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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ X ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from January 1, 1996 to March 31, 1996
Commission file number: 0-21510
Sanctuary Woods Multimedia Corporation
(Exact name of registrant as specified in its charter)
British Columbia, Canada 75-2444-109
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
1825 South Grant Street
San Mateo, California 94402
(Address of principal executive offices) (Zip Code)
(415) 286-6000
(Registrant's telephone number, including area code)
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[ ]
The number of Common Shares of the registrant outstanding as of
June 14, 1996 was 22,708,580.*
Except where the context otherwise requires, as used herein, the
term "Company" means Sanctuary Woods Multimedia Corporation and its
subsidiaries.
_______________________________
* Does not include 4,000,000 voting Performance Shares which are
held in escrow.
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PART I - Financial Information
ITEM 1 - Condensed Consolidated Financial Statements
(unaudited) 3
Condensed consolidated balance sheets -
March 31, 1996 and December 31, 1995 3
Condensed consolidated statement of operations -
three months ended March 31, 1996 and 1995 4
Condensed consolidated statement of cash flows -
three months ended March 31, 1996 and 1995 5
Notes to condensed consolidated financial
statements 6
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
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<TABLE>
<CAPTION>
SANCTUARY WOODS MULTIMEDIA CORPORATION
Condensed Consolidated Balance Sheets
As of March 31, 1996 and December 31, 1995
(unaudited)
March 31, December 31,
1996 1995
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 8,455 $ 11,484
Accounts receivable 800,701 1,308,603
Inventories 1,384,840 1,977,858
Deferred royalties 127,000 80,000
Prepaid expenses 294,203 662,179
---------- ----------
Total current assets 2,615,199 4,040,124
PROPERTY AND EQUIPMENT 1,834,266 2,367,589
DEFERRED ROYALTIES 134,000 181,000
LICENSES AND OTHER INTANGIBLES 10,396 9,921
---------- ----------
TOTAL ASSETS $4,593,861 $6,598,634
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Bank line of credit $2,226,781 $1,800,000
Notes payable 1,563,666 -
Accounts payable 3,087,886 2,486,497
Accrued expenses 1,395,359 1,557,648
Royalty obligations 611,905 480,884
Current portion of capital lease obligations 28,715 29,626
---------- ----------
Total current liabilities 8,914,312 6,354,655
LONG-TERM ROYALTY OBLIGATIONS 534,000 581,000
CAPITAL LEASE OBLIGATIONS 13,781 20,359
---------- ----------
Total liabilities 9,462,093 6,956,014
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Authorized, 100,000,000 common shares,
no par value; issued and outstanding,
22,158,580 at March 31, 1996, and
22,153,580 at December 31, 1995 31,763,839 31,754,188
Accumulated deficit (35,874,113) (31,359,942)
Accumulated translation adjustments (757,958) (751,626)
------------ ------------
Total stockholders' equity (deficit) (4,868,232) (357,380)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $4,593,861 $6,598,634
============ ============
See notes to consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
SANCTUARY WOODS MULTIMEDIA CORPORATION
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1996 and 1995
(unaudited)
1996 1995
<S> <C> <C>
SALES:
Consumer titles $ 931,805 $ 1,302,125
Publisher services 5,807 202,990
----------- -----------
Total sales 937,612 1,505,115
----------- -----------
COST OF SALES:
Consumer titles 759,288 501,696
Technology amortization 0 80,308
Publisher services 164,922 145,173
----------- -----------
Total cost of sales 924,210 727,177
----------- -----------
GROSS MARGIN 13,402 777,938
----------- -----------
OPERATING EXPENSES:
Research and development 1,261,391 1,008,334
Marketing and sales 1,789,866 1,737,749
Administration 1,196,553 719,049
Depreciation 210,932 211,449
----------- -----------
Total operating expenses 4,458,742 3,676,581
----------- -----------
LOSS BEFORE OTHER INCOME
(EXPENSE) (4,445,340) (2,898,643)
----------- -----------
OTHER INCOME (EXPENSE)
Foreign exchange gain (loss) (203) (10,833)
Interest expense and other (68,628) 12,484
----------- -----------
Total other income (expense) (68,831) 1,651
----------- -----------
NET LOSS $(4,514,171) $(2,896,992)
============ ============
NET LOSS PER SHARE ($0.25) ($0.18)
============ ============
SHARES USED IN COMPUTATION 18,158,085 15,739,957
============ ============
See notes to consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
SANCTUARY WOODS MULTIMEDIA CORPORATION
Condensed Consolidated Statement of Cash Flows
Three Months Ended March 31, 1996 and 1995
(unaudited)
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,514,171) $ (2,896,992)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 211,457 356,622
Stock option compensation 12,381 -
Loss on disposals of assets 401,658 -
Changes in assets and liabilities:
Accounts receivable 507,902 1,018,926
Inventories 593,018 (80,748)
Deferred royalties and prepaid expenses 451,997 (333,220)
Licenses and other intangibles (1,000) (57,477)
Accounts payable 601,389 (623,330)
Accrued expenses (162,289) 73,357
-------------- -------------
Net cash used in operating (1,897,658) (2,542,862)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (79,267) (272,123)
-------------- -------------
Net cash used in investing activities (79,267) (272,123)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock-net of issue costs (2,730) 214,106
Net borrowings on bank line of credit 426,781 200,000
Proceeds from issuance of notes payable 1,556,177 -
-------------- -------------
Net cash provided by financing activities 1,980,228 414,106
-------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (6,332) -
-------------- -------------
NET INCREASE (DECREASE) IN CASH (3,029) (2,400,879)
CASH, BEGINNING OF PERIOD 11,484 2,669,431
-------------- -------------
CASH, END OF PERIOD $ 8,455 $ 268,552
============== =============
CASH PAID DURING THE PERIOD FOR:
Interest $ 57,985 $ 73,972
Income taxes - 1,600
See notes to consolidated financial statements.
</TABLE>
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
1. NATURE OF OPERATIONS AND CHANGE IN FISCAL YEAR-END
Sanctuary Woods Multimedia Corporation and its
subsidiaries (the "Company") currently develop, market
and distribute interactive multimedia software products
("consumer titles") targeted at the childrens' education
market. Products are sold primarily through
distributors into retail outlets. Sales are also
generated directly to schools, hardware and equipment
manufacturers, and to distributors internationally.
Prior to 1996, the Company published interactive
entertainment products and provided interactive
multimedia services to trade and textbook publishers.
In 1996, the Board of Directors of the Company
determined that it would be in the best interests of the
Company and its shareholders to change the Company's
fiscal year from one ending on December 31 to one ending
March 31 and accordingly, the Company adopted a March 31
year-end beginnning on April 1, 1996. Accordingly, the
accompanying statements of operations and cash flows
include the transition fiscal period for the three
months from January 1, 1996 to March 31, 1996.
The accompanying unaudited condensed consolidated
financial statements have been prepared in conformity
with U.S. generally accepted accounting principles
("GAAP") for interim financial statements and include
all adjustments which, in the opinion of management, are
necessary for a fair statement of the consolidated
financial position, results of operations and cash flows
as of and for the interim periods. Such adjustments
consist of items of a normal recurring nature. The
consolidated financial statements included herein should
be read in conjunction with the Company's Annual Report
on Form 10-K/A-1 and A-2 as filed on April 15, 1996 and
April 29, 1996, for the year ended December 31, 1995.
Results of operations for interim periods are not
necessarily indicative of results for the full year.
2. GOING CONCERN UNCERTAINTY
1996 Net Loss
The net loss for the Transition Quarter ended March 31,
1996 was ($4,514,171) compared to a net loss of
($2,896,992) for the quarter ended March 31, 1995. Net
cash used by operating activities was ($1,897,658) for
the quarter ended March 1996 as compared to ($2,542,862)
for the same quarter one year ago. At March 31, 1996 the
Company had $8,455 in cash and bank borrowings and notes
payable totalling $3,790,447.
Beginning in 1996, the Company commenced plans to
reorganize its operations as outlined below. A major
part of that reorganization involved ceasing publication
of new entertainment titles and eliminating the
Publishers Services Division. Costs incurred from
reorganization, including severance, site closure and
consolidation, significantly contributed to the net loss
for the quarter ended March 31, 1996. The amount of
these expenses included the following:
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<TABLE>
<S> <C>
Closure of Publisher Services Operation $ 437,000
Severance Expenses 210,000
Consolidation of Facilites & Related Items 358,000
Total $1,005,000
</TABLE>
Additional contributing factors to the loss for the
quarter were charges taken against accounts receivable
and inventories. These charges (mostly for entertainment
titles) stem from a review of current product
inventories in the distribution channel and the price
relief required to sell them through to the consumer and
an evalution of the salability of inventories on hand.
These charges, totalling $640,000, were as follows:
<TABLE>
<S> <C>
Product Returns $ 175,000
Channel Price Reductions 215,000
Inventory Obsolescense 250,000
Total $ 640,000
</TABLE>
Since January 1996, the Company has experienced severe
liquidity problems. The Company has had difficulty in
generating sufficient cash flows to meet its obligations
and sustain its operations. This cash shortage has
effected the Company's ability to sell its products and
generate additional revenue. Management believes that
the Company will need to raise significant capital
through debt or equity financing to sustain itself and
fund its Fiscal 1997 operations. If the Company is
unable to successfully obtain such funding, management
feels that the Company may be forced to cease
operations.
1996 Actions
During 1996, the Company formulated plans and
instituted measures to improve operations and cash flows
and to enable the Company to continue its operations.
Specific items accomplished through June 14, 1996
include the following:
- Appointment of a new Chief Executive Officer, a new
Vice President of Sales, a new Controller, Vice President of
Marketing, and promotion of the Vice President of the
Education Studio to Senior Vice President.
- Reduction of head count from 148 employees at December
31, 1995 to 45 at June 14, 1996, and elimination of many
part-time, temporary and contract positions.
- Elimination of its Publishers Services Division.
- Sale of substantially all of the fixed assets of its
Entertainment Division, including its Victoria Studio in May
1996, for approximately $1.9 million, $500,000 of which was
used to reduce bank borrowings. The resulting gain on the
sale of the studio, which will be recorded in the quarter
ending June 30, 1996, totaled approximately $860,000.
- A 10% reduction in senior management salaries.
- Termination of all software development projects
through outside developers.
- The hiring of Strategic Marketing Partners to represent
the Company's product line in the retail channel.
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Private Placement
In March 1996, a private placement of $1,500,000 of 10%
convertible notes due in August 1996, were issued,
including $50,000 of notes to the Company's President
and Chief Executive Officer, and $50,000 of notes to the
Company's Senior Vice President. In June 1996,
$1,500,000 of these notes were converted into 3,000,000
shares of common stock which are subject to certain
registration rights. The Company waived the requirement
that conversion of $500,000 of the notes be subject to
shareholder approval. In addition, certain of the
convertible note holders have exercised warrants to
purchase 1,500,000 of the 1,875,000 shares of common
stock subject to certain registration rights covered by
warrants issued in connection with the issuance of the
notes at an exercise price of $.50 per share. As a
result, the Company received $750,000 in cash proceeds
in May and June 1996.
Bank Line of Credit
As a result of the significant losses discussed above,
the Company was in violation of certain covenants of its
bank line of credit prior to March 31, 1996 and
thereafter. In addition, the Company has borrowed in
excess of the amounts allowed under the bank credit
agreement. On April 2, 1996 the bank extended the
maturity date of the line until May 15, 1996 and amended
its agreement with the Company as outlined in the 1995
Form 10-K/A. On May 15, 1996, the bank agreed to further
extend the line of credit and further amend the
agreement as follows:
- The maturity date was extended to December 31, 1996.
- The line of credit was set at a maximum of $1,000,000
effective upon reduction of outstanding borrowings to that
level by June 30, 1996.
- Existing covenant violations were waived and revised
covenants were established requiring minimum levels of
profitability and net worth and certain debt to equity
ratios. The Company will need to increase its net worth
significantly in order to meet the covenant at June 30,
1996.
- The bank is applying 50% of all accounts receivable
collections to outstanding indebebtedness while the
borrowing base is in an over-advanced condition or until
further notice by the bank.
- The Company agreed to pay the bank $50,000 in fees and
has issued warrants to purchase an additional 200,000 shares
at $.5625 per share. The warrants expire in five years.
However, warrants to purchase 100,000 shares will be
cancelled if the Company obtains $3,000,000 in additional
capital prior to June 30, 1996. The Company expects to
record in fiscal 1997 an expense of approximately $50,000 in
connection with all warrants issued.
Current Status and Management's Plans
At June 14, 1996, the Company had cash of $290,000 and
total bank borrowings of $1,191,000. Of the total bank
borrowings, $191,000 is due by June 30, 1996, with the
remaining balance payable in full by December 31, 1996.
The Company is actively pursuing various sources of
additional debt, equity and strategic investor funding
including business combinations and strategic
relationships that may enhance its ability to develop,
8
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publish and/or distribute its products. The Company is
also attempting to sell or license the rights to its
entertainment product catalog and certain entertainment
products. No assurance can be given that additional
financing will be available or that, if available, such
financing will be obtainable on terms favorable to the
Company. If the Company is unable to successfully
obtain such funding, management believes that the
Company may be forced to cease operations.
Going Concern Uncertainty Conclusion
The accompanying unaudited consolidated financial
statements have been prepared on a going concern basis,
which contemplates the realization of assets and
satisfaction of liabilities in the normal course of
business. The matters discussed above, among others, may
indicate that the Company will be unable to continue as
a going concern.
The unaudited condensed consolidated financial
statements do not include any adjustments relating to
the recoverability and classification of recorded assets
or liabilities that might be necessary should the
Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent
upon its ability to generate sufficient cash flow to
meet its obligations on a timely basis, to comply with
the terms and covenants of its bank line of credit, to
obtain additional financing, and ultimately to sustain
successful operations.
3. ACCOUNTS RECEIVABLE
The Company allows customers to exchange and/or return
products, or in order to promote their sell-through and
limit product returns, will provide "price protection."
In addition, the Company's products are sold with a
ninety-day warranty against defects. The Company has
recorded reserves for such sales returns and allowances
and price protection based on historical experience and
management's current estimates of potential returns and
necessary price protection.
Accounts receivable consist of:
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
<S> <C> <C>
Accounts receivable - trade $ 4,814,104 $ 6,936,840
Less:
Allowance for doubtful accounts (207,352) (200,000)
Sales returns and allowances (3,806,051) (5,428,237)
------------ ------------
Total $ 800,701 $ 1,308,603
============ ============
</TABLE>
4. INVENTORIES
Inventories consisted of:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
<S> <C> <C>
Finished goods $ 1,967,558 $ 2,532,033
Raw materials 866,957 963,825
----------- -----------
2,834,515 3,495,858
Less allowance for obsolete, slow-
moving and non-salable inventory (1,449,675) (1,518,000)
------------ ------------
Inventories, net $ 1,384,840 $ 1,977,858
============ ============
</TABLE>
Inventory write-downs in the transition quarter totalled
$250,000 (see note 2).
9
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5. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The lawsuit Quadra Interactive v Presto Studios,
Sanctuary Woods, et al. was settled as of May 24, 1996,
and the entire case was dismissed with prejudice.
Sanctuary Woods received a full release of all claims
and made no payment to settle the case.
Sanctuary Woods was recently sued by Starpak, Inc. in
the district court for the state of Colorado. Starpak's
complaint alleges breach of contract, and claims damages
in the amount of $103,092.65 plus fees, interest and
costs. Starpak was engaged by Sanctuary Woods to
provide high quality technical support, customer
service, and product fulfillment services to Sanctuary
Woods' customers; however it is Sanctuary Woods
contention that Starpak failed to do so. Sanctuary
Woods has removed the case to the United States District
Court for the District of Colorado. Sanctuary Woods
denies any liability for this claim, and has
counterclaimed against Starpak stating causes of action
for breach of fiduciary duty, fraud and deceit,
negligent misrepresentation, conversion, breach of
contract, breach of the implied covenant of fair
dealing, interference with contractual relations,
interference with prospective economic advantage and
declaratory relief. The case is in a very early stage
of litigation. At this time, management believes that
the ultimate outcome of the case will not have a
material adverse impact on the Company's financial
statements or results of operations taken as a whole.
6. PERFORMANCE SHARES
In October 1991, in connection with the sale of
1,800,000 common shares to the Company's founders and
principal stockholders, the Company issued 4,000,000
common "performance" shares (the "Performance Shares")
at CDN $0.01 per share to certain of these individuals.
These Performance Shares were issued pursuant to Local
Policy #3-07 of the British Columbia Securities
Commission ("BCSC") and policy 19 of the Vancouver Stock
Exchange, which provide the guidelines for the issuance
of performance shares. Approximately 1,200,000 of these
shares have been transferred to certain members of the
current management of the Company. The Performance
Shares are held in escrow to be released as the Company
achieves positive operating cash flow on an annual basis
as defined by the BCSC ("BCSC Operating Cash Flow").
The holders of Performance Shares will be entitled to a
pro rata release from escrow on the basis of one share
for every CDN $0.653 of positive BCSC Operating Cash
Flow, subject to approval by the BCSC and the Vancouver
Stock Exchange. Performance Shares are permitted to be
released from escrow on an annual basis, and all of the
Performance Shares will be released once CDN $2,612,000
of positive BCSC Operating Cash Flow has been generated
by the Company. The Company may pursue an early release
of all or a large portion of the Performance Shares from
escrow. Such an early release would reduce a source of
continuing uncertainty surrounding the Company's
financial statements, but could also result in a similar
expense in the quarter in which the release is made.
Through March 31, 1996, no Performance Shares have been
earned or released.
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The Company will be required to recognize as
compensation expense an amount equal to the difference
between the CDN $0.01 per share originally paid for the
Performance Shares and the market price of its common
stock at the time such Performance Shares or pro rata
portion thereof are released. Such pro rata or full
expense recognition will occur prior to the pro rata or
full release from escrow of the Performance Shares. If
and when such expense recognition criteria are achieved,
based on the closing price of the Company's common stock
at June 14, 1996, of $1.06 per share (for example
purposes only), the aggregate compensation expense that
would be recognized as a result would be approximately
$4,200,000. Any compensation expense recognized related
to the Performance Shares will be a noncash charge
against income and will have no net impact on total
stockholders' equity (deficit).
If and when the Performance Shares are released, the
number of shares used to calculate net income (loss) per
share will increase by the number of Performance Shares
released.
ITEM 2
Management's Discussion and Analysis of Financial Condition
and
Results of Operations
The following information should be read in conjunction with
the unaudited condensed consolidated financial statements
and the notes thereto included in item 1 of this Quarterly
Report and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the
Company's Annual Report on Form 10-K/A-1 and A-2 for the
fiscal year ended December 31, 1995, as filed with the
Securities and Exchange Commission.
The following description of the Company's business in this
Item and other Items in this Report contains 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. Actual results
could differ materially from those projected, as a result of
risk factors discussed in this section, and in Management's
Discussion and Analysis of Financial Condition and Results
of Operations contained in the Company's report on Form 10-
K/A-1 and A-2.
Overview and Recent Developments.
On May 6, 1996, the Company changed its fiscal year end to
March 31. Thus, this is a transition report for the period
January 1, 1996 through March 31, 1996 (the "Transition
Quarter").
During the Transition Quarter, the Company was engaged in an
extensive reorganization of its operations. These
reorganizational efforts are discussed in detail in the
Company's Report on Form 10-K/A-1 and A-2 on file with the
Securities and Exchange Commission, and the reader is
directed to this report for a more extensive description of
the reorganizational changes. Of particular note, during
and subsequent to the Transition Quarter, were the following
developments:
- Appointment of a new Chief Executive Officer, a new
Vice President of Sales and a new Controller, a new Vice
President of Marketing, and the promotion of the Vice
President of the Education division to Senior Vice
President.
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- Reduction of head count from 148 employees at December
31, 1995 to 45 employees currently, and elimination of many
part-time, temporary and contract positions.
- Elimination of its Publishers Services Division.
- Sale of substantially all of the fixed assets of its
Entertainment Division, including its Victoria Studio in May
1996, for approximately $1.9 million, $500,000 of which was
used to reduce bank borrowings. The resulting gain on the
sale of the studio, which will be recorded in the quarter
ending June 30, 1996, totaled approximately $860,000.
- A 10% reduction in senior management salaries.
- Termination of all software development projects
through third party developers.
- Extension of its Bank Line of Credit (see discussion
below).
- In March 1996, $1,500,000 of 10% convertible notes were
issued in a private placement, including $50,000 of notes to
the Company's President and Chief Executive Officer, and
$50,000 of notes to the Company's Senior Vice President. In
June 1996, $1,500,000 of these notes were converted into
3,000,000 shares of common stock which are subject to
certain registration rights. The Company waived the
requirement that conversion of $500,000 of the notes be
subject to shareholder approval. In addition, certain of
the convertible note holders have exercised warrants to
purchase 1,500,000 of the 1,875,000 shares of common stock
subject to certain registration rights covered by warrants
issued in connection with the issuance of the notes at an
exercise price of $.50 per share for total proceeds of
$750,000.
- The hiring of Strategic Marketing Partners to represent
the Company's product line to the retail channel.
Under the direction of President and CEO Charlotte Walker,
the Company has now focused on the development and
publishing of its children's curriculum-based educational
software products. The Company develops these products in
its San Mateo, California, and Toronto, Canada offices.
During the month of May 1996, the Company completed the
development of four new products: Major League Math,
Franklin Learns Math, How Do You Spell Adventure?, and Orion
Burger. The Company has begun the marketing and sale of the
three educational products and is presently negotiating to
license the publishing rights of Orion Burger to a third
party publisher.
Going Concern Uncertainty.
The accompanying unaudited condensed consolidated financial
statements have been prepared on the going concern basis,
which contemplates the realization of assets and
satisfaction of liabilities in the normal course of
business. The matters discussed herein, among others, may
indicate that the Company may be unable to continue as a
going concern for a reasonable period of time. The
consolidated financial statements do not include any
adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and
classification of liabilities that may be necessary should
the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon
its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to comply with the terms and
covenants of its bank line of credit, to obtain additional
financing or refinancing, and ultimately to attain
successful operations. To date the Company has not been
able to generate sufficient cash flow from operations to
cover its expenses, and the Company has been substantially
dependent on equity financing as a method of financing its
operations. There can be no assurance that such financing
will be available to the Company at all, or on terms that
12
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are favorable to the Company and its shareholders.
Management is continuing its efforts to obtain additional
funds so that the Company can meet its obligations and
sustain its operations.
Because of the possible material effects of this going
concern uncertainty, the independent auditors were unable to
express, and did not express, an opinion on the Company's
1995 consolidated financial statements.
Liquidity and Capital Resources.
At June 14, 1996, the Company had cash of $290,000. Of the
total bank borrowings of $1,191,000 outstanding at June 14,
$191,000 is due by June 30, 1996 with the remaining balance
payable in full by December 31, 1996. No additional bank
borrowings are currently available. Management continues to
explore a number of options, including equity and debt
financing, to improve its capital resources. No assurance
can be given that additional financing will be available or
that, if available, such financing will be obtainable on
terms favorable to the Company or its stockholders. If the
Company is unable to successfully obtain such funding,
management believes that the Company may be forced to cease
operations.
As a result of the significant losses discussed above, the
Company was in violation of certain covenants of its bank
line of credit at March 31, 1996 and thereafter. In
addition, the Company has borrowed in excess of the amounts
allowed under the bank credit agreement. In April 1996, and
subsequently through a further amendment in May, 1996, the
bank agreed to amend the bank line of credit as follows:
- The maturity date was extended to December 31, 1996.
- The line of credit was set at a maximum of $1,000,000
effective upon reduction of outstanding borrowings to that
level.
- Existing covenant violations were waived, but no
further borrowings are allowed until the Company complies
with all covenants. The Company will need to increase its
net worth significantly in order to meet the covenant at
June 30, 1996.
- The bank is applying 50% of all accounts receivable
collections to outstanding indebtedness while the borrowing
base is in an overadvanced condition or until further notice
by the bank.
- The Company agreed to pay the bank $50,000 in fees and
has issued warrants to purchase 200,000 shares of common
stock at $.50 per share and 200,000 shares at $.5625 per
share. The warrants expire in five years although warrants
to purchase 100,000 shares will be canceled if the Company
obtains $3,000,000 in additional capital between May 15th
and June 30, 1996.
During the Transition Quarter, the Company was hampered, and
continues to be hampered, in its ability to develop, market
and sell its products due to its lack of capital resources.
The Company's net loss for the Transition Quarter was
$4,514,171. Cash used in operating activities for the
Transition Quarter was $1,897,658.
In addition, subsequent to March 31, 1996, the Company
issued warrants to purchase 285,000 shares of common stock
to Strategic Marketing Partners pursuant to an agreement to
represent the Company's products at the retail level in
North America, and issued warrants to purchase 300,000
shares of common stock to a financial consultant to the
Company.
Nasdaq Listing.
Subsequent to the Transition Quarter, it was determined that
the Company no longer met the requirements for inclusion in
the Nasdaq National Market System, because the Company
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<PAGE>
failed to meet the continuing inclusion requirements for
tangible net worth and minimum bid price. As of June 3,
1996, the Company's stock ceased trading on the National
Market System, and began trading on the Nasdaq SmallCap
Market. The Company is currently trading on the SmallCap
market under an exception to the SmallCap initial inclusion
requirements, and has been given until July 1, 1996 to meet
these initial listing requirements. If the Company fails to
meet these requirements, it will be delisted from the Nasdaq
Stock Market. The Company's stock symbol has temporarily
changed to "SWMFC"-the trailing "C" indicating that the
stock is trading pursuant to an exception granted by Nasdaq.
Results of Operations, Transition Quarter January 1, 1996
through March 31, 1996, compared with first quarter of 1995
(January 1, 1995 through March 31, 1995).
Net Loss. The net loss for the Transition Quarter was
($4,514,171) compared to ($2,896,992) in the quarter ended
March 31, 1995. The increase in the net loss resulted from
substantial severance costs and other costs related to the
reorganization of the Company's operations, as well as the
additional inventory reserves and write-offs noted above.
In particular, the Company recorded the following expenses
in the Transition Quarter related to the reorganization of
its operations:
[S] [C]
Closure of Publisher Services Operation $437,000
Severance Expenses $210,000
Consolidation of Facilities & Related Items $358,000
----------
Total $1,005,000
Fixed salary and overhead costs, combined with lower sales
revenues also contributed to this loss. The 4,000,000
performance shares are not included in the calculation of
net loss per share (see note 6 to consolidated financial
statements, and discussion of performance shares herein).
Net Revenues. Net revenues from consumer titles decreased
to $931,805 in the Transition Quarter from $1,302,125 in the
first quarter of 1995. The decrease is attributable to
continued excess inventory levels of the Company's products
at the distributor and retail level. This decrease also
resulted from the Company's lack of resources to market and
promote its titles, and to fund retail and distributor sales
programs. In addition, as with the first quarter of 1995,
the Company released no new products during the Transition
Quarter.
Gross Margins. Cost of sales increased as a percentage of
net consumer title revenues to 81% in the Transition Quarter
from 38% for the quarter ended March 31, 1995. Cost of
sales in the Transition Quarter reflects a charge of
$250,000 for a write-down of product inventory to net
realizable value. The Company's decision to take such
additional reserves and write-downs reflects the Company's
assessment of the salability of the products in its
inventory, and the Company's decision to exit the
entertainment publishing arena. The Company's inventory has
grown as additional returns have been processed. The
Company took no such reserve in the quarter ended March 31,
1995. Without this additional write-down and reserve
charge, cost of sales as a percentage of net revenues from
consumer titles would have been 54% in the Transition
Quarter, versus 38% in the quarter ended March 31, 1995.
The high percentage in 1996 reflects liquidation sales of
excess inventory, as well as a general decline in the price
charged for the Company's products, the results of an
increasingly competitive marketplace.
Research and Development Costs. Research and Development
costs increased 25% to $1,261,391 in the Transition Quarter
from $1,008,334 in the quarter ended March 31, 1995. This
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<PAGE>
increase resulted from higher salaries and contract labor
costs due to higher staffing levels at the beginning of the
Transition Quarter compared to the quarter a year ago, along
with higher costs for rent and facilities.
Marketing and Sales. Marketing and sales expenditures
increased to $1,789,866 in the Transition Quarter from
$1,737,749 in the quarter ended March 31, 1995. This
increase includes charges totaling $486,206 related to the
write-downs of certain assets for the entertainment
marketing department and the closure of the Dallas office.
Without these changes, expenses for the Transition Quarter
would have decreased. This decrease was due to the
Company's lack of resources to spend capital on advertising
and promotion, as well as a substantial decrease in salary
expense, partially offset by higher contract labor expenses
and higher travel and entertainment expenses.
Administrative Costs. Administrative expenses increased 66%
to $1,196,553 in the Transition Quarter from $719,049 in the
quarter ended March 31, 1995. Increased salary expense, and
substantially increased accounting fees were primary
components of this increase. The 1996 total also includes
$150,000 in charges related to the consolidation of the San
Mateo office.
As noted above, during and after the Transition Quarter, the
Company reduced staff levels, divested both its Victoria and
Dallas studios and terminated its lease on approximately
half of the space in its San Mateo facility. The Company
has also reduced expenses in a number of other areas. The
Company therefore believes that the expense levels discussed
above are not representative of the level of expenses the
Company expects to incur going forward. Approximately $2.5
million of operating expenses in the Transition Quarter were
associated with operations which have since been sold, shut-
down or consolidated. This amount, in addition to the
$640,000 in charges taken against accounts receivable and
inventories (see note 2), represents over $3 million in
expense related to curtailed operations. As of June 14,
1996, the Company had 45 full time employees and operated
facilities in San Mateo, California and Toronto, Canada.
These employees were employed in the following functions:
[S] [C]
Product Development- Kids Products 18
Marketing 4
Sales, Customer Service and Technical Support 12
General and Administrative 11
---
Total 45
The Company expects to maintain its operations at this level
in the near future. There can be no assurances, however,
that the Company will be able to continue its operations at
this level, or that the Company will be successful in
operating at this level.
ADDITIONAL RISK FACTORS
There are numerous additional risks associated with the
Company's on-going operations, including without limitation
the following:
Continued Losses; Fluctuations in Operating Results;
Seasonality. The Company has not been profitable on an annual
basis in the last three years. The Company has experienced,
and expects to continue to experience, significant
fluctuations in operating results due to a variety of factors,
including the size and rate of growth of the consumer software
market, market acceptance of the Company's products and those
of its competitors, development and promotional expenses
relating to the introduction of new products or new versions
of existing products, projected and actual changes in
computing platforms, the timing and success of product
introductions, product returns, changes in pricing policies by
15
<PAGE>
the Company and its competitors, difficulty in securing retail
shelf space for the Company's products, the accuracy of
retailers' forecasts of consumer demand, the timing of orders
from major customers, order cancellations and delays in
shipment. In response to competitive pressures, the Company
may take certain pricing or marketing actions that could
materially adversely affect the Company's business, operating
results and financial condition. The Company may be required
to pay fees in advance or to guarantee royalties, which may be
substantial, or to obtain licenses to intellectual properties
from third parties before such properties have been introduced
or achieved market acceptance. A significant portion of the
Company's operating expenses are relatively fixed, and planned
expenditures are based in part on sales forecasts. If net
sales do not meet the Company's expectations, the Company's
business, operating results and financial condition could be
materially adversely affected.
Possible Write-Offs from Product Returns, Price Protection;
Bad Debts; Collections. The Company recognizes revenue in
accordance with industry practice (net of an allowance for
product returns and price protection) from the sale of its
products upon shipment to its distributors and retailers. The
Company had a reserve balance for price protection and returns
as of March 31, 1996, of $3,806,051. Product returns or price
protection concessions that exceed the Company's reserves
could materially adversely affect the Company's business,
operating results and financial condition and could increase
the magnitude of quarterly fluctuations in the Company's
operating and financial results. In addition, as also
discussed above, the Company has experienced in the past, and
continues to experience, significant delays in the collection
of its accounts receivable. Further, if the Company's
assessment of the creditworthiness of its customers receiving
products on credit proves incorrect, the Company could be
required to significantly increase the reserves previously
established.
Impact of Reorganization of Operations. The Company may take
additional steps to reorganize or consolidate its operations.
These steps may include, among other things, the sale of
certain assets of the Company. In an effort to reduce its
expense structure, the Company reorganized its operations
during the Transition Quarter, reduced its work force by more
than 66% and revised its product development plans for 1996.
These changes or other future steps to reorganize and reduce
expenses could result in the delayed introduction of new
products which could have a material adverse effect on the
Company's financial condition and results of operations.
Dependence on Key Personnel; Retention of Employees. The
Company's success depends in large part on the continued
service of its key creative, technical, marketing, sales and
management personnel and its ability to continue to attract,
motivate and retain highly qualified employees. Because of
the multifaceted nature of interactive media, key personnel
often require a unique combination of creative and technical
talents. Such personnel are in short supply, and the
competition for their services is intense. The process of
recruiting key creative, technical and management personnel
with the requisite combination of skills and other attributes
necessary to execute the Company's strategy is often lengthy.
The Company has entered into at-will employment agreements
with its management and other personnel, who may generally
terminate their employment at any time. The loss of the
services of key personnel or the Company's failure to attract
additional qualified employees could have a material adverse
effect on the Company's results of operations and research and
development efforts. In particular, the Company has recently
reorganized its operations and has undergone a reduction in
force among its employees. Such reduction in force, combined
with the Company's disappointing operating performance, the
price of the Company's stock, and the availability of
substantial alternative employment opportunities for talented
employees of the Company, may result in key employees and
managers leaving the Company, which could materially adversely
impact the Company's ability to develop and sell its products.
The Company does not have key person insurance covering any of
its personnel.
16
<PAGE>
Dependence on New Product Development; Product Delays. The
success of the Company depends on the continual and timely
introduction of successful new products. In general, consumer
preferences for software products are difficult to predict and
are often short-lived. The retail life of software programs
has become shorter, and may now last only 9 to 12 months (or
even less for unsuccessful products), while the Company
typically requires 6 to 9 months or longer for the development
of a new educational CD-ROM title. The short life span of a
product combined with a lengthy development cycle makes it
especially difficult to predict whether a product will be a
success by the time it comes to market. There can be no
assurance that new products introduced by the Company will
achieve any significant market acceptance or that, if such
acceptance occurs, it will be sustained for any significant
period. If the Company does not correctly anticipate and
respond to demand for its products in a timely manner, the
Company's business, operating results and financial condition
will be materially adversely affected.
A significant delay in the introduction of, or the presence of
a defect in, one or more new products could have a material
adverse effect on the Company's business, operating results
and financial condition, particularly in view of the
seasonality of the Company's business. Further, delays in a
product introduction near the end of a fiscal quarter may
materially adversely affect operating results for that
quarter, as initial shipments of a product may move from one
quarter to the next and may represent a substantial percentage
of annual shipments of a product. The timing and success of
software development is unpredictable due to the technological
complexity of software products, inherent uncertainty in
anticipating technological developments, the need for
coordinated efforts of numerous creative and technical
personnel and difficulties in identifying and eliminating
errors prior to product release. In the past, the Company has
experienced delays in the introduction of certain new
products. There can be no assurance that new products will be
introduced on schedule or at all or that they will achieve
market acceptance or generate significant revenues.
Competition. The software industry is intensely competitive,
and market acceptance for any of the Company's products may be
adversely affected by the introduction by the Company's
competitors of similar products with greater consumer demand.
The Company competes against a large number of other companies
of varying sizes and resources. Most of the Company's
competitors have substantially greater financial, technical
and marketing resources, as well as greater name recognition
and better access to consumers. Existing competitors may
continue to broaden their product lines and potential
competitors, including large computer or software
manufacturers, entertainment companies, diversified media
companies, and book publishers, may enter or increase their
focus on the CD-ROM school and home education markets,
resulting in increased competition for the Company. Retailers
of the Company's products typically have a limited amount of
shelf space and promotional resources, and there is intense
competition among consumer software producers for high quality
and adequate levels of shelf space and promotional support
from retailers. To the extent that the number of consumer
software products and computer platforms increases, this
competition for shelf space may intensify. Due to increased
competition for limited shelf space, retailers and
distributors are increasingly in a better position to
negotiate favorable terms of sale, including price discounts
and product return policies. Retailers often require software
publishers to pay fees in exchange for preferred shelf space.
There can be no assurance that retailers will continue to
purchase the Company's products or provide the Company's
products with adequate levels of shelf space. Increased
competition could result in loss of shelf space for, and
reduction in sell-through of, the Company's products at retail
stores and significant price competition, any of which could
adversely affect the Company's business, operating results and
financial condition. In addition, other types of retail
outlets and methods of product distribution, such as on-line
services, may become important in the future, and it may be
important for the Company to gain access to these channels of
distribution. There can be no assurance that the Company will
17
<PAGE>
gain such access or that the Company's access will be on terms
favorable to the Company.
Changing Product Platforms and Formats. The Company's
software products are intended to be played on machines built
by other manufacturers. The operating systems of machines
currently being manufactured are characterized by several
competing and incompatible formats or "platforms," and new
platforms will probably be introduced in the future. The
Company must continually anticipate the emergence of, and
adapt its products to, popular platforms for consumer
software. When the Company chooses a platform for its
products, it must commit a substantial development time and
investment in advance of shipments of products on that
platform. If the Company invests in a platform that does not
achieve significant market penetration, the Company's planned
revenues from those products will be adversely affected and it
may not recover its development investment. If the Company
does not choose to develop for a platform that achieves
significant market success, the Company's revenues may also be
adversely affected. The Company is currently developing
products only for DOS and Windows PC, and Macintosh computers.
The Company has terminated virtually all current development
for other platforms such as the Sony PlayStation and Sega
Saturn. There can be no assurance that the Company has chosen
to support the platforms that ultimately will be successful.
Changes in Technology and Industry Standards. The consumer
software industry is undergoing rapid changes, including
evolving industry standards, frequent new product
introductions and changes in consumer requirements and
preferences. The introduction of new technologies, including
operating systems and media formats, can render the Company's
existing products obsolete or unmarketable. Recent operating
setbacks at Apple Computer may adversely affect future sales
of Macintosh computers. The development cycle for products
utilizing new operating systems, microprocessors or formats
may be significantly longer than the Company's current
development cycle for products on existing operating systems,
microprocessors and formats and may require the Company to
invest resources in products that may not become profitable.
There can be no assurance that the current demand for the
Company's products will continue or that the mix of the
Company's future product offerings will keep pace with
technological changes or satisfy evolving consumer preferences
or that the Company will be successful in developing and
marketing products for any future operating system or format.
Limited Protection of Intellectual Property and Proprietary
Rights; Risk of Litigation. The Company regards its software
as proprietary and relies primarily on a combination of
trademark, copyright and trade secret laws, and employee and
third-party nondisclosure agreements and other methods to
protect its proprietary rights. However, the Company does not
have signed license agreements with its end-users and does not
include in its products any mechanism to prevent or inhibit
unauthorized copying. Unauthorized parties may copy the
Company's products or reverse engineer or otherwise obtain and
use information that the Company regards as proprietary. If a
significant amount of unauthorized copying of the Company's
products were to occur, the Company's business, operating
results and financial condition could be materially adversely
affected. Further, the laws of certain countries in which the
Company's products are or may be distributed do not protect
applicable intellectual property rights to the same extent as
the laws of the United States. In addition, the Company holds
no patents, and, although the Company has developed and
continues to develop certain proprietary software tools, the
copyrights to which are owned by the Company, most of the
technology used to develop the Company's products is not
proprietary. There can be no assurance that the Company's
competitors will not independently utilize existing
technologies to develop products that are substantially
equivalent or superior to the Company's. Also, as the number
of software products in the industry increases and the
functionality of these products further overlaps, software
developers and publishers may increasingly become subject to
18
<PAGE>
infringement claims. There can be no assurance that third
parties will not assert infringement claims against the
Company in the future with respect to current or future
products.
As is common in the industry, from time to time the Company
receives notices from third parties claiming infringement of
intellectual property or other rights of such parties. The
Company investigates these claims and responds as it deems
appropriate. There has been substantial litigation regarding
copyright, trademark and other intellectual property rights
involving computer software companies in general. The Company
may also face suits as a result of employment matters,
publicity rights, or due to claims of breach of the Company's
obligations under various agreements to publish or develop
products, or for goods or services provided to the Company.
Adverse determinations in such claims or litigation could have
a material adverse effect on the Company's business, operating
results and financial condition. The Company may find it
necessary or desirable in the future to obtain licenses
relating to one or more of its products or relating to current
or future technologies. There can be no assurance that the
Company will be able to obtain these licenses or other rights
on commercially reasonable terms or at all.
Relationship with Vendors. Due to the substantial operating
losses in the fourth quarter of 1995, and the Transition
Quarter, and the Company's current financial condition and
lack of capital resources, the Company has in the Transition
Quarter and subsequently been unable to pay certain of its
vendors. This failure may result in loss of the availability
of the services of such vendors, which could hamper the
Company's ability to manufacture and ship products, and may
ultimately result in the Company being sued for collection of
such amounts as may be owed to such vendors, as has occurred
to some extent to date. If the Company is unable to produce
its products to fill orders, the Company's operating results
and financial condition could be materially adversely
affected. In the event that suits by vendors are filed
against the Company, the Company may find it necessary to seek
protection under the applicable bankruptcy statutes of Canada
and/or the United States.
Market for Common Stock; Stock Price Volatility. The Common
Stock has been quoted on the Nasdaq National Market or Small
Cap Market since September 8, 1993 and on the Vancouver Stock
Exchange since December 1991. Based upon historical trends in
the market for other software company stocks, the Company
anticipates that the trading price of its Common Stock may be
subject to wide fluctuations in response to quarterly
variations in operating results, changes in actual earnings or
in earnings estimates by analysts, announcements of
technological developments by the Company or its competitors,
general market conditions or other events largely outside the
Company's control. In addition, the stock market has
experienced, from time to time, extreme price and volume
fluctuations which have particularly affected the market
prices of high technology stocks. These fluctuations have
often been disproportionate or unrelated to the operating
performance of these companies. These broad market
fluctuations, general economic conditions or other factors
outside the Company's control may adversely affect the market
price for the Company's stock.
Performance Shares and Related Compensation Expense. In 1991,
the Company issued to its founders an aggregate of 4,000,000
Performance Shares for nominal consideration. Approximately
1,200,000 of these Performance Shares have been transferred to
members of the Company's current management. Pursuant to
certain Vancouver Stock Exchange ("VSE") requirements, these
Performance Shares are currently held in an escrow account,
subject to release upon specified conditions. One Performance
Share is scheduled to be released from escrow for each
(Canadian dollar) CDN$0.653 of cumulative operating cash flow
generated by the Company, as specifically defined by VSE
Policy 19. The Company will be required to recognize as
compensation expense an aggregate amount equal to the
difference between the amount per share originally paid for
the Performance Shares (CDN$.01) and the market price of the
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<PAGE>
Common Stock at the time such Performance Shares or pro rata
portion thereof are earned. Performance Shares are permitted
to be released from escrow on an annual basis. Any
compensation expense related to the release of the Performance
Shares from escrow will be a non-cash charge against income
and will have no net impact on total shareholders' equity
(deficit). Such pro rata or full expense recognition will
occur prior to the pro rata or full release from escrow of the
Performance Shares. If and when such expense recognition
criteria are achieved, based upon the closing price of the
Company's Common Stock at June 14, 1996 of US$1.06, (for
example purposes only), the aggregate compensation expense
that would be recognized as a result would be approximately
$4,200,000. The Company may pursue an early release of all or
a large portion of the Performance Shares from escrow. Such
an early release would reduce a source of continuing
uncertainty surrounding the Company's financial statements,
but could also result in a similar expense in the quarter in
which the release is made.
Shares Eligible for Future Sale; Possible Adverse Effect on
Future Market Price. Sale of substantial amounts of shares in
the public market or the prospect of such sales could
adversely affect the market price of the Company's Common
Stock. Other than the 4,000,000 Performance Shares issued to
the Company's founders (which are currently held in an escrow
account and are subject to release upon satisfaction of
specified conditions as discussed above) substantially all of
the Company's issued and outstanding shares are freely
tradable, subject to, in certain circumstances compliance with
Rule 144 or Rule 701 or the effectiveness of a resale
registration statement. In addition, as of June 14, 1996, the
Company had outstanding options to purchase an aggregate of
2,712,136 shares of Common Stock and warrants to purchase
1,360,000 shares of Common Stock. Furthermore, the Company
has reserved approximately 18,500 additional shares of Common
Stock for future issuance pursuant to the Company's Stock
Option Plan.
No Dividends. The Company has not paid any cash dividends
since inception and does not anticipate paying cash
dividends in the foreseeable future. The Company's line of
credit prohibits the payment of cash dividends without the
prior written consent of the lender.
PART II - OTHER INFORMATION
20
<PAGE>
Item 1. Legal Proceedings
The lawsuit Quadra Interactive v Presto Studios, Sanctuary
Woods, et al. was settled as of May 24, 1996, and the entire
case was dismissed with prejudice. Sanctuary Woods received
a full release of all claims against the Company. Sanctuary
Woods made no payment to settle the case.
Sanctuary Woods was recently sued by Starpak, Inc. in the
district court for the state of Colorado. Starpak's
complaint alleges breach of contract, and claims damages in
the amount of $103,092.65 plus fees, interest and costs.
Starpak was engaged by Sanctuary Woods to provide high
quality technical support, customer service, and product
fulfillment services to Sanctuary Woods' customers; however
it is Sanctuary Woods contention that Starpak failed to do
so. Sanctuary Woods has removed the case to the United
States District Court for the District of Colorado.
Sanctuary Woods denies any liability for this claim, and has
counterclaimed against Starpak stating causes of action for
breach of fiduciary duty, fraud and deceit, negligent
misrepresentation, conversion, breach of contract, breach of
the implied covenant of fair dealing, interference with
contractual relations, interference with prospective
economic advantage and declaratory relief.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
10.19 Second Amendment to Loan Agreement between Sanctuary
Woods Multimedia, Inc. and Imperial Bank, dated May
29, 1996.
10.20 Warrant granted in connection with Second Amendment to
Loan Agreement between Sanctuary Woods Multimedia,
Inc. and Imperial Bank.
10.21 Agreement with Strategic Marketing Partners dated May
13, 1996.
11 Computation of Net Loss Per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed the following reports on Form 8-K
since it filed its report on Form 10-K/A-1 and A-2:
May 6, 1996 (Item 8 - Change in fiscal year end);
May 13, 1996 (Item 2 - Acquisition or disposition
of assets).
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SANCTUARY WOODS MULTIMEDIA
CORPORATION
By: /s/ CHARLOTTE J. WALKER
Charlotte J. Walker,
President
and Chief Executive
Officer
By: /s/ PETER NICHTER
Peter Nichter
Controller
Principal Financial and
Accounting Officer
Dated: June 18, 1996
22
SECOND AMENDMENT TO
LOAN DOCUMENTS
This Second Amendment to Loan Documents ("Amendment") is
made and entered into as of May 29, 1996, by and among Sanctuary
Woods Multimedia Inc., a Nevada corporation, ("Borrower"),
Sanctuary Woods Multimedia Corporation, a British Columbia
corporation ("Parent") and Magic Quest Inc., a California
corporation ("Magic Quest") (Parent and Magic Quest being
hereinafter collectively referred to as "Guarantors"), and
Imperial Bank ("Bank").
Recitals
A. Borrower and Bank have entered into that certain
Security and Loan Agreement (Accounts Receivable) entered into as
of March 10, 1995 as modified by that First Amendment to Loan
Documents entered into as of April 2, 1996 (as such may be
further amended, modified, supplemented or restated, the "Loan
Agreement"), pursuant to which Bank made certain credit
facilities available to Borrower for the direct and indirect
benefit of Borrower and each Guarantor.
B. Borrower, Guarantors and Bank desire to further amend
the Loan Agreement.
Agreement
Now, Therefore, in consideration of the foregoing recitals
and the mutual covenants herein set forth, and intending to be
legally bound, the parties hereto hereby amend the Loan Documents
as follows:
1. Definitions. Unless otherwise defined herein, all
terms defined in the Loan Agreement have the same meaning when
used herein.
2. Amendments To Loan Agreement. The following amendments
are hereby made to the Loan Agreement:
a. Section 1 of the Loan Agreement is deleted in its
entirety and replaced with the following:
"Facility A Commitment. Bank hereby commits, subject to all
the terms and conditions of this Agreement and prior to the
termination of its commitment as hereinafter provided, to make
loans to Borrower and issue letters of credit for the account of
Borrower from time to time in such amounts as may be determined
by Bank up to, but not exceeding in aggregate principal amount
the
following borrowing base (the "Borrowing Base") as follows:
A. From and after the date of the Second Amendment
Date through June 30, 1996:
i. 70% of Eligible Accounts, plus
ii. 50% of Eligible Inventory, less
iii. interest accrued on amounts in the Facility A
Loan Account, less
iv. Card Indebtedness,
but in no event greater than $1,400,000; and
B. From after June 30, 1996,
i. 65% of Eligible Accounts, less
ii. interest accrued on amounts in
the Facility A Loan Account, less
iii. Card Indebtedness,
but in no event greater than $1,000,000.
All Loans advanced to Borrower shall be referred to as "Facility
A Loans." Letters of credit issued for the account of Borrower
prior to the First Amendment Date shall be referred to as
"Letters of Credit.""
b. Section 2 of the Loan Agreement is deleted in its
entirety and replaced with the following:
"Facility A Loans. The amount of each Facility A Loan made
by Bank to Borrower hereunder shall be debited to the loan
ledger account of Borrower maintained by Bank (herein called
"Facility A Loan Account"). Borrower agrees that from and
after the First Amendment Date fifty percent (50%) of all
accounts receivable collections will be immediately applied
to the Facility A Loan Account until the earlier of (i) the
date the Facility A Loan Account falls below the Borrowing
Base or (ii) the date Bank, acting in its sole and absolute
discretion, provides written notice to borrower that less
than fifty percent (50%) of accounts receivable collections
will be so applied (such date (i) or (ii) being referred to
herein as the "50% Collection Application Termination
Date"). After the 50% Collection Application Termination
Date and so long as the Facility A Loan Account is below the
Borrowing Base, twenty-five (25%) of all accounts receivable
collections will be immediately applied to the Facility A
Loan Account until the earlier of (i) the date the Facility
A Loan Account falls below the Borrowing Base by $500,000
and the Facility A Loan Account is less than $1,000,000 or
(ii) the date Bank, acting in its sole and absolute
discretion, provides written notice to borrower that less
than twenty-five percent (25%) of accounts receivable
collections will be so applied (such date (i) or (ii) being
referred to herein as the "25% Collection Application
Termination Date"). After the 25% Collection Application
Termination Date and so long as the Facility A Loan Account
falls below the Borrowing Base by $500,000 and the Facility
A Loan Account is less than $1,000,000, no accounts
receivable collections will be applied to the Facility A
Loan Account. If the 50% Collection Application Termination
Date or the 25% Collection Application Termination Date, as
applicable, shall have occurred but a decrease in the
Borrowing Base or increase in indebtedness causes the
conditions for collection allocation set forth above to no
longer be applicable, then fifty percent (50%) of
collections shall again be applied to the Facility A Loan
Account and such percentage shall again be subject to
reduction in accordance with this section. All sums
received by Bank for credit to the Facility A Loan Account
shall be applied to the outstanding loan balance on the
second day following receipt thereof by the Bank, except
that sums received by wire transfer shall be applied on the
day received. Interest shall continue to accrue on all
loans outstanding under the Facility A Loan Account until
sums received are applied as herein provided. Borrower
promises to pay Bank (a) the unpaid balance of Borrower's
Facility A Loan Account on December 31, 1996 (the "Facility
A Final Payment Date"), (b) accrued and unpaid interest as
of the Second Amendment Date on June 30, 1996, and
(c) except as provided in the preceding clause (b), on or
before the tenth day of each month, interest on the average
daily unpaid balance of the Facility A Loan Account during
the immediately preceding month at the rate of two and one
half percent (2_%) per annum in excess of the rate of
interest which Bank has announced as its prime lending rate
("Prime Rate") which shall vary concurrently with any change
in such Prime Rate. Interest shall be computed at the above
rate on the basis of the actual number of days during which
the principal balance of the loan account is outstanding
divided by 360, which shall for interest computation
purposes be considered one year. Bank is hereby authorized
to charge Borrower's deposit account(s) with Bank for all
sums due Bank under this Agreement."
c. Section 6 (Definitions) of the Loan Agreement is
modified as follows:
i. Subsection 6J is added as follows:
"J. "Designated Account Debtor Accounts" shall mean the
Accounts of the following account debtors: New Media
Express, Merisel, Handleman Company, Beamscope, GT
Interactive Software and Electronics Boutique and such other
account debtors as Bank may from time to time, in its sole
and absolute discretion, expressly designate in writing."
ii. Subsection 6L is added as follows:
"L. "Second Amendment Date" shall mean May 29, 1996."
iii. Subsection 6M is added as follows:
"M. "Card Indebtedness" shall mean the aggregate of all
principal, interest and other obligations outstanding in
favor of Bank under Borrower's corporate credit cards and
merchant cards."
d. Clause (viii) of Section 11 (Affirmative Covenants) of
the Loan Agreement is deleted in its entirety.
3. Amendments To Addendum to Security and Loan Agreement.
The following amendments are hereby made to the Addendum to
Security and Loan Agreement (the "Addendum"):
a. Section 1 of the Addendum is deleted in its
entirety and replaced with the following:
"1. Termination of Commitment. Any commitment of Bank,
pursuant to the terms of the Security and Loan Agreement, to
make advances against Eligible Accounts and/or eligible
Inventory shall expire on the Facility A Final Payment Date
or such earlier date as is provided for therein. Bank shall
not be required to provide any prior notice to Borrower of
Bank's intent to terminate or not renew its commitment under
the Security and Loan Agreement, whether or not there shall
exist an event of default thereunder. Borrower hereby
acknowledges that it has been informed that Bank has no
present intention of extending the Facility A Final Payment
Date or renewing Bank's commitment under the Loan and
Security Agreement."
b. Sections 6a, 6b, 6c and 6d are deleted in their
entirety and replaced with the following:
"a. At all times maintain a minimum tangible net worth
(meaning the excess of all assets, excluding any value for
goodwill, trademarks, patents, copyrights, organization
expense and other similar intangible items, over its
liabilities, less subordinated debt) of not less than
$1,000,000, provided, however, that this covenant shall
first be measured as of June 30, 1996.
"b. At all times maintain a maximum ratio of total
liabilities to tangible net worth not to exceed 5.5 to one,
provided, however, that this covenant shall first be
measured as of June 30, 1996.
"c. [Intentionally Blank]
"d. Measured on a quarterly basis on the last day of each
fiscal quarter, have maximum quarterly losses not in excess
of (i) $500,000 for the quarter ending June 30, 1996
(exclusive of nonrecurring charges approved by Bank) and
(ii) $1 for the quarter ending September 30, 1996 and
thereafter."
c. A new subsection 5(g) is added and reads as
follows:
"g. With respect to any debt subordinated to the
indebtedness of Parent, Borrower or Magic Quest to Bank
(including, without limitation, indebtedness outstanding
under the Securities Purchase Agreements by and among Parent
and certain investors in Parent dated February 28 and March
8, 1996 (the "Securities Purchase Agreements")
(collectively, "Subordinated Debt"), (i) make any mandatory,
voluntary or optional payment or prepayment on or redemption
or acquisition for value (including, without limitation, by
way of depositing with the trustee with respect thereto
money or securities before due for the purpose of paying
when due) any Subordinated Debt whether at the maturity
thereof or otherwise, (ii) make any payment in respect of
the Subordinated Debt, or (iii) except with respect to
conversions effected prior to June 30, 1996 of the
Subordinated Debt issued pursuant to the Securities Purchase
Agreements, convert, give any instruction to convert, modify
or amend, or agree to any modification or amendment of, the
terms of any agreement or instrument evidencing Subordinated
Debt except."
d. A new subsection 5(h) is added and reads as
follows:
"h. After June 15, 1996, maintain all depository, savings,
payroll and other accounts at Bank, except a Canadian
payroll account which shall only contain such funds as are
sufficient to meet current payroll obligations to Borrower's
Canadian employees and an existing Royal Bank of Canada
operating account which shall be closed by June 30, 1996."
e. A new subsection 5(i) is added and reads as
follows:
"i. Prior to allowing any of Borrower's, Parent's and Magic
Quest's raw materials, work in process, finished goods
inventory and property, plant and equipment to be
transported to or be held at any contract manufacturer,
warehouse or other location (other than with bona fide
distributors and retail accounts or in those locations
specifically identified on Exhibit 5(i) hereto) Borrower
shall provide notice to Bank and Borrower shall have
complied with such filing and notice requirements as shall,
in Bank's opinion, assure Borrower's and Bank's priority in
such property over creditors of such contract manufacturer,
warehouseman or operator of such other location, including,
without limitation, making filings under California
Commercial Code section 2326, providing notice under California
Commercial Code section 9114 and making filings and publications as
required under California Civil Code section 3440.1 and section 3440.5
All such filings, notices and publications shall be in form
and substance satisfactory to Bank."
f. Exhibit 5(i) (Contract Manufacturers) is added in
the form attached here as Annex G.
g. Section 6f is deleted in its entirety and replaced
with the following:
"f. As soon as it is available, but not later than 30 days
after and as of the end of each month, deliver to Bank (i) a
financial statement consisting of a balance sheet and profit
and loss statement prepared in accordance with generally
accepted accounting principles, (ii) a detailed statement
describing the parties, roles, relationships, inventory
amounts, inventory breakdowns and other information as Bank
may request relating to Borrower's contract manufacturing
arrangements, and (iii) a Compliance Certificate in the form
of Exhibit 6.f (attached) certified by an officer of
Borrower."
h. Exhibit 6.f (Compliance Certificate) is replaced
with the form attached hereto as Annex A.
I. Exhibit 6.k (Accounts Receivable and Inventory
Transaction Report) is replaced with the form attached hereto as
Annex B.
j. Section 9g is added and reads as follows:
"g. Upon Bank's request after the occurrence of an
Event of Default, Borrower shall enter into, and shall
cause Parent and Magic Quest to enter into, a lockbox
agreement in form and substance satisfactory to Bank,
pursuant to which all funds received by Borrower,
Parent or Magic Quest from any account debtors shall
immediately be deposited into a deposit account
established at Bank pursuant to such agreement for such
purpose (the "Lockbox Account"). Thereafter, Borrower
shall direct, and shall cause Parent and Magic Quest to
Direct, all account debtors to mail or deliver all
checks or other forms of payment for amounts owing to
them in the ordinary course of business to the Lockbox
Account. In addition, Borrower shall hold in trust for
Bank as Collateral all amounts that Borrower receives
despite the directions to make payment to the Lockbox
Account, and immediately deliver such payments to Bank
in their original form as received from the accounts
debtor, with proper endorsements for deposit into the
Lockbox Account."
4. Representations And Warranties. Borrower and each
Guarantor represents and warrants that its representations and
warranties in the Loan Documents continue to be true and complete
in all material respects as of the date hereof after giving
effect to this Amendment (except to the extent such specifically
relate to another date and except for Borrower's representation
set forth in Section 4a (Litigation) of the Addendum which shall
be true in all respects as of the date hereof or as specifically
described on Annex C hereto) and that the execution, delivery and
performance of this Amendment are duly authorized, do not require
the consent or approval of any governmental body or regulatory
authority (except the approval of the Vancouver Stock Exchange as
to issuance of the Warrant, which approval has been obtained) and
are not in contravention of or in conflict with any law or
regulation or any term or provision of any other agreement
entered into by Borrower or either Guarantor, as applicable. In
addition, Borrower and each Grantor represents and warrants as
follows:
a. Substantially all of Borrower's, Parent's and
Magic Quest's tangible assets are set forth on Annex D hereto,
are owned by the entity indicated on such Annex D and have the
cost and book values indicated thereon.
b. Substantially all of Borrower's, Parent's and
Magic Quest's operations and property are located in the State of
California except for (i) a payroll account in Vancouver, British
Columbia, (ii) a payroll account in Montreal, Quebec and (iii)
the tangible assets set forth on Exhibit D located in Toronto,
Ontario.
c. All of Borrower's, Parent's and Magic Quest's raw
materials, work in process, finished goods inventory and
property, plant and equipment are located on Borrower's premises
as set forth on Annex E except to the extent such are in the
possession of contract manufacturers as described in detail on
Annex E hereto. The value of property owned by Borrower, Parent
and Magic Quest held at such each such other location is not more
than the amount set forth on Annex E and, except with respect to
Softworld Services, no increase in the value of such property
held at such other locations shall be made without Bank's written
consent, which consent shall not be unreasonably withheld if
Bank's interest in such property has priority over the interests
of all other creditors.
d. The conditions which might have caused there to be
a reduction in the number of shares for which that Warrant to
Purchase Stock issued on April 2, 1996 to Bank is exercisable
have not occurred and such Warrant to Purchase Stock is no longer
subject to reduction.
5. Post-Amendment Covenants. Borrower shall perform each
of the following additional covenants on or before the dates
specified:
a. First Amendment Amendment Fee. Pay to Bank the
$25,000 amendment fee not paid in respect of the First Amendment
on the earlier of June 30, 1996 or such date as Parent or
Borrower shall receive proceeds from the issuance of additional
securities.
b. Second Amendment Amendment Fee. Pay to Bank a
$25,000 amendment fee in respect of this Amendment upon the
earlier of December 31, 1996 or such date as Bank's obligation to
make loans to Borrower shall terminate.
c. Intellectual Property Collateral Update. On or
prior to June 15, 1996 Borrower shall have filed copyright
applications in respect of the following products with the U.S.
Copyright Office together with assignments for security thereof
in favor of Bank:
Franklin Learns Math
Major League Math
How do you Spell Adventure
On or prior to the date Borrower ships its "Orion Burger" product
in final form Borrower shall have filed copyright applications
with the U.S. Copyright Office together with assignments for
security thereof in favor of Bank. All such documents shall be
in form satisfactory to Bank and appropriate for filing.
d. Contract Manufacturer Filings and Notices. On or
prior to June 7, Borrower shall have made all filings, notices
and publications as shall be requested by Bank in connection with
Borrower's contract manufacturing relationship with Softworld
Services and/or Zenex Corporation.
e. Unpaid Legal Fees. On or before the last day of
each of each of the next five months beginning June 30, 1996,
Borrower shall pay one-fifth of the remaining outstanding balance
of legal fees accrued through the effective date hereof in
respect of Borrower. Any additional legal fees incurred by Bank
after the effective date hereof shall be due and payable within
30 days of invoice date.
Failure to perform each of the foregoing covenants within the
time periods and as specified above shall constitute an immediate
Event of Default and no grace periods otherwise available to
Borrower under the Loan Documents shall be applicable thereto.
6. Limited Waiver; Full Force and Effect. Subject to the
terms and conditions set forth herein and in reliance upon the
representations and warranties of Borrower and Guarantors set
forth herein and in the Loan Documents, Bank hereby waives
compliance with Section 11(viii) of the Loan Agreement and the
financial covenants set forth in Section 6 of Addendum for any
period ending prior to the date hereof. The amendments and
waivers set forth in this Amendment shall be limited precisely as
written and shall not be deemed (a) to be an amendment or waiver
of any other term or condition of the Loan Documents, to
prejudice any right or remedy which Bank may now have or may have
in the future under or in connection with the Loan Documents or
(b) to be a consent to any future amendment or waiver. Except as
expressly amended hereby, the Loan Documents shall continue in
full force and effect.
7. Conditions Precedent. The legal effectiveness of this
Amendment is subject to the following conditions precedent prior
to 5:00 pm Pacific Time on June 1, 1996:
a. Resolutions and Other Corporate Documents of
Borrower and Parent. Bank shall have received resolutions of the
Board of Directors of each of Borrower and Parent authorizing
Borrower and Parent to enter into this Amendment and issue the
Warrant (as defined below), and such other corporate documents as
Bank shall reasonably request.
b. Delivery of Warrant. Bank shall have received
from Parent a Warrant in the form of Annex F hereto (the
"Warrant").
c. Payment of Fees. Borrower shall have paid $5,000
of Bank's unpaid legal fees outstanding in connection with the
Loan Documents.
d. Subordination Agreements and Conversion Letters.
Bank shall have received a Subordination Agreement in form and
substance satisfactory to Bank from each of the parties to the
Securities Purchase Agreement by and among Parent and the
investors party thereto dated as of March 8, 1996 (the
"Securities Purchase Agreement"). In addition, Bank shall have
received copies of letters from each of such investors in favor
of Parent permitting Parent to convert the indebtedness issued
pursuant to the Securities Purchase Agreement to stock in form
and substance satisfactory to Bank.
e. Other Documents. Bank shall have received such
other documents, information and items from Borrower and
Guarantors as it shall reasonably request.
8. Release And Waiver.
a. Each of Borrower and Guarantors hereby acknowledge
and agree that: (1) it has no claim or cause of action against
Bank or any parent, subsidiary or affiliate of Bank, or any of
Bank's officers, directors, employees, attorneys or other
representatives or agents (all of which parties other than Bank
being, collectively, "Bank's Agents") in connection with the Loan
Documents, the loans thereunder or the transactions contemplated
therein and herein; (2) it has no offset or defense against any
of its respective obligations, indebtedness or contracts in favor
of Bank; and (3) notwithstanding anything stated or implied in
that letter of Charlotte J. Walker dated May 8, 1996, it
recognizes that Bank has at all times acted within its rights and
properly performed and satisfied in a timely manner all of its
obligations to and contracts with Borrower and Guarantors, as
applicable.
b. Although Bank regards its conduct as proper and
does not believe Borrower or either Guarantor to have any claim,
cause of action, offset or defense against Bank or any of Bank's
Agents in connection with the Loan Documents, the loans
thereunder or the transactions contemplated therein, Bank wishes
and Borrower and Guarantors agree to eliminate any possibility
that any past conditions, acts, omissions, events, circumstances
or matters could impair or otherwise affect any rights,
interests, contracts or remedies of Bank. Therefore, Borrower
and Guarantors unconditionally release and waive (1) any and all
liabilities, indebtedness and obligations, whether known or
unknown, of any kind Bank or of any of Bank's Agents to any of
Borrower or either Guarantor, except the obligations remaining to
be performed by Bank as expressly stated in the Loan Agreement,
this Amendment and the other Loan Documents executed by Bank;
(2) any legal, equitable or other obligations or duties, whether
known or unknown, of Bank or of any of Bank's Agents to Borrower
or either Guarantor (and any rights of Borrower or either
Guarantor against Bank) besides those expressly stated in the
Loan Agreement, this Amendment and the other Loan Documents;
(3) any and all claims under any oral or implied agreement,
obligation or understanding with Bank or any of Bank's Agents,
whether known or unknown, which is different from or in addition
to the express terms of the Loan Agreement, this Amendment or any
of the other Loan Documents; and (4) all other claims, causes of
action or defenses of any kind whatsoever (if any), whether known
or unknown, which Borrower or either Guarantor might otherwise
have against Bank or any of Bank's Agents, on account of any
condition, act, omission, event, contract, liability, obligation,
indebtedness, claim, cause of action, defense, circumstance or
matter of any kind whatsoever which existed, arose or occurred at
any time prior to the execution and delivery of this Amendment or
which could arise concurrently with the effectiveness of this
Amendment.
c. Each of Borrower and the Guarantors agree that it
understands the meaning and effect of Section 1542 of the
California Civil Code, which provides:
Section 1542. Certain Claims Not
Affected by General Release. A general
release does not extend to claims which the
creditor does not know or suspect to exist in
his favor at the time of executing the
release, which if known by him must have
materially affected his settlement with the
debtor.
EACH OF BORROWER AND THE GUARANTORS AGREE TO ASSUME THE RISK OF
ANY AND ALL UNKNOWN, UNANTICIPATED OR MISUNDERSTOOD DEFENSES,
CLAIMS, CAUSES OF ACTION, CONTRACTS, LIABILITIES, INDEBTEDNESS
AND OBLIGATIONS WHICH ARE RELEASED BY THIS AMENDMENT IN FAVOR OF
BANK AND BANK'S AGENTS, AND EACH OF BORROWER AND THE GUARANTORS
HEREBY WAIVE AND RELEASE ALL RIGHTS AND BENEFITS WHICH IT MIGHT
OTHERWISE HAVE UNDER THE AFOREMENTIONED SECTION 1542 OF THE
CALIFORNIA CIVIL CODE WITH REGARD TO THE RELEASE OF SUCH UNKNOWN,
UNANTICIPATED OR MISUNDERSTOOD DEFENSES, CLAIMS, CAUSES OF
ACTION, CONTRACTS, LIABILITIES, INDEBTEDNESS AND OBLIGATIONS. TO
THE EXTENT (IF ANY) WHICH ANY SUCH LAWS MAY BE APPLICABLE, EACH
OF BORROWER AND GUARANTORS WAIVE AND RELEASE (TO THE MAXIMUM
EXTENT PERMITTED BY LAW) ANY RIGHT OR DEFENSE WHICH IT MIGHT
OTHERWISE HAVE UNDER ANY OTHER LAW OF ANY APPLICABLE JURISDICTION
WHICH MIGHT LIMIT OR RESTRICT THE EFFECTIVENESS OR SCOPE OF ANY
OF ITS WAIVERS OR RELEASES UNDER THIS AMENDMENT.
9. Full Force And Effect; Entire Agreement. Except to the
extent expressly provided in this Amendment, the terms and
conditions of the Loan Agreement and the other Loan Documents
shall remain in full force and effect. This Amendment and the
other Loan Documents constitute and contain the entire agreement
of the parties hereto and supersede any and all prior agreements,
negotiations, correspondence, understandings and communications
between the parties, whether written or oral, respecting the
subject matter hereof. The parties hereto further agree that the
Loan Documents comprise the entire agreement of the parties
thereto and supersede any and all prior agreements, negotiations,
correspondence, understandings and other communications between
the parties thereto, whether written or oral respecting the
extension of credit by Bank to Borrower, either guarantor and/or
their affiliates.
10. The Guaranties. Each Guarantor hereby consents to this
Amendment and agrees that its obligations under the Continuing
Guarantee executed by it in favor of Bank shall continue in full
force and effect, shall be valid and enforceable and shall not be
impaired or otherwise affected by the execution of this Amendment
or any other document or instrument delivered in connection
herewith.
11. Counterparts; Effectiveness. This Amendment may be
executed in counterparts, each of which when so executed shall be
deemed an original, but all such counterparts together shall
constitute but one and the same instrument. This Amendment shall
be deemed effective upon the execution of a counterpart hereof by
each of Borrower, the Guarantors and Bank.
Witness the due execution hereof by the respective duly
authorized officer of the undersigned as of the date first
written above.
Borrower
Sanctuary Woods Multimedia Inc.
By: /s/ Charlotte J. Walker
Charlotte J. Walker
President
Parent Sanctuary Woods Multimedia
Corporation
By: /s/ Charlotte J. Walker
Charlotte J. Walker
President
Magic Quest Magic Quest Inc.
By: /s/ Charlotte J. Walker
Charlotte J. Walker
President
Bank Imperial Bank
By: /s/ Sam Bhaumik
Sam Bhaumik
Senior Vice President
Annex A
Exhibit 6.f
COMPLIANCE CERTIFICATE
The consolidated financial statements of Parent, Borrower and
Magic Quest attached hereto dated as of
_________________________, and submitted to Imperial Bank
pursuant to Security and Loan Agreement between us dated
____________________, shows compliance with all financial
covenants (unless otherwise noted, below) as specified therein,
as follows:
Financial Covenant:
Actual:
a. Minimum Tangible Net Worth: $1,000,000
6. a. Maximum Liabilities to Tangible
Net Worth Ratio: 5.5:1.0
6. d.Maximum Quarterly Losses not greater than:
quarter ending 6/30/96 $500,000
quarters ending 9/30/96
and thereafter $1
Contract Manufacturing Arrangements:
All arrangements for contract manufacturing of Borrower's,
Parent's or Magic Quest's products are described in full in
the Second Amendment to Loan Documents and the Annexes
thereto and there have been no changes to those arrangements
except as stated below:
Exceptions: (if none, so state):
The undersigned authorized officer of _____________ hereby
certifies that Borrower is in complete compliance with the
terms and conditions of the Security and Loan Agreement,
Addendum to Security and Loan Agreement and related
documents, all as amended from time to time, for the period
ending _____________________, and as of the date of this
certificate the representations and warranties states
therein are true accurate and complete as of the date hereof
(except as to those representations and warranties which
specifically reference a particular date and except as noted
above).
I know of no pending conditions which may cause an Event of
Default to exist in the next thirty (30) days. The required
support documents for this certification are attached and
prepared in accordance with generally accepted accounting
principles, consistently applied.
Date:
Signed
Authorized Officer of Borrower
Name:
Title: (please print)
Annex B
Exhibit 6.k
Accounts Receivable and Inventory Transaction Report
Annex C
Exceptions to Representations and Warranties
Annex D
Tangible Assets of Borrower, Parent and Magic Quest
For Borrower, see attached Annex D-1
For Parent, see attached Annex D-2
For Magic Quest, see attached Annex D-3
Annex E
Location of Assets
and
Description of Contract Manufacturing Relationships
Annex F
Form of Warrant
Annex G
Exhibit 5(i)
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY
NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE
144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT
REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation: Sanctuary Woods Multimedia
Corporation, a British Columbia corporation
Number of Shares: 200,000 (subject to Section 1.3)
Class of Stock: Common
Initial Exercise Price: US $0.5625 per share (subject to Section
1.9)
Issue Date: May 30, 1996
Expiration Date: May 30, 2001 (subject to Section 4.1)
This Warrant Certifies That, in consideration of the payment
of $1.00 and for other good and valuable consideration, Imperial
Bank ("Holder") is entitled to purchase the number of fully paid
and nonassessable shares of the class of securities (the
"Shares") of the corporation (the "Company") at the initial
exercise price per Share (the "Warrant Price") all as set forth
above and as adjusted pursuant to Article 2 of this Warrant,
subject to the provisions and upon the terms and conditions set
forth of this Warrant.
1
Exercise
1.1 Method of Exercise. Holder may exercise this Warrant
by delivering this Warrant and a duly executed Notice of Exercise
in substantially the form attached as Appendix 1 to the principal
office of the Company. Unless Holder is exercising the
conversion right set forth in Section 1.2, Holder shall also
deliver to the Company a check for the aggregate Warrant Price
for the Shares being purchased.
1.2 Net Exercise Conversion Right. In lieu of exercising
this Warrant as specified in Section 1.1, Holder may from time to
time convert this Warrant, in whole or in part, into a number of
Shares determined by dividing (a) the aggregate fair market value
of the Shares or other securities otherwise issuable upon
exercise of this Warrant minus the aggregate Warrant Price of
such Shares by (b) the fair market value of one Share. The fair
market value of the Shares shall be determined pursuant to
Section 1.5.
1.3 Reduction of Shares Subject to Warrant. In the event
that the Company receives cash proceeds equal to or exceeding
$3,000,000 from the issuance and sale of its common stock, other
equity securities or convertible subordinated debt or
subordinated debt (which subordinated debt shall be satisfactory
to Holder) after the date of issuance of this Warrant and before
June 30, 1996 (exclusive of any securities issued pursuant to
convertible subordinated debt or subordinated debt outstanding on
the date of issuance of this Warrant) and the President or Chief
Financial Officer of the Company certifies the same to Holder in
writing, the number of Shares as to which this Warrant may be
exercised shall be automatically reduced to one-half (_) of the
number of Shares for which this Warrant would otherwise be
exercisable. Only one such reduction shall be made pursuant to
this Section 1.3. Neither shall a reduction occur in the number
of Shares subject to this Warrant nor shall a limitation exist on
the number of Shares for which this Warrant may at any time be
exercised, in either case pursuant to this Section 1.3, after
June 30, 1996.
1.4 No Fractional Shares. No fractional shares shall be
issued upon exercise or conversion of this Warrant. The Company
shall, in lieu of issuing any fractional share, pay the Holder
entitled to such fraction a sum in cash equal to the fair market
value of a Share (as determined pursuant to Section 1.5)
multiplied by such fraction.
1.5 Fair Market Value. If the Shares are traded regularly
in a public market, the fair market value of the Shares shall be
the closing price of the Shares (or the closing price of the
Company's stock into which the Shares are convertible) reported
for the business day immediately before Holder delivers its
Notice of Exercise to the Company. If the Shares are not
regularly traded in a public market, the Board of Directors of
the Company shall determine fair market value in its reasonable
good faith judgment. The foregoing notwithstanding, if Holder
advises the Board of Directors in writing that Holder disagrees
with such determination, then the Company and Holder shall
promptly agree upon a reputable investment banking firm to
undertake such valuation. If the valuation of such investment
banking firm is greater than that determined by the Board of
Directors, then all fees and expenses of such investment banking
firm shall be paid by the Company. In all other circumstances,
such fees and expenses shall be paid by Holder.
1.6 Delivery of Certificate and New Warrant. Promptly
after Holder exercises or converts this Warrant, the Company
shall deliver to Holder certificates for the Shares acquired and,
if this Warrant has not been fully exercised or converted and has
not expired, a new Warrant representing the Shares not so
acquired.
1.7 Replacement of Warrants. On receipt of evidence
reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant and, in the case of
loss, theft or destruction, on delivery of an indemnity agreement
reasonably satisfactory in form and amount to the Company or, in
the case of mutilation, or surrender and cancellation of this
Warrant, the Company at its expense shall execute and deliver, in
lieu of this Warrant, a new warrant of like tenor.
1.8 Repurchase on Sale, Merger, or Consolidation of the
Company.
1.8.1 "Acquisition." For the purpose of thisWarrant,
"Acquisition" means any sale, license, or other disposition of
all or substantially all of the assets (including intellectual
property) of the Company, or any reorganization, consolidation,
or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50%
of the outstanding voting securities of the surviving entity
after the transaction.
1.8.2 Assumption of Warrant.If upon the closing of any
Acquisition the successor entity assumes the obligations of this
Warrant, then this Warrant shall be exercisable for the same
securities, cash, and property as would be payable for the Shares
issuable upon exercise of the unexercised portion of this Warrant
as if such Shares were outstanding on the record date for the
Acquisition and subsequent closing. The Warrant Price shall be
adjusted accordingly. The Company shall use reasonable efforts
to cause the surviving corporation to assume the obligations of
this Warrant.
1.8.3 Nonassumption. If upon the closing of any
Acquisition the successor entity does not assume the obligations
of his Warrant and Holder has not otherwise exercised this
Warrant in full, then the unexercised portion of this Warrant
shall be deemed to have been automatically converted pursuant to
Section 1.2 and thereafter Holder shall participate in the
acquisition on the same terms as other holders of the same class
of securities of the Company.
1.8.4 Purchase Right. Notwithstanding the foregoing, at
the election of Holder, the Company shall purchase the
unexercised portion of this Warrant for cash upon the closing of
any Acquisition for an amount equal to (a) the fair market value
of any consideration that would have been received by Holder in
consideration of the Shares had Holder exercised the unexercised
portion of this Warrant immediately before the record date for
determining the shareholders entitled to participate in the
proceeds of the Acquisition, less (b) the aggregate Warrant Price
of the Shares, but in no event less than zero.
1.9 Increase in Exercise Price.
1.9.1 In the event that the Company receives cash
proceeds equal to or exceeding $3,000,000 from the issuance and
sale of its common stock, other equity securities or convertible
subordinated debt after the date of issuance of this Warrant and
before June 30, 1996 (exclusive of any securities issued pursuant
to convertible subordinated debt or subordinated debt outstanding
on the date of issuance of this Warrant) and the President or
Chief Financial Officer of the Company certifies the same to
Holder in writing, then the Initial Exercise Price shall
automatically be reset to equal the average price per share paid
for such securities assuming such securities, if convertible into
common stock were so converted.
1.9.2 The Initial Exercise Price set forth above shall
be increased on each anniversary of the Issue Date as follows:
<TABLE>
<CAPTION>
Date Amount of Increase
<S> <C>
First Anniversary 0%
Second Anniversary 15%
Third Anniversary 15%
Fourth Anniversary 15%
</TABLE>
2
Adjustments To The Shares
2.1 Stock Dividends, Splits, Etc. If the Company declares
or pays a dividend on its common stock (or the Shares if the
Shares are securities other than common stock) payable in common
stock, or other securities, subdivides the outstanding common
stock into a greater amount of common stock, or, if the Shares
are securities other than common stock, subdivides the Shares in
a transaction that increases the amount of common stock into
which the Shares are convertible, then upon exercise of this
Warrant, for each Share acquired, Holder shall receive, without
cost to Holder, the total number and kind of securities to which
Holder would have been entitled had Holder owned the Shares of
record as of the date the dividend or subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon any
reclassification, exchange, substitution, or other event that
results in a change of the number and/or class of the securities
issuable upon exercise or conversion of this Warrant, Holder
shall be entitled to receive, upon exercise or conversion of this
Warrant, the number and kind of securities and property that
Holder would have received for the Shares if this Warrant had
been exercised immediately before such reclassification,
exchange, substitution, or other event. Such an event shall
include any automatic conversion of the outstanding or issuable
securities of the Company of the same class or series as the
Shares to common stock pursuant to the terms of the Company's
Articles upon the closing of a registered public offering of the
Company's common stock. The Company or its successor shall
promptly issue to Holder a new Warrant for such new securities or
other property. The new Warrant shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Article 2 including, without
limitation, adjustments to the Warrant Price and to the number of
securities or property issuable upon exercise of the new Warrant.
The provisions of this Section 2.2 shall similarly apply to
successive reclassifications, exchanges, substitutions, or other
events.
2.3 Adjustments for Combinations, Etc. If the outstanding
Shares are combined or consolidated, by reclassification or
otherwise, into a lesser number of shares, the Warrant Price
shall be proportionately increased.
2.4 Adjustments for Diluting Issuances. The Warrant Price
and the number of Shares issuable upon exercise of this Warrant
or, if the Shares are Preferred Stock, the number of shares of
common stock issuable upon conversion of the Shares, shall be
subject to adjustment, from time to time, in the manner set forth
on Exhibit A attached hereto in the event of Diluting Issuances
(as defined on Exhibit A).
2.5 No Impairment. The Company shall not, by amendment of
its Articles of Incorporation or through a reorganization,
transfer of assets, consolidation, merger, dissolution, issue, or
sale of securities or any other voluntary action, avoid or seek
to avoid the observance or performance of any of the terms to be
observed or performed under this Warrant by the Company, but
shall at all times in good faith assist in carrying out all the
provisions of this Article 2 and in taking all such action as may
be necessary or appropriate to protect Holder's rights under this
Article against impairment. If the Company takes any action
affecting the Shares or its common stock other than as described
above that adversely affects Holder's rights under this Warrant,
the Warrant Price shall be adjusted downward and the number of
Shares issuable upon exercise of this Warrant shall be adjusted
upward in such a manner that the aggregate Warrant Price of this
Warrant is unchanged.
2.6 Certificate as to Adjustments. Upon each adjustment of
the Warrant Price, the Company at its expense shall promptly
compute such adjustment, and furnish Holder with a certificate of
its Chief Financial Officer setting forth such adjustment and the
facts upon which such adjustment is based. The Company shall,
upon written request, furnish Holder a certificate setting forth
the Warrant Price in effect upon the date thereof and the series
of adjustments leading to such Warrant Price.
3
Representations And Covenants Of The Company
3.1 Representations and Warranties. The Company hereby
represents and warrants to the Holder as follows:
(a) The initial Warrant Price referenced on the first page
of this Warrant is not greater than the average closing price on
the Vancouver Stock Exchange over the thirty (30) calendar day
period preceding the date hereof.
(b) All Shares which may be issued upon the exercise of the
purchase right represented by this Warrant, and all securities,
if any, issuable upon conversion of the Shares, shall, upon
issuance, be duly authorized, validly issued, fully paid and
nonassessable, and free of any liens and encumbrances except for
restrictions on transfer provided for herein or under applicable
federal and state securities laws.
3.2 Notice of Certain Events. If the Company proposes at
any time (a) to declare any dividend or distribution upon its
common stock, whether in cash, property, stock, or other
securities and whether or not a regular cash dividend; (b) to
offer for subscription pro rata to the holders of any class or
series of its stock any additional shares of stock of any class
or series or other rights; (c) to effect any reclassification or
recapitalization of common stock; (d) to merge or consolidate
with or into any other corporation, or sell, lease, license, or
convey all or substantially all of its assets, or to liquidate,
dissolve or wind up; or (e) offer holders of registration rights
the opportunity to participate in an underwritten public offering
of the company's securities for cash, then, in connection with
each such event, the Company shall give Holder (1) at least 20
days prior written notice of the date on which a record will be
taken for such dividend, distribution, or subscription rights
(and specifying the date on which the holders of common stock
will be entitled thereto) or for determining rights to vote, if
any, in respect of the matters referred to in (c) and (d) above;
(2) in the case of the matters referred to in (c) and (d) above
at least 20 days prior written notice of the date when the same
will take place (and specifying the date on which the holders of
common stock will be entitled to exchange their common stock for
securities or other property deliverable upon the occurrence of
such event); and (3) in the case of the matter referred to in (e)
above, the same notice as is given to the holders of such
registration rights; provided, however, that nothing in this
Section 3.2 shall require the Company to give notice to any
Holder prior to the earlier of the date notice is given or
required to be given to other shareholders of the Company.
3.3 Information Rights. So long as the Holder holds this
Warrant and/or any of the Shares, the Company shall deliver to
the Holder (a) promptly after mailing, copies of all communiques
to the shareholders of the Company, (b) within ninety (90) days
after the end of each fiscal year of the Company, the annual
audited financial statements of the Company certified by
independent public accountants of recognized standing and (c)
within forty-five (45) days after the end of each of the first
three quarters of each fiscal year, the Company's quarterly,
unaudited financial statements.
3.4 Registration Under Securities Act of 1933, as amended.
The Company agrees that the Shares or, if the Shares are
convertible into common stock of the Company, such common stock,
shall be subject to the registration rights set forth on Exhibit
B hereto.
4
Miscellaneous
4.1 Term: Notice of Expiration. This Warrant is
exercisable, in whole or in part, at any time and from time to
time on or before the Expiration Date set forth above. The
Company shall give Holder written notice of Holder's right to
exercise this Warrant in the form attached as Appendix 2 not more
than 90 days and not less than 30 days before the Expiration
Date. If the notice is not so given, the Expiration Date shall
automatically be extended until 30 days after the date the
Company delivers the notice to Holder.
4.2 Legends. This Warrant and the Shares (and the
securities issuable, directly or indirectly, upon conversion of
the Shares, if any) shall be imprinted with a legend in
substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION
OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND
ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This
Warrant and the Shares issuable upon exercise this Warrant (and
the securities issuable, directly or indirectly, upon conversion
of the Shares, if any) may not be transferred or assigned in
whole or in part without compliance with applicable federal and
state securities laws and the rules of the Vancouver Stock
Exchange by the transferor and the transferee (including, without
limitation, the delivery of investment representation letters,
legal opinions reasonably satisfactory to the Company and the
written approval of the Vancouver Stock Exchange). The Company
shall not require Holder to provide an opinion of counsel or
obtain Vancouver Stock Exchange approval if the transfer is to an
affiliate of Holder or if there is no material question as to the
availability of current information as referenced in Rule 144(c),
Holder represents that it has complied with Rule 144(d) and (e)
in reasonable detail, the selling broker represents that it has
complied with Rule 144(f), and the Company is provided with a
copy of Holder's notice of proposed sale.
4.4 Transfer Procedure. Subject to the provisions of
Section 4.2, Holder may transfer all or part of this Warrant or
the Shares issuable upon exercise of this Warrant (or the
securities issuable, directly or indirectly, upon conversion of
the Shares, if any) by giving the Company notice of the portion
of the Warrant being transferred setting forth the name, address
and taxpayer identification number of the transferee and
surrendering this Warrant to the Company for reissuance to the
transferee(s) (and Holder, if applicable). Unless the Company is
filing financial information with the SEC pursuant to the
Securities Exchange Act of 1934, the Company shall have the right
to refuse to transfer any portion of this Warrant to any person
who directly competes with the Company.
4.5 Notices. All notices and other communications from the
Company to the Holder, or vice versa, shall be deemed delivered
and effective when given personally or mailed by first-class
registered or certified mail, postage prepaid, at such address as
may have been furnished to the Company or the Holder, as the case
may be, in writing by the Company or such Holder from time to
time.
4.6 Waiver. This Warrant and any term hereof may be
changed, waived, discharged or terminated only by an instrument
in writing signed by the party against which enforcement of such
change, waiver, discharge or termination is sought.
4.7 Attorneys' Fees. In the event of any dispute between
the parties concerning the terms and provisions of this Warrant,
the party prevailing in such dispute shall be entitled to collect
from the other party all costs incurred in such dispute,
including reasonable attorneys' fees.
4.8 Governing Law. This Warrant shall be governed by and
construed in accordance with the laws of the State of California,
without giving effect to its principles regarding conflicts of
law.
Sanctuary Woods Multimedia Corporation
By: /s/ Charlotte J. Walker
Name: Charlotte J. Walker
President
Appendix 1
NOTICE OF EXERCISE
1 The undersigned hereby elects to purchase
shares of the Common Stock of Sanctuary Woods Multimedia
Corporation pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price of such shares in
full.
1. The undersigned hereby elects to convert the attached
Warrant into shares in the manner specified in Section 1.2 of the
Warrant. This conversion is exercised with respect to
of the Shares covered by the Warrant.
[Strike paragraph that does not apply.]
2 Please issue a certificate or certificates representing
said shares in the name of the undersigned or in such other name
as is specified below:
(Name)
(Address)
3 The undersigned represents it is acquiring the shares
solely for its own account and not as a nominee for any other
party and not with a view toward the resale or distribution
thereof except in compliance with applicable securities laws.
(Signature)
(Date)
Appendix 2
NOTICE THAT WARRANT IS ABOUT TO EXPIRE
,
(Name of Holder)
(Address of Holder)
Attn: Chief Financial Officer
Dear :
This is to advise you that the Warrant issued to you described
below will expire on , 19 .
Issuer:
Issue Date:
Class of Security Issuable:
Exercise Price Per Share:
Number of Shares Issuable:
Procedure for Exercise:
Please contact [name of contact person at (phone number)] with
any questions you may have concerning exercise of the Warrant.
This is your only notice of pending expiration.
(Name of Issuer)
By:
Its:
Exhibit A
ANTI-DILUTION PROVISIONS
This Exhibit (this "Exhibit") is an exhibit to that certain
Warrant to Purchase Stock (the "Warrant") between Sanctuary Woods
Multimedia Corporation (the "Company") and Imperial Bank
("Holder"). The Company covenants and agrees as follows:
(A) Upon each issuance by the Company of any Additional
Stock (as defined below) after the Issue Date without
consideration or for a consideration per share less the Protected
Price (as defined below), the Warrant Price in effect immediately
prior to each such issuance shall forthwith (except as otherwise
provided in this Exhibit) be adjusted to a price determined by
multiplying the Warrant Price by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding
(assuming full conversion of all outstanding options, warrants,
rights or convertible or exchangeable securities of the Company)
immediately prior to such issuance plus the number of shares of
Common Stock which the aggregate consideration received by the
corporation for such issuance would purchase at the Protected
Price; and the denominator of which shall be the number of shares
of Common Stock outstanding (assuming full conversion of all
outstanding options, warrants, rights or convertible or
exchangeable securities of the Company) immediately prior to such
issuance plus the number of shares of such Additional Stock.
(B) No adjustment of the Warrant Price shall be made in an
amount less than one cent per share, provided that any
adjustments which by reason of this Section (B) are not required
to be, and are not, made, shall be carried forward and shall be
either taken into account in any subsequent adjustment made prior
to three years from the date of the event giving rise to the
adjustment being carried forward, or shall be made at the end of
three years from the date of the event giving rise to the
adjustment being carried forward. Except to the limited extent
provided for in subsections (E)(3) and (E)(4) below, no
adjustment of the Warrant Price pursuant to this Exhibit shall
have the effect of increasing the Warrant Price above the Warrant
Price in effect immediately prior to such adjustment; provided,
however, that in no event shall the aggregate exercise price for
all Shares exceed the initial aggregate exercise price for all
Shares.
(C) In the case of the issuance of Common Stock for cash,
the consideration shall be deemed to be the amount of cash
paid therefor before deducting any reasonable discounts,
commissions or other expenses allowed, paid or incurred by the
Company for any underwriting or otherwise in connection with the
issuance and sale thereof.
(D) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair
market value thereof as determined by applying the procedures of
valuation set forth in Section 1.5 in respect of the
consideration other than cash.
(E) In the case of the issuance of options to purchase or
rights to subscribe for Common Stock, securities by their terms
convertible into or exchangeable for Common Stock or options to
purchase or rights to subscribe for such convertible or
exchangeable securities, the following provisions shall apply for
all purposes of this Exhibit:
(1) The aggregate maximum number of shares of Common Stock
deliverable upon exercise (assuming the satisfaction of any
conditions to exerciseability, including without limitation, the
passage of time, but without taking into account potential
antidilution adjustments) of such options to purchase or rights
to subscribe for Common Stock shall be deemed to have been issued
at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the
manner provided in subsections (C) and (D), above), if any,
received by the Company upon the issuance of such options or
rights plus the minimum exercise price provided in such options
or rights (without taking into account potential antidilution
adjustments) for the Common Stock covered thereby.
(2) The aggregate maximum number of shares of CommonStock
deliverable upon conversion of or in exchange for any such
convertible or exchangeable securities or upon the exercise of
options to purchase or rights to subscribe for such convertible
or exchangeable securities and subsequent conversion or exchange
thereof shall be deemed to have been issued at the time such
securities were issued or such options or rights were issued and
for a consideration equal to the consideration, if any, received
by the Company for any such securities and related options or
rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the additional
consideration, if any, to be received by the Company upon the
conversion or exchange of such securities or the exercise of any
related options or rights (the consideration in each case to be
determined in the manner provided in subsections (C) and (D),
above).
(3) In the event of any change in the number of shares of
Common Stock deliverable or in the consideration payable to the
Company upon exercise of such options or rights or upon
conversion of or in exchange for such convertible or exchangeable
securities, including, but not limited to, a change resulting
from the antidilution provisions thereof, the Warrant Price, to
the extent in any way affected by or computed using such options,
rights or securities, shall be recomputed to reflect such change,
but no further adjustment shall be made for the actual issuance
of Common Stock or any payment of such consideration upon the
exercise of any such options or rights or the conversion or
exchange of such securities.
(4) Upon the expiration of any such options or rights, the
termination of any such rights or rights related to such
convertible or exchangeable securities, the Warrant Price, to the
extent in any way affected by or computed using such options,
rights or securities or options or rights related to such
securities, shall be recomputed to reflect the issuance of only
the number of shares of Common Stock (and convertible or
exchangeable securities which remain in effect) actually issued
upon the exercise of such securities or upon the exercise of the
options or rights related to such securities.
(5) The number of shares of Common Stock deemed issued and
the consideration deemed paid therefor pursuant to subsections
(E)(1) and (2) shall be appropriately adjusted to reflect any
change, termination or expiration of the type described in either
subsection (E)(3) or (4), above.
(F) "Additional Stock" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to Section
(E)), above, by the Company other than options issued or issuable
to employees, consultants or directors of the Company which have
been approved by the shareholders of the Company. "Protected
Price" shall mean $1.00 per share, which price shall be adjusted
in the same manner, but after, each adjustment of the Warrant
Price required under Article 2 of the Warrant.
(G) Subject to Section (H) below, upon each adjustment
of the Warrant Price pursuant to this Exhibit (in this
Section (G) called the "Latest Purchase Price Adjustment") the
Holder of this Warrant shall thereafter (until another such
adjustment) be entitled to purchase, at the adjusted Warrant
Price per share resulting from such Latest Purchase Price
Adjustment, the number of shares (calculated to the nearest
1/100th of a share), obtained by (x) multiplying the number of
shares subject to this Warrant (as adjusted from time to time as
a result of all adjustments to the Warrant Price made prior to
such Latest Purchase Price Adjustment) by the Warrant Price in
effect immediately prior to such Latest Purchase Price
Adjustment, and (y) dividing the product so obtained by the
adjusted Warrant Price resulting from such Latest Purchase Price
Adjustment. Subject to Section (H) below, upon any partial
exercise of this Warrant, the number of shares subject to this
Warrant shall be adjusted so that immediately after such
exercise, the number of shares subject to this Warrant shall be
the difference between (i) the number of shares subject to this
Warrant as in effect immediately prior to such partial exercise
minus (ii) the number of shares of Common Stock issued upon such
partial exercise of this Warrant.
(H) Notwithstanding anything in this Exhibit A to the
contrary, no adjustment to the number of shares into which this
Warrant is exercisable shall be made pursuant to this Exhibit A
to the extent such would cause the total number of shares into
which this Warrant is exercisable to exceed one and one-half
times the number of shares into which this Warrant would have
been exercisable without regard to this Exhibit A.
Exhibit B
REGISTRATION RIGHTS
1 This Exhibit (this "Exhibit") is an exhibit to that
certain Warrant to Purchase Stock (the "Warrant") between
Sanctuary Woods Multimedia Corporation (the "Company") and
Imperial Bank ("Holder"). The Company covenants and agrees as
follows:
1.1 Definitions. Terms defined in the Warrant shall have
the same meaning in this Exhibit as ascribed to such terms in the
Warrant. In addition, for purposes of this Exhibit:
(a) The term "register," "registered," and "registration"
refer to a registration effected by preparing and filing a
registration statement or similar document in compliance with the
Securities Act of 1933, as amended (the "Act"), and the
declaration or ordering of effectiveness of such registration
Statement or document;
(b) The term "Registrable Securities" means the Common
Stock issuable or issued upon exercise or conversion of the
Warrant, excluding in all cases, however, any Registrable
Securities sold by a person in a transaction in which his rights
under this Exhibit are not assigned;
(c) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of
Common Stock outstanding which are, and the number of shares of
Common Stock issuable pursuant to then exercisable or convertible
securities which are, Registrable Securities.
(d) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof
in accordance with Section 1.13 hereof; and
(e) The terms "Form F-2" and "Form F-3" means each such
form under the Act as in effect on the date hereof or any
registration form under the Act subsequently adopted by the SEC
which permits inclusion or incorporation of substantial
information by reference to other documents filed by the Company
with the SEC.
1.2 Short-Form Registrations.
(a) The Holders of a majority of the Registrable Securities
may request registration under the Act of all or part of their
Registrable Securities (as applicable) on Form F-2 or F-3 or any
similar short-form registration ("Short-Form Registrations"), if
available. Within ten (10) days after receipt of any such
request, the Company will give written notice of such request to
all other Holders and will include in such registration all
Registrable Securities with respect to which the Company has
received written requests for inclusion therein within fifteen
(15) days after the receipt of the Company's notice. Subject to
the limitations of subsection 1.2(b), as soon as reasonably
practicable, and in any event within 60 days of the receipt of
such request (or such later date as may be reasonably required to
enable the Company to prepare such financial statements as are
required to be filed in the registration statement) file a
registration statement under the Act covering all such
Registrable Securities and thereafter use its best efforts to
cause such registration statement to become effective as soon as
reasonably possible. The Company shall have the right to delay
the filing of a registration statement pursuant to this Section
for up to 180 days from the date of receipt of a request for such
registration if the Company has filed or had in good faith
previously intended to file a registration statement for a firm
commitment or best efforts underwritten public offering in which
the Holders are entitled to participate pursuant to Section 1.3,
provided that such period shall terminate at such time as the
Company ceases to make good faith efforts to file such
registration statement.
(b) If the Holders initiating the Short-Form Registration
request hereunder ("Initiating Holders") intend to distribute the
Registrable Securities covered by their request by means of an
underwriting, they shall so advise the Company as a part of their
request made pursuant to this Section 1.2 and the Company shall
include such information in the written notice referred to in
subsection 1.2(a). The underwriter will be selected by a
majority in interest of the Initiating Holders and shall be
reasonably acceptable to the Company. In such event, the right
of any Holder to include his Registrable Securities in such Short-
Form Registration shall be conditioned upon such Holder's
participation in such underwriting (unless otherwise mutually
agreed by a majority in interest of the Initiating Holders and
such Holder) to the extent provided herein. All Holders
proposing to distribute their securities through such
underwriting shall (together with the Company as provided in
subsection 1.4(c)) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for
such underwriting by a majority in interest of the Initiating
Holders.
(c) The Company is obligated to effect no more than (i) one
(1) such Short-Form Registration on Form F-2, or (ii) two (2)
such registrations on Form F-3, provided that the Company shall
only be required to effect one (1) registration on behalf of
Initiating Holders in any twelve-month period.
(d) Notwithstanding the foregoing, if the Company shall
furnish to Holders requesting a registration statement pursuant
to this Section 1.2, a certificate signed by the President of the
Company stating that in good faith judgment of the Board of
Directors of the Company, it would be seriously detrimental to
the Company and its shareholders for such registration statement
to be filed and it is therefore essential to defer the filing of
such registration statement, the Company shall have the right to
defer such filing for a period of not more than 60 days after
receipt of the request of the Initiating Holders; provided,
however, that the Company may not utilize this right more than
once in any twelve-month period.
(e) The Company will not include in any Short-Form
Registration any securities which are not Registrable Securities
without the written consent of the holders of at least a majority
of the Registrable Securities requesting such registration. If
other securities are permitted to be included in a Short-Form
Registration which is an underwritten offering and the managing
underwriters advise the Company in writing that in their opinion
the number of Registrable Securities and other securities
requested to be included exceeds the number of Registrable
Securities and other securities which can be sold in such
offering, the Company will include in such registration prior to
the inclusion of any securities which are not Registrable
Securities the number of Registrable Securities requested to be
included which in the opinion of such underwriters can be sold,
pro rata among the respective holders on the basis of the amount
of Registrable Securities owned.
1.3 Piggyback Registration Rights. If (but without any
obligation to do so) the Company proposes to register (including
for this purpose a registration effected by the Company for
shareholders other than the Holders) any of its stock or other
securities under the Act in connection with the public offering
of such securities solely for cash (other than a registration
relating solely to the sale of securities to participants in a
stock option, stock purchase or similar plan, or to purchasers in
connection with a business combination or a registration on any
form which does not include substantially the same information as
would be required to be included in a registration statement
covering the sale of the Registrable Securities), the Company
shall, at such time, promptly give each Holder written notice of
such registration. Upon the written request of each Holder given
within twenty (20) days after mailing of such notice by the
Company, the Company shall, subject to the provisions of Section
1.8, cause to be registered under the Act all of the Registrable
Securities that each such Holder has requested to be registered;
provided, however, that the aggregate value of the Registrable
Securities which all of Holders have requested to be registered
shall equal or exceed $100,000 or any lesser amount if they are
the entire balance of the Registrable Securities in fair market
value at the time of such request. The Company is obligated to
cause an unlimited number of registrations of Registrable
Securities pursuant to this Section 1.3.
1.4 Obligations of the Company. Whenever required under
this Exhibit to effect the registration of any Registrable
Securities, the Company shall, as expeditiously as reasonably
possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best
efforts to cause such registration statement to become effective,
and, upon the request of the Holders of a majority of the
Registrable Securities registered thereunder, keep such
registration statement effective for up to ninety (90) days.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus
used in connection with such registration statement as may be
necessary to comply with the provisions of the Act with respect
to the disposition of all securities covered by such registration
statement.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity
with the requirements of the Act, and such other documents as
they may reasonably request in order to facilitate the
disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such
other securities or Blue Sky laws of such jurisdictions as shall
be reasonably requested by the Holders, provided that the Company
shall not be required in connection therewith or as a condition
thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement,
in usual and customary form, with the managing underwriter of
such offering, provided that the provisions of such underwriting
agreement shall not contain any provision that is inconsistent
with this Agreement. Each Holder participating in such
underwriting shall also enter into and perform its obligations
under such an agreement.
(f) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus
relating thereto is required to be delivered under the Act of the
happening of any event as a result of which the prospectus
included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state
a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the
circumstances then existing.
(g) Furnish, at the request of any Holder requesting
registration of Registrable Securities pursuant to this Exhibit,
on the date that such Registrable Securities are delivered to the
underwriters for sale in connection with a registration pursuant
to this Exhibit, if such securities are being sold through
underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with
respect to such securities becomes effective: (i) an opinion,
dated such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is
customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the
Holders requesting registration of Registrable Securities, and
(ii) a letter dated such date, from the independent certified
public accountants of the Company, in form and substance as is
customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the
underwriters, if any, and to the Holders requesting registration
of Registrable Securities.
1.5 Furnish Information. It shall be a condition precedent
to the obligations of the Company to take any action pursuant to
this Exhibit with respect to the Registrable Securities of any
selling Holder that such Holder shall furnish to the Company such
information regarding itself, the Registrable Securities held by
it, and the intended method of disposition of such securities as
shall be reasonably necessary to effect the registration of such
Holder's Registrable Securities.
1.6 Expenses of Short-Form Registrations. All expenses
other than underwriting discounts and commissions incurred in
connection with registrations, filings or qualifications pursuant
to Section 1.2, including (without limitation) all registration,
filing and qualification fees, printers' and accounting fees,
fees and disbursements of counsel for the Company, and the
reasonable fees and disbursements of one counsel for the selling
Holders shall be borne by the Company; provided, however, that
the Company shall not be required to pay for any expenses of any
registration proceeding begun pursuant to Section 1.2 if the
registration request is subsequently withdrawn at the request of
the Holders of a majority of the Registrable Securities to be
registered (in which case all participating Holders shall bear
such expenses), unless the Holders of a majority of the
Registrable Securities agree to forfeit their right to one demand
registration pursuant to Section 1.2; provided further, however,
that if at the time of such withdrawal, the Holders have learned
of a material adverse change in the condition, business, or
prospects of the Company from that known to the Holders at the
time of their request and have withdrawn the request with
reasonable promptness following disclosure by the Company of such
material adverse change, then the Holders shall not be required
to pay any of such expenses and shall retain their rights
pursuant to Section 1.2.
1.7 Expenses of Company Registration. The Company shall
bear and pay all expenses incurred in connection with any
registration, rising or qualification of Registrable Securities
with respect to the registrations pursuant to Section 1.3 for
each Holder (which right may be assigned as provided in Section
1.12), including (without limitation) all registration, filing,
and qualification fees, printers and accounting fees relating or
apportionable thereto and the fees and disbursements of one
counsel for the selling Holders selected by them, but excluding
underwriting discounts and commissions relating to Registrable
Securities.
1.8 Underwriting Requirements. In connection with any
offering involving an underwriting of shares of the Company's
capital stock, the Company shall not be required under Section
1.3 to include any of the Holders' securities in such
underwriting unless they accept the terms of the underwriting as
agreed upon between the Company and the underwriters selected by
it (or by other persons entitled to select the underwriters);
provided, however, that nothing herein or in the terms of such
underwriting shall permit the Company or the underwriters to
exercise their discretion in any way which would limit the number
of Registrable Securities included in such underwriting.
1.9 Delay of Registration. No Holder shall have any right
to obtain or seek an injunction restraining or otherwise delaying
any such registration as the result of any controversy that might
arise with respect to the interpretation or implementation of
this Exhibit. If, following the date of effectiveness of a
registration statement under this Agreement, the Company advises
the Holders which have included their Registrable Securities in
such registration statement of the occurrence of an event or
circumstances affecting the Company which, in the good faith
judgment of the Company, would be seriously detrimental to the
Company and its shareholders if disclosed publicly, the Holders
of Registrable Securities whose shares are included in such
registration statement shall suspend all sales pursuant to such
registration pending public disclosure of such event or
circumstances, provided that such period of suspension shall not
be for more than 60 days.
1.10 Indemnification. In the event any Registrable
Securities are included in a registration statement under this
Exhibit:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, any underwriter (as
defined in the Act) for such Holder and each person, if any, who
controls such Holder or underwriter within the meaning of the Act
or the Securities Exchange Act of 1934, as amended (the "1934
Act"), against any losses, claims, damages, or liabilities (joint
or several) to which they may become subject under the Act, or
the 1934 Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a "Violation"):
(i) any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including
any preliminary prospectus or final prospectus contained therein
or any amendments or supplements thereto, (ii) the omission or
alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not
misleading, or (iii) any violation or alleged violation by the
Company of the Act, the 1934 Act, any state securities law or any
rule or regulation promulgated under the Act, or the 1934 Act or
any state securities law; and the Company will pay to each such
Holder, underwriter or controlling person, as incurred, any legal
or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage,
liability, or action (provided that the Company shall not be
required to pay for the legal expenses of more than one counsel
for all such indemnified persons); provided, however, that the
indemnity agreement contained in this subsection 1.10(a) shall
not apply to amounts paid in settlement of any such loss, claim,
damage, liability, or action if such settlement is effected
without the consent of the Company (which consent shall not be
unreasonably withheld), nor shall the Company be liable in any
such case for any such loss, claim, damage, liability, or action
to the extent that it arises out of or is based upon a Violation
which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such
registration by any such Holder, underwriter or controlling
person.
(b) To the extent permitted by law, each selling Holder
will indemnify and hold harmless the Company, each of its
directors, each of its officers who has signed the registration
statement, each person, if any, who controls the Company within
the meaning of the Act, any underwriter, any other Holder selling
securities in such registration statement and any controlling
person of any such underwriter or other Holder, against any
losses, claims, damages, or liabilities (joint or several) to
which any of the foregoing persons may become subject, under the
Act, or the 1934 Act or other federal or state law, insofar as
such losses, claims, damages, or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such
violation occurs in reliance upon and in conformity with written
information furnished by such Holder expressly for use in
connection with such registration; and each such Holder will pay,
as incurred, any legal or other expenses reasonably incurred by
any person intended to be indemnified pursuant to this subsection
1.10(b), in connection with investigating or defending any such
loss, claim, damage, liability, or action; provided, however,
that the indemnity agreement contained in this subsection l.10(b)
shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected
without the consent of the Holder, which consent shall not be
unreasonably withheld; provided, that, in no event shall any
indemnity under this subsection 1.10(b) exceed the gross proceeds
from the offering received by such Holder.
(c) Promptly after receipt by an indemnified party under
this Section 1.10 of notice of the commencement of any action
(including any governmental action), such indemnified party will,
if a claim in respect thereof is to be made against any
indemnifying party under this Section 1.10, deliver to the
indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate
in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume
the defense thereof with counsel mutually satisfactory to the
parties; provided, however, that an indemnified party (together
with all other indemnified parties which may be represented
without conflict by one counsel) shall have the right to retain
one separate counsel, with the fees and expenses to be paid by
the indemnifying party, if representation of such indemnified
party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential differing interests
between such indemnified party and any other party represented by
such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any
liability to the indemnified party under this Section 1.10, but
the omission so to deliver written notice to the indemnifying
party will not relieve it of any liability that it may have to
any indemnified party otherwise than under this Section 1.10.
(d) If the indemnification provided for in this Section
1.10 is held by a court of competent jurisdiction to be
unavailable to an indemnified party with respect to any loss,
liability, claim, damage, or expense referred to therein, then
the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable
by such indemnified party as a result of such loss, liability,
claim, damage, or expense in such proportion as is appropriate to
reflect the relative fault of the indemnifying party on the one
hand and of the indemnified party on the other in connection with
the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other
relevant equitable considerations. The relative fault of the
indemnifying party and of the indemnified party shall be
determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied
by the indemnifying party or by the indemnified party and the
parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
(e) The obligations of the Company and Holders under this
Section 1.10 shall survive the completion of any offering of
Registrable Securities in a registration statement under this
Section 1, and otherwise.
1.11 Reports Under Securities Exchange Act of 1934. With a
view to making available to the Holders the benefits of Rule 144
promulgated under the Act and any other rule or regulation of the
SEC that may at any time permit a Holder to sell securities of
the Company to the public without registration or pursuant to a
registration on Form F-2 or Form F-3, the Company agrees to:
(a) make and keep public information available, as those
terms are understood and defined in SEC Rule 144, at all times;
(b) take such action, including the voluntary registration
of its Common Stock under Section 12 of the 1934 Act, as is
necessary to enable the Holders to utilize Form F-2 or Form F-3
for the sale of their Registrable Securities;
(c) file with the SEC in a timely manner all reports and
other documents required of the Company under the Act and the
1934 Act; and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request: (i) a written
statement by the Company that it has complied with the reporting
requirements of SEC Rule 144 (at any time after ninety (90) days
after the effective date of the first registration statement
flied by the Company), the Act and the 1934 Act (at any time
after it has become subject to such reporting requirements), or
that it qualifies as a registrant whose securities may be resold
pursuant to Form F-3 (at any time after it so qualifies), (ii) a
copy of the most recent annual or quarterly report of the Company
and such other reports and documents so filed by the Company, and
(iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which
permits the selling of any such securities without registration
or pursuant to such form.
1.12 Assignment of Registration Rights. The rights to cause
the Company to register Registrable Securities pursuant to this
Exhibit may be assigned (but only with all related obligations)
by a Holder to a transferee or assignee of such securities
provided the Company is, promptly following such transfer,
furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which
such registration rights are being assigned; and provided,
further, that such assignment shall be effective only if
immediately following such transfer the further disposition of
such securities by the transferee or assignee is restricted under
the Act and provided such transferee or assignee agrees to be
bound by the terms of this Exhibit.
1.13 Limitations on Subsequent Registration Rights. From
and after the date of this Agreement, the Company shall not,
without the prior written consent of the Holders of a majority of
the outstanding Registrable Securities, enter into any agreement
with any holder or prospective holder of any securities of the
Company which would allow such holder or prospective holder (a)
to include such securities in any registration filed under
Section l.2 hereof, unless under the terms of such agreement,
such holder or prospective holder may include such securities in
any such registration only to the extent that the inclusion of
his securities will not reduce the amount of the Registrable
Securities of the Holders which is included or (b) to make a
demand registration which could result in such registration
statement being declared effective prior to the effective date of
any registration effected pursuant to Section 1.2 if the request
for registration pursuant to Section 1.2 preceded the request for
registration by such holder or prospective holder or within one
hundred twenty (120) days after the effective date of any
registration effected pursuant to Section 1.2.
SALES REPRESENTATION AGREEMENT
AGREEMENT made this 13th day of May, 1996 by and between
Sanctuary Woods Multimedia Inc., a Nevada corporation having an
office at 1825 S. Grant Street, San Mateo, CA 94402 (hereinafter
referred to as "SW") and Strategic Marketing Partners, Inc. a
Texas corporation having an office at 4975 Preston Park Blvd.,
Suite 775, Plano, Texas 75093 (hereinafter referred to as "SMP").
1. Appointment.
SW hereby appoints SMP as its exclusive sales representative
for the sale and promotion of its products listed in Exhibit
A (hereinafter referred to as the "Products") to the accounts
specified in Exhibit B (hereinafter referred to as the
"Accounts") and SMP accepts such appointment, subject to the
terms and conditions provided herein.
a. SMP shall use its best efforts and skills to sell
the Products to the Accounts. SMP shall keep SW
informed of its sales activities relating to SW.
b. SW shall provide SMP with a reasonable supply of
sales literature, Product samples, etc. at no cost to
SMP. Furthermore, from time to time and where
reasonable, SW shall accompany SMP on key sales calls,
particularly in the pursuit of new accounts and when new
products are released.
c. SMP will provide at least the following services:
- Sales of new products - Generating PO's
- Account Management (Major retailers and distributors)
Inventory Levels, promotions
- Product presentations to buyers
- Manage to MDF budgets/programs
- Help to gather Sell through data
- Find new sales opportunities - budget, back catalog,
new retailers
- Quarterly forecast by account by SKU
- Make joint sales calls with SW staff
- Assist in collections from accounts with buyers, where
appropriate
2. Orders and Invoicing.
a. All orders solicited by SMP on behalf of SW shall
be subject to terms (including approval of credit)
approved by SW, and pursuant to the prices, discounts,
delivery dates and other terms of sale set by SW and
communicated to SMP. Normally, Accounts will give
purchase orders for the Products to SMP, and SMP will
forward copies of same to SW. Should any Account send
purchase orders directly to SW, said orders shall in
every respect apply to the terms and conditions of this
Agreement, as if they had come from SMP directly. SW
shall forward copies to SMP of all purchase orders
received directly from Accounts.
b. SW shall invoice all sales of Products to Accounts,
and payment of said invoices shall be made directly to
SW by Accounts. SW shall send copies of all said
invoices to SMP via Fax or overnight mail service.
3. Commissions.
a. For "retail channel sales" (sales to retail
Accounts or to distributors which in turn sell to retail
Accounts), SMP shall receive from SW commissions of five
percent (5%) of SW's invoiced amounts (less freight,
taxes, or insurance charges, if any) for all sales of
Products to the Accounts, less commissions on any
Product returns from Accounts that were sold by SMP,
during the term of this Agreement. Payment for all said
commissions shall be made by the forty-fifth (45th) day
of the month following the month of shipment. Each
commission payment shall be accompanied by a statement
showing which SW invoices and which Account purchase
orders are being commissioned.
b. Early pay discounts and promotional allowances
(SPIFFs, advertising funds, and the like) granted to
Accounts by SW do not decrease commissions due SMP, even
if such allowances are deducted from invoice. Special
price reductions on Products, however, do decrease SMP
commissions.
c. SMP shall pay all of its own travel, entertainment
and other expenses incurred in connection with
solicitation of sales of the Products, except for
special meetings which are considered over and above
what normally is required for sales solicitation,
subject to prior written approval by SW. In these
special events, SW shall reimburse SMP for reasonable
travel and entertainment expenses within thirty (30)
days of SMP providing appropriate receipts which
substantiate said expenses.
4. Draw
a. SW will advance to SMP a monthly draw of fifteen
thousand dollars (US$15,000) against commissions, the
first of which shall be payable on July 15. This draw
will be recovered by SW out of any commissions otherwise
payable to SMP.
b. If insufficient commissions are owed to SMP in any
month to recover the total outstanding draw for prior
months, the outstanding draw will be recovered by SW
from the current month's draw, and from any subsequent
draws or commissions owed to SMP until fully recovered.
c. SMP shall be entitled to retain any excess of the
draws remaining after final accounting for all sales and
returns through the end of the term of this Agreement,
even if SW has not recovered the full amount of such
draws.
5. Warrants
a. SMP shall be granted warrants to purchase up to 285,000
shares of SW common stock. The warrants shall have a
term of two years. The price shall be set at US$0.875
per share, subject to final Vancouver Stock Exchange
approval. The shares will not be registered shares, but
SW shall provide "piggyback" registration rights in the
event that it files a registration statement on Form S-3
to register any other shares during the term of the
warrant. SMP shall complete and provide to SW all
necessary documentation required to support the issuance
of the warrant, including completion of such forms as
may be required to satisfy regulatory and governmental
requirements. The warrants shall vest and become
exercisable as follows:
- 45,000 shares shall be vested and exercisable
immediately.
- 45,000 shares shall vest at the end of each of the four
quarterly periods following the commencement of the Term,
for a total (including the initial allotment) of 225,000
shares.
- 15,000 additional shares will be available for vesting
in each of the first four quarters of the Term, in the event
that the retail orders received and invoiced in such
quarters through SMP's efforts exceeds the Retail Targets
set forth below. The total additional shares available in
the event that the Retail Targets are exceeded in each of
the first four quarters is thus an additional 60,000 shares.
- In the event that the agreement is terminated prior to
the end of the first year of the Term, vesting of any shares
shall cease upon the effective date of termination.
b. Quarterly Targets:
<TABLE>
<CAPTION>
Quarter Retail
Target
<S> <C>
Q2 1996: $1.9 Million
Q3 1996: $2.0 Million
Q4 1996: $2.8 Million
Q1 1997: $1.6 Million
</TABLE>
6. Exclusivity.
SMP shall have the exclusive right to sell the Products to
the Accounts specified herein. For all "retail channel
sales", SW shall not sell to other customers at prices lower
than those charged to the Accounts for similar classes of
trade and shall agree to "most favored customer" status when
requested by Accounts for similar classes of trade;
furthermore, SW shall adhere to the general pricing structure
specified in Exhibit C herein in an effort to avoid conflict
between the various channels of distribution. No such
restrictions shall apply to OEM sales, which are individually
negotiated with OEM Accounts on a case-by-case basis.
7. Term and Termination.
This Agreement shall commence as of the date first mentioned
herein and shall continue in effect for one (1) year
thereafter, and shall be automatically renewed in one (1)
year increments until terminated by either party as follows:
a. Either party may terminate this Agreement
immediately if the other becomes insolvent or files for
bankruptcy. Commissions shall be paid by, and/or to,
the surviving entities, if any.
b. Termination Without Cause
b.1. With 60 days advance notice, SMP may
terminate this Agreement without cause and receive
commissions on all Net Invoices (Product shipments
less returns) issued to the Accounts during the
term, plus any unshipped orders booked during the
term, payable as specified in Section 3 herein.
b.2. With 60 days advance notice, SW may
terminate this Agreement without cause, and SMP
shall receive commissions, payable as specified in
Section 3 herein, on all Net Invoices issued to the
Accounts, plus unshipped orders booked, for a
period of 90 days from the termination notice date,
regardless of SMP's involvement in said sales.
c. Termination With Cause
Either party may terminate this Agreement "with
cause" upon the failure of the other party to cure a
default of its obligations under this Agreement within
30 days of a notice from the other party of such
default. Should SMP terminate with cause, SMP shall
receive commissions as specified in Section 5.b.2);
should SW terminate with cause, SMP shall receive
commissions on the Net Invoices outstanding at the date
of termination.
d. Upon termination of this Agreement, SMP shall
immediately return all of SW's product samples in its
possession, and shall immediately cease using any of
SW's trade names, trademarks, or logos and shall
otherwise desist from all conduct which might lead the
trade to believe that SMP is authorized by SW to solicit
sales for the Products.
8. Confidentiality.
The parties shall not use, publish, or disclose, or permit
anyone else to use, publish, or disclose any proprietary or
confidential information or trade secret of the other party,
except as required to carry out the purposes of this
Agreement. Proprietary or confidential information shall
include, but not be limited to customer lists, marketing
plans, product and service development plans, computer
software, computer databases or related documentation, data
concerning the Company's products and services, pricing, SW's
trade secrets, and such other data as is designated as
proprietary by the parties from time to time.
9. Relationship of Parties; Approvals.
The relationship created by this Agreement is that of SW and
independent contractor. SMP shall be responsible for any
withholding taxes, payroll taxes, disability insurance
payments, unemployment taxes and other similar taxes or
charges on its personnel or the payments received by SMP.
a. SMP or its agents shall not, without the prior
written consent of SW, have any right or authority to
create or assume any obligation of any kind or nature
whatsoever on behalf of SW, or make any warranty of
representation on behalf of SW, or obligate or render SW
liable in any manner whatsoever. Without limiting the
generality of the foregoing, SMP shall not approve any
MDF, coop advertising, RMA's, or other expenditures or
commitments on behalf of SW without SW's prior written
approval. SMP shall not have authority to sign or make
agreements on behalf of SW, and all orders shall be
subject to SW approval, including without limitation
credit approval.
b. SW shall be solely responsible for the design,
development, supply, production, and performance of the
Products and the protection of its trade names. SW
agrees to indemnify and hold SMP and its employees and
agents harmless and to pay all losses, costs, damages
and expenses whatsoever, including reasonable attorney
fees, which SMP or its employees or agents may sustain
or incur as a result of claims against SMP for
infringement or alleged infringement of patents,
trademarks, or trade names, resulting from the sale of
the Products or arising as a result of warranty or
product liability claims.
c. SMP shall be solely responsible for and shall
indemnify and hold SW free and harmless from any and all
claims or damages arising out of the acts of SMP, its
employees or its agents.
d. It is agreed that, in the event it is necessary to
institute legal proceedings to enforce this Agreement,
the prevailing party will recover from the losing party
reasonable attorney fees.
10. Limited Warranty
a. SW warrants only that the media on which its
products are furnished will be free from defects in
materials and workmanship under normal use for a period
of ninety (90) days from the date of delivery. EXCEPT
FOR THE FOREGOING WARRANTY AS TO THE MEDIA ON WHICH THE
LICENSED PRODUCTS ARE FURNISHED, THE LICENSED PRODUCTS
ARE PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND,
EITHER EXPRESS OR IMPLIED. SW DOES NOT WARRANT THAT
THE FUNCTIONS CONTAINED IN THE LICENSED PRODUCTS WILL BE
UNINTERRUPTED OR ERROR FREE. SW DISCLAIMS ALL OTHER
WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING THE
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
b. The above warranty does not extend to any Licensed
Product which is operated in a manner other than as
specified by SW, has its serial number removed or
altered, is treated with abuse, negligence or other
improper treatment, or is modified or operated outside
the recommended operating environment.
c. No oral or written information or advice given by
SW, its dealers, agents or employees shall create a
warranty of any kind or in any way increase the scope of
this warranty. SMP, its employees and agents shall not
make, or authorize any distributor, retail dealer or
other person or entity to alter, change, enlarge, limit
or otherwise modify the warranty provided by SW beyond
the limited warranty set forth above.
d. If the media on which the Licensed Product is
furnished does not comply with the warranty, the sole
and exclusive remedy will be to return the media to SW
during the warranty period set forth in Section E.1 or
thirty (30) days thereafter, and SW will provide a
replacement in exchange for the defective media as soon
as reasonably possible. SW will not be required to
replace any media damaged by accident, abuse or
misapplication.
11. Limited Liability
NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT OR OTHERWISE,
SW WILL NOT BE LIABLE UNDER THIS AGREEMENT OR UNDER ANY
CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR
EQUITABLE THEORY, FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR
CONSEQUENTIAL DAMAGES (INCLUDING DAMAGES FOR LOSS OF BUSINESS
OR LOSS OF PROFITS) TO SMP, DISTRIBUTORS, RETAILERS OR END-
USERS, EVEN IF SW OR ITS REPRESENTATIVES HAVE BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGES.
12. Notices.
All notices and other communications under this Agreement
shall be deemed given when sent by hand delivery, telegram,
telex, fax confirmed by one of these other methods, or by
prepaid registered or certified mail, or its equivalent, to
the respective party at a SW business address.
13. Successors and Assigns.
This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and
permitted assigns. The parties shall not assign this
Agreement or any rights or obligations hereunder without the
express written consent of the other party.
14. Amendment and Waiver.
This Agreement is intended to be the full and complete
statement of the obligations and rights of the parties
relating to the subject matter hereof and supersedes all
previous agreements, understandings, negotiations, and
proposals as to this Agreement. No provision of this
Agreement shall be deemed waived, amended, or modified by
either party unless such waiver, amendment, or modification
shall be in writing and signed by a duly authorized officer
of the party against whom the waiver or modification is
sought to be enforced.
15. Severability.
In the event that any term or provision of this Agreement
shall be held invalid by a competent court or government
agency, the remainder of this Agreement shall not be effected
thereby, and the parties hereto shall continue to be bound by
the remaining terms hereof.
16. Governing Law and Legal Actions.
This Agreement shall be governed exclusively by the laws of
the State of California and the United States of America,
without regard to conflicts of laws provisions thereof. SMP
agrees that any actions related to the subject matter hereof
shall be brought in the California state and U.S. federal
courts having within their jurisdiction San Francisco or San
Mateo, California. SW shall also be entitled to seek relief
to protect its Proprietary Rights under the applicable laws
of any state or country and in any court of competent
jurisdiction. SMP consents to the jurisdiction of the courts
identified in this section, and waives any objection SMP
might otherwise have based upon lack of personal
jurisdiction, or forum non conveniens. SMP agrees that
process may be served on SMP by any method allowed for the
serving of notices under this Agreement or by any other
method allowed by law. In any action or proceeding to
enforce rights under this Agreement, the prevailing party
shall be entitled to recover costs and attorneys' fees.
17. Headings.
Section and subsection headings herein are provided for
convenience only and will not affect the construction or
interpretation of this Agreement.
18. Counterparts.
This Agreement may be executed in one or more counterparts,
all of which taken together shall constitute one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed on the day and year first mentioned herein.
Sanctuary Woods Multimedia Inc. Strategic Marketing Partners, Inc.
/s/ Charlotte J. Walker /s/ W.C. Mitschrich
Charlotte J. Walker, W.C.Mitschrich,
President President
Exhibit A
This Exhibit is part of the Agreement dated May 13, 1996
between Strategic Marketing Partners and Sanctuary Woods
Multimedia Inc. SMP shall have the first right of refusal
to include in this Exhibit A any or all of SW's products,
which are generally suited for the "Retail Channel" as they
become available.
Products
Product Name Suggested Retail
Price
All products offered by SW which are suited for sale to the
"retail channel" shall be included in this Agreement.
Exhibit B
This Exhibit is part of the Agreement dated May 13, 1996
between Strategic Marketing Partners and Sanctuary Woods
Multimedia Inc.
Accounts
All distributors, resellers, and OEM accounts engaged in the
resale of microcomputer products in the U.S. and Canada,
including but not limited to the following classes of
accounts:
Bookstore Chains
Catalogers
Computer Store Chains
Computer & Peripheral Manufacturers
Corporate Account Resellers
Distributors (National & Regional)
Franchise Chains
Independent Computer Stores
Mail Order Resellers
Mass Merchants
Membership Superstores
Microcomputer Chains & Superstores
Office Supply Superstores
Software Publishers
Toy Chains
Exhibit C
This Exhibit is part of the Agreement dated May 13, 1996
between Strategic Marketing Partners and Sanctuary Woods
Multimedia Inc.
Pricing Structure
Channel of Pricing
Distribution
Sales to End Users "Street" Price*
Sales to Dealers 10-20% more than
Price to Chain
Accounts
Sales to Chain 25-33% of "Street"
Accounts Price
Sales to 5-7% less than Price
Distributors to Chain Accounts
* Average price consumers pay at whichever of the following
Accounts sell the Products on a regular basis: Babbage's,
Best Buy, CompUSA, Computer City, Costco, Sam's, Software
Etc.
SANCTUARY WOODS MULTIMEDIA CORPORATION
EXHIBIT 11 - COMPUTATION OF NET LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
March 31, March 31,
1996 1995
PRIMARY NET LOSS PER SHARE
<S> <C> <C>
NET LOSS $ (4,514,171) $ (2,896,992)
============= =============
PRIMARY SHARES OUTSTANDING:
Common shares 22,158,085 19,739,957
Performance shares held in escrow (4,000,000) (4,000,000)
------------- -------------
Total 18,158,085 15,739,957
============= =============
PRIMARY NET LOSS PER SHARE $(0.25) $(.18)
======== =======
FULLY DILUTED NET LOSS PER SHARE (1)
NET LOSS $(4,500,507) (2,896,992)
============ =============
FULLY DILUTED SHARES OUTSTANDING:
Common shares 22,158,085 19,739,957
Common stock equivalents (including stock
options, warrants, and convertible debt) 3,097,934 519,688
----------- ------------
Total 25,256,019 20,259,645
=========== ============
FULLY DILUTED NET LOSS PER SHARE $(0.18) $(0.14)
======== ========
<FN>
<F1>
Fully Diluted Net Loss Per Common Share, has been presented
in accordance with Regulation S-K Item 601(b)(11) even
though the amounts of fully diluted per share loss are not
required to be presented in the statement of operations
under the provisions of APB Opinion No. 15 because of
anti-dilution.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from the Condensed Consolidated Balance Sheets at
March 31, 1996 (Unaudited) and the Condensed Consolidated
Statement of Operations for the period ended March 31, 1996,
and is qualified in its entirety by reference to such
financial statements and the accompanying management's
discussion and analysis of financial condition.
</LEGEND>
<S> <C>
<PERIOD-START> JAN-01-1996
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1996
<CASH> 8,455
<SECURITIES> 0
<RECEIVABLES> 4,814,104
<ALLOWANCES> 4,013,403
<INVENTORY> 1,384,840
<CURRENT-ASSETS> 2,615,199
<PP&E> 1,834,266
<DEPRECIATION> 210,932
<TOTAL-ASSETS> 4,593,861
<CURRENT-LIABILITIES> 8,914,312
<BONDS> 0
0
0
<COMMON> 31,763,839
<OTHER-SE> (36,632,071)
<TOTAL-LIABILITY-AND-EQUITY> 4,593,861
<SALES> 937,612
<TOTAL-REVENUES> 937,612
<CGS> 924,210
<TOTAL-COSTS> 924,210
<OTHER-EXPENSES> 4,527,573
<LOSS-PROVISION> 16,071
<INTEREST-EXPENSE> 73,279
<INCOME-PRETAX> (4,514,171)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,514,171)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,514,171)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
