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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
(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, 1997
or
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
________ ________
Commission File Number: 0-28676
GRAPHIX ZONE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0697932
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
42 CORPORATE PARK, SUITE 200
IRVINE, CALIFORNIA 92606
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(714) 833-3838
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant were required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. As of May 1, 1997,
12,268,069 shares of the registrant's only class of Common Stock, $.01 par
value, were outstanding.
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1
GRAPHIX ZONE, INC.
Table of Contents
Form 10-Q for the Quarterly Period Ended March 31, 1997
PART I: FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1997 (unaudited) and June 30, 1996 3
Consolidated Statements of Operations for the three months ended March 31,
1997 and 1996 (unaudited) 4
Consolidated Statements of Operations for the nine months ended March 31,
1997 and 1996 (unaudited) 5
Consolidated Statements of Cash Flows for the nine months ended March 31,
1997 and 1996 (unaudited) 6
Notes to Interim Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 21
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRAPHIX ZONE, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, June 30,
1997 1996
------------ ------------
Assets
------
Cash and cash equivalents $ 901,336 $ 1,288,196
Accounts receivable, net 3,018,929 3,867,268
Inventories 581,844 833,700
Prepaid expenses and other current 418,090 281,883
assets
------------ ------------
Total current assets 4,920,199 6,271,047
Property and equipment, net 1,080,603 653,833
Intangibles, net 678,990 850,186
Other assets, net 128,076 753,619
------------ ------------
$ 6,807,868 $ 8,528,685
============ ============
Liabilities and Stockholders' Equity (Deficiency)
-------------------------------------------------
Notes payable $ 3,861,909 $ 750,000
Accounts payable 2,762,774 2,542,806
Accrued royalties 1,170,065 977,764
Accrued liabilities 1,216,164 1,159,946
Accrued restructuring charge 3,633 573,461
Deferred revenue 44,626 286,701
------------ ------------
Total current liabilities 9,059,171 6,290,678
Other liabilities 59,414 189,278
------------ ------------
Total liabilities 9,118,585 6,479,956
Mandatory Redeemable Series C Convertible Preferred Stock 2,741,333 -
Stockholders' equity (deficiency)
Series B Convertible Preferred Stock, $.01 par value, 3,500 shares authorized, 2,355,948 -
3,025 issued and outstanding at March 31, 1997
Common stock, $.01 par value, 100,000,000 shares authorized,
10,698,449 and 10,608,748 issued and outstanding at March 31, 1997 40,319,124 40,189,771
and June 30, 1996, respectively
Accumulated deficit (47,727,122) (38,141,042)
------------ ------------
Net stockholders' equity (deficiency) (5,052,050) 2,048,729
------------ ------------
$ 6,807,868 $ 8,528,685
============ ============
See accompanying Notes to Interim Consolidated Financial Statements
3
GRAPHIX ZONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
March 31, March 31,
1997 1996
------------ ------------
Net revenues $ 2,092,549 $ 1,951,895
Cost of revenues 2,387,574 671,204
------------ ------------
Gross margin (295,025) 1,280,691
------------ ------------
Operating expenses:
Research and development 933,096 355,338
Sales and marketing 990,288 1,012,662
General and administrative 3,026,640 834,327
Acquired in-process technology 1,628,000 -
------------ ------------
Total operating expenses 6,578,024 2,202,327
------------ ------------
Operating loss (6,873,049) (921,636)
Interest expense, net (138,438) (29,642)
Other expense (18,952) (8,746)
------------ ------------
Net loss $(7,030,439) $ (960,024)
============ ============
Loss per share of common stock $ (0.67) $(0.21)
============ ============
Weighted average common shares 10,698,446 4,659,434
============ ============
See accompanying Notes to Interim Consolidated Financial Statements
4
GRAPHIX ZONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
March 31, March 31,
1997 1996
------------ ------------
Net revenues $ 7,140,119 $ 3,927,296
Cost of revenues 4,433,598 2,181,647
------------ ------------
Gross margin 2,706,521 1,745,649
------------ ------------
Operating expenses:
Research and development 2,519,879 2,077,265
Sales and marketing 3,104,344 2,129,072
General and administrative 5,056,422 2,516,529
Restructuring charge (benefit) (263,831) 1,950,000
Acquired in-process technology 1,628,000 -
------------ ------------
Total operating expenses 12,044,814 8,672,866
------------ ------------
Operating loss (9,338,293) (6,927,217)
Interest expense, net (228,835) (71,094)
Other income (expense), net (18,952) 3,096
------------ ------------
Net loss $(9,586,080) $(6,995,215)
============ ============
Loss per share of common stock $ (0.91) $ (1.54)
============ ============
Weighted average common shares 10,649,631 4,532,310
============ ============
See accompanying Notes to Interim Consolidated Financial Statements
5
GRAPHIX ZONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
MARCH 31, MARCH 31,
1997 1996
------------ ------------
Cash flows from operating activities:
Net loss $(9,586,080) $(6,995,215)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 775,250 108,103
Acquired in-process technology 1,628,000 -
Impairment of intangible and other long-term assets 1,101,000 708,776
Write-down of excess furniture and equipment 252,000 545,438
Provision for sales returns and doubtful accounts 1,176,673 -
Provision for excess and obsolete inventory 1,076,632 -
Amortization of discount on convertible debentures - 9,595
Stock option and warrant compensation expense - 215,471
Issuance of common stock as compensation and for services 200,625 -
Change in operating assets and liabilities:
Increase in accounts receivable (328,334) (1,695,103)
Decrease (increase) in inventories (824,776) 337,792
Decrease in prepaid expenses and other current assets 143,793 29,509
Decrease in other assets 71,028 -
Increase (decrease) in accounts payable 219,968 (192,872)
Increase in accrued royalties 192,301 -
Increase in accrued liabilities (85,713) -
Increase (decrease) in accrued restructuring charge (569,828) 761,785
Increase (decrease) in deferred revenue (242,075) 377,730
Decrease in other liabilities (129,864) -
------------ ------------
Net cash used in operating activities (4,929,400) (5,788,991)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (660,635) (29,605)
Proceeds from sale of property and equipment - 137,281
------------ ------------
Net cash provided by (used in) investing activities (660,635) 107,676
------------ ------------
Cash flows from financing activities:
Proceeds from bank loan and notes payable to related parties 3,660,000 1,150,000
Payments for redemption of stock (75,062) -
Payments on bank loan and notes payable to related parties - (400,000)
Payments of notes payable (750,000) (561,781)
Proceeds from Graphix Zone, Inc.(GZ-CA) - 3,504,216
Proceeds from exercise of stock options and warrants 12,289 85,485
Proceeds from preferred stock issuances 2,355,948 -
------------ ------------
Net cash provided by financing activities 5,203,175 3,777,920
------------ ------------
Net decrease in cash (386,860) (1,903,395)
Cash and cash equivalents at beginning of period 1,288,196 1,919,102
------------ ------------
Cash and cash equivalents at end of period $ 901,336 $ 15,707
============ ============
6
MARCH 31, MARCH 31,
1997 1996
------------ ------------
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 101,921 $ -
Cash paid during the period for taxes $ 18,952 $ -
Supplemental disclosure of non-cash investing and financing activities:
Convertible Preferred Stock issued in connection with asset acquisitions $ 2,714,333 $ -
See Note 6 related to recording of original issue discount $ 93,709 $ -
See accompanying Notes to Interim Consolidated Financial Statements
7
GRAPHIX ZONE, INC.
Notes to Interim Consolidated Financial Statements
(Unaudited)
(1) BACKGROUND AND ORGANIZATION
---------------------------
Graphix Zone, Inc., a Delaware corporation (the "Company"), was
incorporated on January 17, 1996 for the purpose of acquiring GZ
Multimedia, Inc. (formerly Graphix Zone, Inc.), a California corporation
("GZ-CA"), and StarPress, Inc., a Colorado corporation ("StarPress"). The
Company is engaged in the development, production and marketing of pc-game
and branded game software products for the personal computer industry.
On January 3, 1996, GZ-CA and StarPress entered into an Agreement and Plan
of Reorganization pursuant to which both companies would become wholly-
owned subsidiaries of the Company. On June 28, 1996, the shareholders of
both GZ-CA and StarPress approved the merger (the "Reorganization") which
was consummated on that date.
Based upon the capitalization of both GZ-CA and StarPress at the
consummation of the Reorganization, the former shareholder interests of
StarPress comprised a larger percentage of the outstanding shares of the
Company than the former shareholder interests of GZ-CA; accordingly,
StarPress was deemed the acquiring entity for financial accounting
purposes. The historical financial statements presented herein, prior to
the effective date of the Reorganization are the financial statements of
StarPress. The historical shares of StarPress presented therein have been
adjusted to reflect a .14666 for 1 stock exchange in connection with the
Reorganization. All references to the "Company" prior to June 28, 1996
relate to StarPress.
During the third quarter of the fiscal year ending June 30, 1997 ("fiscal
1997"), the Company retained a new executive management team to re-focus
the Company's business strategy and operations and began doing business as
Ignite, Inc. As part of the re-focusing, the Company has redefined its
core product line to focus on traditional pc-games and branded game
software products for the personal computer industry. In addition, the
Company has begun the process of divesting or eliminating non-core business
units and products such as its Internet site, WILMA, and the music and
Internet retail product lines.
(2) BASIS OF PRESENTATION
---------------------
The interim unaudited financial statements included herein have been
prepared by the Company in conformity with generally accepted accounting
principles for interim financial information and pursuant to the rules and
regulations of the U.S. Securities and Exchange 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. In the opinion of management, the interim unaudited financial
statements reflect 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 three and nine month periods ended March 31, 1997 are not necessarily
indicative of results which may be expected for the full year. The interim
financial statements should be read in conjunction with the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1996.
(3) INVENTORIES
-----------
Inventories consisted of the following:
Mar. 31, 1997 June 30, 1996
------------- -------------
Finished goods $ 1,209,729 $ 479,747
Components 628,747 533,953
------------- -------------
1,838,476 1,013,700
Reserve for excess and obsolete inventories (1,256,632) (180,000)
------------- -------------
$ 581,844 $ 833,700
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8
(4) IMPAIRMENT OF ASSETS
--------------------
As discussed above, in the third quarter of fiscal 1997, the Company
retained a new management team which began to re-focus the Company's
business strategy and operations. In accordance with Statement of
Financial Accounting Standards No. 121, the Company evaluated all assets
and liabilities to determine impairment, if any, based upon the changes to
the Company's business strategy and operations. As a result, the Company
recorded a charge of approximately $1,353,000 related to property and
equipment, intangible assets and other long term assets being impaired.
In addition, the Company recorded charges to cost of revenues of
approximately $1,000,000 and $189,000 related to the net realizable value
of inventory and prepaid royalties, respectively.
(5) ACQUISITIONS
------------
On February 24, 1997, the Company entered into an agreement with Inscape, a
Delaware general partnership among Home Box Office and corporations owned
by Warner Music Group, Inc. ("WMG") and Nash New Media, Inc., and WMG
(collectively, "Inscape"), to purchase certain assets and assume certain
liabilities. The assets consisted of all rights, title and interest in
twelve existing pc-game products and seven pc-game products under
development, all rights, title and interest in the Inscape name, furniture
and equipment, and certain leases and other agreements. The liabilities
consisted of accrued compensation costs associated with those Inscape
employees offered employment with the Company.
The purchase price for the Inscape assets consisted of 948,148 shares of
the Company's Series C Convertible Preferred Stock ("Series C Preferred").
The Series C Preferred is convertible into the Company's Common Stock, at
the option of the holder, and must be redeemed by the Company by February
28, 2000 at $3.375 per share. Although the stated liquidation value is
$3,200,000, the Company determined the fair market value of the Series C
Preferred to be $2,193,066 based upon the fair market value of the
Company's Common Stock on the date of the agreement, discounted to take
into account the restricted nature of the securities. The holder of the
Series C Preferred is entitled to receive dividends of $0.10125 per share
per annum which are fully cumulative from date of issuance.
An allocation of the purchase price is as follows:
Allocation of Amortization
Purchase Price (Useful Life)
-------------- -------------
Description
- -----------
In-process technology charged to operations $1,153,000 N/A
Assembled workforce 476,000 5 years
Goodwill 129,723 5 years
Furniture and equipment 474,066 2-5 years
Assumed liabilities (39,723) N/A
--------------
Purchase price
$2,193,066
==============
On February 26, 1997, the Company entered into an agreement with Trimark
Holdings, Inc. and its subsidiary, Trimark Interactive, Inc. ("Trimark"),
to purchase certain assets. The assets consisted of all rights, title and
interest in seven existing pc-game products and three pc-game products
under development, inventories and certain other agreements.
The purchase price for the Trimark assets consisted of 237,037 shares of
the Series C Preferred (described above). Although the stated liquidation
value is $800,000, the Company determined the fair market value of the
Series C Preferred to be $548,267 based upon the fair market value of the
Company's Common Stock on the date of the agreement, discounted to take
into account the restricted nature of the securities. The holder of the
Series C Preferred is entitled to receive dividends of $0.10125 per share
per annum which are fully cumulative from date of issuance.
9
An allocation of the purchase price is as follows:
Purchase Price (Useful Life)
-------------- ------------
Description
- -----------
In-process technology charged to
operations $475,000 N/A
Assembled workforce 36,000 5 years
Goodwill 37,267 5 years
--------------
Purchase price
$548,267
==============
(6) NOTES PAYABLE
-------------
On January 31, 1997, the Company entered into a loan agreement with
Madeleine L.L.C. ("Madeleine") in the principal amount of $3,740,000 with
an initial interest rate equal to the prime rate, as announced by Citibank,
N.A., plus 4.25 percent and, commencing on July 31, 1997, increasing to a
rate equal to such prime rate plus 6.25 percent (the "Madeleine Loan
Agreement"). The Madeleine Loan Agreement is secured by all of the
Company's assets and matures on January 30, 1998. The initial loan
proceeds, net of $280,000 of fees to Madeleine were $3,460,000.
The Madeleine Loan Agreement has numerous negative covenants which
restricts the ability of the Company to effect certain transactions without
Madeleine's written consent. Among these covenants is a prohibition on
declaring or paying any cash dividends. At March 31, 1997, The Company was
in default on certain financial covenants and certain other covenants of
the Madeleine Loan Agreement. Among the consequences of such defaults
Madeleine may foreclose on all of the assets of the Company. The Company
is in negotiations to have the defaults waived and to increase the
principal amount of the loan by $1,500,000. Unless a waiver is obtained,
Madeleine retains the right to foreclose on the Company's assets.
In connection with the Madeleine Loan Agreement, the Company issued a
warrant to Madeleine to purchase 300,000 shares of the Company's Common
Stock at an exercise price equal to the lower of $2.68 per share or the per
share fair market value of the Common Stock of the Company at the time of
exercise of the warrant. The warrant expires on January 31, 2000. The
Company recorded an original issue discount of $93,709 which represents the
fair value of the warrants at the time of issuance. The fair value of the
warrants are reflected as a reduction to the face value of the loan amount.
On June 28, 1996, the Company entered into a loan agreement with Silicon
Valley Bank in the principal amount of $750,000 bearing interest at such
bank's prime rate plus 3 percent. As of December 31, 1996, the Company had
repaid $350,000 of the loan and was in default on the balance. Since that
date, the Company has repaid the outstanding principal balance of; and all
accrued and unpaid interest under, such loan using proceeds from the
private equity placements described in Note 7 below.
(7) STOCKHOLDERS' EQUITY
--------------------
On September 25, 1996, the Company sold 1,000 shares of Series A
Convertible Preferred Stock ("Series A Preferred") at $1,000 per share to
one accredited investor in a private placement. In addition, the Company
granted the investor a warrant to purchase 69,717 shares of the Company's
Common Stock at an exercise price of $5.00 per share. The Series A
Preferred is convertible into the Company's Common Stock, at the option of
the holder, based on a per share conversion price equal to the lower of (a)
$3.375 (subject to certain adjustments) or (b) 80% of the average closing
bid price of the Company's Common Stock on the five days immediately prior
to the conversion date. The holder of the Series A Preferred is entitled to
receive dividends of $80 per share per annum which are fully cumulative
from the date of issuance. The cash proceeds, net of offering expenses,
were $939,950.
On November 1, 1996, the Company sold 1,525 shares of Series A Preferred at
$1,000 per share to five accredited investors in a private placement. In
addition, the Company granted the investors warrants to purchase 99,674
shares of the Company's Common Stock at an exercise price of $5.00 per
share. The cash proceeds, net of offering expenses, were $996,048.
On February 7, 1997, the Company sold 500 shares of Series A Preferred at
$1,000 per share to one accredited investor in a private placement. In
addition, the Company granted the investor a warrant to purchase 51,813
shares of the Company's Common Stock at an exercise price of $5.00 per
share. The cash proceeds, net of offering expenses, were $419,950.
10
On February 24, 1997, the Company issued 3,025 shares of Series B
Convertible Preferred Stock with a stated value of $1,000 per share (the
"Series B Preferred") and warrants (the "Series B Warrants") to purchase
221,204 shares of the Company's Common Stock at an exercise price of $5.00
per share to six accredited investors in exchange for the shares of the
Series A Preferred and Common Stock warrants issued to the Series A
Preferred investors in the aforementioned private placements. Such exchange
was effected pursuant to Exchange Agreements entered into between the
Company and each of the investors. The Series B Preferred and Series B
Warrants were not registered under the Securities Act of 1933, as amended
(the "Securities Act") in reliance upon the exemption from registration
provided for in Regulation S promulgated under the Securities Act. The
Series B Preferred is convertible into the Company's Common Stock, at the
option of the holder, based on a per share conversion price equal to the
lower of (a)$3.375 (subject to certain adjustments) or (b) 80% of the
average closing bid price of the Company's Common Stock on the five days
immediately prior to the conversion date.
On March 5, 1997, the Company issued 1,185,185 shares of Series C
Convertible Preferred Stock ("Series C Preferred") to two accredited
investors in connection with two separate asset purchase agreements (see
Note 5). Although the total stated liquidation value of the Series C
Preferred is $4,000,000, the Company determined the fair market value to be
$2,741,333 based upon the current fair market value of the Company's Common
Stock, discounted to take into account the restricted nature of the
securities. The shares of Series C Preferred are convertible into shares
of Common Stock, at the option of the holders, at a conversion price of
$3.375 per share (subject to certain adjustments) and are subject to
mandatory redemption by the Company on February 28, 2000 at $3.375 per
share. The holders of the Series C Preferred are entitled to receive
dividends of $0.10125 per share per annum which are fully cumulative from
date of issuance.
(8) NET INCOME PER SHARE
--------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share"
which, when adopted, will replace the current methodology for calculating
and presenting earning per share. Under SFAS No. 128, primary earnings per
share will be replaced with a presentation of basic earnings per share and
fully diluted earnings per share will be replaced with diluted earnings per
share. Basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted earnings per
share is computed similarly to fully diluted earnings per share. The
statement will be effective beginning in the Company's second quarter of
the fiscal year ending June 30, 1998, and accordingly, the financial
statements for such quarter will include a restatement of historical
earnings per share to conform to the requirements of SFAS No. 128. The
Company believes implementation of SFAS No 128 will not materially change
earnings per share.
(9) LIQUIDITY
---------
As of March 31, 1997, the Company had a net working capital deficiency of
$4,138,972. In addition, the Company has incurred significant losses from
operations during fiscal 1997. In order to continue operations through June
30, 1997, the Company must collect a significant amount of its accounts
receivables and will require additional financing which the Company is
seeking through an amendment to the Madeleine Loan Agreement with Madeleine
and/or equity financing. The Company's ability to continue as a going
concern is dependent upon it successfully raising capital through debt
and/or equity financing and, ultimately, upon it achieving profitable
operations. No assurance can be made that the Company will be able to meet
any or all of the above-referenced goals stated in the two immediately
preceeding sentence.
(10) SUBSEQUENT EVENTS
-----------------
On May 2, 1997, the Company received notice from The Nasdaq Stock Market
that it was not in compliance with the requirements for listing on the
Nasdaq SmallCap Market. Specifically, the Company's closing bid price for
the appropriate measurement period was below $1.00 and the Company did not
meet the alternative listing requirement. To be eligible for continued
listing, all securities, except warrants and rights, must maintain a
minimum bid price of $1.00 or, as an alternative if the bid price is less
than $1.00, maintain capital and surplus of $2,000,000 and a market value
of the public float of $1,000,000. The Company was granted ninety days to
regain compliance with the minimum bid or the alternative requirement. The
Company may be delisted during the ninety day period for failure to
maintain compliance with any other listing requirement which occurs during
the period. In
11
addition, Nasdaq stated in its letter that the alternative requirement
referenced above may be discontinued. As of May 20, 1997, the Company
believes that it is in compliance with the other listing requirements. The
Company expects to regain compliance prior to expiration of the ninety
days; however, no assurances can be made that the Company will regain
compliance with such Nasdaq requirements or that the Nasdaq Stock Market
will not take steps to delist the Company's Common Stock.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements in this Item 2 under the
caption "Outlook" which involve risks and uncertainties. The Company's actual
results may differ significantly from the forward-looking statements in such
section.
THREE AND NINE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE AND NINE MONTHS
ENDED MARCH 31, 1996
General
On January 3, 1996, GZ Multimedia, Inc. (formerly Graphix Zone, Inc.), a
California corporation ("GZ-CA"), and StarPress, Inc. ("StarPress") entered into
an Agreement and Plan of Reorganization pursuant to which both companies would
become wholly-owned subsidiaries of Graphix Zone, Inc., a Delaware corporation
(the "Company"). On June 28, 1996, the shareholders of both GZ-CA and StarPress
approved the merger (the "Reorganization") which was consummated on that date.
Based upon the capitalization of both GZ-CA and StarPress, at the
consummation of the Reorganization, the former shareholder interests of
StarPress comprised a larger percentage of the outstanding shares of the Company
than the former shareholder interests of GZ-CA; accordingly, StarPress was
deemed the acquiring entity for financial accounting purposes. The historical
financial statements presented herein, prior to the effective date of the
Reorganization, are the financial statements of StarPress. All references to the
"Company" prior to June 28, 1996 relate to StarPress.
During the third quarter of the fiscal year ending June 30, 1997 ("fiscal
1997"), the Company retained a new executive management team to re-focus the
Company's business strategy and operations and began doing business as Ignite,
Inc. As part of the re-focusing, the Company has redefined its core product line
to focus on traditional pc-games and branded game software products for the
personal computer industry. In addition, the Company has begun the process of
divesting or eliminating non-core business units and products such as its
Internet site, WILMA, and the music and Internet retail product lines.
Results of Operations
The following table sets forth items from the Company's Consolidated
Statements of Operations as a percentage of net revenues.
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Mar. 31, 1997 Mar. 31, 1996 Mar. 31, 1997 Mar. 31, 1996
------------- ------------- ------------- -------------
Net revenues 100% 100% 100% 100%
Cost of revenues 114% 34% 62% 56%
------------- ------------- ------------- -------------
Gross margin (14)% 66% 38% 44%
Research and development expenses 44% 18% 35% 53%
Sales and marketing expenses 47% 52% 43% 54%
General and administrative expenses 145% 43% 71% 64%
Restructuring charge (benefit) - - (3)% 49%
Acquired in-process technology 78% - 23% -
------------- ------------- ------------- -------------
Operating loss (328)% (47)% (131)% (176)%
Interest expense, net 7% 2% 3% 2%
Other income (expense), net 1% - - -
------------- ------------- ------------- -------------
Net income (loss) (336)% (49)% (134)% (178)%
============= ============= ============= =============
13
NET REVENUES
Net revenues for the three and nine months ended March 31, 1997 increased by
$140,654 and $3,212,823 to $2,092,549 and $7,140,119 as compared to $1,951,895
and $3,927,296 for the three and nine months ended March 31, 1996, respectively.
The increase in net revenues of 7% and 82% for the three and nine months ended
March 31, 1997, respectively, compared to the same prior year periods is a
result of the Reorganization, the acquisition of certain products from Sony
Interactive Entertainment, Inc. ("Sony") in November 1995 and the release of
seven new titles in the first quarter of fiscal 1997 as well as the distribution
of certain affiliate label titles during the second and third quarters of fiscal
1997. All of the aforementioned transactions increased the Company's catalog of
products and corresponding revenues, particularly the Sony products, which
accounted for approximately $1,820,000 and $4,598,000 of revenues for the three
and nine months ended March 31, 1997, respectively. In addition, the increase in
sales for the nine months ended March 31, 1997 was offset by the Company
recording approximately $590,000 for unanticipated returns and markdowns
primarily related to several of the new titles released in the first quarter of
fiscal 1997.
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 for returns based on the Company's historical
experience and retail sell-through information as well as distributor inventory
levels. There can be no assurance that actual levels of returns will not
significantly exceed amounts anticipated by the Company.
GROSS MARGIN
Gross margin as a percentage of net revenues was (14)% and 38% for the three and
nine months ended March 31, 1997, respectively, compared to 66% and 44% for the
three and nine months ended March 31, 1996, respectively. The decrease in gross
margin as a percentage of net revenues for the three months ended March 31, 1997
as compared to the same prior year period is primarily a result of the Company
recording several charges related to the net realizable value of assets
resulting from the Company's re-focus of its business strategy and operations in
the third quarter of fiscal 1997. Among these charges were approximately
$1,000,000 for excess and obsolete inventory as well as approximately $321,000
related to prepaid royalties and acquired capitalized software development
costs. Gross margin as a percentage of net revenues for the nine months ended
March 31, 1997 decreased compared to the nine months ended March 31, 1996
primarily as a result of the aforementioned charges recorded in the third
quarter of fiscal 1997 offset by decreased per unit costs, as compared to the
same prior year period, derived from the Company's greater experience in the
procurement of product components and improved pricing from vendors based upon
increased production volumes associated with the Company's expanded catalog of
products.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three and nine months ended March 31,
1997 increased by $577,758 and $442,614 to $933,096 and $2,519,879,
respectively, as compared to $355,338 and $2,077,265 for the three and nine
months ended March 31, 1996, respectively. The increase in research and
development expenses for the three and nine months ended March 31, 1997 compared
to the same prior year period is primarily a result of StarPress having
transferred most research and development expenditures to GZ-CA during the third
quarter of fiscal 1996 in anticipation of the merger with GZ-CA. These
expenditures were incurred by GZ-CA prior to the consummation of the
Reorganization and are not included in the results of operations of the Company
in accordance with the accounting treatment of the Reorganization as discussed
above. In addition, during the latter part of the third quarter of fiscal 1997,
the Company began to incur costs related to the development of in-process titles
acquired from Inscape and Trimark Interactive.
SALES AND MARKETING EXPENSES
Selling and marketing expenses for the three and nine months ended March 31,
1997 were $990,288 and $3,104,344 representing 47% and 43% of net revenues,
respectively, as compared to $1,012,662 and $2,129,072 representing 52% and 54%
for the three and nine months ended March 31, 1996, respectively. Selling and
marketing expenses remained relatively stable in amount for the third quarter of
fiscal 1997 compared to third quarter of fiscal 1996. The lack of increase
compared to the prior year, as may have been anticipated, was a result of fewer
new product launches during the third quarter of fiscal 1997 compared to the
same prior year period. The increase in selling and marketing expenses of
$975,272 during the nine months ended March 31, 1997 compared to the same prior
year period is primarily a result of increases in personnel as well as increased
participation in cooperative advertising and marketing programs in relation to
increased sales during the first half of fiscal 1997. The decrease in sales and
marketing expenses
14
as a percentage of net revenues for the three and nine months ended March 31,
1997 as compared to the same prior year periods is a result of the Company
having established the core infrastructure and personnel in the sales and
marketing departments during the latter part of fiscal 1996 and reaping certain
economies of scale as net revenues increased.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three and nine months ended March
31, 1997 increased by $2,192,313 and $2,539,893 to $3,026,640 and $5,056,422
representing 145% and 71% of net revenues, respectively, compared to $834,327
and $2,516,529 representing 43% and 64% of net revenues for the three and nine
months ended March 31, 1996, respectively. The increase in general and
administrative expenses for both the three and nine months ended March 31, 1997
as compared to the same prior year periods is due in part to the Company
recording a charge to general and administrative expenses of approximately
$1,253,000 related to property and equipment, intangibles assets and other long
term assets being impaired as a result of the Company re-focusing its business
strategy and operations in the third quarter of fiscal 1997. In addition, during
the third quarter of fiscal 1997, the Company recorded a charge of approximately
$203,000 for additional bad debt reserves. As a percentage of net revenues,
general and administrative expenses remained relatively consistent for the nine
months ended March 31, 1997 as compared to the same prior year period primarily
due to the increase in net revenues during the nine months ended March 31, 1997
compared to the same prior year period.
RESTRUCTURING CHARGE
During the second quarter of the fiscal year ended June 30, 1996 ("fiscal
1996"), in anticipation of the Reorganization, the Company adopted a
restructuring plan to enhance overall competitiveness, productivity and
efficiency through the reduction of overhead costs. The total estimated cost of
the restructuring charged to operations during the second quarter of fiscal 1996
was $1,950,000. During the first quarter of fiscal 1997, the Company reversed
$263,831 of the remaining reserve for restructuring related to facility and
equipment leases for its San Francisco facility, which the Company has
subsequently subleased.
ACQUIRED IN-PROCESS TECHNOLOGY
As a result of the Company's asset acquisitions from Inscape and Trimark
Interactive in February 1997, the Company wrote-off $1,153,000 and $475,000 of
acquired in-process technology, respectively. These costs are considered non-
recurring expenses.
OUTLOOK
The statements contained in this outlook are "forward-looking statements" for
purposes of Section 21E of the Securities Exchange Act of 1934. They are based
on the Company's current plans, strategies, hopes and expectations. Actual
results may differ materially.
The new management team retained during the third quarter of fiscal 1997 has
redefined the Company's core product line to focus on traditional pc-games and
branded game software products for the personal computer industry. The Company
is in the process of divesting or eliminating non-core business units and
products such as its Internet site, WILMA, and the interactive music and
Internet retail products lines. Management recognizes that it will be entering a
highly competitive pc-games market competing against other companies with
greater resources. However, the Company views the pc-games market as a proven
market, unlike the interactive music and non-game entertainment markets. The
Company's revenues and income may fluctuate periodically as a result of the
timing and success of new title releases, and external factors such as seasonal
buying patterns. The Company is aggressively pursuing new opportunities to
distribute titles developed by other entities and is attempting to expand its
international business. The Company does not anticipate any significant
increases in revenues through the balance of fiscal 1997 as it implements its
new business strategy and restructured operations.
Gross margin may fluctuate depending upon the component costs and royalty
structure of the specific product mix for any given period. If the percentage of
revenues represented by OEM/bundling deals and the distribution of products
developed by other entities increases, the Company expects gross margin as a
percentage of net revenues to decrease. However, in consideration of
approximately $1,321,000 of charges recorded against cost of revenues during the
third quarter of fiscal 1997 related to the re-focusing of the Company's
business strategy, the Company anticipates gross margin to increase in amount
and improve as a percentage of net revenues during the balance of fiscal 1997.
15
Research and development costs may fluctuate depending upon the number of
projects in process in a particular period and the degree of internally
developed versus externally developed or acquired content in the related
projects. In the near term, and particularly as a result of the in-process
development projects acquired from Inscape and Trimark, the Company expects
research and development costs to increase in amount and as a percentage of net
revenues over the balance of fiscal 1997.
In order to generate increased sales and enter the pc-games market, the Company
will need to increase sales and marketing expenditures. A portion of these
expenditures will be incurred prior to the generation of offsetting revenues.
Accordingly, in the near term, the Company anticipates sales and marketing
expenditures to increase both in amount and as a percentage of net revenues.
Given the $1,253,000 charge recorded against general and administrative expenses
related to the impairment of assets in the third quarter of fiscal 1997, the
Company expects a comparative decrease in general and administrative expenses
during the balance of fiscal 1997. The Company is in the process of reducing the
number of its employees and the number of facilities it operates. As a result,
the Company anticipates a noticeable decrease in general and administrative
expenses going forward. As a result of the Company entering into a loan
agreement with Madeleine L.L.C. ("Madeleine") in January 1997 (see the
discussion below under the caption "Liquidity and Capital Resources" for a
further discussion of the loan), the Company expects a significant increase in
interest expense in the near term.
Liquidity and Capital Resources
The Company's principal source of liquidity is cash. At March 31, 1997, cash and
cash equivalents were $901,336, net working capital deficit was $(4,138,972) and
net stockholders' deficiency was $(5,052,050). At June 30, 1996, cash and cash
equivalents were $1,288,196, net working capital deficiency was $(19,631) and
net stockholders' equity was $2,048,729. Although the Company raised $2,355,948
through private equity placements and obtained net proceeds of $3,460,000 from a
loan agreement with Madeleine (described below), as discussed below, the vast
majority of these funds were used to satisfy approximately $808,000 of secured
debt and interest, payment of $790,000 of specific royalties, purchase of
$661,000 of property and equipment, and, in part, the funding of the net loss of
$9,586,080 for the nine months ended March 31, 1997. Cash used in operations for
the nine months ended March 31, 1997 was $4,929,400.
Due to substantial up-front costs associated with the development of Internet
web sites (which have since been terminated) and CD-ROM titles, the Company has
continually needed to locate outside sources of liquidity. On September 25,
1996, the Company raised $939,950, net of offering expenses, through a private
placement of 1,000 shares of Series A Preferred Stock and a warrant to purchase
69,717 shares of the Company's Common Stock to one accredited investor. On
November 1, 1996, the Company raised $996,048, net of offering expenses, through
a private placement of 1,525 shares of Series A Preferred Stock and warrants to
purchase 99,674 shares of the Company's Common Stock to five accredited
investors. Additionally, on February 7, 1997, the Company raised $419,950, net
of offering expenses, through a private placement of 500 shares of Series A
Preferred Stock and a warrant to purchase 51,813 shares of the Company's Common
Stock to one accredited investor. The proceeds from the Company's private
placements have been used as working capital to fund the development of future
products, and other costs associated with the growth of the Company.
On January 31, 1997, the Company entered into a loan agreement with
Madeleine in the principal amount of $3,740,000 with an initial interest rate
equal to the prime rate, as announced by Citibank, N.A., plus 4.25 percent and,
commencing on July 31, 1997, increasing to a rate equal to such prime rate plus
6.25 percent (the "Madeleine Loan Agreement"). The Madeleine Loan Agreement is
secured by all of the Company's assets and matures on January 30, 1998. The
initial loan proceeds, net of $280,000 of fees to Madeleine, were $3,460,000 and
were used to satisfy existing trade debt and royalties and to provide working
capital to fund development of future projects as well as other costs associated
with the growth of the Company. At March 31, 1997, the Company was in default on
certain financial covenants and certain other covenants of the Madeleine Loan
Agreement. The Madeleine Loan Agreement has numerous negative covenants which
restricts the ability of the Company to effect certain transactions without
Madeleine's written consent. Among those negative covenants is a prohibition on
declaring or paying dividends. Among the consequences of such defaults,
Madeleine may foreclose on all of the assets of the Company. The Company is in
negotiations to have the defaults waived and to increase the principal amount of
the loan by $1,500,000. Unless a waiver is obtained, Madeleine retains the right
to foreclose on the Company's assets.
On June 28, 1996, the Company entered into a loan agreement with Silicon Valley
Bank in the principal amount of $750,000 bearing interest at such bank's prime
rate plus three percent. As of December 31, 1996, the Company had repaid
$350,000
16
of the loan and was in default on the balance. Since that date, the Company has
repaid the outstanding principal balance of and all accrued and unpaid interest
under such loan using proceeds from the private placements and described above.
The Company's long-term liquidity is principally contingent on its ability
to raise funds through private and public debt and equity offerings.
Additionally, the Company must improve the collection period and related aging
of its accounts receivables. The Company's anticipated liquidity needs are
based upon a number of factors, including the size of the business and related
working capital needs, the extent of development costs and funding requirements,
and the level of corporate operating costs.
In order to continue operations through June 30, 1997, the Company must
collect a significant amount of its accounts receivables and will require
additional financing which the Company is seeking through an amendment to the
Madeleine Loan Agreement and/or an equity financing. The Company's ability to
continue as a going concern is dependent upon it successfully raising capital
through debt and/or equity financing and, ultimately, upon it achieving
profitable operations. No assurance can be made that the Company will be able to
meet any or all of the above-referenced goals stated in the two immediately
preceeding sentences.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
On February 7, 1997, the Company sold 500 shares of Series A Convertible
Preferred Stock ("Series A Preferred") for $1,000 per share to one
accredited investor in a private placement pursuant to Sections 4(2) and
4(6) of the Securities Act of 1933, as amended (the "Securities Act") and
Regulation D promulgated thereunder. In addition, the Company granted the
investor a warrant to purchase up to 51,813 shares of common stock for
$2.50 per share. The holder of Series A Preferred is entitled to receive
dividends of $80 per share per annum, fully cumulative from the date of
issuance. The aggregate offering price was $500,000, the aggregate
underwriting discounts and commissions were $60,050 and the net cash
proceeds were $419,950. Tanner Unman Securities acted as placement agent
and was paid a commission of 10% of the gross proceeds, and was reimbursed
for certain expenses.
The Series A Preferred is convertible into shares of Common Stock, at the
option of the holder based on a per share conversion price equal to the
lower of (a) $3.375 (subject to certain adjustments) or (b) 80% of the
average closing bid price of the Company's common stock on the five days
immediately prior to the conversion date.
On February 24, 1997, the Company issued 3,025 shares of Series B
Convertible Preferred Stock with a stated value of $1,000 per share (the
"Series B Preferred") and warrants (the "Series B Warrants") to purchase
221,204 shares of Common Stock at an exercise price of $5.00 per share to
six accredited investors in exchange for the 3,025 shares of the Series A
Preferred and Common Stock warrants issued to the Series A Preferred
investors. Such exchange was effected pursuant to Exchange Agreements
entered into between the Company and each of the investors. The Series B
Preferred and Series B Warrants were not registered under the Securities
Act in reliance upon the exemption from registration provided for
in Regulation S promulgated under the Securities Act. The Series B
Preferred is convertible into the Company's Common Stock, at the option of
the holders, based on a per share conversion price equal to the lower of
(a) $3.375 (subject to certain adjustments) or (b) 80% of the average
closing bid price of the Company's Common Stock on the five days
immediately prior to the conversion date.
On March 5, 1997, the Company issued 1,185,185 shares of Series C
Convertible Preferred Stock ("Series C Preferred") to two accredited
investors, in connection with two separate asset purchase agreements,
pursuant to Sections 4(2) and 4(6) of the Securities Act and Regulation D.
In exchange for the issuance of the shares of the Series C Preferred, the
Company acquired assets consisting of rights in existing pc-game products,
pc-game products in development, furniture and equipment and leases.
Although the total stated liquidation value of the Series C Preferred is
$4,000,000, the Company determined the fair market value to be $2,741,333
based upon the current fair market value of the Company's Common Stock,
discounted to take into account the restricted nature of the securities.
The shares of Series C Preferred are convertible into shares of Common
Stock, at the option of the holders, at a conversion price of $3.375 per
share (subject to certain adjustments) and are subject to mandatory
redemption by the Company on February 28, 2000 at $3.375 per share (subject
to certain adjustments). The holders of the Series C Preferred are entitled
to receive dividends of $0.10125 per share per annum which are fully
cumulative from date of issuance.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
On January 31, 1997, the Company entered into a loan agreement with
Madeleine L.L.C. ("Madeleine") in the principal amount of $3,740,000 with
an initial interest rate equal to the prime rate, as announced by Citibank,
N.A., plus 4.25 percent and, commencing on July 31, 1997, increasing to a
rate equal to such prime rate plus 6.25 percent (the "Madeleine Loan
Agreement"). The Madeleine Loan Agreement is secured by all of the
Company's assets and matures on January 30, 1998. In connection with the
Madeleine Loan Agreement, the Company issued a warrant to Madeline
to purchase 300,000 shares of the Company's Common Stock at an exercise
price equal to the lower of $2.68 per share or the per share fair market
value of the Common Stock of the Company at the time of exercise of the
warrant. The warrant expires on January 31, 2000. The initial loan
proceeds, net of $280,000 of fees to Madeleine, were $3,460,000. At March
31, 1997 the Company was in default on certain financial covenants and
certain other covenants of the loan agreement. Among the consequences of
such defaults,
18
and Madeleine may foreclose on all of the assets of the Company. The
Company is in negotiations to have the defaults waived and to increase the
principal amount of the loan by $1,500,000. Unless a waiver is obtained,
Madeleine retains the right to foreclose on the Company's assets.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
On May 2, 1997, the Company received notice from The Nasdaq Stock Market
that it was not in compliance with the requirements for listing on the
Nasdaq SmallCap Market. Specifically, the Company's closing bid price for
the appropriate measurement period was below $1.00 and the Company did not
meet the alternative listing requirement. To be eligible for continued
listing, all securities, except warrants and rights, must maintain a
minimum bid price of $1.00 or, as an alternative if the bid price is less
than $1.00, maintain capital and surplus of $2,000,000 and a market value
of the public float of $1,000,000. The Company was granted ninety days to
regain compliance with the minimum bid or the alternative requirement. The
Company may be delisted during the ninety day period for failure to
maintain compliance with any other listing requirement which occurs during
the period. In addition, Nasdaq stated in its letter that the alternative
requirement referenced above may be discontinued. As of May 16, 1997, the
Company believes that it is in compliance with the other listing
requirements. The Company expects to regain compliance prior to expiration
of the ninety days however, no assurances can be made that the Company will
regain compliance with such Nasdaq requirements or that the Nasdaq Stock
Market will not take steps to delist the Company's Common Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The exhibits listed below are hereby filed with the U.S.
Securities and Exchange Commission ("the "Commission") as part of
this quarterly report on Form 10-Q.
3.1 Certificate of Designations of Series B
Convertible Preferred Stock of the Registrant,
filed as Exhibit 3.1 to the Registrant's Current
Report on Form 8-K dated February 18, 1997, and
filed with the Commission on March 5, 1997 (File
No. 0-28676) ("March 5th Current Report") which
is hereby incorporated herein by reference.
3.2 Certificate of Designations of Series C
Convertible Preferred Stock of the Registrant,
filed as Exhibit 10.34 to the Registrant's
Current Report on Form 8-K dated March 5, 1997
and filed with the Commission on March 20, 1997
(File No. 0-28676) ("March 20th Current Report")
which is hereby incorporated herein by
reference.
10.1 Loan and Security Agreement dated January 31,
1997 between the Registrant and Madeleine L.L.C.
10.2 Form of Common Stock Purchase Warrant for shares
of the Registrant's Company's Common Stock
between the Registrant and Madeleine L.L.C.
10.3 Amendment No.1 to Loan and Security Agreement
between the Registrant and Madeleine L.L.C.
dated March 5, 1997.
10.4 Asset Purchase Agreement dated February 24, 1997
by and among the Registrant, Inscape and Warner
Music Group Inc., filed as Exhibit 10.32 to the
Registrant's March 20th Current Report,
19
which is hereby incorporated herein by
reference.
10.5 Asset Purchase Agreement dated February 26, 1997
by and among the Registrant, Trimark Holdings,
Inc. and its subsidiary Trimark Interactive,
filed as Exhibit 10.33 to the Registrant's March
20th Current Report which is hereby incorporated
herein by reference.
10.6 Employment letter between the Registrant and
Robert D. Shishino dated February 26, 1997
27 Financial Data Schedule
(b) Reports on Form 8-K.
On March 5, 1997, the Company filed a current report on Form 8-K
dated March 5, 1997, under Item 9 - Sales of Equity Securities
Pursuant to Regulation S, reporting the issuance of shares of
Series B Convertible Preferred Stock and related warrants to
purchase shares of Common Stock in exchange for shares of Series A
Convertible Preferred Stock and related warrants to purchase
common stock in a transaction effected in reliance on the
exemption set forth in Regulation S promulgated under the
Securities Act of 1933, as amended.
On March 20, 1997, the Company filed a current report on Form 8-K
dated March 20, 1997, under Item 2 - Acquisition or Disposition of
Assets, describing two separate asset acquisitions of pc-game
products, and "in development" pc-game products and other assets
and certain liabilities, one from Inscape, a Delaware general
partnership, and the other from Trimark Interactive, Inc.
20
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRAPHIX ZONE, INC.
Date: May 20, 1997 By: /s/ ROBERT D. SHISHINO
-------------------------------------
Robert D. Shishino,
Vice President of Finance and
Chief Financial Officer (Principal
Financial and Accounting Officer)
21
Exhibit Index
-------------
Item No. Description
- -------- -----------
3.1 Certificate of Designations of Series B Convertible
Preferred Stock of the Registrant, filed as Exhibit 3.1 to
the Registrant's Current Report on Form 8-K dated February
18, 1997, and filed with the Commission on March 5, 1997
(File No. 0-28676) ("March 5th Current Report") which is
hereby incorporated herein by reference.
3.2 Certificate of Designations of Series C Convertible
Preferred Stock of the Registrant, filed as Exhibit 10.34 to
the Registrant's Current Report on Form 8-K dated March 5,
1997 and filed with the Commission on March 20, 1997 (File
No. 0-28676) ("March 20th Current Report") which is hereby
incorporated herein by reference.
10.1 Loan and Security Agreement dated January 31, 1997 between
the Registrant and Madeleine L.L.C.
10.2 Form of Common Stock Purchase Warrant for shares of the
Registrant's Company's Common Stock between the Registrant
and Madeleine L.L.C.
10.3 Amendment No.1 to Loan and Security Agreement between the
Registrant and Madeleine L.L.C. dated March 5, 1997.
10.4 Asset Purchase Agreement dated February 24, 1997 by and
among the Registrant, Inscape and Warner Music Group Inc.,
filed as Exhibit 10.32 to the Registrant's March 20th
Current Report, which is hereby incorporated herein by
reference.
10.5 Asset Purchase Agreement dated February 26, 1997 by and
among the Registrant, Trimark Holdings, Inc. and its
subsidiary Trimark Interactive, filed as Exhibit 10.33 to
the Registrant's March 20th Current Report which is hereby
incorporated herein by reference.
10.6 Employment letter between the Registrant and Robert D.
Shishino dated February 26, 1997
27 Financial Data Schedule
22