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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
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Commission File Number 0-28676
GRAPHIX ZONE, INC.
(Name of Registrant as specified in its charter)
DELAWARE 33-0697932
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
42 CORPORATE PARK, SUITE 200
IRVINE, CALIFORNIA 92606
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (including area code): (714) 833-3838
-----------------------------------------------
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
shorter period that registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
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The number of shares outstanding of the registrant's only class of Common
Stock, $.01 par value, was 10,698,446 on February 14, 1997.
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GRAPHIX ZONE, INC.
Table of Contents
Form 10-Q for the Quarterly Period Ended December 31, 1996
PART I: FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and
June 30, 1996 3
Consolidated Statements of Operations for the three months
ended December 31, 1996 and 1995 4
Consolidated Statements of Operations for the six months
ended December 31, 1996 and 1995 5
Consolidated Statements of Cash Flow for the six months
ended December 31, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRAPHIX ZONE, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 30,
1996 1996
-------------- --------------
ASSETS
Cash and cash equivalents $ 532,935 $ 1,288,196
Accounts receivable, net 3,655,426 3,867,268
Inventories 1,879,124 833,700
Prepaid expenses and other current assets 314,836 281,883
-------------- --------------
Total current assets 6,382,321 6,271,047
Property and equipment, net 586,343 653,833
Intangibles, net 764,419 850,186
Other assets, net 695,178 753,619
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$ 8,428,261 $ 8,528,685
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-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 403,316 $ 750,000
Accounts payable 3,744,713 2,542,806
Accrued royalties 1,695,617 977,764
Accrued liabilities 825,837 1,159,946
Accrued restructuring charge 28,862 573,461
Deferred revenue 97,251 286,701
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Total current liabilities 6,795,596 6,290,678
Other liabilities 65,726 189,278
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Total liabilities 6,861,322 6,479,956
Stockholders' equity
Preferred stock, $.01 par value, 25,000,000
shares authorized, 2,525 and zero issued
and outstanding at December 31, 1996 and
June 30, 1996, respectively 1,935,998 -
Common stock, $.01 par value, 100,000,000
shares authorized, 10,698,449 and 10,608,748
issued and outstanding at December 31, 1996
and June 30, 1996, respectively 40,327,624 40,189,771
Accumulated deficit (40,696,683) (38,141,042)
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Net stockholders' equity 1,566,939 2,048,729
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$ 8,428,261 $ 8,528,685
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See accompanying notes to consolidated financial statements
3
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GRAPHIX ZONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
(Unaudited)
1996 1995
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Net revenues $ 1,592,435 $ 1,064,794
Cost of revenues 1,235,649 1,022,732
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Gross margin 356,786 42,062
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Operating expenses:
Research and development 682,186 978,907
Sales and marketing 1,193,854 640,401
General and administrative 1,282,730 1,052,611
Restructuring charge - 1,950,000
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Total operating expenses 3,158,770 4,621,919
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Operating loss (2,801,984) (4,579,857)
Interest expense, net (56,494) (23,176)
Other income (expense), net - 6,268
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Net loss $ (2,858,478) $ (4,596,765)
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-------------- --------------
Loss per share of common stock $ (0.27) $ (1.01)
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-------------- --------------
Weighted average common shares 10,633,541 4,564,799
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See accompanying notes to consolidated financial statements
4
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GRAPHIX ZONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
(Unaudited)
1996 1995
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Net revenues $ 5,047,570 $ 1,975,401
Cost of revenues 2,046,024 1,510,443
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Gross margin 3,001,546 464,958
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Operating expenses:
Research and development 1,586,784 1,721,927
Sales and marketing 2,114,056 1,116,410
General and administrative 2,029,782 1,682,202
Restructuring charge (benefit) (263,831) 1,950,000
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Total operating expenses 5,466,791 6,470,539
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Operating loss (2,465,245) (6,005,581)
Interest expense, net (90,396) (41,452)
Other income (expense), net - 11,842
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Net loss $ (2,555,641) $ (6,035,191)
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Loss per share of common stock $ (0.24) $ (1.35)
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Weighted average common shares 10,625,755 4,469,134
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See accompanying notes to consolidated financial statements
5
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GRAPHIX ZONE, INC.
CONSOLIDATED STATMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,555,641) $ (6,035,191)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 470,883 103,103
Amortization and write-off of intangible assets - 660,498
Write-down of excess furniture and equipment - 545,438
Provision for sales returns and doubtful accounts 892,622 -
Provision for excess and obsolete inventory 170,000 -
Amortization of discount on convertible debentures - 9,595
Stock option and warrant compensation expense - 67,244
Issuance of common stock as compensation and for services 200,625 -
Change in operating assets and liabilities:
Increase in accounts receivable (680,780) (385,235)
Decrease (increase) in inventories (1,215,424) 85,474
Decrease (increase) in prepaid expenses and other current assets (32,953) 32,163
Increase in other assets (28,564) -
Increase in accounts payable 1,201,907 586,984
Increase in accrued royalties 717,853 -
Increase (decrease) in accrued liabilities (334,109) 379,963
Increase (decrease) in accrued restructuring charge (544,599) 1,107,492
Decrease in deferred revenue (189,450) (67,270)
Decrease in other liabilities (123,552) -
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Net cash used in operating activities (2,051,182) (2,909,742)
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Cash flows from investing activities:
Purchase of property and equipment (230,621) (13,564)
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Net cash used in investing activities (230,621) (13,564)
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Cash flows from financing activities:
Proceeds from bank loan and notes payable to related parties - 1,150,000
Payments for redemption of stock (75,062) -
Payments on bank loan and notes payable to related parties (346,684) (150,000)
Proceeds from exercise of stock options and warrants 12,290 13,113
Proceeds from preferred stock issuances, net. 1,935,998 -
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Net cash provided by financing activities 1,526,542 1,013,113
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Net decrease in cash (755,261) (1,910,193)
Cash and cash equivalents at beginning of period 1,288,196 1,919,102
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Cash and cash equivalents at end of period $ 532,935 $ 8,909
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Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 44,208 $ -
See accompanying notes to consolidated financial statements
</TABLE>
6
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GRAPHIX ZONE, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(1) BACKGROUND AND ORGANIZATION
Graphix Zone, Inc. (the "Company") is a Delaware corporation and was
incorporated in January 1996 for the purpose of acquiring Graphix Zone,
Inc., a California corporation (GZ-CA), and StarPress, Inc., a Colorado
corporation (StarPress). The Company is engaged in the development,
production and marketing of CD-ROM and DVD-ROM products for the personal
computer industry.
On January 3, 1996 the Company's wholly owned subsidiaries GZ-CA and
StarPress, entered into an Agreement and Plan of Reorganization pursuant to
which both companies would become wholly owned subsidiaries of Graphix
Zone, Inc., a Delaware corporation. All conditions to the merger were met
and on June 28, 1996 the shareholders of both GZ-CA and StarPress approved
the merger (the "Reorganization") which was consummated on that date.
Based upon the capitalization of both GZ-CA and StarPress, at the
consummation of the merger, the former shareholder interests of StarPress
comprised a larger percentage of the outstanding shares of the Company than
the former shareholder interests of GZ-CA, and accordingly StarPress was
deemed 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. All shares have been adjusted to reflect a .14666 : 1 stock
exchange in connection with the Reorganization.
All references to the "Company" prior to June 28, 1996 relate to StarPress.
(2) BASIS OF PRESENTATION
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the "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. The Company
believes that the disclosures are adequate to make the information
presented not misleading when read in conjunction with the Company's
financial statements for the year ended June 30, 1996 included in the
Company's Annual Report on Form 10-K filed with the Commission. The
financial information presented reflects 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 and six month periods ended December 31,
1996 are not necessarily indicative of results which may be expected for
the full year.
(3) INVENTORIES
Inventories consisted of the following:
Dec. 31, 1996 June 30, 1996
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Finished goods $ 1,520,462 $ 479,747
Components 708,662 533,953
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2,229,124 1,013,700
Reserve for excess and obsolete (350,000) (180,000)
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$ 1,879,124 $ 833,700
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7
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(4) STOCKHOLDERS' EQUITY
On September 25, 1996, the Company sold 1,000 shares of Series A
Convertible Preferred Stock at $1,000 per share to one accredited investor
in a private equity offering. In addition, the Company granted the
investor a warrant to purchase 69,717 shares of Common Stock. The
Preferred Stock is convertible into the Company's Common Stock, at the
option of the holders, commencing 60 days from the date of issuance based
upon, among other things, the average closing bid price of the Company's
Common Stock at or near the conversion date. The holders of the Preferred
Stock are entitled to receive dividends of $80 per share per annum which
are fully cumulative from the date of issuance. The cash proceeds, net of
offering expenses, were $939,950.
On November 1, 1996, the Company sold 1,525 shares of Series A Convertible
Preferred Stock at $1,000 per share to five accredited investors in a
private equity offering. In addition, the Company granted the investors
warrants to purchase 99,674 shares of Common Stock. The Preferred Stock is
convertible into the Company's Common Stock, at the option of the holders,
commencing 60 days from the date of issuance based upon, among other
things, the average closing bid price of the Company's Common Stock at or
near the conversion date. The holders of the Preferred Stock are entitled
to receive dividends of $80 per share per annum which are fully cumulative
from the date of issuance. The cash proceeds, net of offering expenses,
were $996,048.
(5) SUBSEQUENT EVENTS
On January 31, 1997 the Company entered into a loan agreement with
Madeleine L.L.C. for a $3,700,000 loan initially bearing interest at prime
rate, as announced by Citibank, N.A., plus 425 basis points and stepping up
to the prime rate plus 625 points on July 31, 1997. The loan is secured by
all of the Company's assets and matures on January 30, 1998. In connection
with the loan agreement, the Company also issued a warrant to Madeleine
L.L.C. to purchase 300,000 shares of the Company's Common Stock at an
exercise price of $2.68 per share. The warrant expires on January 31,
2000. The proceeds, net of $240,000 of bank fees, were $3,460,000.
On February 7, 1997, the Company sold 500 shares of Series A Convertible
Preferred Stock at $1,000 per share to one accredited investor in a private
equity offering. In addition, the Company granted the investor a warrant
to purchase 51,813 shares of Common Stock. The Preferred Stock is
convertible into the Company's Common Stock at the option of the holder
based upon, among other things, the average closing bid price of the
Company's Common Stock at or near the conversion date. The holder of the
Preferred Stock is entitled to receive dividends of $80 per share per
annum which are fully cumulative from the date of issuance. The cash
proceeds, net of offering expenses, were $419,950.
On June 28, 1996 the Company entered into a loan agreement with Silicon
Valley Bank for a $750,000 loan bearing interest at the bank's prime rate
plus 300 basis points. As of December 31, 1996 the Company had repaid
$350,000 of the loan and was in default on the balance. The Company has
repaid the outstanding balance and interest from the proceeds of the above
described private equity offering.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
THREE AND SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THE THREE AND SIX
MONTHS ENDED DECEMBER 31, 1995
GENERAL
The Company's business focus and strategy is to become an industry leader
in interactive entertainment. The Company develops and distributes interactive
CD-ROM multimedia products for the growing interactive multimedia segment of the
desktop computer industry. The Company is also developing interactive DVD-ROM
multimedia products. The Company has decided to suspend the development of its
network of Internet music web sites and focus on CD-ROM and DVD-ROM products.
In June 1996, the Company acquired all of the outstanding capital stock of
GZ-CA, a developer and publisher of interactive software titles, in exchange for
5,526,543 shares of the Company's Common Stock. The total purchase price for
GZ-CA was $23,930,957 (which was determined by the fair market value of GZ-CA
Common Stock) including acquisition costs of $823,932. The acquisition was
accounted for by the purchase method of accounting.
RESULTS OF OPERATIONS
The following table sets forth items from the Company's Consolidated
Statements of Operations as a percentage of net revenues.
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1996 Dec. 31, 1995
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Net revenues 100% 100% 100% 100%
Cost of revenues 78% 96% 41% 76%
------------- -------------- -------------- --------------
Gross margin 22% 4% 59% 24%
Research and development expenses 43% 92% 31% 87%
Sales and marketing expenses 75% 60% 42% 57%
General and administrative expenses 80% 99% 40% 85%
Restructuring charge (benefit) - 183% (5)% 99%
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Operating loss (176)% (430)% (49)% (304)%
Interest expense, net 4% 2% 2% 2%
------------- -------------- -------------- --------------
Net income (loss) (180)% (432)% (51)% (306)%
------------- -------------- -------------- --------------
------------- -------------- -------------- --------------
</TABLE>
NET REVENUES
Net revenues for the three and six months ended December 31, 1996 increased
by $527,641 and $3,072,169 to $1,592,435 and $5,047,570 as compared to
$1,064,794 and $1,975,401 for the three and six months ended December 31, 1995,
respectively. The increase in net revenues of 50% and 156% for the three and
six months ended December 31, 1996, respectively, compared to the same prior
year periods is a result of the Reorganization and merger of GZ-CA and
StarPress, the acquisition of certain products from Sony Interactive
Entertainment, Inc. (Sony) in November 1995 and the release of seven new titles
in the first three months of fiscal 1997. All of the aforementioned have
increased the Company's catalog of products and corresponding revenues,
particularly the Sony products, which accounted for approximately $1,042,000 and
$2,752,000 of net revenues for the three and six months ended December 31, 1996,
9
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respectively. In addition, the increase in sales for the three months ended
December 31, 1996 was offset by the Company recording approximately $590,000 for
unanticipated returns and markdowns primarily related to several of the new
titles released in the first quarter of fiscal 1997.
The Company grants certain distributors and retailers certain rights to
return unsold inventory. Consequently, although the Company records revenue
upon shipment, it accrues a reserve based on the Company's estimate of expected
returns.
GROSS MARGIN
Gross margin as a percentage of net revenues was 33% and 63% for the three
and six months ended December 31, 1996, respectively, compared to 4% and 24% for
the three and six months ended December 31, 1995, respectively. The increase in
gross margin as a percentage of net revenues for both the three and six month
periods ended December 31, 1996 as compared to the same prior year periods is
primarily a result of the Company having decreased per unit costs as it gained
greater experience in the procurement of product components and has received
improved pricing from vendors based upon increased production volumes associated
with the Company's expanded catalog of products. Gross margin as a percentage
of net revenues for the three months ended December 31, 1996 decreased compared
to the six months ended December 31, 1996 as a result of several factors.
First, during the second quarter of fiscal 1997 the Company began to sell
certain titles produced by other entities which generate a lower gross margin
percentage. Second, the Company recorded a charge of $170,000 for excess and
obsolete inventory and expensed approximately $100,000 of prepaid royalties
which the Company determined were not realizable. Third, the Company incurred
certain costs associated with moving and consolidating its inventory into one
primary production and storage facility.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three and six months ended
December 31, 1996 decreased by $296,721 and $135,143 to $682,186 and $1,586,784,
respectively, as compared to $978,907 and $1,721,927 for the three and six
months ended December 31, 1995, respectively. Although the dollar expenditures
between the comparable periods were relatively stable, research and development
expenditures as a percentage of net revenues decreased from 87% in the first
half of fiscal 1996 to 31% for the first half of fiscal 1997. The significant
decrease is primarily a result of the increase in net revenues of $3,072,169 in
the first half of fiscal 1997 over the same period from fiscal 1996.
SALES AND MARKETING EXPENSES
Selling and marketing expenses for the three and six months ended December
31, 1996 increased by $553,453 and $997,646 to $1,193,854 and $2,114,056,
respectively, as compared to $640,401 and $1,116,410 for the three and six
months ended December 31, 1995, respectively. The increase in sales and
marketing expenses for the three and six months ended December 31, 1996 as
compared to the same prior year periods is primarily a result of increases in
personnel as well as increased participation in cooperative advertising and
marketing programs in relation to increased sales and to increase overall
product awareness. The decrease in sales and marketing expenses as a percentage
of net revenues for the first half of fiscal 1997 compared to the first half of
fiscal 1996 is a result of the Company having established the core
infrastructure and personnel in the sales and marketing departments during the
latter part of fiscal 1996 and reaping certain economies of scale as net
revenues increased. The increase in sales and marketing expenses as a
percentage of net revenues for the second quarter of fiscal 1997 as compared to
the second quarter of fiscal 1996 is primarily a result of the Company recording
a reserve for unanticipated reserves and markdowns of approximately $590,000
decreasing net revenues and thus increasing the percentage represented by sales
and marketing expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three and six months ended
December 31, 1996 increased by $230,119 and $347,580 to $1,282,760 and
$2,029,782 representing 80% and 40% of net revenues, respectively, compared to
$1,052,611 and $1,682,202 representing 99% and 85% of net revenues for the three
and six months ended December 31, 1995, respectively. Although general and
administrative expenses increased modestly in amount, they decreased
considerably as a percentage of net revenues for the first half of fiscal 1997
as compared to the first half of fiscal 1996. The decrease as a percentage of
net revenues is primarily a result of the increased revenues, resulting in part
from the Reorganization and merger of GZ-CA and StarPress, and the related
elimination of certain duplicate administrative costs including facility rents
and accounting personnel.
10
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RESTRUCTURING CHARGE
During the second quarter of fiscal 1996, in anticipation of the
Reorganization, the Company adopted a restructuring plan to enhance overall
competitiveness, productivity and efficiency through the reduction of overhead
costs. The total estimated cost of the restructuring charged to operations
during the second quarter of fiscal 1996 was $1,950,000. During the first
quarter of fiscal 1997 the Company reversed $263,831 of the remaining reserve
for restructuring related to facility and equipment leases for its San Francisco
facility, which the Company has subsequently sub-leased.
OUTLOOK
The statements contained in this outlook are "forward looking statements"
for purposes of Section 21E of the Securities Exchange Act of 1934. They are
based on the Company's current plans, strategies, hopes and expectations.
Actual results may differ materially.
The Company's revenues and income may fluctuate periodically as a result of
the timing and success of new CD-ROM and DVD-ROM releases, and external factors
such as seasonal buying patterns. The Company is aggressively pursuing new
opportunities to distribute titles developed by other entities and is expanding
its international business. Accordingly, and in light of the decrease to net
revenues in the second quarter of fiscal 1997 as a result of recording a
$590,000 reserve for unanticipated returns and markdowns, the Company
anticipates a moderate increase in sales over the balance of fiscal 1997.
Gross margin may fluctuate depending upon the component costs and royalty
structure of the specific product mix for any given period. If the percentage
of revenues represented by OEM/bundling deals and the distribution of products
developed by other entities increases, the Company expects gross margin as a
percentage of net revenues to decrease. Accordingly, the gross margin as a
percentage of net revenues for the six months ended December 31, 1996 may not be
indicative of future period results.
Research and development costs may fluctuate depending upon the number of
projects in process in a particular period and the degree of internally
developed versus externally developed or acquired content in the related
projects. In the near term, the Company expects research and development costs
to increase in amount and as a percentage of net revenues.
In order to generate increased sales, the Company will need to increase
sales and marketing expenditures. If net revenues do increase, these costs may
decrease as a percentage of net revenues. However, if net revenues do not
increase or increase slowly, these costs will most likely increase as a
percentage of net revenues.
The Company expects general and administrative expenses to increase in
amount in the near term as the Company continues to develop its infrastructure
while continuing to seek cost savings. If net revenues increase, as hoped, then
general and administrative expenses may decrease as a percentage of net
revenues. As a result of the Company entering into a loan agreement with
Madeleine L.L.C. in January 1997 (see LIQUIDITY AND CAPITAL RESOURCES) the
Company expects a significant increase in interest expense in the near term.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity is cash. At December 31, 1996,
cash and cash equivalents were $532,935, net working capital deficiency was
$(413,275) and net stockholders' equity was $1,566,939. At June 30, 1996, cash
and cash equivalents were $1,288,196, net working capital deficiency was
$(19,631) and net stockholders' equity was $2,048,729. The decrease in cash and
cash equivalents is primarily a result of the payment of certain obligations
related to the Reorganization, payment of approximately $347,000 of debt and
$231,000 for the purchase of property and equipment, and in part the funding of
the net loss of $2,555,641 for the six months ended December 31, 1996, offset by
the equity infusion of $1,935,998 discussed below. Cash used in operations for
the six months ended December 31, 1996 was $2,051,182.
11
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Due to substantial up-front costs associated with the development of
Internet web sites (which have since been suspended) and CD-ROM titles, the
Company has continually needed to locate outside sources of liquidity. On
September 25, 1996, the Company raised $939,950, net of offering expenses,
through a private equity offering of 1,000 shares of Preferred Stock and a
warrant to purchase 69,717 shares of Common Stock to one accredited investor.
On November 1, 1996, the Company raised $996,048, net of offering expenses,
through a private equity offering of 1,525 shares of Preferred Stock and
warrants to purchase 99,674 shares of Common Stock to five accredited investors.
Additionally, on February 7, 1997, the Company raised $419,950, net of offering
expenses, through a private equity offering of 500 shares of Preferred Stock and
a warrant to purchase 51,813 shares of Common Stock to one accredited investor.
The proceeds from the Company's private equity offerings have and will be used
as working capital to fund the development of future CD-ROM and DVD-ROM
products, and other costs associated with the growth and expansion of the
Company.
On January 31, 1997 the Company entered into a loan agreement with
Madeleine L.L.C. for a $3,700,000 loan initially bearing interest at prime
rate, as announced by Citibank, N.A., plus 425 basis points and stepping up to
the prime rate plus 625 points on July 31, 1997. The loan is secured by all
of the Company's assets and matures on January 30, 1998. In connection with
the loan agreement, the Company also issued a warrant to Madeleine L.L.C. to
purchase 300,000 shares of the Company's common stock at an exercise price of
$2.68 per share. The warrant expires on January 31, 2000. The proceeds, net
of $240,000 of bank fees, were $3,460,000 and will be used to satisfy
existing trade debt and royalties and to provide working capital to fund the
development of future CD-ROM and DVD-ROM products as well as other costs
associated with the growth and expansion of the Company.
On June 28, 1996 the Company entered into a loan agreement with Silicon
Valley Bank for a $750,000 loan bearing interest at the bank's prime rate plus
300 basis points. As of December 31, 1996 the Company had repaid $350,000 of
the loan and was in default on the balance. The Company has repaid the
outstanding balance and interest from the proceeds of the above described
private equity offering.
The Company's long-term liquidity is principally contingent on its ability
to raise funds through private and public debt and equity offerings.
Additionally, the Company must improve the collection period and related aging
of its accounts receivables. Having completed the Reorganization, the Company
believes it will generate cost savings relative to net revenues and thus
gradually improve liquidity. The Company's anticipated liquidity needs are
based upon a number of factors, including the size of the business and related
working capital needs, the extent of CD-ROM and DVD-ROM development costs and
funding requirements, and the level of corporate operating costs. The Company
believes that its present funding sources, including the proceeds from the
aforementioned loan agreement with Madeleine L.L.C. and the private equity
offerings are sufficient to sustain these needs through fiscal 1997.
12
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
On February 7, 1997, the Company sold 500 shares of Series A
Convertible Preferred Stock for $1,000 per share to one accredited
investor in a private placement pursuant to Sections 4(2) and 4(6) of
the Securities Act of 1933 and Regulation D thereunder. In addition,
the Company granted the investor a warrant to purchase up to 51,813
shares of common stock for $2.50 per share. The holder of Series A
Convertible Preferred Stock is entitled to receive dividends of $80
per share per annum, fully cumulative from the date of issuance. The
cash proceeds of the offering, net of expenses, were $419,950. Tanner
Unman Securities acted as placement agent and was paid a commission of
10 % of the gross proceeds, and was reimbursed for certain expenses.
The Series A Convertible Preferred Stock is convertible into shares of
Common Stock, at the option of the holder based on a conversion price
equal to the lower of (a) $2.13 or (b) 80% of the average closing bid
price of the Company's Common Stock on the five days immediately prior
to the conversion date. As of February 14, 1997, the 500 shares of
Series A Convertible Preferred Stock are convertible into 310,559
shares of Common Stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: February 19, 1997 GRAPHIX ZONE, INC.
By: /S/NORMAN H. BLOCK
-------------------------------------
Norman H. Block, President, Chief
Operating Officer, Interim Chief
Financial Officer and Principal
Financial and Accounting Officer.
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 532,935
<SECURITIES> 0
<RECEIVABLES> 3,655,426
<ALLOWANCES> 0
<INVENTORY> 1,879,124
<CURRENT-ASSETS> 6,382,321
<PP&E> 586,343
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,428,261
<CURRENT-LIABILITIES> 6,795,596
<BONDS> 0
0
1,935,998
<COMMON> 40,327,624
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,566,939
<SALES> 1,592,435
<TOTAL-REVENUES> 1,592,435
<CGS> 1,235,649
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,158,770
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,494
<INCOME-PRETAX> (2,858,478)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,858,478)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,858,478)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.27)
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