ------------ ------------ Net cash provided by (used in) financing activities...................................... 6,454,818 (436,793) 6,561,263 Net increase (decrease) in cash and cash equivalents....... (561,753) (630,906) 1,018,304 Cash and cash equivalents at the beginning of year......... 1,288,196 1,919,102 900,798 ------------ ------------ ------------ Cash and cash equivalents at end of year................... $ 726,443 $ 1,288,196 $ 1,919,102 ============ ============ ============
(continued) 23 26 GRAPHIX ZONE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1997 1996 1995 ------------ ------------ ------------ Supplemental disclosure of cash flow information: Cash paid during the year for interest..................... $ 257,664 $ 86,635 $ 140,251 ============ ============ ============ Supplemental disclosure of noncash investing and financing activities: Mandatory redeemable Series C convertible preferred stock issued in connection with acquisitions................. $ 2,741,333 -- -- ============ ============ ============ Common stock issued in connection with acquisitions and services............................................... $ 200,625 $ 24,018,627 $ 1,674,682 ============ ============ ============ Conversion of convertible debentures and notes payable to common stock........................................... $ -- $ 195,180 $ 2,200,278 ============ ============ ============ Common stock issued in satisfaction of obligations....... $ -- $ 80,000 $ -- ============ ============ ============ Preferred stock dividends accrued and not paid........... $ 172,359 $ -- $ -- ============ ============ ============ Discount on issuance of preferred stock.................. $ 603,792 $ -- $ -- ============ ============ ============ Loan fees added to notes payable......................... $ 330,000 $ -- $ -- ============ ============ ============ Common stock warrants issued in connection with notes payable................................................ $ 809,805 $ -- $ -- ============ ============ ============
See accompanying Notes to Consolidated Financial Statements 24 27 GRAPHIX ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997, 1996 AND 1995 (1) GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Graphix Zone, Inc., a Delaware corporation (the "Company" or "GZ-DE"), was incorporated on January 17, 1996 for the purpose of acquiring GZ Multimedia, Inc. (formerly Graphix Zone, Inc.), a California corporation ("GZ-CA"), and StarPress, Inc., a Colorado corporation ("StarPress"). Both GZ-CA and StarPress were publishers of entertainment-oriented interactive multimedia software. On June 28, 1996, the Company acquired GZ-CA and StarPress in reverse triangular mergers and the companies became wholly-owned subsidiaries of the Company (the "Reorganization"). Following the consummation of the Reorganization, the Company's principal business was developing, producing and marketing CD-ROM and on-line products for the personal computer industry. In addition, the Company operated certain other businesses, including developing and operating WILMA, an Internet site for live music venues and developing and marketing certain Internet access and exploration products. HISTORICAL FINANCIAL STATEMENTS Upon the consummation of the Reorganization, the stockholder interests in the Company of the former StarPress shareholders were larger than those of the former GZ-CA shareholders, and therefore, StarPress was deemed to be the acquiring entity for financial accounting purposes. Accordingly, the historical financial statements presented herein, prior to the effective date of the Reorganization, are the financial statements of StarPress. The historical shares of StarPress presented therein have been adjusted to reflect a .14666 for 1 stock exchange in connection with the Reorganization. All references to the "Company" prior to June 28, 1996 relate to StarPress. CURRENT STATUS OF COMPANY In March 1997, the Company hired a new executive management team for the purpose of evaluating the current business and operations and financial condition of the Company and, if necessary, restructuring the Company (the "Restructuring"). The management team performed an in-depth review of the Company's past history of operating losses, current financial condition, current strategic position within the entertainment software industry, competitors in such industry and capital requirements for new product development. In June 1997, based on the results of its review, the management team proposed to the Board of Directors of the Company a restructuring plan (as described below, the "Restructuring Plan") for the Company, which included terminating the Company's existing business operations. On June 3, 1997, the Board of Directors of the Company adopted the Restructuring Plan proposed by the management team. The Restructuring Plan adopted by the Board of Directors of the Company consists of the following elements: Business -- Divest or dispose of the Company's existing businesses related to the personal computer industry and explore opportunities to enter into new businesses and industries; Senior Secured Debt -- Renegotiate the terms of the Company's senior secured loan and the related collateral agreements to extend the term of the loan, reduce the interest rate thereof and provide for later payments of amounts due thereunder and to reduce the senior lender's warrant position in the Company; Outstanding Unsecured Debt -- Pay to unsecured creditors $0.30 for each $1.00 of debt outstanding; Outstanding Convertible Preferred Stock -- Exchange outstanding shares of the Company's Series B and Series C Convertible Preferred Stock, each $.01 par value per share (collectively, the "Preferred Stock"), for shares of the Company's common stock, $.01 par value per share ("Common Stock"), at an exchange price of approximately $0.75 per share; and Additional Capital -- Evaluate alternatives for raising additional funds for the Company. 25 28 GRAPHIX ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1996 AND 1995 By June 24, 1997, the Company had taken steps to cease its principal business operations and had terminated all employees other than Mr. David Hirschhorn, the Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer and Treasurer of the Company. Since July 1997, the Company's business activities have consisted of licensing and attempting to enter into licenses for certain of the entertainment software products held in its library, divesting or disposing of its businesses and products related to the personal computer industry, and attempting to restructure its debt obligations, equity structure and business operations. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries GZ-CA and StarPress. All material inter-company balances and transactions have been eliminated in consolidation. REVENUE RECOGNITION Revenue was recognized from CD-ROM sales upon shipment. The Company granted certain distributors limited rights to exchange merchandise and price protection on unsold merchandise. The Company established a reserve for price adjustments and estimated returns at the time the related revenue was recognized. CASH AND CASH EQUIVALENTS Cash equivalents are highly liquid investments purchased with an original maturity of three months or less. Cash equivalents include bank demand deposits and money market funds. INVENTORIES Inventories are comprised primarily of CD-ROM products and packaging materials and are stated at the lower of cost (first-in, first-out) or market (net realizable value). See Note 8 for a discussion regarding the write-down of inventory. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation of property and equipment is computed on a straight-line basis over estimated useful lives of two to seven years. Equipment held under capital leases and leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the related asset. See Note 8 for discussions regarding write-downs of property and equipment. SOFTWARE DEVELOPMENT COSTS The Company capitalized costs related to the development of certain software products. In accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software," capitalization of costs began when technological feasibility was established and ended when the product was available for general release to customers. Capitalized software development costs as of June 30, 1996 included amounts capitalized pursuant to the acquisitions described in Note 7. Amortization was computed on an individual product basis and was recognized over the greater of the remaining economic lives of each product or the ratio that current gross revenues for a product bore to the total of current and anticipated revenues for that product, commencing when the products became available 26 29 GRAPHIX ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1996 AND 1995 for general release to customers. Software development costs generally were being amortized over a three-year period. The Company continually assesses the recoverability of software development costs by comparing the carrying value of individual products to their net realizable value. The Company incurred amortization expense for software development costs of $85,720, $214,731 and $720,340 in Fiscal 1997, 1996 and 1995, respectively. The Company wrote-down software development costs of approximately $21,000 in Fiscal 1997 in connection with the Restructuring. See Note 8 for discussions regarding write-downs of software development costs. INTANGIBLE ASSETS The Company accounted for goodwill and other intangible assets at the lower of amortized cost or fair value. Goodwill represented the excess of purchase price over fair value of net assets acquired. Goodwill and other intangibles are amortized on a straight-line basis over the expected periods to be benefited (generally two to five years). The Company assesses the recoverability of intangible assets by determining whether the amortization of the intangible asset balance over its remaining life could be recovered through projected non- discounted cash flows. The amount of goodwill impairment, if any, is measured based on projected discounted cash flows using a discount rate reflecting the Company's average cost of funds. See Note 8 for discussions of write-downs of goodwill and intangible assets. ROYALTY EXPENSE Royalty expense was recognized based upon actual net product sales in accordance with the terms of the related royalty agreement. Royalty advances were capitalized and expensed when earned. The Company periodically reviewed the realizability of capitalized royalty advances and wrote-off those advances which it determined might not be realized from future sales. Royalty expenses are included in cost of revenues in the accompanying consolidated statements of operations. See Note 8 for a discussion of write-downs of royalty advances. FAIR VALUE OF FINANCIAL INSTRUMENTS In December 1991, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure about Fair Value of Financial Instruments." SFAS No. 107 requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value. SFAS No. 107 defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of June 30, 1997 and 1996, the carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and accrued royalties approximates fair value due to the short term nature of such instruments. The carrying value of all debt approximates fair value as the related interest rates approximates rates currently available to the Company. LONG-LIVED ASSETS During Fiscal 1996, the Company adopted SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which establishes accounting standards for the recognition and measurement of impairment of long-lived assets, certain identifiable intangibles and goodwill either to be held or disposed of. See Note 8 for a discussion of charges recorded by the Company during Fiscal 1997 in accordance with SFAS No. 121. 27 30 GRAPHIX ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1996 AND 1995 USE OF ESTIMATES The financial statements have been prepared in conformity with generally accepted accounted principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets and revenues and expenses for the periods. Actual results could differ significantly from those estimates. INCOME TAXES The Company accounts for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 generally provides that deferred tax assets and liabilities be recognized for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities and expected benefits of utilizing net operating loss carry-forwards. A valuation allowance is required to reduce the potential deferred tax asset when it is more likely than not that all or some portion of the potential deferred tax asset will not be realized due to the lack of expected future taxable income. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled, and are reflected in the financial statements in the period of enactment. STOCK-BASED COMPENSATION Effective June 30, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes the financial accounting and reporting standards for stock-based compensation plans. The Company elected to continue accounting for stock-based employee compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations ("APB Opinion No. 25"), as SFAS No. 123 permits, and to follow the pro forma net income, pro forma earnings per share, and stock-based compensation plan disclosure requirements set forth in SFAS No. 123 (See Note 9). NET LOSS PER SHARE OF COMMON STOCK In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This statement is effective for both interim and annual periods ending after December 15, 1997, and replaces the presentation of "primary" earnings per share with "basic" earnings per share and the presentation of "fully diluted" earnings per share with "diluted" earnings per share. Earlier application is not permitted. When adopted, all previously reported earnings per share amounts must be restated based on the provisions of the new standard. Application of SFAS No. 128 is not expected to have a material impact on the Company's loss per share. Net loss per share of Common Stock is computed using the weighted average number of shares of Common Stock outstanding for the year. Dividends declared and discounts on issuances of Preferred Stock increase the net loss for determining net loss per share of Common Stock. COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This statement is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting comprehensive income and its components in annual financial statements. Reclassification or restatement of comparative financial statements of financial information for earlier periods is required upon adoption of SFAS No. 130. Application of the SFAS No. 130 is not expected to have a material impact on the Company's consolidated results of operations or loss per share data as currently reported. 28 31 GRAPHIX ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1996 AND 1995 DISCLOSURES ABOUT SEGMENTS In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 establishes standards for reporting financial and descriptive information about an enterprise's operating segments in its annual financial statements and selected segment information in interim financial reports. Reclassification or restatement of comparative financial statements or financial information for earlier periods is required upon adoption of SFAS No. 131. Application of SFAS No. 131 is not expected to have a material impact on the Company's consolidated results of operations or earnings per share data as currently reported. RECLASSIFICATION Certain prior year amounts have been reclassified to conform to the presentation for Fiscal 1997. (2) INVENTORIES Inventories consisted of the following:
JUNE 30, ------------------------ 1997 1996 --------- ---------- Finished goods.................................... $ 34,001 $ 479,747 Components........................................ -- 353,953 ------- -------- $ 34,001 $ 833,700 ======= ========
See Note 8 for discussions regarding write-downs of inventory. (3) PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
JUNE 30, ------------------------ 1997 1996 --------- ---------- Computer and office equipment..................... $ 333,000 $ 824,474 Furniture and fixtures............................ 15,000 174,760 Computer software................................. 27,000 101,287 Equipment held under capital lease obligations.... -- 100,575 --------- --------- 375,000 1,201,096 Accumulated depreciation and amortization......... (125,000) (547,263) --------- --------- $ 250,000 $ 653,833 ========= =========
See Note 8 for discussions regarding write-downs of property and equipment. 29 32 GRAPHIX ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1996 AND 1995 (4) INTANGIBLE ASSETS Intangible assets consist of the following:
JUNE 30, -------------------- 1997 1996 ------- -------- Assembled work force.................................. $ -- $185,000 Goodwill.............................................. -- 560,186 Other................................................. -- 105,000 ----- -------- -- 850,186 Accumulated amortization.............................. -- -- ----- -------- $ -- $850,186 ===== ========
See Note 8 for discussions regarding write-downs of goodwill and intangible assets. (5) OTHER ASSETS Other assets consist of the following:
JUNE 30, -------------------- 1997 1996 ------- -------- Capitalized software development costs................ $ -- $238,342 Capitalized warrant valuation (see Note 12)........... -- 312,000 Other................................................. 26,570 221,477 ------- -------- 26,570 771,819 Accumulated amortization.............................. -- (18,200) ------- -------- $26,570 $753,619 ======= ========
See Note 8 for discussions regarding write-downs of other assets. (6) NOTES PAYABLE On October 27, 1995, the Company borrowed $750,000 under a loan agreement with Silicon Valley Bank. The note bore interest at the bank's prime rate plus 1.5%, was secured by all of the Company's assets, excluding the assets purchased from Sony Interactive Entertainment (see Note 7), and had a maturity date of February 24, 1996. In connection with the loan agreement, the Company issued to Silicon Valley Bank a warrant to purchase 6,160 shares of Common Stock at an exercise price of $8.52 per share. The warrant expires on October 27, 2000. On June 28, 1996, the Company repaid the outstanding principal balance of, and all accrued and unpaid interest under, its existing loan with Silicon Valley Bank and simultaneously entered into a new loan agreement with Silicon Valley Bank for a $750,000 loan bearing interest at the bank's prime rate plus 3%. In connection with the new loan agreement, the Company issued to Silicon Valley Bank a warrant to purchase 20,000 shares of Common Stock at an exercise price of $5.625 per share. The warrant expires on June 26, 2001. In December 1996, in connection with a Forbearance Agreement pursuant to which Silicon Valley Bank agreed to forbear until December 31, 1996 from taking any legal actions to foreclose on the assets of the Company in connection with the Company's defaults under the loan agreement with Silicon Valley Bank, the Company issued to Silicon Valley Bank a warrant to purchase 100,000 shares of Common Stock at an exercise price equal to the lowest price at which the Company sells securities in the two equity placements immediately prior to the time of exercise of the warrant. The warrant expires on December 12, 2001. The fair value of the warrant was deemed immaterial as of the date of issuance. In February 1997, the 30 33 GRAPHIX ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1996 AND 1995 Company repaid the outstanding principal balance of, and all accrued and unpaid interest under, such loan using proceeds from the private equity placements described in Note 9 below. On January 31, 1997, the Company entered into a loan agreement with Madeleine L.L.C., a New York limited liability company ("Madeleine"), in the original principal amount of $3,740,000 with an initial interest rate equal to the prime rate, as announced by Citibank, N.A., plus 4.25% and, commencing on July 31, 1997, increasing to a rate equal to such prime rate plus 6.25% (the "Madeleine Loan Agreement"). The Madeleine Loan Agreement is secured by all of the Company's assets and matures on January 30, 1998. The loan proceeds, net of $280,000 of fees paid to Madeleine, were $3,460,000. The Madeleine Loan Agreement has numerous negative covenants which restrict the ability of the Company to effect certain transactions without Madeleine's written consent. Among these negative covenants is a prohibition on declaring or paying any cash dividends. In connection with the Madeleine Loan Agreement, the Company issued to Madeleine a warrant (the "Madeleine Warrant") to purchase 300,000 shares of Common Stock at an exercise price equal to the lower of $2.68 per share or the fair market value of the Common Stock which shall be determined based on the average of the last sales prices for Common Stock over the 7 trading days immediately preceding the date of exercise (the "Fair Market Value Calculation"). The Madeleine Warrant expires on January 31, 2000. The Company recorded an original issue discount with respect to the Madeleine loan of $93,709 which represents the fair value of the Madeleine Warrant at the time of issuance. The fair value of the Madeleine Warrant is reflected as a reduction to the principal amount of the Madeleine loan and is being amortized over the life of the loan. On February 3, 1997, in connection with a production and development agreement entered into with Intel Corporation ("Intel"), the Company entered into a Convertible Promissory Note with Middlefield Ventures, Inc. ("Middlefield"), an affiliate of Intel in the principal amount of $200,000, bearing interest at the rate of 8% per annum. The Promissory Note matures on February 3, 2000. Commencing on January 1, 1998 and on the first day of each calendar quarter thereafter, the Company must pay one-eighth of the principal amount and all accrued and unpaid interest. The Company expects to repay the Promissory Note in the fiscal year ending June 30, 1998 and, therefore, the Promissory Note is classified as a current liability on the Company's balance sheet as of June 30, 1997. In connection with the Promissory Note, the Company issued to Intel a warrant (the "Intel Warrant") to purchase 613,718 shares of Common Stock of the Company at an exercise price of $3.46 per share. Pursuant to the terms of the Intel Warrant, shares subject to the Intel Warrant vest as Middlefield cancels amounts under the Promissory Note or as Intel provides certain marketing funds to the Company. The Company recorded an original issue discount with respect to the Intel Promissory Note of $226,226 which represents the fair value of the Intel Warrant at the time of issuance. The fair value of the Intel Warrant is reflected as a reduction to the principal amount of the Intel Promissory Note and is being amortized over the life of the loan. On June 5, 1997, the Company and Madeleine entered into an amendment (the "Amendment") to the Madeleine Loan Agreement which provided for an additional loan in the principal amount of $1,300,000 under the terms of the Madeleine Loan Agreement. The loan proceeds from the Amendment, net of $50,000 of fees paid to Madeleine, were $1,250,000. Pursuant to the terms of the Amendment, Madeleine waived certain events of default under the Madeleine Loan Agreement and certain exceptions to the representatives and warranties contained in the Madeleine Loan Agreement, which events of default and exceptions were outstanding on June 5, 1997. The Madeleine Loan Agreement and the Amendment are hereafter collectively referred to as the "Amended Loan Agreement." In connection with the Amendment, the Company issued to Madeleine a warrant (the "Second Madeleine Warrant") to purchase 25% of the Common Stock of the Company, determined on a fully diluted basis as of June 5, 1997, at an exercise price equal to the lowest of (a) $0.2366 per share, (b) the lower of $1.00 per share or the fair market value (determined based on the Fair Market Value Calculation) of the Common Stock of the Company as of the effective date that the Company files a registration statement on Form S-4, or such other form, with the U.S. Securities and Exchange 31 34 GRAPHIX ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1996 AND 1995 Commission, in connection with a merger or consolidation involving the Company, or (c) the fair market value (determined based on the Fair Market Value Calculation) of the Common Stock of the Company as of the date the Second Madeleine Warrant is exercised. The Second Madeleine Warrant expires on June 5, 2000. The Company recorded an original issue discount with respect to the loan made in connection with the Amendment of $489,870 which represents the fair value of the Second Madeleine Warrant at the time of issuance. The fair value of the Second Madeleine Warrant is reflected as a reduction to the principal amount of the Madeleine loan and is being amortized over the life of the loan. As a condition subsequent to the Amendment, the Company entered into a loan transaction with Mr. David J. Hirschhorn, Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer, Treasurer and a director of the Company, pursuant to which at October 1997 Mr. Hirschhorn loaned $250,000 to the Company on similar terms as set forth in the Amendment. In connection with such loan, the Company agreed to issue to Mr. Hirschhorn a warrant to purchase shares of Common Stock on terms and conditions to be agreed to between the Company and Mr. Hirschhorn. The Company and Mr. Hirschhorn have not reached an agreement regarding the terms of the warrant. On July 14, 1997, the Company received a Notice of Default and Demand for Payment from Madeleine with respect to the Madeleine Loan Agreement based upon the Company's failure to make certain interest payments when due. The notice stated that the Company was in default under the terms of the Madeleine Loan Agreement and demanded that all past due amounts be paid to Madeleine by July 18, 1997. The Company did not pay to Madeleine the past due amounts by the July 18, 1997 deadline. On August 29, 1997, the Company received a second Notice of Default and Demand for Payment (the "August Notice") from Madeleine. The August Notice stated that in the event that the Company failed to pay all past due amounts by September 5, 1997, Madeleine would exercise its rights to declare all obligations under the Amended Loan Agreement immediately due and payable. The Company did not pay the past due amounts by the September 5, 1997. As of October 8, 1997, Madeleine has not declared all obligations under the Amended Loan Agreement immediately due and payable. The Company currently is negotiating with Madeleine to obtain a waiver of defaults under the Amended Loan Agreement and to amend the terms of the Madeleine Loan Agreement to extend its term, reduce the interest rate thereof and provide for later payments of amounts thereunder. (7) ACQUISITIONS AND TRANSACTIONS STARPRESS MULTIMEDIA, INC. In June 1995, the Company acquired all of the outstanding capital stock of StarPress Multimedia, Inc., a developer and publisher of interactive software titles, in exchange for 1,935,539 shares of the Company's Common Stock (which were valued using the per share price determined by an independent appraisal). StarPress Multimedia, Inc. had acquired iTravel International Ltd. ("iTravel"), a developer located in Seattle, Washington, on March 31, 1995 for 180,000 shares of common stock of StarPress Multimedia, Inc. StarPress assumed StarPress Multimedia, Inc.'s obligations to issue additional shares of common stock to former iTravel shareholders. In April and May 1996, 71,258 additional shares of the Company's Common Stock were issued to meet this commitment. In addition, the Company issued options to purchase 34,318 shares of Common Stock at a price of $8.52 per share (vested immediately and exercisable for three years) for outside financing expenses directly related to the acquisition and assumed all outstanding options and warrants of StarPress Multimedia, Inc. to purchase shares of the Company's Common Stock. The acquisition was accounted for by the purchase method of accounting. 32 35 GRAPHIX ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1996 AND 1995 The total purchase price for StarPress Multimedia, Inc. was $2,011,682 based upon an independent appraisal (including acquisition costs of $362,000). An allocation of the purchase price is as follows:
ALLOCATION OF AMORTIZATION DESCRIPTION PURCHASE PRICE (USEFUL LIFE) -------------------------------------------------- -------------- ------------- In-process technology charged to operations....... $ 2,810,000 N/A Product development costs......................... 110,000 3 years Assembled work force.............................. 240,000 3 years Goodwill.......................................... 31,686 3 years Net liabilities assumed........................... (1,180,004) ----------- Purchase price.................................. $ 2,011,682 ===========
SONY INTERACTIVE ENTERTAINMENT, INC. On November 1, 1995, the Company purchased from Sony Interactive Entertainment, Inc. ("Sony") certain products and other assets which consisted of 14 products currently in distribution or production and related finished goods inventory, prepaid royalties, certain accounts receivable and furniture and equipment. The purchase price for these assets consisted of 136,059 shares of Common Stock valued at $115,965 (which were valued by independent appraisal) and a promissory note with a principal amount of $561,781 which bore interest at the prime rate as quoted by Chemical Bank and which was secured by the assets acquired. The promissory note was paid in full on February 2, 1996. The acquisition was accounted for by the purchase method of accounting. The allocation of the purchase price for the Sony assets is as follows:
ALLOCATION OF AMORTIZATION DESCRIPTION PURCHASE PRICE (USEFUL LIFE) -------------------------------------------------- -------------- ------------- Prepaid royalties................................. $311,000 N/A Finished goods inventory.......................... 132,457 3 years Product development costs......................... 125,417 3 years Furniture and equipment........................... 100,000 3 years Accounts receivable............................... $ 8,872 N/A -------- Purchase price.................................. $677,746 ========
DIGITAL MEDIA THEORY, INC. On April 22, 1996, the Company entered into an Asset Purchase Agreement with Digital Media Theory, Inc. ("DMT"). The Company purchased from DMT certain assets which consisted of an Internet computer database, equipment contracts and supplies, and rights, title and interest to certain intellectual property. The purchase price for these assets consisted of 36,000 shares of the Company's Common Stock valued at $176,887 and a promissory note for $23,099. Acquisition costs were $20,890. The acquisition was accounted for by the purchase method of accounting. 33 36 GRAPHIX ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1996 AND 1995 The allocation of the purchase price for the assets of DMT is as follows:
ALLOCATION OF AMORTIZATION DESCRIPTION PURCHASE PRICE (USEFUL LIFE) -------------------------------------------------- -------------- ------------- Goodwill.......................................... $ 100,876 5 years Computer database................................. 75,000 5 years Trademarks and covenant not to compete............ 30,000 2-5 years Furniture and equipment........................... 15,000 3-5 years -------- Purchase price.................................. $ 220,876 ========
GZ-CA On June 28, 1996, the Company acquired all of the outstanding shares of capital stock of GZ-CA in exchange for the issuance of 5,526,543 shares of Common Stock to the shareholders of GZ-CA. In connection with the acquisition, the Company also issued 125,000 shares of Common Stock to its investment banker in exchange for services rendered in connection with the acquisition. In addition, the Company assumed all outstanding options and warrants of GZ-CA and such options and warrants became exercisable to purchase shares of Common Stock. The acquisition was accounted for by the purchase method of accounting. The total purchase price for the shares of the capital stock of GZ-CA was $23,930,957 (which was determined based upon the fair market value of GZ-CA common stock), including acquisition costs of $823,932. The allocation of the purchase price for the shares of the capital stock of GZ-CA is as follows:
ALLOCATION OF AMORTIZATION DESCRIPTION PURCHASE PRICE (USEFUL LIFE) -------------------------------------------------- -------------- ------------- In-process technology charged to operations....... $ 17,934,863 N/A Product development costs......................... 89,390 3 years Assembled work force.............................. 185,000 3 years Goodwill.......................................... 459,310 3 years Net assets assumed................................ 5,262,394 N/A ----------- Purchase price.................................. $ 23,930,957 ===========
INSCAPE On February 24, 1997, the Company entered into an agreement with Inscape, a Delaware general partnership among Home Box Office and corporations owned by Warner Music Group, Inc. ("WMG") and Nash New Media, Inc., and WMG (collectively, "Inscape"), to purchase certain assets from and assume certain liabilities of Inscape. The purchased assets consisted of all rights, title and interest in twelve existing pc-game products and seven pc-game products under development, all rights, title and interest in the Inscape name, furniture and equipment and certain leases and other agreements. The liabilities assumed consisted of accrued compensation costs associated with those Inscape employees offered employment with the Company. The purchase price for the Inscape assets consisted of 948,148 shares of the Company's Series C Convertible Preferred Stock, $.01 par value per share, and a stated liquidation value of $3.375 per share (the "Series C Preferred"). The Series C Preferred is convertible into Common Stock, at the option of the holder, at a conversion price of $3.375 per share and must be redeemed by the Company on February 28, 2000 at $3.375 per share. The holder of the Series C Preferred is entitled to receive dividends of $0.10125 per share per annum which are fully cumulative from date of issuance. Although the stated liquidation value of the shares of the Series C Preferred issued is $3,200,000, the Company determined the fair market value of such 34 37 GRAPHIX ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1996 AND 1995 shares of Series C Preferred to be $2,193,066 based upon the fair market value of the Common Stock on the date of the transaction, discounted to take into account the restricted nature of the securities. The allocation of the purchase price for the Inscape assets is as follows:
ALLOCATION OF AMORTIZATION DESCRIPTION PURCHASE PRICE (USEFUL LIFE) ------------------------------------------------ -------------- ------------- In-process technology charged to operations..... $1,153,000 N/A Assembled work force............................ 476,000 5 years Goodwill........................................ 129,723 5 years Furniture and equipment......................... 474,066 2 - 5 years Assumed liabilities............................. (39,723) N/A ---------- Purchase price........................ $2,193,066 ==========
Certain assets acquired from Inscape were written-off in the fourth quarter of Fiscal 1997 in connection with the Restructuring (See Note 8). TRIMARK On February 26, 1997, the Company entered into an agreement with Trimark Holdings, Inc. and its subsidiary, Trimark Interactive, Inc. ("Trimark"), to purchase certain assets from and assume certain liabilities of Trimark. The purchased assets consisted of all rights, title and interest in seven existing pc-game products and three pc-game products under development, inventories and certain other agreements. The liabilities assumed consisted primarily of liabilities related to pc-game products under development. The purchase price for the Trimark assets consisted of 237,037 shares of the Series C Preferred. The Series C Preferred is convertible into Common Stock, at the option of the holder, at a conversion price of $3.375 per share and must be redeemed by the Company on February 28, 2000 at $3.375 per share. The holder of the Series C Preferred is entitled to receive dividends of $0.10125 per share per annum which are fully cumulative from date of issuance. Although the stated liquidation value of the shares of Series C Preferred issued is $800,000, the Company determined the fair market value of the shares of Series C Preferred to be $548,267 based upon the fair market value of the Common Stock on the date of the transaction, discounted to take into account the restricted nature of the securities. The allocation of the purchase price for the Trimark assets is as follows:
ALLOCATION OF AMORTIZATION DESCRIPTION PURCHASE PRICE (USEFUL LIFE) -------------------------------------------------- -------------- ------------- In-process technology charged to operations....... $475,000 N/A Assembled work force.............................. 36,000 5 years Goodwill.......................................... 37,267 5 years ---------- Purchase price.......................... $548,267 5 years ==========
Certain assets acquired from Trimark were written off in the fourth quarter of Fiscal 1997 in connection with the Restructuring (See Note 8). (8) RESTRUCTURING CHARGES During the second quarter of Fiscal 1996, the Company adopted a restructuring plan to enhance overall competitiveness, productivity and efficiency through the reduction of overhead costs (the "1996 Restructuring Plan"). The 1996 Restructuring Plan included the elimination of the Company's in-house software research and development activities. In connection with the 1996 Restructuring Plan, the Company recorded 35 38 GRAPHIX ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1996 AND 1995 restructuring charges of $1,950,000, $50,000 of which were reversed in the fourth quarter of Fiscal 1996 due to changes in the underlying estimates. The charges principally reflected severance costs of $777,492 resulting from a reduction of a significant portion of the Company's work force, write-down and disposal of excess furniture and equipment and office facilities of $946,103, and write-offs of assembled work force and goodwill of $226,405 arising from the Company's acquisition of StarPress Multimedia, Inc. in June 1995. At June 30, 1997, none of the accrued restructuring costs related to the 1996 Restructuring Plan remained outstanding. During the first quarter of Fiscal 1997, the Company reversed approximately $267,000 of the accrued restructuring charge recorded in Fiscal 1996, primarily related to facility and equipment leased for its San Francisco, California facility, which leases were subsequently sub-leased. In March 1997, the Company hired a new executive management team for the purpose of evaluating the current business and operations and financial condition of the Company and, if necessary, restructuring the Company (the "Restructuring"). The management team performed an in-depth review of the Company's past history of operating losses, current financial condition, current strategic position within the entertainment software industry, competitors in such industry and capital requirements for new product development. In connection with the Company's evaluation of its business and operations and financial condition and in accordance with SFAS 121, in March 1997 the Company evaluated all assets and liabilities to determine impairment, if any. As a result, the Company recorded a charge of approximately $1,221,000 to general and administrative expenses related to property and equipment, intangible assets and other long term assets being impaired during the third quarter of Fiscal 1997. In addition, the Company recorded charges to cost of revenues of approximately $1,000,000 related to the net realizable value of inventory, approximately $321,000 related to the net realizable value of prepaid royalties and acquired capitalized software development costs being impaired and approximately $203,000 of bad debt reserves during the third quarter of Fiscal 1997. In June 1997, based on the results of its review, the management team proposed to the Board of Directors of the Company a Restructuring plan for the Company, which included terminating the Company's existing business operations. On June 3, 1997, the Board of Directors adopted the Restructuring plan. By June 24, 1997, the Company had taken steps to cease its principal business operations and had terminated all employees other than Mr. David Hirschhorn, the Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer and Treasurer of the Company. In June 1997, in connection with the Restructuring, the Company recorded a charge of approximately $2,063,000 primarily related to the write-down of property and equipment, goodwill and intangibles related to the Inscape and Trimark asset purchases and severance costs related to terminating all but one of the employees of the Company. As of June 30, 1997, the remaining balance in the restructuring accrual is $75,000 and is expected to be paid by December 31, 1997. Additionally, as part of the Company's continuing evaluation of its business and operations and financial condition the Company recorded charges to cost of revenues and general and administrative expenses of approximately $966,000 and $976,000, respectively, in the fourth quarter of Fiscal 1997. Charges to cost of revenues primarily relates to the net realizable value of inventory and to the accrual for certain future guaranteed royalties. Charges to general and administrative expenses primarily relate to reserves established for uncollectable accounts receivable. (9) STOCKHOLDERS' EQUITY PREFERRED STOCK During the period from September 25, 1996 to February 7, 1997, the Company issued 3,025 shares of Series A Convertible Preferred Stock, $.01 par value per share and a stated liquidation value of $1,000 per share (the "Series A Preferred"), at a price of $1,000 per share to a number of accredited investors in a series 36 39 GRAPHIX ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1996 AND 1995 of private placements. The cash proceeds to the Company from such issuances, net of offering expenses, was $2,355,948. The Series A Preferred was convertible, at the option of the holders, into shares of Common Stock at a conversion price per share equal to the lower of (a) $3.375 or (b) 80% of the average closing bid price of the Common Stock for the five days immediately prior to the applicable conversion date. In connection with the issuance of the Series A Preferred, the Company recorded a discount of $603,792 to reflect the initial conversion discount feature. The discount was amortized over the 60-day holding period and is reflected in the accompanying Consolidated Statement of Stockholders' equity (deficiency) in Fiscal 1997. The holders of the Series A Preferred were entitled to receive dividends of $80 per share per annum which were fully cumulative from the date of issuance. In addition, the Company issued to such investors warrants to purchase 221,204 shares of Common Stock at an exercise prices of between $4.69 and $5.00 per share (the "Series A Warrants"). The Company determined the value of the Series A Warrants to be immaterial. On February 24, 1997, the Company issued 3,025 shares of Series B Convertible Preferred Stock, $.01 par value per share and with a stated liquidation value of $1,000 per share (the "Series B Preferred"), and warrants to purchase 221,204 shares of Common Stock at an exercise price of $5.00 per share (the "Series B Warrants") in exchange for all of the outstanding shares of Series A Preferred and Series A Warrants. The Series B Preferred is convertible, at the option of the holders, into shares of Common Stock at conversion price per share equal to the lower of (a) $3.375 or (b) 80% of the average closing bid price of the Common Stock for the five days immediately prior to the conversion date. The holders of the Series B Preferred are entitled to receive dividends of $80 per share per annum which are fully cumulative from the date of issuance. The Series B Warrants expire on January 31, 2000. During the fourth quarter of Fiscal 1997, certain holders of 770 shares of Series B Preferred converted such shares into 2,023,515 shares of Common Stock. During the period from July 1, 1997 to October 8, 1997, 579 shares of Series B Preferred were converted into 3,433,501 shares of Common Stock. In April 1997, the Company solicited the votes of the six holders of its Series B Preferred to amend the Certificate of Designations of the Series B Preferred to establish a $1.00 conversion price floor. For the proposed amendment to become effective, a vote of the holders of the Series B Preferred, voting as a class, and (b) the Common Stock and Series C Preferred Stock, voting together as one class, must be obtained. In light of the Restructuring, the Company has not pursued obtaining this vote. On March 5, 1997, the Company issued 1,185,185 shares of Series C Preferred to two accredited investors in connection with two separate acquisitions of certain assets from such investors (see Note 7). The total stated liquidation value of such shares of Series C Preferred was $4,000,000, however, the Company determined that the fair market value of such shares at the time of issuance was $2,741,333 based upon the fair market value of the Common Stock at the time of such issuance of Preferred Stock, discounted to take into account the restricted nature of the Series C Preferred. The shares of Series C Preferred are convertible into shares of Common Stock at the option of the holders, at a conversion price of $3.375 per share and are subject to mandatory redemption by the Company on February 28, 2000 at $3.375 per share. The holders of the Series C Preferred are entitled to receive dividends of $0.10125 per share per annum which are fully cumulative from the date of issuance. In connection with the issuance of the Series C Preferred, the Company recorded a discount of $1,258,667 which is being amortized on a straight line basis through February 28, 2000. The Company is negotiating exchange agreements with the holders of shares of Series B Preferred and Series C Preferred pursuant to which all outstanding shares would be converted into shares of Common Stock of the Company at an exchange price of approximately $0.75 per share. The Company has entered into exchange agreements with several, but not all, of the holders of Series B Preferred and has not entered into exchange agreements with the holders of Series C Preferred. 37 40 GRAPHIX ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1996 AND 1995 COMMON STOCK In December 1996, the Company issued (i) 34,375 shares of Common Stock, with a fair market value of $103,125 on the date of issuance, to Cruttenden Roth Incorporated ("Cruttenden"), the Company's investment banker, and (ii) 9,167 shares of Common Stock, with a fair market value of $27,500 on the date of issuance, to David J. Hirschhorn, a managing director of Cruttenden at the time of such issuance and the current Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer, Treasurer and a director of the Company, in connection with investment banking services performed by such parties for the Company related to the Reorganization. In December 1996, the Company issued 24,348 shares of Common Stock with a fair market value of $70,000 on the date of issuance to Ronald S. Posner, the Company's Chairman of the Board and Chief Executive Officer at the time of issuance, as payment for accrued compensation. CONVERTIBLE SUBORDINATED DEBENTURES AND BRIDGE LOANS During March 1995, the Company raised net proceeds of $2,766,537 (net of offering costs of $165,963) through the issuance of convertible subordinated debentures (the "Debentures") with detachable common stock warrants. The net proceeds of the offering were allocated between the Debentures and the warrants ($1,806,741 and $959,796, respectively) based on their relative fair values. The Debentures bore interest at a rate of 9% per annum and were convertible at a price of $8.52 per share under certain circumstances. As of June 30, 1995, Debentures with a carrying balance of $2,200,278 had been converted into 319,132 shares of Common Stock. On July 31, 1995, the remaining $185,585 of Debentures were converted into 24,932 shares of Common Stock. During Fiscal 1995, the Company borrowed $300,000 from certain officers and shareholders of the Company and $265,000 from outside investors. In consideration for such loans, the Company paid interest at a rate of 9% per annum and issued warrants to purchase 25,134 shares of Common Stock with the same terms and conditions as the warrants issued in the Debentures offering. All of the above-described loans were repaid with proceeds from the Debentures offering. STOCK WARRANTS In September 1994, the Company issued warrants to purchase up to 82,130 shares of Common Stock to two financial consultants ("Financial Consultants' Warrants") in connection with services provided to the Company. The exercise price of the Financial Consultants' Warrants is $10.23 per share and they may be exercised until thirty (30) days after the registration of the shares underlying the Financial Consultants' Warrants. In connection with the issuance of the Debentures, discussed above, each Debenture holder was issued a warrant to purchase shares of the Company's Common Stock at a purchase price of $.48 per share. Warrants to purchase a total of 329,614 shares were issued in connection with the Debentures. In October 1995, the Company issued a warrant to purchase up to 6,160 shares of Common Stock to a lender ("Lender's Warrant") in connection with a business loan. The exercise price of the Lender's Warrant is $8.52 per share and the Lender's Warrant may be exercised at any time prior to October 27, 2000. 38 41 GRAPHIX ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1996 AND 1995 In connection with the Reorganization, the Company assumed all outstanding warrants of GZ-CA. The following table summarizes the number of shares of Common Stock issuable upon exercise of such warrants, the exercise price per share of Common Stock and the applicable expiration date:
SHARES OF PER SHARE WARRANT COMMON STOCK EXERCISE PRICE EXPIRATION DATE ------------ -------------- --------------- 116,667 $ 2.50 5/31/99 120,000 $ 3.90 6/30/99 15,000 $ 3.63 6/05/00 483,135 $4.125 2/02/99 720,000 $5.125 2/28/01 20,000 $5.625 6/26/01 --------- Total: 1,474,802 =========
STOCK OPTIONS 1996 Stock Option Plan The Company's 1996 Stock Option Plan (the "Plan") is administered by a committee of the Board of Directors of the Company (the "Committee") which determines the recipients and terms of options granted under the Plan. All stock option plans of the Company's wholly-owned subsidiaries, GZ-CA and StarPress, have been assumed under the Plan. The Plan provides for the grant of incentive stock options ("ISOs") and non-qualified stock options ("NQOs") for up to 2,500,000 shares of Common Stock. The terms of the Plan require that ISOs granted must have an exercise price of not less than 100% of the fair market value of the Common Stock on the date of grant and must be exercised within ten years of the date of grant. The terms of the Plan require that NQOs granted under the Plan must have an exercise price of not less than 85% of the fair market value of the Common Stock on the date of grant and must be exercised within five years of the date of grant. The Plan also provides for automatic annual grants of NQOs to each member of the Committee for the purchase of 25,000 shares of Common Stock at an exercise price equal to 100% of the fair market value on the date of grant. NQOs granted to members of the Committee vest as follows: 50% of the shares subject to the NQO vest six months after the date of grant and the remaining 50% of the shares vest twelve months after the date of grant. At June 30, 1997, 934,446 options granted under the Plan were exercisable with a weighted average exercise price of $3.09. At June 30, 1997, there were 394,818 additional shares available for grant under the Plan. 39 42 GRAPHIX ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1996 AND 1995 The following is a summary of stock option activity under the Plan:
NUMBER OF WEIGHTED-AVERAGE SHARES EXERCISE PRICE --------- ---------------- Outstanding at June 30, 1994...................... 66,437 7.37 Options granted................................... 46,613 2.40 Options exercised................................. (1,467) 1.70 Options canceled.................................. (16,238) 7.24 Assumed from StarPress Multimedia, Inc. .......... 279,414 0.56 --------- Outstanding at June 30, 1995...................... 374,759 1.75 Options granted................................... 517,710 6.38 Options exercised................................. (300,260) 1.37 Options canceled.................................. (396,647) 4.94 Assumed from GZ-CA................................ 314,050 4.33 --------- Outstanding as of June 30, 1996................... 509,612 5.12 Options granted................................... 1,270,450 2.88 Options exercised................................. (43,716) 0.11 Options canceled.................................. (262,855) 3.27 --------- ---- Outstanding at June 30, 1997...................... 1,473,491 3.01 ========= ====
Subsequent to June 30, 1997, as a result of the termination of all but one employee (see Note 8), all options under the Plan have been cancelled. During Fiscal 1996, the Company accelerated the vesting period of certain stock options granted to an officer of the Company resulting in a new measurement date of such options. The exercise price of the options was below the fair market value on the date of acceleration. Accordingly, earned compensation of $195,682 was recorded for the difference between the option exercise price and fair market value on the date of acceleration. NON-PLAN STOCK OPTIONS On March 17, 1997, the Company granted David J. Hirschhorn, the Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer, Treasurer and a director of the Company, a non-Plan NQO to purchase 2,500,000 shares of Common Stock at an exercise price of $2.00 per share (the fair market value of the Common Stock on the date of grant). The option vests over a period of four years. The option may be exercised as to the vested portions at any time after the date of vesting until the date that is five years from the individual vesting dates. During Fiscal 1997, the Company granted various non-Plan NQOs to purchase an aggregate of 30,000 shares of Common Stock at exercise prices ranging from $3.00 to $4.13 per share (the fair market value of the Common Stock on the respective date of grant). The options were granted to several consultants and individuals providing assistance to the Company. The options vest at various times and upon certain triggering events, and expire in five years from the date of grant. The Company determined the fair value of the options granted to be immaterial. During Fiscal 1995, the Company granted various non-Plan NQOs to purchase an aggregate of 106,679 shares of Common Stock at exercise prices ranging from $3.43 to $4.25 per share (the fair market value of the 40 43 GRAPHIX ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1996 AND 1995 Common Stock on the respective date of grant). Options for 56,679 shares were granted to certain related parties. The remainder were granted to consultants and other individuals providing assistance to the Company. The options vest at various times until their expiration ten years from the date of grant, subject to acceleration upon the occurrence of certain events. Certain directors, officers and consultants of the Company were granted non-Plan NQOs to purchase 121,581 shares of Common Stock during Fiscal 1995. These options vested immediately upon grant at exercise prices ranging form $.007 to $8.52 per share. Compensation expense of $720,351 related to the issuance of these stock options was recorded for the year ended June 30, 1995. A summary of the stock option activity for all non-Plan NQOs is as follows:
NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE --------- ---------------- Outstanding at June 30, 1994..................... 182,988 5.57 Options granted.................................. 121,581 3.25 --------- ---- Outstanding at June 30, 1995..................... 304,569 4.66 Assumed from GZ-CA............................... 119,179 3.43 --------- ---- Outstanding at June 30, 1996..................... 423,748 4.34 Options granted.................................. 2,530,000 2.02 Options exercised................................ (9,134) 0.88 Options canceled................................. (4,441) 5.06 --------- ---- Outstanding at June 30, 1997..................... 2,940,173 2.34 ========= ====
As of June 30, 1997, there were approximately 1,269,490 non-Plan NQOs exercisable with a weighted average exercise price of $2.95. The per share weighted-average fair value of options granted during Fiscal 1997 and 1996 was $2.88 and $6.38, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: Fiscal 1997 -- risk-free interest rate of 6.50%, volatility of 25% and an expected life of 4 years; Fiscal 1996 -- risk-free interest rate of 6.50%, volatility of 25% and an expected life of 4 years. The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss and net loss per share would have been reduced to the pro forma amounts indicated below:
YEAR ENDED JUNE 30 ----------------------------- 1997 1996 ------------ ------------ Net loss: As reported................................. $(16,831,025) $(23,518,660) Pro forma................................... $(17,569,606) $(23,591,052) Net loss per share: As reported................................. $ (1.61) $ (5.05) Pro forma................................... $ (1.68) $ (5.06)
41 44 GRAPHIX ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1996 AND 1995 Pro forma net loss and pro forma net loss per share reflect only options granted in Fiscal 1997 and 1996. The full impact of calculating compensation cost for stock options under SFAS 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' vesting period of four years and compensation cost for options granted prior to July 1, 1995 is not considered. (10) INCOME TAXES Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities, are as follows:
JUNE 30, ---------------------------- 1997 1996 ------------ ----------- Deferred tax assets: Net operating loss carryforwards............. $ 13,418,000 $ 6,867,000 Reserves not currently deductible............ 3,117,000 698,000 Less valuation allowance..................... (16,535,000) (7,565,000) ------------ ------------ Total deferred tax assets................. -- -- ============ ============ Deferred tax liability: Identified intangible assets................. -- -- ============ ============
The valuation allowance for deferred tax assets as of June 30, 1997 was $16,535,000. The net change in the total valuation allowance for the year ended June 30, 1997 was an increase of $8,970,000. Reconciliation of the Federal statutory rate to the Company's effective tax rate is as follows:
1997 1996 ----- ----- Federal statutory rate..................................... (34.0)% (34.0)% State income taxes, net.................................... (3.7) (6.1) Write-off of acquired in-process technology for which no tax benefit is recognized................................ 9.7 30.6 Net operating loss carryforward with no tax benefit recognized............................................... 28.0 9.5 ---- ---- -- -- ==== ====
As of June 30, 1997, the Company had net operating loss carryforwards for Federal and state income tax purposes of approximately $36,484,000 and $16,664,000, respectively, which are available to offset future taxable income. The net operating loss carryforwards, if not utilized, will expire over the period from 2005 through 2012. Pursuant to the Reorganization and the conversion of certain shares of Preferred Stock into shares of Common Stock and other equity related transactions, the utilization of the net operating loss carryforwards may be limited due to restrictions imposed under applicable Federal and state tax law due to a change in ownership. 42 45 GRAPHIX ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1996 AND 1995 (11) COMMITMENTS AND CONTINGENCIES LEASES The Company leases certain equipment under non-cancelable operating lease agreements which provide for the following minimum annual lease payments:
YEAR ENDING OPERATING JUNE 30, LEASES --------------------------------------------------------- ------- 1998................................................... $24,315 1999................................................... 11,133 2000................................................... 1,856 ------- Total minimum lease payments............................. $37,304 =======
On June 27, 1997, the Company entered into a month-to-month lease for its corporate office and warehouse space with an affiliated party. The monthly lease payment under the lease is $2,550, which management believes is below the market rate for comparable space. The Company subleases approximately 12,100 square feet of office space in San Francisco, California, which location formerly was used as the principal executive offices of StarPress. The Company has assigned its sublease to a third party, but remains liable as a guarantor of the sublease, in the event of default by the assignee, until December 1997. Total rental expense, including month-to-month rentals, approximated $447,906, $248,000 and $230,000 in Fiscal 1997, 1996 and 1995, respectively. ROYALTIES The Company entered into agreements with major music production and entertainment companies to produce interactive music, educational and entertainment CD-ROM titles. These agreements obligate the Company to pay royalties, as specified in the agreements, based on the sales of the CD-ROMs and based on certain guarantees. As of June 30, 1997, the Company has accrued all earned royalties and future guarantees. LEGAL MATTERS The Company is involved with certain legal proceedings and other claims arising in the normal course of business. In the opinion of the Company's management, the liability, if any, resulting from such litigation would not have a material adverse affect on the Company's consolidated financial position or results of operations. Set forth below is a summary of certain material legal proceedings to which the Company and/or any of its subsidiaries is a party. The Company and Tunes Network, Inc. (formerly Surf Communications, Inc.) ("Tunes") currently are involved in an arbitration pending in the San Francisco, California office of the American Arbitration Association. The arbitration was instituted in April 1997. The arbitration relates to claims made by Tunes against the Company in the amount of $322,000, plus unspecified additional royalties, interest and attorneys' fees, allegedly owed under an agreement entered into between the Company and Tunes as of November 5, 1996 (the "November 5th Agreement"). The November 5th Agreement relates to services to be performed by Tunes in connection with creating and maintaining an Internet website for the Company. The Company intends to vigorously contest liability for the amounts claimed. Although the Company cannot predict the likely outcome of this arbitration at this time, management intends to vigorously defend this arbitration and believes that the final outcome will not have a material adverse effect on the Company's consolidated financial condition, results of operations or liquidity. 43 46 GRAPHIX ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1996 AND 1995 (12) DISTRIBUTION AGREEMENT On March 13, 1996, the Company entered into a distribution agreement (the "GT Agreement") with GT Interactive Software Corp. ("GT"). In connection with the GT Agreement, the Company issued a warrant to GT to purchase up to 800,000 shares of Common Stock at a per share exercise price of $5.125. The Warrant expires on February 28, 2001. As of June 30, 1996, GT had acquired 80,000 shares through partial exercise of such warrant. The Company has agreed that upon receiving a request from GT the Company will register the Common Stock underlying the warrant. At the time of issuance, management estimated that the fair market value of the warrant was $312,000. Such amount was being amortized over the five year life of the GT Agreement. During the third quarter of Fiscal 1997, the Company determined that the GT Agreement would not yield any material future economic benefit to the Company and recorded a charge of $247,000 for the unamortized value of the warrant which amount is included in general and administrative expenses in the accompanying consolidated statements of operations. On July 2, 1997, the Company and GT amended and restated the GT Agreement in connection with settling certain disputes related to payments under the terms of the original agreement. (13) SIGNIFICANT CUSTOMERS AND EXPORT SALES The Company had sales to two major customers: Tech Data Corporation and Navarre Corporation, which represented approximately 26% and 15%, respectively, of Fiscal 1997 revenues. The Company had sales to three major customers: GT Interactive, Tech Data Corporation and Navarre Corporation, which represented approximately 27%, 24% and 15%, respectively, of Fiscal 1996 revenues and 36%, 12% and 10%, respectively, of Fiscal 1995 revenues. At June 30, 1997 and 1996, accounts receivable included approximately $313,000 and $3,134,000, respectively, due from these major customers. (14) RELATED PARTY TRANSACTIONS Certain former officers and major shareholders of the Company were affiliated with companies which provided various shipping, warehousing, consulting, legal and accounting services to the Company. The cost of these services were $47,975 for the year ended June 30, 1995. On March 21, 1996, GZ-CA advanced an aggregate of $110,162 to two executive officers and one senior staff member of the Company in order to assist such persons with the exercise of certain vested stock options under the Plan. These advances were secured by promissory notes which bore interest at a rate of 6% per annum and became due on or before termination of employment with the Company. As of June 30, 1996, $94,062 remained outstanding under these promissory notes. During Fiscal 1997, two of the promissory notes were paid off in full. On May 21, 1997, the Company cancelled the third promissory note in connection with a Separation and Settlement Agreement entered into with Ronald S. Posner with respect to the termination of Mr. Posner's employment as the Co-Chairman of the Board and Chief Executive Officer of the Company. At the time that the Company cancelled Mr. Posner's promissory note, the balance of unpaid principal and accrued and unpaid interest thereunder was approximately $44,000. Pursuant to the 1996 Restructuring Plan, on April 2, 1996, the Company entered into an agreement pursuant to which PolarCap, LLC, owned and operated by Douglas D. Cole, a former director and chief executive officer of the Company, acquired 100% equity ownership of Logatronix, Ltd. ("Great Bear -- Bulgaria"), a wholly-owned subsidiary of the Company based in Sofia, Bulgaria, and certain other assets of the Company. The purchase price consisted of a $40,000 promissory note, a contingent payment in the event of the sale or other transfer of any of the Great Bear - Bulgaria stock by PolarCap, LLC, a contingent payment in the event of the collection of certain receivables transferred to PolarCap, LLC in the acquisition, and the assumption by PolarCap, LLC of certain Great Bear -- Bulgaria liabilities. 44 47 GRAPHIX ZONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997, 1996 AND 1995 (15) PROFIT SHARING PLAN The Company and its wholly-owned subsidiaries maintain a pretax savings and profit sharing plan under Section 401(k) of the Internal Revenue Code. Under the plan, eligible employees are able to contribute from 1% to 15% of their compensation. The Company makes a matching contribution of certain amounts contributed by the employee and may, at its discretion, make additional contributions to the plan, up to a maximum of 15% of the employee's compensation. During Fiscal 1997, the Company made matching contributions in the aggregate amount of $13,137. (16) JOINT VENTURE Under a joint venture agreement with Olivetti Telemedia, the Company is obligated to invest $450,000 in cash and contribute intellectual property valued by the joint venture at $1,000,000. The cash is to be contributed based upon the financial needs of the joint venture, as determined by the joint venture's governing board. On February 26, 1996, the Company received a letter from Olivetti Telemedia requesting that the Company become current on its cash contribution obligations to the joint venture. The parties are currently in negotiations regarding this request. During Fiscal 1996, the Company had accrued and expensed $100,000 of the required contribution of $450,000. The Company does not expect it will be required to contribute material amounts to the joint venture beyond the $100,000 accrued as of June 30, 1997. (17) GOING CONCERN The Company incurred significant losses from operations during Fiscal 1997 and Fiscal 1996, and, as of June 30, 1997, the Company's net working capital deficiency was ($9,133,497). By July 24, 1997, the Company had taken steps to cease its principal business operations. The Company does not have the necessary funds to pay its secured and unsecured debt obligations. The Company is in default under the terms of its senior secured loan and agreements with other creditors and has received two Notices of Default from its senior secured lender. In connection with the Restructuring, the Company is attempting to renegotiate the terms of its senior secured loan, negotiate the payment of $.30 for each $1.00 of unsecured debt, convert outstanding shares of Preferred Stock into shares of Common Stock, and raise operating funds for the Company. However, there can be no assurances that the Company will be able to successfully complete the Restructuring and continue as a going concern. If the Company is unsuccessful in completing the Restructuring, it is likely that Madeleine will foreclose upon all of the assets of the Company and pursue the dissolution of the Company. 45 48 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under the captions "ELECTION OF DIRECTORS" and "TRANSACTIONS WITH MANAGEMENT AND OTHERS -- Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive proxy statement (the "Proxy Statement") for the Annual Meeting of Stockholders scheduled to be held on December 16, 1997, is incorporated herein by reference. The Proxy Statement will be filed with the U.S. Securities and Exchange Commission not later than 120 days after the close of Fiscal 1997. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the captions "COMPENSATION OF EXECUTIVE OFFICERS" and "INFORMATION ABOUT THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD -- Compensation of Directors" in the Proxy Statement is incorporated herein by reference, provided however, that the Report of the Compensation Committee on Executive Compensation and the Performance Graph set forth under the caption "COMPENSATION OF EXECUTIVE OFFICERS" shall not be deemed incorporated by reference in this Report and shall not otherwise be deemed "filed" as part of this Report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "TRANSACTIONS WITH MANAGEMENT AND OTHERS" in the Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE ---- (A)(1) FINANCIAL STATEMENTS Index to Financial Statements and Financial Statements................... 17 (A)(2) FINANCIAL STATEMENT SCHEDULES Schedule II -- Valuation and Qualifying Accounts......................... S-1
All other schedules are omitted because they are not required, are not applicable or the information required to be set forth therein is included in the financial statements or in the notes thereto. 46 49 (A)(3) EXHIBITS. The Exhibits listed below are filed with this Annual Report on Form 10-K.
EXHIBIT NUMBER DESCRIPTION - ------- -------------------------------------------------------------------------------- 2.1 Agreement and Plan of Reorganization dated January 3, 1996 between GZ Multimedia, Inc. (formerly Graphix Zone, Inc.), a California corporation ("GZ-CA"), and StarPress, Inc., a Colorado corporation ("StarPress"), previously filed with the U.S. Securities and Exchange Commission (the "Commission") as Exhibit 2.1 to the Company's Registration Statement on Form S-4 dated March 25, 1996 (Registration No. 333-2642) (the "Registration Statement"), which is incorporated herein by reference. 2.2 Restructuring Plan adopted by the Board of Directors of the Company on June 3, 1997. 3.1 Certificate of Incorporation of the Company, previously filed with the Commission as Exhibit 3.1 to the Registration Statement, which is incorporated herein by reference. 3.2 Amended and Restated Certificate of Designations of Series A Convertible Preferred Stock of the Company, previously filed with the Commission as Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996 (File No. 0-28676) (the "September 1996 Quarterly Report"), which is incorporated herein by reference. 3.3 Certificate of Amendment of Amended and Restated Certificate of Designations of Series A Convertible Preferred Stock of the Company, previously filed with the Commission as Exhibit 3.4 to the Company's September 1996 Quarterly Report, which is incorporated herein by reference. 3.4 Certificate of Amendment of Certificate of Designations of Series A Convertible Preferred Stock of the Company. 3.5 Certificate of Designations of Series B Convertible Preferred Stock of the Company, previously filed with the Commission as Exhibit 3.1 to the Company's Current Report on Form 8-K dated February 18, 1997, and filed with the Commission on March 5, 1997 (File No. 0-28676) (the "March 5th Current Report"), which is incorporated herein by reference. 3.6 Certificate of Designations of Series C Convertible Preferred Stock of the Company, previously filed as Exhibit 10.34 to the Company's Current Report on Form 8-K dated March 5, 1997, and filed with the Commission on March 20, 1997 (File No. 0-28676) (the "March 20th Current Report"), which is incorporated herein by reference. 3.7 Bylaws of the Company, previously filed with the Commission as Exhibit 3.2 to the Registration Statement, which is incorporated herein by reference. 4.1 Registration Rights Agreements dated January 31, 1994 and February 28, 1994 among GZ-CA, Frank Cutler, James Cutler, Jr. and Gregory A. Brown, previously filed with the Commission as an exhibit to GZ-CA's Registration Statement on Form SB-2 dated March 15, 1994 or amendment thereto dated May 15, 1994 (Registration No. 33-76552-LA) (the "1994 Registration Statement"), which is incorporated herein by reference. 4.2 Form of Registration Rights Agreement dated February 2, 1996 among GZ-CA and each of the investors in the GZ-CA 1996 private placement offering (the "1996 Private Placement"), previously filed with the Commission as Exhibit 10.16 to the Registration Statement, which is incorporated herein by reference. 4.3 Registration Rights Agreement dated March 13, 1996 between GZ-CA and GT Interactive Software Corp., a Delaware corporation ("GTIS"), previously filed with the Commission as Exhibit 10.7 to the Registration Statement, which is incorporated herein by reference. Management Contracts and Compensatory Plans or Arrangements 10.1 Warrant Agreements dated January 31, 1994 and February 28, 1994 between GZ-CA and Frank Cutler, previously filed with the Commission as an exhibit to the 1994 Registration Statement, which is incorporated herein by reference.
47 50
EXHIBIT NUMBER DESCRIPTION - ------- -------------------------------------------------------------------------------- 10.2 Non-Qualified Stock Option Agreement dated July 1, 1994 between GZ-CA and Frank Cutler, previously filed with the Commission as Exhibit 10.4 to GZ-CA's Registration Statement on Form S-8 dated December 6, 1994, and filed with the Commission on December 9, 1994, which is incorporated herein by reference. 10.3 Non-Qualified Stock Option Agreement dated January 26, 1995 between GZ-CA and John and Anne Aber, previously filed with the Commission as Exhibit 10.20 to GZ-CA's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1995, and filed with the Commission on October 5, 1995 (File No. 0-24166) (the "GZ-CA 1995 Annual Report"), which is incorporated herein by reference. 10.4 Non-Qualified Stock Option Agreement dated January 26, 1995 between GZ-CA and John Aber, previously filed with the Commission as Exhibit 10.21 to the GZ-CA 1995 Annual Report, which is incorporated herein by reference. 10.5 Non-Qualified Stock Option Agreement dated January 26, 1995 between GZ-CA and Anne Aber, previously filed with the Commission as Exhibit 10.22 to the GZ-CA 1995 Annual Report, which is incorporated herein by reference. 10.6 Non-Qualified Stock Option Agreement dated January 26, 1995 between GZ-CA and Thomas and Honor Vandeveer, previously filed with the Commission as Exhibit 10.23 to the GZ-CA 1995 Annual Report, which is incorporated herein by reference. 10.7 1996 Stock Option Plan of the Company (the "1996 Plan"), previously filed with the Commission as Exhibit 10.1 to the Registration Statement, which is incorporated herein by reference. 10.8 Form of Non-Qualified Stock Option Agreement pertaining to the 1996 Plan, previously filed with the Commission as Exhibit 10.2 to the Registration Statement, which is incorporated herein by reference. 10.9 Form of Incentive Stock Option Agreement pertaining to the 1996 Plan, previously filed with the Commission as Exhibit 10.3 to the Registration Statement, which is incorporated herein by reference. 10.10 Employment letter dated January 15, 1996 between GZ-CA and Norman H. Block. 10.11 Separation and Settlement Agreement dated April 18, 1997 between the Company and Norman H. Block. 10.12 Employment Agreement dated June 23, 1995 between StarPress and Ronald S. Posner, previously filed with the Commission as an exhibit to StarPress' Annual Report on Form 10-KSB for the fiscal year ended June 30, 1995, and filed with the Commission on September 27, 1995 (the "StarPress 1995 Annual Report"), which is incorporated herein by reference. 10.13 Promissory Note dated March 21, 1996 in the original principal amount of $41,250 by Ronald S. Posner in favor of the Company. 10.14 Separation and Settlement Agreement dated May 21, 1997 among the Company, GZ-CA, StarPress and Ronald S. Posner. 10.15 Employment letter dated March 25, 1996 between the Company and Melissa Orr. 10.16 Amended and Restated Employment Agreement dated October 28, 1996 between the Company and Charles R. Cortright, Jr. 10.17 Employment letter dated February 26, 1997 between the Company and Robert D. Shishino, previously filed with the Commission as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997, and filed with the Commission on May 20, 1997 (File No. 0-28676) (the "March 1997 Quarterly Report"), which is incorporated herein by reference.
48 51
EXHIBIT NUMBER DESCRIPTION - ------- -------------------------------------------------------------------------------- 10.18 Terms of Employment Agreement between the Company and David J. Hirschhorn. 10.19 Terms of Stock Option granted by the Company to David J. Hirschhorn. 10.20 Confidential Settlement Agreement and Mutual General Release dated October 13, 1997 and effective as of May 30, 1997 among the Company, Charles Cortright and Angela Cortright. Other Material Contracts 10.21 Office Building Lease dated October 10, 1990 between GZ-CA and Masaaki & Fumiko Nakaoka, as amended, previously filed with the Commission as an exhibit to the 1994 Registration Statement, which is incorporated herein by reference. 10.22 Office Building Lease dated September 13, 1994 between GZ-CA and Pan Pacific Investments, as amended by First, Second and Third Amendments, previously filed with the Commission as an exhibit to the GZ-CA 1995 Annual Report, which is incorporated herein by reference. 10.23 Joint Venture Agreement dated March 31, 1995 among StarPress Multimedia, Inc., a Delaware corporation ("StarPress Multimedia"), Olivetti Systems and Network Holdings N.V., previously filed with the Commission as an exhibit to the StarPress 1995 Annual Report, which is incorporated herein by reference. 10.24 Sublease Agreement dated August 13, 1995 between StarPress and International Business Machines Corporation, previously filed with the Commission as an exhibit to the StarPress 1995 Annual Report, which is incorporated herein by reference. 10.25 Business Loan Agreement dated October 27, 1995 between Silicon Valley Bank and StarPress, previously filed with the Commission as an exhibit to StarPress' Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 1995 (the "StarPress September 1995 Quarterly Report"), which is incorporated herein by reference. 10.26 Business Loan Agreement dated June 26, 1996 between GZ-CA and Silicon Valley Bank, previously filed with the Commission as Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (File No. 0-28676), which is incorporated herein by reference. 10.27 Warrant to Purchase Stock dated December 12, 1996 between the Company and Silicon Valley Bank. 10.28 Asset Purchase Agreement dated November 1, 1995 between StarPress and Sony Interactive Entertainment, Inc., previously filed with the Commission as an exhibit to the StarPress September 1995 Quarterly Report, which is incorporated herein by reference. 10.29 Form of Warrant Agreement entered into between GZ-CA and each of the investors in the 1996 Private Placement, previously filed with the Commission as Exhibit 10.17 to the Registration Statement, which is incorporated herein by reference. 10.30 Distribution Agreement dated March 13, 1996 among GZ-CA, StarPress and GTIS, previously filed with the Commission as Exhibit 10.4 to the Registration Statement, which is incorporated herein by reference. 10.31 Keep-Well Agreement dated March 13, 1996 among the Company, GZ-CA and GTIS, previously filed with the Commission as Exhibit 10.5 to the Registration Statement, which is incorporated herein by reference. 10.32 Common Stock Purchase Warrant dated March 13, 1996 between GZ-CA and GTIS, previously filed with the Commission as Exhibit 10.6 to the Registration Statement, which is incorporated herein by reference.
49 52
EXHIBIT NUMBER DESCRIPTION - ------- -------------------------------------------------------------------------------- 10.33 Loan and Security Agreement dated January 31, 1997 between the Company and Madeleine L.L.C., a New York limited liability company ("Madeleine"), previously filed with the Commission as Exhibit 10.1 to the March 1997 Quarterly Report, which is incorporated herein by reference. 10.34 Amendment No. 1 to Loan and Security Agreement dated March 5, 1997 between the Company and Madeleine, previously filed with the Commission as Exhibit 10.3 to the March 1997 Quarterly Report, which is incorporated herein by reference. 10.35 Consent and Amendment Number Two to Loan and Security Agreement dated June 5, 1997 between the Company and Madeleine. 10.36 Warrant to Purchase 300,000 Shares of Common Stock dated January 31, 1997 between the Company and Madeleine, previously filed with the Commission as Exhibit 10.2 to the March 1997 Quarterly Report, which is incorporated herein by reference. 10.37 Warrant to Purchase Shares of Common Stock dated June 5, 1997 between the Company and Madeleine. 10.38 Asset Purchase Agreement dated February 24, 1997 among the Company, Inscape and Warner Music Group, Inc., previously filed with the Commission as Exhibit 10.32 to the March 20th Current Report, which is incorporated herein by reference. 10.39 Asset Purchase Agreement dated February 26, 1997 among the Company, Trimark Holdings, Inc. and its subsidiary, Trimark Interactive, previously filed with the Commission as Exhibit 10.33 to the March 20th Current Report, which is incorporated herein by reference. 10.40 Form of StarPress 9% Convertible Subordinated Debentures with Warrant Agreements, previously filed with the Commission as an exhibit to StarPress' Current Report on Form 8-K dated March 31, 1995, which is incorporated herein by reference. 10.41 Sub-Lease Agreement dated June 23, 1997 between the Company and Daimler Commerce Partners, L.P. 10.42 Promissory Note dated February 3, 1997 in the original principal amount of $200,000 by the Company in favor of Middlefield Ventures, Inc. 10.43 Warrant to Purchase 613,718 Shares of Common Stock of Graphix Zone, Inc. dated February 3, 1997 between the Company and Intel Corporation. 11 Statement Regarding Computation of Per Share Earnings (Loss). 21 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, independent auditors. 23.2 Consent of KPMG Peat Marwick LLP, independent auditors. 27 Financial Data Schedule.
(B) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the fourth quarter of Fiscal 1997. 50 53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GRAPHIX ZONE, INC. Date: October 13, 1997 By: /s/ DAVID J. HIRSCHHORN ------------------------------------ David J. Hirschhorn Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME TITLE DATE - --------------------------------------------- ----------------------------- ----------------- /s/ DAVID J. HIRSCHHORN Director, Chairman of the October 13, 1997 - --------------------------------------------- Board, President, Chief David J. Hirschhorn Executive Officer, Chief Financial Officer and Treasurer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) /s/ KEVIN P. GENDA Director October 13, 1997 - --------------------------------------------- Kevin P. Genda Director - --------------------------------------------- Ronald S. Posner
51 54 SCHEDULE II GRAPHIX ZONE, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (AMOUNTS IN THOUSANDS)
YEAR ENDED JUNE 30, ------------------------- 1997 1996 1995 ------ ----- ---- ALLOWANCE FOR DOUBTFUL ACCOUNTS Balance, beginning of year......................................... $ 640 $ 177 $ -- Additions charged to expense....................................... 1,524 384 154 Additions from acquisitions........................................ -- 79 23 Deductions, accounts written-off................................... (767) -- -- ------ ----- ---- Balance, end of year............................................... $1,397 $ 640 $177 ====== ===== ==== ALLOWANCE FOR SALES RETURNS AND DISCOUNTS Balance, beginning of year......................................... $ 849 $ 501 $ -- Net additions (reductions) charged (credited) to sales............. 203 (163) 244 Additions from acquisitions........................................ -- 511 257 ------ ----- ---- Balance, end of year............................................... $1,052 $ 849 $501 ====== ===== ==== ALLOWANCE FOR COOPERATIVE ADVERTISING FUNDS Balance, beginning of year......................................... $ 191 $ 165 $ -- Net additions (reductions) charged (credited) to sales and marketing expense................................................ 114 26 165 ------ ----- ---- Balance, end of year............................................... $ 305 $ 191 $165 ====== ===== ====
S-1 55 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- -------------------------------------------------------------------------------- 2.1 Agreement and Plan of Reorganization dated January 3, 1996 between GZ Multimedia, Inc. (formerly Graphix Zone, Inc.), a California corporation ("GZ-CA"), and StarPress, Inc., a Colorado corporation ("StarPress"), previously filed with the U.S. Securities and Exchange Commission (the "Commission") as Exhibit 2.1 to the Company's Registration Statement on Form S-4 dated March 25, 1996 (Registration No. 333-2642) (the "Registration Statement"), which is incorporated herein by reference. 2.2 Restructuring Plan adopted by the Board of Directors of the Company on June 3, 1997. 3.1 Certificate of Incorporation of the Company, previously filed with the Commission as Exhibit 3.1 to the Registration Statement, which is incorporated herein by reference. 3.2 Amended and Restated Certificate of Designations of Series A Convertible Preferred Stock of the Company, previously filed with the Commission as Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996 (File No. 0-28676) (the "September 1996 Quarterly Report"), which is incorporated herein by reference. 3.3 Certificate of Amendment of Amended and Restated Certificate of Designations of Series A Convertible Preferred Stock of the Company, previously filed with the Commission as Exhibit 3.4 to the Company's September 1996 Quarterly Report, which is incorporated herein by reference. 3.4 Certificate of Amendment of Certificate of Designations of Series A Convertible Preferred Stock of the Company. 3.5 Certificate of Designations of Series B Convertible Preferred Stock of the Company, previously filed with the Commission as Exhibit 3.1 to the Company's Current Report on Form 8-K dated February 18, 1997, and filed with the Commission on March 5, 1997 (File No. 0-28676) (the "March 5th Current Report"), which is incorporated herein by reference. 3.6 Certificate of Designations of Series C Convertible Preferred Stock of the Company, previously filed as Exhibit 10.34 to the Company's Current Report on Form 8-K dated March 5, 1997, and filed with the Commission on March 20, 1997 (File No. 0-28676) (the "March 20th Current Report"), which is incorporated herein by reference. 3.7 Bylaws of the Company, previously filed with the Commission as Exhibit 3.2 to the Registration Statement, which is incorporated herein by reference. 4.1 Registration Rights Agreements dated January 31, 1994 and February 28, 1994 among GZ-CA, Frank Cutler, James Cutler, Jr. and Gregory A. Brown, previously filed with the Commission as an exhibit to GZ-CA's Registration Statement on Form SB-2 dated March 15, 1994 or amendment thereto dated May 15, 1994 (Registration No. 33-76552-LA) (the "1994 Registration Statement"), which is incorporated herein by reference. 4.2 Form of Registration Rights Agreement dated February 2, 1996 among GZ-CA and each of the investors in the GZ-CA 1996 private placement offering (the "1996 Private Placement"), previously filed with the Commission as Exhibit 10.16 to the Registration Statement, which is incorporated herein by reference. 4.3 Registration Rights Agreement dated March 13, 1996 between GZ-CA and GT Interactive Software Corp., a Delaware corporation ("GTIS"), previously filed with the Commission as Exhibit 10.7 to the Registration Statement, which is incorporated herein by reference. Management Contracts and Compensatory Plans or Arrangements 10.1 Warrant Agreements dated January 31, 1994 and February 28, 1994 between GZ-CA and Frank Cutler, previously filed with the Commission as an exhibit to the 1994 Registration Statement, which is incorporated herein by reference.
56
EXHIBIT NUMBER DESCRIPTION - ------- -------------------------------------------------------------------------------- 10.2 Non-Qualified Stock Option Agreement dated July 1, 1994 between GZ-CA and Frank Cutler, previously filed with the Commission as Exhibit 10.4 to GZ-CA's Registration Statement on Form S-8 dated December 6, 1994, and filed with the Commission on December 9, 1994, which is incorporated herein by reference. 10.3 Non-Qualified Stock Option Agreement dated January 26, 1995 between GZ-CA and John and Anne Aber, previously filed with the Commission as Exhibit 10.20 to GZ-CA's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1995, and filed with the Commission on October 5, 1995 (File No. 0-24166) (the "GZ-CA 1995 Annual Report"), which is incorporated herein by reference. 10.4 Non-Qualified Stock Option Agreement dated January 26, 1995 between GZ-CA and John Aber, previously filed with the Commission as Exhibit 10.21 to the GZ-CA 1995 Annual Report, which is incorporated herein by reference. 10.5 Non-Qualified Stock Option Agreement dated January 26, 1995 between GZ-CA and Anne Aber, previously filed with the Commission as Exhibit 10.22 to the GZ-CA 1995 Annual Report, which is incorporated herein by reference. 10.6 Non-Qualified Stock Option Agreement dated January 26, 1995 between GZ-CA and Thomas and Honor Vandeveer, previously filed with the Commission as Exhibit 10.23 to the GZ-CA 1995 Annual Report, which is incorporated herein by reference. 10.7 1996 Stock Option Plan of the Company (the "1996 Plan"), previously filed with the Commission as Exhibit 10.1 to the Registration Statement, which is incorporated herein by reference. 10.8 Form of Non-Qualified Stock Option Agreement pertaining to the 1996 Plan, previously filed with the Commission as Exhibit 10.2 to the Registration Statement, which is incorporated herein by reference. 10.9 Form of Incentive Stock Option Agreement pertaining to the 1996 Plan, previously filed with the Commission as Exhibit 10.3 to the Registration Statement, which is incorporated herein by reference. 10.10 Employment letter dated January 15, 1996 between GZ-CA and Norman H. Block. 10.11 Separation and Settlement Agreement dated April 18, 1997 between the Company and Norman H. Block. 10.12 Employment Agreement dated June 23, 1995 between StarPress and Ronald S. Posner, previously filed with the Commission as an exhibit to StarPress' Annual Report on Form 10-KSB for the fiscal year ended June 30, 1995, and filed with the Commission on September 27, 1995 (the "StarPress 1995 Annual Report"), which is incorporated herein by reference. 10.13 Promissory Note dated March 21, 1996 in the original principal amount of $41,250 by Ronald S. Posner in favor of the Company. 10.14 Separation and Settlement Agreement dated May 21, 1997 among the Company, GZ-CA, StarPress and Ronald S. Posner. 10.15 Employment letter dated March 25, 1996 between the Company and Melissa Orr. 10.16 Amended and Restated Employment Agreement dated October 28, 1996 between the Company and Charles R. Cortright, Jr. 10.17 Employment letter dated February 26, 1997 between the Company and Robert D. Shishino, previously filed with the Commission as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997, and filed with the Commission on May 20, 1997 (File No. 0-28676) (the "March 1997 Quarterly Report"), which is incorporated herein by reference. 10.18 Terms of Employment Agreement between the Company and David J. Hirschhorn.
57
EXHIBIT NUMBER DESCRIPTION - ------- -------------------------------------------------------------------------------- 10.19 Terms of Stock Option granted by the Company to David J. Hirschhorn 10.20 Confidential Settlement Agreement and Mutual General Release dated October 13, 1997 and effective as of May 30, 1997 among the Company, Charles Cortright and Angela Cortright. Other Material Contracts 10.21 Office Building Lease dated October 10, 1990 between GZ-CA and Masaaki & Fumiko Nakaoka, as amended, previously filed with the Commission as an exhibit to the 1994 Registration Statement, which is incorporated herein by reference. 10.22 Office Building Lease dated September 13, 1994 between GZ-CA and Pan Pacific Investments, as amended by First, Second and Third Amendments, previously filed with the Commission as an exhibit to the GZ-CA 1995 Annual Report, which is incorporated herein by reference. 10.23 Joint Venture Agreement dated March 31, 1995 among StarPress Multimedia, Inc., a Delaware corporation ("StarPress Multimedia"), Olivetti Systems and Network Holdings N.V., previously filed with the Commission as an exhibit to the StarPress 1995 Annual Report, which is incorporated herein by reference. 10.24 Sublease Agreement dated August 13, 1995 between StarPress and International Business Machines Corporation, previously filed with the Commission as an exhibit to the StarPress 1995 Annual Report, which is incorporated herein by reference. 10.25 Business Loan Agreement dated October 27, 1995 between Silicon Valley Bank and StarPress, previously filed with the Commission as an exhibit to StarPress' Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 1995 (the "StarPress September 1995 Quarterly Report"), which is incorporated herein by reference. 10.26 Business Loan Agreement dated June 26, 1996 between GZ-CA and Silicon Valley Bank, previously filed with the Commission as Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (File No. 0-28676), which is incorporated herein by reference. 10.27 Warrant to Purchase Stock dated December 12, 1996 between the Company and Silicon Valley Bank. 10.28 Asset Purchase Agreement dated November 1, 1995 between StarPress and Sony Interactive Entertainment, Inc., previously filed with the Commission as an exhibit to the StarPress September 1995 Quarterly Report, which is incorporated herein by reference. 10.29 Form of Warrant Agreement entered into between GZ-CA and each of the investors in the 1996 Private Placement, previously filed with the Commission as Exhibit 10.17 to the Registration Statement, which is incorporated herein by reference. 10.30 Distribution Agreement dated March 13, 1996 among GZ-CA, StarPress and GTIS, previously filed with the Commission as Exhibit 10.4 to the Registration Statement, which is incorporated herein by reference. 10.31 Keep-Well Agreement dated March 13, 1996 among the Company, GZ-CA and GTIS, previously filed with the Commission as Exhibit 10.5 to the Registration Statement, which is incorporated herein by reference. 10.32 Common Stock Purchase Warrant dated March 13, 1996 between GZ-CA and GTIS, previously filed with the Commission as Exhibit 10.6 to the Registration Statement, which is incorporated herein by reference. 10.33 Loan and Security Agreement dated January 31, 1997 between the Company and Madeleine L.L.C., a New York limited liability company ("Madeleine"), previously filed with the Commission as Exhibit 10.1 to the March 1997 Quarterly Report, which is incorporated herein by reference.
58
EXHIBIT NUMBER DESCRIPTION - ------- -------------------------------------------------------------------------------- 10.34 Amendment No. 1 to Loan and Security Agreement dated March 5, 1997 between the Company and Madeleine, previously filed with the Commission as Exhibit 10.3 to the March 1997 Quarterly Report, which is incorporated herein by reference. 10.35 Consent and Amendment Number Two to Loan and Security Agreement dated June 5, 1997 between the Company and Madeleine. 10.36 Warrant to Purchase 300,000 Shares of Common Stock dated January 31, 1997 between the Company and Madeleine, previously filed with the Commission as Exhibit 10.2 to the March 1997 Quarterly Report, which is incorporated herein by reference. 10.37 Warrant to Purchase Shares of Common Stock dated June 5, 1997 between the Company and Madeleine. 10.38 Asset Purchase Agreement dated February 24, 1997 among the Company, Inscape and Warner Music Group, Inc., previously filed with the Commission as Exhibit 10.32 to the March 20th Current Report, which is incorporated herein by reference. 10.39 Asset Purchase Agreement dated February 26, 1997 among the Company, Trimark Holdings, Inc. and its subsidiary, Trimark Interactive, previously filed with the Commission as Exhibit 10.33 to the March 20th Current Report, which is incorporated herein by reference. 10.40 Form of StarPress 9% Convertible Subordinated Debentures with Warrant Agreements, previously filed with the Commission as an exhibit to StarPress' Current Report on Form 8-K dated March 31, 1995, which is incorporated herein by reference. 10.41 Sub-Lease Agreement dated June 23, 1997 between the Company and Daimler Commerce Partners, L.P. . 10.42 Promissory Note dated February 3, 1997 in the original principal amount of $200,000 by the Company in favor of Middlefield Ventures, Inc. 10.43 Warrant to Purchase 613,718 Shares of Common Stock of Graphix Zone, Inc. dated February 3, 1997 between the Company and Intel Corporation. 11 Statement Regarding Computation of Per Share Earnings (Loss). 21 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, independent auditors. 23.2 Consent of KPMG Peat Marwick LLP, independent auditors. 27 Financial Data Schedule.
EX-2.2 2 RESTRUCTURING PLAN 1 EXHIBIT 2.2 RESTRUCTURING PLAN On June 3, 1997, the Board of Directors of the Company adopted a restructuring plan for the Company consisting of the following: o Business--Divest or dispose of the Company's existing businesses -------- related to the personal computer industry and explore opportunities to enter into new businesses and industries. o Senior Secured Debt--Renegotiate the terms of the Company's ------------------- senior secured loan and the related collateral agreements to extend the term of the loan, reduce the interest rate thereof and provide for later payments of amounts due thereunder and to reduce the senior lender's warrant position in the Company. o Outstanding Unsecured Debt--Pay to unsecured creditors $0.30 -------------------------- for each $1.00 of debt. o Outstanding Convertible Preferred Stock--Exchange outstanding --------------------------------------- shares of the Company's Series B and Series C Preferred Stock, each $.01 par value per share, for shares of the Company's common stock, $.01 par value per share, at an exchange price of approximately $0.75 per share. o Additional Capital--Evaluate alternative methods for raising ------------------ additional funds for the Company. EX-3.4 3 AMEND TO CERTIFICATE OF DESIGNATION 1 EXHIBIT 3.4 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATION FILED 09:00 AM 01/31/1997 971034629 - 2583237 GRAPHIX ZONE, INC. CERTIFICATE OF AMENDMENT OF CERTIFICATE OF DESIGNATIONS OF SERIES A CONVERTIBLE PREFERRED STOCK (Pursuant to Section 242 of the General Corporation Law of the State of Delaware) ------------- Graphix Zone, Inc., a Delaware corporation (the "Corporation"), in accordance with the provisions of Section 103 of the General Corporation Law of the State of Delaware (the "DGCL") DOES HEREBY CERTIFY: That pursuant to authority vested in the Board of Directors of the Corporation by the Certificate of Incorporation of the Corporation, the Board of Directors of the Corporation, by unanimous written consent, dated January __, 1997, adopted a resolution providing for an amendment of the Certificate of Designations of Series A Convertible Preferred Stock, $.01 par value, as heretofore amended, which resolution is as follows: RESOLVED, that pursuant to authority vested in the Board of Directors of the Corporation by the Certificate of Incorporation, the Board of Directors does hereby provide for the amendment of the Certificate of Designations, as heretofore amended (the "Certificate of Designations"), of Series A Convertible Preferred Stock, $.01 par value, as follows: 1. Section 1 of the Certificate of Designations is hereby amended by deleting the existing Section 1 in its entirety and substituting in lieu thereof the following: SECTION 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series A Convertible Preferred Stock" (the "Series A Convertible Preferred Stock"), and the number of shares constituting the Series A Convertible Preferred Stock shall be 3,500, and shall not be subject to increase. 2 2. Section 9(a) of the Certificate of Designations is hereby amended by deleting the existing Section 9(a) in its entirety and substituting in lieu thereof the following: (a) CONVERSION AT OPTION OF HOLDER. The holders of the Series A Convertible Preferred Stock may, upon surrender of the certificates therefor, convert any or all of their shares of Series A Convertible Preferred Stock into fully paid and nonassessable shares of Common Stock and such other securities and property as hereinafter provided. At any time to and including the day prior to the Mandatory Conversion Date, each share of Series A Convertible Preferred Stock may be converted at the principal executive offices of the Corporation, the office of any transfer agent for the Series A Convertible Preferred Stock, if any, the office of any transfer agent for the Common Stock or at such other office or offices, if any, as the Board of Directors may designate, initially into such number of fully paid and nonassessable shares of Common Stock (calculated as to each conversion to the nearest 1/100th of a share) determined by dividing (x) the sum of (i) the Conversion Amount, (ii) accrued but unpaid dividends to the Conversion Date on the share of Series A Convertible Preferred Stock being converted, and (iii) accrued but unpaid interest on the dividends on the share of Series A Convertible Preferred Stock being converted in arrears to the Conversion Date by (y) the lower of (1) the product of the Conversion Percentage times the arithmetic average of the Closing Price of the Common Stock on the five consecutive trading days immediately preceding the Conversion Date or (2) $3.375 (subject to equitable adjustments for stock splits, stock dividends, combinations, recapitalizations, reclassifications and similar events occurring on or after September 26, 1996), in each case subject to adjustment as hereinafter provided (the "Conversion Rate"); provided, however, that in no event shall any holder be entitled to convert any shares of Series A Convertible Preferred Stock in excess of that number of shares of Series A Convertible Preferred Stock upon conversion of which the sum of (1) the number of shares of Common Stock beneficially owned by such holder and any person whose beneficial ownership of shares of Common Stock would be aggregated with such holder's beneficial ownership of shares of Common Stock for purposes of Section 13(d) of the Securities Exchange Act of 1934, as -2- 3 amended (the "Exchange Act"), and Regulation 13D-G thereunder (each a "Restricted Person" and collectively, the "Restricted Persons") (other than shares of Common Stock deemed beneficially owned through the ownership of unconverted shares of Series A Convertible Preferred Stock and unexercised Warrants) and (2) the number of shares of Common Stock issuable upon the conversion of the number of shares of Series A Convertible Preferred Stock with respect to which the determination in this proviso is being made, would result in beneficial ownership by any Restricted Person of more than 4.9% of the outstanding shares of Common Stock. For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and Regulation 13D-G thereunder, except as otherwise provided in clause (1) of the proviso to the immediately preceding sentence. The "Conversion Price" shall be equal to the Conversion Amount divided by the Conversion Rate. 3. The third paragraph of Section 9(c)(3) of the Certificate of Designations is hereby amended by deleting the existing third paragraph of Section 9(c)(3) in its entirety and substituting in lieu thereof the following: The right of the holders of Series A Convertible Preferred Stock to convert their shares shall be exercised by delivering (which may be done by telephone line facsimile transmission) to the Corporation or its agent, as provided above, a written notice, duly signed by or on behalf of the holder, stating the number of shares of Series A Convertible Preferred Stock to be converted. If a holder of Series A Convertible Preferred Stock elects to convert any shares of Series A Convertible Preferred Stock in accordance with section 8(a), such holder shall not be required to physically surrender the certificate(s) representing such shares of Series A Convertible Preferred Stock to the Corporation unless all of the shares of Series A Convertible Preferred Stock represented thereby are so converted. Each holder of shares of Series A Convertible Preferred Stock and the Corporation shall maintain records showing the number of shares so converted and the dates of such conversions or shall use such other method, satisfactory to such holder and the corporation, so as to not require physical surrender of such certificates upon each such conversion. In the event of any dispute or discrepancy, such records of the -3- 4 Corporation shall be controlling and determinative in the absence of manifest error. Notwithstanding the foregoing, if any shares of Series A Convertible Preferred Stock evidenced by a particular certificate therefor are converted as aforesaid, the holder of Series A Convertible Preferred Stock may not transfer the certificate(s) representing such shares of Series A Convertible Preferred Stock unless such holder first physically surrenders such certificate(s) to the Corporation, whereupon the Corporation will forthwith issue and deliver upon the order of such holder of shares of Series A Convertible Preferred Stock new certificate(s) of like tenor, registered as such holder of shares of Series A Convertible Preferred Stock (upon payment by such holder of shares of Series A Convertible Preferred Stock of any applicable transfer taxes) may request, representing in the aggregate the remaining number of shares of Series A Convertible Preferred Stock represented by such certificate(s). Each holder of shares of Series A Convertible Preferred Stock, by acceptance of a certificate for such shares, acknowledges and agrees that (1) by reason of the provisions of this paragraph and Section 8(d)(1), following conversion of any shares of Series A Convertible Preferred Stock represented by such certificate, the number of shares of Series A Convertible Preferred Stock represented by such certificate may be less than the number of shares stated on such certificate and the number of shares of Common Stock from the Maximum Share Amount (as defined herein) allocated to the shares of Series A Convertible Preferred Stock represented by such certificate for purposes of conversion of such shares may be less than the number thereof on such certificate and (2) the Corporation may place a legend on the certificates of shares of Series A Convertible Preferred Stock which refers to or describes the provisions of this paragraph. The Corporation shall pay any tax arising in connection with any conversion of shares of Series A Convertible Preferred Stock except that the Corporation shall not, however be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery upon conversion of shares of Common Stock or other securities or property in a name other than that of the holder of the shares of the Series A Convertible Preferred Stock being converted, and the Corporation shall not be required to issue or deliver any such shares or other securities or property unless and until the person or persons requesting the issuance thereof -4- 5 shall have paid to the Corporation the amount of any such tax or shall have established to the satisfaction of the Corporation that such tax has been paid. -5- 6 IN WITNESS WHEREOF, Graphix Zone, Inc. has caused its corporate seal to be hereunto affixed and this certificate to be signed by Norman H. Block, its President, as of the 31 day of January, 1997. By: /s/ N. H. BLOCK ----------------------------- Norman H. Block President -6- EX-10.10 4 EMPLOYMENT LTR BETWEEN CZ-CA AND NORMAN H. BLOCK 1 [GRAPHIX ZONE LOGO] EXHIBIT 10.10 January 15, 1996 Mr. Norm Block 26672 Honey Creek Palos Verdes, CA 90275 Dear Norm: Angela, Ron, and I have enjoyed our recent discussions with you regarding the possibility of you joining our company in a senior executive management role. Please let this memo summarize those discussions and serve as an offer letter. During your employment: o Your title will be Executive Vice President and COO/CFO reporting to me. o The following company departments will report to you: - Finance - Administration & Human Resources - Sales (Worldwide) o Your base salary will be $5,700 per pay period (every 2 weeks). o A $10,000 bonus will be paid to you within 30 days after each quarter achieving profits => $300,000. In addition, a $20,000 bonus will be paid to you within 30 days after 4 consecutive quarters achieving profits => $1,200,000 or for meeting the company's annual profit goals. (All above bonus goals are plus or minus 10%). o A $30,000 non-recoverable draw against the above mentioned bonuses will be paid to you at the rate of $7,500 per quarter. o Your start date will be 1/6/96. o 225,000 shares will be granted to you at fair market value of today's stock close price of 5 3/8. - The 225,000 shares shall vest monthly over the next 24 months commencing on your start date. 2 - After the Graphix Zone/StarPress merger is completed and approved by the SEC and shareholders, all above granted shares shall vest if any material change in ownership or control occurs. For example, but not limited to, the sale, partial sale, or merger of the Company. - Currently there is not enough stock in the Graphix Zone 1995 Stock Option Plan to satisfy the above transaction. As a result, we envision your becoming the EVP/CFO/COO of the new Delaware corporation that would be the holding company of both Graphix Zone and StarPress after the merger ("New GZ"). We expect New GZ to be formed and a New GZ Stock Option Plan (which would ultimately subsume all of the Graphix Zone and StarPress plans as well as provide options for New GZ employees such as yourself) adopted within a week. The New GZ 1996 Stock Option Plan would be submitted to the vote of shareholders of both companies at the time of the vote on the merger and would, therefore, be a 16b-3 exempt plan. We expect to be able to form New GZ and adopt New GZ 1996 Stock Option Plan within the two week time frame before your start date. - If, for legal, tax or accounting reasons, we conclude that this method of dealing with the issues proves unworkable (this possible solution was only recently considered and needs to be thought through by the relevant professionals), the alternative solution will be to hire you as EVP CFO/COO of Graphix Zone, grant you an options to purchase approximately 150,000 shares of Graphix Zone now and 75,000 shares after the merger is completed and new plans put in place, with Graphix Zone's commitment to make up to you and loss incurred as a result of increased in Graphix Zone's stock price between the date of grant of the 150,000 shares and the date of grant of the 75,000 shares (by additional options, stock appreciation rights, bonuses, or some combination of the foregoing acceptable to all of us). o You will be invited to attend and participate in each company board meeting. o The company currently does not have a severance package. However, we are willing to provide you with at least 9 months severance pay should you be terminated from the company, expect by your own voluntary resignation or serious cause involving an illegal act. o Medical, dental, and vision insurance are included in your compensation package, subject to your acceptance by our insurance carrier. You may also opt to purchase dependent coverage for your family. If necessary, Jill Lewis, our VP of administration, will give you more information on this. 3 Norm, we are all impressed with your experience, style and track record. We are confident that you can make a significant contribution to our company and its future success and profitability. Please call me at your earliest convenience if you have any questions or comments. I look forward to your positive response. Sincerely, /s/ CHUCK CORTRIGHT - -------------------- Chuck Cortright President & CEO cc: Angela Aber Jill Lewis Ron Posner Accepted: /s/ NORM BLOCK - ------------------------------ Norm Block Date EX-10.11 5 SEPARATION AND SETTLEMENT AGREEMENT W/N.H. BLOCK 1 EXHIBIT 10.11 SEPARATION AND SETTLEMENT AGREEMENT THIS SEPARATION AND SETTLEMENT AGREEMENT (the "Agreement") is made as of April 18, 1997, by and among Graphix Zone, Inc., a Delaware corporation ("GZ"), GZ Multimedia, Inc., a California corporation ("GZM"), StarPress, Inc., a Colorado corporation ("SP") (GZ, GZM and SP are collectively referred to as the "GZ Entities"), and Norman H. Block ("Block"). RECITALS A. Block has been employed as a Director of each of the GZ Entities, as President of GZ, and as President, Chief Financial Officer and Secretary of each of GZM and SP. The parties to this Agreement mutually desire to sever the relationship between the GZ Entities and Block. B. The GZ Entities and Block have agreed to the terms and conditions set forth in this Agreement and the amounts set forth below. AGREEMENT NOW, THEREFORE, in consideration of the foregoing promises and the provisions hereinafter set forth, the parties agree as follows: 1. RESIGNATION AS DIRECTOR AND OFFICERS. Effective April 18, 1997, Block will deliver his signed letter confirming his resignation from his positions as a Director and officer of the various GZ Entities. Block will vacate his office at GZ no later than April 18, 1997. Block hereby promises and affirms that any information, computers (except as otherwise set forth in this Agreement), laptops, files, records, documents, business equipment or information of the GZ Entities, including but not limited to, handwritings, typewritings, printing, photostating, photographing, computer files, hard disk drive, tape, floppy disk, and every other means of recording upon any tangible thing, for communication or representation, including letters, pictures, sounds or symbols or any combination thereof, of the GZ Entities will not be retained, utilized, disseminated, or in any other manner disclosed by Block and Block will surrender possession of these items to whomsoever is designated by the GZ Entities. 2. SEVERANCE PAYMENTS. Pursuant to the terms of this Agreement, GZ agrees to make the following scheduled severance payments to Block: a. On April 18, 1997, all accrued vacation pay through April 18, 1997, which vacation pay totals $12,850.32 less applicable withholdings. b. On July 18, 1997, $45,000.00 less applicable withholdings. c. On August 18, 1997, $15,000.00 less applicable withholdings. 2 d. On September 18, 1997, $15,000.00 less applicable withholdings. e. On October 18, 1997, $15,000.00 less applicable withholdings. f. GZ agrees to pay for the continuation of Block's medical and dental benefits for a period of six months from April 18, 1997. 3. BLOCK'S PURCHASE OF PERSONAL COMPUTER, MONITOR AND OPTICAL DRIVE. Block agrees to purchase a personal computer, monitor and optical drive agreed upon by GZ and Block for the purchase price of $1.00. 4. POST-EMPLOYMENT CONSULTING. Block will in good faith provide reasonable cooperation and assistance to GZ Entities subsequent to the effective date of this Agreement on an "as-needed" basis for a period of not less than six months, but only as requested by the GZ Entities or their attorneys. 5. NON-DISCLOSURE AGREEMENT. Block by this Agreement promises, assets, and affirms not to disclose any confidential information which he learned while employed by or through the GZ Entities, including but not limited to, the contents, terms, or other proprietary information contained in customer lists, drawings, designs, plans, computer software and databases, financial information, operational, marketing activities or employment practices of the GZ Entities. 6. INDEMNITY. The GZ Entities will to the extent authorized in their respective articles of incorporation and bylaws, defend, indemnify and hold harmless Block from and against any and all third-party claims, demands, causes of action, arbitration, litigation, administrative action, arising out of or reasonably related to Block's employment with or service to the GZ Entities. Block will not be indemnified for any claim that involves an allegation that all or a portion of this Agreement has been breached. 7. RELEASE BY BLOCK. Except for the obligations and provisions set forth in this Agreement, Block hereby releases and discharges the GZ Entities, and their respective officers, directors, shareholders, parent corporations, subsidiary corporations, brother/sister corporations, successors, assigns, affiliates, employees, consultants and attorneys, from any and all agreements, obligations, claims, demands and causes of action which arise out of or relate to compensation or benefits relating to Block's employment by the GZ Entities. Block will not initiate, cooperate with, or participate in any litigation, claim, demand, arbitration or other proceeding of any kind in any form pertaining to any of the released claims set forth in this Agreement. - 2 - 3 8. RELEASE BY GZ ENTITIES. Except for the obligations and provisions set forth in this Agreement, each of the GZ Entities hereby releases and discharges Block from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses which arise out of or relate to compensation or benefits relating to Block's employment by the GZ Entities. 9. BINDING OBLIGATION. This Agreement is intended by the parties to this Agreement to be a valid and legally binding obligation, enforceable against such parties in accordance with its terms. Neither the execution or delivery of this Agreement, nor the performance of any of their obligations pursuant to this Agreement, constitutes or will constitute a breach or violation of any contract, law, rule, order, decree, judgment, agreement, indenture, bylaw, certificate of incorporation or other instrument which the parties to this Agreement are legally bound. 10. CONFIDENTIALITY. This Agreement and the transactions described herein are confidential. No party to this Agreement, or any party under the GZ Entities' or Block's respective control, including without limitation, employees, officers, directors, consultants, attorneys and agents, will disclose publicly a copy of all or any portion of this Agreement, or make any statement or disclosure pertaining to the financial transactions described in this Agreement, except as required by law or if necessary for the enforcement of this Agreement. 11. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which will be deemed to be an original, but all of which together will constitute one and the same instrument. 12. ENTIRE AGREEMENT/AMENDMENT/WAIVER. This Agreement contains the entire and complete understanding between the parties concerning its subject matter and all representations, agreements, arrangements and understandings between or among the parties, whether oral or written, have been fully merged herein and are superseded hereby. This Agreement may be amended, supplemented, modified or rescinded only through an express written instrument signed by all the parties or their respective successors and assigns. The parties may specifically and expressly waive in writing any portion of this Agreement or any breach hereof, but such waiver will not constitute a further or continuing waiver of any proceeding or succeeding breach of the same or any other provision. The consent by one party to any act for which such consent was required will not be deemed to imply consent or waiver of the necessity of obtaining such consent for the same or similar acts in the future. 13. SEVERABILITY. Each provision of this Agreement is intended to be severable and if any term or provision herein is determined invalid or unenforceable for any reason, such illegality or invalidity will not affect the validity of the remainder of this Agreement and, wherever possible, intent will be given to the invalid or unenforceable provision. - 3 - 4 14. FURTHER DOCUMENTS AND ACTS. Each of the parties will cooperate in good faith with the others, and execute and deliver such further instruments and perform such other acts as may be reasonably necessary or appropriate to consummate and carry into effect the transactions contemplated by this Agreement. 15. BENEFIT OF AGREEMENT. This Agreement is for the sole and exclusive benefit of the signatories hereto and nothing in this Agreement will be construed to give any person or entity other than the parties hereto any legal or equitable right, claim or remedy. Subject to the foregoing sentence, this Agreement will inure to the benefit of and will be binding upon the specific successors, assigns, personal representatives, estates, heirs and legatees of each of the parties. 16. SIGNATORIES' AUTHORITY. Each of the individuals signing this Agreement represents and warrants to the others that he or she has the right, capacity, power and authority to sign this Agreement on his or her behalf, or on behalf of the corporation or other business entity for which he or she has signed, as the case may be, and to sign all other documents and perform all other acts as may be necessary in relation to this Agreement. 17. COSTS. Each of the parties to this Agreement will pay its own costs and expenses relative to the negotiation and preparation of this Agreement. 18. INTERPRETATION. This Agreement will be interpreted in accordance with California law and any action or proceeding concerning this Agreement will be brought and decided exclusively in Orange County, California. The prevailing party in any action, litigation or other dispute will be entitled to recover all of their costs, expenses, including without limitation, costs, attorneys' fees, postjudgment attorneys' fees and experts' fees. 19. INTERPRETATION. The language in all parts of this Agreement will be in all cases construed simply according to its fair meaning and not strictly for or against any party. Whenever the context requires, all words used in the singular will be construed to have been used in the plural, and vice versa, and each gender will include any other gender. The captions of the sections of this Agreement are for the convenience only and will not affect the construction or interpretation of any of the provisions herein. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -4- 5 20. ARBITRATION. All disputes involving or arising out of any alleged breach of this Agreement shall be resolved by final and binding arbitration without resort to a trial by jury. Issues of procedure, arbitrability, or confirmation of awards shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1-16, except that court review of the arbitrator's award shall be that of an appellate court reviewing a decision of a trial judge sitting without a jury. IN WITNESS WHEREOF, this Agreement has been entered into as of the date first set forth above. GRAPHIX ZONE, INC., a Delaware corporation By: /s/ DAVID J. HIRSCHHORN -------------------------------------- David J. Hirschhorn GZ MULTIMEDIA, INC., a California corporation By: /s/ DAVID J. HIRSCHHORN -------------------------------------- David J. Hirschhorn STARPRESS, INC., a Colorado corporation By: /s/ DAVID J. HIRSCHHORN -------------------------------------- David J. Hirschhorn /s/ NORMAN H. BLOCK ------------------------------------------ NORMAN H. BLOCK, an individual -5- EX-10.13 6 SECURED PROMISSORY NOTE 1 EXHIBIT 10.13 SECURED PROMISSORY NOTE $41,250.00 San Francisco, CA March 21, 1996 FOR VALUE RECEIVED, the undersigned hereby promises to pay to the order of Graphix Zone, Inc., 42 Corporate Park, Suite 200, Irvine, California 92174, or at such other place as the holder of this Note ("Holder") may designate in writing from time to time, the principal amount of Forty-One Thousand Two Hundred Fifty Dollars ($41,250.00) together with interest thereon calculated from the date set forth above until paid at the rate of six percent (6%) per annum, computed and compounded annually. The entire unpaid principal balance and accrued interest shall be due and payable on or before termination of employment with StarPress, Inc. or any successor company (including, without limitation, Holder or any successor to Holder). At the option of the Holder, payments will be applied first to interest, next to any collection charge or expense and last to reduction of principal. The undersigned may prepay all or any portion of the amount due under this Note without premium or penalty. Any prepayment shall be applied first to full payment of accrued interest, next to any collection charge or expense and last to reduction of principal. The undersigned represents and warrants that funds advanced pursuant to this Note will be used to acquire common stock of StarPress, Inc. Time is of the essence of this Note and of the payments and performances hereunder and under any of the other documents executed by the undersigned in connection herewith. The occurrence of one or more of the following events ("Events of Default") shall constitute a default under this Note: (i) the failure to pay principal and interest under this Note when the same shall become due and payable or (ii) the undersigned's application for consent to or acquiescence in the appointment of a trustee, receiver, liquidator, assignee, sequestrator or other similar official for the undersigned or the undersigned's property (or if involuntary the failure of the undersigned to have the same discharged with 60 days), or the making of a general assignment for the benefit of creditors, or any bankruptcy, reorganization, debt arrangement or other proceeding under any bankruptcy or other insolvency law of common law or in equity being instituted by or against the undersigned (and, only if involuntary, the same is not dismissed within 60 days). Upon the occurrence of an Event of Default, and in addition to any other right or remedy provided by applicable law, the Holder may without further demand protest or notice of any kind to the undersigned, declare any or all sums and obligations due under this Note to be immediately due and payable, and upon such declaration the same shall become and be immediately due and payable, the interest rate shall be increased to the lesser of ten percent (10%) per annum or the maximum interest rate allowed under applicable law, and interest shall thereafter be added to the principal balance to bear interest itself. The undersigned agrees to pay all costs of collection and reasonable attorney's fees in case of any Event of Default. The nonexercise by the Holder of its 2 rights hereunder in any particular instance shall not constitute a waiver thereof in that or any subsequent instance. The obligations of this Note shall be joint and several. The undersigned, and all endorsers and all persons liable or to become liable on this Note, severally waive diligence, presentment, demand, protest and notice of demand, protest and nonpayment, and consent to any and all renewals and extensions of the time of payment hereof. This Note shall be governed by and construed in accordance with the laws of the State of California. /s/ RONALD S. POSNER ---------------------------- Ronald S. Posner Social Security #: ###-##-#### ----------- EX-10.14 7 SEPARATION AND SETTLEMENT AGREEMENT, POSNER 1 EXHIBIT 10.14 SEPARATION AND SETTLEMENT AGREEMENT THIS SEPARATION AND SETTLEMENT AGREEMENT (the "Agreement") is made as of May 21, 1997, by and among Graphix Zone, Inc., a Delaware corporation ("GZ"), GZ Multimedia, Inc., a California corporation ("GZM"), StarPress, Inc., a Colorado corporation ("SP") (GZ, GZM and SP are collectively referred to as the "GZ Entities"), and Ronald S. Posner ("Posner"). RECITALS A. Posner has been employed as Chairman and CEO of each of the GZ Entities. The parties to this Agreement mutually desire to sever the relationship between the GZ Entities and Posner, in those capacities, but Posner shall remain a Director of the Entities. B. The GZ Entities and Posner have agreed to the terms and conditions set forth in this Agreement and the amounts set forth below. AGREEMENT NOW, THEREFORE, in consideration of the foregoing promises and the provisions hereinafter set forth, the parties agree as follows: 1. RESIGNATION AS CHAIRMAN & CEO. Effective May 12, 1997, Posner will deliver his signed letter confirming his resignation from his positions as Chairman & CEO of the various GZ Entities. Posner hereby promises and affirms that any information, computers (except as otherwise set forth in this Agreement), laptops, files, records, documents, business equipment or information of the GZ Entities, including but not limited to, handwritings, typewritings, printing, photostating, photographing, computer files, hard disk drive, tape, floppy disk, and every other means of recording upon any tangible thing, for communication or representation, including letters, pictures, sounds or symbols or any combination thereof, of the GZ Entities will not be retained, utilized, disseminated, or in any other manner disclosed by Posner and Posner will surrender possession of these items to whomsoever is designated by the GZ Entities. 2. SEVERANCE PAYMENTS. Pursuant to the terms of this Agreement, GZ agrees to make the following scheduled severance payments to Posner: a. On June 1, 1997, a payment in the amount of $15,266.66 less applicable withholdings. b. On September 1, 1997, $15,266.66 less applicable withholdings. c. On November 1, 1997, $15,266.66 less applicable withholdings. - 1 - 2 3. POSNER'S PURCHASE OF PERSONAL COMPUTER AND MONITOR. Posner agrees to purchase a personal computer and monitor agreed upon by GZ and Posner for the purchase price of $1.00. A. GZ Agrees to continue medical benefit payments through November 1997, at which time Posner can elect to maintain benefits under COBRA. 4. NON-DISCLOSURE AGREEMENT. Posner by this Agreement promises, asserts, and affirms not to disclose any confidential information which he learned while employed by or through the GZ Entities, including but not limited to, the contents, terms, or other proprietary information contained in customer lists, drawings, designs, plans, computer software and databases, financial information, operational, marketing activities or employment practices of the GZ Entities. 5. INDEMNITY. The GZ Entities will to the extent authorized in their respective articles of incorporation and bylaws, defend, indemnify and hold harmless Posner from and against any and all third-party claims, demands, causes of action, arbitration, litigation, administrative action, arising out of or reasonably related to Posner's employment with or service to the GZ Entities. Posner will not be indemnified for any claim that involves an allegation that all or a portion of this Agreement has been breached. 6. RELEASE BY POSNER. Except for the obligations and provisions set forth in this Agreement, Posner hereby releases and discharges the GZ Entities, and their respective officers, directors, shareholders, parent corporations, subsidiary corporations, brother/sister corporations, successors, assigns, affiliates, employees, consultants and attorneys, from any and all agreements, obligations, claims, demands and causes of action which arise out of or relate to compensation or benefits relating to Posner's employment by the GZ Entities. Posner will not initiate, cooperate with, or participate in any litigation, claim, demand, arbitration or other proceeding of any kind in any form pertaining to any of the released claims set forth in this Agreement. 7. RELEASE BY GZ ENTITIES. Except for the obligations and provisions set forth in this Agreement, each of the GZ Entities hereby releases and discharges Posner from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses which arise out of or relate to compensation or benefits relating to Posner's employment by the GZ Entities. 8. BINDING OBLIGATION. This Agreement is intended by the parties to this Agreement to be a valid and legally binding obligation, enforceable against such parties in accordance with its terms. Neither the execution or delivery of this Agreement, nor the performance of any of their obligations pursuant to this Agreement, constitutes or will constitute a breach or violation of any contract, law, rule, order, decree, judgment, agreement, indenture, bylaw, certificate of incorporation or other instrument which the parties to this Agreement are legally bound. - 2 - 3 9. CONFIDENTIALITY. This Agreement and the transactions described herein are confidential. No party to this Agreement, or any party under the GZ Entities' or Posner's respective control, including without limitation, employees, officers, directors, consultants, attorneys and agents, will disclose publicly a copy of all or any portion of this Agreement, or make any statement or disclosure pertaining to the financial transactions described in this Agreement, except as required by law or if necessary for the enforcement of this Agreement. 10. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which will be deemed to be an original, but all of which together will constitute one and the same instrument. 11. ENTIRE AGREEMENT/AMENDMENT/WAIVER. This Agreement contains the entire and complete understanding between the parties concerning its subject matter and all representations, agreements, arrangements and understandings between or among the parties, whether oral or written, have been fully merged herein and are superseded hereby. This Agreement may be amended, supplemented, modified or rescinded only through an express written instrument signed by all the parties or their respective successors and assigns. The parties may specifically and expressly waive in writing any portion of this Agreement or any breach hereof, but such waiver will not constitute a further or continuing waiver of any proceeding or succeeding breach of the same or any other provision. The consent by one party to any act for which such consent was required will not be deemed to imply consent or waiver of the necessity of obtaining such consent for the same or similar acts in the future. 12. SEVERABILITY. Each provision of this Agreement is intended to be severable and if any term or provision herein is determined invalid or unenforceable for any reason, such illegality or invalidity will not affect the validity of the remainder of this Agreement and, wherever possible, intent will be given to the invalid or unenforceable provision. 13. FURTHER DOCUMENTS AND ACTS. Each of the parties will cooperate in good faith with the others, and execute and deliver such further instruments and perform such other acts as may be reasonably necessary or appropriate to consummate and carry into effect the transactions contemplated by this Agreement. 14. BENEFIT OF AGREEMENT. This Agreement is for the sole and exclusive benefit of the signatories hereto and nothing in this Agreement will be construed to give any person or entity other than the parties hereto any legal or equitable right, claim or remedy. Subject to the foregoing sentence, this Agreement will inure to the benefit of and will be binding upon the specific successors, assigns, personal representatives, estates, heirs and legatees of each of the parties. -3- 4 15. SIGNATORIES' AUTHORITY. Each of the individuals signing this Agreement represents and warrants to the others that he or she has the right, capacity, power and authority to sign this Agreement on his or her behalf, or on behalf of the corporation or other business entity for which he or she has signed, as the case may be, and to sign all other documents and perform all other acts as may be necessary in relation to this Agreement. 16. COSTS. Each of the parties to this Agreement will pay its own costs and expenses relative to the negotiation and preparation of this Agreement. 17. INTERPRETATION. This Agreement will be interpreted in accordance with California law and any action or proceeding concerning this Agreement will be brought and decided exclusively in Orange County, California. The prevailing party in any action, litigation or other dispute will be entitled to recover all of their costs, expenses, including without limitation, costs, attorneys' fees, post judgment attorneys' fees and experts' fees. 18. INTERPRETATION. The language in all parts of this Agreement will be in all cases construed simply according to its fair meaning and not strictly for or against any party. Whenever the context requires, all word used in the singular will be construed to have been used in the plural, and vice versa, and each gender will include any other gender. The captions of the sections of this Agreement are for the convenience only and will not affect the construction or interpretation of any of the provisions herein. 19. ARBITRATION. All disputes involving or arising out of any alleged breach of this Agreement shall be resolved by final and binding arbitration without resort to a trial by jury. Issues of procedure, arbitrability, or confirmation of awards shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1-16, except that court review of the arbitrator's award shall be that of an appellate court reviewing a decision of a trial judge sitting without a jury. -4- 5 IN WITNESS WHEREOF, this Agreement has been entered into as of the date first set forth above. GRAPHIX ZONE, INC., a Delaware corporation By: /s/ DAVID J. HIRSCHHORN ---------------------------------------- David J. Hirschhorn GZ MULTIMEDIA, INC., a California corporation By: /s/ DAVID J. HIRSCHHORN ---------------------------------------- David J. Hirschhorn STARPRESS, INC., a Colorado corporation By: /s/ DAVID J. HIRSCHHORN ---------------------------------------- David J. Hirschhorn /S/ RONALD S. POSNER ------------------------------------------- Ronald S. Posner, an individual -5- EX-10.15 8 EMPLOYMENT LETTER BETWEEN COMPANY & MELISSA ORR 1 EXHIBIT 10.15 [Graphix Zone Letterhead] March 25, 1996 Melissa Orr 12 Padua Court Newport Beach, California 92657 Dear Melissa, This letter will confirm our offer to have you join Graphix Zone as Vice President - World Wide Sales. In this position you will report directly to me and be responsible for all sales activity of the combined Graphix Zone and Star Press companies. We will offer you a base salary of $4,230.77 per pay period (26 pay periods), with a non-refundable draw on commission of $10,000.00 to be earned ratably during calendar year 1996. We anticipate that you will earn a total of $40,000.00 in commission during the next 9 months as your target commission earned. Commission will be paid to you at the rate of 1% of all sales, commencing April 1, 1996 through 12/31/96 that exceed $8,000,000.00. Additionally, we will offer you 6 months severance should you be terminated by the company for any reason other than just cause. Furthermore, we will recommend to our Board of Directors that you be granted stock options on 25,000 shares of common stock under our existing Stock Option Plan. Medical, dental and visual benefits are provided for full time employees on the first of the month after thirty days of employment. Melissa, I look forward to having you join us no later than April 15, 1996. Sincerely, /s/ NORM BLOCK Norm Block Chief Operating Officer Accepted: /s/ MELISSA ORR 3/25/96 ------------------------- Melissa Orr cc: Jill Lewis EX-10.16 9 AMENDED & RESTATED EMPLOYMENT AGREEMENTW/CORTRIGHT 1 EXHIBIT 10.16 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of October 28, 1996, between Graphix Zone, Inc., a Delaware corporation (the "Company"), and Charles R. Cortright, Jr. ("Employee"). RECITALS WHEREAS, Employee and the Company had previously entered in an Employment Agreement dated April 18, 1996 (the "Old Agreement"), whereby Employee was employed as President of the Company; and WHEREAS, Employee, with the consent of the Board of Directors of the Company, has resigned as President of the Company; and WHEREAS, the parties desire that Employee remain with the Company to assist management in various ways. NOW, THEREFORE, in consideration of the foregoing premises, the following mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each of the parties hereto, the parties hereto agree, intending to be legally bound, that this Amended and Restated Employment Agreement shall supersede and replace the Old Agreement in its entirety, and shall henceforth read as follows: AGREEMENT 1. SERVICES. (a) The Company hereby employs Employee as an assistant to management of the Company and Employee hereby accepts such employment on the terms and conditions set forth herein. In this regard, Employee shall perform and discharge well and faithfully the duties and responsibilities that shall be assigned to him from time to time by the Company in connection with the conduct of its business, including special projects which may be mutually agreed upon from time-to-time, consistent with the duties customarily performed by an employee of similar stature, and shall devote approximately one-half (1/2) of normal working hours to such duties and responsibilities. (b) Employee is not and shall not be engaged directly or indirectly in any other business activity, or previously have contracted to perform such activity at a future date which would prevent the performance of the obligations hereunder or involve activities which would result in a breach of any provision of this Agreement. 2 2. TERM. (a) The term of this Agreement shall begin on the date hereof and shall cease and terminate upon the earliest of (i) the close of business on April 30, 1997; (ii) the death of Employee; (iii) termination by the Company for "cause" (as defined in Section 2(b)) or otherwise; or (iv) termination by mutual agreement between the parties. (b) As used in this Section 2, "cause" shall mean and be limited to one or more of the following occurrences with respect to Employee: (i) the willful and continued failure by Employee to substantially perform his duties with the Company (other than any such failure resulting from his incapacity due to physical or mental illness) after a written demand for a substantial performance is delivered to Employee by the Board of Directors of the Company which specifically identifies the manner in which the Board of Directors believes that Employee has not substantially performed his duties; or (ii) gross negligence or willful misconduct of Employee in the performance of his duties. (c) The term of this Agreement shall automatically be extended for successive six (6) month terms unless either party gives written notice to the other at least thirty (30) days prior to the end of the term (or any extended term) that such party desires to terminate this Agreement at the end of the term (or any extended term). 3. COMPENSATION. (a) The Company shall pay to Employee a base salary of Thirty Thousand Dollars ($30,000) per 6 month period, payable in semi-monthly installments. (b) Employee shall receive additional compensation from time-to-time at the discretion of the Company's Board of Directors. (c) If Employee's employment pursuant to this Agreement is terminated by the Company other than for "cause" (as defined in Section 2 hereof), the Company shall continue to pay Employee his base salary until the end of the term (or any extended term), plus any amounts accrued through the end of the term (or any extended term) as additional compensation referred to in clause (b) above. (d) During the term of his employment, Employee shall be entitled to participate in employee benefit plans or programs of the Company, if any, to the extent his position, tenure, salary, age, health and other qualifications makes him eligible to 3 participate, subject to the rules and regulations applicable thereto; provided, however, that Employee shall be entitled to participate in the Company's health insurance program to the same extent as a full-time employee for the remainder of his life, and the Company shall pay all premiums with respect thereto. (e) Employee shall not be entitled to paid vacation, per se; however, because Employee will essentially be a "half-time" employee, he shall not be required to follow any particular schedule and work a particular number of hours, other than that, during the term of this Agreement, he shall devote a number of hours to the Company's business which shall be approximately equal to one-half (1/2) of the hours a regular, full-time employee would devote during a time period equal to the term. 4. EXPENSES. The Company will reimburse Employee for direct out-or-pocket expenses properly incurred by him in his performance of this Agreement and provided that a written accounting is made to the Company by Employee, and as approved in advance by the Company's President. 5. CONFIDENTIALITY. (a) Employee acknowledges that as a consequence of his relationship with the Company, he has been and will continue to be given access to confidential information which may include the following types of information: financial statements and related financial information with respect to the Company, trade secrets, computer programs, certain methods of operation, procedures, improvements, systems, customer lists, supplier lists and specifications and other private and confidential materials concerning the Company's business (collectively, "Confidential Information"). Employee agrees that he shall maintain any Confidential Information in strictest confidence and shall not disclose any Confidential Information to third parties during the term of this Agreement and after the termination hereof, however such termination shall occur, unless previously approved by the Board of Directors of the Company in writing. (b) Notwithstanding the foregoing, nothing herein shall be construed as prohibiting Employee from disclosing any Confidential Information (i) which, at the time of disclosure, Employee can demonstrate either was in the public domain and generally available to the public by publication or otherwise through no act of Employee; (ii) which Employee can show was received by him after the termination of this Agreement from a third party who did not acquire it directly or indirectly from the Company under an obligation of confidence; (iii) to the extent that Employee can reasonably demonstrate such disclosure is required by law or in any legal proceeding, governmental investigation, or other similar proceeding. 6. PREVIOUS EMPLOYMENT. Employee hereby represents that Employee's execution of this Agreement, employment with the Company and performance of Employee's proposed duties to the Company in the development of its business will not violate any obligations Employee may have to any former employer, including, but not 4 limited to, any obligations to keep confidential any proprietary or confidential information of any such employer. Employee has not entered into, and Employee will not enter into, any agreement which conflicts with or would, if performed by Employee, cause Employee to breach this Agreement. Employee hereby represents, warrants and covenants to the Company, that in the course of performing Employee's duties to the Company, Employee will not utilize any proprietary or confidential information of any former employer. 7. NO WAIVER; AMENDMENTS, ETC. The failure of any party to insist upon the strict performance of any of the terms, conditions or provisions of this Agreement shall not be construed as a waiver or relinquishment of future compliance therewith, and said terms, conditions and provisions shall remain in full force and effect. No interpretation, amendment, changes, or other modifications or waivers of any of the provisions of this Agreement shall be binding upon the Company or Employee unless in writing and signed by the person to be bound. 8. RIGHTS, OBLIGATIONS AND ASSIGNMENT. the rights and obligations of the Company under this Agreement shall inure to the benefit of, and shall be binding upon, its successors and assigns. The duties of Employee to any such successor entity shall not be greater than the duties performed for the Company prior to such succession. Employee is prohibited from making any assignment of this Agreement. 9. ENTIRE AGREEMENT. This Agreement embodies the entire understanding between the parties hereto pertaining to the subject matter hereof and supersedes all prior agreements and understandings of the parties in connection therewith. 10. SEVERABILITY. If any of the provisions of this Agreement shall for any reason be adjudged by any court of competent jurisdiction to be invalid or unenforceable, such judgment shall not affect, impair or invalidate the remainder of this Agreement, but shall be confined in its operations to the provision of this Agreement directly involved in the controversy in which such judgment shall have been rendered. 11. NOTICES. Notices, other communications or deliveries required or permitted under this Agreement shall be in writing directed as follows: If to the Company, at: Graphix Zone, Inc. 42 Corporate Park, Suite 200 Irvine, California 92606 Attn: Chairman of the Board If to Employee, at: Mr. Charles R. Cortright, Jr. 23 San Mateo Way Corona del Mar, California 92625 5 The parties may designate by notice to each other any new address for the purpose of this Agreement. Unless otherwise specified in this Agreement, all notices shall be effective when mailed postage prepaid by registered or certified mail, return receipt requested. 12. APPLICABLE LAW. This Agreement shall be interpreted, enforced and construed in accordance with the laws of the State of California. 13. HEADINGS. The captions and headings contained in this Agreement are for reference purposes only and shall not affect the interpretation or meaning of this Agreement. 6 14. ATTORNEYS' FEES. In any dispute related to this Agreement, the prevailing party shall, in addition to all damages, be entitled to recover reasonable attorneys' fees and costs. IN WITNESS WHEREOF, the parties have executed this Amended and Restated Employment Agreement as of the date and year first above written. COMPANY: GRAPHIX ZONE, INC. By: /s/ R. S. POSNER ------------------------------- Ronald S. Posner, Chairman of the Board COMPANY: By: /s/ CHARLES R. CORTRIGHT, JR. ------------------------------- Charles R. Cortright, Jr. EX-10.18 10 TERMS OF EMPLOYMENT AGREEMENT W/ HIRSCHHORN 1 EXHIBIT 10.18 ---------------------------------------------------------------------------- MEMORANDUM TO: Ron Posner CC: FROM: David Hirschhorn DATE: February 28, 1997 RE: Employee Agreement ---------------------------------------------------------------------------- As per our conversation and your e-mail, I understand our agreement as follows: o Compensation = Option to purchase 1.0 million shares upon execution of formal employee contract with an exercise price of $2.00 (as determined by a $0.125 premium over the closing bid price of $1.875 on February 21, 1997) = Additional option to purchase 1.5 million shares with exercise prices of $2.00 (as determined by a $0.125 premium over the closing bid price of $1.875 on February 21, 1997). Vesting as follows: a) 200,000 1 year from date of employee contract b) 300,000 2 years from date of employee contract c) 450,000 3 years from date of employee contract d) 550,000 4 years from date of employee contract = Annual salary as follows: a) Year 1: $180,000 b) Year 2: $250,000* c) Year 3: $300,000* * assumes Company operates profitably for 2 trailing quarters, if Company is not profitable then annual salary will be $180,000 o Severance Provisions = 18 months of current salary o Change of control = in the event of change of control at the Company (i.e. 50.1% of the voting stock or control of the Board of Directors goes to an unaffiliated entity) all options shall vest immediately o Other issues = shall receive all customary benefits (i.e. medical coverage, expense allowance, etc.) = title shall be Co-Chairman* and Chief Executive Officer * pending necessary shareholder approval at first available voting opportunity = Art Schneiderman at Wilson Sonsini Goodrich & Rosati will prepare the formal employee contract. EX-10.19 11 TERMS OF STOCK OPTION W/HIRSCHORN 1 EXHIBIT 10.19 TERMS OF DAVID J. HIRSCHHORN STOCK OPTION On March 17, 1997, the Company granted to David J. Hirschhorn a stock option to purchase 2,500,000 shares of Common Stock of the Company at an exercise price $2.00 per share. The stock option vests as follows: 1,000,000 shares vest on March 17, 1997; 200,000 shares vest on March 17, 1998; 300,000 shares vest on March 17, 1999; 450,000 shares vest on March 17, 2000; and 550,000 vest on March 17, 2001. The stock option may be exercised as to the vested portions at any time after the date of vesting until the date that is five years from the individual vesting dates. EX-10.20 12 CONFIDENTIAL SETTLEMENT AGREEMENT 1 EXHIBIT 10.20 CONFIDENTIAL SETTLEMENT AGREEMENT AND MUTUAL GENERAL RELEASE This Confidential Settlement Agreement and Mutual General Release is entered into by Graphix Zone, Inc. (hereinafter the "Company") and Charles Cortright, for himself and his heirs, successors, and assigns (hereinafter collectively "Charles Cortright"), and Angela Cortright, for herself and her heirs, successors, and assigns (hereinafter collectively "Angela Cortright") effective as of May 30, 1997. WHEREAS, various differences and issues have arisen between the Company on the one hand, and Charles and Angela Cortright on the other hand, and WHEREAS, all three parties desire to resolve all differences by the terms of this agreement and with no admission of any wrongdoing of any kind by any party. NOW, THEREFORE, the parties agree as follows: CHARLES CORTRIGHT 1. Charles Cortright agrees to pay the Company $10,000 regarding various expenses he charged to the Company (the "Expense Amount"). Charles and Angela Cortright agree that they will pay the Expense Amount; provided, however, that the Expense Amount will be reduced by the $5,000 owed to Angela Cortright by the Company which is referenced under Initialed: /s/DH -------- /s/CC/AC -------- 2 paragraph 6 of this Agreement, and Angela Cortright hereby authorizes the Company to use said $5,000 owed to her as partial payment of the Expense Amount. As a condition to the Company signing this Agreement, Charles Cortright will pay the $5,000 balance owed to the Company on the date on which the parties execute and deliver this Agreement. 2. The Company agrees to waive any claim that Charles Cortright owes the Company any additional amount regarding such charges or otherwise. 3. Charles Cortright agrees that he is not owed any money by the Company based on his Amended and Restated Employment Agreement entered into as of October 28, 1996 or on any other basis. 4. Charles Cortright agrees to waive any and all rights which he had or may have under said Amended and Restated Employment Agreement, including but not limited to specifically waiving any and all rights to any health benefits under Section 3(d) of said Agreement. 5. Except as specifically stated in paragraph 1, Charles Cortright and the Company hereby agree to waive any and all claims which either had or may have against the other for any reason (contract, covenant, tort, statute, public policy, or otherwise, without exception) on or before the effective date of this agreement. It is further understood and agreed that as a condition of this agreement, Initialed: /s/DH -------- /s/CC/AC -------- -2- 3 all rights under Section 1542 of the Civil Code of the State of California are expressly waived by Charles Cortright and the Company. Such section reads as follows: "A general release does not extend to claims which the creditor does not know 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." ANGELA CORTRIGHT 6. With the exception of $5,000 which the Company and Angela Cortright agree that the Company owes to her under Section 3(b) of the Amended and Restated Employment Agreement entered into as of October 28, 1996 between the Company and Angela Cortright (the "AC Employment Agreement"), Angela Cortright agrees that she is not owed any money by the Company based on the AC Employment Agreement or on any other basis. Angela Cortright hereby acknowledges and consents to the use of the $5,000 to be paid to her under the AC Employment Agreement as an offset to the Expense Amount that Charles Cortright owes to the Company pursuant to paragraph 1 of this Agreement. Initialed: /s/DH -------- /s/CC/AC -------- -3- 4 7. Angela Cortright agrees to waive any and all other rights which she had or may have under the AC Employment Agreement including, but not limited to specifically waiving any and all rights to any health benefits under Section 3(d) of the AC Employment Agreement. 8. Except as specifically stated in paragraph 6, Angela Cortright and the Company hereby agree to waive any and all claims which either had or may have against the other for any reason (contract, covenant, tort, statute, public policy, or otherwise, without exception) on or before the effective date of this agreement. It is further understood and agreed that as a condition of this agreement, all rights under Section 1542 of the Civil Code of the State of California are expressly waived by Angela Cortright and the Company. Such section reads as follows: "A general release does not extend to claims which the creditor does not know 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." Initialed: /s/DH -------- /s/CC/AC -------- -4- 5 GENERAL PROVISIONS 9. The employment agreements referred to herein are deemed terminated and of no force and effect, except that paragraph 5 of both agreements remains in effect in accordance with its terms. Otherwise, this document represents the sole and entire agreement between the Company on the one hand and Charles and Angela Cortright on the other, and supersedes any other prior agreements or understandings, express or implied. 10. Charles Cortright and Angela Cortright agree that their releases of the Company above include the Company and all of its related and subsidiary entities, predecessors, successors, assigns, directors, officers, employees, agents, attorneys and representatives of the Company. 11. The parties agree that nothing contained in this Agreement, including but not limited to the Releases set forth herein, shall or does affect or diminish any of the Cortrights' rights relating to stock in the Company. 12. All parties hereto agree to keep this agreement in confidence and not to disclose the contents thereof to any other person, including but not limited to any current, former, or future employee, customer, or vendor of the Company. The only exceptions are required disclosures by the Company under applicable securities laws, Initialed: /s/DH -------- /s/CC/AC -------- -5- 6 tax and legal advisors, and governmental taxing authorities to the extent disclosure is required by law. 13. Any dispute hereafter arising between the Company and either or both of the Cortrights, including but not limited to any dispute pertaining to the formation, validity, interpretation, effect or alleged breach of this Agreement, or any act which allegedly has or would violate any provision of this Agreement, will be submitted to arbitration in Orange County, California. The arbitrator will be selected and such arbitration shall be conducted in accordance with the Employment Arbitration Rules of the American Arbitration Association and shall be the exclusive remedy for any such claim or dispute, in lieu of any court action, which is hereby waived. Should either Charles or Angela Cortright or the Company hereafter institute any legal action or administrative proceeding against the other or the released parties with respect to any claim waived by this Agreement or pursue any dispute or matter covered by this paragraph by any method other than said arbitration, the responding party shall be entitled to recover from him all damages, costs, expenses, and attorneys' fees incurred as a result of such action. 14. In the event any provision of this Agreement shall be invalid, illegal or unenforceable in any respect by -6- Initialed: /s/ DH --------- /s/ CC/AC --------- 7 a Court of competent jurisdiction, the remaining provisions shall remain in full force and effect, and shall be interpreted in such manner as to best fulfill the purpose and intent of this Agreement. Dated: October 13, 1997 Dated: October 13, 1997 GRAPHIX ZONE, INC. CHARLES CORTRIGHT By: /s/ CHARLES CORTRIGHT By: /s/ DAVID J. HIRSCHHORN ---------------------- ------------------------ Charles Cortright David J. Hirschhorn President and Chief Executive Officer ANGELA CORTRIGHT By: /s/ ANGELA CORTRIGHT --------------------- Angela Cortright APPROVED: /s/ JOHN COCHRANE ---------------------- John Cochrane, Esq. Attorney for Charles and Angela Cortright EX-10.27 13 WARRANT OF PURCHASE STOCK W/SILICON VALLEY BANK 1 EXHIBIT 10.27 THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. WARRANT TO PURCHASE STOCK Corporation: Graphix Zone, Inc., a California corporation Number of Shares: 100,000 Class of Stock: Common Initial Exercise Price: The price per share of the Company's common stock equal to the lowest price posted in the two equity rounds immediately prior to the initial exercise date. Issue Date: December 12, 1996 Expiration Date: December 12, 2001 THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for other good and valuable consideration, SILICON VALLEY BANK ("Holder") is entitled to purchase the number of fully paid and nonassessable shares of the class of securities (the "Shares") of the corporation (the "Company") at the initial exercise price per Share (the "Warrant Price") all set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth of this Warrant. ARTICLE 1. EXERCISE 1.1 Method of Exercise. Holder may exercise this Warrant by delivering a duly executed Notice of Exercise in substantially the form attached as Appendix 1 to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Section 1.2, Holder shall also deliver to the Company a check for the aggregate Warrant Price for the Shares being purchased. 1.2 Conversion Right. In lieu of exercising this Warrant as specified in Section 1.1, Holder may from time to time convert this Warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant Section 1.4. 1.3 Alternate Stock Appreciation Right. At Holder's option, the Company shall pay Holder the fair market value of the Shares issuable upon conversion of this Warrant pursuant to Section 1.2 in cash in lieu of such Shares. 1.4 Fair Market Value. If the Shares are traded in a public market, the fair market value of the Shares shall be the closing price of the Shares (or the closing price of the Company's stock into which the Shares are convertible) reported for the business day immediately before Holder delivers its Notice of Exercise to the Company. If the Shares are not traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment. The foregoing notwithstanding, if Holder advises the Board of Directors in writing that Holder disagrees with such determination, then the Company and Holder shall promptly agree upon a reputable investment 1 2 banking firm to undertake such valuation. If the valuation of such investment banking firm is greater than that determined by the Board of Directors, then all fees and expenses of such investment banking firm shall be paid by the Company. In all other circumstances, such fees and expenses shall be paid by Holder. 1.5 Delivery of Certificate and New Warrant. Promptly after Holder exercises or converts this Warrant, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired. 1.6 Replacement of Warrants. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, or surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor. 1.7 Repurchase on Sale, Merger, or Consolidation of the Company. 1.7.1 "Acquisition". For the purpose of this Warrant, "Acquisition" means any sale, license, or other disposition of all or substantially all of the assets of the Company, or any reorganization, consolidation or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. 1.7.2 Assumption of Warrant. Upon the closing of any Acquisition the successor entity shall assume the obligations of this Warrant, and this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price shall be adjusted accordingly. 1.7.3 Purchase Right. Notwithstanding the foregoing, at the election of Holder, the Company shall purchase the unexercised portion of this Warrant for cash upon the closing of any Acquisition for an amount equal to (a) the fair market value of any consideration that would have been received by Holder in consideration of the Shares had Holder exercised the unexercised portion of this Warrant immediately before the record date for determining the shareholders entitled to participate in the proceeds of the Acquisition, less (b) the aggregate Warrant Price of the Shares, but in no event less than zero. ARTICLE 2. ADJUSTMENTS TO THE SHARES. 2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend on its common stock (or the Shares if the Shares are securities other than common stock) payable in common stock, or other securities, subdivides the outstanding common stock into a greater amount of common stock, or, if the Shares are securities other than common stock, subdivides the Shares in a transaction that increases the amount of common into which the Shares are convertible, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred. 2 3 2.2 Reclassification, Exchange or Substitution. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company's Articles of Incorporation upon the closing of a registered public offering of the Company's common stock. The Company or its successor shall promptly issue to Holder a new Warrant for such new securities or other property. The new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events. 2.3 Adjustments for Combinations, Etc. If the outstanding Shares are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased. 2.4 Adjustments for Diluting Issuances. The Warrant Price and the number of Shares issuable upon exercise of this Warrant or, if the Shares are Preferred Stock, the number of shares of common stock issuable upon conversion of the Shares, shall be subject to adjustment, from time to time in the manner set forth on Exhibit A in the event of Diluting Issuances (as defined on Exhibit A). 2.5 No Impairment. The Company shall not, by amendment of its Articles of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Article against impairment. If the Company takes any action affecting the Shares or its common stock other than as described above that adversely affects Holder's rights under this Warrant, the Warrant Price shall be adjusted downward and the number of Shares issuable upon exercise of this Warrant shall be adjusted upward in such a manner that the aggregate Warrant Price of this Warrant is unchanged. 2.6 Fractional Shares. No fractional Shares shall be issuable upon exercise or conversion of the Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional share interest arises upon any exercise or conversion of the Warrant, the Company shall eliminate such fractional share interest by paying Holder amount computed by multiplying the fractional interest by the fair market value of a full Share. 2.7 Certificate as to Adjustments. Upon each adjustment of the Warrant Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price. ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY. 3 4 3.1 Representations and Warranties. The Company hereby represents and warrants to the Holder as follows: (a) The initial Warrant Price referenced on the first page of this Warrant is not greater than (i) the price per share at which the Shares were last issued in an arms-length transaction in which at least $500,000 of the Shares were sold and (ii) the fair market value of the Shares as of the date of this Warrant. (b) All Shares which may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. 3.2 Notice of Certain Events. If the Company proposes at any time (a) to declare any dividend or distribution upon its common stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (c) to effect any reclassification or recapitalization of common stock; (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; or (e) offer holders of registration rights the opportunity to participate in an underwritten public offering of the company's securities for cash, then, in connection with each such event, the Company shall give Holder (1) at least 20 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of common stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in the case of the matters referred to in (c) and (d) above at least 20 days prior written notice of the date when the same will take place (and specifying the date on which the holders of common stock will be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event); and (3) in the case of the matter referred to in (e) above, the same notice as is given to the holders of such registration rights. 3.3 Information Rights. So long as the Holder holds this Warrant and/or any of the Shares, the Company shall deliver to the Holder (a) promptly after mailing, copies of all notices or other written communications to the shareholders of the Company, (b) within ninety (90) days after the end of each fiscal year of the Company, the annual unaudited financial statements of the Company certified by independent public accountants of recognized standing and (c) within forty-five (45) days after the end of each of the first three quarters of each fiscal year, the Company's quarterly, unaudited financial statements. 3.4 Registration Under Securities Act of 1933, as amended. The Company agrees that the Shares or, if the Shares are convertible into common stock of the Company, such common stock, shall be subject to the registration rights set forth on Exhibit B, if attached. ARTICLE 4. MISCELLANEOUS. 4.1 Term; Notice of Expiration. This Warrant is exercisable, in whole or in part, at any time and from time to time on or before the Expiration Date set forth above. The Company shall give Holder written notice of Holder's right to exercise this Warrant in the form attached as Appendix 2 not more than 90 days and not less than 30 days before the Expiration Date. If the notice is not so given, 4 5 the Expiration Date shall automatically be extended until 30 days after the date the Company delivers the notice to Holder. 4.2 Legends. This Warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. 4.3 Compliance with Securities Laws on Transfer. This Warrant and the Shares issuable upon exercise this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the tranferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder or if there is no material question as to the availability of current information as referenced in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144(f), and the Company is provided with a copy of Holder's notice of proposed sale. 4.4 Transfer Procedure. Subject to the provisions of Section 4.2, Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) by giving the Company notice of the portion of the Warrant being transferred setting forth the name, address and taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable). Unless the Company is filing financial information with the SEC pursuant to the Securities Exchange Act of 1934, the Company shall have the right to refuse to transfer any portion of this Warrant to any person who directly competes with the Company. 4.5 Notices. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, as such address as may have been furnished to the Company or the Holder, as the case may be, in writing by the Company or such holder from time to time. 4.6 Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. 4.7 Attorneys Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys' fees. 5 6 4.8 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of California, without giving effect to its principles regarding conflicts of law. GRAPHIX ZONE, INC., a California corporation By: /s/ NORMAN BLOCK ----------------------------------------- Norman Block Its President and Chief Operating Officer 6 7 APPENDIX I NOTICE OF EXERCISE 1. The undersigned hereby elects to purchase 100,000 shares of the Common Stock of Graphix Zone, Inc., a California corporation, pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 2. The undersigned hereby elects to convert the attached Warrant into Shares in the manner specified in the Warrant. This conversion is exercised with respect to ___________________ of the Shares covered by the Warrant. [Strike paragraph that does not apply.] 3. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below: Silicon Valley Bank ------------------- (Name) 3003 Tasman Drive ------------------- Santa Clara, CA 95054 --------------------- (Address) 4. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws. ------------------------------------ Douglas Turley - -------------------- (Date) 7 8 APPENDIX 2 Notice that Warrant Is About to Expire -------------------------------------- (Name of Holder) (Address of Holder) Attn: Chief Financial Officer Dear: ----------------------- This is to advise you that the Warrant issued to you described below will expire on ______________________, 19__. Issuer: Issue Date: Class of Security Issuable: Exercise Price per Share: Number of Shares Issuable: Procedure for Exercise: Please contact [name of contract person at (phone number)] with any questions you may have concerning exercise of the Warrant. This is your only notice of pending expiration. --------------------------------------- (Name of Issuer) By ------------------------------------ Its ------------------------------------ 8 9 EXHIBIT A Anti-Dilution Provisions (For Common Stock Warrants Where Exercise Price Equals Price of Preferred Stock Which Has Anti-Dilution Protection) ------------------------------------------------------------ In the event of the issuance (a "Diluting Issuance") by the Company, after the Issue Date of the Warrant, of securities at a price per share less than the then conversion price of the Company's Series __ Preferred Stock, then the number of Shares issuable upon exercise of the Warrant shall be adjusted as a result of Diluting Issuances in the same proportion as the number of shares of common stock issuable upon conversion of the Company's Series __ Preferred Stock (the "Preferred Stock") are adjusted pursuant to those provisions (the "Provisions") of the Company's Articles (Certificate) of Incorporation which adjust the conversion price of the Preferred Stock in the event of Diluting Issuances. The Company agrees that the Provisions, as in effect on the Issue Date, shall be deemed to remain in full force and effect during the term of the Warrant notwithstanding (a) any subsequent amendment, waiver or termination thereof by the Company's shareholders or (b) the conversion of the Preferred Stock. Under no circumstances shall the aggregate Warrant Price payable by the Holder upon exercise of the Warrant increase as a result of any adjustment arising from a Diluting Issuance. 9 10 EXHIBIT A --------- Anti-Dilution Provisions (For Preferred Stock Warrants With Existing Anti-Dilution Protection) --------------------------------------------------------------------- In the event of the issuance (a "Diluting Issuance") by the Company, after the Issue Date of the Warrant, of securities at a price per share less than the Warrant Price, then the number of shares of common stock issuable upon conversion of the Shares shall be adjusted in accordance with those provisions (the "Provisions") of the Company's Articles (Certificate) of Incorporation which apply to Diluting Issuances. The Company agrees that the Provisions, as in effect on the Issue Date, shall be deemed to remain in full force and effect during the term of the Warrant notwithstanding any subsequent amendment, waiver or termination thereof by the Company's shareholders. Under no circumstances shall the aggregate Warrant Price payable by the Holder upon exercise of the Warrant increase as a result of any adjustment arising from a Diluting Issuance. 9 11 EXHIBIT A Anti-Dilution Provisions (For Preferred Stock or Common Stock Warrants Where Anti-Dilution Protection is Inadequate or Non-existent) In the event of the issuance (a "Diluting Issuance") by the Company, after the Issue Date of the Warrant, of securities at a price per share less than the Warrant Price, or, if the Shares are common stock, less than the then conversion price of the Company's Series __ Preferred Stock, then the number of shares of common stock issuable upon conversion of the Shares, or if the Shares are common stock, the number of Shares issuable upon exercise of the Warrant, shall be adjusted as a result of Diluting Issuances in accordance with the Holder's standard form of Anti-Dilution Agreement in effect on the Issue Date. Under no circumstances shall the aggregate Warrant Price payable by the Holder upon exercise of the Warrant increase as a result of any adjustment arising from a Diluting Issuance. 9 12 EXHIBIT B REGISTRATION RIGHTS The Shares (if common stock), or the common stock issuable upon conversion of the Shares, shall be deemed "registrable securities" or otherwise entitled to "piggy back" registration rights in accordance with the terms of the following agreement (the "Agreement") between the Company and its investor(s): --------------------------------------------------------------- [Identify Agreement by Date, title and parties. If no Agreement exists, indicate by "none".] The Company agrees that no amendments will be made to the Agreement which would have an adverse impact on Holder's registration rights thereunder without the consent of Holder. By acceptance of the Warrant to which this Exhibit B is attached, Holder shall be deemed to be a party to the Agreement. If no Agreement exists, then the Company and the Holder shall enter into Holder's standard form of Registration Rights Agreement as in effect on the Issue Date of the Warrant. 10 EX-10.35 14 CONSENT & AMENDMENT #2 TO LOAN & SECURITY AGREEMEN 1 EXHIBIT 10.35 CONSENT AND AMENDMENT NUMBER TWO TO LOAN AND SECURITY AGREEMENT --------------------------- THIS CONSENT AND AMENDMENT NUMBER TWO TO LOAN AND SECURITY AGREEMENT (this "Amendment") is entered into as of June 5, 1997 (but effective only in accordance with the terms and conditions of Section 4 of this Amendment), by and between MADELEINE L.L.C., a New York limited liability company ("Lender"), and GRAPHIX ZONE, INC., a Delaware corporation ("Borrower"), with reference to the following facts: A. Lender and Borrower heretofore have entered into that certain Loan and Security Agreement, dated as of January 31, 1997, as amended by that certain Consent to Inscape and Trimark Acquisitions and Amendment Number One to Loan and Security Agreement, dated as of March 5, 1997 (as amended, the "Loan Agreement"); B. Borrower has requested that Lender (i) amend the Loan Agreement to provide for an additional term loan facility in the amount of $1,250,000, (ii) waive those certain Events of Default (the "Existing Events of Default") identified on (y) that certain letter, dated May 14, 1997, from Borrower to Lender, and (z) that certain update to such letter (both the letter and the update are attached hereto as Exhibit A and collectively shall be referred to as the "Notification Letter"); and (iii) waive those certain exceptions to the representations and warranties contained in the Loan Documents as more particularly set forth in Schedule A attached hereto the "Exceptions"). C. Borrower also has requested that Lender consent to the following transactions being contemplated by Borrower: (i) the proposed merger (such merger currently the subject of preliminary discussions and not currently being subject to a letter of intent or any other oral or written agreement to which Borrower is a party) of a privately held company, which confidentially has been identified to Lender and whose identity is the subject of a letter previously delivered by Borrower to Lender, with and into Borrower in exchange for the issuance of securities of Borrower entitling the shareholders of the acquired company to acquire approximately 30% of the outstanding equity of Borrower on a fully-diluted basis, after giving effect to the transactions contemplated in the Loan Agreement, this Amendment, Warrant #1, Warrant #2, and Warrant #3 (the "Proposed Merger"); (ii) the exchange of all of the issued and outstanding shares of Series B Convertible Preferred Stock of Borrower (the "Series B Stock") for shares of Series D Convertible Preferred Stock of Borrower (the "Series D Stock") which shall possess substantially the same rights and be subject to substantially the same obligations of the Series B Stock, except that the Series D Stock may not be 2 converted at a conversion price below $1.00 per share during the initial 3 year period that such shares are outstanding, or $0.75 per share after such initial 3 year period if the conversion price of the Series B Stock does not exceed $1.00 per share during such initial 3 year period (the "Series B Stock Exchange Transaction"); (iii) the amendment of certain rights and obligations of the Series C Convertible Preferred Stock of Borrower (the "Series C Stock") to reduce the conversion rate of the Series C Stock from $3.375 to $1.00 per share and to delete the mandatory redemption provisions applicable to the Series C Stock, which amendment may be accomplished in the sole discretion of Borrower by either (x) amending the Certificate of Designations of Series C Convertible Preferred Stock of Borrower or (y) exchanging all of the issued and outstanding shares of Series C Stock for shares of a new series of preferred stock of Borrower which shall possess substantially the same rights and be subject to substantially the same obligations of the Series C Stock, except as otherwise set forth in this subparagraph (iii) (the "Series C Stock Exchange Transaction"); (iv) in connection with the Series C Stock Exchange Transaction, the amendment of that certain Asset Purchase Agreement, dated as of February 24, 1997, by and among Borrower, Inscape, and Warner Music Group, Inc. to delete from the definition of "Acquired Assets" contained therein all right, title, and interest in and to the product "The KGB Files" and all agreements and intellectual property related thereto (the "Inscape Amendment"); and (v) the cancellation of the outstanding Indebtedness of Borrower (other than Indebtedness related to the Executive Loan Agreement and the Loan Agreement as amended by this Amendment) identified on Schedule B attached hereto, in exchange for the payment to each of the holders of such Indebtedness of cash in an amount less than the aggregate amount of each such holder's Indebtedness and shares of common Stock of Borrower to be issued at a price equal to the fair market value of such shares at the time of issuance for any remaining portion of each such holder's Indebtedness (the "Creditor Exchange Transaction"). D. Lender is willing to so amend the Loan Agreement and to provide such waivers and consents in accordance with the terms and conditions hereof; and E. All capitalized terms used but not defined herein shall have the meanings ascribed to them in the Loan Agreement, as amended hereby. NOW, THEREFORE, in consideration of the above recitals and the mutual premises contained herein, Lender and Borrower hereby agree as follows: -2- 3 1. Amendments to the Loan Agreement. --------------------------------- a. Section 1.1 of the Loan Agreement hereby is amended by adding the following defined terms in alphabetical order: "Creditor Exchange Transaction" has the meaning set forth in the recitals to the Second Amendment. "Executive" means David Hirschhorn, an individual. "Executive Intercreditor Agreement" means an intercreditor agreement executed and delivered by Executive and Lender in form and substance satisfactory to Lender in its sole discretion. "Executive Loan Agreement" means that certain Loan and Security Agreement executed and delivered by Executive and Borrower, in respect of a loan by Executive to Borrower in the principal amount of $250,000, which loan shall be pari-passu with Term Loan #2 on a pro rata basis. "Executive Loan Documents" means the Executive Loan Agreement, Warrant #3, and any and all other agreements, instruments, and documents executed and delivered by Executive and/or Borrower in respect of the transactions contemplated by the Executive Loan Agreement, each of which documents shall be in form and substance satisfactory to Lender in its sole discretion. "Exceptions" has the meaning set forth in the recitals to the Second Amendment. "Liquidity" means unrestricted cash and cash equivalents. "Notification Letter" has the meaning set forth in the recitals to the Second Amendment. "Proposed Merger" has the meaning set forth in the recitals to the Second Amendment. "Second Amendment" means that certain Consent and Amendment Number Two to Loan and Security Agreement, dated as of June 5, 1997, between Lender and Borrower. "Second Amendment Closing Date" means the date of the funding of Term Loan #2. -3- 4 "Second Amendment Closing Fee" has the meaning set forth in Section 2.8(d). "Series B Stock" has the meaning set forth in the recitals to the Second Amendment. "Series C Stock" has the meaning set forth in the recitals to the Second Amendment. "Series D Stock" has the meaning set forth in the recitals to the Second Amendment. "Series B Stock Exchange Transaction" has the meaning set forth in the recitals to the Second Amendment. "Series C Stock Exchange Transaction" has the meaning set forth in the recitals to the Second Amendment. "Servicing Fee" has the meaning set forth in Section 2.8(c). "Term Loan #1" has the meaning set forth in Section 2.1(a). "Term Loan #2" has the meaning set forth in Section 2.1(b). "Warrant #1" means those certain common Stock purchase warrants issued and delivered to Lender by Borrower on the Closing Date for the purchase of 300,000 shares of Borrower's common Stock, $0.01 par value, having the powers, preferences, and rights, and the qualifications, limitations, or restrictions set forth in Borrower's Governing Documents. "Warrant #2" means those certain common Stock purchase warrants issued and delivered to Lender by Borrower, in form and substance satisfactory to Lender, on the Second Amendment Closing Date for the purchase of shares of Borrower's common Stock, $0.01 par value, having the powers, preferences, and rights, and the qualifications, limitations, or restrictions set forth in Borrower's Governing Documents, as amended, modified, or supplemented to the Second Amendment Closing Date. "Warrant #3" means those certain common Stock purchase warrants issued and delivered to Executive by Borrower in connection with the Executive Loan Agreement, in form and substance satisfactory to Executive and Lender, on the date of the Executive Loan Agreement for the purchase of shares of Borrower's common Stock, $0.01 par value, having the powers, preferences, and rights, and the -4- 5 qualifications, limitations, or restrictions set forth in Borrower's Governing Documents, as amended, modified, or supplemented to the date thereof. b. The definition of "Loan Documents" contained in Section 1.1 of the Loan Agreement hereby is amended by adding the defined term "Second Amendment." c. The definition of "Permitted Liens" contained in Section 1.1 of the Loan Agreement hereby is amended by adding the following text at the end of such definition: (k) Liens granted to Executive so long as the Executive Intercreditor Agreement is in full force and effect. d. The definition of "Term Loan" contained in Section 1.1 of the Loan Agreement hereby is deleted in its entirety and the following is substituted in alphabetical order in lieu thereof: "Term Loan" means Term Loan #1 and Term Loan #2, individually and collectively. e. The defined term "Term Loan" used in the definition of "Closing Date," and Sections 2.8(a) (Closing Fee) and 3.1 (Conditions Precedent) of the Loan Agreement shall be deleted and the defined term "Term Loan #1" shall be substituted in lieu thereof. f. The defined term "Warrants" shall be deleted in its entirety and the following is substituted in alphabetical order in lieu thereof: "Warrants" means Warrant #1 and Warrant #2, individually and collectively. g. The defined term "Warrants" used in subsections 3.1(c) and (r) (Conditions Precedent) of the Loan Agreement hereby is deleted and the defined term "Warrant #1" is substituted in lieu thereof. h. Section 2.1 of the Loan Agreement hereby is deleted in its entirety and the following is substituted in lieu thereof: 2.1 TERM LOAN. (a) Lender has agreed to make a term loan ("Term Loan #1") to Borrower on the Closing Date in the original principal amount of (i) $3,500,000, plus (ii) the amount of the Closing Fee. -5- 6 (b) Lender has agreed to make a term loan ("Term Loan #2") to Borrower on the Second Amendment Closing Date in the original principal amount of (i) $1,250,000, plus (ii) the amount of the Second Amendment Closing Fee. (c) The outstanding principal balance of the Term Loan and all accrued and unpaid interest under the Term Loan shall be due and payable upon the termination of this Agreement, whether by its terms, by prepayment, by acceleration, or otherwise. The unpaid principal balance of the Term Loan may be prepaid in whole or in part without penalty or premium at any time during the term of this Agreement upon 30 days prior written notice by Borrower to Lender. All amounts outstanding under the Term Loan shall constitute Obligations. i. Section 2.2(e) of the Loan Agreement hereby is deleted in its entirety and the following is substituted in lieu thereof: (e) Application of Proceeds. With respect to mandatory prepayments described in subsection (a) through (d) above, such prepayments shall be applied (i) first, in payment of the outstanding balance of the Term Loan on a pro rata basis until the Term Loan is paid in full, and (ii) then, in payment of any other Obligations owing by Borrower to Lender, such payments to be applied to such Obligations by Lender in its sole discretion. j. Section 2.8(c) of the Loan Agreement hereby is deleted in its entirety and the following is substituted in lieu thereof: (c) Servicing Fee. On the first day of each of April, July, October, and January during the term of this Agreement, and thereafter so long as the Obligations are outstanding, a servicing fee (the "Servicing Fee") in an amount equal to $35,000. k. Section 2.8 of the Loan Agreement hereby is amended by adding the following subsection (d) thereto: (d) Second Amendment Closing Fee. On the Second Amendment Closing Date, a closing fee (the "Second Amendment Closing Fee") of $50,000, which fee is in addition to any fees previously paid by Borrower to Lender and shall be paid by adding the amount thereof to the balance of Term Loan #2. l. Section 7.17 of the Loan Agreement hereby is deleted in its entirety and the following is substituted in lieu thereof: -6- 7 7.17 USE OF PROCEEDS. (a) Use the proceeds of Term Loan #1 made hereunder for any purpose other than (i) on the Closing Date, (y) to repay (1) in full the outstanding principal, accrued interest, and accrued fees and expenses owing to Existing Lender and (2) trade payables; provided, however, that not more than $3,000,000 of the proceeds of Term Loan #1 may be used to complete the payments under this clause (y), and (z) to pay transactional costs and expenses incurred in connection with this Agreement, and (ii) thereafter, consistent with the terms and conditions hereof, for its lawful and permitted corporate purposes. (b) Use the proceeds of Term Loan #2 for any purpose other than (i) on the Second Amendment Closing Date, to pay transactional costs and expenses incurred in connection with the Second Amendment, and (ii) thereafter, consistent with the terms and conditions hereof, for its lawful and permitted corporate purposes. m. Section 7.20 of the Loan Agreement hereby is amended by adding following thereto: (d) Liquidity. Liquidity, at all times, of at least $250,000 after giving effect to the repayment of Indebtedness made by Borrower in connection with the Creditor Exchange Transaction. 2. Waivers and Consents. --------------------- a. Lender hereby (i) waives the Existing Events of Default and the Exceptions, and (ii) agrees to forbear until the earlier of (y) such time as Borrower shall have completed its restructuring, and (z) 90 days from the Second Amendment Closing Date from exercising any of its rights, powers, or remedies under the Loan Agreement in respect of any Event of Default caused by (1) Borrower's failure to maintain the covenants set forth in Section 7.20 of the Loan Agreement (other than the covenant contained in subsection 7.20(d) thereof), and (2) Borrower's insolvency, unless and until an Insolvency Proceeding as described in Sections 8.5 or 8.6 of the Loan Agreement is commenced by any Person other than Lender. b. Lender hereby consents to the Proposed Merger, the Series B Stock Exchange Transaction, the Series C Stock Exchange Transaction, the Creditor Exchange Transaction, the Inscape Amendment, and the Executive Loan Agreement (collectively, the "Transactions") and agrees that the consummation of the Transactions shall be deemed not to cause any Default or Event of Default or accelerate any rights or remedies under, or otherwise violate the Loan Agreement, including, but not limited to, with respect to the provisions of Sections 7.1, 7.3, 7.4, or 7.9 of the Loan Agreement, or any other applicable provision of the Loan Agreement as amended by this Agreement, and any other Loan Document; provided, however, that the foregoing consent and agreement -7- 8 with respect to the Creditor Exchange Transaction shall be subject to the satisfaction of the covenant contained in subsection 7.20(d) of the Loan Agreement. c. Lender hereby (i) consents to Borrower doing business under the name "Ignite" and "Ignite Media" and any variations thereof and (ii) acknowledges that the use of such names by Borrower shall not constitute a breach of the provisions of Section 7.5 of the Loan Agreement. 3. Representations and Warranties. Borrower hereby represents and warrants to Lender that (a) the execution, delivery, and performance of this Amendment and of the Loan Agreement, as amended by this Amendment, are within its corporate powers, have been duly authorized by all necessary corporate action, and are not in contravention of any law, rule, or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or governmental authority, or of the terms of its charter or bylaws, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected, and (b) this Amendment and the Loan Agreement, as amended by this Amendment, constitute Borrower's legal, valid, and binding obligation, enforceable against Borrower in accordance with its terms. 4. Conditions Precedent to the Effectiveness of this Amendment. The effectiveness of this Amendment is subject to the fulfillment, to the satisfaction of Lender and its counsel, of each of the following conditions: a. Lender shall have received Warrant #2 duly executed and in full force and effect; b. Lender shall have received a certificate from the Secretary of Borrower attesting to (i) the resolutions of Borrower's Board of Directors authorizing its execution, delivery, and performance of this Amendment and Warrant #2 and authorizing specific officers to execute the same, and (ii) Borrower's Governing Documents, as amended, modified, or supplemented to the Second Amendment Closing Date; c. Mr. Kevin Genda shall have been nominated for the position of director of Borrower; d. Except as set forth in the Exceptions, the representations and warranties in this Amendment, the Loan Agreement as amended by this Amendment, and the other Loan Documents shall be true and correct in all respects on and as of the date hereof, as though made on such date (except to the extent that such representations and warranties relate solely to an earlier date); e. Except as set forth in the Exceptions and the Notification Letter, no Event of Default or event which with the giving of notice or passage of time would -8- 9 constitute an Event of Default shall have occurred and be continuing on the date hereof, nor shall result from the consummation of the transactions contemplated herein; f. No injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the consummation of the transactions contemplated herein shall have been issued and remain in force by any governmental authority against Borrower, Lender, or any of their Affiliates; and g. Except as set forth in the Exceptions and the Notification Letter, no material adverse change in the financial condition of Borrower or in the value of the Collateral shall have occurred since March 31, 1997. 5. Conditions Subsequent. As conditions subsequent to the making of Term Loan #2 on the Second Amendment Closing Date, Borrower shall perform or cause to be performed the following (the failure by Borrower to so perform or cause to be performed constituting an Event of Default under the Loan Agreement): a. Within 10 days of the Second Amendment Closing Date, Lender shall have received Collateral Access Agreements in respect of any new facilities occupied by Borrower subsequent to and in connection with the consummation of the acquisition of certain assets of Inscape and Trimark Interactive, Inc. by Borrower; b. Within 15 days of the Second Amendment Closing Date, Lender shall have received (i) fully executed copies of the Executive Loan Documents, each certified by the Secretary of Borrower as being true, correct, and complete, and (ii) a fully executed original of the Executive Intercreditor Agreement; and c. Within 5 days of the Second Amendment Closing Date, Lender shall have received UCC-1 Financing Statements in regard to the additional locations of Inventory listed on Schedule A attached hereto. 6. Effect on Loan Agreement. The Loan Agreement, as amended hereby, shall be and remain in full force and effect in accordance with its respective terms and hereby is ratified and confirmed in all respects. The execution, delivery, and performance of this Amendment shall not operate as a waiver of or, except as expressly set forth herein, as an amendment, of any right, power, or remedy of Lender under the Loan Agreement, as in effect prior to the date hereof. 7. Further Assurances. Borrower shall execute and deliver all agreements, documents, and instruments, in form and substance satisfactory to Lender, and take all actions as Lender may reasonably request from time to time, to perfect and maintain the perfection and priority of Lender's security interests in the Collateral and to -9- 10 fully consummate the transactions contemplated under this Amendment and the Loan Agreement, as amended by this Amendment. 8. Miscellaneous. -------------- a. Upon the effectiveness of this Amendment, each reference in the Loan Agreement to "this Agreement", "hereunder", "herein", "hereof", or words of like import referring to the Loan Agreement shall mean and refer to the Loan Agreement as amended by this Amendment. b. Upon the effectiveness of this Amendment, each reference in the Loan Documents to the "Loan Agreement", "thereunder", "therein", "thereof" or words of like import referring to the Loan Agreement shall mean and refer to the Loan Agreement as amended by this Amendment. c. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. d. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Amendment by signing any such counterpart. [Remainder of page intentionally left blank] -10- 11 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. MADELEINE L.L.C., a New York limited liability company By: /s/ KEVIN P. GENDA -------------------------------------- Title: Kevin P. Genda, Attorney-in-Fact GRAPHIX ZONE, INC., a Delaware corporation By: /s/ DAVID J. HIRSCHHORN -------------------------------------- Title: President and Chief Executive Officer -------------------------------------- S-1 EX-10.37 15 WARRANT TO PURCHASE STOCK W/ MADELEINE 1 EXHIBIT 10.37 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED, (iii) RECEIPT OF A NO-ACTION LETTER(S) FROM THE APPROPRIATE GOVERNMENTAL AUTHORITY(IES), OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THIS WARRANT. GRAPHIX ZONE, INC. ------------------ WARRANT TO PURCHASE SHARES OF COMMON STOCK (this "Warrant") GRAPHIX ZONE, INC., a Delaware corporation (the "Company"), hereby certifies that, for value received, Madeleine L.L.C., a New York limited liability company ("Madeleine"), or registered assigns, is the registered holder of warrants (the "Warrants") to subscribe for and purchase the Initial Amount (as defined below) of shares of the fully paid and nonassessable Common Stock (as adjusted pursuant to the second paragraph hereof and Section 4 hereof, the "Shares") of the Company, at the price equal to the lowest of (i) $0.2366 per share, (ii) the lower of (a) the fair market value of the Common Stock as determined pursuant to Section 4 hereof or (b) $1.00 per share, as of the effective date (the "S-4 Date") of the Company's filing of a registration statement on Form S-4, or such other form, if in connection with a merger or consolidation involving the Company, with the Securities and Exchange Commission (the "Filing Event"), or (iii) the fair market value of the Common Stock as determined pursuant to Section 4 hereof as of the date the Warrants are exercised (or converted pursuant to Section 10.3(b) hereof) (such price and such other price as shall result, from time to time, from the adjustments specified in Section 4 hereof is herein referred to as the "Warrant Price"), subject to the provisions and upon the terms and conditions hereinafter set forth. As used herein, (a) the term "Common Stock" shall mean the Company's presently authorized Common Stock, $0.01 par value per share, and any stock into or for which such Common Stock may hereafter be converted or exchanged, (b) the term "Date of Grant" shall mean June 5, 1997, (c) the term "Warrant Percentage" shall mean the quotient of 1,250,000 divided by 1,500,000, (d) the term "Other Warrants" shall mean any warrant issued upon transfer or partial exercise of this Warrant, and (e) the term "Warrant #3" shall have the meaning of such term as set forth in the Amendment (defined below) and shall be deemed to include any warrant issued upon transfer or partial exercise of Warrant #3. The terms "Warrant" and "this Warrant" as used herein shall be deemed to include Other Warrants, and the term "Shares" shall be deemed to include shares of the Common Stock of the Company to be issued upon exercise of Other Warrants, unless the context hereof or thereof clearly requires otherwise. Solely for the purposes of Section 9 hereof, the terms "Warrant" and "this Warrant" shall also be deemed to 2 include Warrant #3 and the term "Shares" shall also be deemed to include shares of the Common Stock of the Company to be issued upon exercise of Warrant #3, unless the context hereof or thereof clearly requires otherwise. As of the Date of Grant, the "Initial Amount" shall be an amount equal to such number of shares of Common Stock as would, if issued on the Date of Grant, equal the Warrant Percentage multiplied by product of (i) the quotient of thirty percent (30%) divided by seventy percent (70%) and (ii) the outstanding Common Stock of the Company immediately prior to such issuance (calculated on a fully diluted basis as described below). If the Company, during the ninety (90) day period beginning on the Date of Grant (the "Restructuring Period"), effects the Series B Stock Exchange Transaction or Series C Stock Exchange Transaction, as such terms are defined in that certain Consent and Amendment Number Two to Loan and Security Agreement (the "Amendment") entered into as of June 5, 1997 by and between Madeleine and the Company, or the stock option and warrant reduction plan of the Company (by which certain stock options and warrants of the Company set forth on Exhibit B hereto will be exchanged for other securities of the Company), (each, a "Transaction"), whereby the outstanding Common Stock of the Company (calculated on a fully diluted basis) decreases in connection with such a Transaction (net of any increases pursuant to such Transaction), then the number of Shares to be issued upon exercise or conversion of this Warrant shall be decreased by an amount equal to such number of shares of Common Stock (the "Decreased Amount") as would equal the Warrant Percentage multiplied by the product of (i) the amount by which the number of shares of outstanding Common Stock of the Company (calculated on a fully diluted basis) are reduced as a result of the Transaction (net of any increases pursuant to such Transaction and without regard to the corresponding reduction in the number of (A) Shares for which the Warrant is exercisable and (B) shares of Common Stock for which Warrant #3 is exercisable) and (ii) the quotient of thirty percent (30%) divided by seventy percent (70%). For all purposes of this paragraph, when determining the number of outstanding shares of Common Stock calculated on a fully diluted basis, the maximum number of shares of Common Stock which a holder of any rights, options, warrants or convertible or exchangeable securities shall be entitled to subscribe for or purchase shall be deemed to be issued and outstanding excluding the number of Shares for which the Warrant is exercisable. Adjustments described in this paragraph shall be made successively. Section 1 of this Warrant notwithstanding, this Warrant may not be exercised, in whole or part, during the Restructuring Period. Any adjustment, pursuant to the terms of this paragraph, to the number of Shares to be issued upon exercise or conversion of the Warrant are to be made in addition to any adjustments to such number of Shares as are required pursuant to, and in the order described in, Section 4 hereof. 1. Term. The purchase right represented by this Warrant is exercisable, in whole or in part, at any time and from time to time from the Date of Grant through and including the third anniversary thereof. 2. Method of Exercise; Payment; Issuance of New Warrant. Subject to Section 1 hereof, the purchase right represented by this Warrant may be exercised by the holder hereof, in whole or in part and from time to time, by the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A duly executed) at the principal office of the Company and by the payment to the Company of an amount equal to the then applicable Warrant 2 3 Price multiplied by the number of Shares then being purchased. The person or persons in whose name(s) any certificate(s) representing shares of Common Stock shall be issuable upon exercise of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the shares represented thereby (and such shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which this Warrant is exercised. In the event of any exercise of the rights represented by this Warrant, certificates for the shares of stock so purchased shall be delivered to the holder hereof as soon as possible and in any event within thirty (30) days after such exercise and, unless this Warrant has been fully exercised or expired, a new Warrant representing the portion of the Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof as soon as possible and in any event within such thirty-day period. 3. Stock Fully Paid; Reservation of Shares. All Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance pursuant to the terms and conditions herein, be fully paid and nonassessable, and free from all taxes, liens, charges, and pre-emptive rights with respect to the issue thereof. The Company shall pay all transfer taxes, if any, attributable to the issuance of Shares upon the exercise of the Warrants. During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of the issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant. 4. Adjustment of Warrant Price and Number of Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: a. Reclassification or Merger. In case of any reclassification, change or conversion of securities of the class issuable upon exercise of this Warrant (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in case of any merger of the Company with or into another corporation (other than a merger with another corporation in which the Company is the acquiring and the surviving corporation and which does not result in any reclassification or change of outstanding securities issuable upon exercise of this Warrant), or in case of any sale of all or substantially all of the assets of the Company, the Company, or such successor or purchasing corporation, as the case may be, shall duly execute and deliver to the holder of this Warrant a new Warrant (in form and substance satisfactory to the holder of this Warrant), so that the holder of this Warrant shall have the right to receive, at a total purchase price not to exceed that payable or to be payable upon the exercise of the unexercised portion of this Warrant, and in lieu of the shares of Common Stock theretofore issuable upon exercise of the unexercised portion of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, change or merger by a holder of the number of shares of Common Stock then purchasable under this Warrant. Such new Warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4. The provisions of this subparagraph (a) shall similarly apply to successive reclassifications, changes, mergers and transfers. 3 4 b. Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its outstanding shares of Common Stock, the Warrant Price shall be proportionately decreased in the case of a subdivision or increased in the case of a combination, effective at the close of business on the date the subdivision or combination becomes effective. c. Stock Dividends and Other Distributions. If the Company at any time while this Warrant is outstanding and unexpired shall (i) pay a dividend with respect to Common Stock payable in Common Stock, or (ii) make any other distribution with respect to Common Stock (except any distribution specifically provided for in the foregoing sub-paragraphs (a) and (b)) of Common Stock, then the Warrant Price shall be adjusted, from and after the date of determination of shareholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Price in effect immediately prior to such date of determination by a fraction (i) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such dividend or distribution. d. Rights Offerings. In case the Company shall issue rights, options or warrants to any person or persons who are at the time of such issuance the holders of equity securities of the Company, entitling them to subscribe for or purchase shares of Common Stock (or securities convertible or exchangeable into Common Stock) at a price per share of Common Stock (or having a conversion or exchange price per share of Common Stock if a security convertible or exchangeable into Common Stock) less than the fair market value per share of Common Stock on the record date for such issuance (or the date of issuance, if there is no record date), the Warrant Price to be in effect on and after such record date (or issuance date, as the case may be) shall be determined by multiplying the Warrant Price in effect immediately prior to such record date (or issuance date, as the case may be) by a fraction (i) the numerator of which shall be the number of shares of Common Stock outstanding on such record date (or issuance date, as the case may be) plus the number of shares of Common Stock which the aggregate offering price of the total number of shares of such Common Stock so to be offered (or the aggregate initial exchange or conversion price of the exchangeable or convertible securities so to be offered) would purchase at such fair market value on such record date (or issuance date, as the case may be) and (ii) the denominator of which shall be the number of shares of Common Stock outstanding on such record date (or issuance date, as the case may be) plus the number of additional shares of Common Stock to be offered for subscription or purchase (or into which the convertible securities to be offered are initially exchangeable or convertible). In case such subscription price may be paid in part or in whole in a form other than cash, the fair value of such consideration shall be determined by the Board of Directors of the Company in good faith as set forth in a duly adopted board resolution certified by the Company's Secretary or Assistant Secretary. Such adjustment shall be made successively whenever such an issuance occurs; and in the event that such rights, options, warrants, or convertible or exchangeable securities are not so issued or expire or cease to be convertible or exchangeable before they are exercised, converted, or exchanged (as the case may be), then the Warrant Price shall again be adjusted to be the Warrant Price that would then be in effect if such issuance had 4 5 not occurred, but such subsequent adjustment shall not affect the number of Shares issued upon any exercise of Warrants prior to the date such subsequent adjustment is made. e. Special Distributions. In case the Company shall fix a record date for the making of a distribution to all holders of shares of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the surviving corporation) of evidences of indebtedness or assets (other than dividends and distributions referred to in subparagraphs (b) and (c) above and other than cash dividends) or of subscription rights, options, warrants, or exchangeable or convertible securities containing the right to subscribe for or purchase shares of any class of equity securities of the Company (excluding those referred to in subparagraph (d) above), the Warrant Price to be in effect on and after such record date shall be adjusted by multiplying the Warrant Price in effect immediately prior to such record date by a fraction (i) the numerator of which shall be the fair market value per share of Common Stock on such record date, less the fair value (as determined by the Board of Directors of the Company in good faith as set forth in a duly adopted board resolution certified by the Company's Secretary or Assistant Secretary) of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription rights, options, warrants, or exchangeable or convertible securities applicable to one (1) share of the Common Stock outstanding as of such record date, and (ii) the denominator of which shall be such fair market value per share of Common Stock. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Warrant Price shall again be adjusted to be the Warrant Price which would then be in effect if such record date had not been fixed, but such subsequent adjustment shall not affect the number of Shares issued upon any exercise of Warrants prior to the date such subsequent adjustment was made. f. Other Issuances of Securities. In case the Company or any subsidiary shall issue shares of Common Stock, or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock (excluding (i) shares, rights, options, warrants, or convertible or exchangeable securities described in subparagraphs (f) or (g) of Section 11 hereof or issued in any of the transactions described in subparagraphs (b), (c), (d) or (e) above, (ii) shares issued upon the exercise of such rights, options or warrants or upon conversion or exchange of such convertible or exchangeable securities, and (iii) the Warrants, Warrant #3 and any shares issued upon exercise thereof), at a price per share of Common Stock (determined in the case of such rights, options, warrants, or convertible or exchangeable securities by dividing (x) the total amount receivable by the Company in consideration of the sale and issuance of such rights, options, warrants, or convertible or exchangeable securities, plus the total minimum consideration payable to the Company upon exercise, conversion, or exchange thereof by (y) the total maximum number of shares of Common Stock covered by such rights, options, warrants, or convertible or exchangeable securities) lower than the fair market value per share of Common Stock on the date the Company fixes the offering price of such shares, rights, options, warrants, or convertible or exchangeable securities, then the Warrant Price shall be adjusted so that it shall equal the price determined by multiplying the Warrant Price in effect immediately prior thereto by a fraction (i) the numerator of which shall be the sum of (A) the number of shares of Common Stock outstanding immediately prior to such sale and issuance plus (B) the number of shares of Common Stock which the aggregate consideration received (determined as provided below) for 5 6 such sale or issuance would purchase at such fair market value per share, and (ii) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such sale and issuance. Such adjustment shall be made successively whenever such an issuance is made. For the purposes of such adjustment, the maximum number of shares of Common Stock which the holder of any such rights, options, warrants or convertible or exchangeable securities shall be entitled to subscribe for or purchase shall be deemed to be issued and outstanding as of the date of such sale and issuance and the consideration received by the Company therefor shall be deemed to be the consideration received by the Company for such rights, options, warrants, or convertible or exchangeable securities, plus the minimum consideration or premium stated in such rights, options, warrants, or convertible or exchangeable securities to be paid for the shares of Common Stock covered thereby. In case the Company shall sell and issue shares of Common Stock, or rights, options, warrants, or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock for a consideration consisting, in whole or in part, of property other than cash or its equivalent, then in determining the price per share of Common Stock and the consideration received by the Company for purposes of the first sentence of this subparagraph (f), the Board of Directors of the Company shall determine, in good faith, the fair value of said property, and such determination shall be described in a duly adopted board resolution certified by the Company's Secretary or Assistant Secretary. In case the Company shall sell and issue rights, options, warrants, or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock together with one or more other securities as a part of a unit at a price per unit, then in determining the price per share of Common Stock and the consideration received by the Company for purposes of the first sentence of this subparagraph (f), the Board of Directors of the Company shall determine, in good faith, which determination shall be described in a duly adopted board resolution certified by the Company's Secretary or Assistant Secretary, the fair value of the rights, options, warrants, or convertible or exchangeable securities then being sold as part of such unit. Such adjustment shall be made successively whenever such an issuance occurs, and in the event that such rights, options, warrants, or convertible or exchangeable securities expire or cease to be convertible or exchangeable before they are exercised, converted, or exchanged (as the case may be), then the Warrant Price shall again be adjusted to the Warrant Price that would then be in effect if such sale and issuance had not occurred, but such subsequent adjustment shall not affect the number of Shares issued upon any exercise of Warrants prior to the date such subsequent adjustment is made. g. Adjustment of Number of Shares; Exception to Warrant Price Adjustment; Calculations for Complex Transactions. Upon each adjustment pursuant to this Section 4 (but other than pursuant to Section 4(a) hereof) that would represent an adjustment in the Basis (i) Warrant Price (defined below), the number of Shares of Common Stock purchasable upon exercise of the Warrant shall be adjusted, to the nearest whole share, to the product obtained by multiplying the number of Shares purchasable immediately prior to such adjustment in the Basis (i) Warrant Price by a fraction, the numerator of which shall be the Basis (i) Warrant Price immediately prior to such adjustment and the denominator of which shall be the Basis (i) Warrant Price immediately thereafter. The "Basis (i) Warrant Price" shall mean the Warrant Price calculated by using the basis for determining same set forth in clause (i) of the first paragraph of this Warrant (as adjusted pursuant to this Section 4), as if such basis were the 6 7 only basis for determining the Warrant Price. For the purposes of this Section 4, the adjustments to the Warrant Price set forth herein shall not apply to or be made with respect to (i) the second alternative basis for determining the Warrant Price as set forth in the first paragraph of this Warrant (the lower of $1.00 per share or the fair market value of the Common Stock as of the S-4 Date) with respect to the period prior to the Filing Event, or (ii) the third alternative basis for determining the Warrant Price as set forth in such paragraph (the fair market value of the Common Stock as of the date the Warrants are exercised or converted) with respect to the period prior to the date of such exercise or conversion. In the event an adjustment or adjustments to the number of Shares for which this Warrant is exercisable and/or the Warrant Price (including the Basis (i) Warrant Price) pursuant to this Section 4 would occur simultaneously with an adjustment or adjustments to the number of Shares for which this Warrant is exercisable pursuant to the second paragraph of this Warrant, calculations (including without limitation pursuant to the following sentence) and adjustments pursuant to this Section 4 shall be made first and without taking into account adjustments to be made pursuant to such second paragraph, which second paragraph adjustments shall then subsequently be made. In determining whether an adjustment to the Warrant Price (including the Basis (i) Warrant Price) will be made, or in calculating the amount of same, in the event an increase in the outstanding Common Stock of the Company (calculated on a fully diluted basis if so described herein) occurs simultaneously with a decrease in same, such decrease shall be taken into account when determining, and reflected in, the number of shares of Common Stock outstanding immediately prior to the increasing issuance, dividend or distribution, notwithstanding the actual time of such decrease. h. Determination of Fair Market Value. For purposes of this Section 4 and for determining the Warrant Price of this Warrant, "fair market value" of a share of Common Stock as of a particular date (the "Determination Date") shall mean (i) if shares of Common Stock are traded as a national securities exchange (an "Exchange"), the average of the closing prices of a share of the Common Stock of the Company on the last seven (7) trading days prior to the Determination Date reported on such Exchange as reported in The Wall Street Journal, or (ii) if shares of Common Stock are not traded on an Exchange but trade in the over-the-counter market and such shares are quoted on the National Association of Securities Dealers Automated Quotations System ("NASDAQ"), (A) the average of the last sale prices reported on NASDAQ or (B) if such shares are an issue for which last sale prices are not reported on NASDAQ, the average of the closing bid and ask prices, in each case on the last seven (7) trading days (or if the relevant price or quotation did not exist on any of such days, the relevant price or quotation on the next preceding business day on which there was such a price or quotation) prior to the Determination Date as reported in The Wall Street Journal. 5. Notice of Adjustments. Whenever the Warrant Price (including a basis for determining same) or the number of Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof, the Company shall make a certificate signed by its chief financial officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price and the number of Shares purchasable hereunder after giving effect to such adjustment, which shall be mailed (without regard to Section 13 hereof, by first class mail, postage prepaid) to the holder of this Warrant. 7 8 6. Fractional Shares. No fractional shares of Common Stock will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor based on the fair market value (as determined in accordance with Section 4(h) above) of a share of Common Stock on the date of exercise. 7. Compliance with Securities Act; Disposition of Warrant or Shares of Common Stock. a. Compliance with Securities Act. The holder of this Warrant, by acceptance hereof, agrees that this Warrant, the shares of Common Stock to be issued upon exercise hereof are being acquired for investment and that such holder will not offer, sell or otherwise dispose of this Warrant, or any shares of Common Stock to be issued upon exercise hereof except under circumstances which will not result in a violation of the Securities Act of 1933, as amended (the "Act"). Upon exercise of this Warrant, the holder hereof shall confirm in writing, by executing the form attached as Schedule 1 to Exhibit A hereto, that the shares of Common Stock so purchased are being acquired for investment and not with a view toward distribution or resale. This Warrant and all shares of Common Stock issued upon exercise of this Warrant (unless registered under the Act) shall be stamped or imprinted with a legend in substantially the following form: "THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED, (iii) RECEIPT OF A NO-ACTION LETTER(S) FROM THE APPROPRIATE GOVERNMENTAL AUTHORITY(IES), OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE SECURITIES WERE ISSUED DIRECTLY OR INDIRECTLY." In addition, in connection with the issuance of this Warrant, the holder specifically represents to the Company by acceptance of this Warrant as follows: (1) The holder is aware of the Company's business affairs and financial condition, and has acquired information about the Company sufficient to reach an informed and knowledgeable decision to acquire this Warrant. The holder is acquiring this Warrant for its own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Act. (2) The holder understands that this Warrant and the Shares have not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the holder's investment intent as expressed herein. In this connection, the holder understands that, in the view of the Securities and Exchange Commission (the "SEC"), the statutory basis for such exemption may be unavailable if the holder's representation was predicated solely upon a present intention to 8 9 hold the Warrant and the Shares for the minimum capital gains period specified under applicable tax laws, for a deferred sale, for or until an increase or decrease in the market price of the Warrant and the Shares, or for a period of one (1) year or any other fixed period in the future. (3) The holder further understands that this Warrant and the Shares must be held indefinitely unless subsequently registered under the Act and any applicable state securities laws, or unless exemptions from registration are otherwise available. (4) The holder is aware of the provisions of Rule 144 and 144A, promulgated under the Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, if applicable, including, among other things: the availability of certain public information about the Company, the resale occurring not less than one (1) year after the party has purchased and paid for the securities to be sold; the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934, as amended) and the amount of securities being sold during any three-month period not exceeding the specified limitations stated therein. (5) The holder further understands that at the time it wishes to sell this Warrant and the Shares there may be no public market upon which to make such a sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144 and 144A, and that, in such event, the holder may be precluded from selling this Warrant and the Shares under Rule 144 and 144A even if the one-year minimum holding period had been satisfied. (6) The holder further understands that in the event all of the requirements of Rule 144 and 144A are not satisfied, registration under the Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 and 144A is not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 and 144A will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. b. Disposition of Warrant or Shares. With respect to any offer, sale or other disposition of this Warrant, or any Shares acquired pursuant to the exercise of this Warrant prior to registration of such Warrant or Shares, the holder hereof and each subsequent holder of this Warrant agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such holder's counsel, if reasonably requested by the Company, to the effect that such offer, sale or other disposition may be effected without registration or qualification (under the Act as then in effect or any federal or state law then in effect) of this Warrant or such Shares and indicating whether or not under the Act certificates for this Warrant or such Shares to be sold or otherwise disposed of require any restrictive legend as to applicable restrictions on transferability in order to ensure 9 10 compliance with applicable law. Promptly upon receiving such written notice and reasonably satisfactory opinion, if so requested, the Company, as promptly as practicable, shall notify such holder that such holder may sell or otherwise dispose of this Warrant or such Shares, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this subsection (b) that the opinion of counsel for the holder is not reasonably satisfactory to the Company, the Company shall so notify the holder promptly after such determination has been made. The foregoing notwithstanding, this Warrant or such Shares may, as to such federal laws, be offered, sold or otherwise disposed of in accordance with Rule 144 and 144A under the Act, provided that the Company shall have been furnished with such information as the Company may reasonably request to provide a reasonable assurance that the provisions of Rule 144 and 144A have been satisfied. Each certificate representing this Warrant or the Shares thus transferred (except a transfer pursuant to Rule 144) shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with such laws, unless in the aforesaid opinion of counsel for the holder, such legend is not required in order to ensure compliance with such laws. The Company may issue stop transfer instructions to its transfer agent or, if acting as its own transfer agent, the Company may stop transfer on its corporate books, in connection with such restrictions. 8. Rights as Shareholders; Information. No holder of this Warrant, as such, shall be entitled to vote or receive dividends or be deemed the holder of Common Stock or any other securities of the Company which may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a shareholder of the Company or any right to vote for the election of the directors or upon any matter submitted to shareholders at any meeting thereof, or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised and the Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. The foregoing notwithstanding, the Company will transmit to the holder of this Warrant such information, documents and reports as are generally distributed to the holders of any class or series of the securities of the Company concurrently with the distribution thereof to the shareholders. 9. Registration Rights. -------------------- 9.1. Demand Registration. -------------------- a. The Company covenants and agrees that at any time after receipt of a written request (a "Demand Registration Request") from the holders of this Warrant and the Other Warrants and/or holders of Shares (this Warrant, the Other Warrants, and the Shares are referred to herein, collectively, as the "Securities") (hereinafter, the "Securityholders") constituting in the first instance, at least fifty percent (50%), and in the second instance, one hundred percent (100%), of the Securities outstanding on such date (determined on an as-converted basis) and then eligible for inclusion in a registration pursuant to this Section 9.1, stating that the Initiating Securityholders (as defined below) desire and intend to transfer all or a portion of the Securities held by them under such circumstances (constituting in the first instance, at least fifty percent (50%), and in the second instance, one hundred percent (100%) of the aggregate of all such outstanding and eligible Securities), the Company shall give 10 11 notice (the "Registration Notice") to all of the Securityholders within fifteen (15) days of the Company's receipt of such registration request, and the Company shall cause to be included in such requested registration all Securities requested to be included therein by any such Securityholder within fifteen (15) days after such Registration Notice is effective (subject to the provisions of the final sentence of this Section 9.1(a)). After such 15-day period, the Company shall file as promptly as practicable a registration statement and use its reasonable best efforts to cause such registration statement to become effective under the Act and remain effective for one hundred and twenty (120) days or such shorter period as may be required if all such Securities covered by such registration statement are sold prior to the expiration of such 120-day period; provided that the Company shall not be obligated to effect any such registration pursuant to this Section 9.1 after the Company has effected two (2) such registrations pursuant to this Section 9.1. The Company shall have the right to select the form used to effect the registration hereunder (subject to the approval of a majority in interest of the Securityholders requesting registration, which will not be unreasonably withheld). Each Securityholder making a demand for registration under this Section 9.1 is referred to herein as an "Initiating Securityholder." For purposes of this Section 9, a registration shall not be deemed to have been effected unless a registration statement with regard thereto has been declared effective and remained effective for a period of one hundred and twenty (120) days (or such shorter period as is permitted in the second sentence of this Section 9.1). The foregoing notwithstanding, in the event of an underwritten offering pursuant to this Section 9.1, if the managing underwriter of such offering shall advise the Securityholders in writing that, in its opinion, the distribution of a specified portion of the securities requested to be included in the registration would materially adversely affect the distribution of such securities by increasing the aggregate amount of the offering in excess of the maximum amount of securities which such managing underwriter believes can reasonably be sold in the contemplated distribution, then the securities to be included in the registration shall be included in the following order: (i) first, all of the Securities requested to be included therein by the Initiating Securityholders, (ii) second, the Securities requested to be included therein by the other Securityholders, pro rata among such Securityholders according to the number of Securities requested to be included by each such Securityholder requesting inclusion therein, and (iii) third, the securities the Company proposes to include therein and (iv) fourth, such other securities requested to be included therein, pro rata among the holders of such other securities according to the number of securities requested to be included by each such holder requesting inclusion therein. b. For purposes of this Section 9.1, the Securityholders who have requested registration of Shares to be acquired upon the exercise of Warrants not theretofore exercised shall furnish the Company with an undertaking that they or the underwriters or other persons to whom such Warrants will be transferred have undertaken to exercise such Warrants and to sell, transfer or otherwise dispose of the Shares received upon exercise of such Warrants in such registration. c. In the event of an underwritten offering pursuant to this Section 9.1, the Initiating Securityholders requesting registration of the Securities being registered shall be entitled to select the underwriter; provided, that the underwriter so selected shall be subject to approval by the Company, which approval shall not be withheld unreasonably. 11 12 d. Notwithstanding the terms of Section 9.1(a), the Company shall not be required to register the Securities of Securityholders pursuant to Section 9.1, if the Company elects, at its sole option and to the extent that it may legally do so, to purchase such Securities and completes such purchase pursuant to the provisions of this Section 9.1(d). Within fifteen (15) days after receipt of a Demand Registration Request, the Company may elect to purchase all and not less than all of the Securities that would otherwise be subject to registration pursuant to Section 9.1(a) by providing written notice (the "Purchase Notice") to all of the Securityholders setting forth (i) its election to purchase such Securities, (ii) the purchase price of the Securities, and (iii) the closing date for such purchase. The Company shall thereafter purchase all of the Securities requested to be included in such purchase by the Securityholders within fifteen (15) days after the Purchase Notice becomes effective. The purchase price for each Share shall be the fair market value (as defined in Section 4) of a share of Common Stock on the date of the Demand Registration Request; the purchase price for each Warrant shall be (x) the fair market value (as defined in Section 4) of a share of Common Stock on the date of the Demand Registration Request less (y) the Warrant Price as of such date. The closing of the purchase of the Securities shall take place on the date set forth in the Purchase Notice, which date shall be not less than fifteen (15) not more than forty-five (45) days after the date of the Purchase Notice. At the closing, the Company shall deliver to each Securityholder, in cash, the purchase price for the Securities surrendered by such Securityholder. 9.2. Piggy-Back Registration Rights. ------------------------------- a. The Company covenants and agrees with the Securityholders that in the event that the Company proposes to file a registration statement under the Act with respect to any of its equity securities (other than pursuant to registration statements on Form S-4 or Form S-8 or any successor or similar forms), whether or not for its own account, then the Company shall give written notice of such proposed filing to all Securityholders promptly (and in any event at least twenty (20) days before the anticipated filing date). Such notice shall offer to such Securityholders, together with others who have similar rights, the opportunity to include in such registration statement such number of Securities as they may request. The Company shall cause the managing underwriter of a proposed underwritten offering (unless the offering is an underwritten offering of a class of the Company's equity securities other than Common Stock and the managing underwriter has advised the Company in writing that, in its opinion, the inclusion in such offering of Common Stock would materially adversely affect the distribution of such offering) to permit the holders of Securities requested to be included in the registration to include such Securities in the proposed offering and the Company shall use its reasonable best efforts to include such Securities in such proposed offering on the same terms and conditions as any similar securities of the Company included therein. If the offering of which the Company gives notice is a public offering involving an underwriter, the right of a Securityholder to registration pursuant to this Section 9.2 shall be conditioned upon such Securityholder's participation in such underwriting and the inclusion of the Securities to be sold by such Securityholder in the underwriting. All Securityholders proposing to distribute Securities through such underwriting shall enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters. The foregoing notwithstanding, in the case of a firm commitment offering on underwriting terms appropriate for such a transaction, other than a registration requested by Securityholders pursuant to Section 9.1, if any such managing 12 13 underwriter of recognized standing shall advise the Company and the Securityholders in writing that, in its opinion, the distribution of all or a specified portion of the Securities requested to be included in the registration concurrently with the securities being registered by the Company would materially adversely affect the distribution of such securities by increasing the aggregate amount of the offering in excess of the maximum amount of securities which such managing underwriter believes can reasonably be sold in the contemplated distribution, then the securities to be included in a registration which is a primary underwritten offering on behalf of the Company shall be included in the following order: (i) first, the securities the Company proposes to include therein and (ii) second, such other securities (including the Securities) requested to be included, pro rata among the holders (including the Securityholders) of such other securities according to the number of securities requested to be included by each such holder requesting inclusion therein. b. In the event that a holder or holders of the Company's securities (other than a Securityholder or Securityholders) requests, pursuant to rights granted to such holder or holders, that the Company file a registration statement for the public offering of securities and the Company and the other holders of the Company's securities (including the Securityholders) who have rights to be included in such registration, request to be included in such registration and the managing underwriter of such offering shall advise the Company and the holders requesting inclusion in the offering that, in its opinion, the distribution of a specified portion of the securities requested to be included in the registration would materially adversely affect the distribution of such securities by increasing the aggregate amount of the offering in excess of the maximum amount of securities which such managing underwriter believes can reasonably be sold in the contemplated distribution then, the securities to be included in the registration shall be included in the following order: (i) first, all of the securities requested to be included therein by the holder or holders making the initial request for the registration, and (ii) second, such other securities requested to be included therein by the Company and the holders of such other securities, pro rata among the Company and the holders of such other securities according to the number of securities requested to be included by the Company and each such holder requesting inclusion therein. For purposes of this Section 9.2(b), the Company agrees to request for inclusion in the registration only that number of securities that the Company intends, in good faith, to sell, if all such securities so requested by the Company were permitted to be included by the managing underwriter in such registration and sold pursuant thereto. 9.3. Company Covenants; Registration Right Provisions. ------------------------------------------------ a. In connection with the registration of Securities on behalf of the holders thereof (such Securityholders being referred to herein as "Sellers") in accordance with Section 9.1 or Section 9.2 above, the Company agrees to: (i) enter into a cross-indemnity agreement, in customary form, with each underwriter, if any, and each Seller; (ii) subject to the provisions of Section 9.1(a), Section 9.2(a) and Section 9.2(b) regarding reductions by the managing underwriter, include in 13 14 the registration statement filed with the SEC, the Securities for which requests for registration have been made; provided, however, that promptly after filing a registration statement or prospectus or any amendments or supplements thereto, the Company shall furnish to each Seller copies of all such documents proposed to be filed including documents incorporated by reference in the registration statement; and notify each Seller of any stop order issued or threatened by the SEC and use its best efforts to prevent the entry of such stop order or to remove it if entered; (iii) prepare and file with the SEC such amendments of and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective (A) in the case of a registration pursuant to Section 9.1, for a period of one hundred and twenty (120) days, or, in the case of a registration pursuant to Section 9.2, for a period of ninety (90) days or (B) such shorter period as may be required if all such Securities covered by such registration statement are sold prior to the expiration of such periods, and comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the Sellers set forth in such registration statement; (iv) furnish to each Seller and each underwriter, if any, without charge, such number of copies of the registration statement, each amendment and supplement thereto (in each case including all exhibits thereto), the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such Seller may reasonably request in order to facilitate the disposition of the Securities proposed to be sold by such Seller; (v) use its reasonable best efforts to register or qualify such Securities under such other securities or Blue Sky laws of such jurisdictions as any Seller or any such underwriter reasonably requests and keep such registrations or qualifications in effect for so long as such registration statement remains in effect and do any and all acts and things which may be reasonably necessary or advisable to enable such Seller to consummate the disposition in such jurisdictions of the Securities owned by such Seller; provided, however, that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subsection (v), (ii) subject itself to taxation in any such jurisdiction, or (iii) consent to general service of process in any jurisdiction; (vi) notify each Seller, at any time when a prospectus relating to such Seller's Securities is required to be delivered under the Act, of the occurrence of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits to state any material fact necessary to make the statements therein not misleading, and as soon as practicable prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; 14 15 (vii) cause all such Securities to be listed on any Exchange on which similar securities issued by the Company are then listed; (viii) provide a transfer agent, registrar and CUSIP number for all such Securities not later than the effective date of such registration statement; (ix) enter into such customary agreements (including an underwriting agreement in customary form) and take all such other actions that the Sellers or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Securities; (x) make available for inspection by the Sellers and their counsel, any underwriter participating in any disposition pursuant to such registration statement, and any counsel retained by any such underwriter, all pertinent financial and other information and corporate documents of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such Seller, underwriter or counsel in connection with such registration statement; (xi) use its reasonable best efforts to obtain a "cold comfort" letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by "cold comfort" letters as the Sellers or any underwriter may reasonably request; (xii) obtain an opinion of counsel to the Company, addressed to the Sellers and any underwriter, in customary form and including such matters as are customarily covered by such opinions in underwritten registered offerings of equity securities as the Sellers or any underwriter may reasonably request, such opinion to be reasonably satisfactory in form and substance to each Seller; and (xiii) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its securityholders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months subsequent to the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Act and Rule 158 thereunder. b. Any other provisions of this Section 9 notwithstanding, upon receipt by the Securityholders of a written notice signed by the chief executive officer, chief operating officer or chief financial officer of the Company to the effect set forth below, the Company shall not be obligated during a reasonable period of time thereafter to effect any registrations pursuant to this Section 9, and the Securityholders agree that they will immediately suspend sales of shares under any effective registration statement for a reasonable period of time, in either case not to exceed ninety (90) days, at any time at which, in the Company's reasonable judgment, (i) there is a development involving the Company or any of its affiliates which is material but which has not yet been publicly disclosed or (ii) sales pursuant to the registration statement would materially and adversely affect an underwritten public offering for the account of the Company or any other material financing project or a proposed or pending material 15 16 merger or other material acquisition or material business combination or material disposition of the Company's assets, to which the Company or any of its affiliates is, or is expected to be, a party. In the event a registration is postponed or sales by the Securityholders pursuant to an effective registration statement are suspended in accordance with this Section 9.3(b), there shall be added to the period during which the Company is obligated to keep a registration effective the number of days for which the registration was postponed or sales were suspended pursuant to this Section 9.3(b). c. The Company may require each Seller to furnish to the Company such information regarding the distribution of the Securities proposed to be sold by such Seller as the Company may from time to time reasonably request in writing. d. Each Seller agrees that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in subsection (vi) of Section 9.3(a) above, such Seller shall forthwith discontinue disposition of Securities pursuant to the registration statement covering such Securities until such Seller's receipt of copies of the supplemented or amended prospectus contemplated by Section 9.3(a)(vi) above and, if so directed by the Company, such Seller will deliver to the Company (at the Company's expense) all copies, other than permanent file copies in such Seller's possession, of the prospectus covering such Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the period mentioned in Section 9.3(a)(iii) above shall be extended by the number of days during the period from and including the date of giving of such notice to and including the date when each Seller shall have received the copies of the supplemented or amended prospectus contemplated by Section 9.3(a)(vi) above. e. The Company shall not file or permit the filing of any registration or comparable statement which refers to any Seller by name or otherwise as the Seller of any securities of the Company unless such reference to such Seller is specifically required by the Act or any similar federal statute then in force. 9.4 Expenses. All expenses incident to the Company's performance of or compliance with this Warrant, including without limitation all registration and filing fees, fees and expenses relating to filings with any Exchange, fees and expenses of compliance with securities or Blue Sky laws in jurisdictions reasonably requested by any Seller or underwriter pursuant to Section 9.3(a)(v) (including reasonable fees and disbursements of counsel in connection with Blue Sky qualifications of the Securities), all word processing, duplicating and printing expenses, messenger and delivery expenses, fees and disbursements of counsel for the Company and one (1) counsel for the Sellers, independent public accountants (including the expenses of any special audit or "cold comfort" letters required by or incident to such performance) and underwriters (excluding discounts, commissions or fees of underwriters, selling brokers, dealer managers or similar securities industry professionals attributable to the securities being registered, or legal expenses of any person other than the Company and the Sellers, but including liability insurance if the Company so desires), all the Company's internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the expense of any liability insurance (if the Company determines to obtain such insurance) and the fees and 16 17 expenses incurred in connection with the listing of the securities to be registered on each Exchange on which such securities issued by the Company are then listed, the reasonable fees and expenses of any special experts (including attorneys) retained by the Company (if it so desires) in connection with such registration and fees and expenses of other persons retained by the Company (all such expenses being herein called "Registration Expenses"), shall be borne by the Company. 9.5 Registration Statement Preparation; Investigation. In connection with the preparation and filing of each registration statement under the Act pursuant to this Section 9, the Company shall give the Sellers under such registration statement, their underwriters, if any, and their respective counsel and accountants, the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto, and will give each of them such access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of such Sellers' and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the Act. 9.6. Indemnification. ---------------- a. In the event of any registration of any securities of the Company under the Act, the Company shall, and hereby does, indemnify and hold harmless in the case of any registration statement filed pursuant to Section 9.1 or Section 9.2, the Seller of any Securities covered by such registration statement, its directors, officers and employees, each other person who participates as an underwriter in the offering or sale of such Securities and each other person, if any, who controls such Seller or any such underwriter within the meaning of the Act against any losses, claims, damages, or liabilities (or actions or proceedings whether commenced or threatened in respect thereof), joint or several, to which such Seller or any such director or officer or underwriter or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Securities were registered under the Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company shall reimburse such Seller and each such director, officer, employee, underwriter and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action, or proceeding; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding, whether commenced or threatened in respect thereof), or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment, or supplement in reliance upon 17 18 and in conformity with written information furnished to the Company through an instrument duly executed by such Seller specifically stating it is for use in the preparation thereof and, provided, further, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding, whether commenced or threatened, in respect thereof), or expense arises out of such person's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended, within the time required by the Act to the person asserting an untrue statement or alleged untrue statement or omission or alleged omission if such statement or omission was corrected in such final prospectus. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Seller or any such director, officer, underwriter or controlling person and shall survive the transfer of such Securities by such Seller. b. The Company may require, as a condition to including any Securities in any registration statement filed pursuant to Section 9.3, that the Company shall have received an undertaking satisfactory to it from the prospective Seller, to indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 9.6(a)) the Company, each director, officer and employee of the Company, and each other person, if any, who controls the Company within the meaning of the Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus, or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such Seller specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment, or supplement. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer, or controlling person and shall survive the transfer of such Securities by such Seller. In no event shall the liability of any selling Seller hereunder (including without limitation indemnification liability in connection with Section 9.6(d) hereof) be in the aggregate greater in amount than the dollar amount, if any, by which (1) the proceeds received by such Seller upon the sale of the Securities giving rise to such indemnification obligation exceed (2) the purchase or exercise price paid by such Seller for such Securities. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers, and similar securities industry professionals participating in the distribution to the same extent as provided above with respect to information so furnished in writing by such persons specifically for inclusion in any prospectus or registration statement. c. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in this Section 9.6, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 9.6, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying 18 19 parties may exist in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that the indemnifying party may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. If, in the indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, the indemnified party may assume the defense of such claim, jointly with any other indemnified party that reasonably determines such conflict of interest to exist, and the indemnifying party shall be liable to such indemnified parties for the reasonable legal fees and expenses of one counsel for all such indemnified parties and for other expenses reasonably incurred in connection with the defense thereof incurred by the indemnified party. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement of any such action which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability, or a covenant not to sue, in respect of such claim or litigation. No indemnified party shall consent to entry of any judgment or enter into any settlement of any such action the defense of which has been assumed by an indemnifying party without the consent of such indemnifying party. d. Indemnification and contribution similar to that specified in this Section 9.6 (with appropriate modifications) shall be given by the Company and may be required of each Seller with respect to any required registration or other qualification of Securities under any Federal or state law or regulation of any governmental authority, other than the Act. e. The indemnification required by this Section 9.6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. f. If the indemnification provided for in this Section 9.6 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities, or expenses referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of losses, claims, damages, liabilities, or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified party in connection with the actions which resulted in such losses, claims, damages, liabilities, or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities, and expenses referred to above shall be deemed to include any legal or other fees or 19 20 expenses reasonably incurred by such party in connection with any investigation or proceeding. In no event shall the liability of any Seller hereunder (including without limitation contribution liability in connection with Section 9.6(d) hereof) be in the aggregate greater in amount than the dollar amount, if any, by which (1) the proceeds received by such Seller upon the sale of the Securities giving rise to such contribution obligation exceed (2) the purchase or exercise price paid by such Seller for such Securities. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 9.6(f) were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in this Section 9.6(f). No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. 9.7 Conflicting Rights. The Company hereby represents and covenants that, prior to and as of the Date of Grant the Company has not granted, and after the Date of Grant the Company shall not grant, any registration rights which conflict with the rights under this Section 9. 9.8 Lock-up Period. If requested by the managing underwriter of an offering for which Shares of such Securityholder have been registered, a Securityholder shall not sell or otherwise transfer or dispose of any Securities held by such Securityholder (other than those included in the registration) during such period following the effective date of such registration as is usual and customary at such time in similar public offerings of similar securities; provided, however, that the Company shall use its reasonable best efforts to cause each holder of a material number of shares of Common Stock to enter into similar "lock-up" agreements in respect of such offering. The obligations described in this Section 9.8 shall not apply to offerings pursuant to a registration statement on Form S-4 or Form S-8 or any successor or similar form. 10. Additional Rights. ----------------- 10.1 Secondary Sales. The Company agrees that, to the extent reasonable, it will cooperate with the holder of this Warrant in obtaining liquidity if opportunities to make secondary sales of the Company's securities become available. To this end, the Company will promptly provide the holder of this Warrant with notice of any offer to acquire from the Company's security holders more than five percent (5%) of the total voting power of the Company and will cooperate with the holder, if requested, in consummating the sale of this Warrant to the person or persons making such offer. The foregoing paragraph notwithstanding, the provisions of this Section 10.1 shall not require the Company to take any action which would constitute a violation of Federal securities laws. 10.2 Mergers. In the event that the Company undertakes to (i) sell, lease, exchange, convey or otherwise dispose of all or substantially all of its property or business, or (ii) merge into or consolidate with any other corporation (other than a wholly-owned subsidiary of the Company), or effect any transaction (including a merger or other reorganization) or series of related transactions, in which more than 50% of the voting power of the Company is disposed of, the Company will use its reasonable best efforts to provide at 20 21 least thirty (30) days notice of the terms and conditions of the proposed transaction. The Company will cooperate with the holder in consummating the sale of this Warrant in connection with any such transaction. The foregoing paragraph notwithstanding, the provisions of this Section 10.2 shall not require the Company to take any action which would constitute a violation of, or create a material liability for the Company under, Federal securities laws. 10.3 Right to Convert Warrant into Common Stock; Net Issuance. -------------------------------------------------------- a. Right to Convert. In addition to and without limiting the rights of the holder under the terms of this Warrant, the holder shall have the right to convert this Warrant or any portion thereof (the "Conversion Right") into shares of Common Stock as provided in this Section 10.3 at any time or from time to time during the term of this Warrant. Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant (the "Converted Warrant Shares"), the Company shall deliver to the holder (without payment by the holder of any exercise price or any cash or other consideration) that number of shares of fully paid and nonassessable Common Stock equal to the quotient obtained by dividing (i) the value of this Warrant (or the specified portion hereof) on the Conversion Date (as defined in subsection (b) hereof), which value shall be equal to (A) the aggregate fair market value of the Converted Warrant Shares issuable upon exercise of this Warrant (or the specified portion hereof) on the Conversion Date less (B) the aggregate Warrant Price of the Converted Warrant Shares immediately prior to the exercise of the Conversion Right by (ii) the fair market value of one share of Common Stock on the Conversion Date. Expressed as a formula, such conversion shall be computed as follows: X= A - B ----- Y Where: X = the number of shares of Common Stock that may be issued to holder Y = the fair market value (FMV) of one share of Common Stock A = the aggregate FMV (i.e., FMV x Converted Warrant Shares) B = the aggregate Warrant Price (i.e., Converted Warrant Shares x Warrant Price) No fractional shares shall be issuable upon exercise of the Conversion Right, and, if the number of shares to be issued determined in accordance with the foregoing formula is other than a whole number, the Company shall pay to the holder an amount in cash equal to the fair market value of the resulting fractional share on the Conversion Date. For purposes of Section 9 of this Warrant, shares issued pursuant to the Conversion Right shall be treated as if they were issued upon the exercise of this Warrant. 21 22 b. Method of Exercise. The Conversion Right may be exercised by the holder by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that the holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to this Warrant which are being surrendered (referred to in subsection (a) hereof as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the "Conversion Date"). Certificates for the shares issuable upon exercise of the Conversion Right and, if applicable, a new warrant evidencing the balance of the shares remaining subject to this Warrant, shall be issued as of the Conversion Date and shall be delivered to the holder within thirty (30) days following the Conversion Date. c. Determination of Fair Market Value. For purposes of this Section 10.3, "fair market value" of a share of Common Stock shall have the meaning set forth in Section 4(h) above. 11. Representations and Warranties. The Company represents and warrants to the holder of this Warrant as follows: a. This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and the rules of law or principles at equity governing specific performance, injunctive relief and other equitable remedies; b. The Shares have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable; c. The rights, preferences, privileges and restrictions granted to or imposed upon the Common Stock and the holders thereof are as set forth in the articles or certificate of incorporation of the Company, as amended to the Date of Grant (as so amended, the "Charter"), a true and complete copy of which has been delivered to the original holder of this Warrant; d. The execution and delivery of this Warrant are not, and the issuance of the Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Charter or by-laws of the Company, do not and will not contravene, in any material respect, any governmental rule or regulation, judgment or order applicable to the Company, and do not and will not conflict with or contravene, in any material respect, any provision of, or constitute a material default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration or filing with or the taking of any action in respect of or by, any Federal, state or local government authority or agency or other person, except for the filing of notices pursuant to federal and state securities laws, which filings will be effected by the time required thereby; 22 23 e. Except for the pending judicial settlements with Time, Inc. and CNN, there are no actions, suits, audits, investigations or proceedings pending or, to the knowledge of the Company, threatened against the Company in any court or before any governmental commission, board or authority which, if adversely determined, will have a material adverse effect on the ability of the Company to perform its obligations under this Warrant; f. The authorized capital stock of the Company consists of One Hundred Million (100,000,000) shares of Common Stock, $0.01 par value per share, of which approximately Twelve Million Two Hundred Sixty-Eight Thousand Sixty-Nine (12,268,069) shares were issued and outstanding as of the close of business on May 20, 1997, and Twenty-Five Million (25,000,000) shares of Preferred Stock, $0.01 par value per share, of which Three Thousand Five Hundred (3,500) shares are authorized as Series A Convertible Preferred Stock, of which no shares are issued and outstanding as of the Date of Grant, Three Thousand Five Hundred (3,500) shares are authorized as Series B Convertible Preferred Stock, of which Two Thousand Two Hundred Four (2,204) shares are issued and outstanding as of the Date of Grant and One Million Three Hundred Thousand (1,300,000) shares are authorized as Series C Convertible Preferred Stock, of which One Million One Hundred Eighty-Five Thousand One Hundred Eighty Five (1,185,185) shares are issued and outstanding as of the Date of Grant. All such outstanding shares have been validly issued and are fully paid, nonassessable shares free of preemptive rights, except that the Company makes no representations or warranties as to the valid issuance of shares of Common Stock issued upon conversion of Series B Convertible Preferred Stock at a conversion price not in accordance with the provisions of the Certificate of Designations of Series B Convertible Preferred Stock of the Company. g. Other than the Warrants, Warrant #3 and as provided in the Company's Certificate of Designations of Series A Convertible Preferred Stock, as amended, Certificate of Designations of Series B Convertible Preferred Stock, and Certificate of Designations of Series C Convertible Preferred Stock, and except as disclosed in the Schedule of Outstanding Rights attached hereto as Exhibit B, there are no subscriptions, rights, options, warrants, or calls relating to any shares of the Company's capital stock, including any right of conversion or exchange under any outstanding security or other instrument; and h. Except as disclosed in the Company's most recent Proxy Statement and Form 10-K, and except as provided in the Company's Certificate of Designations of Series A Convertible Preferred Stock, as amended, Certificate of Designations of Series B Convertible Preferred Stock, and Certificate of Designations of Series C Convertible Preferred Stock, (each of which the Company represents and warrants have been delivered to Madeleine or its counsel and in the form of same most recently filed with the Secretary of State of the State of Delaware), the Company is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any security convertible into or exchangeable for any of its capital stock. 12. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 23 24 13. Notices. Any notice, request, communication or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered, or shall be sent by private courier or certified or registered mail, postage prepaid, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor on the signature page of this Warrant. 14. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets, and all of the obligations of the Company relating to the Common Stock issuable upon the exercise or conversion of this Warrant shall survive the exercise, conversion and termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. The Company will, at the time of the exercise or conversion of this Warrant, in whole or in part, upon request of the holder hereof but at the Company's expense, acknowledge in writing its continuing obligation to the holder hereof in respect of any rights to which the holder hereof shall continue to be entitled after such exercise or conversion in accordance with this Warrant; provided, that the failure of the holder hereof to make any such request shall not affect the continuing obligation of the Company to the holder hereof in respect of such rights. 15. Lost Warrants or Stock Certificates. The Company covenants to the holder hereof that, upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant or any stock certificate and, in the case of any loss, theft or destruction, upon receipt of an executed lost securities bond or indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 16. Descriptive Headings. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. 17. Governing Law. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Delaware. 18. Survival of Representations, Warranties and Agreements. All representations and warranties of the Company and the holder hereof contained herein shall survive the Date of Grant, the exercise or conversion of this Warrant (or any part hereof) or the termination or expiration of rights hereunder. All agreements of the Company and the holder hereof contained herein shall survive indefinitely until, by their respective terms, they are no longer operative. 19. Remedies. In case any one or more of the covenants and agreements contained in this Warrant shall have been breached, the holders hereof (in the case of a breach by the Company), or the Company (in the case of a breach by a holder), may proceed to protect and enforce their or its rights either by suit in equity and/or by action at law, including, but not 24 25 limited to, an action for damages as a result of any such breach and/or an action for specific performance of any such covenant or agreement contained in this Warrant. 20. Acceptance. Receipt of this Warrant by the holder hereof shall constitute acceptance of and agreement to the foregoing terms and conditions. 21. No Impairment of Rights. The Company will not, by amendment of its Charter or through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. [SIGNATURE PAGE FOLLOWS] 25 26 IN WITNESS WHEREOF, Graphix Zone, Inc. has caused this Warrant to be executed on its behalf by one of its officers thereunto duly authorized. GRAPHIX ZONE, INC. By: /s/ DAVID J. HIRSCHHORN -------------------------------------- Name: David J. Hirschhorn Title: President and Chief Executive Officer Address: 42 Corporate Park, Suite 200 Irvine, California 92606 Date: June 5, 1997 S-1 27 EXHIBIT A NOTICE OF EXERCISE To: GRAPHIX ZONE, INC. 1. The undersigned hereby elects to purchase _________ shares of Common Stock of GRAPHIX ZONE, INC. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name or names as are specified below: -------------------------------------- (Name) -------------------------------------- -------------------------------------- (Address) 3. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. In support thereof, the undesigned has executed an Investment Representation Statement attached hereto as Schedule 1. -------------------------------------- (Signature) - ------------------ (Date) 28 Schedule 1 ---------- INVESTMENT REPRESENTATION STATEMENT Purchaser: Company: GRAPHIX ZONE, INC. Security: Common Stock Amount: Date: In connection with the purchase of the above-listed securities (the "Securities"), the undersigned (the "Purchaser") represents to the Company as follows: (a) The Purchaser is aware of the Company's business affairs and financial condition, and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. The Purchaser is purchasing the Securities for its own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933, as amended (the "Act"). (b) The Purchaser understands that the Securities have not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Purchaser's investment intent as expressed herein. In this connection, the Purchaser understands that, in the view of the Securities and Exchange Commission ("SEC"), the statutory basis for such exemption may be unavailable if the Purchaser's representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under applicable tax laws, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. (c) The Purchaser further understands that the Securities must be held indefinitely unless subsequently registered under the Act or unless an exemption from registration is otherwise available. In addition, the Purchaser understands that the certificate evidencing the Securities will be imprinted with the legend referred to in the Warrant under which the Securities are being purchased. 29 (d) The Purchaser is aware of the provisions of Rule 144 and 144A, promulgated under the Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, if applicable, including, among other things: The availability of certain public information about the Company, the resale occurring not less than one (1) year after the party has purchased and paid for the securities to be sold; the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934, as amended) and the amount of securities being sold during any three-month period not exceeding the specified limitations stated therein. (e) The Purchaser further understands that at the time it wishes to sell the Securities there may be no public market upon which to make such a sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144 and 144A, and that, in such event, the Purchaser may be precluded from selling the Securities under Rule 144 and 144A even if the one-year minimum holding period had been satisfied. (f) The Purchaser further understands that in the event all of the requirements of Rule 144 and 144A are not satisfied, registration under the Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 is not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden or proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Purchaser: --------------------- Date: --------------- EX-10.41 16 SUBLEASE AGREEMENT 1 EXHIBIT 10.41 SUBLEASE AGREEMENT THIS SUBLEASE AGREEMENT (this "Sublease") is made this twenty-third day of June 1997, by and between ACG (U.S.) Inc., having an office at 2915 S. Daimler Street, Santa Ana, California 92705-5810 ("Sublessor"), and Graphix Zone, a California corporation, dba Ignite incorporated, having an office at 42 Corporate Park, Suite 200, Irvine, CA 92714 ("Sublessee)". RECITALS -------- A. Whereas, Sublessor, as lessee, entered into a lease with DAIMLER COMMERCE PARTNERS, L.P., a California limited partnership, as lessor (the "Prime Lessor"), dated August 1, 1996, leasing certain space at 2915 S. Daimler Street, Santa Ana, California 92705-5810 (the "Prime Premises"), which lease is hereinafter referred to as the "Prime Lease." B. Whereas, Sublessor and Sublessee have agreed that Sublessor shall sublet approximately 2,100 square feet of the Prime Premises to Sublessee (the "Subleased Premises") as depicted on Exhibits "A" and "B" attached hereto and incorporated herein. COVENANTS --------- NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows: 1. Premises. Sublessor, hereby subleases to Sublessee the Subleased Premises subject to the terms and conditions contained herein. 2. Term. The term of this Sublease (the "Term") shall commence on June 23, 1997 (the "Commencement Date"), and continue on a month to month basis until (unless sooner terminated by Sublessor and Sublessee pursuant to the terms hereof) the termination of the Prime Lease as provided in Section 1.05 of the Prime Lease (the "Termination Date"). Notwithstanding the foregoing, Sublessor and Sublessee may each terminate this Sublease upon thirty (30) days' written notice to the other party. 3. Rent. (a) During the term hereof, Sublessee shall pay Sublessor as rent for the Sublease of the Subleased Premises $1,785.00 per month. The sublessee shall pay for its own utilities, liability and property insurance, janitorial service, security alarm service and all other normal facility expenses; except (i) real property tax, (ii) premiums, costs, expenses and deductibles of insurance maintained by Prime Lessor or Sublessor pursuant to the Prime Lease, and (iii) common area maintenance costs. (b) Upon execution of this Sublease, Sublessee shall pay to Sublessor the Rent due for the first month of the Term. All Rent payable hereunder shall be paid in advance on the first day of each succeeding calendar month during the Term, with Rent due hereunder apportioned for any fractional calendar months for which Rent is due. All payments required 1 2 to be made by Sublessee pursuant to the terms hereof shall be paid in lawful money of the United States of America, without notice, setoff, or deduction, at the address of Sublessor set forth above, or such other place as Sublessor may from time to time designate in writing. 4. Use. The Subleased Premises shall be used for the Permitted Uses set forth in the Prime Lease and for no other purpose. 5. Assignment. Sublessee shall not assign this Sublease nor sublet the Subleased Premises in whole or in part; and shall not permit Sublessee's interest in this to be vested in any third party by operation of law or otherwise. 6. Services and Rights. Notwithstanding anything herein contained, the only services or rights to which Sublessee is entitled hereunder are those to which Sublessor is entitled under the Prime Lease and that for all such services and rights Sublessee will look to the Prime Lessor. 7. Indemnity. Sublessee shall neither do nor permit anything to be done which would cause the Prime Lease to be terminated or forfeited by reason of any right of termination or forfeiture reserved or vested in the Prime Lessor and Sublessee shall indemnify and hold Sublessor harmless from and against all claims of any kind whatsoever by reason of any breach or default on the part of Sublessee under the Prime Lease or any other act or omission by Sublessee, its employees, agents, contractors and invitees on or about the Subleased Premises or the Prime Premises or otherwise arising out of or related to this Sublease except and to the extent caused by the gross negligence or willful misconduct of Sublessor. 8. Security Deposit. Sublessee shall pay the Sublessor on the execution and delivery of this Sublease the sum of Seventeen hundred and eight five dollars ($1,785.00) as security for the full and faithful performance of the terms, covenants and conditions of this Sublease on Sublessee's part to be performed or observed, including but not limited to payment of Rent and additional rent or for any other sum which Sublessor may expend or be required to expend by reason of Sublessee's default, including any damages or deficiency in reletting the Subleased Premises, in whole or in part, whether such damage shall accrue before or after summary proceedings or other re-entry by Sublessor. If Sublessee shall fully and faithfully comply with all the terms, covenants and conditions of this Sublease on Sublessee's part to be performed or observed, the security, or any unapplied balance thereof, shall be returned to Sublessee after the time fixed as the expiration of the demised term and after surrender of possession of the Subleased Premises to Sublessor and/or Prime Lessor. 9. Possession. Sublessee hereby acknowledges that Sublessee has accepted the Subleased Premises in their existing condition "as is" and that Sublessor has made no representations or warranties concerning the condition of the Subleased Premises, whether the condition complies with the requirements of law or as to its fitness for the use intended by Sublessee. 10. Prime Lease. It is expressly understood, acknowledged and agreed by Sublessee that all of the terms, conditions and covenants of the Prime Lease, except as expressly modified by the terms of this Sublease, shall apply to this Sublease, as though such 2 3 terms, conditions and covenants were fully set forth herein. Sublessee shall and hereby agrees to be subject to and bound by and to comply with all of the provisions of the Prime Lease, except as expressly modified by the terms of this Sublease, to satisfy all applicable terms and conditions of the Prime Lease, except as expressly modified by the terms of this Sublease, for the benefit of both Sublessor and Prime Lessor. It is understood and agreed that wherever in those provisions of the Prime Lease the word "Tenant" appears, for the purposes of this Sublease, the word "Sublessee" shall be substituted, and wherever in those provisions of the Lease the word "Landlord" appears, for the purposes of this Sublease, the word "Sublessor" shall be substituted. Upon the breach of any of those terms, conditions or covenants of the Lease, except as expressly modified by the terms of this Sublease, by Sublessee or upon the failure of Sublessee to pay Rent or comply with any of the provisions of this Sublease, Sublessor may exercise any and all rights and remedies granted to Sublessor by the Lease. In the event of any conflict between this Sublease and the Lease, except as otherwise specifically provided in this Sublease, the terms of the Lease shall control. Sublessee hereby acknowledges that it has read and is familiar with the terms of the Prime Lease and agrees that this Sublease is subordinate and subject to the Prime Lease and that any termination thereof without the fault of Sublessor shall likewise terminate this Sublease. 11. Late Charges. Sublessee's failure to pay rent promptly may cause sublessor to incur unanticipated costs. The exact amount of such costs are impractical or extremely difficult to ascertain. Such costs may include, but are not limited to, processing and accounting charges and late charges which may be imposed on Sublessor by third parties. Therefore, if sublessor does not receive any rent payment within ten (10) days after it becomes due, sublessee shall pay sublessor a late charge equal to ten percent (10%) of the overdue amount. The parties agree that such late charge represents a fair and reasonable estimate of the costs sublessor will incur by reason of such late payment. 12. Interest on Past Due Obligations. Any amount owed by sublessee to sublessor which is not paid when due shall bear interest at the rate of fifteen percent (15%) per annum from the due date of such amount. However, interest shall not be payable on late charges to be paid by sublessee under this sublease. The payment of interest on such amounts shall not excuse or cure any default by sublessee under this sublease. If the interest rate specified in this sublease is higher than the rate permitted by law, the interest rate is hereby decreased to the maximum legal interest rate permitted by law. 13. Legal Costs. If sublessee or sublessor shall be in breach or default under this sublease, such party (the "Defaulting Party") shall reimburse the other party (the "Nondefaulting Party") upon demand for any costs or expenses that the Nondefaulting Party incurs in connection with any breach or default of the defaulting Party under this sublease, whether or not suit is commenced or judgment entered. Such costs shall include legal fees and costs incurred for the negotiation of a settlement, enforcement of rights or otherwise. Furthermore, if any action for breach of or to enforce the provisions of this sublease is commenced, the court in such action shall award to the party in whose favor a judgment is entered, a reasonable sum as attorneys' fees and costs. The losing party in such action shall pay such attorneys' fees and costs. Sublessee shall also indemnify sublessor against and hold sublessor harmless from all costs, expenses, demands and liability sublessor may incur if sublessor becomes or is made a party to any claim or action (a) instituted by sublessee against any third party, or by any third party against sublessee, or by or against any person 3 4 holding any interest under or using the Property by license of or agreement with sublessee; (b) for foreclosure of any lien for labor or material furnished to or for sublessee or such other person; (c) otherwise arising out of or resulting from any act or transaction of sublessee or such other person; or (d) necessary to protect sublessor's interest under this sublease in a bankruptcy proceeding, or other proceeding under Title 11 of the United States Code, as amended. Sublessee shall defend sublessor against any such claim or action at sublessee's expense with counsel reasonably acceptable to sublessor or, at sublessor's election, sublessee shall reimburse sublessor for any legal fees or costs sublessor incurs in any such claim or action. 14. Sole Agreement. This Sublease, its Exhibits and the Prime Lease and its Exhibits constitute the entire agreement between the parties hereto pertaining to the subject matter hereof, and the final, complete and exclusive expression of the terms and conditions hereof. All prior agreements, representations, negotiations and understandings of the parties, oral or written, express or implied, are superseded hereby and merged herein. 15. Notices. All notices and demands that may or are required to be given by either party to the other hereunder shall be in writing. All notices and demands by Sublessor to Sublessee shall be personally delivered, posted or sent by United States certified or registered mail, postage prepaid, addressed to Sublessee at the Subleased Premises. All notices and demands by Sublessee to Sublessor shall be personally delivered or sent by United States certified or registered mail, postage prepaid, addressed to Sublessor at the Prime Premises, or to such other place as Sublessor may from time to time designate in a notice to the Sublessee. 16. Relationship. Nothing herein contained shall be construed as creating a partnership or joint venture between Sublessor and Sublessee or between Sublessor and any other party, or cause Sublessor to be responsible in any way for the debts or obligations of Sublessee or any other party. 17. Severability. In case any provision of this Sublease is invalid, illegal or unenforceable, such provision shall be severable from the rest of this Sublease, and the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. 18. Governing Law. This Sublease shall be governed by and construed in all respects according to the laws of the State of California, as such laws are applied to contracts between California residents entered into and to be performed entirely within California. 19. Headings. Headings of the sections of this Sublease are inserted for convenience only and shall not be deemed to constitute a part hereof. 20. Amendment. This Sublease may be modified or amended only by written instrument duly executed by the parties hereto. 21. Counterparts. This Sublease may be executed in one or more counterparts, each of which shall be deemed an original, but shall in the aggregate constitute one and the same document. 4 5 IN WITNESS WHEREOF, the parties hereto have caused these presents to be executed the day and year first above written. Sublessee: Ignite Incorporated a California corporation By: /s/ DAVID HIRSCHHORN ------------------------------- Name: David Hirschhorn Title: President Sublessor: ACG (U.S.) Inc., a California corporation By: /s/ JOHN AUYEUNG -------------------------------- John AuYeung, Ph.D. President PRIME LESSOR'S CONSENT The undersigned, the Prime Lessor referred to in the foregoing Sublease, hereby consents to subleasing of the Subleased Premises in accordance with the terms and conditions of the foregoing Sublease. This consent does not constitute any waiver of Prime Lessor's rights related to any other subleasing or assignment of the Prime Premises or rights to consent to any amendment or modification of the foregoing Sublease all in accordance with the terms and conditions of the Prime Lease. DAIMLER COMMENCE PARTNERS, L.P., a California limited partnership By: CONIFER INVESTMENTS, INC., a California corporation Its General Partner By: /s/ MISAKO YUEN --------------------------- Misako Yuen President Dated: 07/15/97 ------------ 5 EX-10.42 17 PROMISSORY NOTE 1 EXHIBIT 10.42 PRODUCTION AND DEVELOPMENT AGREEMENT - -------------------------------------------------------------------------------- ATTACHMENT D PROMISSORY NOTE $200,000.00 CUPERTINO, CALIFORNIA FEBRUARY 3, 1997 For value received, Graphix Zone, Inc., a Delaware corporation ("Borrower"), at 42 Corporate Park, Suite 200, Irvine, CA 92714, promises to pay to the order of Middlefield Ventures, Inc., a Delaware corporation ("Middlefield"), at 2200 Mission College Boulevard, PO Box 58119, RN6-26, Santa Clara, California 95052-8119, attention Assistant Treasurer, Mergers & Acquisitions, or any subsequent holder of this Promissory Note ("Holder"), the principal sum of Two Hundred Thousand Dollars ($200,000.00) together with interest from the date hereof, on unpaid principal at the rate of eight percent (8%) per annum, compounded daily, 365/360 day basis; provided, however, that rate at which interest will accrue on unpaid principal under this Promissory Note will not exceed the highest rate permitted by applicable law. The term of this Promissory Note shall commence on February 3, 1997 and end on February 3, 2000. Principal and interest shall be payable in lawful money of the United States of America, without any deduction of any nature by way of set off, counterclaim, or otherwise. Commencing on January 1, 1998, and on the first day of each calendar quarter thereafter, during the term of this Note, Borrower shall pay one eighth of the principal sum (ratably diminished by any amounts canceled by Holder pursuant to that certain Production and Development Agreement by and between Intel and Graphix Zone dated on even date herewith) and any outstanding interest, and shall pay any unpaid amount of this Note no later than February 3, 2000. The unpaid principal sum of this Promissory Note, together with the interest accrued thereon (the "Repayment Amount"), is subject to Intel Corporation's conversion rights and/or obligations under Section 4.3 of the Production and Development Agreement. Upon conversion of the Repayment Amount, this Promissory Note shall terminate and Borrower's obligations to pay the Repayment Amount to Holder shall be extinguished. This Promissory Note may be prepaid in cash at any time without penalty, subject to Intel's conversion rights as set forth in Section 4.3 of the Production and Development Agreement. Borrower will be deemed to be in default under this Promissory Note and the principal sum of this Promissory Note, together with all interest accrued thereon, will immediately become due and payable in full upon any material breach of the Production and Development Agreement not cured within thirty days of written notice thereof. Upon any default of Borrower under this Promissory Note, Middlefield will have, in addition to its rights and remedies under this Promissory Note, full recourse against any real, personal, tangible or intangible assets of Borrower, and may pursue any legal or equitable remedies that are available to it. The Holder shall not have the right to sell or assign this Promissory Note to a third party, except as permitted in the Loan Agreement. Borrower waives presentment for payment, protest, notice of protest and notice of prepayment of this Promissory Note. Borrower agrees to reimburse Holder for all its reasonable costs and expenses, including reasonable attorneys' fees, in connection with the enforcement of this Promissory Note, whether or not any suit is instituted. Should suit be commenced to collect this Promissory Note or any portion thereof, such sum as the court may deem reasonable shall be added hereto as attorneys' fees, including any fees awarded on any appeal. Suit as used herein includes actions before the United States Bankruptcy Courts. This Promissory Note shall be governed and construed according to the laws of the State of California and shall be binding on the successors and assigns of Borrower. Graphix Zone, Inc. By: /s/ N. H. BLOCK --------------- Signature N. H. Block --------------- Printed Name President --------------- Title - ------------------------------------------------------------------------------- Intel Corporation 14 Confidential EX-10.43 18 WARRANT TO PURCHASE STOCK WITH INTEL CORPORATION 1 EXHIBIT 10.43 WARRANT THE WARRANT EVIDENCED OR CONSTITUTED HEREBY AND THE SHARES OF COMMON STOCK ISSUABLE HEREUNDER HAVE BEEN AND WILL BE ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("THE ACT"), AND MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED, PLEDGED HYPOTHECATED WITHOUT REGISTRATION UNDER THE ACT UNLESS EITHER (i) THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL TO THE EFFECT THAT REGISTRATION IS NOT REQUIRED IN CONNECTION WITH SUCH DISPOSITION OR (ii) THE SALE OF SUCH SECURITIES IS MADE PURSUANT TO SECURITIES AND EXCHANGE COMMISSION RULE 144. WARRANT TO PURCHASE 613,718 SHARES OF COMMON STOCK OF GRAPHIX ZONE, INC. (Subject to Adjustment) NO._______ THIS CERTIFIES THAT, for value received by Graphix Zone, a Delaware corporation (the "Company"), the receipt and sufficiency of which is hereby acknowledged, from Intel Corporation, a Delaware corporation ("Intel"), Intel or its permitted registered assigns ("Holder"), is entitled, subject to the terms and conditions of this Warrant, at any time after February 3, 1997 (the "Effective Date"), and before 5:00 p.m. Pacific Time on February 3, 2003 (the "Expiration Date"), to purchase from the Company, six hundred thirteen thousand, seven hundred eighteen (613,718) fully paid and nonassessable shares of the Company's Common Stock, $.01 par value per share (the "Warrant Stock"), at the Exercise Price (as defined in Section 1.5 below). Both the number of shares of Warrant Stock purchasable under this Warrant and the Exercise Price are subject to adjustment as provided herein. This Warrant shall terminate on the Expiration Date, and is subject to the Vesting provisions set out in Section 2. 1. CERTAIN DEFINITIONS. As used in this Warrant: 1.1. The term "Warrant Stock" shall mean the Common Shares, $0.01 par value per share, of the Company, and any other securities and property at any time receivable or issuable upon exercise of this Warrant, unless the context otherwise requires. 1.2. The term "Warrant" as used herein, shall include this Warrant and any warrant delivered in substitution or exchange therefor as provided herein. 1.3. The term "Registered Holder" shall mean any Holder in whose name this Warrant is registered upon the books and records maintained by the Company. 1.4. The term "Fair Market Value" of a share of Warrant Stock as of a particular date (the "Determination Date") shall mean: (a) If traded on a securities exchange or Nasdaq, the Fair Market Value shall be deemed to be the average of the closing prices of the Common Stock of the Company on such trading market, over the 10 business days ending three (3) days prior to the Determination Date; 2 (b) If actively traded over the counter or on an electronic bulletin board, the Fair Market Value shall be deemed to be the average of the closing bid prices over the 20-day period ending three (3) days prior to the Determination Date; and (c) If there is no active public market, the Fair Market Value shall be the value thereof, as determined in good faith by the Board of Directors of the Company. 1.5 The term "Vested Shares" shall mean a set of Warrant Shares as to which Holder has performed the acts described in Section 2.5. 1.6 The term "Vesting Date" shall mean the date on which Holder has performed the acts necessary to cause such shares to become Vested Shares. 1.7 The term "Exercise Price" shall mean three dollars and forty six cents ($3.46). 2. EXERCISE OF WARRANT 2.1 Payment. Subject to compliance with the terms and conditions of this Warrant and applicable securities laws, this Warrant may be exercised, in whole or in part at any time on or before the Expiration Date, by surrendering this Warrant at the principal office of the Company together with: (a) the form of Notice of Exercise attached hereto as Exhibit 1 (the "Notice of Exercise") duly executed by the Holder, and (b) payment, (i) in cash (by check) or by wire transfer, (ii) by cancellation by the Holder of indebtedness of the Company to the Holder or (iii) by a combination of (i) and (ii), of an amount equal to the product obtained by multiplying the number of shares of Warrant Stock being purchased upon such exercise by the then effective Exercise Price (the "Exercise Amount"). 2.2 Partial Exercise; Effective Date of Exercise. In case of any partial exercise of this Warrant, the Company shall cancel this Warrant upon surrender hereof and shall execute and deliver a new Warrant of like tenor and date for the balance of the shares of Warrant Stock purchasable hereunder. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above. The person entitled to receive the shares of Warrant Stock issuable upon exercise of this Warrant shall be treated for all purposes as the holder of record of such shares as of the close of business on the date the Holder is deemed to have exercised this Warrant. 2.3 Stock Certificates; Fractional Shares. As soon as practicable on or after such date, the Company shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of whole shares of Warrant Stock issuable upon such exercise, together with cash in lieu of any fraction of a share equal to such fraction of the Fair Market Value of one whole share of Warrant Stock as of the date of exercise of this Warrant. No fractional shares of scrip representing fractional shares will be issued upon an exercise of this Warrant. -2- 3 2.4 Vested Shares Intel shall only have the right to exercise this Warrant with respect to Warrant Shares which have become Vested Shares. The period of exercise shall extend for a period of three years from the Vesting Date. 2.5 Vesting A Warrant Share shall become a Vested Share as of the date that Holder gives written notice to Company that, as provided in that certain Production and Development Agreement dated as of February 3, 1997 it has: (a) Converted to warrant obligations and canceled the unpaid portion of the Equipment Loan provided in said Production and Development Agreement, whereupon a number of Warrant Shares equal to the amount so canceled divided by 25% of the Fair Market Value (determined as of the Determination Date) of each Warrant Share shall be deemed to be Vested Shares. (b) Expended marketing funds as set out in Section 3.3.1 of the Production and Development Agreement and Intel's giving notice of such expenditures to GZ, a number of Warrants equal to the amount expended divided 25% of the Fair Market Value (determined as of the Determination Date) of each Warrant Share shall be deemed to be Vested Shares. 2.6 Exercise Period Intel may exercise its rights with respect to Vested Shares at any time after the Vesting Date and before 5:00 p.m., Pacific Time, on the third anniversary of the Vesting Date. 2.7 Net Issue Exercise In lieu of the payment methods set forth in Section 2.1(b) above, the Holder may elect to exchange the Warrant for shares of Warrant Stock equal to the value of the amount of the Warrant being exchanged on the date of exchange. If Holder elects to exchange this Warrant as provided in this Section 2.7, Holder shall tender to the Company the Warrant for the amount being exchanged, along with written notice of Holder's election to exchange up to the full amount of the Warrant, and the Company shall issue to Holder the number of shares of the Company's Warrant Stock computed using the following formula: X = Y (A-B) ------- A Where X = the number of shares of Warrant Stock to be issued to Holder. Y = the number of shares of Warrant Stock purchasable under the amount of the Warrant being exchanged (as adjusted to the date of such calculation). A = the Fair Market Value of one share of the Company's Common Stock. B = Exercise Price (as adjusted to the date of such calculation). -3- 4 All references herein to an "exercise" of the Warrant shall include an exchange pursuant to this Section 2.7. 3. VALID ISSUANCE; TAXES. All shares of Warrant Stock issued upon the exercise of this Warrant shall be validly issued, fully paid and non-assessable, and the Company shall pay all taxes and other governmental charges that may be imposed in respect of the issue or delivery thereof. The Company shall not be required to pay any tax or other charge imposed in connection with any transfer involved in the issuance of any certificate for shares of Warrant Stock in any name other than that of the Registered Holder of this Warrant, and in such case the Company shall not be required to issue or deliver any stock certificate or security until such tax or other charge has been paid, or it has been established to the Company's reasonable satisfaction that no tax or other charge is due. 4. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The number of shares of Warrant Stock issuable upon exercise of this Warrant (or any shares of stock or other securities or property receivable or issuable upon exercise of this Warrant) and the Exercise Price are subject to adjustment upon occurrence of the following events: 4.1 Adjustment for Stock Splits, Stock Subdivisions or Combinations of Shares. The Exercise Price of this Warrant shall be proportionally decreased and the number of shares of Warrant Stock issuable upon exercise of this Warrant (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) shall be proportionally increased to reflect any stock split or subdivision of the Company's Common Stock. The Exercise Price of this Warrant shall be proportionally increased and the number of shares of Warrant Stock issuable upon exercise of this Warrant (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) shall be proportionally decreased to reflect any combination of the Company's Common Stock. 4.2 Adjustment for Dividends or Distributions of Stock or Other Securities or Property. In case the Company shall make or issue, or shall fix a record date for the determination of eligible holders entitled to receive, a dividend or other distribution with respect to the Warrant Stock (or any shares of stock or other securities at the time issuable upon exercise of the Warrant) payable in (i) securities of the Company or (ii) assets (excluding cash dividends paid or payable solely out of retained earnings), then, in each such case, the Holder of this Warrant on exercise hereof at any time after the consummation, effective date or record date of such dividend or other distribution, shall receive, in addition to the shares of Warrant Stock (or such other stock or securities) issuable on such exercise prior to such date, and without the payment of additional consideration therefore, the securities or such other assets of the Company to which such Holder would have been entitled upon such date if such Holder had exercised this Warrant on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock available by it as aforesaid during such period giving effect to all adjustments called for by this Section 4. 4.3 Reclassification. If the Company, by reclassification of securities or otherwise, shall change any of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities that were subject to the purchase rights under this Warrant immediately prior to such -4- 5 reclassification or other change and the Exercise Price therefore shall be appropriately adjusted, all subject to further adjustment as provided in this Section 4. 4.4. Adjustment for Capital Reorganization, Merger or Consolidation. In case of any capital reorganization of the capital stock of the Company (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), or any merger or consolidation of the Company with or into another corporation, or the sale of all or substantially all the assets of the Company then, and in each such case, as a part of such reorganization, merger, consolidation, sale or transfer, lawful provision shall be made so that the Holder of this Warrant shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified herein and upon payment of the Exercise Price then in effect, the number of shares of stock or other securities or property of the successor corporation resulting from such reorganization, merger, consolidation, sale or transfer that a holder of the shares deliverable upon exercise of this Warrant would have been entitled to receive in such reorganization, consolidation, merger, sale or transfer if this Warrant had been exercised immediately before such reorganization, merger, consolidation, sale or transfer, all subject to further adjustment as provided in this Section 4. The foregoing provisions of this Section 4.4 shall similarly apply to successive reorganizations, consolidations, mergers, sales and transfers and to the stock or securities of any other corporation that are at the time receivable upon the exercise of this Warrant. If the per-share consideration payable to the Holder hereof for shares in connection with any such transaction is in a form other than cash or marketable securities, then the value of such consideration shall be determined in good faith by the Company's Board of Directors. In all events, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Holder after the transaction, to the end that the provisions of this Warrant shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable after that event upon exercise of this Warrant. 4.5. Reservation of Securities and Assets. The Company shall reserve, for the life of the Warrant, such securities or such other assets of the Company the Holder is entitled to receive pursuant to this Section 4. 5. CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment in the Exercise Price, or number or type of shares issuable upon exercise of this Warrant, the Chief Financial Officer of the Company shall compute such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment and showing in detail the facts upon which such adjustment is based, including a statement of the adjusted Exercise Price. The Company shall promptly send (by facsimile and by either first class mail, postage prepaid or overnight delivery) a copy of each such certificate to the Holder. 6. LOSS OR MUTILATION. Upon receipt of evidence reasonably satisfactory to the Company of the ownership of and the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to it, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver in lieu thereof a new Warrant of like tenor as the lost, stolen, destroyed or mutilated Warrant. -5- 6 7. RESERVATION OF COMMON STOCK The Company hereby covenants that at all times there shall be reserved for issuance and delivery upon exercise of this Warrant such number of shares of Common Stock or other shares of capital stock of the Company as are from time to time issuable upon exercise of this Warrant and, from time to time, will take all steps necessary to amend its Certificate of Incorporation to provide sufficient reserves of shares of Common Stock issuable upon exercise of this Warrant. All such shares shall be duly authorized, and when issued upon such exercise, shall be validly issued, fully paid and non-assessable, free and clear of all liens, security interests, charges and other encumbrances or restrictions on sale and free and clear of all preemptive rights, except encumbrances or restrictions arising under federal or state securities laws. Issuance of this Warrant shall constitute full authority to the Company's officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the exercise of this Warrant. 8. TRANSFER AND EXCHANGE. Subject to the terms and conditions of this Warrant and compliance with all applicable securities laws, this Warrant and all rights hereunder may be transferred, in whole or in part, on the books of the Company maintained for such purpose at the principal office of the Company referred to above, by the Registered Holder hereof in person, or by duly authorized attorney, upon surrender of this Warrant properly endorsed and upon payment of any necessary transfer tax or other governmental charge imposed upon such transfer. Upon any permitted partial transfer, the Company will issue and deliver to the Registered Holder a new Warrant or Warrants with respect to the shares of Warrant Stock not so transferred. Each taker and holder of this Warrant, by taking or holding the same, consents and agrees that when this Warrant shall have been so endorsed, the person in possession of this Warrant may be treated by the Company, and all other persons dealing with this Warrant, as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented hereby, any notice to the contrary notwithstanding; provided, however, that until a transfer of this Warrant duly registered on the books of the Company, the Company may treat the Registered Holder hereof as the owner for all purposes. 9. RESTRICTIONS ON TRANSFER. The Holder, by acceptance hereof, agrees that, absent an effective registration statement filed with the U.S. Securities and Exchange Commission ("SEC") under the Act covering the disposition or sale of this Warrant or the Warrant Stock issued or issuable upon exercise hereof, as the case may be, and registration or qualification under applicable state securities laws, such Holder will not sell, transfer pledge, or hypothecate any or all such Warrants or Warrant Stock, as the case may be, unless either (i) the Company has received an opinion of counsel to the effect that such registration is not required in connection with such disposition or (ii) the sale of such securities is made pursuant to SEC Rule 144. 10. COMPLIANCE WITH SECURITIES LAWS. By acceptance of this Warrant, the holder hereby represents, warrants and covenants that any shares of stock purchased upon exercise of this Warrant shall be acquired for investment only and not with a view to, or for sale in connection with, any distribution thereof; that the Holder has had such opportunity as such Holder has deemed adequate to obtain from representatives of the Company such information as is necessary to permit the holder to evaluate the merits and risks of its investment in the Company; that the Holder is able to bear the economic risk of holding such shares as may be acquired pursuant to the exercise of this Warrant for an indefinite period; that the Holder understands that the shares of stock acquired pursuant to the exercise of this Warrant will not be registered under the Act (unless otherwise required -6- 7 pursuant to exercise by the holder of the registration rights, if any, previously granted to the registered Holder) and will be "restricted securities" within the meaning of Rule 144 under the Act and that the exemption from registration under Rule 144 currently is not available for at least two years from the date of exercise of this Warrant, subject to any special treatment by the Securities and Exchange Commission for exercise of this Warrant pursuant to Section 2.2, and even then will not be available unless a public market then exists for the stock, adequate information concerning the Company is then available to the public, and other terms and conditions of Rule 144 are complied with; and that all stock certificates representing shares of stock issued to the Holder upon exercise of this Warrant may have affixed thereto a legend substantially in the following form: THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE BEEN AND WILL BE ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("THE ACT"), AND MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED WITHOUT REGISTRATION UNDER THE ACT OR UNLESS EITHER (i) THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL TO THE EFFECT THAT REGISTRATION IS NOT REQUIRED IN CONNECTION WITH SUCH DISPOSITION OR (ii) THE SALE OF SUCH SECURITIES IS MADE PURSUANT TO SECURITIES AND EXCHANGE COMMISSION RULE 144. 11. NO RIGHTS OR LIABILITIES AS STOCKHOLDERS. This Warrant shall not entitle the Holder to any voting rights or other rights as a stockholder of the Company. In the absence of affirmative action by such Holder to purchase Warrant Stock by exercise of this Warrant, no provisions of this Warrant, and no enumeration herein of the rights or privileges of the Holder hereof shall cause such Holder hereof to be a stockholder of the Company for any purpose. 12. REGISTRATION RIGHTS. 12.1. Definitions. As used in this Section 12: (a) The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Act and the declaration or ordering of the effectiveness of such registration statement; (b) The term "Registrable Securities" means: (i) any Common Stock issued or to be issued pursuant to exercise of the Warrant, and (ii) any Common Stock or other securities issued as a dividend or other distribution with respect to, or in exchange for, or in replacement of, the Common Stock described in subsections (i) and (ii) of this Section 12.1(b); provided, however, that any such securities shall cease to be Registrable Securities with respect to a proposed offer or sale thereof when such securities shall have been disposed of under SEC Rule 144 or in accordance with the plan of distribution set forth in an effective registration statement under the Act; and (c) The term "Holder" means any holder of outstanding Registrable Securities or any person to which the registration rights provided for in this Section 12 shall have been properly assigned in accordance with Section 12.10 hereof. 12.2. Company Registration. (a) Notice of Registration. If, at any time or from time to time from and after the first anniversary of the Effective Date, the Company shall determine to register any of its securities, -7- 8 either for its own account or for the account of a security holder or holders (other than a registration relating solely to employee stock option or purchase plans or relating solely to an SEC Rule 145 transaction), the Company will: (1) promptly and in any event within twenty (20) days prior to the anticipated filing date of such registration statement, give to each Holder written notice thereof which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable blue sky or other state securities laws; and (2) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in any written request or requests, made within ten (10) days after receipt of such written notice from the Company, by any Holder or Holders, except as set forth in Section 12.2(b) below. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 12.2(a)(1). In such event, the right of any Holder to registration pursuant to this Section 12.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Section 12.2, if the underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the Company shall include in such registration (i) first, all of the securities to be included in such registration for the Company's own account, and (ii) second, up to the full number of Registrable Securities and other securities of the Company sought to be included in such registration by Holders and other security holders to whom the Company has granted registration rights ("Other Holders"); and, if less than the full number of such securities is to be included, the number to be included shall be allocated pro rata on the basis of the total number of Registrable Securities and other securities sought to be included in such registration by the Holders and Other Holders. The Company shall advise all Holders of Registrable Securities which would otherwise be registered and underwritten pursuant hereto of any such limitations, and the number of shares of Registrable Securities that may be included in the registration. If any Holder disapproves of the terms of any such underwriting, such Holder may elect to withdraw therefrom by written notice to the Company and the underwriter. The Registrable Securities so withdrawn shall also be withdrawn from registration. 12.3. Expenses of Registration. All expenses incurred in connection with any registration, qualification or compliance pursuant to Section 12.2, including without limitation, all registration, filing and qualification fees, printing expenses, fees and disbursements of counsel for the Company, expenses of any special audits incidental to or required by such registration and the fees and disbursements of one counsel retained by the Holders of Registrable Securities covered by such registration, qualification or compliance shall be borne by Company, except that the Company shall not be required to pay any underwriters' discounts, commissions or stock transfer taxes relating to Registrable Securities. 12.4. Registration Procedures. In the case of each registration, qualification or compliance effected by the Company pursuant to this Section 12, the Company will keep each Holder participating therein advised in writing as to the initiation of such registration, qualification and compliance and as to the completion thereof. At its expense (except as otherwise provided in Section 12.3 above), the Company will: -8- 9 (a) keep any such registration, qualification or compliance pursuant to Section 12.2 above effective for a period of ninety (90) days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; (b) furnish such number of prospectuses and other documents incident thereto as a Holder from time to time may reasonably request; (c) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statements as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement; (d) notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto covered by such registration statement is required to be delivered under the Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; and (e) furnish, at the request of any Holder, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Section 12, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statements with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders. 12.5. Indemnification. (a) Indemnification by the Company. The Company will indemnify each Holder of Registrable Securities with respect to which registration, qualification or compliance has been effected pursuant to this Section 12, each of its officers and directors, and each person controlling such Holder and each underwriter, if any, of such Registrable Securities and each person who controls any such underwriter, against all claims, losses, damages, costs, expenses and liabilities of any nature whatsoever (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other documents (including any related registration, statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Act or any state securities law or of any rule or regulation promulgated under the Act or any state securities law applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each such Holder, each of its officers and directors, and each person controlling such Holder, and each such underwriter and each person who controls any such underwriter, for any legal and other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, cost, expense, liability or action, except that the Company will not be liable in any such case to the extent that any such claim, loss, damage, cost, expense, liability or action arises out of or is based on any untrue -9- 10 statement or omission based upon written information furnished to the Company in an instrument duly executed by any Holder or underwriter and stated to be specifically for use therein, and except that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement (or alleged untrue statement) or omission (or alleged omission) made in the preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the registration statement becomes effective or in the amended prospectus filed with the SEC pursuant to Rule 424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit or any underwriter or any Holder, if there is no underwriter, if a copy of the Final Prospectus was furnished to the person or entity asserting the claim, loss, damage, cost, expense, liability or action at or prior to the time such action is required by the Act. (b) Indemnification by the Holders. Each Holder will, if Registrable Securities held by or issuable to such Holder are included in the securities to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company within the meaning of the Act, and each other Holder, each of such other Holder's officers and directors and each person controlling such other Holder, against all claims, losses, damages, costs, expenses and liabilities of any nature whatsoever (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other documents (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such other Holders, such directors, officers, persons or underwriters for any legal or other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, cost, expense, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company in an instrument duly executed by such Holder and stated to be specifically for use therein, except that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement (or alleged untrue statement) or omission (or alleged omission) made in the preliminary prospectus but eliminated or remedied in the Final Prospectus, such indemnity agreement shall not inure to the benefit of the Company or any underwriter or any Holder, if there is no underwriter, if a copy of the Final Prospectus was furnished to the person or entity asserting the claim, loss, damage, cost, expense, liability or action at or prior to the time such action is required by the Act. In no event shall the indemnity under this Section 12.5(b) exceed the gross proceeds from the offering received by such Holder. (c) Procedures for Indemnification. Each party entitled to indemnification under this Section 12.5 (the "Indemnified Party"), shall give notice to the party required to provide indemnification (the "Indemnified Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense. Failure of the Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 12.5, unless the failure or delay in giving notice has a material adverse impact on the ability of the Indemnifying Party to defend against such claim. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof, the giving of a release from all liability in respect to such claim or litigation. If -10- 11 any such Indemnified Party shall have been advised by counsel chosen by it that there may be one or more legal defenses available to such Indemnified Party that are different from or additional to those available to the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense of such action on behalf of such Indemnified Party and will reimburse such Indemnified Party and any person controlling such Indemnified Party for the reasonable fees and expenses of any counsel retained by the Indemnified Party, it being understood that the Indemnifying Party shall not, in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys for such Indemnified Party or controlling person, which firm shall be designated in writing by the Indemnified Party to the Indemnifying Party. 12.6 Information by Holder. The Holder or Holders of Registrable Securities included in any registration shall furnish to the Company such information regarding such Holder or Holders and the distribution proposed by such Holder or Holders as the Company may reasonably request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section 12. 12.7 Rule 144 Reporting. From and after such time that the Company becomes a reporting company under the Exchange Act, with a view to making available the benefits of certain rules and regulations of the SEC which may permit the sale of Warrant Stock or Registrable Securities to the public without registration, the Company agrees to: (a) at all times make and keep public information available, as those terms are understood and defined in SEC Rule 144; (b) take such action as soon as practicable, including the voluntary registration of its Common Stock under Section 12 of the Exchange Act, as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities; (c) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the Exchange Act; and (d) furnish to the Holder, so long as the Holder owns any Warrant Stock or Registrable Securities, forthwith upon written request a written statement by the Company that it has complied with the reporting requirements of Rule 144, the Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as may be reasonably requested in availing the Purchaser of any rule or regulation of the SEC permitting the selling of any such securities without registration. 12.8 Transfer of Registration Rights. The registration rights granted by the Company under this Section 12 may be assigned by any Holder to any permitted transferee or permitted assignee of the Warrant, Warrant Stock or Registrable Securities, provided that such transfer may otherwise be and is effected in accordance with applicable federal and state securities laws and provided further that the Company is given written notice of such transfer at the time of or within a reasonable time after such transfer, stating the name and address of the transferee or assignee and identifying the securities with respect to which such registration rights are being assigned. 12.9 Limitations on Subsequent Registration Rights. Any right given by the Company to any holder or prospective holder of Company's securities in connection with the registration of securities shall be conditioned such that it shall be consistent with the provisions of this Section 12 and with the rights -11- 12 of the Holders provided in this Agreement. This Section 12 shall not limit the right of the Company to enter into any agreements with any holder or prospective holder of any securities of the Company giving such holder or prospective holder the right to require the Company, upon any registration of any of its securities, to include, among the securities which the Company is then registering, securities owned by such holder, but only if such rights provide that, if the underwriter in any such registration requires a reduction in the number of securities to be included in such registration, then the amount of securities included in any such registration at the request and on behalf of such holder shall be reduced pro rata with any reduction in the securities requested by the Holder to be included in such registration. 12.10 Limitation on Registration. The Company shall not be obligated to effect any registration pursuant to Section 12.2 hereof if the Registrable Securities intended to be included in such registration on behalf of the Holders could be sold by the Holders to the public in an offering without registration within a period of three consecutive months. 13. NOTICES. Except as otherwise provided, all notices and other communications required or permitted hereunder shall be in writing and shall be mailed by first class mail, postage prepaid, addressed (a) if to Intel, to 2200 Mission College Boulevard, Mail Stop SC4-210, Santa Clara, California 95052-8119, Attn: Treasurer, and (b) if to the Company, to 42 Corporate Park, Suite 200, Irvine, California 92606, Attn: President or (c) to such other address as the receiving party shall have furnished to the other in writing. 14. HEADINGS. The headings in this Warrant are for purposes of convenience in reference only, and shall not be deemed to constitute a part hereof. 15. LAW GOVERNING. This Warrant shall be construed and enforced in accordance with, and governed by, the laws of the State of Delaware. 16. NO IMPAIRMENT. The Company will not, by amendment of its Certificate of Incorporation or bylaws, or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Registered Holder of this Warrant against impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of stock issuable upon the exercise of this Warrant above the amount payable therefor upon such exercise, and (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of Warrant Stock upon exercise of this Warrant. 17. NOTICES OF RECORD DATE. In case: 17.1 the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time receivable upon the exercise of this Warrant) for the purpose of entitling them to receive any dividend or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any other securities or to receive any other right; or -12- 13 17.2 of any consolidation or merger of the Company with or into another corporation, any capital reorganization of the Company, any reclassification of the Capital Stock of the Company, or any conveyance of all or substantially all of the assets of the Company to another corporation in which holders of the Company's stock are to receive stock, securities or property of another corporation; or 17.3 of any voluntary dissolution, liquidation or winding-up of the Company; or 17.4 of any redemption or conversion of all outstanding Common Stock; then, and in each such case, the Company will mail or cause to be mailed to the Registered Holder of this Warrant a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, or (ii) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation, winding-up, redemption or conversion is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such stock or securities as at the time are receivable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be delivered at least thirty (30) days prior to the date therein specified. 18. SEVERABILITY. If any term, provision, covenant or restriction of this Warrant is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 19. COUNTERPARTS. For the convenience of the parties, any number of counterparts of this Warrant may be executed by the parties hereto and each such executed counterpart shall be, and shall be deemed to be, an original instrument. 20. NO INCONSISTENT AGREEMENTS. The Company will not on or after the date of this Warrant enter into any agreement with respect to its securities which is inconsistent with the rights granted to the Holders of this Warrant or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to holders of the Company's securities under any other agreements, except rights that have been waived. -13- 14 21. SATURDAYS, SUNDAYS AND HOLIDAYS. If the Expiration Date falls on a Saturday, Sunday or legal holiday, the Expiration Date shall automatically be extended until 5:00 p.m. the next business day. AGREED: INTEL CORPORATION GRAPHIX ZONE, INC. /s/ RON WHITTIER /s/ N. H. BLOCK - ------------------------- -------------------- Signature Signature Ron Whittier N. H. Block - ------------------------- -------------------- Printed Name Printed Name Senior Vice President President - ------------------------- -------------------- Title Title February 3, 1997 February 5, 1997 - ------------------------- -------------------- Date Date LEGAL OK /s/ DM 2/3/97 -14- EX-11 19 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 GRAPHIX ZONE, INC. AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (Amounts in thousands, except per share amounts)
Years ended June 30, --------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Weighted average number of shares outstanding 11,043,679 4,661,401 1,406,688 ------------ ------------ ------------ Earnings: Net loss $(16,831,025) $(23,518,660) $(10,916,397) Dividends and discounts recorded in connection with preferred stock issuances (916,003) - - ------------ ------------ ------------ $(17,747,028) $(23,518,660) $(10,916,397) Net loss per common share $ (1.61) $ (5.05) $ (7.76)
EX-21 20 SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT A. GZ Multimedia, Inc. (formerly Graphix Zone, Inc.), a California corporation B. StarPress, Inc., a Colorado corporation C. Subsidiaries of StarPress, Inc.: 1. Great Bear Technology, Inc., a California corporation 2. Healthsoft, Inc., a California corporation 3. Great Bear - Arizona, Inc., an Arizona corporation 4. StarPress Multimedia, Inc., a Delaware corporation 5. iTravel International Ltd., a Washington corporation EX-23.1 21 CONSENT OF ERNST & YOUNG LLP 1 Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 of Graphix Zone, Inc. (No. 333-09149) of our report dated August 18, 1995, with respect to the consolidated statements of operations, stockholders' equity and cash flows of StarPress, Inc. (formerly known as Great Bear Technology Incorporated) for the year ended June 30, 1995 included in the Annual Report of Graphix Zone, Inc. (Form 10-K) for 1997 filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Walnut Creek, California October 14, 1997 EX-23.2 22 CONSENT OF KPMG PEAS MARWICK LLP 1 Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT To the Board of Directors of Graphix Zone, Inc. We consent to the incorporation by reference in the Registration Statement (No. 333-09149) on Form S-8 of Graphix Zone, Inc. (the "Company") of our report dated October 8, 1997, relating to the consolidated balance sheets of Graphix Zone, Inc. and subsidiaries as of June 30, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity (deficiency) and cash flows for the years then ended, and related schedule, which report appears in the June 30, 1997 Annual Report on Form 10-K of Graphix Zone, Inc. Our report dated October 8, 1997 contains an explanatory paragraph that states that the Company has suffered recurring losses from operations, has a net capital deficiency and does not have the necessary funds to pay its secured and unsecured debt obligations. In addition, the Company has received two Notices of Default from its senior secured lender and has taken steps to cease its principal business operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated Financial Statements and Financial Statement Schedule do not include any adjustment that might result from the outcome of this uncertainty. /s/ KPMG Peat Marwick LLP October 14, 1997 Orange County, California EX-27 23 FINANCIAL DATA SCHEDULE
5 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 726,443 0 1,784,977 (1,397,270) 34,001 1,475,114 375,000 (125,000) 1,751,684 10,608,611 0 2,881,185 1,585,948 127,455 (13,502,662) 1,751,684 7,708,900 7,708,900 5,995,565 5,995,565 17,926,042 0 592,966 (16,831,025) 0 (16,831,025) 0 0 0 (16,831,025) (1.61) (1.61)
-----END PRIVACY-ENHANCED MESSAGE-----