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67,614,973 SHARES
------------------------
SANCTUARY WOODS MULTIMEDIA CORPORATION
RIGHTS TO PURCHASE COMMON STOCK
AND COMMON STOCK ISSUABLE ON EXERCISE OF RIGHTS
All of the Shares of Common Stock offered hereby are being sold by
Sanctuary Woods Multimedia Corporation (the "Company").
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5 HEREIN FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE
CONSIDERED BY POTENTIAL INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE OR OTHER SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE OR OTHER SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<S> <C> <C> <C>
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PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS COMPANY(1)
- ------------------------------------------------------------------------------------------------
Per Share............................. $0.12 -- $0.12
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Total Maximum......................... $8,113,797 -- $8,113,797
================================================================================================
</TABLE>
(1) Before deducting estimated offering expenses of $150,000 payable by the
Company.
-----------------------------
The shares of Common Stock are being offered by the Company on a
best-efforts basis with no minimum purchase requirement. As a result, there can
be no assurance that the Company will be able to sell all or any of the shares
of Common Stock offered hereby. No arrangements have been made to place the
funds received in an escrow, trust or similar arrangement.
The Company is distributing the Rights directly to its holders of Common
Stock and 8% Convertible Debentures due July 31, 1999 as of March 7, 1997, who
are not Canadian residents, and has made no arrangements with brokers or dealers
to solicit purchases of shares by holders of Rights. The Rights will be
exercisable at any time after issuance until 5:00 p.m., California time, April
4, 1997 (the "Expiration Date").
On or before the Expiration Date of this offering, any Rights holder who
fully exercises all Rights initially issued to him is entitled to subscribe for
shares of Common Stock which were not otherwise subscribed for by other Rights
holders in the primary subscription. A maximum of 67,614,973 shares of Common
Stock will be issued in this offering including all over-subscriptions. If
sufficient shares of Common Stock remain after the primary subscription, all
over-subscriptions will be honored in full. If over-subscriptions for Common
Stock exceed the Common Stock available for sale after the primary subscription,
the available Common Stock will be allocated among those who over-subscribed
based on the number of shares of Common Stock for which a Rights holder
over-subscribes.
THE DATE OF THIS PROSPECTUS IS MARCH 14, 1997.
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TABLE OF CONTENTS
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PAGE
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SUMMARY............................................................................... 3
RISK FACTORS.......................................................................... 5
AVAILABLE INFORMATION................................................................. 11
INFORMATION INCORPORATED BY REFERENCE................................................. 11
RECENT DEVELOPMENTS................................................................... 13
RIGHTS OFFERING....................................................................... 15
Purpose of the Rights Offering...................................................... 15
Eligible Participants............................................................... 15
The Rights.......................................................................... 15
Transferability of Rights........................................................... 15
Over-Subscription Privilege......................................................... 15
Exercise of Rights.................................................................. 16
Rights Agent........................................................................ 17
Information Agent................................................................... 17
The Subscription Price.............................................................. 17
Expiration of Rights Offering....................................................... 18
Amendment, Extension or Termination of Rights Offering.............................. 18
Delivery of Shares Upon Exercise.................................................... 18
Plan of Distribution................................................................ 18
Dilution of Canadian Common Stock Holders........................................... 19
USE OF PROCEEDS....................................................................... 20
DILUTION.............................................................................. 20
DESCRIPTION OF CAPITAL STOCK.......................................................... 21
LEGAL MATTERS......................................................................... 22
</TABLE>
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SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Prospectus. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information contained or incorporated by
reference in this Prospectus and the exhibits hereto. Unless otherwise defined
herein, capitalized terms used in this summary have the respective meanings
ascribed to them elsewhere in this Prospectus. Unless otherwise indicated, all
dollar amounts are stated in U.S. dollars.
RIGHTS OFFERING:
Securities Offered......... The Company is issuing to its holders of Common
Stock, including beneficial owners of shares held
in the name of Cede & Co. as nominee for The
Depository Trust Company or in the name of any
other depositary or nominee, and 8% Convertible
Debentures due July 31, 1999, of record March 7,
1997 (the "Rights Offering Record Date") (who are
not Canadian residents) rights ("Rights") entitling
the holders thereof to subscribe for and purchase
up to an aggregate of 67,614,973 shares of Common
Stock of the Company ("Rights Holders"). Each
Rights Holder will receive one Right for every
share of Common Stock and 441.83 Right(s) for every
share of Series A Preferred Stock for which a
Rights Holder's Debentures are exchangeable. Each
Right will entitle the holder to purchase one share
of the Company's Common Stock. The Rights will be
exercisable at any time after issuance until 5:00
p.m. California time, April 4, 1997.
Over-Subscription
Privilege.................. Any Rights Holder who fully exercises all Rights
initially issued to him is entitled to subscribe
for shares of Common Stock which were not otherwise
subscribed for by other Rights Holders in the
primary subscription (the "Over-Subscription
Privilege").
Subscription Price......... The subscription price per share of Common Stock
(the "Subscription Price") is U.S.$0.12.
How to Exercise Rights..... To exercise Rights, the Rights Holder must complete
and sign the Subscription Certificate enclosed with
this Prospectus. Payment of the Exercise Price must
be made in United States dollars by check, bank
draft or money order, payable to the order of the
Rights Agent for the Company pursuant to the
instructions set forth in the Subscription
Certificate and the Prospectus. Payment may not be
made in cash and may only be made on business days.
The completed Subscription Certificate, accompanied
by payment of the Exercise Price, must be delivered
to the Rights Agent on or before the Expiration
Date. The addresses of the Rights Agent to which
delivery may be made, by mail or by hand, are set
forth in this Prospectus. Once the Subscription
Certificate together with payment, has been
delivered or mailed, the exercise of the Rights
represented thereby is not revocable for any
reason.
Sale of Rights............. The Rights are not transferable. No certificates
for Rights will be issued. Fractional Rights will
be rounded up to the nearest full share.
Foreign Restrictions....... Rights will not be issued to Common Stockholders of
Record whose addresses of record are in Canada.
Important Dates to
Remember................... Rights Offering Record Date: March 7, 1997
Expiration Date: April 4, 1997
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Amendment, Extension or
Termination of Rights
Offering................. The Company reserves the right, in its sole
discretion, to:(a) terminate the Rights Offering
prior to delivery of the shares of Common Stock for
which Rights Holders have subscribed pursuant to
the exercise of Rights in the primary subscription
or the Over-Subscription Privilege; (b) extend the
Expiration Date to a later date; (c) change the
Rights Offering Record Date prior to the
distribution of the Rights to Rights Holders; or
(d) amend or modify the terms of the Rights
Offering.
Risk Factors............... An investment in the Common Stock involves a high
degree of risk. See "Risk Factors."
Use of Proceeds............ The proceeds received from the Rights Offering will
be used to fund the Company's operations and for
other general corporate purposes. See "Use of
Proceeds."
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RISK FACTORS
An investment in the Common Stock issuable upon exercise of Rights issued
in the Rights Offering involves a high degree of risk. Before deciding to
purchase any of the Common Stock offered hereby, prospective investors should
consider the following factors, among others set forth herein. The following
risk factors and other information in this Prospectus contain 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 elsewhere in this Prospectus.
Additional Financing Required; No Assurance of Exercise of Rights. At
February 12, 1997, the Company had cash of $925,000, bank borrowings of $174,000
and available credit under its line of credit with Imperial Bank of $576,000.
The Company's line of credit matures on April 3, 1997 and Imperial Bank has
notified the Company that the line of credit will not be renewed. The Company
believes that its existing cash resources (not including its line of credit) and
cash flows from operations will fund continuing operations only through April
15, 1997. In order to raise additional working capital to fund the Company's
continued operations, the Company is issuing Rights to its shareholders to
purchase 67,614,973 shares of the Company's Common Stock at U.S. $0.12 per
share. The number of Rights that will be exercised by Rights Holders in the
Rights Offering cannot be presently determined. Accordingly, the amount of
proceeds to the Company from the Rights Offering is uncertain. Certain
shareholders of the Company have informed the Company that they intend to
exercise the Rights issued to them, however, they are not legally bound to do
so. The Company believes that if all of the Rights are exercised (which cannot
be assured), the proceeds from the Rights Offering, together with the Company's
existing cash resources and cash flows from operations, will be sufficient to
permit the Company to continue its operations through December 31, 1997.
Thereafter, unless the Company returns to profitability, additional financing
may be required to fund the Company's continued operations. In the event the
Rights Offering is delayed, the Company believes it has the ability to raise
additional capital on a near term basis from both existing shareholders and
other sources. There can be no assurance, however, that the Company will be able
to raise additional funds on favorable terms or at all, or that such funds, if
raised, will be sufficient to permit the Company to continue operations long
enough to return to profitability. If the Company is unable to raise additional
capital through the Rights Offering or from other sources, the Company's ability
to continue its operations will be seriously impaired.
Continued Losses; Liquidity. The Company had operating losses and net
losses in each fiscal year since its inception in 1991 and has suffered
operating losses in each of its last five quarters. In the three years ended
December 31, 1995, 1994 and 1993, the Company reported operating losses of $18.7
million, $8.0 million and $4.4 million, respectively, and net losses in each of
these years of $18.7 million, $7.4 million and $4.2 million, respectively. These
losses were due to low sales volumes and expenditures incurred by the Company in
the development of its CD-ROM publishing business, including significant
expenses related to internally and externally developed products, formation of
its own direct sales force, and the write-off of certain significant assets as a
result of the Company's lack of capital resources and its reassessment of the
future salability of certain products. There is no assurance that the Company
will become profitable in the near future or at all. "See -- Recent
Developments."
Fluctuations in Operating Results; Seasonality. 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 from major customers, order cancellations and
delays in shipment. In addition, the Company's business has been in the past
(due to the seasonal nature of consumer purchases of entertainment products) and
is expected to continue to be subject to seasonal fluctuations as a result of
the purchasing cycle of consumers, school districts and dealers in educational
products. In response to competitive pressures, the Company may take certain
pricing or marketing actions that could materially adversely affect
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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 December
31, 1996, of $1,049,688. 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 certain 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.
Recent Changes in Management Team. The Company recently experienced a
period of reorganization that has placed, and could continue to place, a
significant strain on the Company's financial, management, personnel and other
resources. The Company is operating under the direction of a new President and
Chief Executive Officer, and a new management team. If the Company's executives
are unable to effectively manage the Company's business, the Company's operating
results and financial condition could be materially adversely affected.
Impact of Reorganization of Operations. The Company may take additional
steps to reorganize or consolidate its operations. As discussed above, in an
effort to reduce its expense structure, the Company reorganized its operations
in 1996, in addition to revising its product development plans for the year.
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 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 continuous 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
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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 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 quarterly and
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 home entertainment and education software industry is
intensely competitive, and market acceptance for any of the Company's products
may be adversely affected by competitors introducing 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 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
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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. 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.
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. Failure to pay vendors on a timely basis 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. 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 be required to incur unanticipated legal
expenses.
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Market for Common Stock; Stock Price Volatility. The Company's Common
Stock was quoted on the Vancouver Stock Exchange until March 12, 1997 when the
Company's shares were approved for delisting at the Company's request. The
Company's Common Stock was quoted on the Nasdaq National Market or Small Cap
Market from September 8, 1993 until July 2, 1996 when it began trading on the
Nasdaq Bulletin Board for failing to meet NASDAQ requirements for trading. 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. The
Company has called an Extraordinary General Meeting on April 15, 1997 at which
it will ask its shareholders to approve a one-for-twenty share consolidation in
order to help the Company requalify its Common Stock for listing on the Nasdaq
SmallCap Market. If the share consolidation is approved, there is no assurance
that the one-for-twenty share consolidation will increase the price of the
Company's Common Stock sufficiently to qualify for relisting on the Nasdaq
SmallCap Market or that the Company will be able to meet the other requirements
necessary to qualify its Common Stock for listing on such exchange. In addition,
the NASD has proposed new entry and maintenance standards that, if adopted,
would require a company to (i) have net tangible assets of at least $4,000,000,
a market capitalization of at least $50,000,000 or net income in two of the last
three years of $750,000 in order to be listed for trading on the Nasdaq SmallCap
Market and (ii) net tangible assets of at least $2,000,000, a market
capitalization of at least $35,000,000 or net income of at least $500,000 during
two of the last three years in order to maintain its listing on the Nasdaq
SmallCap Market. Under the proposed new rules, a company would also have to have
a public float of at least 1,000,000 shares with a market value of at least
$5,000,000, and a minimum bid price of $4.00 per share for initial listing and a
public float of 500,000 shares with a market value of at least $1,000,000 and a
minimum bid price of $1.00 per share, to maintain such listing. There is no
assurance that the Company will be able to meet these new listing requirements,
or, that if the Company does meet the initial listing requirement, that it will
be able to continue to meet the maintenance requirements. If the Company were
unable to list its shares on the Nasdaq SmallCap Market, trading in the Common
Stock would thereafter be conducted in the over-the-counter market on an
electronic bulletin board established for securities that do not meet the Nasdaq
SmallCap Market listing requirements. As a result, an investor could continue to
find it difficult to dispose of, or to obtain accurate quotations as to the
price of, the Company's Common Stock.
Performance Shares and Related Compensation Expense. 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. In July 1996, a total of 1,200,000 of these shares were sold
and transferred to certain members of management at their then estimated fair
market value of $.03 per share.
The Company has agreed with holders of all of these shares to cancel their
Performance Shares in consideration for Cdn $.01 per Performance Share, which
the Company will pay by the issuance of Common Stock at a price of Cdn $0.21 per
share (190,476 shares) plus warrants to purchase one share of Common Stock for
every 6.67 Performance Shares (600,000 shares) at an exercise price of Cdn $0.21
per share in the first year after their issuance and Cdn $0.23 per share in the
second year after their issuance. For example, if a shareholder held 1,000,000
Performance Shares, in consideration for the cancellation of such Performance
Shares, he would receive approximately 47,619 shares of Common Stock and
warrants to purchase approximately 150,000 shares of Common Stock. The Company
intends to account for this exchange by
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charging Cdn. $0.01 per share to its capital accounts and the value of the
Common Stock warrants against current earnings.
Shares Eligible for Future Sale; Possible Adverse Effect on Future Market
Price. The 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.
Substantially all of the Company's issued and outstanding shares are freely
tradable. In addition, as of March 7, 1997, the Company had outstanding options
to purchase 2,635,000 shares of Common Stock, warrants to purchase 5,751,000
shares of Common Stock and 8% Convertible Debentures convertible into 9,640,000
shares of Common Stock. Furthermore, as of the Record Date the Company had
reserved approximately 6,821,000 additional shares of Common Stock for future
issuance pursuant to the Company's Stock Plans. In addition, the Company has
agreed with certain holders of the 8% Convertible Debentures to exchange the
Debentures for shares of Series A Preferred Stock. Assuming the exchange of all
of the outstanding Convertible Debentures upon the consummation of the exchange,
the Company will have outstanding approximately 100,000 shares of Series A
Preferred Stock, which will be convertible at any time at the option of the
holder into 44,183,333 shares of Common Stock. In connection with the exchange,
the Company will issue an additional 9,499,416 warrants to purchase shares of
the Company's Common Stock.
No Dividends. The Company's bank credit agreement prohibits the payment of
cash dividends without the prior written consent of the lender. The Company's
bank credit agreement matures on April 3, 1997, at that time assuming repayment
of all amounts owed thereunder, the dividends restrictions will be lifted.
Notwithstanding the foregoing, the Company has not paid any cash dividends since
inception and does not anticipate paying cash dividends in the foreseeable
future.
Broad Discretion on Use of Proceeds. Management of the Company will have
broad discretion in determining the use to which the net proceeds of the Rights
Offering will be put.
Potential Dilution in Net Tangible Book Value (Deficit). The net tangible
book value (deficit) of the Company at December 31, 1996 was approximately
($3,500,000) or ($0.15) per share of common stock "Net tangible book value
(deficit)" per share is equal to the Company's total tangible assets less its
total liabilities, divided by the total number of shares of common stock
outstanding (excluding the 4,000,000 performance shares). Investors purchasing
shares of common stock in the Rights Offering will incur immediate and
substantial net tangible book value dilution of approximately $.07. See
"-- Dilution."
10
<PAGE> 11
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended ("the 1934 Act"), and in accordance therewith
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at its principal office at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: in Chicago, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and in New York, 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such materials can be obtained at prescribed
rates by written request addressed to the Commission, Public Reference Section,
450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a Web
site that contains reports, proxy and information statements and information
regarding the Company. The address of such Web site is (http://www.sec.gov).
The Company has filed with the Commission in Washington, D.C. Registration
Statements on Forms S-2 and S-4 (collectively, and together with all amendments,
supplements, and exhibits thereto, referred to as the "Registration Statements")
under the Securities Act of 1933, as amended, with respect to the Common Stock,
Series A Preferred Stock and Warrants to be issued in connection with the
Domestication (the "Securities"), and the Common Stock to be issued by the
Company in connection with the Rights Offering. As permitted by the rules and
regulations of the Commission, this Prospectus does not contain all of the
information set forth in the Registration Statements and the exhibits thereto.
For further information with respect to the Company and the Securities offered
hereby, reference is made to the Registration Statements, including the exhibits
filed or incorporated as a part thereof, copies of which can be inspected at, or
obtained at prescribed rates from, the Public Reference Section of the
Commission at the address set forth above. While statements contained in this
Proxy Statement fully and accurately describe the material aspects of the
transactions being contemplated, statements as to the contents of any contract
or other document referred to herein or therein are not necessarily complete,
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statements or such other
document.
INFORMATION INCORPORATED BY REFERENCE
The following documents filed with the Commission (File No. 0-21510)
pursuant to the Exchange Act are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 filed pursuant to the Exchange Act.
2. The Company's Annual Report on Form 10-K/A-1 for the fiscal year ended
December 31, 1995 filed pursuant to the Exchange Act.
3. The Company's Annual Report on Form 10-K/A-2 for the fiscal year ended
December 31, 1995 filed pursuant to the Exchange Act.
4. The Company's Annual Report on Form 10-K/A-3 for the fiscal year ended
December 31, 1995 filed pursuant to Section 13 of the Exchange Act.
5. The Company's quarterly report on Form 10-Q for the quarter ended March
31, 1996 filed pursuant to Section 13 of the Exchange Act.
6. The Company's quarterly report on Form 10-Q for the quarter ended June
30, 1996 filed pursuant to Section 13 of the Exchange Act.
7. The Company's quarterly report on Form 10-Q for the quarter ended
September 30, 1996 filed pursuant to Section 13 of the Exchange Act.
8. The Company's quarterly report on Form 10-Q for the quarter ended
December 31, 1996 filed pursuant to Section 13 of the Exchange Act.
11
<PAGE> 12
9. The Company's report dated October 30, 1996 on Form 8-K filed pursuant
to Section 13 of the Exchange Act.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. These documents are available without charge upon
request from Sanctuary Woods Multimedia Corporation, c/o Peter Nichter, 1825
South Grant Street, San Mateo, California 94402. In order to ensure timely
delivery of the documents, any request should be made by March 20, 1997.
A COPY OF THE COMPANY'S REPORT ON FORM 10-K/A-3 FOR THE YEAR ENDED DECEMBER
31, 1995, AND A COPY OF THE COMPANY'S REPORT ON FORM 10-Q FOR THE QUARTER ENDED
DECEMBER 31, 1996 ARE BEING DELIVERED WITH THIS PROSPECTUS.
12
<PAGE> 13
RECENT DEVELOPMENTS
BANK LINE OF CREDIT
The Company is a party to a revolving credit agreement with Imperial Bank,
through which the Company can borrow up to $750,000. Borrowings under the credit
agreement are limited to 65% of eligible trade accounts receivable. Interest is
payable at the bank's prime rate plus 2.50% (4% if the Company is out of
compliance with certain covenants under the credit agreement). At February 3,
1997 the interest rate was 10.75%
On April 2, 1996, the bank agreed to waive certain debt covenant violations
and to extend the credit agreement to May 15, 1996 in consideration for warrants
to purchase 200,000 shares of the Company's Common Stock at an exercise price of
$.5625 per share. On May 29, 1996, the bank again agreed to waive certain debt
covenant violations and to extend the credit agreement to December 31, 1996 in
consideration for warrants to purchase an additional 200,000 shares of the
Company's Common Stock at an exercise price of $.50 per share. On August 15,
1996, the bank agreed to extend the credit agreement to April 3, 1997.
As of February 12, 1997, the Company had outstanding bank borrowings of
$174,000. The Company did not comply with the earnings covenant under the credit
agreement for the quarter ended December 31, 1996. The bank has advised the
Company that it will not enforce its default rights under the agreement at this
time but that it does not intend to renew the line of credit when it matures
April 3, 1997. The Company does not presently anticipate obtaining another bank
line of credit. Because the Company's borrowings under its line of credit have
been minimal and because the bank has not enforced its default rights, the
Company believes the default under its bank credit agreement did not or will not
have a material adverse effect on the Company.
The Company's bank credit agreement prohibits the payment of cash dividends
without the prior written consent of the bank. The credit agreement expires on
April 3, 1997. Assuming repayment of all amounts owing thereunder, the dividend
restrictions will be lifted. Notwithstanding the foregoing, the Company has not
paid any dividends since inception and does not anticipate paying any dividends
in the foreseeable future.
8% CONVERTIBLE DEBENTURES
In September 1996, the Company privately placed 8% Convertible Debentures
due July 31, 1999 ("Debentures") in the principal amount of $5,302,000. In
addition, the Company issued to each purchaser of the Debentures a warrant to
purchase one share of Common Stock for each $2.00 invested (2,651,000 total
shares). Each warrant is exercisable at $.6875 per share. The warrants expire in
September 1999. The Debentures are convertible into shares of the Company's
Common Stock at the rate of one share for each $.55 of principal plus accrued
interest. The Debentures are automatically convertible on July 31, 1999 or upon
occurrence of either of the following events: (a) the Company's obtaining any
equity financing in an amount not less than $2,000,000 at prices not less than
$1.00 per share or (b) the Common Stock of the Company having closed trading at
a price of $1.375 or more per share for any 21 trading days in any consecutive
40 day trading period. From April 1, 1997 to July 31, 1999 the Debentures are
convertible at the option of the holder. The Debentures are subordinate to
senior debt and to the security interest of the Company's bank. The Company may
prepay the Debentures at any time without penalty.
In order to improve the Company's financial condition, the Company has
agreed with holders of outstanding Debentures in the principal amount of
$4,550,000 and is negotiating agreements with the remaining holders that,
subject to regulatory approval, the holders of the Debentures will exchange the
outstanding Debentures for an aggregate of 100,000 shares of the Company's
Series A Preferred Stock. The Series A Preferred Stock will have an aggregate
liquidation preference of $5,302,000, and shall be convertible into Common Stock
at the rate of $0.12 per share (44,183,333 total shares) (as adjusted for stock
splits, stock dividends and the like). The Series A Preferred Stock shall
automatically convert into Common Stock on July 31, 1999 or upon the occurrence
of either (i) the Company obtaining equity financing of not less than $2,000,000
at a price not less than $0.22 per share or (ii) the closing price of the
Company's Common Stock having been 250% of the conversion price of the Series A
Preferred Stock for any 21 trading days in any consecutive 40 day trading
period. In addition, the Company will issue to the Debenture Holders warrants to
13
<PAGE> 14
purchase 9,499,416 additional shares of the Company's Common Stock at an
exercise price of U.S.$0.15 per share and will decrease the exercise price of
existing warrants issued to the Debenture holders to $0.15 per share. The
warrants must be exercised if the Company's Common Stock trades at 300% of the
exercise price or $0.45 per share for any 21 trading days in any consecutive 40
day trading period. In consideration for the exchange, the Debenture Holders
will retroactively forego interest on the Convertible Debentures.
DOMESTICATION TO THE STATE OF DELAWARE
The Company has called an Extraordinary General Meeting of its shareholders
on April 15, 1997 to consider, among other things, a proposal to change the
Company's jurisdiction of incorporation from British Columbia to the State of
Delaware and to approve a one-for-twenty share consolidation. In addition, the
Company has applied to delist its shares of Common Stock from trading on the
Vancouver Stock Exchange. The Company expects such delisting to be effective on
or about March 12, 1997.
14
<PAGE> 15
RIGHTS OFFERING
The Company is granting rights ("Rights") to the holders of the Company's
Common Stock ("Common Stock Holders") and holders of the Company's 8%
Convertible Debentures due July 31, 1999 ("Debenture Holders")(who are not
Canadian residents) to purchase up to 67,614,973 shares of Common Stock of the
Company ("Rights Holders"). The purpose of the Rights Offering is to raise
necessary capital for the Company. See "Use of Proceeds."
PURPOSE OF THE RIGHTS OFFERING
The Board of Directors of the Company has determined that it is necessary
for the Company to raise additional capital at this time to finance its
operations. The Rights Offering provides the Company with the opportunity to
raise additional capital without diluting the ownership interests of existing
non-Canadian shareholders who exercise their Rights, and without paying
underwriting commissions and expenses. Rights Holders who exercise their Rights
in the Rights Offering will be able to purchase shares of the Company's Common
Stock at a price below market, without incurring brokers' commissions, and will
be able to maintain their prorata share of the Company's equity.
ELIGIBLE PARTICIPANTS
All Common Stock and Debenture Holders (who are not Canadian residents) of
record on the Rights Offering Record Date will receive Rights. If a Common Stock
Holder's or a Debenture Holder's shares are not held in such holder's own name
but in the name of a broker, bank, trust company or other entity as record or
nominee holder (the "Record Holder"), the Common Stock Holder or Debenture
Holder will need to contact the Record Holder as soon as possible to exercise
Rights.
THE RIGHTS
Rights Holders will receive one Right for every share of Common Stock and
441.83 Rights for every share of Series A Preferred Stock for which the Rights
Holder's Debentures are exchangeable. Each Right will entitle the holder to buy
one share of Common Stock of the Company.
TRANSFERABILITY OF RIGHTS
The Rights are not transferable. No certificates for Rights will be issued.
No fractional Rights will be issued and no cash will be paid in lieu of
fractional Rights.
OVER-SUBSCRIPTION PRIVILEGE
Any Rights Holder who fully exercises all Rights initially issued to him is
entitled to subscribe for shares of Common Stock which were not otherwise
subscribed for by other Rights Holders in the primary subscription (the
"Over-Subscription Privilege"). Record Date Shareholders such as broker-dealers,
banks and other professional intermediaries who hold shares on behalf of clients
may participate in the Over-Subscription Privilege for a client if the client
fully exercises all Rights attributable to him. For purposes of determining the
maximum number of shares of Common Stock a Rights Holder may acquire pursuant to
the Rights Offering, broker-dealers whose shares of Common Stock are held of
record by Cede & Co. ("Cede") or by any other depository or nominee will be
deemed to be the holders of the Rights that are issued to Cede or such other
depository or nominee on their behalf. Shares of Common Stock acquired pursuant
to the Over-Subscription Privilege may be subject to allotment. Rights Holders
should indicate, on the Subscription Certificate how many shares of Common Stock
they are willing to acquire pursuant to the Over-Subscription Privilege. If
sufficient shares of Common Stock remain after the primary subscription, all
over-subscriptions will be honored in full. If subscriptions for Common Stock
through the Over-Subscription Privilege exceed the Common Stock available for
sale after the primary subscription, the available Common Stock will be
allocated among those who over-subscribe based on the number of shares of Common
Stock a Rights Holder subscribes for pursuant to the Over-Subscription
Privilege. The percentage of remaining Common Stock each over-subscribing Rights
Holder may acquire may be rounded up or down to result in delivery of whole
shares.
15
<PAGE> 16
A Rights Holder who is not allocated the full amount of shares that such holder
subscribes for pursuant to the Over-Subscription Privilege will receive a refund
of the Subscription Price paid by such holder for shares that are not allocated
to and purchased by such holder. Such refund will be made by a check mailed by
the Rights Agent.
If a Rights Holder does not deliver full payment of the Subscription Price
for the number of shares indicated as being subscribed through the exercise of
the Over-Subscription Privilege, then such Rights Holder will be deemed to have
exercised the Over-Subscription Privilege to purchase the maximum number of
shares of Common Stock determined by dividing the total Subscription Price paid
(in excess of the Subscription Price for the number of shares of Common Stock
such holder purchased through the exercise of Rights in the primary
subscription) by the Subscription Price per share.
EXERCISE OF RIGHTS
To exercise Rights, the Rights Holder must complete and sign the
Subscription Certificate enclosed with this Prospectus. Payment of the
Subscription Price must be made in United States dollars by check, bank draft or
money order, payable to the order of the Rights Agent for the Company pursuant
to the instructions set forth in the Subscription Certificate and this
Prospectus. Payment may not be made in cash and may only be made on business
days. The completed Subscription Certificate, accompanied by payment of the
Subscription Price, must be delivered to the Rights Agent on or before the
Expiration Date. The addresses of the Rights Agent to which delivery may be
made, by mail or by hand, are set forth in this Prospectus.
If delivery is made by mail, the holder of Rights bears the risk of late
delivery. Completed Subscription Certificates should not be sent to the Company.
If a Common Stock Holder's shares or a Debenture Holder's Debentures are
not held in the holder's own name but in the name of a broker, bank, trust
company or other entity as Record Holder, the holder will need to contact the
Record Holder as soon as possible to exercise Rights, and any Subscription
Certificate must be signed by such Record Holder.
Once a completed Subscription Certificate, together with payment, has been
delivered or mailed, the exercise of the Rights represented thereby is not
revocable for any reason.
All questions as to the validity, form and eligibility (including times of
receipt and matters pertaining to beneficial ownership) pertaining to the
exercise of Rights will be determined by the Company, which determinations shall
be final and binding. No alternative, conditional or contingent exercises will
be accepted. The Company reserves the absolute right to reject any or all
Subscription Certificates not properly submitted or the acceptance of which
would, in the opinion of the Company's counsel, be unlawful. The Company also
reserves the right to waive any irregularities or conditions, and the Company's
interpretations of the terms and conditions of the Rights Offering shall be
final and binding. Any irregularities in connection with the execution of a
Subscription Certificate must be cured within such time as the Company shall
determine, unless waived. Neither the Company nor the Rights Agent, however,
shall be under any duty to give notification of defects in Subscription
Certificates, nor shall either incur any liability for failure to give
notification. Subscription Certificates received by the Rights Agent that are
not properly submitted and as to which the irregularities have not been cured or
waived will be returned by the Rights Agent to the appropriate holder of the
Rights before the Expiration Date, but only if time permits.
The State of Wisconsin Investment Board, which owns 2,145,000 shares of the
Company's Common Stock, Travelers Indemnity Corporation, which owns 3,350,000
shares of the Company's Common Stock and an 8% Convertible Debenture in the
principal amount of $550,000, and Pequot Partners Fund, L.P. and Pequot
International Fund, Inc., which own 8% Convertible Debentures in the aggregate
principal amount of $4,000,000 have informed the Company that they intend to
purchase up to 29,166,666 shares of Common Stock through the exercise of Rights
distributed to them in the Rights Offering, although they are not legally bound
to do so. Any shares of Common Stock so acquired by these holders and other
persons who are "affiliates" of the Company, as that term is defined under the
Securities Act of 1933, as amended (the "Securities Act"), may only be sold in
accordance with Rule 144 under the Securities Act or pursuant to an effective
registration statement under the Securities Act. In general, under Rule 144, as
currently in effect, an "affiliate" of the Company is entitled to sell, within
any three-month period, a number of shares that does not
16
<PAGE> 17
exceed the greater of 1% of the then-outstanding shares of Common Stock or the
average weekly reported trading volume of the shares of Common Stock during the
four calendar weeks preceding such sale. Sales under Rule 144 are also subject
to certain restrictions on the manner of sale, to notice requirements and to the
availability of current public information about the Company.
RIGHTS AGENT
The Rights Agent is The First National Bank of Boston through its parent
entity State Street Bank and Trust Company, 225 Franklin Street, Concourse
Level, Boston, MA 02110, which will receive, for the administrative, processing,
invoicing and other services as Rights Agent, a fee estimated to be $5,000 plus
reimbursement for all out-of-pocket expenses related to the Rights Offering.
Shareholder questions or inquiries should be directed to State Street Bank and
Trust Company, P.O. Box 8200, Boston, MA 02266-8200, telephone (800) 426-5523.
SIGNED SUBSCRIPTION CERTIFICATES SHOULD BE SENT TO STATE STREET BANK AND TRUST
COMPANY, by one of the methods described below:
<TABLE>
<CAPTION>
EXERCISE FORM
DELIVERY METHOD ADDRESS/NUMBER
- --------------------------------------------- ---------------------------------------------
<S> <C>
By Mail State Street Bank and Trust Company
Corporate Reorganization
P.O. Box 9061
Boston, MA 02205-8686
By Hand Securities Transfer and Reporting Services
55 Broadway, Concourse Level
New York, NY 10006
By Overnight Courier State Street Bank and Trust Company
or Express Mail 70 Campanelli Drive
Braintree, MA 02184
Attn: Corp. Reorg.
By Broker-Dealer or other Nominee Shareholders whose Shares are held in a
(Notice of Guaranteed Delivery) brokerage, bank, or trust account may contact
their broker or other nominee and instruct
them to submit a Notice of Guaranteed
Delivery and Payment on their behalf.
</TABLE>
Delivery to an address other than as set forth above does not constitute a
valid delivery.
INFORMATION AGENT
Any questions or requests for assistance may be directed to the Information
Agent at its telephone number and address listed below:
SHAREHOLDER COMMUNICATIONS CORPORATION
17 State Street
New York, NY 10004
Call Toll Free: (800) 733-8481, Ext. 352
or
Call Collect: (212) 305-7000
THE SUBSCRIPTION PRICE
The Subscription Price for the Common Stock to be issued pursuant to the
Rights is U.S.$0.12 per share.
The Company announced the Rights Offering on February 26, 1997. The last
reported sale price of the Common Stock on the Nasdaq Bulletin Board on February
26, 1997 was U.S.$0.17.
17
<PAGE> 18
EXPIRATION OF RIGHTS OFFERING
The Rights will be exercisable at any time after issuance until 5:00 p.m.,
California time, April 4, 1997 (the "Expiration Date"). After the Expiration
Date, the Rights will expire and become void.
AMENDMENT, EXTENSION OR TERMINATION OF RIGHTS OFFERING
The Company reserves the right, in its sole discretion, to: (a) terminate
the Rights Offering prior to delivery of the Common Stock for which Rights
Holders have subscribed pursuant to the exercise of Rights; (b) extend the
Expiration Date to a later date; (c) change the Rights Offering Record Date to a
later date; or (d) amend or modify the terms of the Rights Offering. If the
Company amends the terms of the Rights Offering, an amended Prospectus will be
distributed to holders of record of Rights and to holders of Rights who have
previously exercised Rights. All holders of Rights who exercised their Rights
prior to such amendment or within four business days after the mailing of the
amended Prospectus will be given the opportunity to confirm the exercise of
their Rights by executing and delivering a consent form.
Any Rights Holder who exercised Rights before or within four days after
mailing of an amended Prospectus relating to an amendment of the Rights Offering
and who fails to deliver, in a proper and timely manner, a properly executed
consent form will be deemed to have rejected the amended terms of the Rights
Offering and to have elected to revoke in full his exercise of the Rights. If a
Rights Holder's exercise of Rights is so revoked, the full amount of the
Subscription Price paid by such Rights Holder will be returned to the Rights
Holder.
A Rights Holder whose executed Subscription Certificate is received by the
Rights Agent more than four days after the mailing of an amended Prospectus will
be deemed to have accepted the amended terms of the Rights Offering in
connection with the exercise of their Rights.
If the Company elects to terminate the Rights Offering before delivering
the Common Stock for which Rights Holders have subscribed, the Subscription
Price paid will be returned by mail. Except for the obligation to return the
Subscription Price paid by Rights Holders who attempted to exercise their
Rights, neither the Company nor the Rights Agent will have any obligation or
liability to a Rights Holder in the event of an amendment or termination of the
Rights Offering.
DELIVERY OF SHARES UPON EXERCISE
No delivery of shares of Common Stock of the Company issuable upon exercise
of Rights will be made prior to the date of the Rights Offering Record Date.
Certificates for shares purchased upon exercise of Rights will be delivered as
soon as practicable after such purchase; provided, however, that the stock
certificates may be issued after the Company's Extraordinary General Meeting to
be held on April 15, 1997.
PLAN OF DISTRIBUTION
The Company is distributing the Rights directly to its Debenture Holders
(there are no Canadian Debenture Holders) and Common Stock Holders who are not
Canadian residents, and has made no arrangements with brokers or dealers to
solicit purchases of shares by holders of Rights.
The Company will not distribute any Rights or offer to sell any of the
underlying shares of Common Stock in states or other jurisdictions where it is
unlawful to do so or whose laws, rules, regulations or orders would require the
Company, in its sole determination, to incur costs, obligations or time delays
disproportionate to the net proceeds to be realized by the Company from such
offers, sales or issuance. If the Company were to issue rights to its Canadian
Common Stock Holders, the Company would be required to comply with the
regulatory requirements of each province of Canada in which Common Stock Holders
reside. This would cause the Company to incur significant costs and time delays
disproportionate to the net proceeds to be realized from the issuance of Rights
in Canada. Consequently, the Company will not issue Rights to any Common Stock
Holder who is a Canadian resident. The exclusion of the Company's Canadian
Common Stock Holders from the Rights Offering does not contravene the B.C.
Company Act and the rules and regulations of the B.C. Securities Commission.
18
<PAGE> 19
DILUTION OF CANADIAN COMMON STOCK HOLDERS
The Company will not distribute any Rights to its Common Stock Holders who
reside in Canada. As a result, these holders will not be able to maintain their
pro rata share of the Company's equity and (assuming the exercise of any Rights)
will have their ownership in the Company diluted. This dilution could be
substantial if a large number of Rights are exercised.
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<PAGE> 20
USE OF PROCEEDS
The net proceeds received by the Company from the sale of the 67,614,973
shares of Common Stock in the Rights Offering are estimated to be $8.0 million,
assuming a subscription price of U.S.$0.12 per share and assuming that all of
the Rights are exercised (which cannot be assured), and after deducting expenses
of the Rights Offering of approximately $150,000.
The Company intends to use the net proceeds of the Rights Offering for the
repayment of short-term borrowings that as of February 14, 1997 consisted of
$174,000 under its revolving line of credit, which bears interest at the bank's
prime rate plus 2.5% and expires on April 3, 1997. The Company intends to use
the balance of the proceeds for research and development and marketing and sales
activities, including increasing the Company's sales and marketing and research
and development staffs, advertising and promotional activities and capital
expenditures. Pending the use of the net proceeds for the above purposes, the
Company intends to invest such funds in short-term, interest-bearing money
market funds.
DILUTION
The net book value (deficit) of the Company as of December 31, 1996 was
($3,498,600), or a negative ($0.15) per share based on the then outstanding
23,241,164 shares, excluding 4,000,000 performance shares held in escrow. After
giving effect to the sale of 67,614,973 shares of Common Stock (the purchase of
all of which cannot be assured) by the Company in this Rights Offering at U.S.
$0.12 per share and the receipt of the net proceeds therefrom (less $150,000 in
estimated expenses) and the issuance of 190,476 common shares in connection with
the cancellation of the 4,000,000 performance shares, the pro forma net tangible
book value of the Company as of December 31, 1996 would have been approximately
$4,465,197, or $0.05 per share. This represents an immediate increase in net
tangible book value per share of $0.20 to existing shareholders and an immediate
dilution of $0.07 per share to new investors. The following table illustrates
the dilution of a new investor's equity per share as of December 31, 1996.
<TABLE>
<S> <C> <C>
Assumed offering price per share.......................................... $0.12
=====
Pro forma net book value (deficit) per share before offering....... $(0.15)
Increase per share attributable to new investors................... $ 0.20
======
Pro forma net tangible book value per share after offering................ $0.05
=====
Dilution per share to new investors....................................... $0.07
=====
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1996 (a) the number of shares purchased from the Company, the total
consideration paid and the average price per share paid by the existing
shareholders and (b) the number of shares to be purchased from the Company, the
total consideration to be paid and the average price per share to be paid by the
new investors at the offering price of $0.12 per share.
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
---------------------- ----------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Existing shareholders.................. 23,431,640 26% $34,742,521 81% $1.48
New investors.......................... 67,614,973 74 7,963,797(1) 19 0.12
---------- ------- ----------- -------
Total........................ 91,046,613 100% $42,706,318 100%
========= ===== ========== =====
</TABLE>
- ------------------------
(1) After deducting estimated expenses of $150,000.
The foregoing calculations do not include an aggregate of 2,635,000 shares
issuable upon exercise of outstanding stock options under the Company's Stock
Plans at a weighted average exercise price of $1.31 as of March 7, 1997, and (b)
15,250,416 shares issuable upon exercise of outstanding warrants at a weighted
average exercise price of $.20, and (c) $5,302,000 of 8% Convertible Debenture
due July 31, 1999 exchanged for up to 100,000 shares of Series A Preferred
Stock.
20
<PAGE> 21
DESCRIPTION OF CAPITAL STOCK
COMMON AND PREFERRED STOCK
Following completion of the Domestication, if approved, and after giving
effect to the Company's proposed one-for-twenty share consolidation, the
authorized capital of the Company will consist of 50,000,000 shares of Common
Stock of which approximately 4,533,283 will be issued and outstanding (assuming
the exercise of all Rights offered pursuant to the Rights Offering), and
5,000,000 shares of Preferred Stock, of which 100,000 shares will be designated
Series A Preferred Stock, 99,993 shares of which will be issued and outstanding
(assuming exchange of all of the outstanding Convertible Debentures) and
4,900,000 shares of Preferred Stock will be undesignated and unissued. Holders
of Common Stock and Series A Preferred Stock are entitled to receive dividends
as may from time to time be declared by the Board of Directors of the Company
out of funds legally available therefor. Holders of Common Stock are entitled to
one vote per share on all matters on which the holders of Common Stock are
entitled to vote. Holders of Series A Preferred Stock are entitled to vote on
all matters on which the holders of Common Stock are entitled to vote and have
the number of votes equal to the number of shares of Common Stock into which
their shares of Series A Preferred are convertible. Holders of Common Stock and
Series A Preferred Stock have no cumulative voting, preemptive, redemption or
sinking fund rights. In the event of a liquidation, dissolution or winding up of
the Company, holders of Series A Preferred Stock are entitled to receive
approximately $53.02 or an aggregate of $5,302,000 (assuming conversion of all
of the Convertible Debentures into Series A Preferred Stock) per share prior to
and in preference of the holders of Common Stock. After the Series A Preferred
Stock liquidation preference is paid, the holders of Common Stock are entitled
to share equally and ratably in the remaining assets of the Company, if any. The
outstanding shares of Common Stock and Preferred Stock are fully paid and
nonassessable. The Series A Preferred is convertible at the option of the holder
at the conversion price of $0.12 per share or 441.83 shares of Common Stock for
each share of Series A Preferred Stock. In addition, the Series A Preferred
Stock converts automatically on July 31, 1999 or upon either (i) the Company
obtaining equity financing in an amount not less than $2 million and at a price
of not less than $0.22 per share, or (ii) the stock trading at 250% or more of
the conversion price for any 21 trading days in any consecutive 40 day trading
period.
WARRANTS
As of the Record Date there were outstanding warrants to purchase an
aggregate of 15,250,416 shares of Common Stock at exercise prices from
U.S.$.5625 to U.S.$.15 per share (including warrants to purchase up to 9,499,416
shares of Common Stock to be issued to holders of 8% Convertible Debentures.
See -- "Recent Developments."). These Warrants expire on various dates between
March 1997 and November 2001.
REGISTRATION RIGHTS
The holders of the 8% Convertible Debentures and warrants issued with
respect thereto (the 'Holders') are entitled to certain rights with respect to
the registration of the resale of shares issued on conversion or exercise
thereof under the Securities Act. Under the terms of an agreement between the
Company and the Holders, the Company has an obligation to register these shares
as soon as reasonably practical after written demand of purchasers holding a
majority of the Debentures and warrants.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is the
Montreal Trust Company of Canada. After the Domestication, the Company's
transfer agent and registrar in the United States will be The First National
Bank of Boston.
21
<PAGE> 22
LEGAL MATTERS
Certain matters with respect to the legality of the issuance of the Rights
to purchase Common Stock and the Common Stock issuable upon exercise of the
Rights in connection with the Rights Offering will be passed upon by Campney &
Murphy, Barristers and Solicitors, Vancouver, British Columbia.
22
<PAGE> 23
APPENDIX I
Account #
- ------------------ Control #
- ------------------
THIS OFFER EXPIRES AT 5:00 P.M. CALIFORNIA TIME, ON APRIL 4, 1997
SANCTUARY WOODS MULTIMEDIA CORPORATION
SUBSCRIPTION RIGHTS FOR COMMON STOCK
THESE SUBSCRIPTION RIGHTS ARE NON-TRANSFERABLE
SUBSCRIPTION CERTIFICATE
Dear Shareholder and Debenture Holder
You are entitled to exercise the Rights issued to you as of March 7, 1997,
the Rights Offering Record Date for the Company's Rights Offering to subscribe
for the number of Shares of Common Stock of Sanctuary Woods Multimedia
Corporation ("Shares") shown on this Subscription Certificate pursuant to the
primary subscription upon the terms and conditions specified in the Company's
Prospectus dated March 11, 1997 (the "Prospectus"). The terms and conditions of
the Rights Offering set forth in the Prospectus are incorporated herein by
reference. Capitalized terms not defined herein have the meanings attributed to
them in the Prospectus. In accordance with the Over-Subscription Privilege, as a
Record Date Rights Holder, you are also entitled to subscribe for additional
Shares if Shares remaining after exercise of Rights pursuant to the primary
subscription are available and if you have fully exercised all Rights issued to
you. If sufficient Shares remain after completion of the primary subscription,
all over-subscriptions will be honored in full. If the aggregate number of
Shares requested pursuant to the Over-Subscription Privilege exceeds the number
of additional Shares, the available Shares will be allocated among those who
over-subscribe based on the number of Shares a Rights Holder subscribes for
pursuant to the Over-Subscription Privilege. The Company will not offer or sell
any Shares which are not subscribed for pursuant to the primary subscription or
the Over-Subscription Privilege.
- --------------------------------------------------------------------------------
SAMPLE CALCULATION
FULL PRIMARY SUBSCRIPTION ENTITLEMENT
(ONE SHARE FOR EACH RIGHT)
No. of shares of Common Stock owned on the Record Date 100 X 1 = 100
Rights
No. of shares of Series A Preferred Stock that a Debenture
Holder is entitled to on the Record Date 100 X 441.83 = 44,183 Rights
Total Rights: 44,280
================================================================================
SECTION 1: DETAILS OF SUBSCRIPTION
IF YOU WISH TO SUBSCRIBE FOR YOUR FULL ENTITLEMENT:
A: I apply for ALL of my entitlement of new Shares pursuant to the Primary
Subscription
-------------------- X $0.12 = $
--------------------
(No. of Shares)
B: I apply for additional Shares pursuant to the Over-Subscription
Privilege*
-------------------- X $0.12 = $
--------------------
(No. of Shares)
A+B =
------------------ X $0.12 = $
------------------
*You can only over-subscribe if you have fully exercised your primary
subscription rights.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT ALL INFORMATION CLEARLY AND LEGIBLY
Control #
------------
Number of Rights Issued:
------------
<PAGE> 24
- --------------------------------------------------------------------------------
IF YOU DO NOT WISH TO APPLY FOR YOUR FULL ENTITLEMENT:
C: I apply for
------------------ shares x $0.12 = $
------------------
================================================================================
SECTION 2: TO SUBSCRIBE
I acknowledge that I have received the Prospectus for this Rights Offering
and I hereby irrevocably subscribe for the number of Shares indicated
above either as a total of A and B or as indicated in C, on the terms and
conditions specified in the Prospectus relating to the primary
subscription and the Over-Subscription Privilege.
I hereby agree that if I fail to pay in full for the Shares for which I
have subscribed, the Company may exercise any of the remedies set forth in
the Prospectus.
Signature of subscriber:
Telephone number (including area code) ( )
If you wish to have your shares and refund check (if any) delivered in a
different name or to an address other than that listed on this
Subscription Certificate you must have your signature guaranteed by a
member of the New York Stock Exchange or a bank or trust company. Please
provide the delivery address below and note if it is a permanent change.
================================================================================
SIGNATURE GUARANTY
- --------------------------------------------------------------------------------
SIGNED SUBSCRIPTION CERTIFICATES SHOULD BE SENT TO STATE STREET BANK & TRUST
COMPANY BY ONE OF THE METHODS DESCRIBED BELOW:
<TABLE>
<CAPTION>
EXERCISE FORM
DELIVERY METHOD ADDRESS/NUMBER
- --------------------------------------------------------------------------------------------------------------
<S> <C>
By Mail State Street Bank and Trust Company
Corporate Reorganization
P.O. Box 9061
Boston, MA 02205-8686
By Hand Securities Transfer and Reporting Services
55 Broadway, Concourse Level
New York, NY 10006
By Overnight Courier State Street Bank and Trust Company
or Express Mail 70 Campanelli Drive
Braintree, MA 02184
Attn: Corp. Reorg.
By Broker-Dealer or other Nominee Shareholders whose Shares are held in a brokerage, bank, or trust
(Notice of Guaranteed Delivery) account may contact their broker or other nominee and instruct them
to submit a Notice of Guaranteed Delivery and Payment on their
behalf.
</TABLE>
Delivery to an address other than as set forth above does not constitute a valid
delivery.
