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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended March 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from __________ to __________
Commission File Number 0-24166
GRAPHIX ZONE, INC.
(Name of small business issuer in its charter)
CALIFORNIA 33-0367598
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
42 CORPORATE PARK, SUITE 200
IRVINE, CALIFORNIA 92714
--------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (including area code): (714) 833-3838
-----------------------------------------------------------
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
shorter period that 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 outstanding of the registrant's only class of Common
Stock, no par value, was 5,193,343 on May 2, 1996.
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GRAPHIX ZONE, INC.
Table of Contents
Form 10-QSB for the Quarterly Period Ended March 31, 1996
PART I: FINANCIAL INFORMATION PAGE
- - ------ --------------------- ----
Item 1. Financial Statements
Balance Sheet at March 31, 1996 3
Statements of Operations for the three-month
periods ended March 31, 1996 and 1995 4
Statements of Operations for the nine-month
periods ended March 31, 1996 and 1995 5
Statements of Cash Flow for the nine-month
periods ended March 31, 1996 and 1995 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 9
PART II. OTHER INFORMATION
- - -------- -----------------
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 16
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GRAPHIX ZONE, INC.
Balance Sheet
March 31, 1996
(Unaudited)
ASSETS
Cash and cash equivalents $ 1,473,490
Accounts receivable, net 864,898
Inventories 470,952
Prepaid expenses 164,254
Deferred income taxes 51,283
-------------
Total current assets 3,024,877
Property and equipment, net 650,134
Due from StarPress 3,504,216
Other assets 169,999
-------------
$ 7,349,226
-------------
-------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Obligation under sponsor advance agreement $ 75,000
Current installments of obligations under capital leases 132,161
Accounts payable 1,306,860
Accrued royalties 478,279
Accrued liabilities 280,550
Deferred revenue 300,984
-------------
Total current liabilities 2,573,834
Accrued royalties - long-term 116,985
Other liabilities 98,481
-------------
Total liabilities 2,789,300
Shareholders' equity:
Preferred stock, no par value. Authorized 5,000,000
shares; no shares issued or outstanding --
Common stock, no par value. Authorized 10,000,000
shares; issued and outstanding 5,186,743 shares 15,214,552
Accumulated deficit (10,654,626)
-------------
Net shareholders' equity 4,559,926
-------------
$ 7,349,226
-------------
-------------
See accompanying notes to financial statements.
3
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GRAPHIX ZONE, INC.
Statements of Operations
(Unaudited)
Three-month periods
ended March 31,
----------------
1996 1995
---- ----
Net revenues $ 578,282 $ 1,656,627
Cost of revenues 155,947 1,206,019
---------- ------------
Gross margin 422,335 450,608
---------- ------------
Operating expenses:
Research and development 819,681 --
Sales and marketing 296,249 365,872
General and administrative 684,561 379,850
---------- ------------
Total operating expenses 1,800,491 745,722
---------- ------------
Operating loss (1,378,156) (295,114)
Interest income, net 4,823 705
---------- ------------
Loss before income taxes (1,373,333) (294,409)
Provision for income taxes -- --
---------- ------------
Net loss $(1,373,333) $ (294,409)
---------- ------------
---------- ------------
Loss per share of common stock $ ( .29) $ ( .12)
---------- ------------
---------- ------------
Weighted average common shares 4,676,203 2,540,890
---------- ------------
---------- ------------
See accompanying notes to financial statements.
4
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GRAPHIX ZONE, INC.
Statements of Operations
(Unaudited)
Nine-month periods
ended March 31,
-----------------
1996 1995
---- ----
(As Restated -
see note 3)
Net revenues $ 1,628,809 $ 2,746,447
Cost of revenues 1,495,865 2,540,900
---------- ------------
Gross margin 132,944 205,547
---------- ------------
Operating expenses:
Research and development 1,663,546 --
Sales and marketing 1,170,496 794,358
General and administrative 1,631,553 1,469,973
---------- ------------
Total operating expenses 4,465,595 2,264,331
---------- ------------
Operating loss (4,332,651) (2,058,784)
Interest income, net 12,987 15,455
---------- ------------
Loss before income taxes (4,319,664) (2,043,329)
Provision for income taxes 800 --
---------- ------------
Net loss $(4,320,464) $ (2,043,329)
---------- ------------
---------- ------------
Loss per share of common stock $ (1.11) $ ( .80)
---------- ------------
---------- ------------
Weighted average common shares 3,886,908 2,539,999
---------- ------------
---------- ------------
See accompanying notes to financial statements.
5
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GRAPHIX ZONE, INC.
Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
Nine-month periods
ended March 31,
---------------
1996 1995
---- ----
(As Restated -
see note 3)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,320,464) $ (2,043,329)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 645,556 605,312
Stock option compensation expense -- 332,000
Write-down of software development costs 237,600 --
Provision for sales returns, allowances and doubtful accounts 708,168 10,000
Increase in accounts receivable (859,186) (547,104)
Increase in inventories (418,862) (16,954)
Increase in prepaid expenses (64,288) (225,000)
Increase in other current assets -- (4,919)
Decrease (increase) in other assets 6,500 (29,412)
Increase in accounts payable 798,638 201,361
Increase (decrease) in accrued royalties (573,359) 443,778
Increase in accrued liabilities 17,016 95,108
Increase (decrease) in deferred revenue 78,000 (78,787)
Increase (decrease) in other liabilities 22,094 (21,175)
----------- -----------
Net cash used in operating activities (3,722,587) (1,279,121)
----------- -----------
Cash flows from investing activities:
Proceeds from short-term investments -- 1,466,435
Advances to StarPress (3,504,216) --
Purchases of property and equipment (346,128) (210,628)
Software development costs (535,740) (818,440)
----------- -----------
Net cash provided by (used in) investing activities (4,386,084) 437,367
----------- -----------
Cash flows from financing activities:
Principal payments on short-term borrowings (500,000) --
Principal payments on capital lease obligations (127,836) --
Repayment of sponsor advances (150,000) (75,000)
Proceeds from common stock issuance 9,841,807 450,000
----------- -----------
Net cash provided by financing activities 9,063,971 375,000
----------- -----------
Net increase (decrease) in cash and cash equivalents 955,300 (466,754)
Cash and cash equivalents at beginning of period 518,190 775,422
----------- -----------
Cash and cash equivalents at end of period $ 1,473,490 $ 308,668
----------- -----------
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 22,366 $ 19,397
Cash paid during the period for income taxes $ 800 $ --
</TABLE>
See accompanying notes to financial statements.
6
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GRAPHIX ZONE, INC.
Notes to Financial Statements
(Unaudited)
(1) BACKGROUND AND ORGANIZATION
Graphix Zone, Inc. (the "Company") is a California corporation and was
incorporated in August 1989. The Company is engaged in the development
and marketing of interactive CD-ROM products and multimedia services for
the personal computer industry.
(2) BASIS OF PRESENTATION
The financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission"). Certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations. The
Company believes that the disclosures are adequate to make the information
presented not misleading when read in conjunction with the Company's
financial statements for the year ended June 30, 1995 included in the
Company's Annual Report on Form 10-KSB filed with the Commission. The
financial information presented reflects all adjustments, consisting only
of normal recurring adjustments, which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods
presented. Results for the nine month period ended March 31, 1996 is not
necessarily indicative of results which may be expected for the full year.
(3) RESTATEMENT OF FISCAL 1995 INTERIM FINANCIAL STATEMENTS
In the fourth quarter of fiscal 1995, the Company recorded a compensation
charge of $332,000 relating to an August 1994 extension of a stock option
held by an executive officer who left the Company. The accompanying
financial statements for the nine-month period ended March 31, 1995 have
been restated to reflect this compensation charge which was not originally
reflected in such statements.
(4) MERGER/DUE FROM STARPRESS
As of January 3, 1996, the Company entered into an Agreement and Plan of
Reorganization with StarPress, Inc. ("StarPress"), a Colorado corporation,
pursuant to which each of the Company and StarPress will become wholly
owned subsidiaries of a newly formed Delaware corporation ("New GZ"). The
consummation of the reorganization is subject to completion of numerous
conditions, including without limitation, effectiveness of a Form S-4
Registration Statement with the Securities and Exchange Commission,
obtaining a permit from the California Department of Corporations and
other blue sky authorities, securing approval of the reorganization from
the shareholders of both the Company and StarPress, and a limited number
of shareholders exercising dissenting shareholder status.
7
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On February 2, 1996, the Company sold units consisting of an aggregate of
1,449,378 shares of its Common Stock and warrants to purchase an aggregate
of 483,135 shares of its Common Stock (at $4.125 per share) to twenty-two
(22) accredited investors for a total consideration of $5,978,645
($4.125 per unit). Offering expenses related to the private placement of
$405,898 were netted against the total proceeds. As of May 1, 1996,
approximately $3,716,000 of the net proceeds from the sale of Common Stock
have been advanced to or expended on behalf of StarPress as working
capital and for debt repayment. Of these advances, $2,765,600 are secured
by a second priority security interest in all of StarPress' assets, bear
interest at the applicable Federal rate as of the date of the advances and
are payable on demand or in six months if no demand is made. The bank
loan with the first priority interest in StarPress' assets matured on
March 29, 1996 and is currently in default. Management of the Company
and of StarPress have tentatively negotiated a refinancing of that loan,
subject to execution of definitive documentation.
Beginning in February, 1996 the Company and StarPress began centralizing
operations at the Company's facilities and the Company incurred certain
costs on behalf of StarPress. In addition to the secured advances
discussed above, the Company has recorded a receivable due from StarPress,
of approximately $738,600, related to these costs. Included in the
receivable is an allocation to StarPress of selling, marketing and
administrative costs based upon a percentage of the combined entity's
sales for the fiscal quarter, and an estimate of use of personnel and
resources. The secured advances and receivable of approximately $2,765,600
and $738,600, respectively, are recorded as Due from StarPress on the
accompanying March 31, 1996 balance sheet.
(5) STOCK WARRANTS
On March 13, 1996 the Company and StarPress signed a multi-year
distribution agreement with GT Interactive Software Corporation to
exclusively distribute the Company's and StarPress' products in the mass-
merchant channel. Included as part of the distribution agreement, GT
Interactive was issued a warrant to purchase eight hundred thousand
(800,000) shares of the Company's common stock. The warrant is
exercisable at the lesser of $5.125 or the current market price of the
common stock of the New GZ twenty-one trading days following the
consummation of the reorganization of the Company and StarPress. The
warrant is exercisable immediately and expires on February 28, 2001.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
THREE AND NINE MONTHS ENDED MARCH 31, 1996 COMPARED TO THE THREE AND
NINE MONTHS ENDED MARCH 31, 1995
GENERAL
The Company develops, produces and markets multimedia products and
services for the personal computer industry. Multimedia is a rapidly
expanding area of the personal computer industry characterized by the
combination of sound, video, animation, graphics and interactivity with
conventional text applications. The Company is best known for its interactive
music CD-ROM ("IMCD-TM-") titles, but also develops, publishes and
distributes other entertainment and education-oriented titles. The Company
previously operated marketing and multimedia production services departments,
but these services have been discontinued as the Company focuses its efforts
on CD-ROM publishing and the development of a comprehensive Internet strategy.
The Company entered the interactive music market in June 1994 with the
introduction of P INTERACTIVE, featuring the recording artist formerly known
as Prince. This was followed in February 1995 with HIGHWAY 61 INTERACTIVE,
featuring Bob Dylan. In September 1995 the Company entered into a contract
with Herbie Hancock to develop a series of interactive jazz titles, and is in
negotiations with numerous other musical artists.
The Company also develops entertainment and "edutainment" titles,
including its first CD-ROM title, THE GUIDED TOUR OF MULTIMEDIA, which was
introduced in May 1993 and is a reference tool on multimedia. The Company
released the second edition of this title in November 1995. The Company
released its first in a series of entertainment titles based on the AMERICA'S
FUNNIEST HOME VIDEOS television show in November 1995. In March, 1996 the
Company released, in partner with Earthlink Network, Inc., an all-in-one
Internet access product. Additionally, the Company has collaborated with
Oliver Stone to produce an interactive CD-ROM based on Stone's film NIXON
which is expected to be released in May 1996.
As of January 3, 1996, the Company entered into an Agreement and Plan of
Reorganization with StarPress, Inc. ("StarPress"), a Colorado corporation,
pursuant to which each of the Company and StarPress will become wholly owned
subsidiaries of a newly formed Delaware corporation ("New GZ"). The
consummation of the reorganization is subject to completion of numerous
conditions, including without limitation, effectiveness of a Form S-4
Registration Statement with the Securities Exchange Commission, obtaining a
permit from the California Department of Corporations and other blue sky
authorities, securing approval of the reorganization from the shareholders of
both the Company and StarPress, and a limited number of shareholders
exercising dissenting shareholder status.
On February 2, 1996, the Company sold units consisting of an aggregate
of 1,449,378 shares of its Common Stock and warrants to purchase an aggregate
of 483,135 shares of its Common Stock (at $4.125 per share) to twenty-two
(22) accredited investors for a total consideration of $5,978,645 ($4.125 per
unit). As of May 1, 1996, approximately $3,716,000 of the net proceeds from
the sale of Common Stock have been advanced to or expended in behalf of
StarPress as working capital and for debt repayment. Of these advances,
$2,765,600 are secured by a second priority security interest in all of
StarPress' assets, bear interest at the applicable Federal rate as of the
date of the advances and are payable on demand or in six months if no demand
is made. The bank loan with the first priority interest in StarPress' assets
matured on March 29, 1996 and is currently in default. Management of the
Company and of StarPress have tentatively negotiated a refinancing of that
loan, subject to execution of definitive documentation.
In February, 1996 the Company and StarPress began centralizing
operations at the Company's facilities and the Company incurred certain costs
on behalf of StarPress. The Company has recorded a receivable from StarPress
of approximately $738,600 related to these costs. Included in the receivable
is an allocation to StarPress of selling, marketing and administrative
9
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costs based upon a percentage of the combined entity's sales for the fiscal
quarter, and an estimate of use of personnel and resources.
On March 13, 1996 the Company and StarPress signed a multi-year
distribution agreement with GT Interactive Software Corporation to
exclusively distribute the Company's and StarPress' products in the
mass-merchant channel. Included as part of the distribution agreement, GT
Interactive was issued a warrant to purchase eight hundred thousand (800,000)
shares of the Company's common stock. The warrant is exercisable at the
lesser of $5.125 or the current market price of the common stock of the New
GZ twenty-one trading days following the consummation of the reorganization
of the Company and StarPress. The warrant is exercisable immediately and
expires on February 28, 2001.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of total revenues represented by items included in the Company's
Statements of Operations:
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Mar 31, 1996 Mar 31, 1995 Mar 31, 1996 Mar 31, 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues . . . . . . . . . . . . . 100% 100% 100% 100%
Cost of revenues . . . . . . . . . . . 27% 73% 92% 93%
---- ---- ---- ----
Gross Margin . . . . . . . . . . . . . 73% 27% 8% 7%
Research and development expenses. . . 142% -- 102% --
Sales and marketing expenses . . . . . 51% 22% 72% 29%
General and administrative expenses. . 118% 23% 100% 53%
---- ---- ---- ----
Operating loss . . . . . . . . . . . . (238)% (18)% (266)% (75)%
Interest income, net . . . . . . . . . 1% -- 1% 1%
---- ---- ---- ----
Net loss . . . . . . . . . . . . . . . (237)% (18)% (265)% (74)%
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
NET REVENUES
Revenues for the three months ended March 31, 1996 decreased $1,078,345
to $578,282 as compared to $1,656,627 for the comparable prior year period.
There were several reasons for the significant decrease. First, for the
three months ended March 31, 1995 the Company recorded revenues of
approximately $351,000 from multimedia production and marketing services
compared to a negligible amount for the three months ended March 31, 1996.
Second, for both the three months ended March 31, 1996 and 1995 the Company
released one new product; however, the Company recorded revenues of
approximately $1,183,000 for the launch of HIGHWAY 61 INTERACTIVE during the
three months ended March 31, 1995 compared to approximately $538,000 for the
release of an Internet access product for the three months ended March 31,
1996.
10
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For the nine months ended March 31, 1996, revenues decreased $1,117,638
to $1,628,809 as compared to $2,746,447 for the nine months ended March 31,
1995. The decrease occurred for the same reasons discussed above for the
decrease for the three months ended March 31, 1996.
The Company's revenues and income may fluctuate periodically as a result
of timing of new IMCD-TM- and entertainment and edutainment releases, and
external factors such as seasonal buying patterns for IMCD-TM-s and other
CD-ROM titles. The Company grants certain distributors and retailers certain
rights to return unsold inventory. Consequently, although the Company records
revenue upon shipment, it accrues a reserve based on the Company's estimate
of expected returns.
GROSS MARGIN
Gross margin was 73% and 8% for the three and nine month periods ended
March 31, 1996 respectively, as compared to 27% and 7% for the comparable
prior year periods. The significant increase in gross margin, as a
percentage of net revenues, for the three months ended March 31, 1996 as
compared to the comparable prior year period is primarily a result of the
fiscal 1996 period not including amortization of capitalized software
development costs. The Company fully amortized all software development
costs in the second quarter of fiscal year 1996 and now expenses continuing
development efforts as research and development expense, as incurred (see
Research and Development expenses). The Company expects the gross margin, as
a percentage of net revenues, for the three months ended March 31, 1996, to
be more representative of future operating periods, than the gross margin
percentage for the nine months ended March 31, 1996.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $819,681 and $1,663,546 for the
three and nine months ended March 31, 1996 and represented 142% and 102%,
respectively, of the Company's net revenues. The Company did not expense
software development costs as incurred in prior year periods, as no
significant costs were incurred prior to establishment of technological
feasibility. Recently the development process has evolved to the point were
technological feasibility is established later in the development cycle.
Therefore, the Company expects to expense these development costs as
incurred. The Company believes that in future periods research and
development expenses may increase in volume as more projects are undertaken.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased by $376,138 to $1,170,496 and
increased as a percentage of net revenues to 72% from 29%, for the nine
months ended March 31, 1996. The increase in sales and marketing expenses in
fiscal 1996 as compared to fiscal 1995 is primarily due to costs associated
with direct distribution of the Company's CD-ROM products. These costs
include sales commissions, administrative costs of internally managing the
distribution network and internal sales force, as well as increased
marketing expenditures. Direct distribution costs were only incurred during
the last two quarters of fiscal 1995 (and hence had a much smaller effect on
the first nine months of fiscal 1995), compared to all of fiscal 1996. The
increase in sales and marketing expenses, as a percentage of net revenues,
for the three months ended March 31, 1996 as compared to the comparable prior
year period was primarily attributable to lower revenues in the 1996 period
against a relatively stable cost base.
11
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GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $304,711 and $161,580 to
$684,561 and $1,631,553 and increased as a percentage of net revenues to 118%
and 102% from 23% and 53%, respectively, for the three and nine month periods
ended March 31, 1996. The increase in general and administrative expenses
both in volume and as a percentage of net revenues for the three months ended
March 31, 1996 as compared to the comparable prior year period is primarily a
result of the Company recording approximately $409,000 of non-recurring
merger related professional fees offset by certain cost reduction efforts
made in anticipation of the reorganization with StarPress. The increase in
general and administrative expenses for the nine months ended March 31, 1996
as compared to the comparable prior year period is primarily a result of the
$409,000 merger related charge discussed above and the addition of personnel
and professional consulting to support the Company's growth offset by the
recording of a one-time compensation charge of $332,000 in the first quarter
of fiscal 1995.
INTEREST INCOME, NET
The Company's net interest income of $4,823 and $15,455 for the three
and nine months ended March 31, 1996 resulted primarily from earnings on the
proceeds from the Company's private equity offering in the first and third
quarters of fiscal 1996 offset by interest expense incurred on its leasing
lines. The Company will continue to incur interest expense to the extent
that it utilizes leasing or other forms of financing to acquire computer or
other equipment for expanding operations.
NET LOSS
The Company incurred a net loss of $1,373,333 and $4,320,464 for the
three and nine months ended March 31, 1996, respectively, as compared to a
net loss of $294,409 and $2,043,329 for the comparable prior year periods.
The increase in net loss for the three months ended March 31, 1996 compared
to the same prior year period resulted from the Company recording
approximately $472,000 of non-recurring operating expenses related to the
merger coupled with the recording of research and development expenditures
which were not expensed as incurred in the prior fiscal year. The increase
in net loss for the nine months ended March 31, 1996 occurred for several
reasons. First, the nine months ended March 31, 1996 were impacted by the
increase in net loss for the three months ended March 31, 1996, discussed
above. Second, THE IMPROV PRESENTS WINDOWS 95 FOR THE TECHNICALLY
CHALLENGED, which was released in the first quarter of fiscal 1996, was
largely unsuccessful and therefore revenues did not offset related
development costs. Third, in the second quarter of fiscal 1996 the Company
accelerated and fully amortized all software development costs.
Because the Company did not incur significant interest or income
taxes, net loss for the periods presented was not materially different from
operating loss.
12
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LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity is cash. At March 31, 1996,
the Company had cash and cash equivalents of $1,473,490, net working capital
of $451,043 and net shareholders' equity of $4,559,926. At June 30, 1995,
cash, net working capital deficiency and net shareholders' deficiency were
$518,190, ($1,509,379) and ($961,417), respectively. The increase in cash and
cash equivalents, working capital and shareholders' equity were primarily a
result of the Company raising $9,445,997 through two private equity offering.
In August and September 1995 the Company raised $3,873,250 from private
equity offerings of a total of 697,930 shares of restricted common stock to
thirteen accredited investors. In February 1996 the Company raised
$5,978,645 from a private equity offering of a total of 1,449,378 shares of
restricted common stock to twenty-two accredited investors. Net of offering
expenses, the Company received $5,572,747 in cash of which, as of May 1,
1996, approximately $3,716,000 has been advanced to or expended on behalf of
StarPress as working capital and for debt repayment. Additionally, the
Company received $395,810 from the exercise of stock options. The Company
anticipates additional advances to StarPress prior to the consummation of the
reorganization. Cash used in operating activities for the nine months ended
March 31, 1996 was $3,722,587.
The proceeds from these private offerings have been and will be used as
working capital to fund the development of future CD-ROM products, marketing
costs for various soon to be released titles, royalty payments on existing
titles and expected advance royalty payments to entertainment content owners
for future titles, and other costs associated with the reorganization with
StarPress and the continued growth and expansion of the Company.
These costs will continue to affect liquidity as the Company devotes
additional capital resources to the development of CD-ROM titles, because
these costs are incurred considerably in advance of the revenues to be
received. The Company's liquidity can be adversely affected in any given
quarter of a year by the timing of incurred CD-ROM development costs, which
is difficult for the Company to predict. As the Company continues to grow and
upon completion of the merger with StarPress, it expects to begin producing
and distributing multiple titles simultaneously. This diversification should
help the Company's quarter-to-quarter liquidity as development costs on one
title can be offset by revenues from a previously released title.
As the Company focuses its resources and energies on CD-ROM publishing
and the development of a comprehensive Internet strategy, the costs
(including capital expenditures) associated with such development have
recently been and will continue to be considerable and will be incurred
before any significant related CD-ROM title revenue is realized. The Company
established an equipment purchase line of credit during fiscal year 1995 with
a leasing company to finance computer equipment aggregating up to $250,000.
As of March 31, 1996, $198,850 remained available for future equipment
acquisitions. This credit line gives the Company added financial flexibility
to either purchase or lease necessary equipment.
The Company's long-term liquidity is principally contingent on the
Company's completion of the reorganization with StarPress and its ability to
raise funds through private and public equity offerings. The combined Graphix
Zone/StarPress entity is expected to yield greater revenues and significant
cost savings thus improving overall liquidity. The Company's anticipated
liquidity needs are based on a number of factors, including the size of the
business and related working capital needs, the extent of CD-ROM development
costs and funding requirements, and the level of corporate operating costs.
The Company believes that its present funding sources, including the proceeds
from the aforementioned private equity offerings are sufficient to sustain
these needs through fiscal 1996.
13
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.32 . . . . . . . Distribution Agreement dated March 13, 1996,
by and among the Company, StarPress and GT
Interactive Software Corp., a Delaware
corporation ("GTIS"). (1)
10.33 . . . . . . . Keep-Well Agreement date March 13, 1996 by
and among the Company, GTIS and Graphix Zone,
Inc, a Delaware corporation. (1)
10.34 . . . . . . . Common Stock Purchase Warrant for 800,000
shares of the Company's Common Stock dated
March 13, 1996. (1)
10.35 . . . . . . . Registration Rights Agreement dated
March 13, 1996 by and between the Company
and GTIS. (1)
10.36 . . . . . . . Form of Registration Rights Agreement dated
February 2, 1996, entered into by and among
the Company and each of the accredited
investors that purchased Units, consisting
of one share of the Company's Common Stock
and a warrant to purchase one additional
share of the Company's Common Stock for
every three shares of the
14
<PAGE>
Company's Common Stock purchased, in the
Company's 1996 private placement offering,
pursuant to which an aggregate of
1,449,378 shares of the Company's Common
Stock and warrants to purchase an additional
483,135 shares of the Company's Common Stock
(the "1996 Private Placement Warrants") were
issued and sold. (1)
10.37 . . . . . . . Form of Warrant Agreement dated February 2,
1996, entered into by and among the Company
and each of the holders of the 1996 Private
Placement Warrants. (1)
(1) Filed as an exhibit to Graphix Zone, Inc.'s, a Delaware
corporation, Registration Statement on Form S-4 filed with the
Commission March 26, 1996 and incorporated herein by reference.
(b) Reports on Form 8-K.
The Company filed a current report on Form 8-K on January 3, 1996,
under Item 5 - Other Events, with respect to the Company entering
into an Agreement and Plan of Reorganization between the Company and
StarPress, Inc.
The Company filed a current report on Form 8-K on February 2, 1996,
under Item 5 - Other Events, with respect to a sale of restricted
stock.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: May 14, 1996 GRAPHIX ZONE, INC.
By: /s/CHARLES R. CORTRIGHT JR.
-----------------------------------
Charles R. Cortright, Jr., President,
Interim Chief Financial Officer and
Principal Financial and Accounting
Officer.
16
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<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,473,490
<SECURITIES> 0
<RECEIVABLES> 864,898
<ALLOWANCES> 0
<INVENTORY> 470,952
<CURRENT-ASSETS> 3,024,877
<PP&E> 650,134
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,349,226
<CURRENT-LIABILITIES> 2,573,834
<BONDS> 0
0
0
<COMMON> 15,214,552
<OTHER-SE> (10,654,626)
<TOTAL-LIABILITY-AND-EQUITY> 7,349,226
<SALES> 578,282
<TOTAL-REVENUES> 578,282
<CGS> 155,947
<TOTAL-COSTS> 155,947
<OTHER-EXPENSES> 1,800,491
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4,823)
<INCOME-PRETAX> 1,373,333
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,373,333
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,373,333
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
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