<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 1997
[ ] 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)
Delaware 75-2444109
State or other jurisdiction of (IRS 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 shares of Common Stock of the registrant outstanding as of August
11,1997 was 2,104,154.
Except where the context otherwise requires, as used herein, the term "Company"
means Sanctuary Woods Multimedia Corporation and its subsidiaries.
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<TABLE>
<S> <C> <C>
PART I - Financial Information
ITEM 1 - Condensed Consolidated Financial Statements (unaudited)
Condensed consolidated balance sheets -
June 30, 1997 and March 31, 1997 3
Condensed consolidated statement of operations -
three months ended June 30, 1997 and 1996 4
Condensed consolidated statement of cash flows -
three months ended June 30, 1997 and 1996 5
Notes to condensed consolidated financial statements 6
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security-Holders 18
Item 5. Other 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 23
</TABLE>
This Form 10-Q of Sanctuary Woods Multimedia Corporation ("Sanctuary Woods" or
the "Company") contains forward-looking statements that are subject to risks and
uncertainties. Statements indicating that the Company "believes," "expects,"
"anticipates" or "estimates" are forward looking as are all other statements
regarding future financial results, market conditions, product offerings or
other events that have not yet occurred. There are many important factors that
could cause actual results or events to differ materially and/or adversely from
those anticipated by the forward looking statements contained in this Form 10-Q.
Such factors include but are not limited to, the rate of growth of the consumer
software market, market acceptance of the Company's products or those of its
competitors, the timing of new product introductions, expenses relating to the
development and promotion of new product introductions, changes in pricing
policies by the Company or its competitors, projected and actual changes in
platforms and technologies, timely and successful adaptation to such platforms
or technologies, the accuracy of forecasts of consumer demand, product returns,
market seasonality, the timing of orders from major customers and order
cancellations, and changes or disruptions in the consumer software distribution
channels as well as those factors listed under Risk Factors elsewhere herein.
Actual events or the actual future results of the Company may differ materially
from any forward looking statement due to such risks and uncertainties. Other
factors, uncertainties and assumptions not specifically identified or disclosed
by the Company were also involved in the derivation of these forward looking
statements and the failure of such other assumptions to be realized may also
cause actual results to differ materially from those projected. The Company
assumes no obligation to update these forward looking statements to reflect
actual results or changes in factors or assumptions affecting such forward
looking statements.
2
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SANCTUARY WOODS MULTIMEDIA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1997 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 683,660 $ 101,932
Accounts receivable 542,534 275,335
Inventories 496,620 656,415
Prepaid royalties 83,083 197,941
Prepaid expenses 142,744 244,136
Prepaid offering expenses 90,507
-------------- ----------------
Total current assets 1,948,641 1,566,266
-------------- ----------------
PROPERTY AND EQUIPMENT 436,943 462,348
OTHER ASSETS 30,490 258,185
-------------- ----------------
TOTAL ASSETS $ 2,416,074 $ 2,286,799
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable 889,250 1,343,214
Accrued expenses 407,412 429,297
Accrued professional fees 202,685 150,000
Royalty obligations 286,043 371,043
Accrued interest 225,443
Current portion of capital lease obligations 9,227 13,748
-------------- ----------------
Total current liabilities 1,794,617 2,532,745
8% CONVERTIBLE SUBORDINATED DEBENTURES 5,302,000
-------------- ----------------
Total liabilities 1,794,617 7,834,745
-------------- ----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value, authorized 5,000,000
shares; Series A issued and outstanding 99,993 shares 5,083,538
Common stock, authorized, 50,000,000 shares, $.001 par
value; issued and outstanding, 2,104,154 shares at
June 30, 1997 and 1,171,582 shares at March 31, 1997 37,127,779 34,755,092
Accumulated deficit (40,837,946) (39,551,124)
Accumulated translation adjustments (751,914) (751,914)
-------------- ----------------
Total stockholders' equity (deficit) 621,457 (5,547,946)
-------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 2,416,074 $ 2,286,799
============== ================
</TABLE>
See notes to condensed consolidated financial statements.
3
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SANCTUARY WOODS MULTIMEDIA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
SALES:
Consumer titles $ 651,599 $ 994,716
Licensing revenue 35,490 925,653
-------------- --------------
Total sales 687,089 1,920,369
-------------- --------------
COST OF SALES 325,409 683,099
-------------- --------------
GROSS MARGIN 361,680 1,237,270
-------------- --------------
OPERATING EXPENSES:
Research and development 365,139 459,064
Marketing and sales 719,683 632,080
Administration 502,084 488,631
Depreciation 64,764 135,405
-------------- --------------
Total operating expenses 1,651,670 1,715,180
-------------- --------------
OPERATING LOSS (1,289,990) (477,910)
-------------- --------------
OTHER INCOME (EXPENSE)
Other income 4,869 27,895
Interest expense, net (1,701) (82,168)
Net gain on sale and disposal of assets 875,161
-------------- --------------
Total other income (expense) 3,168 820,888
-------------- --------------
NET INCOME (LOSS) $ (1,286,822) $ 342,978
============== ==============
PRIMARY NET INCOME (LOSS) PER SHARE ($0.66) $0.34
FULLY DILUTED NET INCOME (LOSS)
PER SHARE ($0.66) $0.28
PRIMARY SHARES USED IN COMPUTATION 1,959,087 1,013,273
FULLY DILUTED SHARES USED IN
COMPUTATION 1,959,087 1,214,141
</TABLE>
See notes to condensed consolidated financial statements.
4
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SANCTUARY WOODS MULTIMEDIA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,286,822) $ 342,978
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 74,217 136,230
Warrant compensation expense 53,254
Sale of intellectual property rights in consideration for a
reduction in royalty obligations (429,688)
Net gain on sale and disposal of assets (875,161)
Changes in assets and liabilities:
Accounts receivable (267,199) (4,295)
Inventories 159,795 377,873
Prepaid royalties, expenses and intangibles 215,980 73,711
Accounts payable and accrued expenses (423,166) (1,095,208)
Accrued royalty obligations (85,000) (57,182)
----------------- ---------------
Net cash used in operating activities (1,612,195) (1,477,488)
----------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 1,900,000
Purchase of property and equipment (39,579)
----------------- ---------------
Net cash provided (used) in investing activities (39,579) 1,900,000
----------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (4,521) (7,730)
Proceeds from issuance of common stock under rights offering 2,238,023
Proceeds from exercise of warrants 750,000
Net repayments on bank debt (1,090,877)
----------------- ---------------
Net cash (used) provided in financing activities 2,233,502 (348,607)
----------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
6,087
----------------- ---------------
NET INCREASE IN CASH 581,728 79,992
CASH, BEGINNING OF PERIOD 101,932 8,455
----------------- ---------------
CASH, END OF PERIOD $ 683,660 $ 88,447
================= ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 592 $ 2,200
Income taxes 800
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING INFORMATION:
Conversion of convertible debentures into Series A
Preferred Stock net of deferred warrant charges $ 5,083,538
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
</TABLE>
See notes to condensed consolidated financial statements.
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
1. NATURE OF OPERATIONS
Sanctuary Woods Multimedia Corporation and its subsidiaries (the "Company")
develop, publish and market interactive multimedia educational software
products for use in the K-12 school and home consumer markets. Products are
sold to distributors for placement in retail outlets, education dealers,
and directly to schools and end users. The Company also sells to
international distributors. Revenue is also generated from licensing and
other activities related to the Company's products and intellectual
properties.
Revenues on consumer titles are recognized upon shipment and if collection
of the resulting receivable is deemed probable. The Company grants certain
distributors and resellers rights of return and price protection on unsold
merchandise held by them. Accordingly, reserves for estimated future
returns, exchanges, and credits for price protection are accrued upon
shipment. The Company provides for sales return reserves and price
protection for distributor inventories in amounts deemed reasonable by it.
These reserves are based on the Company's estimate of expected sell-through
by distributors and resellers of its products and on historical experience.
Actual results could differ from these estimates.
Licensing revenues are recognized upon receipt of cash advances pursuant to
contractual agreements and from periodic sales reports provided by the
licensee.
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
condensed consolidated financial statements included herein should be read
in conjunction with the Company's Annual Report on Form 10-K and 10-K/A as
filed on June 30, 1997 and July 29, 1997, respectively for the year ended
March 31, 1997. Results of operations for interim periods are not
necessarily indicative of results for the full year.
2. CORPORATE RESTRUCTURING
Domestication into the State of Delaware. On April 15, 1997, the Company's
stockholders approved a special resolution authorizing the Company to
change its jurisdiction of incorporation from British Columbia, Canada to
the state of Delaware and the adoption by the Company of a Certificate of
Incorporation and Bylaws under Delaware's corporate legislation. The
domestication became effective April 15, 1997.
Reverse Stock Split. On April 15, 1997, the Company's stockholders approved
a one-for-twenty share consolidation of the Company's common stock and an
increase in the number of the Company's authorized shares of common stock
to 50,000,000. All references in the accompanying condensed consolidated
financial statements to share information, per share amounts, stock option
data and market prices of the Company's common stock have been restated to
reflect such stock consolidation.
6
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Rights Offering. In April 1997, the Company completed a stock rights
offering in which it issued approximately 932,500 shares of common stock at
$2.40 per share and received gross proceeds of $2,238,023.
Conversion of 8% Convertible Debentures into Series A Preferred Stock. In
April 1997, the Company exchanged $5,302,000 in 8% convertible debentures
for 99,993 shares of the Company's Series A Preferred Stock. The Series A
Preferred Stock has an aggregate liquidation preference of $5,302,000 and
is convertible into common stock at a rate of $2.40 per share (2,209,167
shares) and has voting privileges on an "as converted" basis. The Series A
Preferred Stock automatically converts into common stock on July 1, 1999 or
upon the occurrence of either (i) the Company's obtaining equity financing
of not less than $2,000,000 at a price not less than $4.40 per share or
(ii) the closing price of the Company's common stock having been 250% of
the conversion price of Series A Preferred Stock ($6.00) for any 21 trading
days in any consecutive 40 day trading period.
In addition, the Company issued to the debenture holders warrants to
purchase an additional 1,021,474 shares of the Company's common stock at an
exercise price of U.S. $3.00 per share and reduced the exercise price of
132,550 previously issued warrants from $13.75 to $3.00 per share. The
warrants must be exercised if the closing price of the Company's common
stock equals or exceeds 300% of the exercise price ($9.00) for any 21
trading days in any consecutive 40 day trading period. In consideration for
the exchange, the debenture holders agreed to retroactively forgo interest
(totaling approximately $235,000 on April 18, 1997 which was payable in
common stock) on the Convertible Debentures. The holders of common stock
issued upon conversion of preferred stock or exercise of warrants have
certain rights to have these shares registered.
3. ACQUISITION OF THEATRIX INTERACTIVE, INC.
On August 12, 1997, the Company acquired 100% of the outstanding shares of
Theatrix Interactive, Inc. (Theatrix). The Company will issue 3,102,528
shares of the Company's common stock in consideration for all of the shares
of Theatrix capital stock. Up to an additional 500,000 shares of the
Company's common stock are issuable one year after the effective date of
the merger if certain revenue goals are met with respect to products
acquired from Theatrix. In addition, Sanctuary Woods will set aside 300,000
shares, pursuant to its 1996 Stock Option Plan, for issuance to former
Theatrix employees who become employees of Sanctuary Woods. The Company
will also issue warrants to Kingdon Capital and Montgomery Securities to
purchase 500,000 and 100,000 shares respectively of Sanctuary Woods common
stock at $3.00 per share.
4. GOING CONCERN UNCERTAINTY
Historical Operating Losses
Net loss for the quarter ended June 30, 1997 was $1,286,822 compared to net
income of $342,978 for the quarter ended June 30, 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, 1997 totalled $1,289,990 compared to a net operating
loss of $477,910 for the same quarter one year ago. Net cash used by
operating activities was $1,612,195 for the quarter
7
<PAGE> 8
ended June 30, 1997 as compared to net cash used by operating activities of
$1,477,488 for the same quarter one year ago.
Current Status and Management's Plans
At August 11, 1997 the Company had cash of $425,000. Management believes
that the Company will need to raise significant working capital through
additional debt or equity financing to continue and sustain its operations
and fund its fiscal March 31, 1998 operating plan.
Historically, the Company has been able to sustain its operations in the
face of financial restrictions. The Company has achieved this through
substantially reducing overhead to increase cash flow and maintaining
workable relationships with its vendors. In July 1997, the Company reduced
its workforce by 49% to 18 employees currently and incurred severance
obligations of approximately $125,000. This was done to reduce operating
expenses in anticipation of its merger with Theatrix . The Company hopes
that the increase in scale effected by the merger will augment sales by
providing a larger and more diverse product catalog to the marketplace and
enhance its research and development capabilities.
The Company plans to pursue various sources of additional funding
including, but not limited to, debt, equity, and strategic investors. The
Company is also actively exploring various business combinations (see note
3 regarding acquisition of Theatrix, Inc.) and strategic relationships that
may enhance the Company's ability to develop, publish and distribute its
products. No assurance can be given that additional financing will be
available or that, if available, such financing will be obtainable on terms
favorable to the Company.
Going Concern Uncertainty
The accompanying 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 above, among others, may indicate that the Company
will be unable to continue as a going concern for a reasonable period of
time.
The condensed 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 might
be necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent upon its ability
to generate sufficient cash flow to meet its obligations on a timely basis,
to obtain additional financing or refinancing, and ultimately to attain
successful operations. Management is continuing its efforts to obtain
additional funds so that the Company can meet its obligations and sustain
its operations.
5. 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.
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Accounts receivable consisted of:
<TABLE>
<CAPTION>
June 30 March 31
1997 1997
---- ----
<S> <C> <C>
Accounts receivable $1,410,353 $ 1,210,365
Less allowances for:
Doubtful accounts (133,419) (123,424)
Sales returns and markdowns (734,400) (811,606)
---------- ------------
Accounts receivable - net $ 542,534 $ 275,335
========== ===========
</TABLE>
6. INVENTORIES
Inventories consisted of:
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
---- ----
<S> <C> <C>
Finished goods $ 385,353 $ 488,824
Raw materials 297,214 339,491
-------- --------
682,567 828,315
Less allowance for obsolete, slow-moving
and non-salable inventory (185,947) (171,900)
-------- --------
Inventories, net $ 496,620 $ 656,415
========== ===========
</TABLE>
7. NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130 (Reporting Comprehensive Income),
which requires that an enterprise report the change in its net assets from
nonowner sources by major components and as a single total. The Board also
issued Statements of Financial Accounting Standards No. 131 (Disclosures
about Segments of an Enterprise and Related Information), which establishes
annual and interim reporting standards for an enterprise's operating
segements and related disclosures about its products, services, geographic
areas, and major customers. Adoption of these statements will not impact
the Company's consolidated financial position, results of operations or
cash flows, and any effect will be limited to the form and content of its
disclosures. Both statements are effective for fiscal years beginning after
December 15, 1997, with earlier application permitted.
In February 1997, The Financial Accounting Standards Board issued Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS 128). The Company
is required to adopt SFAS 128 in the December 31, 1997 quarter and will at
that time restate earnings per share (EPS) data for prior periods to
conform with SFAS 128. Earlier application is not permitted. SFAS 128
replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income (loss) available to common shareholders by
the weighted average of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock. If
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SFAS 128 had been in effect during the fiscal year ended March 31, 1997,
basic and diluted would not have been significantly different than EPS
currently reported for the periods.
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 and 10-K/A for the fiscal year ended March 31, 1997.
Overview and Recent Developments
Domestication into the State of Delaware. On April 15, 1997, the Company's
stockholders approved a special resolution authorizing the Company to change its
jurisdiction of incorporation from British Columbia, Canada to the state of
Delaware and the adoption by the Company of a Certificate of Incorporation and
Bylaws under Delaware's corporate legislation. The domestication became
effective April 15, 1997.
Reverse Stock Split. On April 15, 1997, the Company's stockholders approved a
one-for-twenty share consolidation of the Company's common stock and an increase
in the number of the Company's authorized shares of common stock to 50,000,000.
All references in the accompanying condensed consolidated financial statements
to share information, per share amounts, stock option data and market prices of
the Company's common stock have been restated to reflect such stock
consolidation.
Rights Offering. In April 1997, the Company completed a stock rights offering
in which it issued approximately 932,500 shares of common stock at $2.40 per
share and received gross proceeds of $2,238,023.
Conversion of 8% Convertible Debentures into Series A Preferred Stock. In April
1997, the Company exchanged $5,302,000 in 8% convertible debentures for 99,993
shares of the Company's Series A Preferred Stock. The Series A Preferred Stock
has an aggregate liquidation preference of $5,302,000 and is convertible into
common stock at a rate of $2.40 per share (2,209,167 shares) and has voting
privileges on an "as converted" basis. The Series A Preferred stock
automatically converts into common stock on July 1, 1999 or upon the occurrence
of either (i) the Company's obtaining equity financing of not less than
$2,000,000 at a price not less than $4.40 per share or (ii) the closing price of
the Company's common stock having been 250% of the conversion price of Series A
Preferred Stock ($6.00) for any 21 trading days in any consecutive 40 day
trading period.
In addition, the Company issued to the debenture holders warrants to purchase
an additional 1,021,474 shares of the Company's common stock at an exercise
price of U.S. $3.00 per share and reduced the exercise price of 132,550
previously issued warrants from $13.75 to $3.00 per share. The warrants must be
exercised if the closing price of the Company's common stock equals or exceeds
300% of the exercise price ($9.00) for any 21 trading days in any consecutive 40
day trading period. In consideration for the exchange, the Debenture Holders
agreed to retroactively forgo interest (totaling approximately $235,000 on April
18, 1997 which was payable in common stock) on the Convertible
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Debentures. The holders of common stock issued upon conversion of preferred
stock or exercise of warrants have certain rights to have these shares
registered.
Acquisition of Theatrix Interactive, Inc. On August 12, 1997, the Company
acquired 100% of the outstanding shares of Theatrix Interactive, Inc.
(Theatrix). The Company will issue 3,102,528 shares of the Company's common
stock in consideration for all of the shares of Theatrix capital stock. Up to an
additional 500,000 shares of the Company's common stock are issuable one year
after the effective date of the merger if certain revenue goals are met with
respect to products acquired from Theatrix. In addition, Sanctuary Woods will
set aside 300,000 shares, pursuant to its 1996 Stock Option Plan, for issuance
to former Theatrix employees who become employees of Sanctuary Woods. The
Company will also issue warrants to Kingdon Capital and Montgomery Securities to
purchase 500,000 and 100,000 shares respectively of Sanctuary Woods common stock
at $3.00 per share respectively.
Liquidity and Capital Resources.
At August 11, 1997 the Company had cash of $425,000. Management believes that
the Company will need to raise significant working capital through additional
debt or equity financing to continue and sustain its operations and fund its
fiscal March 31, 1998 operating plan.
Historically, the Company has been able to sustain its operations in the face of
financial restrictions. The Company has achieved this through substantially
reducing overhead to increase cash flow and maintaining workable relationships
with its vendors. In July 1997, the Company reduced its workforce by 49% to 18
employees currently and incurred severance obligations of approximately
$125,000. This was done to reduce operating expenses in anticipation of its
merger with Theatrix . The Company hopes that the increase in scale effected by
the merger will augment sales by providing a larger and more diverse product
catalog to the marketplace and enhance its research and development
capabilities.
The Company plans to pursue various sources of funding including, but not
limited to, debt, equity, and strategic investors. No assurance can be given
that additional financing will be available or that, if available, such
financing will be obtainable on terms favorable to the Company. The Company also
continues to explore various business combinations (see note 3 regarding
acquisition of Theatrix, Inc.) and strategic relationships that may enhance the
Company's ability to develop, publish and distribute its products.
Going Concern Uncertainty
The accompanying 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 above, among others, may indicate that the Company will be unable to
continue as a going concern for a reasonable period of time.
The condensed 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 might be necessary should the
Company be unable to continue as a going concern. The Company's continuation as
a going concern is dependent upon its ability to generate sufficient cash flow
to meet its obligations on a timely basis, to obtain additional financing or
refinancing, and ultimately to attain successful operations.
11
<PAGE> 12
RESULTS OF OPERATIONS - QUARTERS ENDED JUNE 30, 1997 AND 1996
Net Loss. The net loss for the quarter ended June 30, 1997 was $1,286,822
compared to net income of $342,978 in the quarter ended June 30, 1996. The net
income in the June 1996 quarter was due to the $897,260 gain recognized on the
sale of the assets of the Company's Victoria studio. The operating loss for the
June 1997 quarter was $1,289,990 compared to an operating loss of $477,910 in
the quarter ended June 30, 1996. The increase in operating loss is due mostly to
the significant decrease in sales from the June 1996 quarter to the June 1997
quarter in part as a result of the discontinuance of sales of entertainment
titles. Revenues in the June 1996 quarter contain approximately $1.2 million in
the sale of entertainment titles including the sale of rights to certain
entertainment products totaling $580,000.
Sales. The Company continues to experience fierce competition making retail
shelf space for its products scarce or unaffordable. In addition, competitive
forces continue to put downward pressure on pricing throughout the industry. For
the quarter ended June 30, 1997, total net sales decreased significantly to
$687,089 from $1,920,369 for the quarter ended June 30, 1996. This decrease
included a 33% reduction in gross retail channel sales to $400,000 in the June
1997 from $594,000 in the June 1996 quarter. Gross sales in the education
channel remained relatively unchanged at approximately $378,000 in both the June
1997 and 1996 quarters while mail order revenues increased 29% to $35,600 from
$28,500 in the same periods respectively.
Licensing revenue decreased 96% to $35,490 in the June 1997 quarter from
$925,653 in the quarter ended June 30, 1996. Although the June 1996 quarter
contains the sale of rights to certain entertainment products totaling $580,000,
this decrease reflects a significant drop-off in the Company's international
sales which included mostly the Company's entertainment product line. The
Company has recently employed a full-time international sales manager to sell
the Company's education products into overseas markets.
Gross Margins. Gross margins decreased to 53% of total sales in the quarter
ended June 30, 1997 from 64% in the quarter ended June 30, 1996. This decrease
is due to continued pricing competition in the marketplace, the sale of low
margin close-out products and an increase in royalty expense primarily due to
the Company's licensing and sale of products produced by Virgin Sound and
Vision, Inc. In addition, the June 1996 quarter contained much higher licensing
revenues which carry no cost of sale including the sale of rights to certain
entertainment products totaling $580,000. Provisions for inventory obsolescence
included in cost of sales were $50,000 and $100,000 for the quarters ended June
30, 1997 and 1996 respectively.
Research and Development Costs. Research and development costs decreased 21% to
$365,139 in the quarter ended June 30, 1997 from $459,064 in the quarter ended
June 30, 1996. This decrease is to due to approximately $250,000 in expenses
related to the Company's Victoria, British Columbia studio included in the June
1996 quarter. Excluding these expenses, research and development expenditures
would have increased 75% from 1996 to 1997 primarily as a result of increased
headcount and payments to subcontractors.
Marketing and Sales Costs. Marketing and sales expenditures increased 14% to
$719,683 in the quarter ended June 30, 1997 from $632,080 in the quarter ended
June 30, 1996. This
12
<PAGE> 13
increase was due primarily to the Company's ability to fund advertising and
promotional activities in 1997 as compared to the June 1996 quarter. Although
customer service expenses decreased 36% from 1996 to 1997, they were offset by
increased advertising and promotional efforts. The decrease in customer service
expenses results mostly from a drop in contract labor expenses incurred by the
Company in the June 1996 quarter to process customer returns of mostly
entertainment products sold in calendar year 1995 and in the quarter ended March
31, 1996. As a percentage of sales, sales and marketing expenses were 105% in
the quarter ended June 30, 1997 versus 33% in the same quarter last year. This
percentage increase is primarily the result of substantially reduced sales from
the quarter ended June 30, 1996 to the quarter ended June 30, 1997.
Administrative Costs. Administrative expenses increased 3% to $502,084 in the
quarter ended June 30, 1997 from $488,631 in the quarter ended June 30, 1996. As
a percentage of sales, administrative costs were 73% in the quarter ended June
30, 1997 versus 25% in the same quarter last year. This percentage increase is
primarily the result of substantially reduced sales from the quarter ended June
30, 1996 to the quarter ended June 30, 1997.
ADDITIONAL RISK FACTORS
There are numerous additional risks associated with the Company's on-going
operations, including without limitation the following:
Continued Losses; Liquidity. The Company had operating losses and net losses in
each fiscal year since its inception. In the three years ended March 31, 1997,
December 31, 1995, and December 31, 1994, the Company reported operating losses
of $4.1 million, $18.7 million and $8.0 million, respectively, and net losses in
each of these years of $3.7 million, $18.7 million and $7.4 million,
respectively. The losses were primarily due to low sales volumes and with
respect to fiscal year ended 1997 to expenses incurred by the Company in
connection with steps taken by Sanctuary Woods to reorganize or consolidate its
operations, including moving its jurisdiction of incorporation from British
Columbia, Canada to Delaware, USA, effecting a one-for-twenty share
consolidation, exchanging outstanding convertible debentures for equity and the
cancellation of outstanding Performance Shares in consideration for Common Stock
of the Company. Losses were also due to 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.
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 and educational 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, budgetary
constraints of school districts and other education providers, 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 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 the
Company's business, operating results and financial condition. The Company may
13
<PAGE> 14
be required to pay fees in advance to obtain licenses to intellectual properties
from third parties. 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 forecasts, 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 from the sale of its products upon
shipment to its distributors, retailers and end users (net of an allowance for
product returns and price protection), which is in accordance with industry
practice. There can be no assurance that the Company's reserves will be adequate
and 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. In addition, the
Company has experienced in the past, and continues to experience, significant
delays in the collection of certain of its accounts receivable. Product returns
or price protection concessions that exceed the Company's reserves, or the
failure to collect accounts receivable in a timely manner 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.
Impact of Reorganization of Operations. The Company recently experienced a
period of reorganization, including moving its jurisdiction of incorporation
from British Columbia, Canada to Delaware, USA, effecting a one-for-twenty share
consolidation, exchanging outstanding convertible debentures for equity and the
cancellation of outstanding Performance Shares in consideration for Common Stock
of the Company, that has placed, and could continue to place a significant
strain on the Company's financial, management, personnel and other resources.
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.
Competition. The edutainment 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 them 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
14
<PAGE> 15
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.
Dependence on Key Personnel; Retention of Existing Employees; Hiring of New
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 edutainment software products are
difficult to predict and are often short-lived. The retail life of edutainment
software programs has become shorter, and may now last only 4 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 edutainment CD-ROM title. In
addition, some of the Company's edutainment CD-ROM products are seasonal,
especially the sports-based products. 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 timely introduce new products, or 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 and certain of its products. 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
15
<PAGE> 16
that new products will be introduced on schedule or at all or that they will
achieve market acceptance or generate significant revenues.
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
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 affect 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
Windows and PC-based environments and Macintosh computers. The Company has
terminated virtually all current development for other platforms, such as CDX,
the Sony PlayStation and Sega. 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 edutainment software industry
is continually undergoing rapid changes, including evolving industry standards
and the introduction of new technologies, including audio and video enhancement
technologies such as DVD, MMX and 3D graphic accelerators, and operating system
upgrades. These evolving industry standards and new technologies can render the
Company's existing products obsolete or unmarketable and may require the Company
to expend substantial resources to develop products that incorporate
technological changes and evolving industry standards. There can be no assurance
that the Company will have the resources necessary to undertake such a
development effort, or if such development effort is undertaken that the Company
will be successful in introducing new products that keep pace with technological
changes or evolving industry standards, or satisfy evolving consumer
preferences. Failure to do so will have a material adverse effect on the
Company's business, operating results and financial condition.
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 of 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
16
<PAGE> 17
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. In the past the Company has experienced difficulty in
paying its vendors. If the Company experiences such difficulty in the future, it
may result in the 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 against the Company are
filed by vendors, the Company may be required to incur unanticipated legal
expenses.
Market for Common Stock; Stock Price Volatility. The Company's Common Stock has
traded solely on the over-the-counter bulletin board since March 12, 1997, when
the Company's shares were delisted from the Vancouver Stock Exchange at the
Company's request. Shares traded over-the-counter are subject to wide
fluctuations between bid and ask prices. In addition, the Company's Common Stock
is thinly traded. Based upon these factors and 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.
Importance of International Sales. The development of products for foreign
markets requires substantial time, effort and expense because of the large
differences among countries' education requirements and cultures. The Company
expects that international sales will represent a significant percentage of
net sales. International sales may be adversely affected by the imposition of
governmental controls, restrictions on export technology, political instability,
trade restrictions, changes in tariffs and the difficulties associated with
staffing and managing international operations, lack of acceptance of localized
products in foreign countries, longer accounts receivable payment cycles,
difficulties in collecting payment, reduced protection for the Company's
intellectual property rights and the burdens of complying with a wide variety of
foreign laws. In addition, international sales may be adversely affected by the
economic conditions in each country. There can be no assurance that the Company
will be able to maintain or increase international market demand for the
Company's products or that such factors will not have
17
<PAGE> 18
a material adverse effect on the Company's ability to generate international
revenue and, consequently, the Company's business, operating results and
financial condition.
The Company's international revenue is currently denominated in a variety of
foreign currencies and the Company does not currently engage in any hedging
activities. Although exposure to currency fluctuations to date has been
insignificant, there can be no assurance that fluctuations in the currency
exchange rates in the future will not have a material adverse effect on the
Company's business, operating results and financial condition.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
In April 1997, the Company exchanged $5,302,000 in 8% convertible
debentures for 99,993 shares of the Company's Series A Preferred Stock.
The Series A Preferred Stock has an aggregate liquidation preference of
$5,302,000 and is convertible into common stock at a rate of $2.40 per
share (2,209,167 shares) and has voting privileges on an "as converted"
basis. The Series A Preferred Stock automatically converts into common
stock on July 1, 1999 or upon the occurrence of either (i) the Company's
obtaining equity financing of not less than $2,000,000 at a price not less
than $4.40 per share or (ii) the closing price of the Company's common
stock having been 250% of the conversion price of Series A Preferred Stock
($6.00) for any 21 trading days in any consecutive 40 day trading period.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security-Holders
An Extraordinary General Meeting of the Company's Stockholders was held on
April 15, 1997. The Company furnished its security holders proxy material
which was filed with the Securities and Exchange Commission. During the
meeting, the following matters were voted upon and passed on motion duly
made and seconded on vote of the shareholders as indicated:
1. To consider and, if deemed advisable, to pass a Special Resolution
authorizing the Company to change its jurisdiction of incorporation
from British Columbia, Canada to Delaware, USA by way of a
domestication under Section 388 of the Delaware General Corporation
Law:
<TABLE>
<CAPTION>
NOT
FOR: AGAINST: WITHHELD: ABSTAINED: VOTED
---- -------- --------- ---------- -----
<S> <C> <C> <C> <C>
517,376 3,814 0 1,972 355,232
</TABLE>
2. To approve provisions of the Company's Delaware Certificate of
Incorporation eliminating a director's liability for monetary damages:
18
<PAGE> 19
<TABLE>
<CAPTION>
NOT
FOR: AGAINST: WITHHELD: ABSTAINED: VOTED
---- -------- --------- ---------- -----
<S> <C> <C> <C> <C>
841,749 33,061 0 2,960 623
</TABLE>
3. To approve provisions of the Company's Delaware Certificate of
Incorporation providing for a supermajority vote to amend certain
provisions of the Company's Delaware Certificate of Incorporation of
Bylaws:
<TABLE>
<CAPTION>
NOT
FOR: AGAINST: WITHHELD: ABSTAINED: VOTED
---- -------- --------- ---------- -----
<S> <C> <C> <C> <C>
403,655 116,220 0 2,727 355,790
</TABLE>
4. If the one-for-twenty share consolidation is not approved by the
shareholders, to approve a special resolution to increase the number of
authorized shares of Common Stock of the Company from 100,000,000 to
250,000,000:
<TABLE>
<CAPTION>
NOT
FOR: AGAINST: WITHHELD: ABSTAINED: VOTED
---- -------- --------- ---------- -----
<S> <C> <C> <C> <C>
852,052 19,848 0 6,064 429
</TABLE>
5. To approve a one-for-twenty share consolidation of the Company's Common
Stock and to increase the Company's authorized shares of Common Stock
after the share consolidation to 50,000,000:
<TABLE>
<CAPTION>
NOT
FOR: AGAINST: WITHHELD: ABSTAINED: VOTED
<S> <C> <C> <C> <C>
854,544 20,235 0 2,746 867
</TABLE>
6. To approve, subject to the Domestication, the Company's 1996 Stock
Option Plan, and reserve 400,000 shares of the Company's Common Stock
for issuance thereunder (prior to giving effect to the one-for-twenty
share consolidation):
<TABLE>
<CAPTION>
NOT
FOR: AGAINST: WITHHELD: ABSTAINED: VOTED
---- -------- --------- ---------- -----
<S> <C> <C> <C> <C>
523,254 16,594 0 3,537 335,008
</TABLE>
7. To approve, subject to the Domestication, the adoption of
Indemnification Agreements for the Company's director's, officers,
employees, agents and fiduciaries:
<TABLE>
<CAPTION>
NOT
FOR: AGAINST: WITHHELD: ABSTAINED: VOTED
---- -------- --------- ---------- -----
<S> <C> <C> <C> <C>
860,778 11,713 0 5,901 0
</TABLE>
Item 5. Other Information
None
19
<PAGE> 20
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT DESCRIPTION
NUMBER
2.1 Certificate of Domestication
(Incorporated by reference to Exhibit 2.1to Registrant's Report on
Form 8-B filed on May 2, 1997.
3.1 Certificate of Incorporation of Registrant
(Incorporated by reference to Exhibit 3.1 to Registrant's Report on
Form 8-B filed on May 2, 1997.
3.2 Amended and Restated Certificate of Incorporation
(Incorporated by reference to Exhibit 3.2 to Registrant's Report on
Form 8-B filed on May 2, 1997.
3.3 Bylaws of Registrant
(Incorporated by reference to Exhibit 3.3 to Registrant's Report on
Form 8-B filed on May 2, 1997.
4.1 Specimen Common Stock Certificate
(Incorporated by reference to Exhibit 4.1 to Registrant's Report on
Form 8-B filed on May 2, 1997.
10.9 Sub-Lease dated November 23, 1994 between the Registrant and
Heublein, Inc., for premises located at 1825 South Grant Street, San
Mateo, California 94402
(Incorporated herein by reference to Exhibit 10.36 to Registrant's
Report on Form 10-K filed on March 31, 1995)
10.13 Form of Warrant to Purchase Common Stock issued by the Company to the
placement agent for the July 1995 private placement
(Incorporated herein by reference to Exhibit 7.5 of Registrant's
Report on Form 8-K dated February 14, 1995)
10.18 Amendment to Loan Agreement between Sanctuary Woods Multimedia, Inc.
and a bank, dated April 2, 1996 and related warrant
(Incorporated herein by reference to Exhibit 10.18 of Registrant's
Report on Form 10-K/A-1 filed April 15, 1996)
20
<PAGE> 21
10.20 Warrant granted in connection with Second Amendment to Loan Agreement
between the Registrant and Imperial Bank
(Incorporated herein by reference to Exhibit 10.20 of Registrant's
Report on Form 10-Q filed June 19, 1996)
10.21 Agreement with Strategic Marketing Partners dated May 13, 1996
(Incorporated herein by reference to Exhibit 10.21 of Registrant's
Report on Form 10-Q filed June 19, 1996)
10.23 Amendment 1 to License Agreement between Ripley Entertainment and the
Registrant (effective August 1, 1996)
(Incorporated herein by reference to Exhibit 10.23 of Registrant's
Report on Form 10-Q filed August 14, 1996)
10.25 Form of Indemnification Agreement Executed by Registrant and its
officers and directors
(Incorporated by reference to Exhibit 3.3 to Registrant's Report on
Form 8-B filed on May 2, 1997.)
10.26 Agreement and Plan of Reorganization between Registrant and Teacher
Acquisition Corporation and Theatrix Interactive, Incorporated dated
June 4, 1996
(Incorporated herein by reference to Exhibit 10.26 of Registrant's
Report on Form 10-K filed June 30, 1997)
10.27 Republishing and Distribution Agreement between Registrant and Virgin
Sound and Vision, Inc. dated June 12, 1997 (PORTIONS OMITTED -
CONFIDENTIAL TREATMENT GRANTED)
Incorporated herein by reference to Exhibit 10.27 of Registrant's
Report on Form 10-K filed June 30, 1997)
10.28 Form of Warrant to Purchase Common Stock issued by the Company to the
holders of Series A Preferred Stock
Incorporated herein by reference to Exhibit 10.28 of Registrant's
Report on Form 10-K filed June 30, 1997)
10.28A Form of Warrant to Purchase Common Stock issued by the Company to the
holders of Series A Preferred Stock
Incorporated herein by reference to Exhibit 10.28A of Registrant's
Report on Form 10-K filed June 30, 1997)
21
<PAGE> 22
10.29 Form of Warrant to Purchase Common Stock issued by the Company to
certain individuals and employees pursuant to the cancellation of
their performance shares.
Incorporated herein by reference to Exhibit 10.29 of Registrant's
Report on Form 10-K filed June 30, 1997)
11 Computation of Net Income (Loss) Per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed the following reports on Form 8-K since it filed its
report on Form 10-K:
August 6, 1997 (Item 5 - Other)
22
<PAGE> 23
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/ MARYLYN ROSENBLUM
-----------------------------------------
Marylyn Rosenblum, Acting President
and Chief Executive Officer
By: /s/ JACOB STEIN
-----------------------------------------
Jacob Stein
Controller
Principal Financial and
Accounting Officer
Dated: August 12, 1997
23
<PAGE> 24
EXHIBIT LIST
NO. DESCRIPTION
11 Computation of Net Income (Loss) Per
Common Share
27 Financial Data Schedule
24
<PAGE> 1
SANCTUARY WOODS MULTIMEDIA CORPORATION
EXHIBIT 11 - COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
JUNE 30, JUNE 30,
1997 1996
Net Income (Loss) $ (1,286,822) 342,978
============ ============
<S> <C> <C>
Primary shares outstanding:
Common shares 1,959,087 1,165,308
Performance shares held in escrow (200,000)
Stock options and warrants 47,965
------------ ------------
Total 1,959,087 1,013,273
============ ============
Primary net income (loss) per share $ (0.66) $ 0.34
============ ============
FULLY DILUTED NET LOSS PER SHARE
Net Income (Loss) $ (1,286,822) $ 342,978
============ ============
Fully diluted shares outstanding:
Common Shares 1,959,087 1,165,308
Stock options and warrants 48,833
------------ ------------
Total 1,959,087 1,214,141
============ ============
Fully diluted net income (loss) per share $ (0.66) $ 0.28
============ ============
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 683,660
<SECURITIES> 0
<RECEIVABLES> 1,410,353
<ALLOWANCES> 133,419
<INVENTORY> 496,620
<CURRENT-ASSETS> 1,948,641
<PP&E> 1,046,451
<DEPRECIATION> 609,508
<TOTAL-ASSETS> 2,416,074
<CURRENT-LIABILITIES> 1,794,617
<BONDS> 0
0
5,083,538
<COMMON> 37,127,779
<OTHER-SE> 751,914
<TOTAL-LIABILITY-AND-EQUITY> 2,416,074
<SALES> 687,089
<TOTAL-REVENUES> 687,089
<CGS> 325,409
<TOTAL-COSTS> 325,409
<OTHER-EXPENSES> 1,651,670
<LOSS-PROVISION> 15,000
<INTEREST-EXPENSE> 10,672
<INCOME-PRETAX> (1,286,822)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,286,822)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
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