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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. As of November 17,
1997, 16,179,003 shares of the issuer's only class of common stock, $.01 par
value per share, were outstanding.
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GRAPHIX ZONE, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
September 30, 1997 and June 30, 1997...................................... 3
Consolidated Statements of Operations -
Three months ended September 30, 1997 and 1996............................ 4
Consolidated Statements of Cash Flows -
Three months ended September 30, 1997 and 1996............................ 5
Notes to Interim Unaudited Consolidated Financial Statements ............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ........................................................ 12
PART II OTHER INFORMATION
Item 3. Defaults Upon Senior Securities........................................... 13
Item 5. Other Information......................................................... 13
Item 6. Exhibits and Reports on Form 8-K.......................................... 14
SIGNATURES............................................................................ 15
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
GRAPHIX ZONE, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND JUNE 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
------------- ------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 440,865 $ 726,443
Accounts receivable, net 224,180 387,707
Inventories -- 34,001
Other current assets 355,860 326,963
------------ ------------
Total current assets 1,020,904 1,475,114
Property and equipment, net 217,470 250,000
Intangibles, net -- --
Other assets, net 23,081 26,570
------------ ------------
TOTAL ASSETS $ 1,261,455 $ 1,751,684
============ ============
Liabilities and Stockholders' Equity (Deficiency)
Notes payable $ 4,787,875 $ 4,561,895
Accounts payable 2,709,817 2,852,819
Accrued royalties 1,409,730 1,609,730
Accrued liabilities 1,509,500 1,509,167
Accrued restructuring charge -- 75,000
Deferred revenue -- --
------------ ------------
Total current liabilities 10,416,923 10,608,611
Other liabilities 51,147 51,147
------------ ------------
Total liabilities 10,468,070 10,659,758
Mandatory Redeemable Series C Convertible Preferred Stock,
1,300,000 shares authorized, 1,185,185 issued and
outstanding at September 30, 1997 and June 30, 1997,
(Liquidation preference $4,000,000) 2,986,074 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, 1,806 and 2,225 issued
and outstanding at September 30,
1997 and June 30, 1997, respectively 1,136,948 1,585,948
Common stock, $.01 par value, 100,000,000 shares
authorized, 15,929,004 and 12,745,503 issued and
outstanding at September 30, 1997
and June 30, 1997, respectively 159,290 127,455
Additional paid-in capital 41,781,040 41,469,405
Accumulated deficit (55,269,967) (54,972,067)
------------ ------------
Net stockholders' equity (deficiency) (12,192,689) (11,789,259)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,261,455 $ 1,751,684
============ ============
</TABLE>
See accompanying notes to financial statements
3
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GRAPHIX ZONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Net revenues $ 675,466 $ 3,455,135
Cost of revenues 54,001 871,820
------------ ------------
Gross margin 621,465 2,583,315
------------ ------------
Operating expenses:
Research and development 76,617 843,903
Sales and marketing 11,167 919,452
General and administrative 256,408 747,052
Restructuring charge -- (263,831)
------------ ------------
Total operating expenses 344,192 2,246,576
Operating income (loss) 277,273 336,739
Interest expense, net (187,707) (33,901)
Other income (expenses), net (387,466) --
------------ ------------
Net income (loss) $ (297,900) $ 302,838
============ ============
Income (loss) per share of common stock $ (0.02) $ 0.03
============ ============
Weighted average common shares 14,560,676 10,617,968
============ ============
</TABLE>
See accompanying notes to financial statements
4
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GRAPHIX ZONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(297,900) $ 302,838
Additions for non-cash interest 50,984 --
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 26,997 228,937
Provision for sales returns and doubtful accounts -- (229,678)
Amortization of discount on convertible debentures -- --
Amortization of discount on mandatory redeemable preferred 104,889 --
Stock option and warrant compensation expense -- --
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable 163,527 (717,810)
Decrease (increase) in inventories 34,001 (56,349)
Increase in other current assets (28,897) (106,147)
Increase (decrease) in other assets 3,489 40,697
Decrease in accounts payable (143,002) (228,326)
Increase (decrease) in accrued royalties (200,000) 409,702
Decrease in accrued liabilities 333 (297,256)
Decrease in accrued restructuring charge -- (451,143)
Decrease in deferred revenue -- (114,225)
Decrease in other liabilities -- (117,241)
--------- -----------
Net cash used in operating activities (285,578) (1,336,001)
Cash flows from investing activities:
Purchase of property and equipment -- (126,020)
--------- -----------
Net cash used in investing activities -- (126,020)
Cash flows from financing activities:
Payments for redemption of stock -- (75,062)
Payments on notes payable -- --
Proceeds from notes payable -- --
Proceeds from exercise of stock options and warrants -- 10,297
Proceeds from preferred stock issuances, net -- 939,950
--------- -----------
Net cash provided by financing activities -- 875,185
Net Decrease in cash (285,578) (586,836)
Cash and cash equivalents at beginning of period 726,443 1,288,196
--------- -----------
Cash and cash equivalents at end of period $ 440,865 $ 701,360
========= ===========
Supplemental disclosure of cash flow information
Cash paid during period for interest $ -- $ 73,028
</TABLE>
See accompanying notes to financial statements
5
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GRAPHIX ZONE, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(1) GENERAL INFORMATION AND CURRENT STATUS OF COMPANY
ORGANIZATION
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"). 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.
RECENT DEVELOPMENTS AND 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
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 $.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
6
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NOTES TO INTERIM UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
approximately $0.75 per share; and Additional Capital -- Evaluate alternatives
for raising additional funds for the Company.
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. As of November 18, 1997, the Company has no
operating business. Management continues to attempt to restructure its debt
obligations and equity structure, raise additional capital and position the
Company to take advantage of potential business opportunities.
On each of July 14, 1997 and August 29, 1997, the Company received from
its senior secured lender, Madeleine, LLC, a New York limited liability company
("Madeleine"), a Notice of Default and Demand for Payment based on the Company's
failure to make certain interest payments when due. As of November 18, 1997, the
Company has not paid the past-due amounts owing under the senior secured loan
and Madeleine has not foreclosed on the senior secured loan. As of November
18, 1997, the outstanding principal balance under the senior secured loan is
$5,382,158 and accrued and unpaid interest is $50,458.
The Company has attempted to negotiate a settlement with its unsecured
creditors pursuant to which the Company would pay to such creditors $0.30 for
each $1.00 of debt outstanding provided that it raised the capital needed to pay
such amounts. Preliminary discussions with the creditors seemed to indicate that
most of the creditors would agree to such terms. However, as of November 18,
1997, the Company has not been successful in entering into settlement agreements
with the majority of its unsecured creditors. In addition, the Company has
attempted to negotiate the conversion of its outstanding shares of Series B and
Series C Convertible Preferred Stock into shares of Common Stock. As of November
18, 1997, certain of the holders of Series B Convertible Preferred Stock and all
of the holders of Series C Convertible Preferred Stock have not agreed to
convert their shares.
The Company is depleting its cash reserves and is in critical need of an
immediate capital infusion. The capital is required for three primary purposes:
(i) to pay past-due amounts currently outstanding under the Company's senior
secured loan with Madeleine, (ii) to fund the proposed settlements being
negotiated with unsecured creditors and to repay the principal amount of its
senior secured loan which becomes due on January 30, 1998 and (iii) to pursue
future business opportunities that have been presented to the Company. The
Company requires a minimum of $3.0 million in new capital to complete its
Restructuring Plan. The Company has contacted numerous current stockholders,
investment banks, investment funds and other organizations that specialize in
investing in turn-around situations in an effort to raise capital. As of
November 18, 1997, the Company has not been able to obtain the minimum $3.0
million of funds required to complete the Company's restructuring.
7
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NOTES TO INTERIM UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS - (CONTINUED)
(2) BASIS OF PRESENTATION
The interim unaudited consolidated financial statements included herein
have been prepared by the Company in conformity with generally accepted
accounting principles for interim financial information and pursuant to the
rules and regulations of the U.S. Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the interim unaudited consolidated financial statements reflect all
adjustments, consisting only of normal recurring adjustments, which are, in the
opinion of management, necessary for a fair statement of the results for the
interim periods presented. Results for the three month period ended September
30, 1997 are not necessarily indicative of the results of operations for the
entire fiscal year ending June 30, 1998. The interim financial statements should
be read in conjunction with the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1997.
(3) GOING CONCERN
The Company has incurred significant losses since its inception, and, as
of September 30, 1997, the Company's net working capital deficiency was
($9,396,019). By June 24, 1997, the Company had taken steps to cease its
principal business operations. As of November 18, 1997, the Company has ceased
all 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 and Demand for Payment from its senior secured
lender. In connection with its Restructuring Plan, 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,
the Company has not been successful in negotiating agreements with such parties
or raising operating funds. There can be no assurances that the Company will be
able to successfully complete its Restructuring Plan and continue as a going
concern. If the Company is unsuccessful in completing its Restructuring Plan,
the Company will be left with a diminishing list of alternatives including
reviewing its options under the U.S. Bankruptcy Laws, exchanging all outstanding
equity and debt for new equity and dissolving the Company. Alternatively,
Madeleine may foreclose upon all of the assets of the Company and pursue the
dissolution of the Company.
8
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ITEM 2. 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 the fiscal year ended June 30, 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 November 18, 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 obligations, equity structure and business operations. As
of November 18, 1997, the Company has no operating business; accordingly, the
Company does not expect any material amount of revenues in subsequent quarters.
Management continues to attempt to restructure its debt obligations and equity
structure, raise additional capital and position the Company to take advantage
of potential business opportunities. The Company is depleting its cash reserves
in its effort to raise capital, implement a restructuring plan and comply with
the requirements of a reporting company under the Securities Exchange Act of
1934, as amended. It is in critical need of an immediate capital infusion to
fund the payment of the Company's secured and unsecured obligations and to
provide working capital to the Company to pursue potential business
opportunities that have been presented to the Company. As of November 18, 1997,
the Company has not been able to raise the capital necessary to effect the
Restructuring and pursue future business opportunities.
9
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RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
Consolidated Statements of Operations as a percentage of net revenues for the
three month periods ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Net revenues 100% 100%
Cost of revenues 8% 25%
--- ---
Gross margin 92% 75%
Research and development expenses 11% 24%
Sales and marketing expenses 2% 27%
General and administrative expenses 38% 22%
Restructuring charge -- (8)%
--- ---
Operating Income 41% 10%
Interest expense, net 28% 1%
Other expenses, net 57% --
--- ---
Net income (loss) (44)% 9%
=== ==
</TABLE>
NET REVENUES
Net revenues for the three months ended September 30, 1997 were $675,466
compared to $3,455,135 for the three months ended September 30, 1996, a decrease
of 80%. Net revenues decreased as a result of the implementation of the
Restructuring. Net revenues for the three months ended September 30, 1997 were
comprised of revenues from licensing activities and sales of entertainment
software products from the Company's library. Substantially all of net revenues
for the three months ended September 30, 1997 relate to non-recurring payments
under license agreements.
COST OF REVENUES
Cost of revenues for the three months ended September 30, 1997 were
$54,001 compared to $871,820 for the three months ended September 30, 1996, a
decrease of 94%. Cost of revenues decreased as a result of the implementation of
the Restructuring.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three months ended September
30, 1997 were $76,617 compared to $843,903 for the three months ended September
30, 1996, a decrease of 91%. The decrease is a result of the implementation of
the Restructuring. The Company does not anticipate the release of any future
products, consequently, the Company is not engaged in any ongoing research and
development.
10
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SALES AND MARKETING EXPENSES
Sales and marketing expenses for the three months ended September 30,
1997 were $11,167 compared to $919,452 for the three months ended September 30,
1996, a decrease of 99%. The decrease is a result of the implementation of the
Restructuring.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three months ended September
30, 1997 were $256,408 compared to $747,052 for the three months ended September
30, 1996, a decrease of 66%. The decrease in general and administrative expenses
is a result of the implementation of the Restructuring, including the
termination of all employees of the Company other than Mr. David Hirschhorn who
is the Chairman of the Board, President, Chief Executive Officer, Chief
Financial Officer and Treasurer of the Company.
RESTRUCTURING CHARGE
During the three months ended September 30, 1996, the Company reversed
$263,831 of restructuring charges expensed during a prior period. The Company
did not incur any similar amounts during the three months ended September 30,
1997.
INTEREST EXPENSES AND OTHER EXPENSES
Interest expenses for the three months ended September 30, 1997 were
$187,707 compared to $33,901 for the three months ended September 30, 1996, an
increase of 454%. The increase in interest expenses is primarily related to the
increase in the Company's notes payable balance as a result of borrowing
$3,740,000 in January 1997 and $1,300,000 in June 1997 from its senior secured
lender. Other expenses, which are made up of amortized loan expenses, for the
three months ended September 30, 1997 were $387,466 and the Company did not
incur any similar expenses during the three months ended September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity is cash. At September 30,
1997, the balance of cash and cash equivalents was $440,865, the net working
capital deficiency was ($9,396,019) and net stockholders' deficiency was
($12,192,689). 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). The decrease in the balance of cash
and cash equivalents from June 30, 1997 to September 30, 1997 was primarily due
to the Company's use of the cash to fund operations.
The Company does not have the necessary funds to pay its secured and
unsecured debt obligations and, as noted above, is in default under its senior
secured loan and various other credit agreements. See Notes to Interim
Unaudited Consolidated Financial Statements - Note (1) and Part II - Other
Information, Item 3 Defaults Upon Senior Securities.
As part of the Restructuring, the Company is attempting to negotiate
settlements with all trade creditors and debtors related to its prior business
activities pursuant to which the Company
11
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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 September 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 its senior secured lender a waiver of defaults under the senior
secured loan (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 to 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/FUTURE PROSPECTS
Included in this "Item 2. 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 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.
As of November 18, 1997, it is unlikely that the Company will be able to
effect the Restructuring in light of the fact that all efforts to raise capital
have failed to date and an insufficient percentage of the unsecured creditors
(both in terms of dollar amount and number of creditors) have executed
settlement agreements. If the Company cannot raise capital and effect the
Restructuring, the Company's options on a going-foward basis decrease
significantly. Among the remaining alternatives for the Company are to further
investigate its options under the U.S. Bankruptcy Laws, exchange all outstanding
equity and debt for new equity and explore dissolution scenarios. In addition,
at any time, the secured creditor may institute a foreclosure proceeding against
the Company. If the Company is able to raise additional capital, 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 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 the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1997 under the
heading "Item 1. Business -- Risk Factors."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
12
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PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On July 14, 1997, the Company received a Notice of Default and Demand
for Payment from Madeleine, LLC, a New York limited liability company
("Madeleine"), with respect to the amended loan agreement between the Company
and Madeleine (the "Amended Loan Agreement") based on 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 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 did not pay the 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 September 5, 1997. As of November 18, 1997, the Company has not paid
the past due amounts under the Amended Loan Agreement and Madeleine has not
declared all obligations under the Amended Loan Agreement immediate due and
payable. The Company has attempted to negotiate 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. However, as of November
18, 1997, Madeleine has not been willing to agree to the Company's proposals. As
of November 18, 1997, the outstanding principal balance under the Amended Loan
Agreement is $5,382,158 and accrued and unpaid interest is $50,458.
ITEM 5. OTHER INFORMATION
The information set forth under the captions "Notes to Interim Unaudited
Consolidated Financial Statements -- Note (1) General Information and Current
Status of Company -- Recent Developments and Current Status of Company" in Item
1 of Part I in this Report and "Forward-Looking Statements/Future Prospects" in
Item 2 of Part I in this Report is hereby incorporated by reference in its
entirety into this Item 5.
13
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The exhibits listed below are filed with the U.S.
Securities and Exchange Commission as part of this quarterly report on Form
10-Q.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3.1 Certificate of Incorporation of Graphix Zone, Inc., a Delaware
corporation (the "Company"), previously filed with the U.S. Securities
and Exchange Commission (the "Commission") as Exhibit 3.1 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.
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, previously filed with the
Commission as Exhibit 3.4 to the Company's Annual Report on Form 10-K
for the annual period ended June 30, 1997 (File No. 0-28676), and filed
with the Commission on October 14, 1997, which is incorporated herein by
reference.
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), 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), 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.
10.1 Letter Agreement dated June 26, 1997 between the Company and GT
Interactive Software Corp.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K. No reports on Form 8-K were filed during
the Company's first quarter ended September 30, 1997.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements 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.,
a Delaware corporation
Date: November 18, 1997 By /S/ DAVID J. HIRSCHHORN
------------------------------------
David J. Hirschhorn
Chairman of the Board,
President, Chief Executive
Officer, Chief Financial
Officer and Treasurer
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1 Certificate of Incorporation of Graphix Zone, Inc., a Delaware
corporation (the "Company"), previously filed with the U.S. Securities
and Exchange Commission (the "Commission") as Exhibit 3.1 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.
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, previously filed with the
Commission as Exhibit 3.4 to the Company's Annual Report on Form 10-K
for the annual period ended June 30, 1997 (File No. 0-28676), and filed
with the Commission on October 14, 1997, which is incorporated herein by
reference.
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), 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), 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.
10.1 Letter Agreement dated June 26, 1997 between the Company and GT
Interactive Software Corp.
27 Financial Data Schedule
</TABLE>
16
<PAGE> 1
EXHIBIT 10.1
GT Interactive Software
- --------------------------------------------------------------------------------
DEPARTMENT OF LEGAL AFFAIRS
June 26, 1997
Mr. David J. Hirschhorn
Chief Executive Officer
Graphix Zone, Inc. d/b/a Ignite
42 Corporate Park
Suite 200
Irvine CA 92714
Dear David:
Thank you for your continued interest in GT Interactive Software
Corp. ("GT").
Except as expressly stated otherwise below, this letter supersedes
the agreement dated March 13, 1996 as subsequently amended by offer
and acceptance letters of July 1, 1996 and by an undated letter
agreement concerning agreement Exhibit A (together, the "1996
Agreement") by which GT, its subsidiaries and affiliates shall
manufacture, package and distribute computer programs published,
vended or created either by Graphix Zone, Inc. d/b/a Ignite, a
Delaware corporation, or its affiliates, subsidiaries, parent
companies and licensors, including, without limitation, StarPress,
Inc. and its successors in interest (together, "Ignite").
1. Definitions:
a. "Software Package" means a Title on floppy disk or CD-ROM,
along with any applicable manuals and packaging. "Inventory Software
Package" means Software Packages currently in possession or control
of GT, its subsidiaries or affiliates, as delivered to them, or
manufactured at their direction, under the 1996 Agreement.
b. "Title" means a computer program for which Ignite shall
have the right to grant to GT its rights of manufacture, packaging
and distribution under the terms of this agreement.
2. Grant of Rights: GT is exclusively granted all rights in the
Territory to duplicate, manufacture and package and to contract for
the duplication, manufacture and packaging (together, "Manufacture")
and to distribute Software Packages of the Titles set forth in the
attached Exhibit A. In addition, GT is granted
1
- --------------------------------------------------------------------------------
16 East 40th Street New York NY 10016 Tel (212) 726-6500 Fax (212) 679-3064
web: http//www.gtinteractive.com
<PAGE> 2
the non-exclusive rights to sell off Inventory Software Packages of the Titles
set forth in the attached Exhibit B, without payment to Ignite of any further
sums with respect to them. GT shall have the right to compile Software Packages
containing the Titles set forth in Exhibit A with each other in any combination,
to sell those Titles in boxes or in jewel-case packaging, or otherwise to
package them for sale to the trade or consumers.
3. Exclusive Option: Ignite grants GT the exclusive option to purchase existing
inventory of finished Software Packages and components of unfinished Software
Packages of the Titles named in the following chart. Listed opposite each is the
number finished Software Packages which Ignite represents and warrants remain in
inventory accessible to it for sale to GT:
Title Quantity
Wheel of Fortune/jeopardy!
Side by Side Bundle 3283
Wheel of Fortune/Jeopardy!
Back to Back Bundle 3687
Wheel of Fortune 9379
Jeopardy! 16772
Jeopardy! Sports Pack 2874
Jeopardy! TV-Movies Pack 1535
Jeopardy! in Jewel Case Packaging 1718
Wheel of Fortune in Jewel Case Pack. 1550
For each finished Software Package so purchased by GT pursuant to its exclusive
option, it shall pay, at GT's option, Ignite or its agent or subcontractor the
sum of two dollars ($2.00). For each unfinished Software Package so purchased by
GT pursuant to its exclusive option, it shall directly pay the manufacturer or
duplicator in whose possession the materials remain a sum to be negotiated
between that party and GT. Ignite shall notify those third parties as to the
existence of GT's exclusive option and shall reasonably cooperate in
facilitating GT's exploitation of its rights under that option, without further
payment by GT to Ignite. With respect to the above-named Titles, Ignite
represents and warrants that none of the finished Software Packages shall be
sold and that none of the unfinished Software Packages shall be completed and
sold except to GT in the exercise of its option rights as set forth in this
agreement.
4. Term:
a. The term of this agreement shall commence as of the date first set
forth above and continue through September 1, 1997 (the "Term"), plus the
applicable sell-off period.
b. GT's rights under this agreement with respect to each Exhibit A
Title shall continue for the greater of the duration of the Term, followed by a
sell-off period of six (6) months. GT's
2
<PAGE> 3
rights under this agreement with respect to each Exhibit B Title shall continue
until sell-off is complete.
c. This agreement shall remain in effect unless earlier terminated by
either party as provided below.
d. In the event a party is given notice that it is in material breach
of this agreement, it shall have thirty (30) days from receipt to cure its
breach in all material respects. On the failure to cure, the non-breaching party
may terminate this agreement. However, either party may, at its option,
immediately terminate this agreement if (i) a receiver is appointed for the
other party or its property, (ii) the other party becomes insolvent or unable to
pay its debts as they mature, or makes an assignment for the benefit of its
creditors, (iii) the other party seeks relief or if proceedings are commenced
against the other party or on its behalf under any bankruptcy, insolvency or
debtor's relief law, and those proceedings have not been vacated or set aside
within sixty (60) days from the date of their commencement, or (iv) if the other
party is liquidated or dissolved.
5. Channels of Distribution in the Territory: all.
6. Territory: The "Territory" means the United States (and its
territories, military facilities and possessions), Canada and Mexico.
7. Compensation and Statements:
a. In consideration for the rights and options granted to it by
Ignite in this agreement, GT shall pay Ignite a single fee, regardless of the
number of Software Packages ultimately affected, of five hundred thousand
dollars ($500,000) (the "Fee"). The Fee shall be paid as follows: (i) two
hundred fifty thousand dollars ($250,000) upon the full execution of this
agreement, (ii) one hundred thousand dollars ($100,000) on receipt of all
materials set forth in Subsection 10(a), (iii) seventy-five thousand dollars
($75,000) three (3) months after full execution, and (iv) seventy-five thousand
dollars ($75,000) six (6) months after full execution.
b. As an express exception to the forgoing, in the event that, prior
to September 1, 1997, GT manufactures greater than one hundred thousand
(100,000) Software Packages of either of the Titles Jeopardy! and Wheel of
Fortune (excluding add-on packs), it shall pay Ignite the bonus sum of two
dollars ($2.00) per Software Packages so manufactured, if sold through prior to
the expiration of the applicable sell-off period. That payment shall be made
upon conclusion of the applicable sell-off period. The sell through of the
foregoing number of Software Packages of one of the titles named in this
Subsection (b) shall only entitle
3
<PAGE> 4
Ignite to the bonus sum for that Title.
c. As an express exception to the superseding of the 1996 Agreement,
compensation (and only compensation) with respect to sell-off of Software
Packages of Titles set forth in Exhibit B shall be as provided in the 1996
Agreement. That compensation shall be paid upon conclusion of that sell off.
d. Within sixty (60) days following the end of the Term, GT will
provide Ignite with a statement itemizing the remaining quantities of Software
Packages of Exhibit A Titles in its possession. Within sixty (60) days following
the end of the sell-off period for Software Packages of Exhibit A Titles, GT
will provide Ignite with a statement itemizing the remaining quantities of
Exhibit A Title Software Packages in its possession.
8. Shelf Price: Retailers have the discretion to set the street price
for Software Packages distributed under this agreement.
9. Promotional copies: GT shall have the right to distribute promotional
copies and to use Software Packages as premiums, without compensation.
10. Materials, Art Work and Co-operative Advertising:
a. Within two (2) days of full execution, Ignite shall supply to GT
all master disks, art work, end-user documentation and other materials necessary
for the Manufacture of the Titles in accordance with all prevailing industry and
licensor standards and requirements. All Software Package, promotional and
CD-ROM art work shall be provided by Ignite on SyQuest disk at no charge to GT.
b. Ignite shall provide GT with any necessary technical assistance to
facilitate the Manufacturing process.
c. GT shall assume responsibility for up to thirty thousand dollars
($30,000) worth of co-operative advertising documented to the satisfaction of GT
as having been previously contracted for by Ignite and not yet paid for (the
"Coop Ads"). Ignite shall be responsible for all other Coop Ads in any amount
and of any kind or nature; however, if the event that any party makes a claim
against GT with respect to any such other Coop Ads, GT may, at its option, in
the interest of fostering good will and without admission as to liability, elect
to satisfy all or part of those claims and deduct the amount or value of that
satisfaction from any amounts otherwise owed to Ignite under this agreement.
Ignite represents and warrants that attached to this agreement as Exhibit C are
all Coop Ad commitments made Ignite as of the date first set forth above with
respect to the Titles. In the event
4
<PAGE> 5
that any retailer claims to GT that additional Coop Ad commitments have been
made, GT shall notify Ignite of that claim orally or in writing in order to
allow Ignite the opportunity to comment upon that claim.
11. Intellectual-Property Rights: The Software Packages shall contain
appropriate notices evidencing ownership of applicable intellectual-property
rights of Ignite in forms reasonably acceptable to Ignite. If any Software
Package contains intellectual property of GT, including, without limitation, any
of its trademarks, it shall contain appropriate notices evidencing ownership of
applicable intellectual-property rights of GT in forms reasonably acceptable to
GT. During the Term, in connection with GT's advertisement, promotion and
distribution of Software Packages, GT is licensed by Ignite, on a royalty-free,
non-exclusive basis, to use the trademarks Ignite uses for Software Packages.
12. Advertising: Advertising and promotion shall be the responsibility of
GT. To the extent that Ignite has any advertising or promotional materials for
the Titles, it shall provide them to GT at no charge.
13. Confidentiality: During the term of this agreement, each party will
have access to, and may become acquainted with, certain confidential information
relating to merchandising, Manufacturing, distribution and financial
arrangements with the other party. Both parties agree that they shall not, until
the later of the expiration of the term of this agreement or until such time as
the information is made public either directly or indirectly, by the party
originally responsible for disclosing the information to the other party, make
known to any person, firm or corporation other than a party to this agreement,
any of the foregoing information. These obligations shall not apply to any
information which is required to be disclosed in the context of an
administrative, regulatory or judicial process or review.
14. Product Technical Support: End-user product technical support will be
provided by GT if and only if Ignite shall have named, on full execution of this
agreement, and it shall maintain until the end of the last sell-off period, a
technical-support expert fully conversant with the Titles and who shall be
available without further charge to GT to assist GT in the provision of
technical support.
15. Notices: Notice shall be given to the receiving party at its address
set forth above or at any other address as may be designated in a notice given
in the manner prescribed in this section. Except as otherwise expressly provided
in this agreement, all notices shall be in writing and sent by registered or
certified mail with return receipt requested, by secure courier (such as FedEx)
or personally delivered to an appropriate
5
<PAGE> 6
officer of the party and, in the case of GT, its vice president of legal
affairs. Copies of notices may be sent simultaneously by fax for information
purposes only.
16. Warrants: As an express exception to the superseding of the 1996
agreement, its provisions with respect to Ignite Warrants (including, without
limitation, Ignite's applicable representations and warranties), and all related
rights granted to GT with respect to them, remain in full force and effect.
Nothing contained in this agreement shall modify, amend or abrogate the terms of
(i) Grafix Zone, Inc. warrant certificate No. 1, representing the eight hundred
thousand (800,000) Ignite warrants granted to GT, or (ii) the registration
rights agreement between the parties, dated March 13, 1996. The parties
acknowledge that, on June 26, 1996, GT exercised warrants for the purchase of
eighty thousand (80,000) shares of Ignite common stock, the purchase price of
which it has paid in full.
17. Further Representations and Warranties of Ignite: Ignite further
represents and warrants (a) that it is duly incorporated, validly existing and
in good standing under the laws of the jurisdiction in which it was
incorporated, (b) that it has the full right, power, legal capacity and
authority to enter into this agreement and to carry out its terms, (c) that it
owns or has obtained all intellectual-property rights and all related rights to
the Titles, (d) that nothing contained in the Titles, Software Packages or any
materials relating to them originating with Ignite or furnished by it shall
infringe upon the rights of any third-party, (e) that it has the unencumbered
right to license GT as a Manufacturer and distributor, (f) that, as of the date
first set forth above, Ignite shall have contracted for and not yet paid for no
more than thirty thousand dollars ($30,000) worth of Coop Ads, (g) that Ignite's
rights to manufacture, publish and distribute the Titles Jeopardy! and Wheel of
Fortune shall terminate by contract on September 1, 1997 and that its
contractual sell-off rights are for six (6) months thereafter, and that (h) the
following is a true and accurate account of all remaining Title Software
Packages in distribution and retail channels outside of Ignite's control and, if
contained in single boxed-unit packaging, the wholesale prices charged for them:
Title Quantity Wholesale
Wheel/Jeop Side/Side Bundle 9358 28.25
Wheel/Jeop Back/Back Bundle 3127 28.25
Wheel of Fortune 24619 18.00
Jeopardy! 15911 18.00
Jeopardy! Sports Pack 4891 9.50
Jeopardy! TV-Movies Pack 3785 9.50
Ignite hereby indemnifies and holds GT harmless from and against any liability
arising out of any breach by it of the terms of this agreement, its
representations or warranties. Ignite
6
<PAGE> 7
further agrees to defend, indemnify and hold harmless GT from any loss, damage
or liability for any claimed infringement of any patent, copyright, trademark,
trade secrets, or other claims asserted by any third party arising out of GT's
manufacture or distribution of any Software Packages under the terms of this
agreement.
18. Representations and Warranties of GT: GT represents and warrants (a)
that it is duly incorporated, validly existing and in good standing under the
laws of the jurisdiction in which it was incorporated, and (b) that it has the
full right, power, legal capacity and authority to enter into this agreement and
to carry out its terms. GT hereby indemnifies and holds Ignite harmless from and
against any liability arising out of any breach by it of the terms of this
agreement, its representations or warranties.
19. Miscellaneous:
a. This agreement will be governed by and construed in accordance
with the internal laws of the state of New York applicable to agreements entered
into, and to be performed entirely within New York, without reference to
conflict of laws principles. The forum for the resolution of disputes concerning
this agreement shall be the courts of the state of New York, County of New York,
including federal courts located there.
b. This agreement shall not be construed to create a joint venture,
partnership, franchise or the relationship of principal and agent between the
parties, nor to impose upon either party any obligations for any losses, debts
or other obligations incurred by the other party except as expressly set forth
in it.
c. No waiver of any default or breach of this agreement by either
party shall be deemed a continuing waiver or a waiver of any other breach or
default.
d. If any provision contained in this agreement shall be held by any
court of competent jurisdiction to be illegal, void or unenforceable, that
provision shall be of no force or effect while that infirmity shall exist. The
infirmity shall have no effect upon the binding force or effectiveness of any of
the other provisions.
e. This agreement sets forth the entire agreement between the parties
with respect to its subject matter and except as set forth above supersedes any
prior oral or written agreements between the parties. This agreement may not be
changed, modified, amended or supplemented, except in writing signed by the
parties. Each of the parties acknowledges and agrees that the other has not made
any representations, warranties or agreements of any kind, except as may be
expressly set forth in
7
<PAGE> 8
this agreement.
f. The section headings used in this agreement are for convenience
only and shall have no legal effect. Sections 4(b), 7, 8, 11, 13, 15, 16, 17, 18
and 19 shall survive the expiration of the term or earlier termination of this
agreement. The performance of any of the rights or obligations by GT may be made
by any of its subsidiaries or affiliates, which shall be third-party
beneficiaries under this agreement. GT may contract with others as it deems
necessary for its performance under this agreement. "Sale" is a term of art for
the lawful licensure of software to end users; nothing contained in this
agreement shall be deemed to imply that any intellectual-property rights of
Ignite in its Titles shall be transferred to end users or GT. Where appropriate
in context, the use of the singular shall include the plural, the conjunctive
shall include the disjunctive, any shall include all, and vice versa.
By your countersignature below, you agree to the foregoing.
Sincerely,
GT Interactive Software Corp.
By: /s/ CHUCK BOND
---------------------------------
Chuck Bond
President, Value-Price and Distribution Divisions
Execution Date: 7/2/97
---------------------
Accepted and agreed:
Graphix Zone, Inc. d/b/a Ignite
By: /s/ DAVID HIRSCHHORN
---------------------------------
Name: David Hirschhorn
Title: President
Execution Date: 7/2/97
---------------------
8
<PAGE> 9
EXHIBIT A
TITLES
Wheel of Fortune
Jeopardy!
Jeopardy! Sports Pack (Add-On)
Jeopardy! Television/Movies Pack (Add-On)
9
<PAGE> 10
EXHIBIT C
CO-OP COMMITMENTS MADE BY GRAPHIX ZONE (IGNITE)
<TABLE>
<CAPTION>
Account Month Vehicle Amount
- ------- ----- ------- ------
<S> <C> <C> <C>
Computer City October Cashwrap $22,000
Fas-Track August Catalog $ 250
The Edutainment Co. Fall Catalog $ 750
Lechmere July Mailer $ 1,000
Home Express July Insert $ 1,000
Electric Ave Fall Mailer $ 2,000
Micro Center July Broadsheet $ 1,000
Micro Center August Broadsheet $ 1,000
Micro Center September Broadsheet $ 1,000
-------
TOTAL $30,000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 440,865
<SECURITIES> 0
<RECEIVABLES> 224,180
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,020,904
<PP&E> 217,470
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,261,455
<CURRENT-LIABILITIES> 10,416,923
<BONDS> 0
2,986,074
1,136,948
<COMMON> 41,940,330
<OTHER-SE> (55,269,967)
<TOTAL-LIABILITY-AND-EQUITY> (12,192,689)
<SALES> 675,466
<TOTAL-REVENUES> 675,466
<CGS> 54,001
<TOTAL-COSTS> 54,001
<OTHER-EXPENSES> 344,192
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 575,173
<INCOME-PRETAX> (297,900)
<INCOME-TAX> 0
<INCOME-CONTINUING> (297,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (297,900)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> 0
</TABLE>
