<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM 8-K
DATED AUGUST 12, 1997, AS FILED ON AUGUST 27, 1997
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) August 12, 1997
--------------------------------
Sanctuary Woods Multimedia Corporation
- --------------------------------------------------------------------------------
(Exact Name of the Registrant as Specified in Its Charter)
Delaware
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation)
0-21510 75-2444109
- --------------------------------------------------------------------------------
(Commission File Number) (I.R.S. Employer Identification No.)
1250 45th Street, Suite 350, Emeryville, California 94608-2924
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(510) 594-3200
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
1825 S. Grant Street, San Mateo, CA 94402
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 7. FINANCIAL STATEMENTS AND EXHIBITS.
In connection with the Report on Form 8-K dated August 12, 1997 and filed
by the Registrant on August 24, 1997, the following financial statements and
exhibits are filed as part of this Report:
(a) Financial statements of business acquired, prepared pursuant to Rule
3-05 of Regulation S-X:
(b) Pro forma financial information required pursuant to Article 11 of
Regulation S-X:
(c) Exhibits in accordance with Item 601 of Regulation S-K:
None.
-2-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: October 2, 1998
SANCTUARY WOODS MULTIMEDIA CORPORATION
By: /s/ Michelle Kraus
-------------------------
Michelle Kraus
President and
Chief Executive Officer
-3-
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
INDEX TO FORM 8-K/A
<TABLE>
<CAPTION>
PAGE
<S> <C>
SANCTUARY WOODS MULTIMEDIA CORPORATION UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS:
Unaudited Pro Forma Combined Condensed Consolidated Financial Information. . . . . . . . . . . . . . . . . F-2
Unaudited Pro Forma Combined Condensed Balance Sheet as of June 30, 1997 and accompanying Note . . . . . . F-3
Unaudited Pro Forma Combined Condensed Statement of Operations for the year ended March 31,
1997 and accompanying Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Unaudited Pro Forma Combined Condensed Statements of Operations for the
three month period ended June 30, 1997 and accompanying Note . . . . . . . . . . . . . . . . . . . . . . F-5
THEATRIX INTERACTIVE, INCORPORATED:
Report of the Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Balance Sheets as of June 30, 1995, 1996 and 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . F-7
Statements of Operations for the years ended June 30, 1995, 1996 and 1997 (unaudited). . . . . . . . . . . F-8
Statements of Stockholders' Deficit for the years ended June 30, 1995, 1996 and 1997 (unaudited) . . . . . F-9
Statements of Cash Flows for the years ended June 30, 1995, 1996 and 1997 (unaudited). . . . . . . . . . .F-10
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-11
</TABLE>
F-1
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial information gives
effect to the acquisition by Sanctuary Woods Multimedia Corporation ("SWMC") of
Theatrix Interactive, Incorporated ("Theatrix") in a transaction to be accounted
for as a purchase.
The following unaudited pro forma combined condensed financial information is
based on the historical financial statements of SWMC and Theatrix and should be
read in conjunction with such financial statements and the notes thereto. The
financial statements of SWMC as of March 31, 1997 and for the year ended are
from the SWMC Annual Report on Form 10-K and the condensed financial statements
of SWMC as of June 30, 1997 and for the three months ended are from the SWMC
Form 10-Q for the period ended June 30, 1997. The financial statements of
Theatrix as of June 30, 1997 and for the three years then ended are included
elsewhere in this Form 8-K/A.
The unaudited pro forma combined condensed balance sheet is based upon SWMC's
June 30, 1997 unaudited condensed consolidated balance sheet and Theatrix's
June 30, 1997 unaudited condensed balance sheet and has been prepared to reflect
the acquisition of SWMC of Theatrix as of June 30, 1997. The unaudited pro forma
combined condensed statement of operations for the year ended March 31, 1997 is
based upon SWMC's historical condensed consolidated statements of operations for
year ended March 31, 1997 and Theatrix's historical condensed statements of
operations for the year ended June 30, 1997 and combines the results of
operations of SWMC and of Theatrix for the year ended March 31, 1997 as if the
acquisition occurred on April 1, 1996. The unaudited pro forma combined
condensed statement of operations for the three months ended June 30, 1997 is
based upon SWMC's historical condensed consolidated statements of operations for
three months ended June 30, 1997 and Theatrix's historical condensed statements
of operations for the three months ended June 30, 1997 and combines the results
of operations of SWMC and of Theatrix for the three months ended June 30, 1997
as if the acquisition occurred on April 1, 1996.
The unaudited pro forma combined condensed financial information is based on the
estimates and assumptions set forth in the notes to such information. The
unaudited pro forma combined condensed information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the acquisition had been
consummated at the beginning of the periods presented, nor is it necessarily
indicative of future operating results or financial position.
F-2
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED
BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
SWMC THEATRIX ADJUSTMENTS COMBINED
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 684,000 $ 858,000 $ - $ 1,542,000
Accounts receivable, net 542,000 229,000 - 771,000
Inventories 497,000 192,000 - 689,000
Prepaid expenses and other current assets 226,000 29,000 - 255,000
-------------- -------------- -------------- ---------------
Total current assets 1,949,000 1,308,000 - 3,257,000
Property and equipment, net 437,000 957,000 - 1,394,000
Other assets 30,000 119,000 9,858,000 d 10,007,000
-------------- -------------- -------------- ---------------
Total assets $ 2,416,000 $ 2,384,000 $ 9,858,000 $ 14,658,000
-------------- -------------- -------------- ---------------
-------------- -------------- -------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 889,000 $ 307,000 $ - $ 1,196,000
Accrued expenses and other current liabilities 896,000 1,067,000 500,000 c 2,463,000
Current portion of long-term debt 9,000 968,000 - 977,000
Convertible subordinated debt - 2,000,000 (2,000,000) b -
-------------- -------------- -------------- ---------------
Total liabilities 1,794,000 4,342,000 (1,500,000) 4,636,000
-------------- -------------- -------------- ---------------
Mandatorily redeemable convertible preferred
stock - 19,750,000 (19,750,000) b -
-------------- -------------- -------------- ---------------
Stockholders' equity (deficit):
Preferred stock 5,084,000 6,000 (6,000) b 5,084,000
Common stock 37,000 31,000 (28,000) a,b 40,000
Warrants issued 868,000 a,c 868,000
Additional paid-in capital 37,091,000 - 8,529,000 a 45,620,000
Accumulated deficit (40,838,000) (21,745,000) 21,745,000 b (40,838,000)
Accumulated translation adjustments (752,000) - - (752,000)
-------------- -------------- -------------- ---------------
Total stockholders' equity (deficit) 622,000 (21,708,000) 31,108,000 10,022,000
-------------- -------------- -------------- ---------------
$ 2,416,000 $ 2,384,000 $ 9,858,000 $ 14,658,000
-------------- -------------- -------------- ---------------
-------------- -------------- -------------- ---------------
</TABLE>
NOTE 1 - The pro forma balance sheet has been prepared to reflect the
acquisition of Theatrix by SWMC for an aggregate price of $9,299,000. Pro forma
adjustments are made to reflect:
a. The issuance of 3,102,528 shares of SWMC common stock valued at $8,532,000
and of a warrant for 500,000 shares of SWMC common stock valued at $723,000
necessary to complete the purchase acquisition;
b. The elimination of the common stockholders' equity accounts of Theatrix,
including the conversion of a $2,000,000 note payable to preferred stock of
Theatrix;
c. The issuance of a warrant to purchase 100,000 shares of SWMC common stock
valued at $145,000 in exchange for investment banking fees and the net
assets of Theatrix at estimated fair value at the acquisition date; and
d. The excess of acquisition cost over the fair value of net assets acquired
(goodwill).
F-3
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
SWMC THEATRIX ADJUSTMENTS COMBINED
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenues $ 4,750,000 $ 1,862,000 $ - $ 6,612,000
Cost of revenues 1,513,000 447,000 - 1,960,000
--------------- --------------- --------------- ----------------
Gross margin 3,237,000 1,415,000 - 4,652,000
--------------- --------------- --------------- ----------------
Operating expenses:
Research and development 1,396,000 4,865,000 - 6,261,000
Marketing and sales 3,061,000 5,301,000 - 8,362,000
General and administration 2,851,000 1,950,000 2,629,000 a 7,430,000
--------------- --------------- --------------- ----------------
Total operating expenses 7,308,000 10,116,000 2,629,000 22,053,000
--------------- --------------- --------------- ----------------
Operating loss (4,071,000) (10,701,000) (2,629,000) (17,401,000)
Other income (expense), net 394,000 (93,000) - 301,000
--------------- --------------- --------------- ----------------
Net loss $ (3,677,000) $ (10,794,000) $ (2,629,000) $ (17,100,000)
--------------- --------------- --------------- ----------------
--------------- --------------- --------------- ----------------
Pro forma net loss per share $ (3.30) $ (4.06)
--------------- ----------------
--------------- ----------------
Shares used to compute pro
forma net loss per share 1,113,145 3,102,528 b 4,215,673
--------------- --------------- ----------------
--------------- --------------- ----------------
</TABLE>
NOTE 1 - The above statement gives effect to the following pro forma adjustments
to reflect the acquisition as of the beginning of the period (April 1, 1996):
a. The amortization of goodwill on a straight-line basis over three years; and
b. The issuance of 3,102,528 shares of SWMC common stock. Common stock
equivalent shares from the issuance of warrants and options are excluded
from the computation, as their effect is anti-dilutive.
A non-recurring adjustment of $1,972,000 to write-off acquired in-process
research and development was not reflected above.
F-4
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
SWMC THEATRIX ADJUSTMENTS COMBINED
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 687,000 $ 162,000 $ - $ 849,000
Cost of revenues 325,000 85,000 - 410,000
--------------- -------------- -------------- ---------------
Gross margin 362,000 77,000 - 439,000
--------------- -------------- -------------- ---------------
Operating expenses:
Research and development 365,000 1,233,000 - 1,598,000
Marketing and sales 720,000 776,000 - 1,496,000
General and administration 567,000 451,000 657,000 a 1,675,000
--------------- -------------- -------------- ---------------
Total operating expenses 1,652,000 2,460,000 657,000 4,769,000
--------------- -------------- -------------- ---------------
Operating loss (1,290,000) (2,383,000) (657,000) (4,330,000)
Other income (expense), net 3,000 (40,000) - (37,000)
--------------- -------------- -------------- ---------------
Net loss $ (1,287,000) $ (2,423,000) $ (657,000) $ (4,367,000)
--------------- -------------- -------------- ---------------
--------------- -------------- -------------- ---------------
Pro forma net loss per share $ (0.66) $ (0.86)
--------------- ---------------
--------------- ---------------
Shares used to compute pro
forma net loss per share 1,959,087 3,102,528 b 5,061,615
--------------- -------------- ---------------
--------------- -------------- ---------------
</TABLE>
NOTE 1 - The above statement gives effect to the following pro forma adjustments
to reflect the acquisition as of the beginning of the period (April 1, 1996):
a. The amortization of goodwill on a straight-line basis over three years; and
b. The issuance of 3,102,528 shares of SWMC common stock. Common stock
equivalent shares from the warrants and options issued are excluded from
the computation, as their effect is anti-dilutive.
A non-recurring adjustment of $1,972,000 to write-off acquired in-process
research and development was not reflected above.
F-5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Theatrix Interactive, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Theatrix Interactive, Inc. at
June 30, 1996 and 1995, and the results of its operations and its cash flows for
the years then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from operations
and additional financing may be necessary to fund its operations in fiscal 1997.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to this matter is described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
September 17, 1996
F-6
<PAGE>
THEATRIX INTERACTIVE, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------
1995 1996 1997
--------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,000 $ 387,000 $ 858,000
Accounts receivable, net of returns and allowances of
$0, $709,000 and $270,000 at June 30,
1995, 1996 and 1997, respectively - 448,000 229,000
Inventories - 188,000 192,000
Other current assets 2,000 22,000 29,000
--------------- --------------- ---------------
Total current assets 19,000 1,045,000 1,308,000
Property and equipment, net 180,000 1,331,000 957,000
Deposits and other assets 27,000 165,000 119,000
--------------- --------------- ---------------
$ 226,000 $ 2,541,000 $ 2,384,000
--------------- --------------- ---------------
--------------- --------------- ---------------
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 358,000 $ 1,004,000 $ 307,000
Accrued liabilities 612,000 810,000 1,067,000
Payables to stockholders 574,000 378,000 -
Current portion of long term debt 10,000 198,000 968,000
Convertible subordinated debt 1,843,000 2,408,000 2,000,000
--------------- --------------- ---------------
Total current liabilities 3,397,000 4,798,000 4,342,000
Long term debt, net of current portion 29,000 933,000 -
Other liabilities 14,000 34,000 -
--------------- --------------- ---------------
Total liabilities 3,440,000 5,765,000 4,342,000
--------------- --------------- ---------------
Mandatorily redeemable convertible preferred stock - 7,694,000 19,750,000
Commitments and contingencies (Notes 7 and 12)
Stockholders' deficit:
Preferred Stock, $0.001 par value; 5,767,153
shares authorized; no shares issued or outstanding - - -
Common Stock, $0.001 par value; 50,000,000
shares authorized; 5,800,500, 6,296,064 and
6,153,059 shares issued and outstanding in
June 30, 1995, 1996 and 1997, respectively 6,000 6,000 6,000
Additional paid-in capital 10,000 27,000 31,000
Accumulated deficit (3,230,000) (10,951,000) (21,745,000)
--------------- --------------- ---------------
Total stockholders' deficit (3,214,000) (10,918,000) (21,708,000)
--------------- --------------- ---------------
$ 226,000 $ 2,541,000 $ 2,384,000
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
THEATRIX INTERACTIVE, INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------
1995 1996 1997
---------------- ---------------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
Net revenues $ 113,000 $ 2,001,000 $ 1,862,000
Cost of revenues 68,000 370,000 447,000
---------------- ---------------- ----------------
Gross profit 45,000 1,631,000 1,415,000
---------------- ---------------- ----------------
Operating expenses:
Research and development 2,161,000 4,737,000 4,865,000
Sales and marketing 339,000 3,112,000 5,301,000
General and administrative 498,000 1,543,000 1,950,000
---------------- ---------------- ----------------
Total operating expenses 2,998,000 9,392,000 12,116,000
---------------- ---------------- ----------------
Loss from operations (2,953,000) (7,761,000) (10,701,000)
Interest income (expense), net (87,000) 40,000 (93,000)
---------------- ---------------- ----------------
Net loss $ (3,040,000) $ (7,721,000) $ (10,794,000)
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
THEATRIX INTERACTIVE, INCORPORATED
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
-------------- ------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1994 1,300,000 $ 1,000 $ 2,000 $ (190,000) $ (187,000)
Issuance of common stock
at $0.0025 per share 3,930,000 4,000 6,000 - 10,000
Issuance of common stock pursuant to the
exercise of stock options 570,500 1,000 2,000 - 3,000
Net loss - - - (3,040,000) (3,040,000)
-------------- ------------- ------------ --------------- ---------------
Balance at June 30, 1995 5,800,500 6,000 10,000 (3,230,000) (3,214,000)
Issuance of common stock at $0.08
per share pursuant to a debt financing 160,533 - 13,000 - 13,000
Issuance of common stock pursuant to the
exercise of stock options 367,500 - 4,000 - 4,000
Repurchase of common stock pursuant to the
1995 Stock Option Plan (see Note 11) (32,469) - - - -
Net loss - - - (7,721,000) (7,721,000)
-------------- ------------- ------------ --------------- ---------------
Balance at June 30, 1996 6,296,064 6,000 27,000 (10,951,000) (10,918,000)
Unaudited:
Issuance of common stock at $0.08 pursuant 39,467 - 3,000 - 3,000
to a debt financing
Issuance of common stock pursuant to the
exercise of stock options 42,562 - 3,000 - 3,000
Repurchase of common stock pursuant to the
1995 Stock Option Plan (see Note 11) (225,034) - (2,000) - (2,000)
Net loss - - - (10,794,000) (10,794,000)
-------------- ------------- ------------ --------------- ---------------
Balance at June 30, 1997 (unaudited) 6,153,059 $ 6,000 $ 31,000 $ (21,745,000) $ (21,708,000)
-------------- ------------- ------------ --------------- ---------------
-------------- ------------- ------------ --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
THEATRIX INTERACTIVE, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------
1995 1996 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net loss $ (3,040,000) $ (7,721,000) $ (10,794,000)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation 61,000 246,000 564,000
Other noncash transactions - 64,000
Changes in assets and liabilities:
Accounts receivable, net 108,000 (448,000) 219,000
Inventories - (188,000) (4,000)
Other current assets (1,000) (20,000) (7,000)
Deposits and other assets (19,000) (138,000) 46,000
Accounts payable 315,000 646,000 (697,000)
Accrued liabilities 524,000 198,000 257,000
Other liabilities 14,000 20,000 (34,000)
-------------- -------------- ---------------
Net cash used in operating activities (2,038,000) (7,341,000) (10,450,000)
-------------- -------------- ---------------
Net cash used in investing activities:
Purchase of equipment, net (82,000) (673,000) (190,000)
-------------- -------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of mandatorily
redeemable convertible preferred stock, net - 5,618,000 8,303,000
Borrowings from convertible subordinated debt 1,843,000 2,578,000 2,592,000
Borrowings under bank loan - 451,000 -
Borrowings from stockholders 281,000 100,000 -
Payments on amounts due stockholders - (296,000) (378,000)
Principal payments under capital lease obligations (4,000) (84,000) (163,000)
Exercise of Series A mandatorily
redeemable convertible preferred stock warrants - - 753,000
Proceeds from the issuance of common stock 10,000 13,000 3,000
Exercise of common stock options 3,000 4,000 3,000
Repuchase of common stock - - (2,000)
-------------- -------------- ---------------
Net cash provided by financing activities 2,133,000 8,384,000 11,111,000
-------------- -------------- ---------------
Net increase in cash 13,000 370,000 471,000
Cash at beginning of year 4,000 17,000 387,000
-------------- -------------- ---------------
Cash at end of year $ 17,000 $ 387,000 $ 858,000
-------------- -------------- ---------------
-------------- -------------- ---------------
Supplemental disclosure of cash flow information: $ 11,000 $ 110,000 $ -
Interest paid $ 1,000 $ 2,000 $ -
Taxes paid
Supplemental disclosure of noncash transactions:
Purchase of equipment under capital lease obligation $ 44,000 $ 725,000 $ -
Value attributed to the warrants issued upon conversion
of convertible subordinated debt into mandatorily
redeemable convertible preferred stock $ - $ 38,000 $ -
Issuance of mandatorily redeemable convertible
preferred stock in exchange for services rendered $ - $ 25,000 $ -
Issuance of mandatorily redeemable convertible
preferred stock upon conversion of convertible debt $ - $ 2,012,000 $ 3,000,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
THEATRIX INTERACTIVE, INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY:
Theatrix Interactive, Incorporated (the "Company") formerly known as
Berkeley Learning Technologies, is a developer and publisher of interactive,
multimedia educational software that provides engaging, high quality and
open-ended exploratory environments to stimulate children's thinking, problem
solving and creative skills.
The Company was initially incorporated in the State of California. In March
1995, the Company was reincorporated under the laws of the State of Delaware
(the "Reincorporation") and changed its name to Theatrix Interactive,
Incorporated.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has incurred cumulative
losses of $21,745,000 from its inception through June 30, 1997. The Company's
fiscal 1998 business plan contemplates additional financing will be necessary
for the Company to meet its business operating plans, continue operations and
meet working capital requirements during 1998 and beyond. The Company believes
it will be successful in securing sufficient financing; however, if the Company
is not successful in its efforts, it will be required to reduce discretionary
spending to ensure working capital requirements are met. There can be no
assurance that the Company can secure sufficient financing or that the Company
will achieve profitability. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
MERGER WITH SANCTUARY WOODS (UNAUDITED)
On August 12, 1997, the Company was acquired by Sanctuary Woods Multimedia
Corporation ("Sanctuary Woods") in a stock purchase transaction. Following the
merger, Theatrix became a wholly-owned subsidiary of Sanctuary Woods. Pursuant
to the Agreement and Plan of Reorganization dated June 4, 1997 (the "Merger
Agreement the holders of Series A, B and C Preferred Stock, in aggregate,
received 614,979, 882,117 and 1,462,829 shares of Sanctuary Woods Common Stock,
respectively. The exchange assumed a conversion ratio of 0.05945, 0.10066 and
1.46283 for Series A, B and C Preferred Stock, respectively. Additionally, all
issued and outstanding shares of Common Stock and all shares of Common Stock
reserved for issuance upon exercise of a common stock options and warrants in
aggregate received 128,755 shares of Sanctuary Woods Common Stock based upon a
conversion ratio of 0.0298. The outstanding warrants for Series B Preferred
Stock were canceled prior to the merger. The outstanding warrants for common
stock terminated prior to the merger.
UNAUDITED 1997 FINANCIAL INFORMATION
The accompanying balance sheet as of June 30, 1997 and the statements of
operations, stockholders' deficit and of cash flows for the year then ended have
not been audited. Similarly, amounts disclosed in the notes to the financial
statements relating to the year ended June 30, 1997 have not been audited. In
the opinion of management, these financial statements have been prepared on the
same basis as the audited financial statements and include all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
Company's financial position at June 30, 1997, the results of its operations and
its cash flows for the year ended June 30, 1997 and the changes in the
stockholders' deficit for the year ended June 30, 1997.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants' Statement of Position 91-1 on Software Revenue
Recognition ("SOP 91-1"). The Company's revenues are derived from product
licensing fees relating to the sale of packaged software products, royalties
from original equipment manufacturers (OEMs), and software development revenues
derived from customer funded software development contract agreements.
F-11
<PAGE>
THEATRIX INTERACTIVE, INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
Product licensing fees are recognized upon shipment if no significant vendor
obligations remain and if collection of the resulting receivable is deemed
probable. The Company grants distributors and resellers certain rights of
return and price protection on unsold merchandise held by those distributors and
resellers. Accordingly, reserves for estimated future returns, exchanges and
credits for price protection are accrued upon product shipment.
The Company has limited control over the extent to which product sold to
distributors and resellers are sold through to end users. Accordingly, a
portion of the Company's sales may from time to time result in increased
inventory at its distributors and resellers. The Company provides sales return
reserves for distributor inventories in amounts deemed reasonable by it. These
reserves are based on the Company's estimates of expected sell-through by
distributors and resellers of its products. Actual results could differ from
these estimates.
The Company provides free telephone technical support to end user customers.
These activities are generally considered insignificant post-contract support
obligations. The Company estimates that these costs have been immaterial to
date.
Revenues for funded software development are recognized on a percentage of
completion basis. The revenue recognized under these contracts in fiscal 1997,
1996 and 1995 were $165,000, $563,000 and $113,000, respectively. Minimum
guaranteed royalty revenues not subject to significant future obligations are
generally recognized on shipment of software. Royalty revenues that are subject
to significant future obligations are recognized when earned. Royalty revenues
that exceed the minimum guarantees are recognized when reported.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
INVENTORY
Inventory consists primarily of purchased materials and are stated at the
lower of cost or market, cost being determined on a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets. All such
assets are estimated to have a useful life of three years.
SOFTWARE DEVELOPMENT COSTS
Software development costs incurred prior to the establishment of
technological feasibility are expensed as incurred. The Company defines the
establishment of technological feasibility as the completion of a working model
and assessment of the reasonable market acceptance of the product. Software
development costs incurred subsequent to the establishment of technological
feasibility through the period of general market availability are capitalized,
if material. To date, all software development costs have been expensed.
DEFERRED RENT
The Company's office lease contains fixed escalations of the minimum annual
lease payments during the term of the lease. The Company recognizes occupancy
expense on a straight-line basis, recording the difference between the rental
amount charged to earnings and the amount payable under the lease as a deferred
liability.
F-12
<PAGE>
THEATRIX INTERACTIVE, INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" under an
asset and liability approach that recognizes deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. In estimating future tax
consequences, the Company considers all expected future events other than
enactments of changes in the tax law or rates.
STOCK SPLIT
In March 1995, the Board of Directors approved a 2-for-1 stock split. All
share amounts have been adjusted to retroactively reflect this split.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of accounts receivable.
The Company's accounts receivable are primarily derived from revenues to
distributors and resellers located in the United States. The Company performs
ongoing credit evaluations of its customers financial condition and maintains an
allowance for uncollectible accounts receivable based upon the expected
collectibility of all accounts.
Ingram Micro accounted for 46% and 35% of total revenues during the year
ended June 30, 1996 and 1997, respectively. Tech Data accounted for 21% of
revenues during the year ended June 30, 1996 and Navarre accounted for 17% of
the total revenues for the year ended June 30, 1997. No customer accounted for
more than 10% of total revenues during the year ended June 30, 1995.
Ingram Micro, Tech Data and Navarre Corporation accounted for 39%, 39% and
11% of accounts receivable at June 30, 1996, respectively, and 32%, 18% and 17%
at June 30, 1997, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), which establishes a fair value method of
accounting for stock-based compensation plans and requires additional
disclosures for those companies who elect not to adopt the new method of
accounting. The Company will continue to measure compensation costs using the
intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and to comply with the pro forma disclosure requirements of
SFAS 123. The Company has determined that SFAS 123 does not have a material
impact on the Company's financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure" ("SFAS 129"). SFAS 129 requires disclosure of certain
information related to the Company's capital structure and is not anticipated to
have a material impact on the Company's financial position or results of
operations.
F-13
<PAGE>
THEATRIX INTERACTIVE, INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income."
SFAS 130 establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined includes
all changes in equity (net assets) during a period from nonowner sources.
Examples of items to be included in comprehensive income, which are excluded
from net income, include foreign currency translation adjustment and unrealized
gain/loss on available for sale securities. The disclosure prescribed by
SFAS 130 must be made beginning with the first quarter of 1998 and is not
anticipated to have a material impact on the Company's financial position or
results of operations.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
has not yet determined the impact, if any, of adopting this new standard. The
disclosures prescribed by SFAS 131 are effective in 1998.
In October 1997 and March 1998, the American Institute of Certified Public
Accountants issued Statements of Position No. 97-2, "Software Revenue
Recognition" ("SOP 97-2") and No. 98-4, "Deferral of the Effective Date of the
Provisions of SOP 97-2, "Software Revenue Recognition" ("SOP 98-4"), which the
Company is currently required to adopt for transactions entered into in the
fiscal year beginning July 1, 1998. SOP 97-2 and SOP 98-4 provide guidance on
recognizing revenue on software transactions and supersede previous guidance
provided by SOP 91-1. The Company believes that the adoption of SOP 97-2 and
SOP 98-4 will not have a significant impact on its current licensing or revenue
recognition practices. However, should the Company amend its existing licensing
practice, the Company's revenue recognition practices may be subject to change
to comply with the accounting guidance provided by SOP 97-2 and SOP 98-4.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1, "Software for Internal Use" ("SOP 98-1") which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP 98-1 is effective for the Company's fiscal year
ending March 31, 2000. The Company does not expect that the adoption of
SOP 98-1 will have a material effect on the Company's financial position or
results of operations.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
NOTE 3 - BALANCE SHEET COMPONENTS:
F-14
<PAGE>
THEATRIX INTERACTIVE, INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------
1995 1996 1997
-------------- ------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
Inventories:
Raw materials $ - $ 122,000 $ 122,000
Finished goods - 66,000 70,000
-------------- ------------- --------------
$ - $ 188,000 $ 192,000
-------------- ------------- --------------
-------------- ------------- --------------
Property and equipment:
Leased equipment $ 67,000 $ 768,000 $ 769,000
Computer equipment 241,000 667,000 762,000
Furniture and fixtures 15,000 171,000 279,000
Leasehold improvements 2,000 93,000 79,000
-------------- ------------- --------------
325,000 1,699,000 1,889,000
Less: accumulated depreciation 145,000 368,000 932,000
-------------- ------------- --------------
$ 180,000 $ 1,331,000 $ 957,000
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
NOTE 4 - RELATED PARTY TRANSACTIONS:
AMOUNTS PAYABLE TO STOCKHOLDERS
At June 30, 1996 and 1995, the Company had unsecured demand notes payable to
stockholders outstanding of $160,000 and $195,000, respectively. Interest
accrued at various interest rates, primarily at prime (9.25% at June 30, 1996)
plus one percent. Accrued interest on these notes was $40,000 and $25,000 at
June 30, 1996 and 1995, respectively. During 1997, the Company repaid these
notes payable and accrued interest.
During 1996 and 1995, stockholders who were also officers of the Company
advanced the Company a total of $218,000 and $118,000 at June 30, 1996 and 1995,
respectively. These advances bear no interest and are payable on demand.
During 1997, the Company repaid these advances.
DEFERRED COMPENSATION
At June 30, 1995, the Company had deferred compensation arrangements
totaling $261,000 with three of its employees, whom were significant
stockholders and members of the Board of Directors. This amount was included in
amounts payable to stockholders at June 30, 1995 and was paid in full during
fiscal 1996.
NOTE 5 - CONVERTIBLE SUBORDINATED DEBT:
CONVERTIBLE SUBORDINATED NOTES PAYABLE
During fiscal 1996 and 1995, the Company borrowed $170,000 and $1,843,000,
respectively, in the form of subordinated notes (the "Notes") convertible into
shares of preferred stock of the Company. Unpaid principal, together with
accrued interest at 9.0% per year, was payable on March 31, 1996. Accrued
interest on the notes at June 30, 1995 was $61,000.
The notes were convertible at the option of the holder into shares of
preferred stock and a warrant to purchase additional shares of preferred stock
at the issuance price upon the sale of at least $500,000 of preferred stock by
the Company through an equity financing, upon which any accrued interest would
be waived.
F-15
<PAGE>
THEATRIX INTERACTIVE, INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
In connection with the Series A Mandatorily Redeemable Convertible Preferred
Stock ("Series A Preferred Stock") offering in fiscal 1996 (see Note 10), the
Notes were converted into 2,469,329 shares of Series A Preferred Stock at a
conversion price of $0.815 per share. Additionally, pursuant to the conversion
of the Notes, the holders of the Notes received warrants to purchase 923,017
shares of Series A Preferred Stock at $0.815 per share. The warrants were
exercisable through July 1996. Management ascribed a nominal value to the
warrants. In fiscal 1997, all holders of the warrants exercised the warrants
for 923,017 shares of Series A Preferred Stock.
BRIDGE FINANCING
In April 1996, the Company entered into a Convertible Promissory Note and
Common Stock Purchase Agreement (the "1996 Bridge Financing Agreement") with
certain stockholders. Pursuant to the 1996 Bridge Financing Agreement, the
stockholders committed to loan the Company up to $3,000,000. The convertible
subordinated promissory notes (the "1996 Promissory Notes") issued pursuant to
the 1996 Bridge Financing Agreement and the related accrued interest
automatically convert into shares of the Company's Series B Mandatorily
Redeemable Convertible Preferred Stock ("Series B Preferred Stock") upon the
closing of a private placement of the Company's Series B Preferred Stock.
Pursuant to the 1996 Bridge Financing Agreement, the Company issued
$2,408,000 of 1996 Promissory Notes and 160,533 shares of Common Stock during
fiscal 1996. The Common Stock was sold at $0.08 per share which represented the
fair market value of the stock as determined by the Company's Board of Directors
at the date of the 1996 Bridge Financing Agreement.
In connection with the Series B Preferred Stock offering in fiscal 1997 (see
Note 10), the 1996 Promissory Notes were converted into 2,173,913 shares of
Series B Preferred Stock at a conversion price of $1.38 per share.
In May 1997, the Company entered into a Bridge Financing Agreement (the
"1997 Bridge Financing Agreement") and Convertible Preferred Notes (the "1997
Notes") with a stockholder. Pursuant to the Bridge Financing Agreement, the
stockholder committed to loan the Company up to $2 million upon the execution of
a letter of intent to merge the Company with Sanctuary Woods in an arrangement
providing the stockholder with a 24% ownership interest in Sanctuary Woods and a
warrant to purchase up to 500,000 shares of Sanctuary Woods Common Stock. As of
June 30, 1997, $2 million of the 1997 Promissory Notes were outstanding. The
1997 Promissory Notes automatically converted into shares of the Company's
Series C Mandatorily Redeemable Convertible Preferred Stock ("Series C Preferred
Stock") upon the closing of the financing arrangement at $2.00 per share (see
Note 12).
NOTE 6 - LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------
1995 1996 1997
------------- -------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Line of credit $ - $ 451,000 $ 449,000
Lease obligations 39,000 680,000 519,000
------------- -------------- -------------
39,000 1,131,000 968,000
Less: current portion 10,000 198,000 968,000
------------- -------------- -------------
$ 29,000 $ 933,000 $ -
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
F-16
<PAGE>
THEATRIX INTERACTIVE, INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
LINE OF CREDIT
In June 1996, the Company obtained a line of credit with a bank that allows
borrowing up to $750,000 for capital equipment purchases made through February
1997. Borrowings are payable in 36 monthly installments of principal and
interest. Interest accrued on the outstanding balance at prime (9.25% at
June 30, 1996) plus 1.5 percent. Borrowings are secured by substantially all of
the Company's assets and requires that the Company comply with certain financial
covenants. The Company was not in compliance with certain of these convenants
as of June 30, 1997. Accordingly, the entire balance outstanding as of June 30,
1997 is included in the current portion of long-term debt.
CAPITAL LEASES
The Company leases office furniture and equipment under capital leases
secured by the leased furniture and equipment.
In August 1995, the Company obtained a $750,000 equipment lease line of
credit for office equipment, furniture and computers. The terms of the
agreement require all equipment to be leased under the agreement to be delivered
by October 31, 1996. For each acquisition, the payment terms require a 10%
deposit, with the remaining balance being financed over 42 months. The Company
will be obligated to acquire the equipment at the end of the lease at 15% of
cost.
Future minimum obligations under the capital leases, including the property
leased under the lease line of credit, are as follows:
<TABLE>
<CAPTION>
CAPITAL
YEAR ENDING JUNE 30, LEASES
-------------
<S> <C>
1997 $ 234,000
1998 255,000
1999 262,000
2000 129,000
2001 -
-------------
880,000
Less: interest 200,000
-------------
680,000
Less: current portion 161,000
-------------
$ 519,000
-------------
-------------
</TABLE>
F-17
<PAGE>
THEATRIX INTERACTIVE, INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7 - COMMITMENTS AND CONTINIGENCIES:
OPERATING LEASES
The Company leases its office space under a five year operating lease
expiring in November 1999 that includes rent escalations throughout the term of
the lease. Additionally, the Company leases office equipment under
noncancelable operating leases expiring in 1998. Future minimum lease payments
required under these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
<S> <C>
1997 $ 219,000
1998 240,000
1999 250,000
2000 110,000
-------------
$ 819,000
-------------
-------------
</TABLE>
Rent expense was approximately $66,000, $158,000 and $312,000 for the years
ended June 30, 1995, 1996 and 1997, respectively.
CONTINGENCIES
The Company has certain contingent liabilities resulting from litigation and
claims arising in the ordinary course of business. Management believes that the
probable resolution of such contingencies will not materially affect the
financial position or results of operations of the Company.
NOTE 8 - INCOME TAXES:
No current provision or benefit for federal or state income taxes has been
recorded for the years ended June 30, 1997, 1996 and 1995 as the Company has
incurred net operating losses and has no carryback potential. No deferred
provision or benefit for income taxes has been recorded as the Company is in a
net deferred tax asset position for which a full valuation allowance has been
provided. Deferred tax assets of approximately $4,400,000 and $1,400,000 at
June 30, 1996 and 1995, respectively, consist primarily of net operating loss
and credit carryforwards.
At June 30, 1996, the Company had federal and state net operating loss
carryforwards of approximately $9,400,000 and $2,100,000, respectively,
available to reduce future taxable income. Such carryforwards begin to expire
in the year 2012. The income tax benefit from the utilization of net operating
loss carryforwards may be limited in certain circumstances including, but not
limited to, cumulative stock ownership changes of more than 50% over a three
year period.
NOTE 9 - STOCKHOLDERS' DEFICIT:
AMENDED AND RESTATED ARTICLES OF INCORPORATION
In conjunction with the Company's reincorporation in the state of Delaware
in March 1995, the Company was authorized to issue common and preferred stock.
The total number of shares of common stock the Company was authorized to issue
increased from 10,000,000 with no par value to 15,000,000 with a par value of
$0.0001. The
F-18
<PAGE>
THEATRIX INTERACTIVE, INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
total number of shares of preferred stock the Company was authorized to issue
increased from 3,000,000 with no par value to 5,000,000 with a par value of
$0.0001.
In July 1995, the Company amended and restated its Articles of Incorporation
to increase the number of authorized shares from 20,000,000 to 70,000,000. The
total shares authorized for common stock increased from 15,000,000 to
50,000,000, and shares authorized for preferred stock increased from 5,000,000
to 20,000,000, each with a par value of $0.001. All share data has been
retroactively adjusted to reflect a par value of $0.001.
In December 1994, two stockholders, who are also officers of the Company,
entered into stock restriction and transfer agreements that place transfer
restrictions upon the two stockholders until the Company files for an initial
public offering. These agreements also provide each stockholder the right of
first refusal to purchase shares from the other stockholder upon the occurrence
of certain events. Further, the Company and the two stockholders have entered
into other agreements allowing the Company the second right of refusal to
purchase shares from either of the two stockholders. In July 1995, the two
stockholders, the Company and the preferred stockholders entered into an
agreement that replaced the December 1994 agreement and provided a third right
of refusal to the preferred stockholders.
In August 1996, the Company amended and restated its Articles of
Incorporation to increase the number of authorized shares from 70,000,000 to
75,000,000. The total shares authorized for preferred stock increase from
20,000,000 to 25,000,000.
As a result of the Company's merger with Sanctuary Woods Multimedia
Corporation, the Company amended and restated its Articles of Incorporation such
that all shares preferred and common stock of the Company outstanding as of the
date of the merger were converted into shares of Sanctuary Woods Common Stock
based on the exchange ratios specified in the Merger Agreement (see Note 12).
COMMON STOCK WARRANTS
During fiscal 1995, the Company entered into a license and co-development
agreement with a nonprofit organization. Pursuant to this arrangement, the
Company issued warrants to purchase up to 122,699 shares of the Company's common
stock at $0.815 per share. Management ascribed a nominal value to the warrants.
In accordance with the warrant provisions, the warrant terminated when the
warrant holder elected not to exercise the warrant in conjunction with the
Merger Agreement (see Note 12).
NOTE 10 - MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
The Company authorized 10,344,401 shares of Mandatorily Redeemable
Convertible Preferred Stock and designated all shares as Series A at June 30,
1996. The Company has 9,421,384 shares of Series A preferred stock issued and
outstanding at June 30, 1996. The Company had no shares of mandatorily
redeemable convertible preferred stock authorized, designated, issued or
outstanding at June 30, 1995.
During fiscal 1997, the Company amended and restated its Articles of
Incorporation and authorized 19,232,847 shares of mandatorily redeemable
convertible preferred stock and designated 10,344,401 shares and 8,888,446
shares as Series A and B preferred stock, respectively.
In July 1997, the Company amended and restated its Articles of Incorporation
to designate 1,000,000 shares of preferred stock as Series C preferred stock and
amend certain liquidation rights of the holders of Series A and Series B
preferred stock.
A summary of mandatorily redeemable convertible preferred stock activity is
as follows:
F-19
<PAGE>
THEATRIX INTERACTIVE, INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
SHARES AMOUNT
---------------- ----------------
<S> <C> <C>
Issuance of Series A Preferred Stock at
$0.815 per share upon conversion of
subordinated debt 2,469,329 $ 2,013,000
Issuance of Series A Preferred Stock at
$0.815 per share, net of issuance costs of
approximately $22,000 6,921,380 5,618,000
Amount of value attributable to warrants
issued upon conversion of subordinated debt
to Series A Preferred Stock - 38,000
Issuance of Series A Preferred Stock at
$0.815 per share in exchange for services
rendered 30,675 25,000
---------------- ----------------
BALANCE AT JUNE 30, 1996 9,421,384 7,694,000
Unaudited:
Exercise of Series A Preferred Stock warrants 923,017 753,000
Issuance of Series B Preferred Stock at
$1.38 per share, net of issuance costs of $868,000 6,594,221 8,198,000
Issuance of Series B Preferred Stock at
$1.38 per share upon conversion of
subordinated debt 2,173,913 3,000,000
Issuance of warrants to purchase 120,312
shares of Series B Preferred Stock at $1.73
per share in exchange for services - 105,000
---------------- ----------------
BALANCE AT JUNE 30, 1997 (UNAUDITED) 19,112,535 $ 19,750,000
---------------- ----------------
---------------- ----------------
</TABLE>
During fiscal 1996, the Company converted $2,013,000 of convertible
subordinated notes payable (see Note 5) into 2,469,329 shares of Series A
preferred stock. During fiscal 1997, the Company converted $3,000,000 of 1997
convertible subordinated notes payable (see Note 5) into 2,137,913 shares of
Series B preferred stock.
Holders of Series A and B preferred stock have certain rights, preferences
and restrictions with respect to dividends, redemption, conversion, liquidation
and voting as set forth in the Amended and Restated Articles of Incorporation
and summarized below.
DIVIDEND RIGHTS
Holders of Series A and B preferred stock are entitled to receive
noncumulative dividends at a per annum rate of $0.0652 and $0.1104 per share,
respectively, when and if declared by the Board of Directors. No dividends on
Series A and B preferred stock have been declared by the Board from inception
through June 30, 1997.
VOTING RIGHTS
Each share of Series A and B preferred stock has voting rights equal to a
share of common stock and votes together as one class with common stock.
F-20
<PAGE>
THEATRIX INTERACTIVE, INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
As long as any shares of Series A and B preferred stock remain outstanding,
the Company must obtain approval from a majority of the holders of Series A and
B preferred stock in order to sell or effect a merger, consolidate or sale of
assets where existing stockholders retain less than 50% of the voting power of
the surviving entity, alter or change the rights, preferences or privileges of
the shares of Series A and B preferred stock, increase or decrease the total
number of authorized shares of preferred stock, or authorize or issue, or
obligate itself to issue, any other equity security having a preference over, or
being on parity with, the Series A and B preferred stock with respect to voting,
dividends, redemption or upon liquidation.
LIQUIDATION RIGHTS
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition or sale of assets where the beneficial owners of
the Company's common stock and preferred stock own less than 51% of the
resulting voting power of the surviving entity, the holders of Series A and B
preferred stock are entitled to receive an amount of $0.815 and $1.38 per share,
respectively, plus any declared but unpaid dividends prior to and in preference
to any distribution to the holders of common stock. Should the Company's legal
available assets be insufficient to satisfy the liquidation preferences, the
funds will be distributed ratably among the holders of the Series A preferred
stock and the Series B preferred stock in proportion to the full preferential
amount each such holder is otherwise entitled to receive.
REDEMPTION
At any time after July 25, 2000, a vote of two-thirds of the then
outstanding shares of Series A and B preferred stock may require the Company to
redeem all or some of the outstanding Series A and B preferred stock at a per
share price equal to the original issue price plus an amount equal to declared
but unpaid dividends on such shares. The redemption amount shall be payable in
twelve equal quarterly installments.
CONVERSION RIGHTS
Each share of Series A and B preferred stock may be converted at any time
and from time to time into one share of common stock, subject to adjustment for
dilution. Subject to certain limitations in the amended and restated Articles
of Incorporation, the conversion price of the Series A and B preferred stock is
subject to anti-dilution adjustments for any future issuance of preferred stock,
common stock or common stock equivalents at a per share price less than the
purchase price of the Series A and B preferred stock. Each share of Series A
and B preferred stock automatically converts into the number of shares of common
stock into which such shares are convertible at the then effective conversion
ratio upon: (1) the closing of an initial public offering for the Company's
common stock at a price not less than $5 per share and $10,000,000 in the
aggregate, (2) the consent or agreement of the holders of a majority of Series A
and B preferred stock, or (3) the date upon which two thirds of the Series A and
Series B preferred stock shares originally issued has been redeemed.
Pursuant to the Merger Agreement, all outstanding shares of the Company's
preferred stock were exchanged for shares of Sanctuary Woods common stock upon
the acquisition of the Company by Sanctuary Woods.
SERIES A AND B PREFERRED STOCK WARRANTS
Pursuant to the conversion of the subordinated notes payable (see Note 5),
the holders received warrants to purchase 923,917 shares of Series A preferred
stock at $0.815 per share during the 1996 fiscal year. The warrants were
exercisable through July 1996. Management ascribed a nominal value to the
warrants. During 1997, the holders exercised the warrants and received 923,017
shares of Series A preferred stock.
In fiscal 1997, pursuant to the Series B preferred stock underwriting
agreement, an investment banker received in exchange for services cash and a
warrant to purchase 120,312 shares of the Series B preferred stock at an
exercise price of $1.73 per share. The warrants were exercisable through August
2001. Management ascribed a value of $105,000 to the warrants. Pursuant to the
Merger Agreement, the warrants were terminated on August 12, 1997 (see Note 12).
F-21
<PAGE>
THEATRIX INTERACTIVE, INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
(Continued)
NOTE 11 - STOCK OPTION PLAN:
In March 1995, the Company adopted a stock option plan ("the 1995 Stock
Option Plan") that allows for the grant of up to 2,000,000 stock options to be
granted as incentive stock options to employees or as nonstatutory stock options
to both employees and consultants. Under the terms of the Plan, stock options
will be granted at a price no less than 85% of the fair market value of the
stock at the date of grant as determined by the Board of Directors, except for
employees who, prior to the grant, own more than 10% of the voting power of the
stock. The exercise price for such employees will be no less than 110% of the
market value of the stock at the date of grant. Stock options generally vest
over a four year period and may be exercised upon their grant, but no longer
than ten years from the date of grant.
The stock option activity from the adoption of the Plan through June 30,
1997 is as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------------------------------------------
1995 1996 1997
--------------------------- --------------------------- ---------------------------
(UNAUDITED)
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------ ------------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year - $ - 158,500 $ 0.005 348,000 $ 0.075
Granted 729,000 0.005 559,000 0.054 590,500 0.125
Exercised (570,500) 0.005 (367,500) 0.017 (42,562) 0.083
Cancelled - - (2,000) 0.050 (350,281) 0.103
------------ ------------- ------------
Outstanding at end of year 158,500 0.005 348,000 0.075 545,657 0.111
------------ ------------- ------------
------------ ------------- ------------
Options exercisable at end of year 158,500 348,000 545,657
------------ ------------- ------------
------------ ------------- ------------
Weighted-average fair value of
options granted during the year $ 0.005 $ 0.054 $ 0.125
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
The following table summarizes information about the stock options
outstanding at June 30, 1997 (unaudited):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISEABLE
---------------------------------------------------------- -----------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISEABLE AT EXERCISE
EXERCISE PRICES JUNE 30, 1997 LIFE PRICE JUNE 30, 1997 PRICE
- --------------- ----------------- ------------------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.05 51,000 8.22 years $ 0.05 51,000 $ 0.05
$ 0.08 190,657 8.88 0.08 190,657 0.08
$ 0.14 304,000 9.55 0.14 304,000 0.14
----------------- -----------------
545,657 9.19 0.11 545,657 0.11
----------------- -----------------
----------------- -----------------
</TABLE>
F-22
<PAGE>
THEATRIX INTERACTIVE, INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
At June 30, 1997 (unaudited), approximately 981,000 stock options had been
exercised and were converted into restricted common stock which vests over the
same period as the underlying options. At June 30, 1997 (unaudited), there were
171,000 shares of restricted common stock vested. The Company has the right of
first refusal which is exercisable in connection with any restricted common
stock until the Company is public. If the option holder terminates employment
or service, the Company has the right to repurchase any shares exercised but
unvested at the exercise price. At June 30, 1997 (unaudited), the Company had
repurchased 258,002 shares for a nominal amount.
NOTE 12 - RECENT DEVELOPMENTS (UNAUDITED):
SERIES C MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
During fiscal 1997, the Company issued $2,000,000 of convertible
subordinated notes payable (see Note 5), which were converted into 1,000,000
shares of Series C preferred stock in fiscal 1998.
The Series C preferred stock has rights with respect to voting, dividends,
redemption, liquidation and conversion similar to the holders of the Series A
and B preferred stock, except that the holders of Series C preferred stock will
receive a dividend rate of $0.16 per share and a liquidation preference of $2.00
per share.
The Company's amended and restated Articles of Incorporation were amended to
provide that in an event of a liquidation, as defined above, should the
Company's legal available assets be insufficient to satisfy the liquidation
preferences, 48.27083% of the funds will be distributed ratably among the
holders of the Series A and Series B preferred stock, 47.14958% of the funds
will be distributed ratably among the holders of Series C preferred stock and
any remaining funds will be distributed ratably among the holders of the common
stock.
MERGER WITH SANCTUARY WOODS
On August 12, 1997, the Company was acquired by Sanctuary Woods in a
stock purchase transaction. Following the merger, Theatrix became a
wholly-owned subsidiary of Sanctuary Woods. Pursuant to the Merger
Agreement, the holders of Series A, B and C preferred stock, in aggregate,
received 614,979, 882,640 and 1,462,829 of Sanctuary Woods common stock,
respectively, assuming a conversion ratio of 0.05945, 0.10066 and 1.46283,
respectively. Additionally, all issued and outstanding shares of common
stock and all shares of common stock reserved for issuance upon exercise of a
common stock options and warrants, in aggregate, were converted into 128,755
shares of Sanctuary Woods common stock using a ratio of 0.0298. The
outstanding warrants for Series B preferred stock were canceled prior to the
merger. The outstanding warrants for common stock terminated prior to the
merger.
BUSINESS REORGANIZATION
On November 4, 1997, Sanctuary Woods and Theatrix proposed a plan of
settlement (the "Proposed Settlement") to all their general unsecured creditors
(the "Creditors"). Sanctuary Woods and Theatrix estimated that combined amounts
due to the Creditors approximate $2.5 million, including $1 million of amounts
due under equipment leases secured by the underlying assets. The Proposed
Settlement excludes a first-priority secured claim of $525,000 due under an
arrangement with a bank. In addition, the Proposed Settlement excludes $500,000
in amounts due under software license agreements and $90,000 of amounts due to
software fulfillment houses as the licensing and fulfillment houses are
necessary to the continued operations of Sanctuary Woods and Theatrix.
The Proposed Settlement provides that (1) the Creditors owed less than
$50,000, will receive a payment of fifteen percent of the aggregate claim on
or before December 27, 1997 or seventeen percent of the aggregate claim on or
before March 20, 1998 and (2) the Creditors owed more than $50,000, will
receive seventeen percent of aggregate claims by March 20, 1998. Sanctuary
Woods and Theatrix met with the Creditors on November 21, 1997 and requested
that the Creditors vote on the Proposed Settlement by December 5, 1997. In
December 1997, the Creditors who elected to receive a payment of fifteen
percent of the aggregate claims totaling $491,000 were paid an amount
totaling $74,000. No other amounts have been paid under the Proposed
Settlement.
F-23
