<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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
August 6, 1996 was 22,786,164.*
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.
<PAGE> 2
PART I - Financial Information
ITEM 1 - Condensed Consolidated Financial (unaudited)
Condensed consolidated balance sheets -
June 30, 1996 and March 31, 1996 3
Condensed consolidated statement of operations -
three months ended June 30, 1996 and 1995 4
Condensed consolidated statement of cash flows -
three months ended June 30, 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 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 24
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
the 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 reports
on Form 10-K/A-1 and A-2 for the year ended December 31,
1995 and on Form 10-Q for the transition quarter ended March
31, 1996.
<PAGE> 3
<TABLE>
<CAPTION>
SANCTUARY WOODS MULTIMEDIA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1996 AND MARCH 31, 1996
(UNAUDITED)
June 30, March 31,
1996 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 88,447 $ 8,455
Accounts receivable 804,996 800,701
Inventories 1,006,967 1,384,840
Prepaid royalties 177,000 127,000
Prepaid expenses 220,492 294,203
----------- ----------
Total current assets 2,297,902 2,615,199
PROPERTY AND EQUIPMENT 793,636 1,834,266
DEFERRED ROYALTIES & OTHER ASSETS 93,571 144,396
----------- ----------
TOTAL ASSETS $ 3,185,109 $4,593,861
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Bank debt $ 1,135,904 $ 2,226,781
Notes payable 1,563,666
Accounts payable 2,517,352 3,087,886
Accrued expenses 795,365 1,395,359
Royalty obligations 454,723 611,905
Current portion of capital lease obligations 27,810 28,715
----------- -----------
Total current liabilities 4,931,154 8,914,312
LONG-TERM ROYALTY OBLIGATIONS 84,000 534,000
CAPITAL LEASE OBLIGATIONS 6,956 13,781
----------- -----------
Total liabilities 5,022,110 9,462,093
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Authorized, 100,000,000 common shares,
no par value; issued and outstanding,
26,708,580 shares at June 30, 1996 and
22,158,580 shares at March 31, 1996. 34,446,006 31,763,839
Accumulated deficit (35,531,136)(35,874,113)
Accumulated translation adjustments (751,871) (757,958)
------------ -----------
Total stockholders' equity (deficit) (1,837,001) (4,868,232)
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQU (DEFICIT) $ 3,185,109 $4,593,861
============ ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
SANCTUARY WOODS MULTIMEDIA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
1996 1995
<S> <C> <C>
SALES:
Consumer titles $ 994,716 $ 1,323,763
Licensing revenue 925,653 565,132
Publisher services 169,975
----------- -----------
Total sales 1,920,369 2,058,870
----------- -----------
COST OF SALES:
Consumer titles 683,099 964,022
Technology amortization 161,090
Publisher services 145,174
----------- -----------
Total cost of sales 683,099 1,270,286
----------- -----------
GROSS MARGIN 1,237,270 788,584
----------- -----------
OPERATING EXPENSES:
Research and development 459,064 978,319
Marketing and sales 632,080 1,812,179
Administration 488,631 1,119,694
Depreciation 135,405 121,146
----------- -----------
Total operating expenses 1,715,180 4,031,338
----------- -----------
OPERATING LOSS (477,910) (3,242,754)
----------- -----------
OTHER INCOME (EXPENSE)
Foreign exchange (loss) gain (2,988) 11,480
Interest expense, net (82,168) (35,663)
Net gain on sale and disposal of assets 875,161 203
Other income 30,883 4,434
----------- -----------
Total other income (expense) 820,888 (19,546)
----------- -----------
NET INCOME (LOSS) $ 342,978 $ (3,262,300)
=========== ===========
PRIMARY NET INCOME (LOSS) PER SHARE $0.02 ($0.21)
FULLY DILUTED NET INCOME (LOSS) PER SHARE $0.01 ($0.21)
PRIMARY SHARES USED IN COMPUTATION 20,265,464 15,837,356
FULLY DILUTED SHARES USED IN COMPUTATION 24,282,820 15,837,356
See notes to consolidated financial statements.
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
SANCTUARY WOODS MULTIMEDIA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 342,978 $ (3,262,300)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 136,230 311,630
Stock warrant compensation and other 53,254
Sale of intellectual property rights in consid-
eration for a reduction in royalty obligations (429,688)
Net gain on sale and disposal of assets (875,161) (203)
Changes in assets and liabilities:
Accounts receivable (4,295) 169,568
Inventories 377,873 (909,575)
Prepaid royalties, expenses and intangibles 73,711 (738,039)
Accounts payable and accrued expenses (1,095,208) 1,396,143
Accrued royalty obligations (57,182) 229,550
Accrued bank payable 395,000
----------- -----------
Net cash used in operating activities (1,477,488) (2,408,226)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 1,900,000
Purchase of property and equipment (302,045)
---------- -----------
Net cash provided (used) in investing activities 1,900,000 (302,045)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants 750,000
Common stock issued 331,285
Net (payments) borrowings on bank debt (1,090,877) 2,240,000
Payments on long-term debt (7,730) (6,912)
----------- -----------
Net cash used (provided) in financing activities (348,607) 2,564,373
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 6,087
----------- -----------
NET INCREASE (DECREASE) IN CASH 79,992 (145,898)
CASH, BEGINNING OF PERIOD 8,455 268,552
----------- -----------
CASH, END OF PERIOD $ 88,447 $ 122,654
============= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,200 $ 34,266
Income taxes 800
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING
INFORMATION:
Conversion of notes payable into common stock $ 1,563,666
Sale of intellectual property in exchange for a reduction
in royalty obligations and issuance of common stock 550,000
Conversion of account payable into common stock 195,000
See notes to consolidated financial statements.
</TABLE>
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
1. NATURE OF OPERATIONS AND CHANGE IN FISCAL YEAR-END
Sanctuary Woods Multimedia Corporation and its
subsidiaries (the "Company") 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 made
directly to schools, hardware manufacturers and bundlers
(OEM), and to international distributors. Revenue is
also generated from licensing and other activities
related to the Company's products and intellectual
properties. 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 determined that it would
be in the best interests of the Company and its
shareholders to change the Company's fiscal year to
March 31 from December 31, which change the Company
effected as of April 1, 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 except as
described herein. 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, respectively
for the year ended December 31, 1995 and Form 10-Q as
filed on June 19, 1996 for the transition period ended
March 31, 1996. Results of operations for interim
periods are not necessarily indicative of results for
the full year.
2.GOING CONCERN UNCERTAINTY
Going Concern Uncertainty.
The accompanying unaudited condensed 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 herein, among
others, may indicate that the Company may be unable to
continue as a going concern in the near future. In such
event the Company may be required to seek protection
under applicable bankruptcy statutes during the course
of which the Company may dispose of its assets at
significantly below book value. The unaudited
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 obtain additional financing and
<PAGE> 7
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, 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 debt obligations,
and the Company has been substantially dependent on debt
and 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 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 Company's independent auditors
were unable to express, and did not express, an opinion
on the Company's December 31, 1995 consolidated
financial statements.
Historical Operating Losses
Net income for the Quarter ended June 30, 1996 was
$342,978 compared to a net loss of ($3,262,300) for
the quarter ended June 30, 1995 and a net loss of
($4,514,171) for the transition quarter ended March
31, 1996. The net income for the June 1996 quarter
was primarily due to the gain of $897,260 on the sale
of the Company's Victoria studio. The net loss from
operations for the Quarter ended June 30, 1996
totalled ($477,910) compared to a net loss of
($3,242,754) for the same quarter one year ago. Net
cash used by operating activities was ($1,477,488)
for the quarter ended June 30, 1996 as compared to
net cash used by operating activities of ($2,408,226)
for the same quarter one year ago. At June 30, 1996
the Company had $88,447 in cash and bank borrowings
totalling $1,135,904.
During 1996, the Company has taken several actions to
eliminate its entertainment products and publishers
services businesses and products (see 1996 actions
below). Revenues and expenses for the quarter ended
June 30, 1996 included the following items related to
entertainment operations and products:
<TABLE>
<S> <C>
Revenues -
Sale of rights to certain entertainment products $580,000
========
Expenses -
Victoria studio operating expenses (sold in May, 1996) $250,000
Consolidation of facilites and related items 47,500
Provisions for product returns and price protection 150,000
Provision for inventory obsolescence 100,000
--------
Total $547,500
========
</TABLE>
The provisions for product returns, price protection and
inventory obsolescence resulted from reviews of current
entertainment products on hand and in the distribution
channel, and to the extent considered practicable,
estimates of price relief to customers required to sell
those entertainment products still considered salable.
Since January 1996, the Company has experienced severe
liquidity problems. There is still a large burden of
bank and trade indebtedness resulting from severe losses
experienced in 1995 and the first quarter of 1996.
Since February 1996, cash receipts from revenues have
been used primarily to pay bank debt, delinquent vendor
obligations, and ongoing payroll related obligations and
facility costs. A lack of cash has greatly affected the
Company's ability to sell its products and generate future
<PAGE> 8
revenue. Management believes that it must raise
additional capital to comply with the terms of its bank
credit agreement, pay overdue vendor obligations, fund
current sales and marketing budgets and sustain future
operations. Management believes that if the Company is
unable to successfully obtain such funding it may be
forced to cease operations.
1996 Actions
After sustaining considerable losses in the fiscal year
ended December 31, 1995, the Company began 1996 by
reorganizing its operations as outlined below. A major
part of that reorganization involved ceasing publication
of new entertainment titles and eliminating the
Publisher Services Division.
During 1996, the Company formulated plans and
instituted measures to improve operations and cash flows
in order to enable it to continue its operations.
Specific items accomplished through August 6, 1996
include the following:
- Appointment of a new President and Chief Executive
Officer, Vice President of Marketing, and a new controller,
and promotion of the Vice President of the Education
Division to Senior Vice President.
- Reduction of head count from 148 employees at December
31, 1995 to 42 at August 6, 1996 and elimination of many
part-time, temporary and contract positions.
- Elimination of its Publisher Services Division.
- Sale of substantially all of the fixed assets of its
Entertainment Division. This included the sale of its
Victoria Studio in May 1996, for approximately $1.9 million,
$500,000 of which was used to reduce bank borrowings. The
net gain on the sale of the studio, included in other income
for the quarter ended June 30, 1996, totaled $897,260.
- Reduction by $1,436,096 of the balance of its bank line
of credit from its January 1996 peak level of $2,572,000.
- Reduction of delinquent trade accounts payable and other
obligations by approximately $770,000.
- 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.
- Sale in the quarter ended June 30, 1996, of certain
enterainment product rights to one of its licensors in
consideration of a $430,000 reduction in royalty
obligations. The transaction also encompassed the issuance of
<PAGE> 9
175,000 shares of the Company's common stock in
consideration of an additional $120,000 reduction in royalty
obligations.
- Sale of other entertainment product rights for $150,000
in the quarter ended June 30, 1996.
Private Placement
In February and March 1996, the Company issued
$1,500,000 of 10% convertible notes pursuant to a
private placement. The notes were to become due in
August 1996 and included $100,000 of principal amount
of notes sold to two of the Company's officers. In June
1996, all of these notes, plus accrued interest, were
converted into 3,077,584 shares of common stock which
are subject to certain registration rights. In addition,
certain of the convertible note holders 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 of the warrant exercise, the
Company received $750,000 in cash.
Bank Line of Credit
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 outlined in
the Company's Report on Form 10-Q for the quarter ended
March 31, 1996. This amendment included a maturity date
of December 31, 1996 and a maximum credit limit of
$1,000,000 effective upon reduction of outstanding
borrowings to that level by June 30, 1996.
The Company was not in compliance with certain covenants
of its bank line of credit at June 30, 1996 and is not
currently in compliance. In addition, the Company has
borrowed in excess of the amounts allowed under the bank
credit agreement. The Company is currently in
negotiations with the bank with regard to these issues.
No additional bank borrowings are available.
Current Status and Management's Plans
At August 6, 1996, the Company had $47,000 of cash in
the bank and total bank borrowings of $1,062,091.
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,
publish and distribute its products. The Company has
also sold and is attempting to further sell or license
the rights to its entertainment product catalog and
certain remaining entertainment products.
Since January 1996, the Company has been able to sustain
its operations in the face of severe financial
restrictions. The Company has achieved this through
restructuring and refocusing itself on the education
software marketplace, substantially reducing overhead to
increase cash flow, and maintaining workable
relationships with its bank and other creditors. The
Company intends to apply the proceeds of any additional
financing to further reduce its indebteness and to
expanding its sales, marketing and product development
activities. However, if the Company is unable to successfully
<PAGE> 10
obtain such funding, management believes
that the Company may be forced to cease operations.
3. ACCOUNTS RECEIVABLE
The Company allows customers to exchange and/or return
products. In order to promote sell-through and limit
product returns, the Company also provides "price
protection" on slow moving products. In addition, the
Company's products are sold with a ninety-day warranty
against defects. The Company has recorded reserves for
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 consisted of:
<TABLE>
<CAPTION>
June 30 March 31
1996 1996
<S> <C> <C>
Accounts receivable - trade $ 2,779,921 $ 4,814,104
Less allowances for:
Doubtful accounts (80,810) (207,352)
Sales returns and allowances (1,894,115) (3,806,051)
------------ -----------
Accounts receivable - net $ 804,996 $ 800,701
=========== ===========
</TABLE>
4. INVENTORIES
Inventories consisted of:
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
<S> <C> <C>
Finished goods $ 1,529,355 $ 1,967,558
Raw materials 725,258 866,957
----------- -----------
2,254,613 2,834,515
Less allowance for obsolete, slow-moving and
non-salable inventory (1,247,646) (1,449,675)
----------- -----------
Inventories, net $ 1,006,967 $1,384,840
=========== ===========
</TABLE>
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.
In 1996, Sanctuary Woods was sued by Starpak, Inc. in
the state courts of Colorado. Starpak's complaint
alleges breach of contract, and claims damages in the
amount of $103,093 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
<PAGE> 11
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 the results of its 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. 1,200,000 of these shares have
been sold and transferred by the original holders to
certain members of current management. 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 annual 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 in any fiscal year. The
Company may pursue an early release of all or a large
portion of the Performance Shares. Such an early
release from escrow would reduce a source of continuing
uncertainty surrounding the Company's financial
statements, but would also result in compensation
expense in the quarter in which the release is made.
Through June 30, 1996, no Performance Shares have been
earned or released.
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 bid price of the Company's common
stock on the Vancouver Stock Exchange at August 6, 1996,
of approximately $.50 per share (for example purposes
only), the aggregate compensation expense that would be
recognized would be approximately $2,000,000. 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.
<PAGE> 12
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, and Form 10-Q for the
transition period ended March 31, 1996, as filed with the
Securities and Exchange Commission.
Overview and Recent Developments.
In 1996, the Company changed its fiscal year to end March
31.
During 1996, the Company formulated plans and instituted
measures to improve operations and cash flows in order to
enable it to continue its operations. Specific items
accomplished through August 6, 1996 include the following:
- Appointment of a new President and Chief Executive
Officer, Vice President of Marketing, and a new controller
and promotion of the Vice President of the Education
Division to Senior Vice President.
- Reduction of head count from 148 employees at December
31, 1995 to 42 at August 6, 1996 and elimination of many
part-time, temporary and contract positions.
- Elimination of its Publisher Services Division.
- Sale of substantially all of the fixed assets of its
Entertainment Division. This included the sale of its
Victoria Studio in May 1996, for approximately $1.9 million,
$500,000 of which was used to reduce bank borrowings. The
net gain on the sale of the studio, included in other income
for quarter ended June 30, 1996, totaled $897,260.
- Reduction by $1,436,096 of the balance of its bank line
of credit from its January 1996 peak level of $2,572,000.
- Reduction of delinquent trade accounts payable and other
obligations by approximately $770,000.
- 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.
<PAGE> 13
- Sale in the quarter ended June 30, 1996, of certain
enterainment product rights to one of its licensors in
consideration of a $430,000 reduction in royalty
obligations. The transaction also encompassed the issuance
of 175,000 shares of the Company's common stock in
consideration of an additional $120,000 reduction in royalty
obligations.
- Sale of other entertainment product rights for $150,000
in the quarter ended June 30, 1996.
In addition, under the direction of its new management, 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 has sold the publishing rights to 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 debt obligations, and the Company
has been substantially dependent on debt and 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 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 Company's independent auditors were
unable to express, and did not express, an opinion on the
Company's December 31, 1995 consolidated financial
statements.
Liquidity and Capital Resources.
Since January 1996, the Company has experienced severe
liquidity problems. At August 6, 1996, the Company had
$47,000 of cash in the bank and total bank borrowings of
$1,062,091. There is still a large burden of bank and trade
indebteness resulting from severe losses experienced in 1995
and the first quarter of 1996. Since February 1996, cash
receipts have been used primarily to pay bank debt and
delinquent vendor obligations, in addition to paying ongoing
payroll related and facility costs. This demand for cash
has greatly affected the Company's ability to sell its
products and generate future revenue. The Company believes
<PAGE> 14
that it must raise additional capital to comply with its
banking arrangements, pay overdue vendor obligations, and
fund current sales and marketing budgets. No assurance can
be given that such financing will be available or that, if
available, that such financing be obtainable on terms
favorable to the Company or its stockholders. Management
believes that if the Company is unable to successfully
obtain such funding, it may be forced to cease operations.
During the quarter ended June 30, 1996, the Company agreed
with two creditors to issue 455,000 shares of common stock
in payment of $195,000 in outstanding obligations and the
cancellation of $120,000 in royalty obligations.
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 outlined in the Company's
Report on Form 10-Q for the quarter ended March 31, 1996.
This amendment included a maturity date of December 31, 1996
and a maximum credit limit of $1,000,000 effective upon
reduction of outstanding borrowings to that level by June
30, 1996.
The Company was not in compliance with certain covenants of
its bank line of credit at June 30, 1996 and is currently
not in compliance. In addition, the Company has borrowed in
excess of the amounts allowed under the bank credit
agreement. The Company is currently in negotiations with the
bank with regard to these issues. No additional bank
borrowings are currently available.
During the Quarter ended June 30, 1996, the Company issued
warrants to purchase 585,000 shares of common stock at price
of $.6875 and $.875 per share to its new sales organization.
Nasdaq Listing.
In July 1996, it was determined that the Company no longer
met the requirements for inclusion on the Nasdaq Small Cap
Market because it failed to meet the continuing inclusion
requirements for tangible net worth and minimum bid price.
As of July 1, 1996, the Company's stock ceased trading on
the National Small Cap Market and began trading on the OTC
Bulletin Board.
Results of Operations - Quarters ended June 30, 1996 and 1995.
Net Income and Operating Loss. Net income for the quarter
ended June 30 ,1996 was $342,978 compared to a net loss of
($3,262,300) in the quarter ended June 30, 1995. The 1996
June quarter net income was primarily due to the $897,260
gain on the sale of the assets of the Company's Victoria
studio. The operating loss for the June 1996 quarter was
($477,910) compared to an operating loss of ($3,242,754) in
the quarter ended June 30, 1995. The decrease in the net
operating loss was due in part to the reduction in operating
expenses resulting from the Company's 1996 restructuring,
including the elimination of the Victoria studio during the
quarter. The Company lacked sufficient capital resources in
the June 1996 quarter to adequately fund sales, marketing
and other operational activities. However, the permanent
reductions in headcount and operating overhead somewhat
offset the negative impact on the operating loss of these
financial constraints.
During 1996, the Company has taken several actions to
eliminate its entertainment products and publishers services
businesses and products (see 1996 actions below). Revenues
<PAGE> 15
and expenses for the quarter ended June 30, 1996 included
the following items related to entertainment operations and
products
<TABLE>
<S> <C>
Revenues -
Sale of rights to certain entertainment products $580,000
========
Expenses -
Victoria studio operating expenses (sold in May, 1996) $250,000
Consolidation of facilites and related items 47,500
Provisions for product returns and price protection 150,000
Provision for inventory obsolescence 100,000
--------
Total $547,500
========
</TABLE>
The provisions for product returns, price protection and
inventory obsolescence resulted from reviews of current
entertainment products on hand and in the distribution
channel, and to the extent considered practicable, estimates
of price relief to customers required to sell those
entertainment products still considered saleable.
Net Sales. Total sales decreased slightly to $1,920,369 in
the quarter ended June 30, 1996 from $2,058,870 for the
quarter ended June 30, 1995. The decrease was due to a
reduction in sales in the retail distribution channel and
the elimination of the publisher services division. This
decrease was almost wholly offset by the increase in
licensing revenue from the quarter ended June 95 to June 96.
Sales in the retail distribution channel declined $829,000
from $1,424,000 in the quarter ended June 30, 1995 to
$595,000 in the quarter ended June 30, 1996. The Company
estimates that the decrease was at least partially due to
the lack of resources needed to market and promote its
titles, especially its new releases of Major League Math and
Franklin Learns Math. This decrease was partially offset by
sales in the education channel which increased by 73% to
$377,400 in the quarter ended June 30, 1996 from $217,194 in
the same quarter one year ago.
Licensing revenue increased by 64% to $925,653 in the June
1996 quarter from $565,132 in the quarter ended June 30,
1995. The increase was primarily due to the sale of rights
to certain entertainment products totaling $580,000.
Gross Margins. Gross margins increased to 64% of total
sales in the quarter ended June 30, 1996 from 38% in the
quarter ended June 30, 1995. This increase is primarily due
to the increase in licensing revenues which carry no cost of
sales, the elimination of the publisher services division,
and the decrease in technology amortization which was fully
expensed in 1995.
In addition, increases in gross margins were aided by the
decrease in cost of sales on consumer titles to 69% in the
quarter ended June 30, 1996 from 73% in the quarter ended
June 30, 1995. The June 1996 quarter includes liquidation
and close-out sales which have little or no margin, as well
as $250,000 in charges for returns, price-protection and
inventory obsolescence. The June 1995 quarter also included
high royalty costs.
Research and Development Costs. Research and development
costs decreased 53% to $459,064 in the quarter ended June
30, 1996 from $978,319 in the quarter ended June 30, 1995.
This decrease is primarily due to a reduction in personnel
<PAGE> 16
and facility costs associated with the sale of the Company's
Victoria studio and the overall reduction of the Company's
workforce.
Marketing and Sales. Marketing and sales expenditures
decreased 65% to $632,080 in the quarter ended June 30, 1996
from $1,812,179 in the quarter ended June 30, 1995. This
decrease was due primarily to the Company's lack of
resources to fund advertising and promotion activities. In
addition, the Company has reduced personnel expenses due to
the elimination of its entertainment products. In the
quarter ended June 1995, the Company invested substantial
sums to promote the release of its then premiere
entertainment title Buried In Time.
Administrative Costs. Administrative expenses decreased 56%
to $488,631 in the quarter ended June 30, 1996 from
$1,119,694 in the quarter ended June 30, 1995, primarily due
to the reduction in the Company's workforce and to some
extent due to the elimination during the quarter of the
Victoria studio operation.
During the quarter ended June 30, 1996 the Company continued
to reduce staff levels, facility costs and administrative
expenses primarily by the sale of its Victoria Studio.
The Company believes that the revenue and expense levels
reported in the quarter ended June 30, 1996 are not
necessarily indicative of the level of operating profits or
losses it expects to incur in the near future.
Approximately $580,000 in revenues and approximately
$550,000 of expenses and reserves included in the Quarter
ended June 30, 1996 were associated with operations and
products which have since been sold or eliminated in
addition to the one-time gain on the sale of the Victoria
studio.
As of August 6, 1996, the Company had 42 full time employees
and operated facilities in San Mateo, California and
Toronto, Canada. These employees were employed in the
following functions:
Product Development- Children's Educational Products 17
Marketing, Sales, Customer Service & Technical Support 15
General and Administrative 10
---
Total 42
The Company currently does not expect to significantly
increase its workforce above this level in the near future.
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
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
<PAGE> 17
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 June 30, 1996, of $1,894,115. 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, 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 first half of calendar 1996, reduced its work force
by more than 66% and revised its product development plans for
1996. These changes or other future actions 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 certain 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.
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,
<PAGE> 18
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 products could have a material
adverse affect 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
materially 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 gain such access or that the Company's access will be on
terms favorable to the Company.
<PAGE> 19
Changing Product Platforms and Formats. The Company's
software products are intended to be used 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 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
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.
<PAGE> 20
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, governmental or regulatory investigations,
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 losses in
the fourth quarter of 1995, and the quarter ended March 31,
1996, and the Company's current financial condition and lack
of capital resources, the Company has been unable to pay
certain of its vendors on a timely basis. 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 Vancouver Stock Exchange since
December 1991, and was quoted on the Nasdaq Stock Market from
September 8, 1993 until July 2, 1996, when it began trading
the OTC Bulletin Board. 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, as well as the Company's
results of operations and financial condition, may adversely
affect the market price of 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. 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$0.653 of operating cash flow generated
by the Company in any fiscal year, as specifically defined by
VSE Policy 19. The Company will be required to recognize as
compensation expense an aggregate amount equal to the
difference between the amount per share originally paid for
the Performance Shares (CDN$.01) and the market price of the
Common Stock at the time such Performance Shares or pro rata
portion thereof are earned. Performance Shares are permitted
<PAGE> 21
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 on the Vancouver Stock Exchange at
August 6, 1996 of approximately US$0.50, (for example purposes
only), the aggregate compensation expense that would be
recognized as a result would be approximately $2,000,000. 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 or the sales
or issuance of convertible securities or warrants 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 and management (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 August 6, 1996, the Company had outstanding
options to purchase an aggregate of 2,072,166 shares of Common
Stock and warrants to purchase 1,960,000 shares of Common
Stock. Furthermore, the Company has reserved approximately
333,000 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 bank
credit agreement prohibits the payment of cash dividends
without the prior written consent of the lender.
<PAGE> 22
PART II - OTHER INFORMATION
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
state courts of Colorado. Starpak's complaint alleges
breach of contract, and claims damages in the amount of
$103,093 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. This case is at a very early stage
of litigation.
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. (Incorporated herein by reference from the
Company's Report on Form 10-Q for the quarter ended
March 31, 1996.)
10.20 Warrant granted in connection with Second Amendment to
Loan Agreement between Sanctuary Woods Multimedia,
Inc. and Imperial Bank. (Incorporated herein by
reference from the Company's Report on Form 10-Q for
the quarter ended March 31, 1996.)
10.21 Agreement with Strategic Marketing Partners dated May
13, 1996. (Incorporated herein by reference from the
Company's Report on Form 10-Q for the quarter ended
March 31, 1996.)
10.22 Amendment 1 to License Agreement between Ripley
Entertainment, Inc. and Sanctuary Woods Multimedia
Corporation (effective date June 17, 1996).
10.23 Amendment 1 to License Agreement between Ripley
Entertainment, Inc. and Sanctuary Woods Multimedia
Corporation (effective date August 1, 1996).
11 Computation of Net Income (Loss) Per Common Share
27 Financial Data Schedule
<PAGE> 23
(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).
<PAGE> 24
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: August 13, 1996
<PAGE>
EXHIBIT LIST
Exhibit Description
Number
10.22 Amendment 1 to License
Agreement between Ripley
Entertainment Inc. and
Sanctuary Woods Multimedia
Corporation (effective date
June 17, 1996).
10.23 Amendment 1 to License
Agreement between Ripley
Entertainment Inc. and
Sanctuary Woods Multimedia
Corporation (effective date
August 1, 1996).
11 Computation of Net Loss Per Share
27 Financial Data Schedule
<PAGE>
Amendment 1 to License Agreement between
Sanctuary Woods Multimedia Corporation
and Ripley Entertainment Inc.
The parties hereby make the following amendment
("Amendment"), effective as of June 17, 1996, to the License
Agreement dated as of September 7, 1993 ("the Agreement"),
by and between Sanctuary Woods Multimedia Corp. ("SW"), and
Ripley Entertainment Inc. ("Ripley").
1.The grant of rights section 2(A) of the Agreement is
amended to be non-exclusive and for children's educational
games only.
2.The minimum guaranteed royalties for years three and four
of the Agreement are hereby waived, and subsections 10(B)
(i) (c) and (d) of the Agreement are hereby deleted.
3.The royalty rate is amended to ten percent (10%) of "net
revenue" received by SW related to sales of the Products,
except as to sales of finished goods inventory of The Riddle
of Master Lu. Net Revenue shall be defined as net of
discounts, returns, and sales and similar taxes. With
regard to finished goods inventory of The Riddle of Master
Lu, as of May 1, 1996, SW shall pay Ripley a royalty of
forty percent (40%) of Net Revenue less additional
deductions for shipping, fulfillment, warehousing, and sales
expenses and costs, such costs not to exceed $4.00 per unit,
accordingly. Concurrent with the signing of this Amendment
by both parties, SW shall also provide one thousand (1,000)
units of The Riddle of Master Lu to Ripley free of charge,
except for shipping costs.
4.Sanctuary Woods shall pay an additional advance royalty
of one hundred fifty thousand United States dollars
(US$150,000) on the following schedule. This advance will
be recoupable from the royalties otherwise payable to
Ripley's under section 3 above:
$10,000 concurrent with the signing of this Amendment by both parties;
$40,000 July 15, 1996;
$50,000 August 15, 1996;
$50,000 September 15, 1996.
5.Ripley shall be given 175,000 shares of common stock of
SW in return for the forgiveness of the obligation to pay
the additional guaranteed royalties set forth in section 2
above, subject to the approval of the Vancouver Stock
Exchange. Such shares shall be subject to holding periods
as imposed by applicable securities laws. SW agrees to
piggyback registration of such shares for resale at the same
time that SW next registers shares for resale under a new
registration statement. If such shares are not registered
within 12 months of the effective date June 17, 1996, Ripley
shall have on demand registration right.
6.In consideration of the reduction and waiver of minimum
guaranteed royalties and royalty rate as set forth herein,
SW shall assign, and does hereby assign to Ripley all right,
title and interest in and to the product design known by the
working title The Siberian Cipher, in its present form. SW
further assigns to Ripley all right, title and interest,
except for the CD-ROM rights, in and to the product The
Riddle of Master Lu. SW agrees to assign to Ripley six
months from the effective date of this Amendment, all CD-ROM
rights to the product The Riddle of Master Lu. The rights
assigned in this paragraph shall include a perpetual,
irrevocable license to the SW Software (including delivery
of the source code) necessary to reproduce the Products. SW
shall retain a non-exclusive license to continue selling
this product. Such assignments shall be on an "as is"
basis, and without warranty of any kind, whether express or
implied. SW SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY OF
<PAGE>
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. SW
DOES NOT WARRANT THAT THE OPERATION OF THE SW PRODUCTS WILL
BE UNINTERRUPTED OR ERROR FREE, OR THAT DEFECTS IN THE
SOFTWARE WILL BE CORRECTED.
7.In the event of any inconsistency between the terms of
the Agreement and the terms of this Amendment, the terms of
this Amendment shall prevail. All other terms and the
Agreement shall remain in full force and effect.
8.This Amendment may be executed in two or more
counterparts and all counterparts so executed shall for all
purposes constitute one executed Amendment, binding on all
parties hereto.
IN WITNESS WHEREOF, the parties execute this Amendment
through their undersigned duly authorized officers:
RIPLEY ENTERTAINMENT INC. SANCTUARY WOODS
MULTIMEDIA CORP.
Signature: /s/ Norman Deska Signature: /s/ Charlotte Walker
Title: Vice President Title: President and CEO
Date: July 8, 1996 Date: July 8, 1996
<PAGE>
Amendment 1 to License Agreement between
Sanctuary Woods Multimedia Corporation
and Ripley Entertainment Inc.
The parties hereby make the following amendment
("Amendment"), effective as of August 1, 1996, to the
License Agreement dates as of September 7, 1993 ("the
Agreement"), by and between Sanctuary Woods Multimedia Corp.
("SW"), and Ripley Entertainment Inc. ("Ripley").
1.The grants of rights section 2(A) of the Agreement is
amended to be non-exclusive and for children's educational
games only.
2.The minimum guaranteed royalties for years three and four
of the Agreement are hereby waived, and subsections 10(B)
(i) (c) and (d) of the Agreement are hereby deleted.
3.The royalty rate is amended to ten percent (10%) of "net
revenue" received by SW related to sales of the Products,
except as to sales of finished goods inventory of The Riddle
of Master Lu. Net revenue shall be defined as net of
discounts, returns, and sales and similar taxes. With
regard to finished goods inventory of The Riddle of Master
Lu, as at August, 1996, SW shall pay Ripley a royalty of
forty percent (40%) of Net Revenue less additional
deductions for shipping, fulfillment, warehousing, and sales
expenses and costs, such costs not to exceed $4.00 per unit,
on sales of such inventory, Section 10(B)(ii) and (iii) of
the Agreement are hereby amended accordingly. Concurrent
with the signing of this Amendment by both parties, SW shall
also provide one thousand (1,000) units of The Riddle of
Master Lu to Ripley free of charge, except for shipping
costs.
4.Sanctuary Woods shall pay an additional advance royalty
of one hundred fifty thousand United States dollars
(US$150,000) on the following schedule. This advance will
be recoupable from the royalties otherwise payable to
Ripley's under section 3 above:
$10,000 concurrent with the signing of this Amendment by both parties;
$40,000 September 1, 1996;
$50,000 October 1, 1996;
$50,000 November 1, 1996.
5.Ripley shall be given 175,000 shares of common stock of
SW in return for the forgiveness of the obligation to pay
the additional guaranteed royalties as set forth in section
2 above, subject to the approval of the Vancouver Stock
Exchange. Such shares shall be subject to holding periods
as imposed by applicable securities laws. SW agrees to
piggyback registration of such shares for resale at the same
time that SW next registers shares for resale under a new
registration statement. If such shares are not registered
within 12 months of the effective date August 1, 1996,
Ripley shall have on demand registration right.
6.In consideration of the reduction and waiver of minimum
guaranteed royalties and royalty rate as set forth herein,
SW shall assign, and does hereby assign to Ripley, all
right, title and interest in and to the product design and
all Work in Progress know by the working title The Siberian
Cypher, in its present form. Such Work in Progress shall
include all existing artwork whether in digital or on disk,
the animation of the train, backgrounds, storyboards and
casting notes, but shall not include the source code for the
engine. SW further assigns to Ripley all right, title and
interest, except for the CD-ROM rights, in and to the
product The Riddle of Master Lu. SW agrees to assign to
Ripley six months from the effective date of this Amendment,
all CD-ROM rights to the product The Riddle of Master Lu.
The rights assigned in this paragraph shall include a
<PAGE>
perpetual, irrevocable license to the SW Software (but not
including delivery of the source code) necessary to
reproduce the Products. SW shall retain a non-exclusive
license to continue selling this product. Such assignments
shall be on an "as is" basis, and without warranty of any
kind, whether express or implied. SW SPECIFICALLY DISCLAIMS
ANY IMPLIED WARRANT OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE. SW DOES NOT WARRANT THAT THE OPERATION
OF THE SW PRODUCTS WILL BE UNINTERRUPTED OR ERROR FREE, OR
THAT DEFECTS IN THE SOFTWARE WILL BE CORRECTED.
7.In the event of any inconsistency between the terms of
the Agreement and the terms of this Amendment, the terms of
this Amendment shall prevail. All other terms of the
Agreement shall remain in full force and effect.
8.This Amendment may be executed in two or more
counterparts and all counterparts so executed shall for all
purposes constitute one executed Amendment, binding all
parties hereto.
IN WITNESS WHEREOF, the parties execute this Amendment
through their undersigned duly authorized officers:
RIPLEY ENTERTAINMENT INC. SANCTUARY WOODS
MULTIMEDIA CORP.
Signature: /s/ Norman Deska Signature: /s/ Charlotte Walker
Title: Vice President Title: President and CEO
Date: July 25, 1996 Date: July 25, 1996
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
EXHIBIT 11 - COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended
------------------------
June 30, June 30,
1996 1995
<S> <C> <C>
Net Income (Loss) $ 342,978 $ (3,262,300)
============= =============
Primary shares outstanding:
Common Shares 23,306,162 19,837,356
Performance shares held in escrow (4,000,000) (4,000,000)
Common stock equivalents (including
stock options and warrants) 959,302
------------- -------------
Total 20,265,464 15,837,356
============= =============
Primary net income (loss) per share $ 0.02 $ (0.21) (a)
============= =============
FULLY DILUTED NET LOSS PER SHARE (1)
Net Income (Loss) $ 342,978 $(3,262,300) (a)
============= =============
Fully diluted shares outstanding:
Common Shares 23,306,162 19,837,356
Common stock equivalents (including
stock options and warrants) 976,658 716,083
------------- -------------
Total 24,282,820 20,553,439
============= =============
Fully diluted net income (loss)
per share $ 0.01 $ (0.16) (a)
============= =============
<FN>
<F1>
(a) Fully Diluted Net Loss Per Common Share has been presented in
accordance with Regulation S-K Item 601(b)(11) even though the
amount of fully diluted loss per share is not required to
be presented in the statement of operations under the provisions
of APB Opinion No. 15 because of the anti-dilutive effects
of including common stock equivalents.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from the Condensed Consolidated Balance Sheets at
June 30, 1996 (Unaudited) and the Condensed Consolidated
Statement of Operations for the period ended June 30, 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> APR-01-1996
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-30-1996
<CASH> 88,447
<SECURITIES> 0
<RECEIVABLES> 2,779,921
<ALLOWANCES> 1,974,925
<INVENTORY> 1,006,967
<CURRENT-ASSETS> 2,297,902
<PP&E> 793,636
<DEPRECIATION> 135,405
<TOTAL-ASSETS> 3,185,109
<CURRENT-LIABILITIES> 4,931,154
<BONDS> 0
0
0
<COMMON> 34,446,006
<OTHER-SE> (751,871)
<TOTAL-LIABILITY-AND-EQUITY> 3,185,109
<SALES> 1,920,369
<TOTAL-REVENUES> 1,920,369
<CGS> 683,099
<TOTAL-COSTS> 683,099
<OTHER-EXPENSES> 894,292
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82,168
<INCOME-PRETAX> 342,978
<INCOME-TAX> 0
<INCOME-CONTINUING> 342,978
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 342,978
<EPS-PRIMARY> .02
<EPS-DILUTED> .01
</TABLE>
