<PAGE>
As filed with the Securities and Exchange Commission on May 23, 1996
Registration No. 333-02148
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- -----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------
Amendment No. 4
to
Form SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
------
MICROLEAGUE MULTIMEDIA, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 7372 23-2563090
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification No.) Identification No.)
incorporation or
organization)
750 DAWSON DRIVE
NEWARK, DE 19713
(302) 368-9990
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------
NEIL B. SWARTZ
CHIEF EXECUTIVE OFFICER
MICROLEAGUE MULTIMEDIA, INC.
750 DAWSON DRIVE
NEWARK, DE 19713
(302) 368-9990
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
------
Copies of all communications to:
JOHN F. BALES, III, ESQUIRE STEVEN B. KING, ESQUIRE
Morgan, Lewis & Bockius LLP MICHAEL A. BROWN, ESQUIRE
2000 One Logan Square Mesirov Gelman Jaffe Cramer & Jamieson
Philadelphia, PA 19103-6993 1735 Market Street
(215) 963-5478 Philadelphia, PA 19103
(215) 994-1037
(215) 994-1131
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933 (the "Securities Act"), check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement the same offering. [ ] ------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ] ------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==============================================================================================================
Proposed Proposed maximum
Title of each class of securities Amount to be maximum offering aggregate offering Amount of
to be registered registered(1) price per unit(1) price (1) registration fee
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,173,000 Units, each consisting of: 6.10 7,155,300 2,467.34
One Share of Common Stock, $.01
par value ....................... 1,173,000(2)
One Redeemable Warrant ........... 1,173,000(2)
- --------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per
share, issuable upon exercise of
the Redeemable Warrants(3) ...... 1,173,000(2) $6.60 $7,741,800 $2,669.59
- --------------------------------------------------------------------------------------------------------------
Underwriter's Warrants, each to
purchase one share of Common
Stock and one redeemable
warrant(4) ...................... 102,000 $.001 $102.00 See Note 5
- --------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per
share, issuable upon exercise of
the Underwriter's Warrants(3) ... 102,000 $7.80 $795,600 $274.34
- --------------------------------------------------------------------------------------------------------------
Redeemable Warrants issuable upon
exercise of the Underwriter's
Warrants ........................ 102,000 $.13 $13,260 $4.57
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Common Stock, par value $.01 per
share, issuable upon exercise of
the warrants underlying the
Underwriter's Warrants(3) ....... 102,000 $6.60 $673,200 $232.14
- --------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per
share, subject to resale upon
exercise of the Bridge Warrants... 160,000 $6.00 $960,000 $331.03
- --------------------------------------------------------------------------------------------------------------
Total Registration Fee ............................................................... $5,979.02(6)
==============================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Assumes exercise in full of the Underwriter's over-allotment option to
purchase up to 153,000 additional shares of Common Stock and/or up to
153,000 additional Redeemable Warrants.
(3) Pursuant to Rule 416, there are also being registered such indeterminable
additional shares of Common Stock as may become issuable pursuant to
anti-dilution provisions contained in the Redeemable Warrants and the
Underwriter's Warrants.
(4) Represents warrants to be issued by the Company to the Underwriter at the
time of delivery and acceptance of the securities to be sold by the
Company to the public hereunder.
(5) None, pursuant to Rule 457(g).
(6) $941.33 paid with this amendment, balance previously paid.
2
<PAGE>
MICROLEAGUE MULTIMEDIA, INC.
CROSS REFERENCE SHEET PURSUANT TO RULE 404
<TABLE>
<CAPTION>
Item Number and Caption in Form SB-2 Location in Prospectus
----------------------------------------------------------- ------------------------------------------------
<S> <C>
1. Front of the Registration Statement and Outside Front Front of the Registration Statement and Outside Front
Cover Page of Prospectus ............................... Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus . Inside Front and Outside Back Cover
Pages of Prospectus
3. Summary of Information and Risk Factors ................ Prospectus Summary; Risk Factors
4. Use of Proceeds ........................................ Use of Proceeds
5. Determination of Offering Price ........................ Outside Front Cover Page of Prospectus; Underwriting;
Risk Factors
6. Dilution ............................................... Dilution; Risk Factors
7. Selling Security Holders ............................... Selling Shareholders
Outside Front Cover Page of Prospectus; Underwriting;
8. Plan of Distribution ................................... Plan of Distribution of Selling Shareholders
9. Legal Proceedings ...................................... Business
10. Directors, Executive Officers, Promoters and Control
Persons ................................................ Management
11. Security Ownership of Certain Beneficial Owners and
Management ............................................. Principal Shareholders
12. Description of Securities ............................. Outside and Inside Front Cover Pages of Prospectus;
Prospectus Summary; Capitalization; Description of
Securities
13. Interest of Named Experts and Counsel ................. Not Applicable
14. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities ............................ Not Applicable
15. Organization Within Last Five Years ................... Not Applicable
16. Description of Business ............................... Business
17. Management's Discussion and Analysis of Financial
Condition and Results of Operation .................... Management's Discussion and Analysis of Financial
Condition and Results of Operation
18. Description of Property ............................... Business
19. Certain Relationships and Related Transactions ........ Certain Transactions
20. Market for Common Equity and Related Stockholder Matters Risk Factors; Management
21. Executive Compensation ................................ Management
22. Financial Statements .................................. Financial Statements
23. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure ................... Not Applicable
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
PROSPECTUS
------
SUBJECT TO COMPLETION, DATED MAY 23, 1996
1,020,000 UNITS
[INSERT LOGO]
Each Unit consisting of One Share of Common Stock
and One Redeemable Common Stock Purchase Warrant
Microleague Multimedia, Inc., a Pennsylvania corporation (the "Company"),
hereby offers for sale 1,020,000 shares (the "Shares") of Common Stock, par
value $.01 per share (the "Common Stock"), and 1,020,000 redeemable Common
Stock purchase warrants (the "Redeemable Warrants"). The Shares of Common
Stock and the Redeemable Warrants offered hereby (sometimes hereinafter
collectively referred to as the "Securities" or the "Offering") may only be
purchased under this Offering together, as one Share of Common Stock and one
Redeemable Warrant. Each Redeemable Warrant is separately transferable
immediately upon issuance and entitles the holder to purchase one share of
the Company's Common Stock at an exercise price equal to 110% of the initial
public offering price per Share of Common Stock, at any time through the
third anniversary date of this Prospectus. Each Redeemable Warrant is
redeemable by the Company at a price of $.10 per Redeemable Warrant on not
less than 45 days' prior written notice if the last sale price of the Common
Stock exceeds 140% of the initial public offering price per Share of Common
Stock for not fewer than 10 of the 15 consecutive trading days ending on the
third trading day prior to the date on which the notice of redemption is
given. See "DESCRIPTION OF SECURITIES." Upon completion of the Offering, the
current officers and directors of the Company will control approximately 62%
of the voting power of the Company's capital stock.
Prior to this Offering, there has been no public market for the Company's
Common Stock or Redeemable Warrants and there can be no assurance that such a
market will develop after the completion of this Offering. The initial public
offering price of the Shares of Common Stock and the exercise price and other
terms of the Redeemable Warrants have been determined arbitrarily by
negotiation between the Company and the Underwriter and are not necessarily
related to the Company's asset value, net worth, financial condition or any
other established criteria of value. See "UNDERWRITING."
It is currently estimated that the initial public offering price for the
Common Stock will be set at between $5.00 and $6.00 per share and for the
Redeemable Warrants at $0.10 per Redeemable Warrant. The Company has
submitted an application for inclusion of the Common Stock and Redeemable
Warrants for listing on the Nasdaq SmallCap Market under the symbols MLMI and
MLMIW, respectively.
By separate prospectus dated this date, certain holders of bridge warrants
may resell Common Stock of the Company upon exercise of those warrants. See
"DESCRIPTION OF SECURITIES -- Bridge Units."
------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
SUBSTANTIAL IMMEDIATE DILUTION AND SHOULD ONLY BE PURCHASED BY INVESTORS WHO
CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING
ON PAGE 8 AND "DILUTION" ON PAGE 16 FOR A DISCUSSION OF CERTAIN
CONSIDERATIONS RELATED TO THIS INVESTMENT.
------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -----------------------------------------------------------------------------
Price Underwriting
to Discounts and Proceeds to
Public Commissions(1) Company(2)(3)
- -----------------------------------------------------------------------------
Per Share of Common Stock .... $ $ $
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Per Redeemable Warrant ...... $ $ $
- -----------------------------------------------------------------------------
Per Unit (3) ................ $ $ $
- -----------------------------------------------------------------------------
(1) Does not reflect additional compensation to be received by the
Underwriter in the form of (i) a non-accountable expense allowance equal
to 3% of the aggregate public offering price of the Offering (including
the over-allotment option described in Note 3 below), (ii) warrants to
purchase up to 102,000 Shares of Common Stock and 102,000 redeemable
warrants at 130% of the initial public offering price, exercisable over a
period of four years commencing one year after the date of this
Prospectus and other compensation. In addition, the Company has agreed to
indemnify the Underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"UNDERWRITING."
(2) Before deducting expenses payable by the Company, estimated to be $ ,
including the Underwriter's nonaccountable expense allowance described in
Note 1 above.
(3) The Company has granted the Underwriter an option, exercisable within 45
days of the date of this Prospectus, to purchase up to an additional 15%
of the total number of Shares of Common Stock and/or Redeemable Warrants
sold in the Offering at the initial public offering price less
underwriting discounts and commissions, to cover over-allotments, if any.
If the over-allotment option is exercised in full, the total Price to the
Public, Underwriting Discount and Commissions and Proceeds to the Company
will be increased to $ , $ and $ , respectively. See
"UNDERWRITING."
The Shares of Common Stock and Redeemable Warrants are being offered by
the Underwriter on a "firm commitment" basis when, as and if delivered to and
accepted by the Underwriter, and subject to withdrawal or cancellation of the
offer without notice and to its right to reject orders in whole or in part
and subject to approval of certain legal matters by counsel and to certain
other conditions. It is expected that delivery of the certificates
representing the Shares of Common Stock and Redeemable Warrants will be made
at the office of First Colonial Securities Group, Inc. in Marlton, New
Jersey.
------
First Colonial Securities Group, Inc.
The date of this Prospectus is , 1996.
<PAGE>
[The inside front cover contains pictures of some of the Company's products]
The Company is currently not a reporting company under the Securities
Exchange Act of 1934, as amended. Upon completion of the Offering, the
Company intends to register as such and to furnish its security holders with
annual reports containing audited financial statements after the close of
each fiscal year and such interim unaudited reports as it deems appropriate.
------
IN CONNECTION WITH THE OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OR REDEEMABLE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE OVER THE COUNTER
MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
------
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Each prospective investor is
urged to read this Prospectus in its entirety. Except as otherwise noted, the
information contained in this Prospectus, including information relating to
the number of shares outstanding, assumes no exercise of the Underwriter's
over-allotment option to purchase up to 153,000 additional Shares and up to
153,000 additional Redeemable Warrants offered hereby or the warrants (the
"Bridge Warrants") issued in connection with the Company's bridge financing
hereinafter described (the "Bridge Financing") or the exercise of the
Underwriter's warrants (the "Underwriter's Warrants") described under
"UNDERWRITING" or the exercise of any other outstanding options or warrants.
In addition, unless otherwise indicated, all share and per share amounts set
forth hereinafter have been adjusted to reflect a stock split of
approximately 1.32 for 1 which occurred on March 1, 1996.
THE COMPANY
Microleague Multimedia, Inc. (the "Company") is a brand-oriented publisher
of interactive multimedia computer software for the entertainment, lifestyle
and education segments of the personal computer software market. The Company
publishes its products under four brand names: MicroLeague(R) Sports,
APBA(R), Ablesoft(TR), and General Admission(TR). The Company currently sells
over 50 titles (of which approximately 25 titles are products licensed from
other software companies) in its existing product lines, and is developing
eight additional titles. The titles under development include a Major League
Baseball Players Association and Time, Inc. licensed product, Sports
Illustrated(R) presents MicroLeague Baseball(R) 6.0, a football game with
content licensed from National Football League Players Incorporated, a
basketball game and a hockey game. The Company is currently engaged in
negotiations with the National Basketball Players Association and the
National Hockey League Players Association to obtain licenses with respect to
the basketball and hockey games currently in development. The products in
development include advanced technological features such as 3-D stadiums,
motion captured 3-D players and "spatializer" sound in support of 32-bit
accelerated graphics cards. Microleague(R) Sports' Blood Bowl received a 1995
Golden Triad Award as Best Strategy Game from Computer Game Review, a
magazine in which the Company advertises.
The Company seeks to expand its product market by focusing on brand
recognition and by publishing technologically state of the art new titles.
The Company also seeks to develop upgrades to existing products, such as
franchise history disks of teams sold separately from the base product, and
add-ons to existing products which include updated team statistics for sports
games and updated pricing information for its Card and Comic Collector
products. The Company has acquired, and will seek to acquire, computer
publishing rights to develop or distribute new software titles within the
Company's existing brands. In addition, the Company plans to expand into
other market segments through its strategy of acquiring other companies with
strong brand names, advanced technology and a registered customer base. The
Company will seek opportunities to utilize its access to retail shelf space
and its direct mail capabilities to expand the market for products of any
companies that it may acquire.
The Company's computerized products, substantially all of which are
offered in CD-ROM format, are available on the Microsoft Windows(R) or DOS
operating systems, and the Company is in the process of upgrading its
existing products and designing its new products to take advantage of the
growth in the use of the Microsoft Windows 95(TR) operating system. The
Company intends, when commercially feasible, to create linkages to the
Company's Internet site and potentially other commercial on-line services to
enhance the distribution of its products.
The Company sells its products to a broad range of retail customers,
including computer superstores, wholesale clubs, mall-based chains, consumer
electronics stores, office superstores, and software retailers and sells
directly to the end user through direct mail. The Company plans to sell its
products through additional outlets such as bookstores, drug stores and original
equipment manufacturers. Sales are made to retail accounts either through
independent software distributors, or directly to retail chains. The Company's
3
<PAGE>
sales staff also utilizes a network of independent sales representatives to
service and merchandise its products to some of these accounts. The Company's
products are currently available in retail stores such as Best Buy, CompUSA,
Computer City, Electronics Boutique, Micro Center, Babbages, Software Etc.,
Egghead Software, Wal-Mart and Office Max. The Company also provides software
manufacturing and production services to other software publishers, as well as
commercial printing services to non-software companies.
To complement the Company's retail sales, the Company distributes monthly
promotional mailings and quarterly catalogues to registered customers to
generate direct-mail sales. Catalogue promotion focuses primarily on software
add-ons or upgrades to the original computer games sold by the Company
through its retail distribution channels. The Company also takes advantage of
its direct-mail operation to sell lower priced products (including add-ons
and upgrades) better suited for the direct mail channel. Through its
acquisition of the assets of APBA Game Company, Inc. ("APBA") in 1995, the
Company acquired additional registered customer lists. In addition, the
Company has certain rights to use Sports Illustrated's(R) customer lists for
marketing its existing products, and the Company has granted Columbia House
certain rights to market the Company's products through its customer lists.
The Company is a Pennsylvania corporation which was incorporated in June
1989 and conducts its operations directly and through its wholly-owned
subsidiary, Ablesoft, Inc. ("Ablesoft"). The Company was incorporated under
the name Sports Associates, Inc. and changed its name to Microleague Multi-
media, Inc. in March 1996. The Company does not believe that its name change
has affected the sale of its products, which have been, and continue to be,
sold under the Microleague(R) Sports, APBA(R), Ablesoft(TR) and General
Admission(TR) brand names. References to the Company include its subsidiary
unless the context otherwise provides. The Company's executive offices are
located at 750 Dawson Drive, Newark, Delaware 19713, telephone no.: (302)
368-9990; fax no.: (302) 368-5164; e-mail: [email protected].
This Prospectus contains forward-looking statements which involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "RISK
FACTORS."
4
<PAGE>
THE OFFERING
Securities offered ............ 1,020,000 Units, each Unit consisting of one
share of Common Stock, $.01 par value per
Share, and one Redeemable Warrant.
Each Redeemable Warrant entitles the holder
to purchase one Share of Common Stock of the
Company at an exercise price equal to 110%
of the initial public offering price per
Share of Common Stock (subject to adjustment
in certain circumstances) at any time
commencing on the date of the Offering and
ending at 5:00 p.m., New York City time, on
the third anniversary of the date of this
Prospectus.
Each Redeemable Warrant will be redeemable
at the option of the Company at a price of
$.10 per Redeemable Warrant at any time upon
not less than 45 days' prior written notice,
if the last sale price of the Common Stock
exceeds 140% of the initial offering price
per Share of Common Stock for not fewer than
10 of the 15 consecutive trading days ending
on the third trading day prior to the date
on which the notice of redemption is given.
See "DESCRIPTION OF SECURITIES."
Common Stock and Redeemable
Warrants to be outstanding
after the Offering(1) ....... 3,776,667 shares of Common Stock and 1,020,000
Redeemable Warrants to purchase Common
Stock.
Use of Proceeds ............... The Company intends to use the net proceeds
of the Offering to repay bridge notes, to
repay a portion of bank indebtedness, to
fund product development and to provide
working capital which may be used for
general corporate purposes, including
acquisitions of companies or computer
publishing rights for products. See "USE OF
PROCEEDS."
Risk Factors .................. The securities offered hereby are
speculative and involve a high degree of
risk and immediate substantial dilution, and
should not be purchased by investors who
cannot afford the loss of their entire
investment. See "RISK FACTORS" and
"DILUTION."
Proposed Nasdaq symbols ....... Common Stock -- "MLMI" and Redeemable
Warrants -- "MLMIW"
- ------
(1) Does not include Bridge Warrants, the Underwriters' Warrant and other
warrants which are not redeemable and which will be exercisable after the
Offering to acquire an aggregate of 334,931 shares of Common Stock and
outstanding options to acquire 358,931 shares of Common Stock. See
"MANAGEMENT -- 1996 Equity Compensation Plan," "DESCRIPTION OF
SECURITIES" and "UNDERWRITING".
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
Set forth below is certain summary financial information for the Company
as of the dates and for the periods indicated. The financial information for
the year ended December 31, 1995 includes the operations of APBA which was
acquired on January 1, 1995 and also includes three months of operations of
Ablesoft which was acquired on October 1, 1995. The following information is
qualified by, and should be read in conjunction with, the consolidated
financial statements of the Company and the notes thereto included elsewhere
in this Prospectus.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
---------------------------------------------- ---------------------------
1994 1995 1995 Pro Forma(3) 1995 1996
------------ ------------ --------------- ------------ ------------
Unaudited(5)
<S> <C> <C> <C> <C> <C>
Net sales ................................... $2,827,197 $5,010,156 $5,557,362 $ 555,954 $1,131,573
Cost of goods sold .......................... 1,566,644 2,374,975 2,531,057 400,705 688,512
------------ ------------ --------------- ------------ ------------
Gross profit ................................ 1,260,553 2,635,181 3,026,305 155,249 443,061
Selling, general and administrative expenses . 1,178,452 2,286,887 2,891,841 502,293 807,887
Income (loss) from operations ............... 82,101 348,294 134,464 (347,044) (364,826)
Interest expense ............................ 145,210 224,451 276,113 62,021 90,617
Other expense ............................... -- 41,054 57,349 -- --
Income tax benefit(1) ....................... -- 16,300 80,000 -- 84,692
------------ ------------ --------------- ------------ ------------
Net income (loss) ........................... $ (63,109) $ 99,089 $ (118,998) $ (409,065) $ (370,751)
============ ============ =============== ============ ============
Net income (loss) per share ................. $ (.13)
============
Weighted average shares outstanding(1) ...... 2,937,978
------------
Pro forma income data (unaudited):
Income (loss) before taxes ................ $ (63,109) $ 82,789 $ (198,998) $ (409,065)
Income taxes (benefit) at 40% ............. (25,244) 33,116 (80,000) (163,626)
------------ ------------ --------------- ------------
Net income (loss) ......................... $ (37,865) $ 49,673 $ (118,998) $ (245,439)
============ ============ =============== ============
Pro forma earnings (loss) per share ......... $ (.01) $ .02 $ (.04) $ (.09)
============ ============ =============== ============
Weighted average common shares outstanding .. $2,650,345 2,937,978 2,937,978 2,865,310
Supplemental Non-GAAP Data:
EBITDA(2) ................................... $ 155,205 $ 508,364 $ 145,206 $ (317,396) $ (224,525)
============ ============ =============== ============ ============
</TABLE>
Sum Fin A
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
At March 31, 1996
------------------------------------
Actual As Adjusted(4)
------------ --------------
<S> <C> <C>
Working Capital (Deficiency) . $ (871,868) $3,263,799
Total Assets ................ 5,722,441 7,691,441
Current Liabilities ......... 4,396,712 2,230,046
Long-Term Debt .............. 950,647 950,647
Shareholders' Equity ........ 173,694 4,309,360
</TABLE>
- ------
(1) In October 1995, the Company converted from an S corporation to a C
corporation for federal income tax purposes. For an explanation of the
method used for accounting for income taxes and the calculation of the
number of shares used to compute per share amounts, see "Consolidated
Financial Statements -- Note 1".
(2) EBITDA is earnings (net income (loss)) before interest, taxes,
depreciation and amortization. EBITDA is a financial measure commonly
used in financial analysis, but should not be construed as an alternative
to net income (loss) (as determined in accordance with generally accepted
accounting principles) as an indicator of operating performance.
(3) Reflects the inclusion of the results of operations for Ablesoft for the
first nine months of 1995.
(4) Adjusted to reflect (a) the anticipated receipt and application of the net
proceeds of the Offering at an assumed Offering price of $5.50 per Share and
$.10 per Redeemable Warrant, without exercise of the Underwriter's
6
<PAGE>
over-allotment option, (b) repayment of the Bridge Notes and a portion of
the bank debt of the Company and (c) payments relating to the redemption of
certain partnership interests. See "DESCRIPTION OF SECURITIES -- Bridge
Units" and "USE OF PROCEEDS."
(5) The summary financial information for the three months ended March 31,
1995 and 1996 have been derived from unaudited financial information,
which in the opinion of the Company's management, contains all adjustments
necessary for a fair presentation of this information. The summary
financial information for the three months ended March 31, 1995 and 1996
should not be regarded as necessarily indicative of the results that may
be expected for the entire year.
7
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND SHOULD ONLY BE MADE BY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. EACH PROSPECTIVE INVESTOR SHOULD CAREFULLY REVIEW AND
CONSIDER THE FOLLOWING RISK FACTORS AND THE OTHER INFORMATION CONTAINED
HEREIN BEFORE MAKING AN INVESTMENT DECISION.
Dependence on New Products; Short Product Life Cycle. The market for
computer software products is characterized by short product life cycles and
significant price erosion over the life of a product. Therefore, the Company
depends on the timely introduction of successful new products and updated
versions to existing products to replace declining revenues from older
products. If, for any reason, revenues from new products and updated versions
to existing products fail to replace declining revenues from existing
products, the Company's operating results and financial condition would be
materially and adversely affected. The development of multimedia products is
difficult and time consuming, requiring the coordinated participation of
various technical and marketing personnel and independent third party
developers to create attractive products that have advanced technological
features and are also easy to use. This development process often encounters
delays and unanticipated expenses, extending projected time schedules and
increasing actual costs. The Company has experienced delays with respect to
new product releases due principally to insufficient personnel resources and
product development issues. The Company has addressed this problem, in part,
by reallocating personnel resources so that more employees are available to
monitor product development. However, as platforms and computers constantly
change, programmers and developers will undoubtedly incur unanticipated
difficulties in the development process. Historically, product delays
experienced by the Company have adversely affected the Company's liquidity
because sales from multimedia products subject to such delays have commenced
later than initially anticipated. The costs of developing new products may
increase significantly as the computer software industry undergoes
technological changes. Moreover, it is highly likely that the Company will
experience delays in developing and introducing new products in the future. A
significant delay in the introduction of, or the presence of a defect in, one
or more new products could have a material adverse effect on the ultimate
success of such products and on the Company's operating results and financial
condition, particularly if such product delay or defect occurs during the
fourth quarter, in view of the seasonality of the Company's business. See
"BUSINESS--Products."
Product Returns; Accounts Receivable Collection. The industry in which the
Company competes is characterized by a high degree of product returns by
retailers and distributors. Consistent with industry practices, the Company
generally will accept product returns or provide other credits in the event
that a retailer or distributor holds excess inventory of the Company's
products, even when the Company is not legally required to do so. The Company
may provide its distributors or retailers to whom it sells directly with
price protection. It is difficult for the Company to ascertain current demand
for its existing products and anticipated demand for newly introduced
products. Accordingly, the Company is exposed to the substantial risk of
unpredictable product returns from retailers and distributors. Further, the
Company's sales are made on credit terms, and the Company does not hold
collateral to secure payment. While the Company believes that it has
established appropriate allowances for anticipated returns and uncollectible
receivables based on its historical experience, there can be no assurance
that actual returns and uncollectible receivables will not exceed the
Company's allowances. Defective products also may result in higher customer
support costs. Any significant increase in product returns or uncollected
accounts receivable beyond reserves could have a material adverse effect on
the Company's results of operations and financial condition. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- General."
Short-term and Availability of Content Licenses. A substantial portion of the
Company's revenues are derived from products in which the content for such
products is licensed. The Company licenses content for its products from a
variety of sources, including the Major League Baseball Players Association,
National Football League Players Incorporated, publishing companies including
Time, Inc. ("Time") (Sports Illustrated Magazine), and individual developers.
These license agreements typically have terms initially extending for two to
four years, with renewal options in certain instances. The Company's licenses
with the Major League Baseball Players Association, National Football League
Players Incorporated and Time expire on August 31, 1996, February 28, 1997 and
August 1, 1997, respectively. No assurance can be given that, if it so desires,
8
<PAGE>
the Company will be able to renew these license agreements beyond their terms or
on terms acceptable to the Company. The computer software publishing and board
games rights granted to the Company pursuant to its license agreements with the
Major League Baseball Players Association and National Football League Players
Incorporated are on a non-exclusive basis. The license agreements with the Major
League Baseball Players Association and National Football League Players
Incorporated are important to the Company because they permit the Company to use
the names, descriptions and biographical data relating to various professional
baseball and football players in its games. Therefore, the Company would no
longer be able to manufacture and sell games using the names and biographical
data of these players if the Company were unable to renew its license agreements
with the Major League Baseball Players Association or National Football League
Players Incorporated, respectively. Many of the Company's license agreements
require the Company to pay in advance or to guarantee certain specified
royalties, which may be substantial, before the products related to such
licenses have been introduced or have achieved market acceptance. There can be
no assurance that Major League Baseball Players Association, National Football
League Players Incorporated, Time or any other licensor will not re-assess its
commitment to the Company at some time in the future and determine not to renew
its respective license or that such licensor will not develop (or enter into
strategic relationships with other companies to develop) products that directly
compete with the Company's products. See "BUSINESS--Licenses and Proprietary
Rights."
Competition. The interactive multimedia market is intensely competitive.
Currently the Company competes with numerous publishers of computer software
products, some of which have licensing rights with the various players'
associations of professional sports which are similar to the licensing rights
that the Company has obtained. Furthermore, existing software companies which
currently do not sell products that compete directly with the Company's
products may broaden their product lines to compete more directly with the
Company's products, and potential new competitors, including computer
hardware manufacturers, diversified media companies and book publishing
companies, or start-up companies may enter or increase their focus on the
Company's segments of the computer software market, resulting in even greater
competition for the Company. Numerous domestic and foreign companies have
developed or are developing sports statistical simulation games for computers
running on computer disk, CD-ROM and the Internet. The Company's competitors
include established software companies such as Electronic Arts, Maxis, Sierra
On-line, Broderbund, Mindscape, Acclaim and Microsoft, among others, all of
which have developed interactive multimedia software titles on CD-ROM. Many
of the Company's current competitors, and other companies that may enter the
market, have substantially greater financial, technical, marketing, sales and
customer support resources, as well as greater name recognition, than the
Company. See "BUSINESS -- Competition."
Changes in Technology and Industry Standards. The computer software industry
is undergoing rapid change, including evolving industry standards, frequent new
product introductions and changes in consumer requirements and preferences,
resulting in short product life cycles and product obsolescence. The
introduction of new technologies, including operating systems, media formats,
and more advanced multimedia features, can render the Company's existing
products obsolete or unmarketable. In 1993, for example, there was a significant
shift in consumer demand from DOS-based software to Windows(R)-based software.
More recently, consumer demand has been shifting from disk-based software to
software on CD-ROM. In addition, the introduction of the new Windows 95(TR)
operating system may affect consumer preferences and the demand for new software
in ways which cannot be foreseen. Further, the Company anticipates that in the
future, software may be delivered increasingly through on-line services and
networks such as the Internet. There can be no assurance that the current demand
for Windows(R)-based computer disk and CD-ROM products will continue or that the
mix of the Company's future product offerings will keep pace with technological
changes or satisfy evolving consumer preferences. The development cycle for
products utilizing new operating systems or formats may be significantly longer
than the Company's current development cycle for products on existing operating
systems and formats and may require the Company to invest significantly more
resources in developing products that may not become profitable. The
technological changes may significantly increase the Company's cost of
developing new products. There can be no assurance that the Company will be
successful in developing and marketing products for certain advanced and
emerging operating systems and formats. Failure to develop and introduce new
products and product enhancements in a timely fashion or on popular formats
could result in significant product returns and inventory obsolescence and could
impair the Company's operating results and financial condition. See "BUSINESS --
Industry Overview."
9
<PAGE>
Dependence on External Development Resources. The Company relies on
external development resources for the development of a significant number of
the software products it publishes. The Company is dependent upon the
continuing services of certain freelance software developers, consultants,
programmers and product designers who comprise the teams which develop
products under the Company's supervision. Independent developers are in high
demand, and there can be no assurance that independent developers, including
those which have developed products for the Company in the past, will be
available to develop products for the Company in the future. Many independent
developers have limited financial resources, which could expose the Company
to the risk that such developers may go out of business prior to completing a
project or require additional funding from the Company to complete a project.
In addition, due to the fact that the Company has less control over the
scheduling and quality of the work of independent developers than it does
over its own employees, there can be no assurance that such developers will
complete products for the Company on a timely basis, within acceptable
guidelines, or at all. Although the Company does have written development
contracts with substantially all of its third party developers, the terms of
such contracts are generally limited to a product or specific products. In
addition, the Company is relying on one developer, Borta, Inc., to develop
the four new MicroLeague(R) Sports' games, which constitute four of the
Company's eight products under development. In the event Borta, Inc.
experiences delays in developing these products or ceases to develop the
products, the Company's business, operating results and financial condition
could be materially adversely affected. See "BUSINESS -- Product
Development."
Dependence on Retailers and Distributors. The Company sells approximately
two-thirds of its products directly to retailers and to distributors for
resale to retailers, and approximately one-third of its products directly to
end-users through direct mail order. The Company's distributors sell other
computer software products which compete directly with the Company's
products. These distributors may elect to discontinue selling the Company's
products or may elect to devote greater time, energy, and preferred shelf
space to sell and distribute products that compete with the Company's
products. The Company's independent sales representatives, who have been
retained to service different geographic regions of the United States on a
non-exclusive, commission only basis, also sell competing products in
addition to those of the Company. These representatives may elect to devote
greater time and energy to other products, or to products that provide them
with greater remuneration. The Company's retail customers are not
contractually required to make future purchases of the Company's products and
therefore could discontinue carrying the Company's products in favor of a
competitor's product or for any other reason. Due to increased competition
for limited shelf space, retailers and distributors are increasingly in a
better position to negotiate favorable terms of sale, including price
discounts and product return policies. Retailers often require software
publishers to pay fees in exchange for preferred shelf space. There can be no
assurance that the Company will be able to increase or sustain its current
amount of retail shelf space, and as a result, the Company's operating
results could be adversely affected. See "BUSINESS -- Sales and Marketing."
Customer Concentration and Credit Risk. In 1995, the Company's three
largest customers accounted for approximately 29% of net revenues and
accounted for approximately 30% of the Company's accounts receivable at
December 31, 1995. The Company's largest customer, Yale Materials Handling
Corporation (a printing services customer) accounted for approximately 15% of
the Company's net revenues in 1995 and accounted for approximately 10% of the
Company's accounts receivable at December 31, 1995. The Company's top ten
customers collectively represented 51% of net revenues in 1995 and accounted
for 73% of the Company's accounts receivable at December 31, 1995. The loss
of any of the Company's major customers, a significant decrease in product
shipments to one or more of them, or an inability to collect receivables from
one or more of them could materially adversely affect the Company's business,
operating results and financial condition. See "BUSINESS -- Sales and
Marketing."
Limited Profitability; Working Capital Deficit; Repayment of Debt. From
inception through 1994, the Company experienced losses. In 1995 the Company had
profits of $99,089. However, there can be no assurance that the Company will
continue to have profitable operations in the future. As of March 31, 1996, the
Company had a working capital deficit of $871,868. The Company believes that the
net proceeds of the Offering, together with cash on hand and anticipated cash
flow from operations will be sufficient to meet its capital requirements for at
least 12 months following the Offering. However, it is likely that the Company
will require additional financing thereafter. In addition, the Company's working
capital requirements may increase depending upon numerous factors, including
without limitation increased costs of development of products and the need to
finance increased inventory and accounts receivable arising from the
10
<PAGE>
introduction and shipment of new products. The Company may seek to satisfy such
requirements through bank financing or the sale of capital stock or debt
securities. There can be no assurance that such financing will be available when
needed, or that such financing, if available, would be on terms acceptable to
the Company. Approximately $2,425,000 (representing 55.50%) of the net proceeds
of the Offering will be used by the Company to repay existing indebtedness. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources."
Limited Protection of Intellectual Property Rights. The Company regards
its software as proprietary and relies primarily on a combination of
trademark, copyright and trade secret laws, employee and third party
nondisclosure agreements and other methods to protect its proprietary rights.
The Company has federal registrations for the trademarks Microleague(R) (the
Company's federal registration actually covers the mark Micro League; the
Company intends to petition the Patent and Trademark Office to amend the
registration to feature the mark as a single word, i.e., Microleague),
MicroLeague Baseball(R) (the Company's federal registration actually covers
the mark Micro League Baseball; the Company intends to petition the Patent
and Trademark Office to amend the registration to feature the first two words
of the mark as a single word, i.e., Microleague) and APBA(R). The Company has
pending trademark applications for federal registration for Microleague
Multimedia(TR), Affiliate Venture Publishing(TR), General Admission(TR) and
Ablesoft(TR). The Company owns the copyright in all of its principal
proprietary software used in its products. With respect to some of its
secondary products, the Company jointly owns the copyright in some of the
software used in those products with the software developer that initially
created the software. The Company has a registered copyright for one of the
several versions of its proprietary software. The Company licenses the right
to publish software owned by other software developers; the Company also
occasionally assists other software vendors in publishing, packaging and/or
distributing their products. The Company makes no claim of ownership in the
copyright of any such software of others, nor is such software proprietary to
the Company. The Company does not include in its products any mechanism to
prevent or inhibit unauthorized copying. Unauthorized copying occurs within
the software industry, and if a significant amount of unauthorized copying of
the Company's products were to occur, the Company's business, operating
results and financial condition could be adversely effected. Also, as the
number of software products in the industry increases and the functionality
of these products further overlaps, software developers and publishers may
increasingly become subject to infringement claims. The commercial success of
the Company's products also depends upon not infringing intellectual property
rights of others. The Company enters into licensing agreements with third
party intellectual property owners for use of their property in connection
with the Company's products in order to protect such third party's
intellectual property rights. The Company is not aware that it is infringing
the trademark rights of any other entity, although some of its trademarks may
be similar in some respect to trademarks used by others. The Company recently
became aware of the existence of at least one third party that may be using
one of the Company's marks (General Admission(TR)) to identify possibly
related goods. The Company believes that the Company's own use of the
pertinent mark predates the third party's use of its mark. The Company is
investigating this potentially infringing apparent third-party use of the
mark and, based on the results of that investigation, may decide to oppose
the third-party's use of the mark or alter its own use of the mark. The
Company is not aware of the existence of any other confusingly similar prior
mark, although there can be no assurance that a claim of infringement will
not be asserted against the Company or that any such assertion will not
result in costly litigation, and/or require the Company to obtain a license
to use the trademark to identify particular products, or require the Company
to change one or more of its trademarks. If the Company were compelled to
change one or more of its significant trademarks, it could thereby lose
goodwill and incur reduced revenues and increased expenses from advertising
and establishing a new name and producing new products and/or packaging
materials. Although the Company has not been the subject of any intellectual
property litigation, there has been substantial litigation regarding
copyright, trademark, and other intellectual property rights involving other
computer software companies. See "BUSINESS -- Licenses and Proprietary
Rights."
Dependence on Key Personnel. The Company is highly dependent on its executive
officers, the loss of any of whom, particularly Neil Swartz, the Company's
Chairman of the Board and Chief Executive Officer or John Ferretti, the
Company's President, could have an adverse affect on the future operations of
the Company. The Company has obtained "key-man" life insurance on the life of
each of Mr. Swartz and Mr. Ferretti in the amount of $1,000,000 and $400,000,
respectively. Effective January 1, 1996, the Company entered into employment
agreements for three year terms with both Neil Swartz and John Ferretti. See
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<PAGE>
"Management -- Employment Agreements." The Company's success is also dependent
on its ability to attract, retain and motivate highly trained technical,
marketing, sales and management personnel. The interactive multimedia industry
is characterized by a high level of employee mobility and aggressive recruiting
of skilled personnel. An inability to attract, retain and motivate personnel
required for development, maintenance and expansion of the Company's activities
could adversely affect its business and prospects. See "MANAGEMENT."
Future Acquisitions and Management's Discretion in Applying Proceeds. During
1995, the Company acquired substantially all of the operating assets of APBA and
all of the stock of Ablesoft. These two acquisitions accounted for approximately
31% of the Company's revenue on a pro forma basis in 1995. Management of the
Company has and will continue to devote substantial time and attention to the
integration of these businesses with the business of the Company. The Company
anticipates that it will acquire additional companies, businesses or corporate
assets in the future to expand its product mix, and management will have broad
discretion in the allocation of approximately $1,944,000 (representing 44.50%)
of the net proceeds of the Offering for, among other things, such acquisitions.
The integration of acquired companies is expensive, difficult, time consuming
and not always successful. See "BUSINESS -- Company Strategy."
Arbitrary Determination of Offering Price. The Offering price of the
Shares of Common Stock and of the Redeemable Warrants as well as the exercise
price of the Redeemable Warrants were arbitrarily determined in negotiations
between the Company and the Underwriter and do not necessarily bear any
relationship to the Company's asset or book value, net worth or any other
established criteria of value. The Offering price of the Common Stock and the
exercise price of the Redeemable Warrants should not be regarded as
indicative of the actual value of such securities being offered by the
Company. See "UNDERWRITING."
Immediate and Substantial Dilution. The present owners of shares of the
Company's issued and outstanding Common Stock have acquired their interests
in the Company at costs substantially less than those which the investors in
the Offering will pay. Upon the sale of the Shares of Common Stock in the
Offering at an assumed offering price of $5.50 per Share, the net tangible
book value of each share of Common Stock would have been $.69 ($.73
(assuming the exercise of all of the Bridge Warrants) on an as adjusted basis
as of March 31, 1996, which will represent an immediate increase in net
tangible book value per share of $1.33 to existing shareholders and dilution
of $4.81 per Share to investors in the Offering (representing 87% of the
initial public offering price per Share). See "DILUTION."
Directors' Liability Limited. The Company's Bylaws provide that its
directors will not be held liable to the Company or its shareholders for
monetary damages upon breach of a director's fiduciary duty, except to the
extent otherwise required by law. See "DESCRIPTION OF SECURITIES -- Certain
Pennsylvania Law and Bylaw Provisions Affecting Shareholders."
Concentration of Stock Ownership and Voting Power in Management. After
completion of the Offering, the current officers and employee directors of
the Company will beneficially own 35.48% of the outstanding Shares of Common
Stock. If all of the Company's officers and directors vote together, they
will control 61.85% of the Company's voting power, and will be able to
control the Company. See "CAPITALIZATION" and "PRINCIPAL SHAREHOLDERS."
Anti-takeover Provisions; Future Issuances of Stock; Ability to Issue
Preferred Stock Without Prior Shareholder Approval. The Company will, upon
consummation of the Offering, be subject to the anti-takeover provisions of the
Pennsylvania Control-Shares Acquisitions Law which creates substantial barriers
to the ability of any person or groups of persons to take control of the Company
without the approval of the Board of Directors of the Company. In addition,
certain provisions of the Articles of Incorporation and Bylaws of the Company
may have the affect of discouraging, delaying or preventing any merger, tender
offer or proxy contest, which could adversely affect the market price of the
common stock of the Company, or the ability of a shareholder to participate in
such a transaction. Following the Offering, the Company will have an aggregate
of 10,000,000 shares of Common Stock authorized, of which 3,776,667 shares will
be issued and outstanding and an additional 2,778,195 shares will have been
reserved for specific purposes. The authorized shares of Common Stock, which are
not reserved for a specific purpose,may be issued without any action by or
approval of the Company's shareholders. The Company will also have 1,000,000
shares of "blank check" preferred stock, $.01 par value per share (the
"Preferred Stock"), authorized, none of which have been issued as of the date
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<PAGE>
hereof. The Board of Directors has the authority to issue one or more series of
Preferred Stock without further action by the shareholders. Each such series may
have such preferences, rights and other provisions, including liquidation,
conversion and voting rights as the Board of Directors may designate, which
could adversely affect the voting power or other rights of the holders of the
Company's Common Stock. Although there are no present plans, agreements or
undertakings with respect to the Company's issuance of any shares of such stock,
or related convertible securities, other than as disclosed in this Prospectus,
the issuance of any of such securities by the Company could have anti-takeover
effects insofar as they could be used as a method of discouraging, delaying or
preventing a change in control of the Company. See "DESCRIPTION OF SECURITIES --
Certain Provisions of Pennsylvania Law and the Company's Articles of
Incorporation and Bylaws."
Shares Eligible for Future Sale. The existing shareholders of the Company
own in the aggregate approximately 2,756,667 shares of the Common Stock of
the Company, and all such shareholders have agreed not to sell their shares
of Common Stock for a period of eighteen months following the date of this
Prospectus without the Underwriter's prior written consent. However, the
shares of the Common Stock underlying the Bridge Warrants are being
registered concurrently with the Offering and, upon exercise of the Bridge
Warrants, would be freely tradeable without restriction. No prediction can be
made as to the effect, if any, that sales of shares of Common Stock or even
the availability of such shares for sale will have on the market prices of
the Company Securities prevailing from time to time. The possibility that
substantial amounts of Common Stock may be sold in the public market may
adversely affect prevailing market prices for the Common Stock and could
impair the Company's ability in the future to raise capital through the sale
of its equity securities. See "SHARES ELIGIBLE FOR FUTURE SALE."
No Dividends. The Company has not paid any dividends on its Common Stock
to date. The Company intends to retain earnings, if any, to finance the
operation and expansion of its business and, therefore, does not expect to
pay dividends in the foreseeable future. See "DIVIDEND POLICY."
No Assurance of Public Market; Certain Market Risks. Prior to the
Offering, there has been no public trading market for the Common Stock or
Redeemable Warrants. There can be no assurance that a regular trading market
for the Common Stock or Redeemable Warrants will develop after the Offering
or that, if developed, it will be sustained. The market prices of the
Company's Securities following the Offering may be highly volatile as has
been the case with the securities of other smaller companies. Factors such as
the Company's operating results, announcements by the Company or its
competitors of new computer software programs affecting the computer
industry, and general market conditions may have a significant impact on the
market price of the Company's Securities. Although it has no obligation to do
so, the Underwriter intends to make a market in the Company's Securities and
may otherwise effect transactions in the Company's Securities. If the
Underwriter makes a market in the Company's Securities, such activities may
exert a dominating influence on the market and such activity may be
discontinued at any time in the sole discretion of the Underwriter. The
prices and liquidity of the Company's Securities may be significantly
affected to the extent, if any, that the Underwriter participates in such
market. See "UNDERWRITING."
Risks Relating to Low-Priced Stocks. It is currently anticipated that the
Company's Common Stock will be eligible for quotation on the Nasdaq SmallCap
market upon the completion of the Offering. In order to continue to be listed on
Nasdaq, however, the Company must maintain $2,000,000 in total assets, and
$1,000,000 in total capital and surplus, plus a public float of $200,000. In
addition, continued inclusion requires two market-makers and a minimum bid price
of $1.00 per share; provided, however, that if the Company falls below such
minimum bid price, it will remain eligible for continued inclusion in Nasdaq if
the market value of the public float is at least $1,000,000 and the Company has
$2,000,000 in capital and surplus. The failure to meet these criteria in the
future may result in the removal of the Common Stock and Redeemable Warrants
from Nasdaq, and trading, if any, in the Company's Securities would thereafter
be conducted in the non-Nasdaq over-the-counter market. As a result of such
removal, an investor could find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, the Company's Securities. The
Securities and Exchange Commission has adopted rules that regulate broker-dealer
practices in connection with transactions in "penny stocks." Penny stocks are
defined by law generally as equity securities with a price of less than $5.00
(other than securities registered on certain national securities exchanges or
quoted on the Nasdaq system provided that current price and volume information
with respect to transactions in such securities is provided by the exchange or
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<PAGE>
system). The penny stock rules place additional responsibilities on
broker-dealers effecting transactions in such securities. These requirements may
have the effect of reducing the level of trading activity in the secondary
markets for a stock that becomes subject to the penny stock rules. If the
Company's Common Stock becomes subject to the penny stock rules, investors may
find it more difficult to sell their Common Stock and such rules may have the
effect of reducing the price of the Company's Securities.
Potential Adverse Effect of a Warrant Redemption. The Redeemable Warrants
are subject to redemption by the Company at a price of $.10 per Redeemable
Warrant at any time upon not less than 45 days prior written notice, if the
last sale price of the Common Stock exceeds 140% of the initial public
offering price per Share of Common Stock for not less than 10 of the 15
trading days ending on the third trading day prior to the day on which the
notice of redemption is given. Redemption of the Redeemable Warrants could
force the holders to exercise the Redeemable Warrants and pay the exercise
price at a time when it may be disadvantageous for the holders to do so, or
when the holders are financially unable to do so, or alternatively, to sell
the Redeemable Warrants at the then current market price or to accept the
redemption price. See "DESCRIPTION OF SECURITIES -- Redeemable Warrants."
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<PAGE>
USE OF PROCEEDS
The net proceeds (after deducting underwriting discounts and commissions
and the estimated expenses of the Offering) to be received by the Company
from the sale of the securities to be sold in the Offering are estimated to
be approximately $4,369,000 (approximately $5,114,000 if the Underwriter's
over-allotment option is exercised in full) based on an assumed initial
public offering price of $5.50 per share of Common Stock and $0.10 per
Redeemable Warrant. The Company expects to use such net proceeds as follows:
<TABLE>
<CAPTION>
Approximate
Amount of Net Percentage
Anticipated Application of Proceeds Proceeds of Net Proceeds
---------------------------------- --------------- ---------------
<S> <C> <C>
Repayment of Bridge Notes, including accrued interest(1) . $ 825,000 18.88%
Partial repayment of bank debt(2) ...................... 1,360,000 31.13
Product development .................................... 500,000 11.44
Redemption of partnership interests(3) 240,000 5.50
Working capital and general corporate purposes(4) ...... 1,444,000 33.05
--------------- ---------------
$4,369,000 100%
=============== ===============
</TABLE>
- ------
(1) The Bridge Notes bear interest at a rate equal to 12% per annum (an
effective rate of 48% per annum after applying the original issue
discount) and will be repaid at the closing of the Offering. See
"DESCRIPTION OF SECURITIES -- Bridge Units".
(2) The bank debt to be repaid is the Company's primary line of credit which
bears interest at the bank's prime rate (8.25% at March 31, 1996).
Amounts due under the line of credit are payable on demand. The Company's
primary line of credit has been used for working capital and general
corporate purposes. As a result of this repayment, a pledge of certain
securities by a director and significant shareholder of the Company will
be released. See "CERTAIN TRANSACTIONS". The Company is currently
negotiating to increase its borrowing capacity and to amend certain other
items of its primary line of credit with this bank.
(3) The Company intends to use a portion of the proceeds to facilitate the
redemption of limited partnership interests in Interactive Multimedia
Limited Partnership (the "Partnership"), which owns a 5% interest in
certain technology relating to two of the Company's products and which is
entitled to receive a royalty equal to 10% of the net cash proceeds from
sales of those products. To provide funds for this redemption by the
Partnership, the Company will prepay a promissory note issued by the
Company to the Partnership in the outstanding principal amount of
$187,820 (the "Note") and will pay to terminate certain royalty rights
owned by the Partnership pertaining to these products. The Note bears
interest at 7% per annum and is payable quarterly. The Company used the
proceeds of the Note for product development. Neil Swartz, the Chief
Executive Officer of the Company, is a 50% shareholder of the corporate
general partner of the partnership. See "CERTAIN TRANSACTIONS."
(4) The Company intends to utilize the working capital provided by the
Offering to finance the expansion of its business including, if
appropriate, the acquisition of complementary businesses, products or
computer publishing rights for products. There are no current agreements
or negotiations with respect to any such transactions which would be
material to the operations of the Company.
If the Underwriter exercises the over-allotment option in full, based on the
assumptions set forth above, the Company would realize additional net
proceeds of $771,000(less the Underwriter's 3% non-accountable expense
allowance on the over-allotment) which will be added to the Company's working
capital.
There can be no assurance as to the specific dollar amounts or timing of
expenditures for the intended uses of the net proceeds set forth above. The
level and timing of expenditures necessary for product development and
working capital will depend upon numerous factors, including the progress of
the Company's acquisition of content licenses for existing sports-related
games and other products, the degree of acceleration of development of
specific titles, the relative mix of services provided by in-house personnel
and contracted third party developers, the responsibilities and size of the
Company's sales and marketing staff, and the timing and amount of revenue
resulting from the release of new titles and products.
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Proceeds not immediately required for the purposes described above will be
invested principally in short-term investment grade debt obligations, bank
certificates of deposit, United States Government money market instruments or
other short-term interest bearing investments, and such proceeds may be
transferred by the Company to a wholly-owned subsidiary to be organized for
such investment purposes.
DILUTION
The difference between the Offering price per Share of Common Stock and
net tangible book value per Share after the Offering constitutes one measure
of the dilution to investors in the Offering. Net tangible book value per
share is determined by dividing the net tangible book value of the Company
(total tangible assets less total liabilities) by the number of Shares of
Common Stock outstanding.
At March 31, 1996 the net tangible book deficit of the Company was
($1,760,996), or ($.64) per share of Common Stock. After giving effect to the
sale of the 1,020,000 Shares of Common Stock offered hereby at an assumed price
of $5.50 per Share of Common Stock and 1,020,000 Redeemable Warrants at $.10
per Redeemable Warrant (less underwriting discounts and commissions and
estimated expenses of this Offering), the pro forma net tangible book value
of the Company would have been $2,608,444 or $.69 per share of Common Stock,
representing an immediate increase in net tangible book value of $4,369,440
or $1.33 per share to existing shareholders and an immediate dilution of
$4.81 per Share of Common Stock to new investors representing 91% of the
initial Public Offering Price per Share.
The following table illustrates the foregoing information with respect to
dilution to new investors on a per Share basis:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price per Share of Common Stock (1) $5.50
-------
Pro forma net tangible book deficit before Offering . (.64)
Increase attributable to new investors .............. 1.33
------
Pro forma net tangible book value after the Offering ..... .69
-------
Dilution to new investors ................................ $4.81
=======
</TABLE>
- ------
(1) Does not include the purchase price of $.10 per Redeemable Warrant and
assumes no exercise of the over-allotment option.
The following table sets forth, at March 31, 1996, a comparison between
the Company's existing shareholders and new investors, with respect to the
number of shares of Common Stock acquired from the Company, the percentage
ownership of such shares, the total consideration paid, the percentage of
total consideration paid and the average price per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price
------------------------ ------------------------- ---------------
Number Percent Amount Percent Per Share
----------- --------- ------------ --------- ---------------
<S> <C> <C> <C> <C> <C>
Existing shareholders . 2,756,667 73% $2,309,436 29% $0.84
New investors ........ 1,020,000 27% $5,610,000 71% $5.50
----------- --------- ------------ --------- ---------------
Total .............. 3,776,667 100% $7,919,436 100%
=========== ========= ============ =========
</TABLE>
The above table assumes a price of $5.50 per Share for the Common Stock
offered hereby and no exercise of the Underwriter's over-allotment option. If
the Underwriter's over-allotment option is exercised in full, the new
investors will have paid $6,451,500 for 1,173,000 shares of Common Stock,
representing approximately 74% of the total consideration, for 30% of the
total number of shares of Common Stock outstanding.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996. On an as adjusted basis, the table reflects the issuance of
Common Stock and Redeemable Warrants contemplated in the Offering (at an
assumed Offering price of $5.50 per Share and $.10 per Redeemable Warrant,
without exercise of the Underwriter's over-allotment option), the repayment
of the Bridge Notes and a portion of the bank debt of the Company and
payments relating to the redemption of certain partnership interests. See
"USE OF PROCEEDS" and "DESCRIPTION OF SECURITIES -- Bridge Units." The table
should be read in conjunction with the financial statements and related notes
contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
March 31, 1996
------------------------------
As
Actual Adjusted
------------- -------------
<S> <C> <C>
Short-term debt
Bridge notes(1)................................. $ 566,666 $ --
Notes payable .................................. 2,175,632 815,632
Current portion of long-term debt .............. 343,746 103,746
------------- -------------
Total Short-term debt ............................ $ 3,086,044 $ 919,378
============= =============
Long-term debt ................................... 950,647 950,647
Shareholders' equity:
Preferred stock $.01 par value -- none issued .. -- --
Common stock $.01 par value 10,000,000 authorized
2,756,667 shares outstanding, 3,776,667 shares
outstanding on an as adjusted basis .......... 27,567 37,767
Additional paid-in capital ..................... 2,383,771 6,640,571
Warrants ....................................... 160,000 262,000
Accumulated deficit (1)......................... (2,243,131) (2,476,465)
Less: Receivable from shareholders ............. (70,180) (70,180)
Deferred Compensation .................... (84,333) (84,333)
------------- -------------
Total shareholders' equity ..................... $ 173,694 $ 4,309,360
============= =============
Total capitalization ........................... $ 1,124,341 $ 5,260,007
============= =============
</TABLE>
- -------
(1) Reflects the impact of expensing the original issue discount of 233,334
related to the 800,000 bridge loan.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock and does
not expect to declare any cash dividends in the foreseeable future. Payments
of dividends, if any, will be at the discretion of the Board of Directors
after taking into account various factors, including the Company's financial
condition, results of operation and current and anticipated cash needs and
other factors the Board of Directors may deem relevant. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Liquidity and Capital Resources."
17
<PAGE>
SELECTED FINANCIAL DATA
The selected historical financial data presented below are derived from
the financial statements of the Company which have been audited by Coopers &
Lybrand L.L.P., independent accountants, whose report is included elsewhere
herein. The 1995 pro forma income statement information is presented to show
the impact of the acquisitions of Ablesoft and APBA as of January 1, 1995.
The selected historical financial data for the three months ended March 31,
1995 and 1996 have been derived from unaudited financial information, which
in the opinion of the Company's management, contain all adjustments necessary
for a fair presentation of this information. The selected historical
financial data for the three months ended March 31, 1995 and 1996 should not
be regarded as necessarily indicative of the results that may be expected for
the entire year. The data set forth below should be read in conjunction with
and is qualified in its entirety by the financial statements and related
notes, Management's Discussion and Analysis of Financial Condition and
Results of Operations and Pro Forma Financial Information.
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
--------------------------------------------- ----------------------------
(unaudited)
1995 Pro
1994 1995 Forma(3) 1995 1996
------------ ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues .................... $2,827,197 $5,010,156 $5,557,362 $ 555,954 $1,131,573
Cost of goods sold .............. 1,566,644 2,374,975 2,531,057 400,705 688,512
------------ ------------ -------------- ------------ ------------
Gross profit .................... 1,260,553 2,635,181 3,026,305 155,249 443,001
Operating expenses:
Selling and marketing ........ 329,209 515,882 676,090 101,633 191,099
General and administrative ... 849,243 1,771,005 2,215,751 400,660 616,788
------------ ------------ -------------- ------------ ------------
Income (loss) from operations ... 82,101 348,294 134,464 (347,044) (364,826)
Interest expense ................ 145,210 224,451 276,113 62,021 90,617
Other expenses .................. -- 41,054 57,349 -- --
------------ ------------ -------------- ------------ ------------
Income (loss) before taxes ...... (63,109) 82,789 (198,998) (409,065) (455,443)
Income tax benefit(1) ........... -- 16,300 80,000 -- 84,692
------------ ------------ -------------- ------------ ------------
Net income (loss) ............... $ (63,109) $ 99,089 $ (118,998) $(409,065) $(370,751)
============ ============ ============== ============ ============
Net income (loss) per share ..... $ (.13)
============
Weighted average common shares
outstanding(1) ............... 2,937,978
============
Pro forma income data (unaudited):
Income (loss) before taxes(1) . $ (63,109) $ 82,789 $ (198,998) $ (409,065)
Income taxes (benefit) at 40% . (25,244) 33,116 (80,000) (163,626)
------------ ------------ -------------- ------------
Net income (loss) ............ $ (37,865) $ 49,673 $ (118,998) $ (245,439)
============ ============ ============== ============
Pro forma earnings (loss) per share $ (.01) $ .02 $ (.04) $ (.09)
============ ============ ============== ============
Weighted average common shares
outstanding ..................... 2,650,345 2,937,978 2,937,978 2,865,310
============ ============ ============== ============
Supplemental Non-GAAP Data:
EBITDA(2) ......................... $ 155,205 $ 508,364 $ 145,206 $ (317,396) $(224,525)
============ ============ ============== ============ ============
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of March 31,
------------------------------- ---------------
(unaudited)
1994 1995 1996
-------------- ------------- ---------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital (deficiency) $(1,276,466) $ (583,245) $ (871,868)
Total assets .............. 1,793,366 5,374,539 5,722,441
Total liabilities ......... 2,939,767 5,232,942 5,548,747
Accumulated deficit ....... (1,971,469) (1,872,380) (2,243,131)
Shareholders' equity
(deficit) .............. (1,146,401) 141,597 173,694
</TABLE>
18
<PAGE>
- ------
(1) In October 1995, the Company converted from an S corporation to a C
corporation for federal income tax purposes. For an explanation of the
method used for accounting for income taxes and the calculation of the
number of shares used to compute per share amounts, see "Consolidated
Financial Statements -- Note 1".
(2) EBITDA is earnings (net income (loss)) before interest, taxes,
depreciation and amortization. EBITDA is a financial measure commonly
used in financial analysis and should not be construed as an alternative
to net income (loss) (as determined in accordance with generally accepted
accounting principles) as an indicator of operating performance.
(3) For complete pro forma financial information and footnotes, see pages
F-26 through F-28.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the historical
financial statements, including the notes thereto, of the Company included
elsewhere in this Prospectus.
GENERAL
The Company designs, develops and markets interactive multimedia software
products for the entertainment, lifestyle and educational segments of the
personal computer software markets and also provides publishing services. The
Company is a Pennsylvania corporation which was incorporated, and commenced
operations, in 1989. To date, the Company has an accumulated deficit as a
result of losses in four of the five years from 1989 through 1993. The losses
in prior years were related to selling, general and administrative expenses
associated with establishing its infrastructure including, but not limited
to, hiring personnel, purchasing information systems and equipment, and
establishing market channels. These efforts have substantially been
completed.
During 1995, the Company acquired two companies, APBA, a publisher and
developer of software and board sports games, which was purchased on January
1, and Ablesoft, a lifestyle and productivity software publisher and
developer, which was purchased on September 30. Both acquisitions were
accounted for in accordance with the purchase method of accounting. APBA was
acquired through an asset purchase financed primarily through seller notes,
while Ablesoft was a tax-free stock exchange. These acquisitions resulted in
the Company recording goodwill of approximately $790,000, of which
approximately $751,000 relates to Ablesoft and approximately $40,000 relates
to APBA, which amounts are being amortized over 10 years. These
acquisitions also contributed approximately $350,000 in additional inventory.
As a result of the acquisitions, the Company plans to consolidate facilities in
1996 at an estimated cost of approximately $45,000.
The Company's interactive multimedia CD-ROM publishing business involves
the development of proprietary computer software, and the licensing of CD-ROM
and, in certain instances, other electronic publishing rights to content. The
Company is expected to require continued increases in the number of the
Company's employees, expenditures for new product development, the
acquisition of licensing or product rights, sales and marketing expenses, and
general and administrative expenses relating to the continued development of
a management infrastructure and facilities necessary to support the Company's
growth.
Net revenues consist of gross revenues, net of allowances for returns and
price protection credits given to distributors and retailers. The Company
records an allowance for returns and price protection credits based on
historical experience at the time revenue is recognized. The Company adjusts
the allowance for returns as it deems appropriate. The Company may accept
substantial product returns or make other concessions to maintain its
relationships with retailers and distributors and its access to distribution
channels. Concessions predominantly consist of price protection credits from
the Company to effectively reduce the distributor's unit cost and prices to
retailers. For 1995 the Company reduced sales and increased the allowance for
returns and doubtful accounts by $784,000. The entire allowance at the
beginning of 1994 of $310,000 was sufficient to cover the actual returns.
Allowances and other reductions to accounts receivable realized in 1995 of
approximately $260,000 resulted from transactions arising in 1994 and prior
years. Of the $784,000 recorded in 1995 $390,000 related to 1995 transactions
with the balance used for future reductions of related transactions. For 1994
the Company reduced sales and increased the allowance for returns and
doubtful accounts by $425,000. The existing allowance at the beginning of
1993 of $512,000 was sufficient to cover actual returns allowances and other
reductions to accounts receivable realized in 1994 of approximately $462,000
resulting from transactions arising in 1993 and prior years. Of the $425,000
recorded in 1994, $165,000 related to 1994 known transactions with the
balance used for future reductions related to 1994 transactions. The Company
records an allowance for returns and price protection credits based on
historical experience at the time revenue is recognized. If the Company
chooses to accept product returns, some of that product may be defective,
shelf-worn or damaged and therefore may not be salable in the ordinary
course. The Company currently anticipates that its actual returns plus
provisions for returns as a percentage of revenues will not change
materially. Historically, the Company's bad debts and uncollected receivables
have not been material.
20
<PAGE>
Cost of goods sold consists primarily of product costs, freight charges,
royalties and an inventory allowance for defective, damaged and obsolete
products. Product costs consist of the costs to purchase the underlying
materials and print both boxes and manuals, media costs (CD-ROMs), and
assembly and shipping. Royalties consist of the amortization of license fees
in connection with the Company's rights to use players associations'
statistical information and content license fees for publishing other
developers' products. All of the Company's current license arrangements call
for the Company to pay royalties based on a percentage of the Company's net
cash received relating to the respective products. Amounts prepaid upon
signing of licenses are generally not substantial, and were treated as
prepayments against the aforementioned royalties. Cash paid for licenses in
the form of royalties was approximately $93,000 in 1994 and $98,000 in 1995.
The Company's provision for inventory obsolescence was $136,143 in 1994 and
$59,271 in 1995.
Despite the possibility of increased competition in the future for these
licenses, the Company believes new content licenses will become available as
both the market and the demand for CD-ROM entertainment products grow.
Accordingly, the Company is unable to predict whether the costs of its
licenses will increase or decrease in future periods.
The printing capabilities of the Company reduce the cost of the Company's
multimedia products, with any excess capacity sold to outside customers.
Accordingly, the printing group has historically operated at a loss. The
Company anticipates that, to the extent printing services volume to outside
customers increases, the printing services group may become profitable.
The consumer electronics market is characterized by significant seasonal
changes in demand, which typically is highest in the fourth quarter of each
year. The most important seasonal pattern is due to the increased demand for
software during the year-end holiday buying season. The Company expects its
net sales and operating results to continue to reflect this seasonality. The
Company's revenues may also experience substantial variations as a result of
a number of factors, such as consumer preferences and the introduction of
competing titles.
QUARTER ENDED MARCH 31, 1996 COMPARED TO THE QUARTER ENDED MARCH 31, 1995
Net sales increased approximately $576,000, or 104%, from approximately
$556,000 in the quarter ended March 31, 1995, to approximately $1,132,000 in the
quarter ended March 31, 1996. The increase consisted of approximately $547,000,
or 203% increase in the Company's multimedia product revenues as well as a
$29,000, or 10%, increase in the Company's printing services revenues. For the
quarter ended March 31, 1996, the Company's revenues were comprised of
approximately $815,000 from multimedia products and approximately $317,000 from
printing services. The significant increase in revenues from multimedia products
is attributable to new products released in the fourth quarter of 1995, as well
as the inclusion of Ablesoft's product revenues in the quarter ended March 31,
1996. The significant increase in multimedia product sales was offset by the
provision for the sales return and price protection allowance of approximately
$170,000 for the quarter ended March 31, 1996. Although net sales increased by
$547,000, $379,000 of this increase is attributable to the Company's direct mail
sales, which have no returns or price protection. The significant direct mail
sales in the first quarter, approximately 47% of net sales in the quarter ended
March 31, 1996 as compared to 27% of net sales for the quarter ended March 31,
1995, are the primary reason the allowance for sales returns and price
protection did not increase substantially in relation to the net sales increase
for the respective quarters.
Costs of goods sold increased by approximately $288,000, or 72%, from
approximately $401,000 for the quarter ended March 31, 1995, to approximately
$689,000 for the quarter ended March 31, 1996 primarily as a result of the
material and labor costs associated with the significant increase in
multimedia unit sales. As a percentage of net sales, cost of goods sold
decreased from approximately 72% in the 1995 quarter to approximately 61% in
the 1996 quarter. The decrease in cost of goods sold as a percentage of net
sales is the result of the significant increase in multimedia product sales
in the 1996 quarter compared to the 1995 quarter. Multimedia product sales
have a much higher gross profit margin than the Company's printing services
sales. For the quarter ended March 31, 1996 multimedia products accounted for
approximately 72% of revenues and printing services accounted for
approximately 28% of revenues, as compared to 48% and 52%, respectively for
the first quarter of 1995.
Although marketing and sales expenses increased from approximately
$102,000 in the quarter ended March 31, 1995 to approximately $191,000 in the
quarter ended March 31, 1996, as a percentage of sales, marketing and selling
expenses were fairly consistent at approximately 18% and 17%, respectively.
The increase in expenses is primarily due to increased marketing activities
to promote the Company's products and brand name, and increased personnel.
The Company intends to continue to launch new marketing promotions and to
hire additional personnel.
21
<PAGE>
General and administrative expenses increased by approximately $216,000,
or by 54%, from approximately $401,000 for the 1995 first quarter, to
$617,000 for the quarter ended March 31, 1996. This substantial increase is
primarily due to the hiring of several personnel in finance to facilitate the
Company's expansion and to assist with financial reporting, as well as due to
the amortization of intangible assets resulting from the acquisitions in
1995.
Depreciation expense increased by approximately $18,000, or 113%, from
approximately $16,000 for the quarter ended March 31, 1995 to $34,000 for the
quarter ended March 31, 1996. This increase is due to additions to property,
plant and equipment during 1995 and the quarter ended March 31, 1996 for
leasehold improvements, autos and trucks and for upgrading computer
equipment.
Interest expense increased by approximately $29,000, or 47%, from
approximately $62,000 for the 1995 quarter, to $91,000 for the quarter ended
March 31, 1996. The significant increase is primarily a result of the
Company's bridge financing completed in February of 1996. As a result of the
common stock warrants associated with the bridge financing, the Company
incurred approximately $27,000 of original issue discount interest expense in
the quarter ended March 31, 1996. The Company anticipates that it will incur
an extraordinary charge to earnings in the second quarter of 1996 for the
remaining unamortized original issue discount interest expense of
approximately $206,000 upon the completion of the Offering.
As a result of the Company's acquisition of Ablesoft on September 30,
1995, the Company converted to a C corporation from an S corporation on
October 1, 1995. Thus, for the first quarter of 1995, the Company did not
have to provide for federal and state corporate income taxes. For the first
quarter of 1996 the Company has estimated its effective tax rate to be 18%,
for the year ended December 31, 1996.
RESULTS OF OPERATIONS IN 1995 COMPARED TO 1994
Net revenues increased $2.2 million, or 77%, from approximately $2.8
million in fiscal 1994, to approximately $5.0 million in 1995. The increase
consisted of an approximately $2.0 million increase in multimedia (including
board game) product revenues and an approximately $200,000 increase in
printing service revenues. The increase in multimedia product revenues is
attributable to the growth in the Company's sports game business of $850,000
as well as the acquisition of APBA in January 1995 which provided
approximately $870,000 of revenues in 1995. The increase in the Company's sports
game business consists of the introduction of APBA products to the mass market,
which increased net revenues by approximately $400,000, as well as MicroLeague
Sports' Blood Bowl, which produced net revenues of approximately $450,000. The
acquisition of Ablesoft in September 1995 also increased the Company's sales by
approximately $290,000. The Company's publishing services group also increased
its Affiliate Venture Publishing sales and its commercial printing sales by
approximately $200,000 in the aggregate. The Company in 1995 provided for
returns at approximately 15% of sales, consistent with its provision of 15% in
1994. For the year ended December 31, 1995, the reserve for sale returns, price
protection and doubtful accounts increased by 43% as compared with an increase
in net sales of 77%. APBA, which was acquired on January 1, 1995 provided
approximately $870,000 in direct mail sales for 1995. Direct mail sales, which
accounted for approximately 31% of the 77% increase in the Company's net sales,
historically have had only nominal returns, price protection charges or bad
debts.
Costs of goods sold increased by $808,000, or 52%, from approximately $1.6
million for 1994, to approximately $2.4 million for 1995. The increase primarily
is due to increased unit sales of the Company's multimedia products which
resulted in increased material and labor costs. As a percentage of net revenues,
costs of goods sold decreased from 55% in 1994 to 47% in 1995. The decrease in
costs of goods sold as a percentage of revenues was a result of increased
software and board game revenues in 1995, as well as the write off of $150,000
of inventory in 1994 due to a decrease in net realizable value. Product revenues
have a higher margin than the service side of the Company's business. In 1995,
product revenues comprised approximately 70% of the Company's revenues, having
increased from roughly 50% in 1994. These factors were offset by higher material
costs used in production in 1995, and an increase in revenues in the Affiliate
Venture Publishing services, which traditionally has a high costs of revenues.
Marketing and sales expenses increased by $187,000, or 57% from $329,000
in 1994 to $516,000 in 1995. The increase is primarily due to increased
marketing personnel and activities to promote the Company's products and
brand names. The Company's marketing and selling expenses for printing
services were approximately equal to those incurred during 1994. The Company
intends to continue to launch new marketing promotions and to hire additional
personnel. As a percentage of sales, marketing and selling expenses decreased
from approximately 12% in 1994 to 10% in 1995. Due to the anticipated release
of several products in 1996, the Company expects that marketing and sales
expenses will increase as a percentage of revenue in the near term.
22
<PAGE>
General and administrative expenses increased by $922,000, or 109%, from
$849,000 for 1994, to approximately $1.8 million for 1995. This increase is
primarily due to the Company's hiring of several personnel in finance and
administration in 1995 to facilitate the Company's expansion. Costs resulting
from the recent acquisitions, such as amortization of intangible assets
acquired and operating costs including rent, utilities and telephone, a
result of operating separate facilities, also contributed to the increase in
general and administrative expenses. General and administrative expenses
increased from 30% of revenues in 1994 to 35% of revenues in 1995 as a result
of the foregoing. Management does not anticipate any further significant
increases in general and administrative expenses as a percentage of revenue
in 1996.
Interest expense increased by $79,000, or 55%, from $145,000 in 1994, to
$224,000 in 1995. This increase is a result of the Company's increasing its
line of credit facility from approximately $1.9 million at December 31, 1994
to $2.4 million at December 31, 1995, as well as new debt of roughly $720,000
incurred or assumed in connection with the Ablesoft and APBA acquisitions
during the year.
Prior to October 1995, the Company elected to be treated as a Subchapter S
Corporation under the Internal Revenue Code of 1986, as amended. Upon
termination on October 1, 1995, the Company ceased such election and the
Company became subject to the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." As a result, the Company
records deferred taxes for the effect of cumulative temporary differences
between the tax and book bases of its assets and liabilities.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically not been able to generate sufficient cash flow
to fund operations. The Company's accounts receivable average collection period
reflected in the Company's days' sales outstanding at December 31, 1995 and 1994
of 117 and 147 days, respectively, has contributed to the Company's lack of
liquidity. For the quarter ended March 31, 1996, the Company's accounts
receivable collections declined, as days sales outstanding increased from 101
days at March 31, 1995 to 129 at March 31, 1996. The increase in the collection
period is primarily due to increased mass market software sales towards the end
of the fourth quarter of 1995 as compared to the fourth quarter of 1994 due to
new product releases in 1995, for which the Company will be paid in the second
quarter of 1996. The Company believes its collection period is consistent with
industry standards. Management seeks to improve its turnover by increasing its
portfolio of products and brands, which the Company believes will enable it to
be paid on a more current basis. Management also intends to focus more
advertising and promotion on the Company's direct mail business, which generates
cash flow immediately upon product shipment to further improve its average
collection period.
Working capital deficiencies have been funded principally through the
Company's credit facility and supplemented by private placements of securities.
Prior to the completion of these private placements, the Company relied
primarily on borrowings under its line of credit and cash flow from operations
to finance its operations and expansion. The Company's completion in 1995 of
private placements of 230,733 shares of Common Stock resulted in net proceeds to
the Company of approximately $575,008 during the year ended December 31, 1995.
These proceeds were used primarily to fund operations, acquisitions and to
increase distribution and product development. As a result of the private
placements, the Company was able to increase its borrowing capacity under its
line of credit from $1.9 million at December 31, 1994 to $2.4 million at
December 31, 1995. The Company has reduced its line of credit to $2.15 million
as of March 31, 1996. The average balance under the line of credit outstanding
during 1995 was $1.9 million. The Company's lines of credit contain a
discretionary demand feature which permits the bank to immediately demand
payment of all obligations outstanding. The Company is currently negotiating
with its bank to eliminate the discretionary demand feature under its existing
lines of credit.
In February 1996, the Company raised an additional $800,000 through the
sale of Bridge Units, consisting of Bridge Notes due upon the earlier of the
consummation of the Offering or 12 months from the date of issuance and
Bridge Warrants to acquire 160,000 shares of Common Stock. The Company has
used these funds for general working capital purposes. The Bridge Notes will
be repaid upon the closing of the Offering. The Company will incur a charge
to earnings in 1996 of approximately $260,000 relating to deemed interest and
deferred financing costs resulting from its offering in February 1996 of the
Bridge Units.
As of March 31, 1996, the Company had payment commitments which expire
through the year 2000 of approximately $140,000 under various product
development agreements, $543,000 under its facility and vehicle leases, and
$1 million under existing employment agreements with certain officers of
the Company.
The Company believes that the net proceeds of the Offering, together with
cash on hand and anticipated cash flow from operations, will be sufficient to
meet its capital requirements for at least 12 months following the completion of
23
<PAGE>
the Offering. However, the Company's working capital requirements may change
depending upon numerous factors, including without limitation the need to
finance increased inventory and accounts receivable arising from the sale and
shipment of anticipated new products. To meet its future capital needs, the
Company may seek additional financing through the public or private sale of
Common Stock or other equity or debt securities. There can be no assurance that
the Company will be able to obtain such financing on favorable terms, if at all,
or that such financing will be on terms acceptable to the Company.
In the normal course of business, the Company evaluates potential
acquisitions and joint ventures that may complement the Company's business.
While the Company has no present plans, commitments or agreements with
respect to any potential acquisitions or joint ventures other than as
disclosed herein, the Company may consummate acquisitions or enter into joint
ventures which may require the Company to make additional capital
expenditures, and such expenditures may be significant and require external
sources of funding.
INFLATION
The Company does not believe that inflation has had a material effect on
its results of operations in recent years. There can be no assurance,
however, that the Company's business will not be affected by inflation in the
future.
24
<PAGE>
BUSINESS
INTRODUCTION
The Company is a brand-oriented publisher of interactive multimedia
computer software for the entertainment, lifestyle and education segments of
the personal computer software market. The Company publishes its products
under four brand names: MicroLeague(R) Sports, APBA(R), Ablesoft(TR), and
General Admission(TR). The Company currently sells over 50 titles
(approximately 25 titles are products licensed from other software companies)
in its existing product lines, and is developing eight additional titles. The
titles under development include a Major League Baseball Players Association
licensed product, Sports Illustrated(R) presents MicroLeague Baseball(R) 6.0,
a football game with content licensed from National Football League Players
Incorporated, a basketball game and a hockey game. The Company's licenses with
the Major League Baseball Players Association, the National Football League
Players Incorporated and Time expire on August 31, 1996, February 28, 1997 and
August 1, 1997, respectively. See - "BUSINESS--Licenses and Proprietary Rights."
The Company is currently engaged in negotiations with the National Basketball
Players Association and the National Hockey League Players Association to obtain
licenses. These products in development include advanced technological features
such as 3-D stadiums, motion captured 3-D players and "spatializer" sound in
support of 32-bit accelerated graphics cards. MicroLeague Sports' Blood Bowl
received a 1995 Golden Triad Award as Best Strategy Game from Computer Game
Review, a magazine in which the Company advertises.
The Company seeks to expand its product market by focusing on brand
recognition and by publishing technologically state of the art new titles.
The Company also seeks to develop new upgrades to existing products, such as
franchise history disks of teams sold separately from the base product, and
add-ons to existing products which include updated team statistics for sports
games and updated pricing information for its card and comic collector
products. The Company has acquired, and seeks to acquire, companies and
computer publishing rights to develop new software titles within the
Company's existing brands. In addition, the Company plans to expand into
other market segments through its strategy of acquiring other companies with
strong brand names, advanced technology and a registered customer base to
leverage the Company's access to retail shelf space and utilize its direct
mail capabilities. The Company's products, substantially all of which are
offered on CD-ROM format, are available on the Microsoft Windows(R) or DOS
operating systems, and the Company is in the process of upgrading its
existing products and designing its new products to take advantage of the
growth in the use of the Microsoft Windows 95(R) operating system. The
Company intends to create linkages to the Company's Internet site and
potentially other commercial on-line services to enhance the distribution of
its products.
The Company sells its products to a broad range of retail customers,
including computer superstores, wholesale clubs, mall-based chains, consumer
electronics stores, office superstores, and software retailers and sells
directly to the end user through catalogue sales. The Company plans to sell
its products through additional outlets such as bookstores and original
equipment manufacturers. Sales are made to retail accounts either through
independent software distributors, or directly to retail chains. The
Company's sales staff also utilizes a network of independent sales
representatives to service and merchandise its products to some of these
accounts. The Company's products are currently available in retail stores
such as Best Buy, CompUSA, Computer City, Electronics Boutique, Micro Center,
Babbages, Software Etc., Egghead Software, Wal-Mart and Office Max. The
Company also provides software manufacturing and production services to other
software publishers, as well as commercial printing services to non-software
companies.
To complement the Company's retail sales, the Company distributes
catalogues quarterly to registered customers to generate direct-mail sales.
Catalogue promotion focuses primarily on software add-ons or upgrades to the
original computer games sold by the Company through its retail distribution
channels. The Company also takes advantage of its direct-mail operation to
sell products better suited for the direct mail channel. Through its
acquisition of the assets of APBA in 1995, the Company acquired additional
registered customer lists. In addition, the Company has the right to use
Sports Illustrated(R) customer lists for marketing its existing products.
In order to extend the life cycle of its products, the Company has
implemented target sales and marketing programs which attempt to maximize
sales of older backlist titles under the General Admission product line in
appropriate sales channels primarily by selling such products at reduced
prices.
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Development efforts are managed by an internal development staff which
supervises a network of independent development contractors. The Company
relies on external development resources for the development of a significant
number of software products it publishes. This strategy enables the Company
to reduce product development expenses and risks and thereby use development
funds in a more efficient manner. The Company believes that its use of
outside development contractors enables the Company to create quality
products more quickly, while at the same time minimizing fixed costs and
related overhead.
After a product is developed, the development contractor delivers a master
CD-ROM to a CD-ROM manufacturing company which replicates the CD-ROMs and
delivers them to the Company. The Company manufactures packaging material and
assembles its products at its headquarters in Newark, Delaware. In addition
to selling software and publishing services to the computer software
industry, the Company sells some of its excess printing capacity to companies
outside the industry. Warehousing and shipping functions are also performed
internally.
INDUSTRY OVERVIEW
The Company believes that the market for interactive multimedia software
products will continue to grow as the installed base of personal computers
with CD-ROM drives expands. According to International Data Corporation,
sales of multimedia personal computers sold for home use nearly doubled from
1994 to 1995, from approximately 4.5 million in 1994 to approximately 8.5
million in 1995. In addition, according to a study prepared by the Software
Publishers Association, sales of games and home creativity CD-ROM titles
increased on a unit basis by 189% and on a revenue basis by 175% from the
first half of 1994 to the first half of 1995.
The Company believes that significant developments in both computer
hardware and software have been driving the rapid growth in the installed
base of CD-ROM drives and personal computers. First, the cost for the
computer hardware necessary to utilize interactive multimedia software
products has continued to decrease. The power, capabilities and functional
uses of computers has expanded dramatically and are currently offered to
consumers at prices comparable to those for much less powerful and capable
machines a few years ago. Entry level machines now include 486 or Pentium
microprocessors, double or quad speed CD-ROM drives, super VGA video, large
disk drives, expanded random access memory, sound cards, high speed modems,
and software for access to computer on-line providers. Second, a new
generation of computer software is now becoming available that takes full
advantage of the power of these personal computers. Operating system
software, such as Microsoft Windows, makes it easier to use these powerful
new applications. New interactive multimedia software applications generally
have improved graphics, high quality sound, full motion video and near
real-time interactivity. For home computer users, applications such as games,
elementary education, home reference and lifestyle software are popular.
The Company believes that certain new industry developments will
contribute to continued strong growth in the markets for home software.
According to Fairfield Research Inc., a market research firm which covers the
computer industry, at December 18, 1995, 15% of home computer users had
integrated Windows 95(R) with another 10% planning on installation by year
end. These numbers are even higher for CD-ROM users with one-third of these
users converted to Windows 95 at December 18, 1995 and 50% expected to be
converted by year end of 1995. The August 1995 release of Windows 95 has also
increased consumers awareness of the benefit of powerful new software titles.
As personal computers have become common home and office appliances, there
have been changes in the ways in which computer software is sold. Traditional
computer software distribution has been through software retailers such as
CompUSA, Computer City, Egghead, Software Etc., Babbages and Electronics
Boutique. However, computer software is becoming more of a consumer product
sold through standard consumer channels such as bookstore chains,
supermarkets and department stores. As a result of this product evolution,
the Company believes that the importance of brand names associated with a
particular software title or line of titles will become significant.
In addition, the popularity of the Internet and the World Wide Web network is
expected to make it possible for virtually every personal computer to be
connected, thereby spurring demand for information (whether books, video, sound
or other data) that can be shared and transmitted. The Internet is currently a
popular medium for providing marketing and sales information about products.
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When the Internet evolves mechanisms for efficiently and securely charging
customers for this information, the Company anticipates that it will become
feasible for companies to distribute their information over the Internet,
thereby developing new forms of software distribution.
COMPANY STRATEGY
Based on the Company's view of the development of its industry and the
Company's capabilities, the Company has developed a six part strategy to
expand its business:
1. Promote the Company's Brand Names. The Company aggressively promotes
its Microleague(R) Sports, APBA(R), Ablesoft(TR), and General Admission(TR)
brand names in order to encourage customer loyalty and repeat purchases. The
Company believes that its brand name software is recognized by consumers as a
high quality product. The Company promotes its brand names through
advertising and the use of a public relations firm. The Company also believes
that by marketing through recognizable brand names, satisfied consumers are
more likely to purchase additional brand-name products published by the
Company when faced with multiple options in a software category. As the
consumer software industry becomes more of a mass market, the Company
believes that brand name recognition will become an increasingly important
means of product differentiation among retailers and consumers.
2. Create products which generate separate add-on and upgrade products.
The Company has adopted a product line strategy for its sports game products
in which a series of titles is developed which can be updated every season
with the most recently completed season's statistics. Further, the Company
intends to continue to develop new add-ons to existing products, such as
additional sports teams sold separately from the base product. This strategy
enables the Company to capitalize on its asset base by updating existing
products rather than developing new product lines and by utilizing its
existing customer base for sales of the particular update or add-on. In
addition, marketing expenditures which create value for each product line can
impact a longer product cycle in contrast to a single product launch.
3. Acquisitions. The Company has acquired, and will seek to acquire,
computer publishing rights to develop new software titles within the
Company's existing brands. In addition, the Company plans to expand into
other market segments through its strategy of acquiring other companies with
strong brand names, advanced technology or a registered customer base. The
Company will seek opportunities to utilize its access to retail shelf space
and its direct mail capabilities to expand the market for products of any
companies which it may acquire.
4. Expand distribution into new outlets and mediums. The Company seeks to
achieve widespread distribution for all of its titles through existing retail
outlets which includes traditional software retailers, mass merchants,
consumer electronic stores, and warehouse clubs. The Company plans to gain
entry into bookstores, supermarkets, department stores and other currently
unconventional outlets for the products as marketing opportunities arise. The
Company plans to expand new and existing distribution channels through the
use of discount bundles and racks and through the development of
relationships with original equipment manufacturers. As the technology
evolves, the Company may expand distribution into new mediums such as the
Internet. The Company's direct-mail business enables the Company to make
repeat sales to its customers. The Company intends to promote add-ons and
updates to existing products through direct-mail sales to its existing
customer base across all of its product lines.
5. Product life-cycle extensions. The life cycle of computer software
products in the segments in which the Company competes generally ranges from
approximately six to twenty-four months. The Company seeks to extend the
life-cycle of many of its products through the General Admission line by
implementing targeted marketing and sales programs which attempt to maximize
the value of older backlist titles in the appropriate sales channels
primarily by selling such products at reduced prices. This strategy allows
the Company to extend the life (and the amortization of development expenses)
of a successful computer game such as Blood Bowl by selling such a product
under the General Admission line after its sales cycle as a front-line full
retail product ended.
6. Provide publishing, manufacturing and marketing services to other software
companies. The Company seeks to expand its Affiliate Venture Publishing business
which provides publishing services to independent developers. The Company's
strategy is to offer complete publishing services to software developers who
have already produced marketable computer software products. This strategy is
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reflected in the products currently distributed by the Company under its
Affiliate Venture Publishing product line. This segment of the Company's
business also provides support to the Company's core business.
PRODUCTS AND SERVICES
For the year ended December 31, 1995, the Company's revenues consisted of
approximately 68% product sales and approximately 32% service sales. The
product sales consisted of software sold in both CD-ROM and 3.5" disk format,
as well as board games. The Company's service sales are derived from its
printing division and from Affiliate Venture Publishing. The Company's
services sales consist of approximately 75% commercial printing services to
non-computer companies and 25% printing and/or publishing services to
computer software companies.
PRODUCTS
The Company currently has four brand-name product lines: MicroLeague(R)
Sports, APBA(R), Ablesoft(TR) and General Admission(TR).
The Company's product lines are targeted towards the computer customer for
use in the entertainment, lifestyle and education segments of the computer
software market. Within these categories, the Company has created product
lines in market niches in which it believes it has opportunities to increase
its market share. The Company believes that its product line approach helps
contribute to brand awareness of other titles sold within a particular brand.
Customer preferences for software products are difficult to predict, and
few consumer software products achieve sustained market acceptance. The
Company's success is dependent on the market acceptance of its existing
products and the continued development and introduction of new products which
achieve market acceptance. In this regard, the Company has attempted to focus
its new product development efforts on products which the Company believes
may have a more extended product life cycle, such as MicroLeague Baseball(R)
6.0, which the Company expects to be able to continue to sell for longer
periods with periodic updates.
The Company seeks to expand its product market by focusing on brand
recognition and by publishing technologically state of the art new software
titles. The Company also seeks to develop new upgrades to existing products,
such as franchise history disks of teams sold separately from the base
product and add-ons to existing products which include updated team
statistics for sports games and updated pricing information for the Card
Collector and Comic Book collector products. The Company has also implemented
targeted sales and marketing programs which attempt to maximize sales of
older backlist titles in appropriate sales channels primarily by selling such
products at reduced prices.
Most of the Company's products work on the popular PC operating system,
Microsoft Windows and all products currently in development are intended to
be compatible with Windows 95.
MICROLEAGUE(R) SPORTS BRAND
The Company's products originated with electronic sports simulation games
pioneered by its predecessor, MicroLeague Sports in the mid-1980's. The primary
focus of the Company's product development continues to be sports game software
products. Emphasis is placed on games featuring periodic statistical updating.
Thus these products provide opportunities for add-on products after the initial
base product offering. The Company's Microleague Sports' product, Blood Bowl,
received a 1995 Golden Triad Award as Best Strategy Game from Computer Game
Review magazine. The titles under development include the Major League Baseball
Players Association licensed product, Sports Illustrated presents MicroLeague
Baseball 6.0, a football game with content licensed from National Football
League Players Incorporated, a basketball game and a hockey game. The Company's
licenses with the Major League Baseball Players Association, National Football
League Players Incorporated and Time expire on August 31, 1996, February 28,
1997 and August 1, 1997, respectively. See - "BUSINESS--Licenses and Proprietary
Rights." The license agreements with the Major League Baseball Players
Association and National Football League Players Incorporated are important to
the Company because they permit the Company to use the names, descriptions and
biographical data relating to various professional baseball and football players
in its games. These licenses also grant to the Company the
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right to use the players association names. Therefore, the Company's ability to
manufacture and sell baseball and football games using the names and
biographical data of these players are dependent on the continuation of
licensing rights and if these licenses were not renewed the Company would no
longer be able to market these particular products. The Company's license
agreements with the Major League Baseball Players Association and the National
Football League Players Incorporated require prior approval for the specific
manner in which licensed rights are used. Products developed in connection with
the license agreement with the Major League Baseball Players Association and
National Football League Players Incorporated were approved by the respective
players associations when they were first developed. The Company submits for
approval any new product releases and packaging changes. The Company is
currently engaged in negotiations with the National Basketball Players
Association and the National Hockey League Players Association to obtain
licenses for its basketball and hockey games under development. The products in
development include advanced technological features such as 3-D stadiums, motion
captured 3-D players and "spatializer" sound in support of 32-bit accelerated
graphics cards.
The Company is currently selling or developing the following MicroLeague
Sports titles:
Name Platform Format Status
- ------------------------------ ------------ -------- ------------------
MicroLeague Hooves of Thunder Windows 95 CD-ROM Released
Blood Bowl CD-ROM DOS CD-ROM Released
Blood Bowl 3.5 DOS Disk Released
Sports Illustrated presents
MicroLeague Baseball 6.0 Windows 95 CD-ROM Under development
Sports Illustrated presents
MicroLeague Football 3.0 Windows 95 CD-ROM Under development
Sports Illustrated presents
MicroLeague Hockey 3.0 Windows 95 CD-ROM Under development
Sports Illustrated presents
MicroLeague Basketball 3.0 Windows 95 CD-ROM Under development
APBA(R) BRAND
On January 1, 1995, the Company acquired substantially all of the assets
of APBA, established in 1951 as a publisher and direct-mail marketer of
statistics-based sports board and computer games. In 1995, APBA's sales mix
is comprised of roughly 50% board game products and 50% computer game
products. Although APBA and MicroLeague Sports both sell computer based
sports games, the two brand products appeal to different customers. APBA
products appeal to die-hard statistical fans, who have little interest in
graphics or playability, while Microleague products have a strong statistical
base, but have a broader appeal to a more diverse customer base than APBA
games, because they have technologically state-of-the-art graphics, sound and
playability features.
Some of the most popular APBA titles the Company is currently selling are:
Name Platform Format Status
- -------------------------------- ------------ -------------- ----------
APBA Sideline Sports CD-ROM Windows CD-ROM Released
APBA Baseball for Windows CD Windows CD-ROM Released
APBA Baseball N/A Board Game Released
APBA Football for Windows Windows Disk Released
APBA Football N/A Board Game Released
APBA Hockey for DOS DOS Disk Released
APBA Hockey N/A Board Game Released
APBA Basketball N/A Board Game Released
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ABLESOFT(TM) BRAND
The Company's Ablesoft brand is marketed to customers with specific
interests or hobbies. For example, The Card Collector and The Comic Collector
enable collectors of sports cards or comic books to track and monitor the
value of their inventories. Add-ons for The Card Collector products are
published periodically to update the pricing information of the products.
Family for Windows enables the user to diagram and research the origins of
their family tree and heritage.
The Company is currently selling or in the process of developing the
following Ablesoft titles:
Name Platform Format Status
- ------------------------------ ------------ -------- ------------------
The Comic Collector 3.5 Windows Disk Released
The Comic Collector CD-ROM Windows 95 CD-ROM Released
The Card Collector 3.5 Macintosh Disk Released
The Card Collector 96 CD-ROM Windows 95 CD-ROM Released
Family for Windows 3.5 Windows Disk Released
Teachers Toolbox 3.5 Windows Disk Released
Family for Windows CD-ROM Windows 95 CD-ROM Under development
Stamp Collector CD-ROM Windows 95 CD-ROM Under development
Coin Collector CD-ROM Windows 95 CD-ROM Under development
Teachers Toolbox CD-ROM Windows 95 CD-ROM Under development
Although included in the lifestyle category, Teachers Toolbox is
productivity software that enables teachers to track and maintain all their
necessary records such as grade histories, attendance and lesson plans as
well as to layout seating charts and organize class schedules.
GENERAL ADMISSION(TM) SOFTWARE BRAND
The General Admission product line is targeted at the lower price point
segment of the entertainment market. General Admission software is designed
to provide entertaining, high-quality software at lower prices. The product
line is comprised of five different sub sets: interactive simulations, role
playing adventure, interactive sports, action and adventure and family
treasures.
SERVICES
The services provided by the Company comprised approximately 32% of the
Company's total revenue in 1995. Approximately 75% of the revenue from
services is derived from providing printing services to non- software
companies. The balance of the revenue from services, approximately 25%, is
derived from providing printing and manufacturing services to software
companies and publishing services to computer software companies through
Affiliate Venture Publishing. The services business constitutes a separate
division of the Company. This division provides quality control, speed of
production and manufacturing, and cost advantages to the Company's product
business.
The Company provides commercial printing services for corporations and
organizations ranging from large manufacturing corporations to local retail
businesses in the Company's trading area. Printing services provided to
non-computer software companies generated approximately $1.2 million in sales
in 1995. The Company's largest customer, Yale Materials Handling Corporation
an equipment manufacturing company, accounted for approximately 15% of the
Company's net revenues in 1995 and accounted for approximately 10% of the
Company's accrued revenues at December 31, 1995. The Company also provides
manufacturing and printing services to other computer software companies. In
1995 these services to computer software companies generated approximately
$200,000 in revenue.
Through its Affiliate Venture Publishing activities, the Company provides
publishing, manufacturing and marketing services to other software development
companies. Through the Company's publishing and manufacturing divisions, the
Company provides packaging, graphic design, manufacturing, distribution,
advertising and administration of the product while capitalizing on the
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developer's brand name and the reputation of the product. Through Affiliate
Venture Publishing, other software developers may obtain access to retail shelf
space that they could not obtain on their own. In 1995 Affiliate Venture
Publishing generated approximately $200,000 in revenue.
LICENSES AND PROPRIETARY RIGHTS
INTELLECTUAL PROPERTY RIGHTS
The Company regards the software that it publishes, the statistical model
that drives the outcomes of its statistical based sports games, and its brand
names as proprietary, and relies primarily on a combination of copyrights,
trade secret laws, trademark laws, and third party nondisclosure agreements
to protect its products and proprietary rights. The Company has federal
registrations for the trademarks Microleague(R), MicroLeague Baseball(R), and
APBA(R). In addition, the Company has pending applications for federal
trademark registration for Microleague Multimedia(TR), General Admission(TR),
Affiliate Venture Publishing(TR) and Ablesoft(TR). The Company owns the
copyright in all of its principal proprietary software used in its products.
The Company licenses the right to use a portion of the executable code with
respect to two of its products from an affiliated partnership. See "CERTAIN
TRANSACTIONS." With respect to some of its secondary products, the Company
jointly owns the copyright in some of the software used in those products
with the software developers that initially created the software. In
addition, the Company licenses the right to publish software owned by other
software developers. The license agreements with such developers typically
require the Company to pay to the developers royalties based upon a specified
percentage of the net cash receipts from the sale of the developers'
respective products. The Company also occasionally assists other software
vendors in publishing, packaging and/or distributing their products. Under
these arrangements, the Company typically is entitled to a fee based upon a
specified percentage of the net cash receipts from the sale of the products.
The Company makes no claim of ownership in the copyright of any such software
of others, nor is such software proprietary to the Company. The Company is
not aware that it is infringing the trademark rights of any other entity,
although some of its trademarks may be similar in some respect to trademarks
used by others. The Company recently became aware of the existence of at
least one third party that may be using one of the Company's marks (General
Admission(TR)) to identify possibly related goods. The Company believes that
the Company's own use of the pertinent mark predates the third party's use of
its mark. The Company is investigating this potentially infringing apparent
third-party use of the mark and, based on the results of that investigation,
may decide to oppose the third-party's use of the mark or alter its own use
of the mark. The Company is not aware of the existence of any other
confusingly similar prior mark, although there can be no assurance that a
claim of infringement will not be asserted against the Company or that any
such assertion will not result in costly litigation, and/or require the
Company to obtain a license to use the trademark to identify particular
products, or require the Company to change one or more of its trademarks. If
the Company were compelled to change one or more of its significant
trademarks, it could thereby lose goodwill and incur reduced revenues and
increased expenses from advertising under a new name and producing new
products and/or packaging materials. Although the Company has not been the
subject of any intellectual property litigation, there has been substantial
litigation regarding copyright, trademark, and other intellectual property
rights involving other computer software companies.
The Company has a copyright in all of its proprietary software used in its
products, but has a registered copyright in only one of the several versions
of such proprietary software. The Company does not have any mechanism to
copy-protect its software, and relies on copyright laws to prevent
unauthorized copying. Unauthorized copying of software frequently occurs in
the software industry, and the Company's business, operating results and
financial condition could be adversely affected if copying of the Company's
products becomes significant. Because of the large amount of data associated
with the Company's CD-ROM software, it is currently more difficult (although
not impossible) for individual customers to copy the Company's software
compared to historical diskette software.
CONTENT LICENSES
The Company licenses content for its products from a variety of sources
including the Major League Baseball Players Association, National Football
League Players Incorporated, publishing companies including Time (Sports
Illustrated(R)), and individual authors. The Company's licenses with the Major
League Baseball Players Association, National Football League Players
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Incorporated and Time expire on August 31, 1996, February 28, 1997 and August 1,
1997, respectively. The Company has also acquired computer publishing rights to
two existing board games which resulted in the release of Blood Bowl and Hooves
of Thunder. In license agreements, the Company seeks (i) a license term of at
least two years; (ii) customary advance guarantees paid by the Company such as
$20,000 and royalty rates typically approximating 15%; (iii) artistic and
editorial cooperation of the licensor; and (iv) to the extent available on a
cost-effective basis, exclusive rights to publish in various or all electronic
formats, in each case including CD-ROM.
In 1993, the Company acquired the computer publishing rights to the board
game Blood Bowl from Games Workshop, Ltd. in Great Britain. The Company
released Blood Bowl on CD-ROM in 1995. In 1993, the Company acquired the
computer publishing rights to the board game Quarterpole and released the
computer version in 1993. In 1995 the Company released an updated version of
Quarterpole under the name Hooves of Thunder. The Company has some form of
exclusive CD-ROM publishing rights to the primary content used in several of
its existing products and new products currently under development. Due to
the multimedia nature of the Company's products, licenses for Company
production of content is usually required for audio, video and written
materials to supplement original content provided by the primary licensor.
Licensing costs may be expected to rise with increased competition in the
CD-ROM and electronic publishing industry.
The Company's license agreements with the Major League Baseball Players
Association and National Football League Players Incorporated grant to the
Company computer software and board game publishing rights, on a
non-exclusive basis. The Company derived $118,904 and $203,881 in revenue
from the Major League Baseball Players Association license in 1994 and 1995,
respectively. The Company derived $17,880 and $216,260 in revenue from the
National Football League Players Incorporated license in 1994 and 1995,
respectively. The Company's license agreement with Time for the use of the
Sports Illustrated(R) trademark grants to the Company the exclusive right to
use such trademark in connection with certain products only on certain
operating platforms. In the event Time desires to produce such products on
other platforms, the Company has a right of first negotiation regarding the
production and distribution of such product. If Time and the Company have not
been able to reach an agreement after a certain period of time, Time is
entitled to produce or distribute competing products on those other operating
platforms. There can be no assurance that Major League Baseball Players
Association, National Football League Players Incorporated, Time or any other
strategic partner of the Company regards its relationship with the Company as
strategic to its own business, that such strategic partner will not re-assess
its commitment to the Company at some time in the future or that it will not
develop (or enter into strategic relationships with other companies to
develop) products that directly compete with the Company's products.
INTERNATIONAL LICENSES
Through the Company's extensive contacts with international software
developers, the Company is constantly reviewing successful international
products which it can license, repackage and redesign and sell in the United
States. The Company also licenses the international rights to its internally
developed products to foreign companies. The Company has had success
licensing its games to software publishers in Australia, Europe, and the Far
East. The Company expects this trend to continue and that licensing revenues
will increase as the Company develops more new products.
PRODUCT DEVELOPMENT
The Company currently is seeking to expand all its product lines with new
brand name content in the entertainment and lifestyle market niches. The
Company seeks opportunities to shift the risks associated with product
development to outside parties. For example, the Company has achieved this
risk-shifting strategy by entering into an agreement with Interactive
Multimedia Limited Partnership to provide research and development financing
for Blood Bowl and MicroLeague Baseball(R) as well as through strategic
partnerships with independent software developers. See "CERTAIN
TRANSACTIONS". The Company's external developers share in the initial cost in
developing new products. The development agreements typically provide for the
Company to pay the developer advance royalties when certain development
milestones are reached.
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The Company's strategic partnership with respect to product developers is
illustrated by the agreement reached in 1995 between Borta, Inc. and the
Company. This agreement requires Borta, Inc., under the Company's
supervision, to develop MicroLeague(R) Sports' four new sports games in 1996.
Ron Borta is the creator of 450 computer related products, and his Company
converted PAC-MAN from arcade play to the Atari home game system.
Once a product is approved for development, an "in-house" project leader,
who is an employee of the Company, is assigned to develop a detailed set of
specifications, time frame and budget. These criteria are reviewed by the
Company's executive management, and are modified on an as needed basis to
reflect market demand, product release schedules and budgetary
considerations. The project leader produces the new product with a team that
may include electronic editors, programmers, graphic artists, animators,
video editors, sound editors, writers, designers and quality assurance
testers. Generally, product design, software programming and editing
functions are performed by independent contractors. The Company performs
quality assurance reviews of its products and then tests for "bugs",
functionality, ease-of-use and compatibility with a variety of popular PC
configurations that are available to consumers. The Company anticipates that
as it increases its development of sports simulation products, its product
development costs with respect to these products may be higher than its
historical product development costs.
The Company's senior marketing and sales staff incorporate the new
products into their marketing and sales plans to attempt to produce marketing
materials and make preliminary sales substantially concurrent with product
releases. The Company's development, marketing and sales staff evaluate the
Company's products and compare them to customer needs and potentially
competitive products. These comparisons form part of the basis for product
upgrades, product revisions and new product ideas. In addition, the Company
looks to acquisitions as a source for new products and new product ideas.
SALES AND MARKETING
The Company relies primarily on two basic sales channels: retail sales and
direct mail. The Company sells its products through distributors for sale to
retailers and on a direct basis to retailers such as software specialty
stores, computer superstores, office supply stores, warehouse clubs, mall
based chains, consumer electronics stores, mass merchants and bookstores.
Retailers purchasing the Company's products directly from the Company or
through distributors include Best Buy, CompUSA, Computer City, Electronics
Boutique, Micro Center, Babbages, Software Etc., Egghead Software, Wal-Mart
and Office Max. Distributors of the Company's products include ABCO, D&H,
Ingram Micro and Navarre. The Company maintains a list of its approximately
225,000 registered user customers and sends periodic mailings primarily to
sell upgrade versions, add-ons and new products.
The Company utilizes an internal sales staff and a network of four
independent sales representatives to sell to retail accounts. These regional
sales representatives sell the Company's products to major retail accounts in
the United States and Canada, and a national book sales representative firm
sells the Company's products to regional and independent bookstores. The
Company's Vice President of Sales manages these sales representative firms,
and also sells directly to certain national accounts. The Company's sales
representatives and in-house sales staff attempt to work with retail buyers
to try to assure that retailers are carrying the appropriate Company products
for their retail outlet, that stocking levels are adequate, that promotions
and advertising are coordinated with product releases and that in-store
merchandising plans are properly implemented. The Company anticipates that in
the event sales increase, the Company will rely more on its internal sales
force and less on independent sales representatives to generate and manage
sales.
To complement the Company's retail sales, the Company distributes catalogues
quarterly to the Company's registered customers to generate direct-mail sales.
The Company also has the right to use Sports Illustrated(R) customer lists for
marketing its existing products. The Company granted Columbia House the right to
market its products through Columbia House's customer lists. The Columbia House
agreement grants to Columbia House the non-exclusive right to distribute any of
the Company's CD-ROM products through direct-mail. The Company receives
royalties from Columbia House which are based on a specified percentage of net
revenues that Columbia House receives from the sale of Company products. The
agreement with Columbia House expires in May 1998. The Company also takes
advantage of its direct-mail operation to sell products not suited for the
retail distribution channel such as add-on and upgrades and products at lower
33
<PAGE>
price points at the end of their life cycle. The Company's graphic design
department provides the artwork and layouts of the catalogues, and the Company's
manufacturing division produces the actual catalogues. In the event the
manufacturing division does not have the capacity to produce the catalogues, the
Company has and will, on occasion contracted an outside contractor for
production of the catalogues. In addition, the Company includes marketing and
promotional literature in all its software products to introduce its software
customers to the Company's direct mail operation.
The Company's marketing department is responsible for creating and
executing marketing programs to generate product sales to retailers and
end-user customers. These programs generally are based on established
consumer product marketing techniques that the Company believes are becoming
more important as CD-ROM products become more of a consumer product. These
techniques include co-operative advertising programs and promotional
allowances coordinated with the retail distributors. The marketing department
also utilizes the Company's graphic design department to attempt to create
effective package designs, catalogues, brochures, advertisements and related
materials. The Company's marketing and sales departments work together to
coordinate retail and publicity programs generally to be in place when
products are initially shipped to retailers and consumers. Public relation
campaigns, in-store advertising, catalog mailings and advertisements are
generally designed in advance of product availability.
In 1995, the direct mail business provided approximately 17% of the
Company's total revenues and more consistent cash flow than the mass market
distribution channel, since all direct mail sales generated cash upon
shipment. In addition, as APBA's existing product base is sports related, it
has provided the Company the opportunity to cross-sell MicroLeague Sports
products to APBA's customer base. Ablesoft, acquired in September of 1995,
also has a direct mail business which generated approximately $25,000 per
month in revenues in the last quarter of 1995. Ablesoft's products are now
cross-sold to APBA customers.
Funds expended for sales and marketing, in the aggregate of approximately
15% of gross revenues, are generally spread across multiple titles in a
series and accrue benefits to the Company as upgrades and new titles are
offered in subsequent years. The Company generally sets suggested list prices
for its products; however, the Company's suggested list prices and actual
wholesale selling prices to most retail outlets typically approximate 55%
less than the Company's suggested list prices. In addition, in connection
with certain seasonal or other promotional programs, the Company may also
offer discounts on its products sold directly to end users.
The Company provides telephone technical support to its customers at no
additional charge and the Company plans to expand its technical support to
the Internet in the future. To date, the call volume to the Company's support
staff has been modest. The Company believes that its efforts to create high
quality, easy-to-install products, coupled with the in-house support
facilities, are sufficient to meet anticipated customer technical support
needs for the foreseeable future. Unexpectedly high technical support needs
or service volume could require the Company to increase its expenditures on
technical support services. Feedback from the support service group is
provided to the Company's product development staff to facilitate product
upgrades and modifications in future products.
The Company is exposed to returns by distributors, retailers and
consumers. Reserves for these returns have been established by the Company
that it believes are adequate based on product sell-through, inventory levels
and historic return rates. The Company currently has a reserve equal to
approximately 20% of outstanding accounts receivable, as customers typically
will partially offset new purchases by returning product. The Company
generally accepts returns from customers, even when not legally required to
do so, in order to maintain good continuing relationships with these
customers and to sell its latest product releases to these customers. The
Company periodically adjusts its reserves for these returns. Significant
product returns could have a materially adverse effect on the Company's
financial condition, operating results and overall business. The Company
sells to major accounts on credit, with varying discounts, return privileges
and credit terms which are a result of the Company's analysis of the
creditworthiness of the particular customer as well as a function of sales
volume the Company has with the particular customer. These sales are not
collateralized. Significant problems in accounts receivable collections could
have an adverse effect on the Company's financial condition, operating
results and overall business.
34
<PAGE>
OPERATIONS
The Company coordinates accounting, purchasing, inventory control,
scheduling, and mass market order processing, warehousing and shipping
activities related to its operations at its headquarters. The Company's main
computer system handles mass market order entry, order processing, picking,
billing, accounts receivable, accounts payable, general ledger, and inventory
control. Subject to credit terms and product availability, orders are
typically shipped from the Company's facilities within 48 hours of receiving
an order. Although third party contractors duplicate the CD-ROM discs, all
manuals, catalog inserts and boxes in which the Company's products are
shipped are produced by the Company's employees at its headquarters. The
Company has multiple sources for all components of its products, and has not
experienced any material delays in production or assembly.
Sales and marketing for the Company and order processing, warehousing and
shipping activities related to the Company's direct mail operation are based
at its Lancaster, Pennsylvania facility. The Company's direct-mail computer
system handles order entry, order processing, picking, billing, and inventory
control.
COMPETITION
The market for the Company's interactive software is intensely and
increasingly competitive. The Company's competitors range from small
companies with limited resources to large companies with substantially
greater financial, technical and marketing resources than those of the
Company. Existing consumer software companies may broaden their product lines
to compete with the Company's products, and potential new competitors,
including computer hardware and software manufacturers, diversified media
companies and book publishing companies, may enter or increase their focus on
the consumer software market, resulting in greater competition for the
Company. Although the Company competes with a number of different companies
across its product lines, the Company regards Expert Software and Softkey as
its closest competitors based upon product offerings and price points. The
Company's competitors also include established software companies such as
Electronic Arts, Maxis, Sierra Online, Broderbund, Mindscape, Acclaim and
Microsoft, among others, all of which have developed interactive multimedia
software titles on CD-ROM.
Only a small percentage of products introduced in the consumer software
market achieve any degree of sustained market acceptance. The Company
believes the principal competitive factors in marketing computer software
include product features, quality, reliability, brand recognition, ease of
use, merchandising, access to distribution channels and retail shelf space,
and price. The Company competes with many of its competitors for shelf space
in the retail distribution market. As the number of competitors grows, the
demand for existing shelf space increases and the Company may experience
difficulty in gaining additional shelf space for new products and maintaining
the shelf space for its current products. Based on its current and
anticipated future product offerings, the Company believes that it competes
or will compete effectively in these areas, particularly in the way of brand
name recognition, quality, ease of use, and access to distribution channels
and retail shelf space.
The Company believes that as competition increases, significant price
competition and reduced profit margins may result. In addition, competition
from new technologies that the Company has not yet implemented may reduce
demand for the Company's products. Extensive price competition, reduced
demand or distribution channel changes may have a material adverse effect on
the Company's business, financial condition or operating results. There can
be no assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures faced by the
Company will not materially and adversely affect its business, operating
results and financial condition.
EMPLOYEES
As of May 1, 1996, the Company and its subsidiary had 54 full-time
employees. The Company also has between 10-30 part-time employees depending
on the level of sales activity in various seasons. The Company's employees
are not represented by a labor union and are not subject to any collective
bargaining arrangement. The Company has never experienced a work stoppage and
believes that it has good relations with its employees.
35
<PAGE>
PROPERTIES
In February 1995, the Company entered into a five-year lease for
approximately 17,800 square feet of office and warehouse space in Newark,
Delaware, (space the Company utilizes for its principal offices and
production facilities) for approximately $5,900 per month. The Company
entered into another lease in Newark, Delaware, for approximately 4,400
square feet of satellite warehouse space in February 1995. This
month-to-month lease costs approximately $1,400 per month.
As part of the Company's acquisition of APBA in January 1995, the Company
entered into a ten-year lease for approximately 21,800 square feet of office
and warehouse space in Lancaster, Pennsylvania, which the Company utilizes
for its direct mail operation, for approximately $3,272 per month plus taxes
and insurance. The Company plans to consolidate its entire publishing group,
including marketing, development and sales at this location in the future.
LEGAL PROCEEDINGS
The Company is not involved in any material litigation or proceeding, and
no such litigation or proceeding is known by the Company to be contemplated.
36
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ----------- ----- -------
<S> <C> <C>
Neil B. Swartz ....... 34 Chairman, Chief Executive Officer and Director
John Ferretti ........ 34 President, Chief Operating Officer, Secretary and Director
Peter Flanagan ....... 29 Vice President and Chief Financial Officer
Frederick H. Light ... 50 Senior Vice President
David Peltz .......... 36 Vice President
Ruly R. Carpenter, III . 55 Director
Donald Gleklen ....... 59 Director
W. Thacher Longstreth . 73 Director
Carl Shaifer ......... 63 Director
</TABLE>
The Company's directors are divided into three classes with one class
being elected by the shareholders each year. The terms of the current
directors will expire as follows: Messrs. Swartz and Ferretti in 1997,
Messrs. Shaiffer and Carpenter in 1998 and Messrs. Longstreth and Gleklen in
1999. There are no family relationships between any of the directors or
executive officers of the Company.
Mr. Swartz has served as Chief Executive Officer and as a Director of the
Company since August 1989. Mr. Swartz served as President of the Company from
1989 through 1994 and has served as Chairman of the Company since 1994. From
1991 to 1993, Mr. Swartz served as President of the Company. From 1989 to
1991, Mr. Swartz served as President and Chief Executive Officer of
Progressive Office Services, Inc., an accounting leasing firm which he
founded in 1987. Prior to 1989, Mr. Swartz served as an accountant with
Arthur Andersen and Peat Marwick & Mitchell. Mr. Swartz received a B.S.
degree in accounting from Northeastern University and he is a member of the
American Institute of Certified Public Accountants and Pennsylvania Institute
of Certified Public Accountants.
Mr. Ferretti has been President, Chief Operating Officer, Secretary and a
Director of the Company since 1994. Prior to joining the Company, he served
as President of Foxfire Printing, which he founded in 1991 and subsequently
merged with the Company in 1994. Before founding Foxfire, Mr. Ferretti served
as an engineer of the Federal Aviation Administration from October 1990
through 1993. Mr. Ferretti received a B.S. in Mechanical Engineering from
West Virginia University and an MBA in Finance from Monmouth College.
Mr. Flanagan has been Vice President of the Company since December 1995.
Before joining the Company, he served as Chief Financial Officer and
Controller of Seaboard Automotive, Inc. from 1993 to 1995. From 1988 to
1993, Mr. Flanagan was a certified public accountant with Coopers and
Lybrand. Mr. Flanagan received his B.S. Degree in Accounting from Babson
College.
Mr. Light has been Senior Vice President of the Company since 1995. Prior
to joining the Company Mr. Light was president and owner of APBA. He served
as Executive Vice President of APBA from 1972 until 1992, and served as
President from 1992 through 1995. Mr. Light holds a B.A. degree from Ursinus
College.
Mr. Peltz joined the Company in February 1996. Before joining the Company,
Mr. Peltz served as Product/Market Development Partner of Telecom Research,
Inc. a Canadian manufacturer of computer hardware products, from 1994 to
1996. From 1992 to 1994, Mr. Peltz served as the Executive Director of
Television Production for a television production company. Mr. Peltz was a
freelance software developer from 1992 to 1996 and a freelance television
producer and director from 1990 to 1992. From 1989 to 1990, Mr. Petlz served
as Vice President of Phil Schulman Productions, Inc., a television production
company. Mr. Peltz received his B.S. in Communications from Ithaca College.
Mr. Carpenter, III has been a director of the Company since 1989. Mr.
Carpenter is the former President and majority owner of the Philadelphia
Phillies including the 1980 World Champion team. Since 1989 Mr. Carpenter has
been a private investor. Mr. Carpenter currently serves as a director of the
University of Delaware Board of Trustees.
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<PAGE>
Mr. Gleklen has been a director of the Company since 1994. Since 1994, he
has been the President of Jocard Financial Services, Inc., a private merchant
banking firm. Mr. Gleklen was the Managing Partner of Brobyn Capital
Partners, a venture capital firm, during 1994. From 1985 to 1994, Mr. Gleklen
was the Senior Vice President of Corporate Development of MEDIQ, Inc. Mr.
Gleklen received his B.A. degree from Cornell University in 1958 and received
his J.D. degree from Columbia University School of Law in 1963. Mr. Gleklen
currently serves as a director of Nutramax Products, Inc., New West Eyeworks,
Inc. and Gandalf Technologies, Inc.
Mr. Longstreth has been a director of the Company since 1989. Since 1984
Mr. Longstreth has served as a Philadelphia City Councilman. Mr. Longstreth
was President of the Philadelphia Chamber of Commerce from 1964 to 1983. Mr.
Longstreth currently serves as director emeritus of Tasty Baking Company,
Inc., and as a director of Delaware Group of Funds and HealthCare Services
Group, Inc.
Mr. Shaifer has been a director of the Company since 1989 and an employee
of the Company since 1994. Mr. Shaifer served as President of The Winchell
Company of Philadelphia from 1972 to 1985 and as Chairman from 1985 to 1994.
Mr. Shaifer received his A.B. in History from Princeton University and his
MBA in marketing from the Wharton Graduate Division of the University of
Pennsylvania.
EXECUTIVE COMPENSATION
The following table sets forth the cash and other compensation paid by the
Company to the person serving as chief executive officer during fiscal 1994
and fiscal 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
---------------------------- ------------------------
Name and Principal Year Ending Securities Underlying
Position December 31, Salary ($) Options/SARs
------ ------------ -------------- ---------- ---------------------
<S> <C> <C> <C>
Neil B. Swartz
Chairman of the Board and 1995 $80,755
Chief Executive Officer . 1994 52,801 59,513(1)
</TABLE>
- ------
(1) Represents presently exercisable options to purchase 59,513 shares of
Common Stock at an exercise price of $1.55 per share expiring on July 1,
2000.
No executive officer of the Company earned in excess of $100,000 during
1994 or 1995.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Frederick
H. Light, Neil Swartz and John Ferretti.
The Company entered into an employment agreement with Frederick H. Light
in connection with its acquisition of substantially all of the assets of APBA
in 1995. Mr. Light was the President and sole shareholder of APBA. Mr.
Light's employment agreement with the Company requires him to promote, market
and sell the Company's existing products, and assist with the promotion and
development of new products. The term of Mr. Light's employment began on
January 18, 1995 and continues until January 1, 2010, subject to a provision
in the agreement which would permit Mr. Light to terminate the employment
agreement without penalty after January 1, 2000, upon the delivery of at
least 120 days' express written notice to the Company. Mr. Light's base
salary is $80,000, and he is eligible for bonuses, awards, and fringe
benefits.
Effective as of January 1, 1996, the Company entered into employment
agreements with Neil Swartz and John Ferretti, both for a three year term.
Mr. Swartz shall serve as Chairman of the Board of Directors and Chief
Executive Officer of the Company and Mr. Ferretti shall serve as President
and Secretary. Compensation payable to Mr. Swartz is $140,000 annually while
Mr. Ferretti is to be paid $90,000 annually on the same terms. Subject to
Board approval, both executives are eligible to a bonus up to one-half of
their annual salary payable no later than April 15 of any calendar year.
There are no objective criteria specified in the employment agreements with
Messrs. Light, Swartz and Ferretti with regard to the determination of the
amount, if any, of bonuses to be paid. The amount of any bonus to be paid
will be at the discretion of the Board of Directors.
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<PAGE>
1996 EQUITY COMPENSATION PLAN
The Company's 1996 Equity Compensation Plan provides for grants of stock
options, restricted stock and stock appreciation rights (collectively,
"Grants") to selected employees. By encouraging stock ownership, the Company
seeks to attract, retain and motivate such employees and to encourage such
employees to devote their best efforts to the business and financial success
of the Company.
General. Subject to adjustment in certain circumstances as discussed
below, the Plan authorizes up to 410,000 shares of Common Stock for issuance
pursuant to the Plan. If and to the extent options granted under the Plan
expire or are terminated for any reason without being exercised, or if any
shares of restricted stock are forfeited, the shares of Common Stock subject
to such Grants again will be available for purposes of the Plan.
Administration of the Plan. The Plan is administered and interpreted by a
Committee (the "Committee") of the Board consisting of not less than two
persons appointed by the Board from among its members.
Grants. Grants under the Plan may consist of (i) options intended to
qualify as incentive stock options ("ISOs") within the meaning of section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), (ii)
non-qualified stock options that are not intended to qualify as ISOs, (iii)
stock appreciation rights ("SARs") and (iv) restricted stock.
Eligibility for Participation. Grants may be made to any employee
(including employees who are officers or members of the Board) of the Company
("Grantees"). During any year, no Grantee may receive Grants for more than
200,000 shares of Common Stock.
Options. The option price of any ISO granted under the Plan will not be
less than the fair market value of the underlying shares of Common Stock on
the date of grant, except that the option price of an ISO granted to an
employee who owns more than 10% of the Common Stock may not be less than 110%
of the fair market value of the underlying shares of Common Stock on the date
of grant. The option price of a nonqualified stock option may be greater
than, equal to or less than the fair market value of the underlying shares of
Common Stock on the date of grant. The Committee shall determine the term of
each Option; provided, however, that the exercise period may not exceed ten
years from the date of grant, and the exercise period of an ISO granted to an
employee who owns more than 10% of the Common Stock may not exceed five years
from the date of grant.
The Grantee may pay the option price (i) in cash, (ii) with the approval
of the Committee, by delivering shares of Common Stock owned by the Grantee
and having a fair market value on the date of exercise equal to the option
price, or (iii) by a combination of the foregoing. The Grantee may instruct
the Company to deliver the shares of Common Stock due upon exercise to a
designated broker instead of to the Grantee.
Restricted Stock. The Committee may issue shares of Common Stock to a
Grantee pursuant to the Plan. Shares may be issued for consideration or for
no consideration, as the Committee determines. The number of shares of Common
Stock granted to each Grantee shall be determined by the Committee, subject
to the maximum limit described above. Grants of restricted stock will be made
subject to such performance requirements, vesting provisions, transfer
restrictions or other restrictions and conditions as the Committee may
determine in its sole discretion.
Stock Appreciation Rights. The Committee may grant SARs in tandem with any
stock option. The exercise price of an SAR will be the greater of (i) the
exercise price of the related stock option or (ii) the fair market value of a
share of Common Stock on the date of grant of the SAR. When the Grantee
exercises an SAR, the Grantee will receive the amount by which the fair
market value of the Common Stock on the date of exercise exceeds the exercise
price of the SAR. The Grantee may elect to have such appreciation paid in
cash or in shares of Common Stock, subject to Committee approval. To the
extent a Grantee exercises an SAR, any related option granted in tandem shall
terminate.
Amendment and Termination of the Plan. The Board may amend or terminate the
Plan at any time; provided, however, that any amendment that (i) increases the
aggregate number of shares of Common Stock that may be issued under the Plan or
the individual limit for any Grantee (except for increases pursuant to
adjustments as discussed below), (ii) modifies the requirements as to
39
<PAGE>
eligibility for participation in the Plan, or (iii) requires stockholder
approval pursuant to Rule 16b-3 of the Exchange Act or section 162(m) of the
Code shall be made subject to stockholder approval. The Plan will terminate on
the day before the tenth anniversary of its effective date unless terminated
earlier by the Board or extended by the Board with approval of the shareholders.
Adjustment Provisions. If there is any change in the number or kind of
shares of Common Stock through the declaration of stock dividends or through
a merger, consolidation or other event, the Committee shall appropriately
adjust the maximum number of shares that may be granted, the number of shares
covered by outstanding Grants, and the price per share or the market value of
Grants. Such adjustments shall be final, binding and conclusive.
Change of Control of the Company. Unless the Committee determines
otherwise, in the event of a change of control, all Grants shall be fully
vested and each Grantee may exercise his or her options within a specified
period. A change of control is defined as (i) a tender offer, merger or other
transaction as a result of which any person or group becomes the owner of
more than 50% of the Common Stock or the combined voting power of the
Company's then outstanding securities, (ii) a liquidation or a sale of
substantially all the Company's assets, or (iii) during a period of two
years, individuals who constitute the Board at the beginning of the period
cease to constitute a majority of the Board, except in certain circumstances.
Grants Outstanding. As of March 1, 1996, 16,667 shares of restricted stock
had been granted under the Plan, subject to shareholder approval of the Plan,
and no options or SARs had been granted under the Plan. The shares of
restricted stock were granted to an employee and will become vested one year
after the date of grant, if such employee remains an employee through that
date.
40
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of the date of this Prospectus, and
after the completion of the Offering, the number of shares of Common Stock
beneficially owned: (i) by each director of the Company, (ii) each person who
is known by the Company to beneficially own 5% or more of the outstanding
shares of Common Stock, (iii) the chief executive officer of the Company, and
(iv) all of the Company's executive officers and directors as a group.
<TABLE>
<CAPTION>
Percentage of Outstanding Shares
-----------------------------------
Amount and Nature of Owned
Beneficial -----
Name and Address of Beneficial Owner(1) Ownership(3) Before Offering After Offering
-------------------------------------- --------------------- --------------- --------------
<S> <C> <C> <C>
Neil B. Swartz(2) ............................. 628,196 22.31% 16.38%
Ruly R. Carpenter, III ........................ 586,140 21.26 15.52
W. Thacher Longstreth(3) ...................... 395,301 14.21 10.40
Melanie Hopkins (4) ........................... 395,301 14.21 10.40
Carl Shaifer(5) ............................... 366,726 12.93 9.51
Kathryn G. Shaifer(6) ......................... 366,726 12.93 9.51
John Ferretti(7) .............................. 277,200 9.82 7.21
Keith Carpenter ............................... 208,693 7.57 5.53
Donald Gleklen(8) ............................. 163,992 5.70 4.21
Frederick H. Light(9) ......................... 125,220 4.50 3.29
David Peltz ................................... 24,046 * *
All executive officers and directors as a group (9
persons)(2)(3)(5)(7)(8)(9) ................... 2,566,821 82.01% 61.85%
-------- ----- -----
</TABLE>
- ------
* Less than 1%.
(1) Unless otherwise noted, the Company believes that all persons named in
the table have sole voting and investment power with respect to all
shares beneficially owned by them. Each beneficial owner's percentage
ownership is determined by assuming that options or warrants that are
held by such person (but not those held by any other person) and which
are exercisable within 60 days of the date of this Prospectus have been
exercised. The address for Neil B. Swartz, John Ferretti, Kathryn G.
Shaifer, Frederick H. Light, Carl Shaifer, and David Peltz is 750 Dawson
Drive, Delaware Industrial Park, Newark Delaware 19713. The address for
Ruly R. Carpenter, III and Keith Carpenter is Powder Mill Square, Suite
204, 3844 Kennett Pike, Greenville, DE 19807. The address for W. Thacher
Longstreth is City Hall, Room 594, Philadelphia, PA 19107. The address
for Melanie Hopkins is 1108 Rittenhouse, 210 West Rittenhouse Square,
Philadelphia, PA 19103. The address for Donald Gleklen is Jocard
Financial Services, 980 Jolly Road, Blue Bell, PA 19422.
(2) Includes 59,513 shares of Common Stock issuable upon the exercise of
options at a price of $1.55 per share.
(3) The amount shown for Mr. Longstreth includes (a) 370,173 shares owned by
Mr. Longstreth and Ms. Hopkins as joint tenants with rights of
survivorship ("JTWRS") and (b) 25,128 shares of Common Stock issuable
upon the exercise of options at a price of $2.84 per share.
(4) The amount shown for Ms. Hopkins includes (a) 370,173 shares, referred to
above in footnote 3, and owned by Mr. Longstreth and Ms. Hopkins as JTWRS
and (b) 25,128 shares of Common Stock issuable upon the exercise of
options at a price of $2.84 per share.
(5) Includes (a) 79,351 shares of Common Stock issuable upon the exercise of
options at a price of $2.84 per share and (b) 209,787 shares, referred to
below in footnote 6, and owned by Mr. Shaifer's wife.
(6) Includes (a) 79,351 shares of Common Stock issuable upon the exercise of
options at a price of $2.84 per share, referred to above in footnote 5,
and owned by Ms. Shaifer's husband and (b) 77,588 shares of Common Stock
owned by Ms. Shaifer's husband.
(7) Includes 66,126 shares of Common Stock issuable upon the exercise of
options at a price of $1.55 per share.
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<PAGE>
(8) Includes (i) 29,095 shares of Common Stock issuable upon the exercise of
options at a price of $2.84 per share and (ii) 89,931 shares of Common
Stock issuable upon exercise of warrants exercisable at a price of $1.68
per share.
(9) Includes 24,070 shares of Common Stock issuable upon the exercise of
options at a price of $2.08 per share. Does not include 24,070 shares of
Common Stock issuable upon exercise of options exercisable at a price of
$2.08 per share commencing on January 15, 1997.
CERTAIN TRANSACTIONS
Effective August 25, 1993, Keith Carpenter, a significant shareholder of
the Company, guaranteed a loan to the Company by the Delaware Economic
Development Authority in the principal amount of $100,000, payable over three
years at a rate of interest of 4.8%. At December 31, 1995, the outstanding
balance of the loan was $59,231.
On December 9, 1994, the Company sold to Donald Gleklen, a director and a
significant shareholder of the Company, 44,966 shares of the Company's Common
Stock, and a nontransferable warrant to purchase 89,931 shares of the
Company's Common Stock. The Common Stock and warrants were sold at an
aggregate price of $93,500 and the warrants are exercisable at a price of
$1.68 per share for a period of three years from September 12, 1994.
On December 31, 1994, the Company acquired through a merger all the
outstanding capital stock of Ferraul Corporation (t/a "Foxfire Printing")
from John Ferretti, President, Chief Operating Officer, Secretary, and a
director of the Company, who received 211,074 shares of the Common Stock of
the Company in exchange for his shares of stock of Ferraul Corporation.
On January 1, 1995, the Company acquired substantially all of the assets
and assumed the liabilities of APBA. In the transaction, the Company issued
three promissory notes in the principal amounts of $175,000, $100,000 and
$37,783, respectively, each convertible upon certain events of default at a
rate of $2.08 of principal and accrued interest into one share of Common
Stock. These promissory notes were assigned by APBA to Frederick H. Light, a
Vice President of the Company and sole shareholder of APBA. On March 17,
1995, Mr. Light converted the $175,000 promissory note into 84,112 shares of
Common Stock. On February 15, 1996 Mr. Light converted the remaining
outstanding balance of the $31,728 promissory note and accrued interest of
$3,800 into 17,038 shares of Common Stock. As of February 15, 1996 the
remaining outstanding balance on the $100,000 promissory note was $50,000
plus interest which accrues at 10% per annum. Such promissory note matures
and becomes due and payable on January 15, 1997.
Simultaneously with the closing of its APBA acquisition, the Company
entered into a ten year lease with APBA for 21,800 square feet of office
space. Rent is payable monthly by the Company at a rate of $3,272 per month
plus taxes, insurance and utilities. Effective January 1, 1997, the Company
has an option to acquire the leased premises at the then mutually agreed fair
market value. Also simultaneously with that closing, Mr. Light entered into
an employment agreement with the Company for a term of 15 years for an annual
salary of $80,000 and a noncompetition agreement for a term of seven years
under which the Company pays him consideration of $3,118 per month.
The Company granted stock options to Mr. Light on January 1, 1995 in
connection with an employment agreement with the Company. Mr. Light's options
entitle him to purchase 48,140 shares of the Company's Common Stock at an
exercise price of $2.08 per share. One half of these options will expire on
January 15, 1997 and the remaining options will expire on February 15, 1998.
In February 1995, the Company entered into a term loan agreement with PNC
Bank for a principal amount of $50,000 at the bank's prime rate of interest
plus 2% per annum. The term of the loan is four years and it is guaranteed by
John Ferretti and Neil Swartz.
In March 1995, Interactive Multimedia Limited Partnership, a Delaware limited
partnership (the "Partnership"), loaned the Company $212,500 pursuant to the
terms of a promissory note (the "Note"). The general partner of this Partnership
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is Interactive Multimedia, Inc., a Delaware corporation ("IMI"), in which Neil
B. Swartz, the Chairman, Chief Executive Officer and a director of the Company,
has a 50% ownership interest. IMI, as the general partner, has a 1% interest in
the Partnership, subject to increase up to 75% upon the occurrence of certain
events. The Partnership was formed to acquire a 5% ownership interest in the
executable code (excluding source code, artwork, computer graphics and
statistical analog) of two of the Company's computer software applications,
Sports Illustrated Presents MicroLeague Baseball Version 6 and Blood Bowl (the
"Technology Applications"), to grant an exclusive worldwide license to the
Company with respect to its ownership interest, and provide short-term debt
financing to the Company in an aggregate of $212,500. The license granted to the
Company may not be transferred by the Company without the consent of the
Partnership. The Partnership is not otherwise involved in the development of the
products. To secure the Note, the Company executed a security agreement in favor
of the Partnership for the Company's interest in each of the Technology
Applications and its worldwide license of the Partnership's interest in each of
the Technology Applications. The Note accrues interest of 7% per annum and
principal and accrued interest is payable in full three years from the date of
execution of the Note. The Partnership is entitled to royalties equal to 10% of
the net cash proceeds from Sports Illustrated Presents MicroLeague Baseball
Version 6.0 and Blood Bowl, and these royalties are credited against interest
payments on the Note. The Partnership intends to redeem the interests of its
limited partners upon completion of the Offering. To provide the funds for that
redemption, the Company will repay the Note and will pay to terminate the
royalty rights granted to the Partnership as described above. Upon completion of
this transaction, the Partnership will be dissolved. See "USE OF PROCEEDS." IMI
will receive no payment for the termination of its interest as the general
partner in the Partnership. Mr. Carl Shaifer, a director and significant
shareholder of the Company, invested $12,500 in the Partnership and thereby
acquired a .5% interest in the net cash proceeds from sales of the products. Mr.
Shaifer will receive approximately $15,050 upon the redemption of his interest
and the termination of the Partnership.
In April 1995, the Company entered into agreement with Mr. Longstreth, a
director of the Company and a significant shareholder of the Company, and Ms.
Melanie Hopkins, a significant shareholder of the Company pursuant to which
the Company borrowed from Mr. Longstreth and Ms. Hopkins $13,000 and $12,000,
respectively. The notes accrue interest at the rate of 7% per annum, and
principal and accrued interest is payable in full three years from the date
of execution of the notes. The Company agreed to pay Mr. Longstreth and Ms.
Hopkins an aggregate of 1% of net cash receipts received by the Company from
sales of Sports Illustrated Presents MicroLeague Baseball Version 6.0 and
Blood Bowl, which amounts will be applied to payment of the notes.
Early in June 1995, in consideration for obtaining and managing printing
business for the Company from an unaffiliated customer of the Company, the
Company paid $127,000 to Carl Shaifer. The payment consisted of $64,500 in cash
(of which $12,500 was used to purchase the interest in the Partnership described
above) and a promissory note in the principal amount of $62,500. On June 30,
1995, the Company entered into an exchange agreement with Mr. Shaifer in which
the Company issued 30,057 shares of Common Stock valued at $2.08 per share to
Mr. Shaifer in exchange for the promissory note. Mr. Shaifer has agreed that if
he terminates his consulting relationship with the Company during the three year
period of the contract, he will remit on a pro rata basis any unearned
compensation.
In August 1995, the Company granted certain stock options to five
individuals, including Donald Gleklen, Carl Shaifer, W. Thacher Longstreth,
directors and significant shareholders of the Company, and Melanie Hopkins
(another significant shareholder). These options were in exchange for
guarantees by these individuals of a term note issued by the Company to PNC
Bank, N.A. in connection with the acquisition of Ablesoft. An aggregate of
185,152 options were granted proportionally to the amount of debt guaranteed
by each individual. Each option entitles the holder to purchase one share of
Common Stock of the Company at an exercise price of $2.84 per share for an
aggregate exercise price of $525,832. These options will expire in August
2000.
Effective October 27, 1995, the Company has lines of credit with PNC Bank
that permit borrowings of up to $2,350,000 in the aggregate. The line of
credit in the amount of $1.6 million accrues interest at the bank's prime
rate and is collateralized by a pledge of securities worth $1.6 million owned
by Ruly R. Carpenter III, a director and significant shareholder of the
Company. As a result of the repayment of bank debt from the proceeds of the
Offering, this pledge will be released. See "USE OF PROCEEDS". The $750,000
line of credit accrues interest at the bank's prime rate plus 2% and is
collateralized by pledges of stock and personal guarantees of Neil Swartz and
John Ferretti.
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In December 1995, the Company sold to Carl Shaifer, a director and a
significant Shareholder of the Company. 77,588 shares of the Company's Common
Stock. The Common Stock was sold at an aggregate price of $220,001.
Historically, the Company has not had a formal mechanism for addressing
potential conflicts of interest. However, management of the Company believes
that the terms of the related party transactions set forth above are
consistent with what would have been negotiated in an arms-length transaction
with an independent third party. In the future, the Company will not enter
into any transactions with officers, directors, 5% shareholders or other
affiliates unless the transactions (i) are approved by a majority of its
independent directors (or, if there are no independent directors, a majority
of disinterested directors), (ii) are for bona-fide business purposes, and
(iii) are on terms no less favorable to the Company than could be obtained
from an independent third party.
As of December 31, 1995, there is $69,930 due from certain shareholders
for outstanding advances. Prior to the Offering, all of these loans will be
paid off.
DESCRIPTION OF SECURITIES
SECURITIES
The authorized capital stock of the Company consists of 10,000,000 shares
of Common Stock, par value $.01 per share, and of 1,000,000 shares of
preferred stock. Upon consummation of the Offering, there will be outstanding
3,776,667 shares of Common Stock and no shares of preferred stock will be
outstanding. As of the date of this Prospectus, the Common Stock is held by
approximately 31 shareholders. On March 1, 1996 the Board of Directors
amended the Company's articles of incorporation to increase the number of
authorized shares from 3,000,000 shares to 10,000,000 shares. In addition,
the Board of Directors approved and effected a 1.3225176 for 1 stock split
effective March 1, 1996.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on
all matters submitted to a vote of shareholders, including the election of
directors, and do not have cumulative voting rights. Accordingly, holders of
a majority of the shares of Common Stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
Common Stock are entitled to receive ratably such dividends, if any, as may
be declared from time to time by the Board of Directors out of funds legally
available therefor, subject to any dividend preferences which may be
attributable to preferred stock. Upon the liquidation, dissolution or winding
up of the Company, holders of Common Stock are entitled to receive ratably
the net assets of the Company available for distribution to such holders
after preferred distributions, if any, to holders of preferred stock. Holders
of Common Stock have no preemptive, subscription, or redemption rights. All
outstanding shares of Common Stock are and the Common Stock offered hereby,
upon issuance and sale will be, fully paid and nonassessable.
PREFERRED STOCK
The Articles of Incorporation of the Company authorizes the issuance of up
to 1,000,000 shares of preferred stock, $.01 par value per share. No shares
of preferred stock are outstanding as of the date of this Prospectus. The
Board of Directors is authorized to issue shares of preferred stock from time
to time in one or more series and, subject to the limitations contained in
the Articles of Incorporation and any limitations prescribed by law, to
establish and designate any such series and to fix the number of shares and
the relative conversion rights, voting rights and terms of redemption
(including sinking fund provisions) and liquidation preferences. If shares of
preferred stock with voting rights are issued by the Company, such issuance
could affect the voting rights of the holders of the Company's Common Stock
by increasing the number of outstanding shares having voting rights, and by
the creation of class or series voting rights. If the Board authorizes the
issuance of shares of preferred stock with conversion rights, the number of
shares of Common Stock outstanding could potentially be increased by up to
the amount which the Company is authorized to issue. In addition, issuance of
preferred stock could, under certain circumstances, have the effect of
delaying or preventing a change in control of the Company and may adversely
affect the rights of holders of Common Stock. Also, preferred stock could
have preferences over the Common Stock with respect to dividends and
liquidation rights.
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REDEEMABLE WARRANTS
The Redeemable Warrants offered hereby entitle the registered holder
thereof (the "Warrant Holder") to purchase one Share of Common Stock of the
Company at a price equal to 110% of the initial public offering price per
Share of Common Stock, at any time commencing on the date of the Offering and
ending at 5:00 p.m., New York City time, on the third anniversary of the date
of this Prospectus, at which time all of the Redeemable Warrants purchased in
the Offering will expire. The Redeemable Warrants are immediately separable
and transferable. The Company may call the Redeemable Warrants purchased in
the Offering for redemption, in whole and not in part, at a price of $.10 per
Redeemable Warrant at any time upon not less than 45 days prior written
notice if the last sale price of the Common Stock exceeds 140% of the initial
public offering price per share of Common Stock ("Redemption Price") for not
fewer than 10 of the 15 consecutive trading days ending on the third trading
day prior to the date on which the notice of redemption is given. If on any
trading day there have not been any sales, the last sale price on such
trading day shall be deemed the last sale price of the Common Stock on the
next preceding prior trading day. The Warrant Holders shall have the right to
exercise their Warrants until the close of business on the date fixed for
redemption.
The Redeemable Warrants will be issued in registered form under a Warrant
Agreement between the Company and StockTrans, Inc., as Warrant Agent.
Reference is made to said Warrant Agreement (which has been filed as an
exhibit to the registration statement of which this Prospectus is a part) for
a complete description of the terms and conditions applicable to the
Redeemable Warrants (the description herein contained being qualified in its
entirety by reference to such Warrant Agreement).
The exercise price, number of shares of Common Stock issuable on exercise
of the Redeemable Warrants and Redemption Price are subject to adjustment in
certain circumstances including in the event of a stock dividend, stock
split, recapitalization, reorganization, merger or consolidation of the
Company. However, the Redeemable Warrants are not subject to adjustment for
issuances of Common Stock at a price below their exercise price.
The Company has the right, in its sole discretion, to decrease the
exercise price of the Redeemable Warrants for a period of not less than 30
days on not less than 30 days, prior written notice to the Warrant Holders.
In addition, the Company has the right, in its sole discretion, to extend the
expiration date of the Redeemable Warrants.
The Redeemable Warrants may be exercised upon surrender of the Redeemable
Warrant Certificate on or prior to the expiration date at the offices of the
Warrant Agent, with the exercise form on the reverse side of the Redeemable
Warrant Certificate completed and executed as indicated, accompanied by full
payment of the exercise price (by certified check, payable to the Company)
for the number of Redeemable Warrants being exercised. The Redeemable Warrant
Holders do not have the rights or privileges of holders of Common Stock prior
to the exercise of the Redeemable Warrants.
No Redeemable Warrants will be exercisable unless at the time of exercise
there is a current prospectus covering the shares of Common Stock issuable
upon exercise of such Redeemable Warrants under an effective registration
statement filed with the Securities and Exchange Commission and such shares
have been qualified for sale or exempt from qualification under the
securities laws of the state of residence of the holder of such Redeemable
Warrants. Although the Company intends to have all shares so qualified for
sale in those states where the Securities are being offered and to maintain a
current prospectus relating thereto until the expiration of the Redeemable
Warrants, subject to the terms of the Warrant Agreement, there can be no
assurance that it will be able to do so.
No fractional shares will be issued upon exercise of the Redeemable
Warrants. However, if a Redeemable Warrant Holder exercises all Redeemable
Warrants then owned of record by him, the Company will pay to such Warrant
Holder, in lieu of the issuance of any fractional share which is otherwise
issuable to such Warrant Holder, an amount in cash based on the market value
of the Common Stock on the last trading day prior to the date of exercise.
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BRIDGE UNITS
In connection with a private placement which raised $800,000 in February
1996, the Company issued an aggregate of eight bridge units (the "Bridge
Units"), each Bridge Unit consisting of a promissory note in the principal
amount of $100,000 (the "Bridge Notes") and one Common Stock purchase warrant
(the "Bridge Warrant"). The proceeds from the sale of the Bridge Units were
used to fund working capital.
Each Bridge Warrant entitles the holder (the "Bridge Warrant Holder") to
purchase 20,000 shares of Common Stock of the Company at a price of $3.00 per
share (the "Bridge Exercise Price") at any time commencing on the date of the
Offering is closed and ending at 5:00 p.m., New York City time, on the first
anniversary of the closing of the Offering, at which time the Bridge Warrants
will expire, provided, however, that such Bridge Warrants may be cancelled by
the Company in its sole discretion without any payment of consideration by
notice at any time if an Initial Public Offering, as defined in the Bridge
Warrant, does not occur on or before September 30, 1996.
The number of shares of Common Stock issuable on exchange of the Bridge
Warrants and the Bridge Exercise Price are subject to adjustment in certain
circumstances including in the event of a stock dividend, stock split,
recapitalization, reorganization, merger or consolidation of the Company.
The Bridge Warrants may be exercised upon surrender of the Bridge Warrant
on or prior to the expiration date at the offices of the Company, with the
Bridge Warrant Exercise Agreement completed and executed as indicated,
accompanied by full payment (by certified check or bank draft payable to the
Company) for the purchase price for the number of Bridge Warrants being
exercised. The Bridge Warrants may also be exercised upon surrender of the
Bridge Warrant on or prior to the expiration date at the offices of the
Company, with the Cashless Exercise Agreement completed and executed as
indicated (a "Cashless Exercise"). In the event of a Cashless Exercise, the
Bridge Warrant Holder shall receive the number of shares of Common Stock of
the Company determined by multiplying the number of underlying shares of
Common Stock for which the Cashless Exercise is made by a fraction, the
numerator of which shall be the difference between the then current market
price per share of Common Stock, defined according to the terms of the Bridge
Warrants, and the Bridge Exercise Price, and the denominator of which shall
be the then current market price per share of Common Stock.
The Company has agreed to use its best efforts to register the Common
Stock underlying the Bridge Warrants under the Securities Act and state
securities laws at is own expense.
The Bridge Notes bear interest at a rate equal to 12% per annum payable
upon maturity. The Bridge Notes mature on the earlier of (a) February 5,
1997, or (b) the closing date of the Offering; provided, that the maturity of
the Bridge Notes will be accelerated upon an event of default (as defined
therein).
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain U.S. federal income tax
considerations generally applicable to the purchase, ownership, and
disposition of Common Stock and Redeemable Warrants, being offered and sold
in the Offering. This summary is not a complete analysis or listing of all
possible tax consequences of such purchase, ownership, or disposition. This
summary is a general description only and is not intended to be, nor should
it be construed to be, legal or tax advice to any particular person. This
summary deals only with purchasers that will hold the Common Stock and
Redeemable Warrants as capital assets, and does not address tax
considerations applicable to (i) purchasers that may be subject to special
tax rules, such as U.S. tax-exempt entities, banks, insurance companies, or
dealers in securities or (ii) purchasers that will hold the Common Stock and
Redeemable Warrants as a position in a "straddle" for tax purposes.
Prospective investors should seek independent advice from their own tax
advisors with reference to their individual circumstances, including the
effect of any state, local or other federal tax laws.
This summary is based on the Internal Revenue Code of 1986, as amended
(the "Code"), as in effect on the date of the Offering, as well as
regulations promulgated thereunder and existing administrative
interpretations and court decisions.
Allocation of purchase price
Purchasers in the Offering should allocate the issue price between the
Common Stock and the Redeemable Warrants based upon their relative fair
market values.
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Sale or exchange of common stock or redeemable warrants
Upon sale or exchange of the Common Stock or a Redeemable Warrant, a
purchaser generally will recognize gain or loss equal to the difference
between the amount realized and the purchaser's tax basis in such Common
Stock or Redeemable Warrant. The tax basis of the Common Stock and a
Redeemable Warrant for a purchaser in the Offering generally will equal the
portion of the issue price allocable to the Common Stock and Redeemable Warrant
as described above.
Gain or loss recognized by a purchaser on the sale or exchange of the
Common Stock and a Redeemable Warrant generally will be long-term capital
gain or loss if the purchaser has held such Common Stock or Redeemable
Warrant for more than one year at the time of disposition. The Code provides
preferential treatment under certain circumstances for net long-term capital
gains realized by individual investors. The ability of purchasers to offset
capital losses against ordinary income is limited. Any loss realized by a
purchaser of a Redeemable Warrant upon expriation of an unexercised
Redeemable Warrant will be a capital loss.
Exercise of redeemable warrants
Generally, a purchaser of a Redeemable Warrant will not recognize any gain
or loss upon exercise of the Redeemable Warrant (except with respect to cash,
if any, paid by the Company in lieu of the issuance of a fractional share of
Common Stock). The purchaser's tax basis of the Shares received will be equal
to the sum of (i) its tax basis in the Redeemable Warrant so exercised and
(ii) the cash paid upon exercise of the Redeemable Warrant. The holding
period of the Shares received upon exercise of a Redeemable Warrant for cash
will not include the period during which the Redeemable Warrant was held; it
shall commence only upon the exercise date of the Redeemable Warrant. If any
cash is received in lieu of fractional Shares, the holder will recognize gain
or loss, and the character and amount of gain or loss will be determined as
if the holder had received such fractional shares and then immediately sold
such shares for cash.
LAPSE OF REDEEMABLE WARRANTS
Upon the expiration without exercise of a Redeemable Warrant, a purchaser
will generally recognize a long-term capital loss equal to such holder's
adjusted tax basis in the Redeemable Warrant, provided the Redeemable Warrant
was held by the holder for more than one year at the time of lapse and the
Shares issuable on exercise of such Redeemable Warrant would have been a
capital asset if acquired by the holder.
Transfer agent and registrar
The Transfer Agent and Registrar for the Common Stock, and the Warrant
Agent for the Redeemable Warrants, is StockTrans, Inc. located in Ardmore,
Pennsylvania, 19010, telephone no.: (610) 649-7300.
CERTAIN PROVISIONS OF PENNSYLVANIA LAW AND THE COMPANY'S ARTICLES OF
INCORPORATION AND BYLAWS
Pennsylvania control-shares acquisitions law
The Company is subject to the provisions of subsections E, F, G and H of
Pennsylvania's Control-Shares Acquisitions Law (the "CSAL"). Generally, the
CSAL places certain procedural requirements and establishes certain
restrictions upon the acquisition of voting shares of a corporation which
would entitle the acquiring person to cast or direct the casting of a certain
percentage of votes in an election of directors.
Subchapter 25E of the CSAL provides generally that, if a company were
involved in a "control transaction," shareholders of the company would have
the right to demand from a "controlling person or group" payment of the fair
value of their shares. For purposes of subchapter 25E, a "controlling person
or group" is a person or group of persons acting in concert that, through
voting shares, has voting power over at least 20% of the votes which
shareholders of the company would be entitled to cast in the election of
directors. A "control transaction" arises, in general, when a person or group
acquires the status of a controlling person or group.
In general, Subchapter 25F of the CSAL delays for five years and imposes
conditions upon "business combinations" between an "interest shareholder" and
the Company. The term "business combination" is defined broadly to include
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various merger, consolidation, division, exchange or sale transactions,
including transactions utilizing the Company's assets for purchase price
amortization or refinancing purposes. An "interested shareholder," in general,
would be a beneficial owner of at least 20% of the Company's voting shares.
In general, subchapter 25G of the CSAL suspends the voting rights of the
"control shares" of a shareholder that acquires for the first time 20% or
more, 33 1/3 % or more, or 50% or more of a company's shares entitled to be
voted in an election of directors. The voting rights of the control shares
generally remain suspended until such time as the "disinterested"
shareholders of the company vote to restore the voting power of the acquiring
shareholder.
Subchapter 25H of the CSAL provides certain circumstances for the recovery
by a company of profits made upon the sale of its common stock by a
"controlling person or group" if the sale occurs within 18 months after the
controlling person or group became such and the common stock was acquired
during such 18 month period or within 24 months prior thereto. In general,
for purposes of subchapter 25H, a "controlling person or group" is a person
or group that (i) has acquired, (ii) offered to acquire, or (iii) publicly
disclosed or caused to be disclosed an intention to acquire voting powers
over shares that would entitle such person or group to cast at least 20% of
the votes that shareholders of the company would be entitled to cast in the
election of directors.
Limitations on Director Liability
The Bylaws of the Company provide that a director of the Company shall not
be personally liable, as such, for monetary damages for any action taken,
unless the director fails to perform his duties as a director and such
failure constitutes self-dealing, willful misconduct or recklessness. These
provisions, however, do not apply to the responsibility or liability of a
director pursuant to any criminal statute or the liability of a director for
payment of taxes.
Restrictions on Shareholder Action
On March 19, 1996, the Company amended its Articles of Incorporation to
provide that shareholder action can only be taken at an annual or special
meeting of shareholders and may not be taken by written consent. The Bylaws
of the Company were also amended to provide that special meetings of
shareholders can be called only by the Board of Directors. Shareholders
cannot call a special meeting or to require that the Board of Directors call
a special meeting of shareholders. Moreover, the business permitted to be
conducted at any special meeting of shareholders is limited to the business
set forth in the notice for the meeting. The Bylaws also set forth an advance
notice procedure with regard to the nomination, other than by or at the
direction of the Board of Directors, of candidates for election as directors
and with regard to business to be brought before an annual meeting of
shareholders of the Company. The Articles of Incorporation of the Company
also provide for a "staggered" Board of Directors, and under Pennsylvania law
such directors can be removed only for cause.
Indemnification of Directors and Officers
The Company's Bylaws provide a right to indemnification to the full extent
permitted by law, for expenses (including attorney's fees), damages, punitive
damages, judgments, penalties, fines and amounts paid in settlement actually
and reasonably incurred by any director or officer whether or not the
indemnified liability arises or arose from any threatened, pending or
completed proceeding by or in the right of the Company (a derivative action)
by reason of the fact that such director or officer is or was serving as a
director, officer, employee or agent of the Company or, at the request of the
Company, as a director, officer, partner, fiduciary or trustee of another
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, unless the act or failure to act giving rise to the claim
for indemnification is financially determined by a court to have constituted
willful misconduct or recklessness. The Bylaws provide for the advancement of
expenses to an indemnified party upon receipt of an undertaking by the party
to repay those amounts if it is finally determined that the indemnified party
is not entitled to indemnification.
The Company's Bylaws authorize the Company to take steps to ensure that
all persons entitled to the indemnification are properly indemnified,
including, if the Board of Directors so determines, purchasing and
maintaining insurance. As of the date of this Prospectus, no such insurance
has been purchased.
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The Bylaws provide for indemnification to the extent provided by law.
Insofar as the indemnity for liabilities under the Securities Act may be
permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933, as amended,
and therefore unenforceable.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have 3,776,667
shares of Common Stock outstanding (assuming no exercise of the
over-allotment option and no exercise of the Redeemable Warrants, the Bridge
Warrants or other outstanding options and warrants). Of these shares, the
1,020,000 shares sold in the Offering will be freely tradable without
restriction or further registration under the Securities Act, except for any
shares purchased by an "affiliate" of the Company (in general, a person who
has a controlling position with regard to the Company) which will be subject
to the resale limitations of Rule 144 promulgated under the Securities Act.
The remaining 2,756,667 shares of Common Stock outstanding are deemed to
be "restricted securities" as that term is defined under Rule 144 promulgated
under the Securities Act because they were acquired in transactions not
involving any public offering and may only be sold pursuant to an effective
registration under the Securities Act, in compliance with the exemption
provisions of Rule 144 or pursuant to another exemption under the Securities
Act. Of the 2,756,667 restricted shares of Common Stock, an aggregate of
1,858,668 of such shares will be eligible for sale under Rule 144, subject to
certain volume limitations prescribed by Rule 144 and to the contractual
restrictions described below, commencing 90 days following the date of this
Prospectus. The balance of such shares will become eligible at various times
commencing in October 1996. All of the shareholders of the Company who, in
the aggregate, beneficially own 2,756,667 shares of Common Stock have agreed
not to sell their shares of Common Stock (excluding any shares of Common
Stock sold in the Offering purchased by such shareholders) for a period of
eighteen months following the date of this Prospectus without the
Underwriter's prior written consent. The 160,000 shares of the Common Stock
underlying the Bridge Warrants are being registered concurrently with the
Offering and will be freely tradable without restriction or further
registration under the Securities Act.
In general, under Rule 144, subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company (or persons whose
shares are aggregated with an affiliate) who has owned restricted shares of
Common Stock beneficially for at least two years is entitled to sell, within
any three-month period, a number of shares that does not exceed the greater
of 1% of the then outstanding shares of the issuer's Common Stock or the
average weekly trading volume during the four calendar weeks preceding such
sale, provided that certain public information about the issuer as required
by Rule 144 is then available and the seller complies with certain other
requirements. Affiliates may also sell such shares that are not restricted in
compliance with Rule 144. A person who is not an affiliate, has not been an
affiliate within three months prior to sale, and has beneficially owned the
restricted shares for at least three years is entitled to sell such shares
under Rule 144 without regard to any of the limitations described above.
Prior to the Offering, there has been no market for the Common Stock and
no prediction can be made as to the effect, if any, that public sales of
Common Stock or the availability of such shares for public sale will have on
the market price prevailing from time to time. Nevertheless, the possibility
that substantial amounts of Common Stock may be sold in the public market may
adversely affect prevailing market prices for the Common Stock and could
impair the Company's ability to raise capital through the sale of its equity
securities.
UNDERWRITING
First Colonial Securities Group, Inc. (the "Underwriter") has agreed,
subject to the terms and conditions contained in the Underwriting Agreement,
to purchase on a firm commitment basis 1,020,000 Units, each of which consists
of one Share of Common Stock and one Redeemable Warrant. The Underwriter is
committed to purchase and pay for all of the Securities offered hereby if any
of such Securities are purchased. The Securities are being offered by the
Underwriter, subject to prior sale, when, as and if delivered to and accepted
by the Underwriter and subject to approval of certain legal matters by
counsel and to certain other conditions. The Underwriter does not intend to
sell any of the Securities to accounts for which it exercises discretionary
authority.
49
<PAGE>
The Company has agreed to sell the Securities to the Underwriter at a
discount of ten percent of the initial public offering price thereof. The
Company has also agreed to pay to the Underwriter a nonaccountable expense
allowance of 3% of the gross proceeds of the Offering including exercise of
the over-allotment option, of which $40,000 has been paid as of the date of
this Prospectus. The Company has also agreed to pay all expenses in
connection with qualifying the securities comprising the Securities offered
hereby for sale under the laws of such states as the Underwriter may
designate, including expenses of counsel retained for such purpose by the
Underwriter.
The Underwriter has advised the Company that it proposes to offer the
Securities to the public at the public offering prices set forth on the cover
page of this Prospectus. The Underwriter may allow to certain dealers who are
members of the National Association of Securities Dealers, Inc. (the "NASD")
concessions, not in the excess of $ per share of Common Stock and $ per
Redeemable Warrant, of which not in excess of $ per share of Common Stock
and $ per Redeemable Warrant may be reallowed to the dealers who are
members of the NASD.
The Company has granted to the Underwriter an option, exercisable for 45
days from the date of this Prospectus, to purchase up to 153,000 additional
Shares and/or up to 153,000 additional Redeemable Warrants at the public
offering prices set forth on the cover page of this Prospectus, less the
underwriting discounts and commissions. The Underwriter may exercise this
option in whole or, from time to time, in part, solely for the purpose of
covering over-allotments, if any, made in connection with the sale of the
Shares and Redeemable Warrants offered hereby.
The Company has agreed to sell to the Underwriter for nominal
consideration warrants (the "Underwriter's Warrants") to purchase an
aggregate of up to 102,000 shares of Common Stock and/or 102,000 redeemable
warrants at 130% of the initial public offering price per share of Common
Stock and per Redeemable Warrant, respectively. The Underwriter's Warrants
are exercisable over a period of four years commencing one year after the
date of this Prospectus, and, other than as to the higher exercise price and
longer term, are substantially identical to the Redeemable Warrants. The
Underwriter's Warrants contain provisions to protect the holders thereof
against dilution by adjustment of the exercise price and/or the number or
kind of securities purchasable upon their exercise in certain events, such as
stock dividends, stock splits, mergers, and reclassifications. Any profit
realized upon any resale of the Underwriter's Warrants or upon any sale of
the securities underlying the Underwriter's Warrants may be deemed to be
additional underwriter's compensation.
The Company has agreed to register (or file a post-effective amendment
with respect to any registration statement registering) the Underwriter's
Warrants and the securities underlying the Underwriter's Warrants under the
Securities Act at its expense on one occasion, and at the expense of the
holders thereof on another occasion.
The Company and all of the Company's shareholders owning Common Stock of
the Company prior to the Offering have agreed, subject to certain exceptions,
that they will not sell any shares of Common Stock of the Company for a
period of 18 months after the date of this Prospectus without the prior
written consent of the Underwriter.
The Company has agreed to retain the Underwriter as a financial consultant
for a period of one year following the consummation of the Offering at a fee
of $30,000, payable in full in advance upon the consummation of the Offering.
The consulting agreement with the Underwriter will not require it to devote a
specific amount of time to the performance of its duties thereunder. It is
anticipated that these consulting services will be provided by principals of
the Underwriter and/or members of the Underwriter's corporate finance
department who, however, have not been designated as of the date hereof.
The Company has agreed that the Underwriter shall act as the exclusive
warrant solicitation agent for the Company, if the Company should elect to
redeem the Redeemable Warrants. The Underwriter will receive a fee equal to
4% of the gross proceeds received by the Company in connection with such
redemption and any related exercise of the Redeemable Warrants at that time.
However, the Underwriter shall not receive a fee related to the redemption of
the Redeemable Warrants if (1) the market price of the Common Stock is lower
than the exercise price of the Redeemable Warrant; or (2) the Redeemable
Warrant is held in a discretionary account at the time of exercise, except
where prior specific written approval for exercise is received from the
customer; or (3) the exercise of the Redeemable Warrant is not solicited by
the Underwriter or a related person, provided however, that any request for
exercise will be presumed to be unsolicited unless the customer states in
writing that the transaction was solicited and designates in writing the
broker/dealer to receive compensation for the exercise.
50
<PAGE>
Prior to the Offering, there has been no public trading market for the
Company's Securities. Consequently, the initial public offering price of the
Common Stock and the Redeemable Warrants has been determined by negotiations
between the Company and the Underwriter. Among the factors considered in
determining the offering prices were the Company's financial condition and
prospects, certain financial and operating information of companies engaged
in activities similar to those of the Company and the general condition of
the securities market.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock and
Redeemable Warrants offered hereby will be passed upon for the Company by
Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain legal
matters related to the Offering will be passed upon for the Underwriter by
Mesirov Gelman Jaffe Cramer & Jamieson, Philadelphia, Pennsylvania.
EXPERTS
The consolidated balance sheets of Microleague Multimedia, Inc. as of
December 31, 1994 and 1995 and the consolidated statements of income,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1995 included in this Prospectus, have been included herein
in reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
which includes an explanatory paragraph pertaining to the revision of the
financial statements for the accounting for barter credits and capitalized
software costs, given on the authority of that firm as experts in accounting and
auditing.
The statements of income and cash flows of APBA Game Company Inc. for
the year ended December 31, 1994 included in this Prospectus, have been
included herein in reliance on the report of Stockton Bates & Company, P.C.,
given on the authority of that firm as experts in accounting and auditing.
The statements of operations and cash flows of Ablesoft, Inc. for the nine
months ended September 30, 1995 included in this Prospectus, have been included
herewith in reliance on the report of Joseph Gerbino, CPA, given on the
authority of that individual as an expert in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 under the
Securities Act with the Commission in Washington, D.C. with respect to the
Securities offered hereby. This Prospectus, which is part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Securities offered hereby,
reference is hereby made to the Registration Statement and the exhibits and
schedules thereto which may be inspected without charge at the office of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. Copies of such material may also be obtained at prescribed rates from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract
or document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
51
<PAGE>
MICROLEAGUE MULTIMEDIA, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
MICROLEAGUE MULTIMEDIA, INC.
Report of Independent Accountants ........................................................................ F-2
Consolidated Balance Sheets as of December 31, 1994 and December 31, 1995 and March 31, 1996 (unaudited) .. F-3
Consolidated Statements of Income for the years ended December 31, 1994 and 1995 and the three months ended
March 31, 1995 and 1996 (unaudited) ..................................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994 and 1995 and the
three months ended March 31, 1996 (unaudited) ........................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994 and 1995 and the three months
ended March 31, 1995 and 1996 (unaudited) ............................................................... F-6
Notes to Consolidated Financial Statements ............................................................... F-7
APBA Game Company, Inc. (An Acquired Entity)
Report of Independent Accountants ........................................................................ F-17
Statement of Income for the year ended December 31, 1994 ................................................. F-18
Statement of Cash Flows for the year ended December 31, 1994 ............................................. F-19
Notes to Financial Statements ............................................................................ F-20
ABLESOFT, Inc. (An Acquired Entity)
Report of Independent Auditor.............................................................................. F-22
Statement of Operations for the nine months ended September 30, 1995....................................... F-23
Statement of Cash Flow for the nine months ended September 30, 1995.. ..................................... F-24
Notes to Financial Statements ............................................................................ F-25
Unaudited Pro Forma Consolidated Financial Statements
Pro Forma Financial Information .......................................................................... F-26
Pro Forma Consolidated Statement of Operations for the year ended December 31, 1995 ...................... F-27
Notes to Unaudited Pro Forma Financial Information ....................................................... F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Microleague
Multimedia, Inc.:
We have audited the accompanying consolidated balance sheets of
Microleague Multimedia, Inc. (formerly, Sports Associates, Inc.) as of
December 31, 1994 and 1995 and the related consolidated statements of income,
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Microleague Multimedia, Inc. as of December 31, 1994 and 1995 and the results
of their income and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
As disclosed in Note 1 the Company revised its 1994 and 1995 financial
statements to reflect adjustments associated with the accounting for barter
credits and capitalized software.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 19, 1996, Except
for Note 7, Note 11 and Note 13
for which the date is March 1, 1996
F-2
<PAGE>
MICROLEAGUE MULTIMEDIA, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996
<TABLE>
<CAPTION>
March 31, 1996
1994 1995 (unaudited)
------------- ------------- --------------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ..................... $ 73,345 $ 6,754 $ 0
Accounts receivable, net of allowance for
returns and doubtful accounts of $310,000,
$444,000 and $335,000 ....................... 691,794 1,763,124 1,440,190
Inventory, net ................................ 489,192 916,715 1,098,602
Royalty advances .............................. 145,537 295,702 386,323
Prepaid and other current assets .............. 72,105 247,500 297,349
Deferred tax asset ............................ -- 208,300 302,380
------------- ------------- -------------
Total current assets ......................... 1,471,973 3,438,095 3,524,844
Fixed assets, net ............................... 297,451 425,162 476,899
Goodwill, net ................................... -- 771,210 747,437
Capitalized software costs, net ................. 23,942 370,021 408,611
Intangible assets, net .......................... -- 262,638 197,574
Other assets .................................... -- 107,413 367,076
------------- ------------- -------------
Total assets ................................. $ 1,793,366 $ 5,374,539 $ 5,722,441
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital
leases ...................................... $ 119,102 $ 391,530 $ 343,746
Notes payable ................................. 1,899,500 2,281,372 2,742,298
Accounts payable .............................. 513,484 1,109,625 1,114,577
Accrued expenses .............................. 216,353 238,813 196,091
------------- ------------- -------------
Total current liabilities .................... 2,748,439 4,021,340 4,396,712
Deferred tax liability .......................... -- 192,000 201,388
Long-term debt and capital leases, net .......... 191,328 1,019,602 950,647
------------- ------------- -------------
Total liabilities ............................ 2,939,767 5,232,942 5,548,747
------------- ------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized; None issued and
outstanding ................................. -- -- --
Common stock, $.01 par value, 10,000,000
shares authorized; 2,188,899, 2,674,870,
and 2,756,667 shares issued and
outstanding ................................. 21,889 26,749 27,567
Additional paid-in capital .................... 849,510 2,057,158 2,383,771
Warrants ...................................... -- -- 160,000
Accumulated deficit ........................... (1,971,469) (1,872,380) (2,243,131)
Receivables from stockholders ................. (46,331) (69,930) (70,180)
Deferred Compensation ......................... (84,333)
------------- ------------- -------------
Total stockholders' (deficiency) equity ...... (1,146,401) 141,597 173,694
------------- ------------- -------------
Total liabilities and stockholders' equity ... $ 1,793,366 $ 5,374,539 $ 5,722,441
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
MICROLEAGUE MULTIMEDIA, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
Year ended December 31, Three Months Ended
1994 1995 March 31, 1995 and 1996
-------------- -------------- ------------------------------
(unaudited)
<S> <C> <C> <C> <C>
Net revenues ............................... $2,827,197 $5,010,156 $ 555,954 $1,131,573
Cost of goods sold ......................... 1,566,644 2,374,975 400,705 688,512
------------ ------------ ----------- ------------
Gross profit .............................. 1,260,553 2,635,181 155,249 443,061
------------ ------------ ----------- ------------
Operating expenses:
Selling and marketing ..................... 329,209 515,882 101,633 191,099
General and administrative ................ 849,243 1,771,005 400,660 616,788
------------ ------------ ----------- ------------
Total operating expenses ................. 1,178,452 2,286,887 502,293 807,887
------------ ------------ ----------- ------------
Income (loss) from operations ............ 82,101 348,294 (347,044) (364,826)
Interest expense ........................... 145,210 224,451 62,021 90,617
Other expense .............................. -- 41,054 -- --
------------ ------------ ----------- ------------
Income (loss) before benefit for income taxes (63,109) 82,789 (409,065) (455,443)
Benefit for income taxes ................... -- 16,300 -- 84,692
------------ ------------ ----------- ------------
Net income (loss) ........................ $ (63,109) $ 99,089 $ (409,065) $ (370,751)
============ ============ =========== ============
Net (loss) per common share ................ $ (.13)
============
Weighted average common shares outstanding . 2,937,978
============
Pro forma income data (unaudited):
Income (loss) before taxes ............... $ (63,109) $ 82,789 $ (409,065)
Income tax provision (benefit) at 40% .... (25,244) 33,116 (163,626)
------------ ------------ -----------
Net income (loss) ........................ $ (37,865) $ 49,673 $ (245,439)
============ ============ ===========
Proforma earnings (loss) per share ......... $ (.01) $ .02 $ (.09)
============ ============ ===========
Weighted average common shares outstanding . 2,650,345 2,937,978 2,865,310
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
MICROLEAGUE MULTIMEDIA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
Additional Receivables
Common Paid-In Accumulated from Deferred
Shares Stock Capital Deficit Stockholders Compensation Total
--------- ------- ---------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 ..... 2,050,299 $20,503 $ 612,256 $(1,831,729) $(77,395) $(1,276,365)
Adjustment for revision to
previously issued
financial statements......... (76,631) (76,631)
--------- ------- ---------- ----------- -------- ------- -----------
Balance January 1, 1994 as
restated .................... 2,050,299 20,503 612,256 (1,908,360) (77,395) (1,352,996)
Issuance of common stock ..... 53,430 534 106,140 106,674
Conversion of notes payable .. 85,170 852 131,114 131,966
Payments by stockholders ..... 31,064 31,064
Net loss ..................... (63,109) (63,109)
--------- ------- ---------- ----------- -------- ------- -----------
Balance, December 31, 1994 ... 2,188,899 21,889 849,510 (1,971,469) (46,331) (1,146,401)
Issuance of common stock ..... 230,733 2,307 572,701 575,008
Stock issued for acquisition . 132,252 1,323 373,677 375,000
Stock issued for services .... 38,874 389 87,111 87,500
Conversion of notes payable .. 84,112 841 174,159 175,000
Borrowings by stockholders ... (23,599) (23,599)
Net income ................... 99,089 99,089
--------- ------- ---------- ----------- -------- ------- -----------
Balance, December 31, 1995 ... 2,674,870 26,749 2,057,158 (1,872,380) (69,930) 141,597
--------- ------- ---------- ----------- -------- ------- -----------
Issuance of common stock ..... 81,797 818 486,613 487,431
Borrowings by stockholders ... (250) (250)
Deferred Compensation ........ (84,333) (84,333)
Net loss ..................... (370,751) (370,751)
--------- ------- ---------- ----------- -------- ------- -----------
Balance, March 31, 1996
unaudited .................. 2,756,667 $27,567 $2,543,771 $(2,243,131) $(70,180) $(84,333) $173,694
========= ======= ========== =========== ======== ======= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
MICROLEAGUE MULTIMEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1995 and 1996
(unaudited)
1994 1995 1995 1996
----------- ------------- ------------ ------------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net income ..................................... $ (63,109) $ 99,089 $(409,065) $(370,751)
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization ............... 73,104 201,124 29,648 140,301
Provision for inventory obsolescence ........ 136,143 59,271 -- --
Provision for returns and uncollectible
accounts................................... 94,279 134,000 -- 170,421
Changes in operating assets and liabilities
net of acquisitions:
Accounts receivable ....................... (589,539) (1,127,991) 148,345 152,513
Inventory ................................. (382,386) (208,989) (301,692) (181,888)
Royalty advances .......................... (93,905) (150,164) (19,612) (90,621)
Prepaid expenses and other assets ......... (56,345) (31,231) 22,568 (49,849)
Deferred tax assets ....................... -- (208,300) -- (94,080)
Other assets .............................. -- (145,122) (424,649) (275,060)
Accounts payable .......................... 215,066 454,605 (100,445) 4,952
Accrued expenses .......................... 3,420 1,110 79,881 (42,722)
Deferred tax liabilities .................. -- 192,000 -- 9,388
----------- ------------- ------------ ------------
Net cash used for operating activities ... (663,272) (730,598) (975,021) (627,396)
----------- ------------- ------------ ------------
Cash flows from investing activities:
Purchases of equipment ......................... (50,258) (137,433) (42,788) (85,237)
Capitalized software costs ..................... (34,202) (360,672) (34,416) (41,155)
----------- ------------- ------------ ------------
Net cash used for investing activities . (84,460) (498,105) (77,204) (126,392)
----------- ------------- ------------ ------------
Cash flows from financing activities:
Net borrowings under lines of credit ........... 678,661 381,872 (12,000) 460,926
Payments (borrowings) of receivables from
stockholders ................................ 31,064 (23,599) -- (250)
Borrowings of long-term debt ................... 23,305 787,500 929,234 --
Principal payments of long-term debt and capital
leases ...................................... (81,631) (558,669) -- (84,956)
Issuance of common stock ....................... 106,674 575,008 75,025 371,314
----------- ------------- ------------ ------------
Net cash provided by financing activities 758,073 1,162,112 992,259 747,034
----------- ------------- ------------ ------------
Net increase (decrease) in cash and cash
equivalent ........................... 10,341 (66,591) (59,966) (6,754)
Cash and cash equivalents at beginning of year ... 63,004 73,345 73,345 6,754
----------- ------------- ------------ ------------
Cash and cash equivalents at end of year ......... $ 73,345 $ 6,754 $ 13,379 --
=========== ============= ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest ......................... $ 137,616 $ 226,066 $ 53,759 $ 95,874
=========== ============= ============ ============
Noncash financing and investing activities:
Acquisition notes ........................... $ -- $ 312,783 -- --
=========== ============= ============ ============
Non-compete agreement ....................... $ -- $ 200,023 -- --
=========== ============= ============ ============
Capital lease obligations ................... $ 31,388 $ 18,020 -- --
=========== ============= ============ ============
Conversion of notes payable to common stock . $ 131,966 $ 175,000 175,000 31,783
=========== ============= ============ ============
Issuance of common stock .................... $ -- $ 375,000 -- --
=========== ============= ============ ============
Issuance of common stock for services ....... $ -- $ 87,500 -- --
=========== ============= ============ ============
Issuance of employee stock grant ............ $ -- $ -- $ -- $ 84,333
=========== ============= ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS:
The 1995 consolidated financial statements for Microleague Multimedia,
Inc. (the "Company" or "Microleague"), include the operations of APBA Game
Company ("APBA") and Ablesoft, Inc. ("Ablesoft") (see Note 2), two
interactive multimedia product companies which were acquired by the Company
in 1995, as well as those of Microleague and Ferraul Corp., doing business as
FoxFire Printing ("FoxFire"). Through December 31, 1994 Microleague's
business was comprised solely of Microleague, engaged in the development and
distribution of sports game simulation and other software. Microleague sells
its products primarily through software retailers, mail order, wholesale
clubs and mass market merchandisers throughout the United States. As more
fully explained in Note 3, on December 31, 1994, the Company merged through a
pooling of interests with FoxFire. FoxFire provides commercial printing,
graphic design and manufacturing services. All significant intercompany
accounts and transactions have been eliminated.
INTERIM FINANCIAL INFORMATION:
The financial statements as of March 31, 1996 and for the three months
ended March 31, 1995 and 1996 are unaudited. In the opinion of management,
all adjustments, including normal recurring adjustments, necessary for a fair
presentation of the results of operations have been included. Results for the
three months ended March 31, 1996 may not be indicitive of the results
expected for the year ended December 31, 1996.
ACCOUNTING ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
For purposes of the statement of cash flows, the Company considers all highly
liquid debt investments purchased with an initial maturity of three months or
less to be cash equivalents. At March 31, 1996 the Company has included in
accrued expenses its cash overdraft of $38,605.
CONCENTRATION OF CREDIT RISKS:
The Company sells products primarily to software retailers and
distributors and extends credit based on an evaluation of the customer's
financial condition, generally without requiring collateral. Exposure to
losses on receivables is principally dependent on each customer's financial
condition. The Company monitors its exposure for credit losses and maintains
allowances for anticipated losses.
In 1994 and 1995, the Company had one customer which accounted for 29% and
15% of revenues, respectively. In 1995, the Company's three largest customers
accounted for approximately 29% of revenues and in the aggregate accounted
for approximately 30% of the Company's accounts receivable at December 31,
1995.
INVENTORY:
Inventory is stated at lower of cost or market, using the first in, first
out (FIFO) method.
The Company periodically reviews inventory for obsolete, slow moving and
nonsalable inventory and records a reduction of such items to their net
realizable value as a component of Cost of Goods Sold.
During 1994 and 1995 the Company recognized writedowns to net realizable
value of its inventory of approximately $286,000 and $60,000 respectively.
During 1994 the Company was able to exchange impaired inventory for barter
credits to be utilized in the future. No value has been assigned to these
credits.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
FIXED ASSETS:
Fixed assets are stated at cost and depreciated over their estimated
useful lives (three to five years for computers and related equipment and 20
years for printing equipment) using the straight-line method. Equipment with
capital leases are also amortized over the estimated useful life of the
asset. Normal repairs and maintenance are expensed as incurred. Upon sale or
retirement of depreciable assets, the cost and related accumulated
depreciation are removed from the accounts. Any gain or loss on the sale or
retirement is recognized in current operations.
COMPUTER SOFTWARE:
The Company capitalizes computer software costs and costs of product
enhancements subsequent to the determination of technological feasibility, which
occurs when all planning, designing, coding and testing activities necessary for
that product to be produced to meet its design specifications have been
completed; such capitalization continues until the product becomes available for
general release. Unamortized capitalized costs of a computer software product
are compared to the net realizable value of that product and reduced as
necessary to its net realizable value. Maintenance and general upgrades are
expensed as incurred. Capitalized software costs are written down to net
realizable value when the carrying amount is in excess thereof.
Computer software development and enhancement costs are amortized on a
product-by-product basis over a period of up to two years. Amortization, which
is included in cost of goods sold, is the greater of the amount computed using
(1) the ratio of the current year's gross revenues to the total current and
anticipated future gross revenues for that product or (2) the straight-line
method over the estimated life of the product. The Company capitalized
approximately $34,200 and $360,700 of these costs in the years ended December
31, 1994 and 1995. Total amortization expense related to computer software was
$10,260 and $14,593 in the years ended December 31, 1994 and 1995.
INTANGIBLE ASSETS:
The Company amortizes costs in excess of fair market value of net assets
acquired using the straight-line method over 10 years. Recoverability is
reviewed annually or sooner if events or changes in circumstances indicate
that the carrying amount may exceed fair value. Recoverability is determined
by comparing the undiscounted net cash flows of the assets to which the
goodwill applies to the net book value including goodwill of those assets.
The Company has other intangible assets resulting from the APBA and
Ablesoft acquisitions as set forth in the table below. The Company amortizes
these intangible assets over their estimated useful lives, which do not
exceed any applicable contractual lives.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
<TABLE>
<CAPTION>
1995 Estimated useful lives
--------- ----------------------
Trademarks ............. 31,428 20
<S> <C> <C>
Noncompete agreements .. 235,023 7
Customer lists ......... 30,000 10
--------- ----------------------
296,451
Accumulated amortization . 33,813
---------
262,638
=========
</TABLE>
Amortization expense was $54,642 in 1995. As 1995 is the first year in
which acquisitions were made and the other intangible assets were acquired,
the aforementioned amortization expense represents the total of accumulated
amortization at December 31, 1995.
DEFERRED OFFERING COSTS:
Deferred offering costs which are included in other assets consist of
legal, accounting, consulting and other costs related to the proposed initial
public offering of the Company's common stock as discussed in Note 13.
ROYALTIES:
The Company routinely enters into various agreements for licensing and
product development of software games, whereby the Company pays periodic
royalty payments. Royalty expense is included in cost of goods sold. Royalty
advances represent advance payments made to independent developers and
licensors of intellectual properties and are expensed against future royalty
obligations. The royalty advances made for specific products are compared to
the Company's estimates of future royalty obligations, which are based on
estimated revenues, and reduced to their net realizable value when the
carrying value of the royalty advance exceeds future obligations.
REVENUE RECOGNITION:
Revenues are recognized when a product is shipped or a service is
performed, and when no significant obligations remain and collection is
probable. Net revenues are comprised of the total sales billed during the
period less the sales value of goods estimated to be returned, trade
discounts and customer allowances anticipated at the time of shipment.
ADVERTISING COSTS:
The catalog costs which are capitalized primarily consist of graphic design
and postage costs for quarterly catalogues which supersede previously issued
catalogues. Capitalized catalog costs are amortized over the three month life of
the catalog. Prepaid advertising costs are reduced to their net realizable value
when the carrying value of the prepaid advertising costs exceeds the anticipated
future benefits. Total prepaid advertising included in prepaid and other current
assets was $23,664 and $28,487 as of December 31, 1994 and 1995, respectively.
Total advertising expense included in selling and marketing expense was $17,383
and $191,501 for the years ended December 31, 1994 and 1995, respectively.
RESEARCH AND DEVELOPMENT:
Research and development costs are included in the accompanying statements
of operations as general and administrative expenses. These costs were
$65,540 and $69,795 in 1994 and 1995, respectively.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
INCOME TAXES:
Prior to October of 1995, the Company elected to be treated as an S
Corporation (as defined in the Internal Revenue Code). As a result of this
election, federal and state income taxes, if any, on taxable income of the
Company were the responsibility of the stockholders. On October 1, 1995 the
Company elected to be recognized as a C Corporation as defined in the
Internal Revenue Code, as amended. Accordingly, a pro forma provision for
income taxes is presented as if the Company were taxed as a C Corporation
during the periods prior to the change in status.
Upon termination of the Company's S election, the Company became subject
to the provisions of Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes." As a result, the Company records deferred
taxes for the effect of cumulative temporary differences between the tax and
book basis of its assets and liabilities.
NET INCOME PER SHARE:
Net income per share and pro forma net income per share is based upon the
weighted average number of common shares and equivalents outstanding during
each period. Common stock equivalents are attributable primarily to
outstanding stock options and warrants. All stock issued, stock options and
warrants granted by the Company during the twelve months immediately
preceding the date of the initial filing by the Company of its initial public
offering have been included in the calculation of the shares outstanding as
if they were outstanding for all periods presented. Historical earnings per
share is not presented in 1994 and 1995 as it is not meaningful due to the
company's tax status.
RESTATEMENT:
During 1996 the Company revised its 1994 and 1995 financial statements to
reflect adjustments associated with the accounting for barter credits and
capitalized software.
The effect of reducing the amouts previously capitalized related to barter
credits received was to reduce net income in 1994 by approximately $150,000. The
effect of increasing the amount of capitalized software development and
enhancemnet costs was to increase (decrease) net income in 1994 and 1995 by
$23,940 and $(10,260), respectively.
2. ACQUISITIONS:
On January 1, 1995, the Company acquired the net assets of APBA, a
developer of software and board sports games. The total purchase price for
the APBA Acquisition was $513,000, of which $313,000 was paid by the issuance
of notes payable and $200,000 was the entrance into a noncompetition
agreement. The notes are due in January 1997, with interest rates ranging
from 8% - 10% per year. The notes can be converted to common stock subject to
certain events at the rate of $2.08 per share. Notes payable of $175,000 were
immediately converted into 84,112 shares of common stock. The $513,000
purchase price pertained to the acquisition of $557,000 of assets and the
assumption of $85,000 of liabilities. The Company recorded approximately
$41,000 of goodwill associated with the APBA acquisition.
On October 1, 1995, the Company acquired the stock of Ablesoft, a
developer/publisher of lifestyle/ entertainment software. The total purchase
price for the Ablesoft Acquisition was $375,000, payable by delivery of
132,252 shares of stock. The purchase price pertained to the acquisition of
assets in the amount of $243,000 and the assumption of liabilities totaling
$619,000. The Company recorded approximately $751,000 of goodwill associated
with the Ablesoft acquisition.
Both acquisitions have been accounted for as business combinations in
accordance with the purchase method. The results of operations for these
acquisitions are included in the Company results of operations from their
respective dates of acquisition.
The following unaudited pro-forma consolidated net sales, net income and
net income per share has been presented as if the acquisitions had occurred
on January 1, 1994:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Net sales .......................... $5,608,490 $5,557,362
Net income (loss) .................. $ 30,811 $ (76,847)
Net income (loss) per share ........ $ .01 $ (.03)
Weighted average shares outstanding . 2,650,345 2,937,978
</TABLE>
Pro forma income (loss) per share presented above have been modified to
assume the Company was a taxable entity in each year.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS: -- (CONTINUED)
The proforma results are not necessarily indicative of the results of
operations that would have occurred had the acquisitions taken place at the
beginning of the periods presented nor are they indicative of the results
that may occur in the future.
3. MERGER:
On December 31, 1994, the Company issued 211,074 shares of its common
stock for all of the outstanding common stock of FoxFire. The merger was
accounted for as a pooling of interests and, accordingly, the Company's
financial statements have been restated to include the results of FoxFire for
the year ended December 31, 1994. Combined and separate results of
Microleague and FoxFire are as follows:
Year ended December 31, 1994:
<TABLE>
<CAPTION>
Microleague FoxFire
Microleague Adjustments FoxFire Adjustments Combined
------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Net revenues ..... $1,684,909 -- $1,657,539 $(515,251) $2,827,197
============= ============= ============ ============= ============
Net income (loss) . $ 156,930 -- $ (74,734) $ (18,620) $ 63,576
============= ============= ============ ============= ============
</TABLE>
Adjustments have been made to eliminate transactions between Microleague
and FoxFire which occurred before the combination and to conform the
accounting policies of the two companies.
4. INVENTORY:
Inventory, net of valuation allowances of $136,143 and $59,271, and
$59,271 consisted of the following:
<TABLE>
<CAPTION>
March 31,
December 31 1996
---------------------------------- -------------
1994 1995 (unaudited)
---------- ---------- -----------
<S> <C> <C> <C>
Raw materials .. $ 40,000 $ 24,695 $ 50,000
Work-in-process . 59,010 86,082 225,000
Finished goods . 390,182 805,938 823,602
---------- ---------- -----------
Total ........ $489,192 $916,715 $ 1,098,602
========== ========== ===========
</TABLE>
5. FIXED ASSETS:
Fixed assets (including equipment acquired under capitalized leases) at
December 31, 1994 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
Printing equipment .................. $315,906 $428,504
<S> <C> <C>
Computers ........................... 206,889 273,374
Furniture and fixtures .............. 26,901 60,843
Automobile .......................... 7,700 15,469
---------- ----------
557,396 778,190
Less accumulated depreciation and
amortization ....................... 259,945 353,028
---------- ----------
$297,451 $425,162
========== ==========
</TABLE>
Computers and equipment under capital leases were $104,474 and $10,900,
respectively at December 31, 1994 and $104,474 and $28,919, respectively at
December 31, 1995. Amortization expense on capital leases totaled $34,920 and
$27,510, respectively for the years ended December 31, 1994 and 1995.
Depreciation expense amounted to $27,924 and $65,573 for the years ended
December 31, 1994 and 1995, respectively.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DEBT AND LINES OF CREDIT:
The Company has demand lines of credit with two banks that permit
borrowings of up to $2,400,000. Borrowings bear interest ranging from the
prime lending rate to 2% above the prime lending at December 31, 1995. The
lines of credit are collateralized by marketable securities held by a
stockholder, all assets of the Company and the personal guarantee of two
stockholders. The lines of credit expire on September 1996 and January 1997.
At December 31, 1994 and 1995, $1,899,500 and $2,281,372, respectively, was
outstanding under the lines of credit.
Long-term debt obligations as of December 31, 1994 and 1995 consist of the
following:
<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
Third party:
Bank term loan, interest only until June 30, 1996 at the bank's prime
rate (8% at December 31, 1995) plus 1%. Principal payable thereafter
in 24 monthly installments of $10,000 plus interest at the bank's
prime rate plus 2% through June 30, 1997, and at the bank's prime
rate plus 3% thereafter with a balloon payment due June, 1998 ...... -- $ 475,000
Equipment loans payable in monthly installments, including interest
at 10.125%, due 1999 (Notes are collateralized by certain equipment) $144,376 105,530
Vendor notes payable at various interest rates ranging from 7.5% to
10% due March 1996 and 1997 ........................................ -- 118,379
Delaware Economic Development Authority Loan, payable monthly,
including interest at 4.8%, due in September of 1996. .............. 92,028 59,231
Capitalized leases for equipment payable in monthly installments
through May 2000 ................................................... 74,026 57,187
Bank term loans payable in monthly installments plus interest at the
bank's prime rate (8% at December 31, 1995) plus 2%, due February
1999 ............................................................... -- 61,621
---------- -----------
310,430 876,948
Related party:
Seller notes payable from acquired businesses at 10% interest, due
October 1996 and January 1997 ...................................... -- 131,783
Notes payable for covenant not to compete including interest at 8%,
due January 2002 ................................................... -- 177,812
Interactive Multimedia partnership notes payable, due March 1998 .... -- 187,820
Notes payable with certain shareholders and a Director interest at
7%, due April 1998 ................................................. -- 36,769
---------- -----------
310,430 1,411,132
Less current portion ................................................ 119,102 391,530
---------- -----------
$191,328 $1,019,602
========== ===========
</TABLE>
The bank term loan with a balance of $475,000 at December 31, 1995 is
guaranteed by three Directors and two stockholders.
The Delaware Economic Development Authority Loan is personally guaranteed
by a stockholder, and includes conditions, among others, that the Company
maintain its present operation within the State of Delaware.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DEBT AND LINES OF CREDIT: -- (CONTINUED)
In the event of default, resulting from a material adverse change in the
financial condition of the Company or failure to make payment of interest or
principal, the seller notes which include both principal and interest, may be
converted into common stock of the Company at a rate of $2.08 per share.
In March of 1995 the Company borrowed $212,500 from Interactive Multimedia
Partnership whose general partners include an officer of the Company and
three stockholders. In April of 1995 the Company borrowed $50,000 from
certain stockholders and a Director of the Company. The loans are payable
June 1998, bear interest at 7% and are collateralized by the Company's
interest in two specific games. The loans are repayable early based on a
percentage of the revenue generated from those games. Once repayment of the
loans occur, royalties will continue to be incurred until the products
terminate their sales.
Aggregate maturities for long-term debt, excluding capital leases, as of
December 31, 1995 for each of the next five years, is as follows:
<TABLE>
<CAPTION>
Year ending
December 31
-------------
<S> <C>
1996 $372,515
1997 265,337
1998 415,110
1999 177,051
2000 88,092
Thereafter 35,840
-----------
$1,353,945
===========
</TABLE>
7. STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
On March 1, 1996, the Company authorized 1,000,000 shares of $.01 par
value preferred stock.
COMMON STOCK:
On September 15, 1995, the Board of Directors amended the Company's
articles of incorporation to increase the number of authorized shares of
Common Stock from 100,000 shares to 3,000,000 shares and authorized a
100-for-1 stock split. On March 1, 1996, the Board of Directors amended the
Company's articles of incorporation to increase the number of authorized
common shares from 3,000,000 to 10,000,000 shares and authorized a stock
split of approximately 1.32 for 1. Stockholders' equity has been restated to
give retroactive recognition to the stock split in all periods. In addition,
all references in the financial statements to number of shares, per share
amounts and stock option data have been restated to reflect such stock
splits.
STOCK OPTIONS AND WARRANTS:
On March 1, 1996, the Board authorized, subject to stockholder approval,
the 1996 Equity Compensation Plan allowing for the issuance of up to 410,000
qualified and nonqualified stock options, stock appreciation rights and
grants of restricted stock. The options, when granted, will expire no later
than 10 years from their grant dates. As of December 31, 1995, options to
purchase 358,931 shares of stock at exercise prices ranging from $1.55 to
$2.84 remain outstanding. These options will expire through 2000.
As of December 31, 1995, the Company had outstanding warrants (issued to a
stockholder in 1994 concurrent with a stock issuance), to purchase 89,931
shares of the Company's common stock at $1.68 per share which expire in
December 1997.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. Stockholders' Equity: -- (Continued)
Options and warrants issued are as follows:
Shares Exercise Price
------ --------------
Outstanding at January 1, 1994 ...... -- --
Granted ............................. 215,570 $1.55 - $1.69
------- -------------
Outstanding at January 1, 1995 ...... 215,570 1.55 - 1.69
Granted ............................. 233,292 2.08 - 2.84
------- -------------
Outstanding at December 31, 1995 .... 448,862 $1.55 - $2.84
======= =============
8. Leases:
The Company leases certain of its operating facilities and equipment under
non-cancelable leases expiring at various dates through 2000. At December 31,
1995, aggregate minimum lease commitments are as follows:
Capital Operating
-------- ---------
1996 $ 27,177 $ 148,000
1997 23,422 129,000
1998 15,449 124,000
1999 4,920 124,000
2000 2,870 59,000
-------- ---------
Minimum lease payments $73,838 $ 584,000
=========
Less amount representing interest
16,651
--------
Present value of minimum
lease payments 57,187
Less current portion 19,015
--------
$ 38,172
========
Rent expense as a result of operating leases amounted to approximately
$122,000 and $184,000 for 1994 and 1995, respectively.
9. INCOME TAXES:
The benefit for income taxes consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Deferred federal income tax . $(14,600)
Deferred state income tax .. (1,700)
-----------
$(16,300)
===========
</TABLE>
The reconciliation of income taxes at the U.S. statutory rate to the
benefit for income taxes for 1995 is as follows:
<TABLE>
<CAPTION>
<S> <C>
U.S. Federal statutory rate .............. $ 38,437
State income taxes net of federal benefit . 11,260
Nondeductible expenses ................... 4,267
Effect of deferred income taxes due to
change in tax status ..................... (70,264)
-----------
Benefit for income taxes .......... $ (16,300)
===========
</TABLE>
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES: -- (CONTINUED)
The tax effects of temporary differences which comprise the deferred tax
assets and liabilities at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Accounts receivable ... $182,100
Inventory ............. 24,300
Other ................. 1,900
-----------
208,300
-----------
Deferred tax liabilities:
Capitalized software .. 146,000
Fixed assets .......... 46,000
-----------
192,000
-----------
Net deferred tax asset .. $ 16,300
===========
</TABLE>
10. RELATED PARTY TRANSACTIONS:
In connection with a consulting agreement with an employee-Director for
obtaining and managing a printing customer the Company issued in June 1995,
30,057 shares of stock valued at $62,500 and paid $64,500. As a result, the
Company has deferred the expense of the consulting agreement over the three year
life of the contract. The unamortized portion of $88,000 is included in other
assets at December 31, 1995. The employee-director has agreed that if he
terminates his relationship with the Company during the three year period of the
contract he will remit on a pro-rata basis any unearned compensation.
At December 31, 1995, there is $69,930 due from stockholders for
outstanding advances. As there are no definitive repayment terms, this amount
has been classified as a reduction of stockholders' equity.
As part of the Company's acquisition of APBA, in January 1995 the Company
entered into a ten year operating lease with one of the Company's officers
for the facility housing APBA. In accordance with this lease, the Company
paid rent of approximately $53,000 in 1995.
During 1995, the Company entered into certain debt agreements aggregating
approximately $212,500 with a limited partnership. Total related party
royalty expense pertaining to the limited partnership was $51,884 for the
year ended December 31, 1995. An officer of the Company is a shareholder in
the corporate general partner of the partnership. In addition, certain
stockholders of the Company are limited partners in said partnership. During
1995, the Company also entered into debt agreements aggregating $50,000 with
certain stockholders and a Director. At December 31, 1995, approximately
$225,000 is outstanding and included in the Company's long-term debt
obligations.
The Company's general counsel is a stockholder of the Company. Fees
incurred by the Company to its general counsel totaled approximately $36,000
in 1995, of which $25,000 was satisfied by issuing 8,817 shares of stock in
October 1995.
11. COMMITMENTS AND CONTINGENCIES:
Certain license and development agreements call for advance royalty
payments by the Company that could aggregate to $139,000 over a period of
years as certain milestones are achieved.
In connection with the APBA acquisition, the Company entered into a
15-year employment contract with one employee with compensation payable at
$80,000 per year.
On March 1, 1996 two officers of the Company entered into employment
agreements with aggregate base compensation of approximately $690,000 payable
over the next three years.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. BUSINESS SEGMENT INFORMATION:
The Company and its subsidiaries operate principally in two industries:
Multimedia products and Printing services.
Multimedia products includes the operations of two subsidiaries, APBA and
Ablesoft, which are engaged in the development and distribution of sports
game simulation and other software.
Printing services include the operations of Foxfire, which provides
commercial printing, graphic design and manufacturing services to software
and non-computer software companies.
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Net Sales:
Multimedia Products ......... 1,534,282 3,602,025
Printing Services .......... 1,292,915 1,408,131
Consolidated ............... 2,827,197 5,010,156
Operating Profits
Multimedia Products ......... 131,428 361,160
Printing Services .......... (49,327) (12,866)
Consolidated ............... 82,101 348,294
Indentifiable Assets
Multimedia Products ......... 1,132,248 4,646,061
Printing Services .......... 661,118 728,478
Consolidated ............... 1,793,366 5,374,539
Depreciation Expense
Multimedia Products ......... 46,766 76,012
Printing Services .......... 16,078 17,071
Consolidated ............... 62,844 93,083
Capital Expenditures
Multimedia Products ......... 17,384 147,129
Printing Services .......... 34,437 73,646
Consolidated ............... 51,821 220,775
</TABLE>
13. SUBSEQUENT EVENTS:
In January 1996, the Company sold 48,092 shares of common stock to two new
investors for $200,000.
In February 1996, the Company raised $800,000 in debt financing through
the sale of eight Bridge units, each consisting of $100,000 principal amount
of Bridge notes, due upon the earlier of an initial public offering of the
Company's common stock, or February 1997. The Bridge notes, which bear
interest at 12%, include 160,000 warrants to acquire shares of the Company's
common stock at $3 per share. The warrants expire in September 1996 if no
public offering is concluded or 1 year after a successful public offering.
The warrants were valued at $160,000 and will be amortized over the life of
the debt.
In February 1996, an officer of the Company elected to exercise his rights
under a Note held by him that was in default by converting $35,528 of
outstanding acquisition indebtedness and interest owed to him by the Company
into 17,038 shares of common stock as repayment of the debt.
In February 1996, the Company's directors authorized the filing of a
registration statement with the Securities and Exchange Commission for the
sale of common stock and warrants.
On March 1, 1996, the Company granted to an employee 16,667 shares of
stock to be vested over one year. This grant will be accounted for as
deferred compensation of approximately $92,000 and amortized over one year.
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
APBA Game Company, Inc.
Lancaster, Pennsylvania
We have audited the accompanying statement of income of APBA Game Company,
Inc. for the year ended December 31, 1994, and the related statement of cash
flows. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the aforementioned financial statements present fairly, in
all material respects, the income and cash flows of APBA Game Company, Inc.
for the year ended December 31, 1994, in conformity with generally accepted
accounting principles.
STOCKTON BATES & COMPANY, P.C.
Lancaster, Pennsylvania
January 26, 1996
F-17
<PAGE>
APBA GAME COMPANY, INC.
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C>
NET SALES .................................................. $1,245,450
Cost of goods sold ..................................... 569,712
------------
GROSS PROFIT ................................................ 675,738
Operating expenses ..................................... 568,200
------------
INCOME FROM OPERATIONS ...................................... 107,538
OTHER INCOME AND (EXPENSE):
Interest income ........................................ 915
Other income ........................................... 4,009
Interest expense ....................................... (33,213)
------------
NET INCOME .................................................. $ 79,249
============
</TABLE>
F-18
<PAGE>
APBA GAME COMPANY, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................................... $79,249
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .............................................. 17,450
Increase in prepaid pension expense ........................................ (9,349)
Change in operating assets and liabilities:
Increase in accounts receivable ....................................... (4,009)
Decrease in inventory ................................................. 21,318
Decrease in prepaid taxes ............................................. 1,479
Increase in accounts payable and accrued expenses ..................... 43,200
---------
Total adjustments ..................................................... 70,089
---------
Net cash provided by operating activities .................................. 149,338
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................................ (7,190)
Deposit ......................................................................... (1,820)
---------
Net cash (used in) investing activities ....................................... (9,010)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt ............................................ (30,883)
Distribution to stockholder ..................................................... (17,000)
---------
Net cash (used in) financing activities ....................................... (47,883)
---------
NET INCREASE IN CASH ................................................................. 92,445
CASH, BEGINNING OF YEAR .............................................................. 67,005
---------
CASH, END OF YEAR .................................................................... $159,450
=========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid amounted to $33,213 during 1994
</TABLE>
F-19
<PAGE>
APBA GAME COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
APBA Game Company, Inc. is a leading designer, producer, and distributor
of sports games located in Lancaster, Pennsylvania. Virtually all of the
Company's sales, which are to individuals throughout the United States, are
via cash or credit card.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Inventory -- Inventory is stated at the lower of cost, determined by the
first-in, first-out (FIFO) method, or market.
Depreciation -- Depreciation is calculated using straight line or
accelerated methods over the asset's useful life.
Maintenance and repairs are expensed when incurred. Expenditures for
significant improvements or additions are capitalized. Gains or losses on
sales and dispositions are charged to operations when incurred.
Depreciation expense for the year ended December 31, 1994 was $16,888.
Refinancing Costs -- Refinancing costs are amortized on a straight-line
basis over ten years, the life of the loan.
Income Taxes -- The Company's stockholder has elected to have the Company
treated as a "small business corporation" (S-Corporation) for federal and
state income tax purposes. Net income or loss is passed through to the
stockholder. Therefore the Company pays no income tax, and no provision or
liability for income taxes is included in the financial statements.
Advertising Costs -- Advertising costs are expensed as incurred. For 1994,
advertising expense totalled $144,131.
Pension Plan -- The policy on the pension plan is included in the pension
plan footnote.
Use Of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
PENSION PLAN:
The Company's eligible employees are covered under a noncontributory
defined benefit pension plan. Eligible employees are over age 21 and have
completed one year of service. The Company's funding policy is to contribute
at least the amount required to meet the minimum funding requirements of
ERISA. An employee's benefits under the plan are based on 1.67% of final
average compensation for each year of service up to 30 ears, and vest on a
graduated basis through year six.
Assets in the plan consist primarily of debt and equity securities,
certificates of deposit and mutual funds.
F-20
<PAGE>
APBA GAME COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
The following table sets forth the plan's funded status and amounts
recognized in the Company's financial statements at December 31, 1994:
<TABLE>
<CAPTION>
<S> <C>
Accumulated benefit obligation, including vested benefit obligation of $165,000 . $166,575
=========
Projected benefit obligation .................................................... $403,520
Plan assets at fair value ....................................................... 535,981
---------
Plan assets in excess of projected benefit .................................. 132,461
Unrecognized experience loss .................................................... 87,039
Unrecognized net transition asset ............................................... (323,503)
Unrecognized prior service cost ................................................. 146,409
---------
Prepaid pension expense ..................................................... $42,406
=========
Net periodic pension expense for 1994 includes the following components:
Service cost ............................................................... $15,483
Interest cost .............................................................. 24,676
Return on plan assets ...................................................... (6,882)
Amortization and deferral .................................................. (42,626)
---------
Net periodic pension plan expense (benefit) ................................ $(9,349)
=========
</TABLE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.0%, while the rate of
compensation increase was 5.0% annually. The expected long-term rate of
return on assets was 7.0%.
SUBSEQUENT EVENT:
On January 1, 1995, essentially all of the operating assets of the
Company, except for the real estate, were sold to a corporation which
operates in the same industry.
Terms of the sale which included proceeds of notes and stock contained an
employment agreement and a non-compete agreement for the Company's
shareholder through 2010 and 2001, respectively, and a lease agreement for
the business premises through 2004.
F-21
<PAGE>
Independent Auditor's Report
I have audited the accompanying statement of operations of Ablesoft, Inc. for
the nine months ended September 30, 1995, and the related statement of cash
flows. These financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these financial
statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above, present fairly, in
all material respects, the operations and cash flows of Ablesoft, Inc. for the
nine months ended September 30, 1995, in conformity with generally accepted
accounting principles.
JOSEPH S. GERBINO, CPA
Union, NJ 07083
May 15, 1996
F-22
<PAGE>
ABLESOFT, INC.
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
NET SALES ................................................ $547,206
COST OF SALES ............................................ 156,082
---------
GROSS PROFIT ............................................. 391,124
OPERATING EXPENSES
Selling & Marketing ................................. 160,208
General & Administrative ............................ 376,655
---------
Total Operating Expenses ................................. 536,863
Loss from Operations ..................................... (145,739)
Interest Expense ......................................... 22,844
Other Expenses ........................................... 16,295
---------
NET LOSS ................................................. ($184,878)
=========
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
ABLESOFT, INC.
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) ................................................................ ($184,878)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Depreciation and Amortization ........................................ 11,851
Changes in Operating Assets and Liabilities:
Decrease in Accounts Receivable, Net ................................. 168,142
(Increase) in Inventories ............................................ (18,440)
Decrease in Other Current Assets ..................................... 15,813
Decrease in Other Assets ............................................. 22,697
(Decrease) in Accounts Payable ....................................... (45,372)
(Decrease) in Accrued Liabilities .................................... (23,121)
-------
Net Cash (Used In) Operating Activities .............................. (53,308)
CASH FLOWS FROM INVESTING ACTIVITIES:
Disposition of Property, Plant and Equipment .............................. 1,746
-------
Net Cash Provided by Investing Activities ................................. 1,746
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on Long-Term Debt .............................................. 54,872
Payments on Long-Term Debt ................................................ (24,902)
Net Increase in Note Payable -- Bank ...................................... 4,379
-------
Net Cash Provided by Investing Activities ................................. 34,349
-------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS .................................... ($17,213)
CASH AND CASH EQUIVALENTS, beginning of period ................................. $14,410
CASH AND CASH EQUIVALENTS, end of period ....................................... ($2,803)
=======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Period For:
Interest .................................................................. $26,307
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
ABLESOFT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
Ablesoft, Inc. is a designer, producer and distributor of lifestyle software
formerly located in Yorktown, Virginia. The Company's operations have been
consolidated with MicroLeague Multimedia, Inc. as of October 1, 1995.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INVENTORY -- Inventory is stated at the lower of cost, determined by the
first-in first-out (FIFO) method, or market.
DEPRECIATION -- Depreciation is calculated using the straight line method
over the asset's useful life.
Maintenance and repairs are expenses when incurred. Expenditures for
significant additions are capitalized. Gains or losses on sales and dispositions
are charged to operations as incurred.
Depreciation expense for the nine months ended September 30, 1995 was
$11,851.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
REVENUE RECOGNITION -- Revenues are recognized when a product is shipped or a
service is performed, and when no significant obligations remain and collection
is probable. Net revenues are comprised of the total sales billed during the
period less the sales value of products estimated to be returned, trade
discounts and customer allowances estimated at the time of shipment.
CASH AND CASH EQUIVALENTS -- For purposes of the statement of cash flows, the
Company considers all highly liquid debt investments purchased with an initial
maturity of three months or less to be cash equivalents.
INCOME TAXES -- An income tax benefit of approximately $52,352 was not
recorded by the Company for the loss incurred in the nine months ended September
30, 1995. The benefit was not recorded because there is no possibility of
realizing future value from the tax benefit due to the Company being acquired by
MicroLeague Multimedia, Inc. effective October 1, 1995.
F-25
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited Pro Forma Consolidated Statement of
Operations for the year ended December 31, 1995 is based on the historical
financial statements of Microleague, APBA Game Company Inc. and Ablesoft,
Inc.
The statement of operations is prepared assuming the acquisitions of APBA
Game Company, consummated January 1, 1995, and Ablesoft, Inc. consummated
September 30, 1995, occurred on January 1, 1995.
This unaudited pro forma consolidated statement of operations may not be
indicative of the operating results that actually would have occurred if the
transactions had been in effect on the dates or periods indicated or that may be
obtained in the future. The unaudited pro forma consolidated statement of
operations should be read in conjunction with the financial statements of
Microleague for 1995 which are included elsewhere in this registration
statement.
F-26
<PAGE>
MICROLEAGUE MULTIMEDIA, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
MicroLeague
Consolidated Ablesoft(4) Adjustments Pro Forma
------------ ---------- ------------- ------------
<S> <C> <C> <C> <C>
Net revenues ............................ $5,010,156 $ 547,206 $5,557,362
Cost of Goods sold ...................... 2,374,975 156,082 2,531,057
---------- --------- ----------
Gross profit ............................ 2,635,181 391,124 3,026,305
Operating Expenses:
Selling and marketing .................. 515,882 160,208 676,090
General and administrative ............. 1,771,005 376,655 68,091(1) 2,215,751
---------- --------- -------- ----------
Total operating expenses .............. 2,286,887 536,863 68,091 2,891,841
Income (loss) from operations ........... 348,294 (145,739) (68,091) 134,464
Interest expense ........................ 224,451 22,844 28,818(3) 276,113
Other expenses .......................... 41,054 16,295 57,349
---------- --------- -------- ----------
Income (loss) before provision for income taxes 82,789 (184,878) (96,909) (198,998)
Benefit for income taxes ................ (16,300) -- (63,700)(2) (80,000)
---------- --------- -------- ----------
Net income (loss) ..................... $ 99,089 $(184,878) $(33,209) $ (118,998)
========== ========= ======== ==========
Net income per common share ............. $ (.04)
==========
Weighted average common shares outstanding 2,937,978
==========
</TABLE>
F-27
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL INFORMATION
Note 1 -- To record amortization expense of $56,325 related to $751,000 of
goodwill resulting from the Ablesoft Acquisition, which is being
amortized over 10 years. Also reflects amortization of non-goodwill
intangible assets over the same respective lives.
Note 2 -- To record an estimated tax provision at an assumed rate of 40% on
the consolidated results from operations.
Note 3 -- To record interest expense on debt incurred in connection with the
Ablesoft acquisition offset by a reduction of interest expense on
APBA acquisition debt, which was converted to equity in 1996.
Note 4 -- Gives effect to the pre-acquisition results of Ablesoft for 1995.
F-28
<PAGE>
[The inside back cover includes pictures of some of the Company's products]
================================================================================
No dealer, sales person or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company or the
Underwriter. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any security other than the securities
offered by this Prospectus, or an offer to sell or a solicitation of an offer
to buy any securities by anyone in any jurisdiction in which such offer or
solicitation is not authorized or is unlawful. The delivery of this
Prospectus shall not, under any circumstances, create any implication that
the information contained herein is correct as of any time subsequent to the
date hereof.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Prospectus Summary .............................. 3
Risk Factors .................................... 8
Use of Proceeds ................................. 15
Dilution ........................................ 16
Capitalization .................................. 17
Dividend Policy ................................. 17
Selected Financial Data ......................... 18
Management's Discussion and Analysis of
Financial Condition and Results of Operations .. 20
Business ........................................ 25
Management ...................................... 37
Principal Shareholders .......................... 41
Certain Transactions ............................ 42
Description of Securities ....................... 44
Shares Eligible for Future Sale ................. 49
Underwriting .................................... 49
Legal Matters ................................... 51
Experts ......................................... 51
Additional Information .......................... 51
Index to Financial Statements ................... F-1
</TABLE>
----------------
Until , 1996 (25 days after the date of this Prospectus), all
dealers effecting transactions in the securities offered hereby, whether or
not participating in this distribution may be required to deliver a
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
================================================================================
<PAGE>
================================================================================
LOGO
1,020,000 Units
Each Unit consisting of One
Share of Common Stock and
One Redeemable Common Stock
Purchase Warrant
------
PROSPECTUS
------
First Colonial Securities
Group, Inc.
, 1996
================================================================================
<PAGE>
[ALTERNATIVE PROSPECTUS COVER PAGE]
PROSPECTUS
----------
MICROLEAGUE MULTIMEDIA, INC.
[INSERT LOGO]
1,537,000 Shares of Common Stock Issuable Upon Exercise
of Redeemable and Bridge Warrants
This Prospectus relates to an offering of up to 1,173,000 shares of common
stock (the "Common Stock") of Microleague Multimedia, Inc., a Pennsylvania
corporation (the "Company") issuable upon exercise of redeemable Common Stock
Purchase Warrants (the "Redeemable Warrants") and 160,000 shares of Common
Stock which may be sold by the holders thereof who have exercised certain
bridge warrants of the Company (the "Bridge Warrants"). This Prospectus also
relates to 204,000 shares of Common Stock issuable upon exercise of the
underwriters warrants and the redeemable warrants included therein. The
Redeemable Warrants were sold by the Company in its initial public offering
(the "IPO") in May 1996. The underwriters warrants were issued in connection
with the IPO. The Bridge Warrants were sold by the Company in a private
financing in February 1996 (the "Bridge Financing"). See "DESCRIPTION OF
SECURITIES -- Bridge Units" and "UNDERWRITING."
Prior to the IPO, there had been no market for the Company's securities.
The exercise price and other terms of the Redeemable Warrants were
arbitrarily determined by negotiations between the Company and the
Underwriter and are not necessarily related to the Company's asset and book
value, results of operations or other established criteria of value. See
"RISK FACTORS," "DESCRIPTION OF SECURITIES" AND "UNDERWRITING".
References in the text of this Prospectus to "the Offering" refer to the
IPO. By separate prospectus dated this date, the Company is offering for sale
up to 1,020,000 shares of Common Stock and up to 1,020,000 Redeemable Warrants
in the Offering.
----------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
SUBSTANTIAL IMMEDIATE DILUTION AND SHOULD ONLY BE PURCHASED BY INVESTORS WHO
CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" AND
"DILUTION" FOR A DISCUSSION OF CERTAIN CONSIDERATIONS RELATED TO THIS
INVESTMENT.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM-
MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPEC-
TUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
[ALTERNATIVE SUMMARY OF OFFERING]
THIS OFFERING
Securities offered............. 1,537,000 shares of Common Stock issuable
upon exercise of Redeemable and Bridge
Warrants.
Common Stock and Redeemable
Warrants outstanding after
the Offering(1) ............. 3,776,667 shares of Common Stock and 1,020,000
Redeemable Warrants to purchase Common
Stock.
Use of Proceeds ............... The Company intends to use the net proceeds
for general corporate purposes. See "USE OF
PROCEEDS."
Risk Factors .................. The securities offered hereby are
speculative and involve a high degree of
risk and immediate substantial dilution, and
should not be purchased by investors who
cannot afford the loss of their entire
investment. See "RISK FACTORS" and
"DILUTION."
Proposed Nasdaq symbols ....... Common Stock -- "MLMI" and Redeemable
Warrants -- "MLMIW"
- ------
(1) Does not include Bridge Warrants, the Underwriters' Warrant and other
warrants which are not redeemable and which will be exercisable after the
Offering to acquire an aggregate of 334,931 shares of Common Stock and
outstanding options to acquire 358,931 shares of Common Stock. See
"MANAGEMENT -- 1996 Equity Compensation Plan," "DESCRIPTION OF
SECURITIES" and "UNDERWRITING".
A-1
<PAGE>
[ALTERNATIVE USE OF PROCEEDS]
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares by
the Selling Shareholders. The maximum amount of the net proceeds (after
deducting underwriting commissions) to be received by the Company from the
exercise of the Redeemable Warrants are estimated to be approximately
$5,924,160 (approximately $6,812,784 if the Underwriter over-allotment option
is exercised in full) based on an assumed initial public offering price of
$5.50 per share of Common Stock. The Company will use the proceeds from the
exercise of the Bridge Warrants and the Redeemable Warrants to provide
working capital.
A-2
<PAGE>
[ALTERNATIVE PAGE]
PLAN OF DISTRIBUTION OF SELLING SHAREHOLDERS
The Shares offered hereby by the Selling Shareholders may be sold from
time to time by the Selling Shareholder, or by pledgees, donees, transferees
or other successors in interest. Such sales may be made on one or more
exchanges or in the over-the-counter market (including the Nasdaq SmallCap
Market), or otherwise at prices and at terms then prevailing or at prices
related to the then-current market price, or in negotiated transactions. The
Shares may be sold by one or more of the following methods, including,
without limitation: (a) a block trade in which the broker-dealer so engaged
will attempt to sell the Shares as agent but may position and resell a
portion of the block as principal to facilitate the transaction; (b)
purchases by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this Prospectus; (c) ordinary brokerage
transactions and transactions in which the broker solicits purchasers; and
(d) face-to-face transactions between the Selling Shareholders and purchasers
without a broker-dealer. In effecting sales, brokers or dealers engaged by
the Selling Shareholders may arrange for other brokers or dealers to
participate. Such brokers or dealers may receive commissions or discounts
from the Selling Shareholders in amounts to be negotiated immediately prior
to the sale. Such brokers or dealers and any other participating brokers or
dealers may be deemed to be "underwriters" within the meaning of the
Securities Act, in connection with such sales. In addition, any securities
covered by this Prospectus that qualify for sale pursuant to Rule 144 under
the Securities Act might be sold under Rule 144 rather than pursuant to this
Prospectus.
To comply with the securities laws of certain jurisdictions, the Shares
offered hereby may only be offered or sold in such jurisdictions through
registered or licensed brokers or dealers. In addition, in certain
jurisdictions the Shares offered hereby may not be offered or sold unless
they have been registered or qualified for sale in such jurisdictions or an
exemption from registration or qualification is available and complied with.
Upon the Company being notified by any Selling Shareholder that a material
arrangement has been entered into with a broker or dealer for the sale of
shares through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, a supplemented
Prospectus will be filed, if required, pursuant to Rule 424(c) under the
Securities Act, disclosing (a) the name of each such broker-dealer, (b) the
number of shares involved, (c) the price at which such shares were sold, (d)
the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable, (e) that such broker-dealer(s) did not
conduct any investigation to verify the information set out or incorporated
by reference in this Prospectus, as supplemented, and (f) other facts
material to the transaction.
The Company is bearing all costs relating to the registration of the
Shares (other than fees and expenses, if any, of counsel or other advisers to
the Selling Shareholders). Any commissions, discounts or other fees payable
to broker-dealers in connection with any sale of the Shares will be borne by
the Selling Shareholders selling such Shares.
A-3
<PAGE>
[ALTERNATIVE PAGE]
SELLING SHAREHOLDERS
Pursuant to the Bridge Financing consummated in February, 1996, the
Company issued Bridge Warrants to purchase an aggregate of 160,000 shares of
Common Stock at an exercise price of $3.00 per share. The Company has agreed
to include, for the benefit of the holders thereof (the "Selling
Shareholders"), the 160,000 shares of Common Stock issued upon exercise of
the Bridge Warrants in the Registration Statement of which this Prospectus is
a part. Assuming all of the Selling Shareholders exercise all of their Bridge
Warrants for Common Stock, the Company would receive $480,000. See
"DESCRIPTION OF SECURITIES -- Bridge Warrants".
The following table sets forth, to the best knowledge of the Company, the
beneficial ownership of securities of the Company by the Selling Shareholders
immediately after the initial public offering of the Company. The Selling
Shareholders may offer and sell up to the full amount of shares set forth
opposite the name of each Selling Shareholder and upon each such sale the
Selling Shareholder would own no securities of the Company.
<TABLE>
<CAPTION>
Name and Address of Selling Shareholder(1) Shares(2) Percentage
--------------------------------------- ---------- ------------
<S> <C> <C>
Harvey Benn ........................... 10,000 *
1299 Brace Road .......................
Cherry Hill, NJ 08034 .................
Jeffrey and Arlen Billow .............. 10,000 *
116 Sandringham Rd. ...................
Cherry Hill, NJ 08003 .................
Daniel Bommer ......................... 20,000 *
11725 Lake Forest Road ................
Reston, VA 22094 ......................
Fred Bor .............................. 30,000 *
3 Sassafras Court .....................
Voorhees, NJ 08043 ....................
Full Circle Partners, L.P. ............ 10,000 *
3516 NW 61st Circle ...................
Boca Raton, FL 33496 ..................
Tiffany Lewin ......................... 5,000 *
40 Andrea Drive .......................
North Caldwell, NJ 07006 ..............
Steven Shapiro ........................ 10,000 *
900 N. Kings Highway ..................
Cherry Hill, NJ 08034 .................
Alan O. Steinberg ..................... 5,000 *
171 White Plains Road .................
Bronxville, NY 10708 ..................
William P. Thoretz .................... 10,000 *
24 Florida Ave. .......................
Island Park, NY 11558 .................
Louis Tomolo .......................... 5,000 *
44 Regan Lane .........................
Voorhees, NJ 08043 ....................
Neil Wright ........................... 25,000 *
50 Town Range .........................
Gibralter .............................
Robert A. Yanover ..................... 20,000 *
133 Quayside Road .....................
Jupiter, FL 33477 .....................
</TABLE>
A-4
<PAGE>
[ALTERNATIVE PAGE]
- ------
* Less than one percent
(1) Each Selling Shareholder's beneficial ownership of Company securities as
of the date of this Prospectus is presumed to consist solely of the
Bridge Warrants and underlying Common Stock included in the Registration
Statement. Thus, the amount and percentage of Common Stock to be owned by
each Selling Security Holder after completion of this offering is zero.
(2) The number of shares listed indicates both the amount of securities owned
by each Selling Shareholder prior to this offering and the maximum amount
which may be offered for the account of such Selling Shareholder. The
shares listed represent, in all cases, shares underlying Bridge Warrants.
Each Selling Shareholder will be entitled to receive all of the proceeds
from the sale of the shares of Common Stock underlying his or its respective
Bridge Warrants. While the Company will receive the proceeds from the
exercise of the Bridge Warrants, assuming the cashless exercise method is not
used, it will not receive any proceeds from the future sale of any of the
aforementioned shares by their respective holders. See "DESCRIPTION OF
SECURITIES -- Bridge Warrants". Except for the costs of inclusion within the
Registration Statement which are borne by the Company, the Selling
Shareholders will bear all expenses of any offering by them of their shares,
including the costs of their counsel and of any sales commissions incurred.
None of the Selling Shareholders has had a material relationship with the
Company within the past three years.
A-5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 1741 and 1742 of the Pennsylvania Business Corporation Law of
1988 provide that the Company may indemnify any officer or director acting in
his capacity as a representative of the Company who was, is, or is threatened
to be made a party to any action or proceeding against expenses, judgments,
penalties, fines and amounts paid in settlement in connection with such
action or proceeding whether the action was instituted by a third party or
arose by or in the right of the Company (a derivative action). Generally, the
only limitation on the ability of the Company to indemnify its officers and
directors is if the act violates a criminal statute (unless the person had no
reasonable cause to believe his conduct was unlawful) or if the officer or
director did not act in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the corporation.
Indemnification is not permitted in a derivative action if the officer or
director in question has been adjudged liable to the Corporation, unless such
indemnification is approved by the court.
The Company's Bylaws provide a right to indemnification to the full extent
permitted by law, for expenses (including attorney's fees), damages, punitive
damages, judgments, penalties, fines and amounts paid in settlement actually
and reasonably incurred by any director or officer whether or not the
indemnified liability arises or arose from any threatened, pending or
completed proceeding by or in the right of the Company (a derivative action)
by reason of the fact that such director or officer is or was serving as a
director, officer, employee or agent of the Company or, at the request of the
Company, as a director, officer, partner, fiduciary or trustee of another
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise. The Bylaws provide for the advancement of expenses to an
indemnified party upon receipt of an undertaking by the party to repay those
amounts if it is finally determined that the indemnified party is not
entitled to indemnification.
The Company's Bylaws authorize the Company to take steps to ensure that
all persons entitled to the indemnification are properly indemnified,
including, if the Board of Directors so determines, purchasing and
maintaining insurance. As of the date of this Prospectus, no such insurance
has been purchased.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by the Company in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions and the Underwriter's non-accountable
expense allowance) are as follows:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission registration fee ........ $ 5,979
NASD filing fee ............................................ 1,865
NASDAQ listing fee ......................................... 10,000
Underwriter's consulting fee ............................... 30,000
Printing and engraving expenses ............................ 50,000
Legal fees and expenses .................................... 225,000
Accounting fees and expenses ............................... 200,000
Blue sky fees and expenses (including legal fees) .......... 45,000
Transfer agent, warrant agent and registrar fees and expenses 5,000
Miscellaneous .............................................. 27,156
--------
Total .................................................. $600,000
=========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Following is a discussion of the Company's sales of securities within the
past three years which have not been registered under the Securities and
Exchange Act of 1933 (the "Act"), as amended. Share amounts have been
adjusted to reflect (i) a 1 for 100 stock split effective September 15, 1995
and (ii) a 1 for 1.3225176 stock split authorized by the Board of Directors
on March 1, 1996.
II-1
<PAGE>
On May 5, 1993, the Company sold to Keith Carpenter, a principal
shareholder of the Company, 33,063 shares of the Company's Common Stock at an
aggregate purchase price of $51,250. On May 26, 1993, the Company sold to Mr.
Carpenter an additional 33,063 shares of the Company's Common Stock at an
aggregate purchase price of $51,250. These transactions did not involve a
public offering and were exempt from the registration requirements under the
Act pursuant to Section 4(2) thereof.
On September 30, 1993, the Company sold to W. Thacher Longstreth, a
director and principal shareholder of the Company, 37,427 shares of the
Company's Common Stock at an aggregate purchase price of $58,015. This
transaction did not involve a public offering and was exempt from the
registration requirements under the Act pursuant to Section 4(2) thereof.
On September 30, 1993, the Company sold to Neil Swartz, the Chairman,
Chief Executive Officer and a principal shareholder of the Company's
outstanding Common Stock, 13,225 shares of the Company's Common Stock at an
aggregate purchase price of $20,500. This transaction did not involve a
public offering and was exempt from the registration requirements under the
Act pursuant to Section 4(2) thereof.
On July 5, 1994, the Company sold to Carl Shaiffer, a director of the
Company, 19,441 shares of the Company's Common Stock at an aggregate purchase
price of $30,135. On October 18, 1994, the Company sold to Mr. Shaiffer an
additional 74,193 shares of the Company's Common Stock at an aggregate
purchase price of $115,005. This transaction did not involve a public
offering and was exempt from the registration requirements under the Act
pursuant to Section 4(2) thereof.
On December 9, 1994, the Company sold to Donald Gleklen, a director of the
Company, 44,966 shares of the Company's Common Stock, and a nontransferable
warrant to purchase 89,931 shares of the Company's Common Stock. The Common
Stock and warrants were sold at an aggregate price of $93,500 and the
warrants are exercisable at a price of $1.68 per share for a period of three
years from September 12, 1994. This transaction did not involve a public
offering and was exempt from the registration requirements under the Act
pursuant to Section 4(2) thereof.
On December 31, 1994, the Company acquired through a merger all of the
outstanding capital stock of Ferraul Corporation (t/a "Foxfire Printing")
from John Ferretti, President, Chief Operating Officer and director of the
Company, who received 211,074 shares of Common Stock of the Company in
exchange for his shares of stock of Ferraul Corporation. This transaction did
not involve a public offering and was exempt from the registration
requirements under the Act pursuant to Section 4(2) thereof.
Effective January 1, 1995, the Company acquired the assets and assumed the
liabilities of APBA. In exchange for those assets the Company issued three
convertible promissory notes in principal amounts of $175,000, $100,000 and
$37,783, respectively, and each convertible upon certain events of default at
a rate of $2.08 of principal and accrued interest into one share of Common
Stock. These promissory notes were assigned by APBA to Frederick H. Light, a
Vice President of the Company and sole shareholder of APBA. On March 17,
1995, Mr. Light converted the $175,000 promissory note, where no payment of
principal had been made, into 84,112 shares of Common Stock. On February 15,
1996, Mr. Light converted the then-outstanding balance of the $37,783
promissory note into 17,038 shares of Common Stock. As of February 15, 1996
the remaining outstanding balance on the $100,000 promissory note was $50,000
plus interest which accrues at 10% per annum. The balance of such promissory
note is due on January 15, 1997. The foregoing issuances of securities by the
Company were exempt from registration as a transfer by the issuer not
involving any public offering and thereby exempt from the registration
requirements under the Act pursuant to Section 4(2) thereof.
On January 1, 1995, the Company granted stock options to Frederick H.
Light in connection with his employment agreement with the Company. Mr.
Light's options entitle him to purchase 48,140 shares of the Company's Common
Stock at an exercise price of $2.08 per share. One half of these options
expire on January 15, 1997 and the remaining options expire on February 15,
1998. This transaction did not involve a public offering and was exempt from
the registration requirements under the Act pursuant to Section 4(2) thereof.
During 1995, the Company entered into several subscription agreements (the
"Agreements" or individually the "Agreement") with different investors on
similar terms for the sale of an aggregate of 109,131 shares of the Company's
Common Stock at an aggregate price of $346,776. The Agreements are listed as
follows: a November 8, 1995 Agreement with an accredited investor in which the
II-2
<PAGE>
Company issued 48,092 shares of Common Stock for $2.08 per share for an
aggregate of $100,000; January 26, 1995 Agreements with two accredited
investors, one transaction for 22,483 shares at a price of $2.08 per share with
an aggregate price of $46,750 and the other transaction for 12,035 shares at
$2.08 per share for an aggregate of $25,025; an October 27, 1995 Agreement with
an accredited investor for 35,268 shares of Common Stock at $2.84 per share for
an aggregate of $100,001; and an October 13, 1995 Agreement with an accredited
investor for 26,450 shares of Common Stock at a price of $2.84 per share for an
aggregate of $75,000. These transactions did not involve public offerings and
were exempt from the registration requirements under the Act pursuant to Section
4(2) thereof.
In June 1995, for obtaining and managing printing business for the Company
from an unaffiliated customer of the Company, the Company issued a promissory
note to Carl Shaifer, a director of the Company, in the principal amount of
$62,500 (the "Note"). On June 30, 1995, the Company entered into an exchange
agreement with Mr. Shaifer in which Mr. Shaifer received 30,057 shares of Common
Stock at a price of $2.08 per share in exchange for the Note. These transactions
did not involve a public offering of securities and were exempt from the
registration requirements under the Act pursuant to Section 4(2) thereof.
In August 1995, the Company granted certain stock options to five
individuals, including two directors (Donald Gleklen and Carl Shaifer), one
director and principal shareholder of the Company's outstanding Common Stock
(W. Thacher Longstreth), and a principal shareholder of the Company's
outstanding Common Stock (Melanie Hopkins). These options were in exchange
for guarantees by these individuals of a term note issued by the Company to
PNC Bank, N.A. in connection with the acquisition of Ablesoft. An aggregate
of 185,152 options were granted proportionately to the amount of debt
guaranteed by each individual. Each option entitles the holder to purchase
one share of Common Stock of the Company at an exercise price of $2.84 per
share for an aggregate exercise price of $525,832. These options will expire
in August 2005. This transaction did not involve a public offering and was
exempt from the registration requirements under the Act pursuant to Section
4(2) thereof.
In December 1995, the Company sold to Leonard Swartz, the father of Neil
Swartz, the Chairman, Chief Executive Officer and a principal shareholder of
the Company, 8,817 shares of the Company's Common Stock at an aggregate
purchase price of $25,001. This transaction did not involve a public offering
and was exempt from the registration requirements under the Act pursuant to
Section 4(2) thereof.
In December of 1995, the Company sold to Carl Shaifer, a director of the
Company, 77,588 shares of the Company's Common Stock at an aggregate purchase
price of $220,001. This transaction did not involve a public offering and was
exempt from the legislation requirements under the Act pursuant to Section
4(2) thereof.
In December 1995, the Company issued to Tucci & Tannenbaum, counsel to the
Company, 8.817 shares of the Company's Common Stock in exchange for $25,001
of legal fees incurred by the Company. This transaction did not involve a
public offering and was exempt from the legislation requirements under the
Act pursuant to Section 4(2) thereof.
In January 1996, the Company sold 48,092 shares of the Company's Common
Stock to an accredited investor for $200,000. This transaction did not
involve a public offering and was exempt from the registration requirements
under the Act pursuant to Section 4(2) thereof.
In February 1996, the Company granted to an employee 16,667 shares of
Common Stock to be vested at the end of one year from the date of grant. This
transaction did not involve a public offering and was exempt from
registration requirements under the Act pursuant to Section 4(2) thereof.
In February 1996, the Company issued promissory notes in the principal
amount of $100,000 each and warrants to purchase 160,000 shares of Common
Stock as Bridge Units to eight accredited investors for an aggregate of
$800,000. In connection therewith, the Underwriter acted as placement agent
for the Company and received a fee equal to 7.75% of the gross proceeds of
the offering. This transaction was a transaction by the issuer not involving
any public offering which was exempt from the registration requirements under
the Act pursuant to Section 4(2) thereof and Rule 506 of Regulation D under
the Act.
II-3
<PAGE>
ITEM 27. EXHIBITS.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
*1.1 Form of Underwriting Agreement.
3.1 Articles of Incorporation of the Company.
3.2 Bylaws of the Company.
4.1 Specimen stock certificate representing the Common Stock
4.2 Specimen warrant certificate representing the Redeemable Warrants
4.3 Form of Redeemable Warrant Agreement
4.4 Form of Underwriter's Warrant Agreement
*5.1 Opinion of Morgan, Lewis & Bockius L.L.P. regarding legality of securities being registered.
10.1 Stock Exchange Agreement entered into by Ablesoft, Inc. and the Company on September 28, 1995.
10.2 Agreement and Plan of Merger entered into by Ferraul, Inc. and the Company on December 15, 1994.
10.3 Agreement of Sale between APBA Game Company, Inc. and the Company dated as of January 1, 1995.
10.4 Noncompetition Agreement between Frederick H. Light and the Company dated January 1, 1995.
10.5 Shareholder's Agreement between Frederick H. Light and the Company dated January 18, 1995.
10.6 Stock Purchase Agreement between the Company and Frederick H. Light dated January 1, 1995.
10.7 Employment Agreement of Frederick H. Light dated January 1, 1995.
10.8 Employment Agreement of Neil Swartz dated January 1, 1996.
10.9 Employment Agreement of John Ferretti dated January 1, 1996.
10.10 Promissory Note executed by the Company in favor of Interactive Multimedia Limited Partnership dated
March 2, 1995.
10.11 License Agreement for the Technology Applications of MicroLeague Baseball between Interactive Multimedia
Limited Partnership and the Company dated March 2, 1995.
10.12 License Agreement for the Technology Applications of Blood Bowl between Interactive Multimedia Limited
Partnership and the Company dated March 2, 1995.
10.13 Purchase Agreement between the Company and Interactive Multimedia Limited Partnership dated March 2,
1995.
10.14a Licensing Agreement between the Company and the National Football League Players Association dated
January 29, 1991.
10.14b Licensing Agreement between the Company and National Football League Players Incorporated dated
April 12, 1996.
10.15 Licensing Agreement between the Company and the Major League Baseball Players Association dated April
12, 1993.
10.16 Amendment to Major League Baseball Players Association Licensing Agreement dated September 11, 1995.
10.17 Licensing Agreement between the Company and Time, Inc. dated February 17, 1995.
10.18 Development and License Agreement between the Company and Borta, Inc. dated August 29, 1995.
10.19 Amendment to Development and License Agreement between the Company and Borta, Inc. dated September
29, 1995.
10.20 Licensing Agreement between the Company and Games Workshop Limited for the game Blood Bowl dated July
8, 1993.
10.21 Exchange Agreement between the Company and Carl Shaifer dated June 30, 1995.
10.22 Delaware Economic Development Authority Loan Agreement dated August 25, 1993.
10.23 PNC Bank Credit Facilities of $1.6 Million and $750,000 dated October 30, 1995.
10.24 PNC Bank Term Loan in the Principal Amount of $50,000 dated February 15, 1995.
10.25 PNC Bank Term Loan in the Principal Amount of $475,000 dated October 27, 1995.
10.26 Term Loan Agreement in the Principal Amount of $800,000 between the Company and Eight Accredited Investors
dated February 5, 1996.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.27 Form of Warrant for Bridge Units dated February 5, 1996.
10.28 1996 Equity Compensation Plan.
10.29 Distribution Agreement between the Company and Columbia House dated April 21, 1995.
10.30 Form of Financial Advisory Services Agreement between the Company and the Underwriter dated May 9,
1996.
21.1 Subsidiary of the Registrant.
*23.1 Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed as Exhibit 5.1).
*23.2 Consent of Coopers & Lybrand L.L.P.
*23.3 Consent of Stockton Bates & Co., P.C.
*23.4 Consent of Joseph S. Gerbino, CPA.
24.1 Power of Attorney (included on signature page).
</TABLE>
- ------
*Filed herewith.
Unmarked items were filed previously.
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act,
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information set forth in the Registration Statement, and
(iii) include any additional or changed material information on the
plan of distribution;
(2) for determining liability under the Act, treat each such
post-effective amendment as a new registration of the securities offered, and
the offering of such securities at that time to be the initial bona fide
offering; and
(3) file a post-effective amendment to remove from registration any of the
securities that remain unsold at the termination of this offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement
certificates in such denominations and registered in such names as required
by the underwriters to permit prompt delivery to each purchaser; (2) that for
the purpose of determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a prospectus filed by
the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act as a
part of this Registration Statement as of the time the Securities and
Exchange Commission declares it effective; and (3) that for the purpose of
determining any liability under the Act, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration
statement for the securities offered in the Registration Statement therein,
and treat the offering of the securities at that time as the initial bona
fide offering of those securities.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has authorized this
amendment to this Registration Statement to be signed on its behalf by the
undersigned, in the city of Newark, State of Delaware on May 23, 1996.
Microleague Multimedia, Inc.
By: /s/ Neil B. Swartz
---------------------------------
Neil B. Swartz
Chairman, Chief Executive Officer
and Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 23, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Ruly R. Carpenter, III* Director
- --------------------------------
Ruly R. Carpenter, III
/s/ John Ferretti* President, Chief Operating Officer and
- -------------------------------- Director
John Ferretti
/s/ Peter Flanagan Chief Financial Officer and Principal
- -------------------------------- Accounting Officer
Peter Flanagan
/s/ Donald Gleklen* Director
- --------------------------------
Donald Gleklen
/s/ W. Thacher Longstreth* Director
- --------------------------------
W. Thacher Longstreth
/s/ Carl Shaifer* Director
- --------------------------------
Carl Shaifer
/s/ Neil B. Swartz Chairman, Chief Executive Officer and
- -------------------------------- Director
Neil B. Swartz
</TABLE>
*By: /s/ Neil B. Swartz
------------------
Neil B. Swartz
Attorney-in-Fact
II-6
<PAGE>
REGISTRATION NO. 333-02148
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------
EXHIBITS
TO
AMENDMENT NO. 4
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------
MICROLEAGUE MULTIMEDIA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
=============================================================================
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------ ----------- ----
<S> <C> <C>
*1.1 Form of Underwriting Agreement.
3.1 Articles of Incorporation of the Company.
3.2 Bylaws of the Company.
4.1 Specimen stock certificate representing the Common Stock
4.2 Specimen warrant certificate representing the Redeemable Warrants
4.3 Form of Redeemable Warrant Agreement
4.4 Form of Underwriter's Warrant Agreement
*5.1 Opinion of Morgan, Lewis & Bockius L.L.P. regarding legality of securities being registered.
10.1 Stock Exchange Agreement entered into by Ablesoft, Inc. and the Company on September 28, 1995.
10.2 Agreement and Plan of Merger entered into by Ferraul, Inc. and the Company on December 15,
1994.
10.3 Agreement of Sale between APBA Game Company, Inc. and the Company dated as of January 1, 1995.
10.4 Noncompetition Agreement between Frederick H. Light and the Company dated January 1, 1995.
10.5 Shareholder's Agreement between Frederick H. Light and the Company dated January 18, 1995.
10.6 Stock Purchase Agreement between the Company and Frederick H. Light dated January 1, 1995.
10.7 Employment Agreement of Frederick H. Light dated January 1, 1995.
10.8 Employment Agreement of Neil Swartz dated January 1, 1996.
10.9 Employment Agreement of John Ferretti dated January 1, 1996.
10.10 Promissory Note executed by the Company in favor of Interactive Multimedia Limited Partnership
dated March 2, 1995.
10.11 License Agreement for the Technology Applications of MicroLeague Baseball between Interactive
Multimedia Limited Partnership and the Company dated March 2, 1995.
10.12 License Agreement for the Technology Applications of Blood Bowl between Interactive Multimedia
Limited Partnership and the Company dated March 2, 1995.
10.13 Purchase Agreement between the Company and Interactive Multimedia Limited Partnership dated
March 2, 1995.
10.14a Licensing Agreement between the Company and the National Football League Players Association
dated January 29, 1991.
10.14b Licensing Agreement between the Company and National Football League Players Incorporated
dated April 12, 1996.
10.15 Licensing Agreement between the Company and the Major League Baseball Players Association dated
April 12, 1993.
10.16 Amendment to Major League Baseball Players Association Licensing Agreement dated September
11, 1995.
10.17 Licensing Agreement between the Company and Time, Inc. dated February 17, 1995.
10.18 Development and License Agreement between the Company and Borta, Inc. dated August 29, 1995.
10.19 Amendment to Development and License Agreement between the Company and Borta, Inc. dated September
29, 1995.
10.20 Licensing Agreement between the Company and Games Workshop Limited for the game Blood Bowl
dated July 8, 1993.
10.21 Exchange Agreement between the Company and Carl Shaifer dated June 30, 1995.
10.22 Delaware Economic Development Authority Loan Agreement dated August 25, 1993.
10.23 PNC Bank Credit Facilities of $1.6 Million and $750,000 dated October 30, 1995.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------ ----------- ----
<S> <C> <C>
10.24 PNC Bank Term Loan in the Principal Amount of $50,000 dated February 15, 1995.
10.25 PNC Bank Term Loan in the Principal Amount of $475,000 dated October 27, 1995.
10.26 Term Loan Agreement in the Principal Amount of $800,000 between the Company and Eight Accredited
Investors dated February 5, 1996.
10.27 Form of Warrant for Bridge Units dated February 5, 1996.
10.28 1996 Equity Compensation Plan.
10.29 Distribution Agreement between the Company and Columbia House dated April 21, 1995.
10.30 Form of Financial Advisory Services Agreement between the Company and the Underwriter dated
May 9, 1996.
21.1 Subsidiary of the Registrant.
*23.1 Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed as Exhibit 5.1).
*23.2 Consent of Coopers & Lybrand L.L.P.
*23.3 Consent of Stockton Bates & Co., P.C.
*23.4 Consent of Joseph S. Gerbino, CPA.
24.1 Power of Attorney (included on signature page).
</TABLE>
- ------
*Filed herewith.
Unmarked items were filed previously.
<PAGE>
850,000 INITIAL SHARES
850,000 INITIAL WARRANTS
and up to 127,500 OVER-ALLOTMENT SHARES
and up to 127,500 OVER-ALLOTMENT WARRANTS
of
MICROLEAGUE MULTIMEDIA, INC.
UNDERWRITING AGREEMENT
May , 1996
First Colonial Securities Group, Inc.
10 Lake Center Executive Park
401 North Route 73 - Suite 202
Marlton, New Jersey 08053
Dear Sirs:
Microleague Multimedia, Inc., a Pennsylvania corporation
formerly known as Sports Associates, Inc. (the "Company"), proposes to issue and
sell, upon the terms and conditions herein contained, (i) an aggregate of
850,000 shares of the Company's common stock, $.01 par value (the "Common
Stock") (the "Initial Shares"); (ii) an aggregate of 850,000 Redeemable Common
Stock Purchase Warrants each of which entitles the holder to purchase one share
(each an "Initial Warrant Share") of the Company's Common Stock (the "Initial
Warrants"); (iii) up to an additional aggregate of 127,500 shares of Common
Stock (the "Over-allotment Shares"); and (iv) up to an additional aggregate of
127,500 Redeemable Common Stock Purchase Warrants each of which entitles the
holder to purchase one share (an "Over-allotment Warrant Share") of the
Company's Common Stock (the "Over-allotment Warrants") to First Colonial
Securities Group, Inc. as underwriter (in its capacity as such, the
"Underwriter").
The Initial Shares and the Over-allotment Shares are
sometimes hereinafter collectively referred to as the "Primary
Shares."
The Initial Warrant Shares and the Over-allotment Warrant
Shares are sometimes hereinafter collectively referred to as the "Warrant
Shares."
The Primary Shares and the Warrant Shares are sometimes
hereinafter collectively referred to as the "Shares."
<PAGE>
The Initial Warrants and the Over-allotment Warrants are
sometimes hereinafter collectively referred to as the "Redeemable
Warrants."
The Shares and the Redeemable Warrants, together with the
Underwriter's Securities (as hereinafter defined) are sometimes hereinafter
collectively referred to as the "Company Securities."
Each Redeemable Warrant shall entitle the holder to
purchase, until the third anniversary of the date of the Prospectus (as
hereinafter defined) as first filed with the Commission (as hereinafter defined)
pursuant to Rule 424(b) (the "Redeemable Warrant Expiration Date"), one share of
Common Stock at a per share price equal to $________, which represents 110% of
the Offering Price Per Share (as hereinafter defined); provided, however, the
Company shall have the right to redeem all or any of the Redeemable Warrants at
a price of $.10 per Redeemable Warrant, at any time upon not less than
forty-five (45) days' prior written notice (the "Redemption Notice") to the
registered holder thereof, if the last reported sale price of the Common Stock
shall have been in excess of $ per share, which represents 140% of the Offering
Price Per Share, for not fewer than ten (10) of the fifteen (15) consecutive
trading days, ending on the third trading day prior to the date of the
Redemption Notice.
The Company wishes to confirm as follows its agreement with
you in connection with your purchase as Underwriter of the Primary Shares and
the Redeemable Warrants.
1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Act"), a registration statement on Form SB-2 under the Act
(the "Registration Statement"), including a prospectus subject to completion
relating to the Company Securities.
The term "Registration Statement" as used in this
Underwriting Agreement (this "Agreement") means the registration statement
(including all financial schedules and exhibits and including any information
omitted therefrom pursuant to Rule 430A under the Act and included in the
Prospectus (as hereinafter defined)), as amended at the time it becomes
effective, or, if the registration statement became effective prior to the
execution of this Agreement, as supplemented or amended prior to the execution
of this Agreement. If it is contemplated, at the time this Agreement is
executed, that a post-effective amendment to the registration statement will be
filed and must be declared effective before the offering of the Primary Shares
and the Redeemable Warrants may commence, the term "Registration Statement" as
(2)
<PAGE>
used in this Agreement means the registration statement as amended by any such
post-effective amendment.
The term "Prospectus" as used in this Agreement means the
prospectus in the form included in the Registration Statement, or, if the
prospectus included in the Registration Statement omits information in reliance
on Rule 430A under the Act and such information is included in a prospectus
filed with the Commission pursuant to Rule 424(b) under the Act, the term
"Prospectus" as used in this Agreement means the prospectus in the form included
in the Registration Statement as supplemented by the addition of the Rule 430A
information contained in the prospectus filed with the Commission pursuant to
Rule 424(b).
The term "Prepricing Prospectus" as used in this Agreement
means the prospectus subject to completion in the form included in the
registration statement at the time of the initial filing of the registration
statement with the Commission, and as such prospectus shall have been amended
from time to time prior to the date of the Prospectus.
Any reference herein to the Registration Statement, any
Prepricing Prospectus or the Prospectus shall be deemed to refer to and include
the documents incorporated by reference therein as of the date of the
Registration Statement, any Prepricing Prospectus or the Prospectus, as the case
may be.
As used herein, the term "Incorporated Documents" means the
documents which at the time are incorporated by reference in the Registration
Statement, any Prepricing Prospectus, the Prospectus or any amendment or
supplement thereto.
2. Agreements to Sell and Purchase. The Company hereby
agrees, subject to all the terms and conditions set forth herein, to issue and
sell to the Underwriter, and the Underwriter, upon the basis of the
representations, warranties and agreements of the Company herein contained and
subject to all the terms and conditions set forth herein, hereby agrees to
purchase from the Company, the Initial Shares and the Initial Warrants, at a
purchase price of $ per Initial Share (the "Purchase Price Per Share") and $0.09
per Initial Warrant (the "Purchase Price Per Warrant").
The Underwriter shall offer the Initial Shares to the public
at a purchase price of $ per Initial Share (the "Offering Price Per Share") and
shall offer the Initial Warrants to the public at a purchase price of $0.10 per
Initial Warrant (the "Offering Price Per Warrant"). An Initial Share and an
Initial Warrant may only be purchased under the Offering (as hereinafter
defined) together, provided however, each is separately transferable upon
issuance.
(3)
<PAGE>
The Company also agrees, subject to all the terms and
conditions set forth herein, to issue and sell the Over-allotment Shares (or any
number thereof designated by the Underwriter) and the Over-allotment Warrants
(or any number thereof designated by the Underwriter) to the Underwriter, and,
upon the basis of the representations, warranties and agreements of the Company
herein contained and subject to all the terms and conditions set forth herein,
the Underwriter shall have the right and option to purchase all or any portion
of the Over-allotment Shares and the Over-allotment Warrants from the Company at
the Purchase Price Per Share or the Purchase Price Per Warrant, respectively
(the "over-allotment option"), which right and option may be exercised at any
time and from time to time prior to 9:00 PM, Philadelphia time, on the
forty-fifth (45th) day after the date of the Prospectus (or, if such 45th day
shall be a Saturday or Sunday or any other day on which the New York Stock
Exchange is not open for trading, on the next business day thereafter when the
New York Stock Exchange is open for trading). An Over-allotment Share and an
Over-allotment Warrant may be purchased separately, and each is separately
transferable immediately upon issuance.
The Underwriter agrees to offer the Over-allotment Shares
and the Over-allotment Warrants acquired by it as a result of the exercise of
the over-allotment option to the public as set forth in the Registration
Statement and the Prospectus. The Underwriter shall have no obligation to
purchase any Over-allotment Shares or any Over-allotment Warrants unless and
until (and then only to the extent) the over-allotment option is exercised.
The Company hereby agrees to issue and sell to First
Colonial Securities Group, Inc., for its own account ("First Colonial"), on the
Closing Date (as hereinafter defined), for an aggregate price of $170, a warrant
(the "Underwriter's Warrant") to purchase (i) an aggregate of 85,000 shares of
Common Stock (the "First Colonial Shares") at a price per First Colonial Share
equal to $ , which represents 130% of the Offering Price Per Share; and (ii) an
aggregate of 85,000 redeemable Common Stock purchase warrants (the "First
Colonial Warrants") at a price per First Colonial Warrant equal to $0.13, which
represents 130% of the Offering Price Per Warrant. The Underwriter's Warrant,
the First Colonial Shares, the First Colonial Warrants and the shares of Common
Stock underlying the First Colonial Warrants are sometimes herein collectively
referred to as the "Underwriter's Securities".
The Underwriter's Warrant will be exercisable at any time
and from time to time on or after the first anniversary of the effective date of
the Registration Statement up to the fifth anniversary thereof, and shall be in
the form of EXHIBIT A attached hereto.
(4)
<PAGE>
3. Terms of Public Offering. The Company has been advised by
the Underwriter that the Underwriter proposes to make a public offering of the
Initial Shares and the Initial Warrants (the "Offering") as soon after the
Registration Statement and this Agreement have become effective as in the
Underwriter's judgment is advisable, and initially to offer the Initial Shares
and the Initial Warrants upon the terms set forth in the Prospectus.
4. Delivery of and Payment for the Initial Shares and the
Initial Warrants. Delivery to the Underwriter of and payment for the Initial
Shares and the Initial Warrants (the "Closing") shall be made at the offices of
the Underwriter, 10 Lake Center Executive Park, 401 North Route 73 - Suite 202,
Marlton, New Jersey 08053 at 10:00 AM Philadelphia time, on May , 1996 (the
"Closing Date"). The place of closing for the Initial Shares and the Initial
Warrants and the Closing Date may be varied by written agreement between the
Underwriter and the Company.
Delivery to the Underwriter of and payment for any
Over-allotment Shares or any Over-allotment Warrants to be purchased by the
Underwriter shall be made at the foregoing offices of the Underwriter at such
time and on such date (the "Option Closing Date"), which may be the same as the
Closing Date but shall in no event be earlier than the Closing Date nor earlier
than three nor later than ten business days after the giving of a written notice
from the Underwriter to the Company of the Underwriter's determination to
purchase a number, specified in such notice, of Over-allotment Shares or
Over-allotment Warrants. The place of closing for any Over-allotment Shares or
Over-allotment Warrants and the Option Closing Date for such Over-allotment
Shares or Over-allotment Warrants may be varied by written agreement between the
Underwriter and the Company.
Certificates for the Initial Shares and the Initial Warrants
and any Over-allotment Shares and Over-allotment Warrants to be purchased
hereunder shall be registered in such names and in such denominations as the
Underwriter shall request prior to 1:00 PM, Philadelphia time, on the third
business day preceding the Closing Date or any Option Closing Date, as the case
may be. Such certificates shall be made available to the Underwriter in
Philadelphia for inspection and packaging not later than 9:30 AM, Philadelphia
time, on the business day next preceding the Closing Date or the Option Closing
Date, as the case may be. The certificates evidencing the Initial Shares and the
Initial Warrants and any Over-allotment Shares and Over-allotment Warrants to be
purchased hereunder shall be delivered to the Underwriter on the Closing Date or
the Option Closing Date, as the case may be, against payment of the purchase
price therefor by certified or official bank check or checks payable in next day
funds to the order of the Company.
(5)
<PAGE>
5. Agreements of the Company. The Company agrees with
the Underwriter as follows:
(a) If, at the time this Agreement is executed and
delivered, it is necessary for the Registration Statement or a post-effective
amendment thereto to be declared effective before the offering of the Initial
Shares and the Initial Warrants may commence, the Company will use its best
efforts to cause the Registration Statement or such post-effective amendment to
become effective as soon as possible and will advise the Underwriter promptly
and, if requested by the Underwriter will confirm such advice in writing, when
the Registration Statement or such post-effective amendment has become
effective.
(b) The Company will advise the Underwriter
promptly and, if requested by the Underwriter, will confirm such advice in
writing: (i) of any request by the Commission for amendment of or a supplement
to the Registration Statement, any Prepricing Prospectus or the Prospectus or
for additional information; (ii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of the
suspension of qualification of any Company Securities for offering or sale in
any jurisdiction or the initiation of any proceeding for such purpose and (iii)
within the period of time referred to in paragraph (f) below, of any change in
the Company's condition (financial or other), business, prospects, properties,
net worth or results of operations, or of the happening of any event which makes
any statement made in the Registration Statement or the Prospectus (as then
amended or supplemented) untrue or which requires the making of any additions to
or changes in the Registration Statement or the Prospectus (as then amended or
supplemented) in order to state a material fact required by the Act or the
regulations thereunder to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or of the necessity to amend or supplement the Prospectus
(as then amended or supplemented) to comply with the Act or any other law. If at
any time the Commission shall issue any stop order suspending the effectiveness
of the Registration Statement, the Company shall use its best efforts to obtain
the withdrawal of such order at the earliest possible time.
(c) The Company will furnish to each of the
Underwriter and counsel for the Underwriter, without charge, one signed copy of
the registration statement as originally filed with the Commission and of each
amendment thereto, including financial statements and all exhibits thereto.
(d) The Company will not (i) file any amendment to
the Registration Statement or make any amendment or supplement to the Prospectus
of which the Underwriter shall not previously have been advised or to which the
Underwriter shall reasonably object after being so advised or (ii) as long as,
(6)
<PAGE>
in the opinion of counsel for the Underwriter, a prospectus is required to be
delivered in connection with sales by the Underwriter or any dealer, file any
information, documents or reports pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act"), without delivering a copy of such
information, documents or reports to the Underwriter prior to or concurrently
with such filing.
(e) Prior to the execution and delivery of this
Agreement the Company has delivered, and hereby covenants and agrees in the
future to deliver, to the Underwriter, without charge, in such quantities as the
Underwriter has requested or may hereafter reasonably request, copies of each
form of the Prepricing Prospectus. The Company consents to the use, in
accordance with the provisions of the Act and with the securities or Blue Sky
laws of the jurisdictions in which any of the Company Securities are offered by
the Underwriter and by dealers, prior to the date of the Prospectus, of each
Prepricing Prospectus so furnished by the Company.
(f) As soon after the execution and delivery of
this Agreement as possible and thereafter from time to time for such period of
time as in the opinion of counsel for the Underwriter a prospectus is required
by the Act to be delivered in connection with sales by any Underwriter or
dealer, the Company hereby covenants and agrees expeditiously to deliver to each
Underwriter and each dealer, without charge, as many copies of the Prospectus
(and of any amendment or supplement thereto) as the Underwriter may reasonably
request. The Company consents to the use of the Prospectus (and of any amendment
or supplement thereto) in accordance with the provisions of the Act and with the
securities or Blue Sky laws of the jurisdictions in which any of the Company
Securities are offered by the Underwriter and by all dealers to whom any of the
Company Securities may be sold, both in connection with the offering and sale of
the Company Securities and for such period of time thereafter as the Prospectus
is required by the Act to be delivered in connection with sales by the
Underwriter or any dealer. If during such period of time any event shall occur
that in the judgment of the Company or in the opinion of counsel for the
Underwriter is required to be set forth in the Prospectus (as then amended or
supplemented) or should be set forth therein in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or if it is necessary to supplement or amend the Prospectus to
comply with the Act or any other law, the Company will immediately prepare and,
subject to the provisions of paragraph (d) above, file with the Commission an
appropriate supplement or amendment thereto, and hereby covenants and agrees
expeditiously to furnish to each Underwriter and each dealer, without charge, as
many copies of the Prospectus (as so amended or supplemented) as the Underwriter
may reasonably request. In the event that the Company and the Underwriter agree
that the Prospectus should be amended or supplemented, the Company, if requested
(7)
<PAGE>
by the Underwriter, will promptly issue a press release announcing or disclosing
the matters to be covered by the proposed amendment or supplement.
(g) The Company will cooperate with the Underwriter
and with counsel for the Underwriter in connection with the registration or
qualification of the Company Securities for offering and sale by the Underwriter
and by dealers under the securities or Blue Sky laws of such jurisdictions as
the Underwriter may designate and will file such consents to service of process
or other documents necessary or appropriate in order to effect such registration
or qualification; provided that in no event shall the Company be obligated to
qualify to do business in any jurisdiction where it is not now so qualified or
to take any action which would subject it to service of process in suits, other
than those arising out of the offering or sale of the Company Securities in any
jurisdiction where it is not now so subject. The Company shall comply with all
requirements to which it is subject under the Act, the Exchange Act and any
applicable state laws, and all rules and regulations promulgated thereunder. The
Company shall provide notice to the Underwriter of the effectiveness of any such
registration or qualification.
(h) The Company will make generally available to
its security holders a consolidated earnings statement, which need not be
audited, covering a period of at least twelve months beginning after the
effective date of the Registration Statement, as soon as practicable after the
end of such period, which consolidated earnings statement shall satisfy the
provisions of Section 11(a) of the Act.
(i) During the period of time from the date hereof
to the fifth anniversary hereof, the Company will furnish to the Underwriter (i)
as soon as available, a copy of each report or other document (including but not
limited to all registration statements, listing applications, proxy statements
and press releases) of the Company mailed to shareholders or filed with the
Commission, and (ii) from time to time, such other information concerning the
Company as the Underwriter may reasonably request.
(j) If this Agreement shall terminate or shall be
terminated after execution and delivery for any reason, each party shall bear
its own expenses incurred in connection with the Offering. This provision shall
not require the Underwriter to return any fees or expenses already paid or
reimbursed to it prior to the date of any such termination.
(k) The Company will apply the net proceeds from
the sale of the Primary Shares and the Redeemable Warrants to be sold by it
hereunder substantially in accordance with the description set forth under the
caption "Use of Proceeds" in the Prospectus.
(8)
<PAGE>
(l) If Rule 430A of the Act is employed, the
Company will timely file the Prospectus pursuant to Rule 424(b) under the Act
and will advise the Underwriter of the time and manner of such filing.
(m) Without the prior written consent of the
Underwriter, prior to the expiration of eighteen months after the effective date
of the Registration Statement (the "lock-up period") the Company will not offer,
sell, contract to sell or otherwise dispose of any Common Stock (or any
securities convertible into or exercisable or exchangeable for Common Stock or
of which Common Stock is a part) or grant any options or warrants to purchase
Common Stock (or any securities convertible into or exercisable or exchangeable
for Common Stock or of which Common Stock is a part), except for (i) the sale of
the Primary Shares and the Redeemable Warrants to the Underwriter, and the sale
of the Underwriter's Warrant to the Underwriter pursuant to this Agreement, (ii)
grants of options pursuant to the Company's existing or currently proposed stock
option plans described in the Prospectus, (iii) issuances of Common Stock upon
exercise of options and warrants (including the "Bridge Warrants") described in
the Prospectus as being outstanding or subsequently issued in accordance with
the foregoing clauses (i) and (ii), (iv) issuances of Warrant Shares issuable
upon exercise of the Redeemable Warrants, as contemplated by the Prospectus and
this Agreement, (v) issuances of the First Colonial Shares or the First Colonial
Warrants upon exercise of the Underwriter's Warrant, and the issuance of shares
of Common Stock underlying the First Colonial Warrants upon exercise of the
First Colonial Warrants, as contemplated by the Prospectus and the Agreement;
and (vi) the sale of Common Stock (or any securities convertible into or
exchangeable for Common Stock or of which Common Stock is a part) of the Company
or options or warrants to acquire Common Stock or such securities issued by the
Company in a private placement exempt from registration under Section 4(2) of
the Act. The Company has caused or will cause each of its current directors and
executive officers and each shareholder of the Company immediately prior to the
date of the Prospectus to furnish a letter or letters, in form and substance
satisfactory to the Underwriter, pursuant to which each such person shall agree
not to offer, sell, contract to sell or otherwise dispose of any Common Stock
(or any securities convertible into or exercisable or exchangeable for Common
Stock or of which Common Stock is a part) for a period of eighteen months after
the effective date of the Registration Statement (i.e. during the lock-up
period) without the prior written consent of the Underwriter.
(n) Except as stated in this Agreement and in the
Prepricing Prospectus and Prospectus, the Company has not taken, nor will it
take, directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of the
(9)
<PAGE>
Common Stock, to facilitate the sale or resale of any of the Primary Shares or
the Redeemable Warrants or Warrant Shares, or for any other reason.
(o) The Company shall cause the Common Stock and
the Redeemable Warrants to be listed on the Nasdaq SmallCap Market, and shall
use its best efforts to maintain such listings while the Common Stock or the
Redeemable Warrants are outstanding. The Company shall obtain CUSIP numbers for
the Common Stock, the Redeemable Warrants and the Underwriter's Warrant prior to
the initial day of trading of any of such securities, and will not release any
such securities for trading without the prior written approval of the
Underwriter.
(p) Prior to the later of the Closing Date or the
Option Closing Date, the Company will not issue, directly or indirectly, without
the prior written consent of the Underwriter, any press release or other
communication or hold any press conference with respect to the Company, its
activities, or the offering or sale of securities contemplated by this
Agreement, except as may be required by applicable law and after consultation
with the Underwriter.
(q) The Company shall use its best efforts to do
and perform all things required to be done and performed under this Agreement by
the Company prior to or after the Closing Date or Option Closing Date, as the
case may be, and to satisfy all conditions precedent on the part of the Company
to the delivery of the Company Securities.
6. Further Agreements of the Company. The Company
further agrees with the Underwriter as follows:
(a) The Company will pay the Underwriter at the
Closing a non-accountable expense allowance of $________, representing three
percent (3%) of the aggregate proceeds of the Offering. The Underwriter hereby
acknowledges prior receipt of $40,000 from the Company which shall be credited
toward the aforesaid non-accountable expense allowance.
(b) The Company agrees to engage First Colonial as
the Company's exclusive warrant solicitation agent if and when the Company seeks
to redeem the Redeemable Warrants, and the Company agrees to pay First Colonial
at such time, a fee equal to four percent (4%) of the gross proceeds received by
the Company upon exercise of the Redeemable Warrants following the Redemption
Notice. However, First Colonial shall not receive a fee related to the
redemption of the Redeemable Warrants if (1) the market price of the Common
Stock is lower than the exercise price of the Redeemable Warrant; or (2) the
Redeemable Warrant is held in a discretionary account at the time of exercise,
except where prior specific written approval for exercise is received from the
customer; or (3) the arrangements whereby compensation is to be paid are not
(10)
<PAGE>
disclosed (a) in the prospectus or offering circular by which the Redeemable
Warrants are offered to the public, if such arrangements are contemplated or any
agreement exists as to such arrangements at that time, and (b) in the prospectus
or offering circular provided to securityholders at the time of exercise; or (4)
the exercise of the Redeemable Warrant is not solicited by First Colonial or a
related person, provided however, that any request for exercise will be presumed
to be unsolicited unless the customer states in writing that the transaction was
solicited and designates in writing the broker/dealer to receive compensation
for the exercise.
(c) The Company agrees to engage First Colonial as
its exclusive financial advisor to provide customary and usual financial
services for a period of one year following the Closing Date, for a fee of
$30,000, payable in advance on the Closing Date, pursuant to the terms of a
Financial Advisory Services Agreement to be entered into on or before the date
of this Agreement.
7. Representations and Warranties of the Company. The
Company represents and warrants to the Underwriter that:
(a) Each Prepricing Prospectus included as part of
the registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the Act, complied when
so filed in all material respects with the provisions of the Act. The Commission
has not issued any order preventing or suspending the use of any Prepricing
Prospectus.
(b) The Company meets the requirements for use of
Form SB-2 under the Act. The Registration Statement in the form in which it
became or becomes effective and also in such form as it may be when any
post-effective amendment thereto shall become effective and the Prospectus and
any supplement or amendment thereto when filed with the Commission under Rule
424(b) under the Act, complied or will comply in all material respects, with the
provisions of the Act and did not or will not at any such times contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that this
representation and warranty does not apply to statements in or omissions from
the Registration Statement made in reliance upon and in conformity with
information relating to the Underwriter furnished to the Company in writing by
the Underwriter expressly for use therein.
(c) The Company has filed in a timely manner with
the Commission each document (including without limitation each Incorporated
Document) required to be filed by it pursuant to the Act or the Exchange Act,
each such document at the time it was filed (or, if any amendment with respect
(11)
<PAGE>
to any such document was filed, when such amendment was filed) conformed in all
material respects to the requirements of the Act or the Exchange Act, as the
case may be, and none of such documents contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. As of the date of this Agreement, no
filings are required or have been made by the Company under the Exchange Act.
(d) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the Commonwealth of
Pennsylvania with full corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the Registration
Statement and the Prospectus, and is duly registered and qualified to conduct
its business and is in good standing in each jurisdiction or place where the
nature of its properties or the conduct of its business requires such
registration or qualification, except where the failure so to register or
qualify does not and will not have a material adverse effect on the condition
(financial or other), business, prospects, properties, net worth or results of
operations of the Company or any Subsidiary (as hereinafter defined) (a
"Material Adverse Effect"), and no proceeding has been instituted in any such
jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority, qualification, license or eligibility.
(e) All the Company's subsidiaries (as defined in
the Act or as set forth on Schedule I attached hereto) are referred to herein
individually as a "Subsidiary" and collectively as the "Subsidiaries." Each
Subsidiary is a corporation duly organized, validly existing and in good
standing in the jurisdiction of its incorporation (as set forth on Schedule I),
with full corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Registration Statement and the
Prospectus, and is duly registered and qualified to conduct its business and is
in good standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify or be in good
standing does not and will not have a Material Adverse Effect, and no proceeding
has been instituted in any such jurisdiction revoking, limiting or curtailing,
or seeking to revoke, limit or curtail, such power and authority, qualification,
license or eligibility. The Company is the sole owner of all of the issued and
outstanding capital stock of each Subsidiary.
All of the outstanding shares of capital stock of each
Subsidiary have been duly authorized and validly issued, are fully paid and
nonassessable, and are wholly owned by the Company directly or indirectly
through one of the other Subsidiaries, free and clear of any lien, adverse
(12)
<PAGE>
claim, security interest, equity or other encumbrance, and there are no (i)
existing preemptive rights under any Subsidiary's Certificate or Articles of
Incorporation or applicable law or (ii) similar rights that entitle or will
entitle any person other than the Company to acquire any shares of or any other
interest in any Subsidiary. No Subsidiary is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on such Subsidiary's capital stock, from repaying to the Company
any loans or advances to such Subsidiary from the Company or from transferring
any of such Subsidiary's property or assets to the Company or any other
Subsidiary of the Company. The Company owns no shares of Common Stock in any
corporation other than in the Subsidiaries. The Company has no Subsidiaries
except as set forth on Schedule I. The Company has no investments in and holds
no equity or other securities of, and has not loaned any money to, any
corporation, partnership, or other organization except for its ownership of its
Subsidiaries.
(f) The Company has authorized, issued and outstanding
capital stock as set forth under the caption "Capitalization" in the Prospectus.
The authorized capital stock of the Company conforms to the description thereof
in the Registration Statement and the Prospectus. All the outstanding shares of
capital stock of the Company have been duly authorized and validly issued, are
fully paid and nonassessable and are free of any preemptive or similar rights
and were issued and sold in compliance with all applicable Federal and state
securities and Blue Sky laws.
The Primary Shares and the Redeemable Warrants to be issued
and sold to the Underwriter and the Warrant Shares underlying the Redeemable
Warrants, and the Underwriter's Warrant to be issued and sold to First Colonial
by the Company and the First Colonial Shares, the First Colonial Warrants and
the shares of Common Stock underlying the First Colonial Warrants, have been
duly authorized and, when issued and delivered to the Underwriter or First
Colonial, or the holder of the Redeemable Warrant, as applicable, against
payment therefor in accordance with the terms hereof or thereof, will be validly
issued, fully paid and nonassessable and free of any preemptive or similar
rights. No holders of Company securities have preemptive or similar rights to
purchase Common Stock, Redeemable Warrants or any other securities of the
Company.
Except as expressly described in the Prospectus, there are
no outstanding options, warrants, agreements or other rights requiring or which
upon exercise or payment of consideration (or both) will require the issuance
of, and there are no commitments, plans or arrangements to issue, any shares of
capital stock of the Company or any security convertible into or exchangeable or
exercisable for or comprised of capital stock of the Company or of any
Subsidiary.
(13)
<PAGE>
The Company has reserved and kept available for the exercise
of the Redeemable Warrants and the Underwriter's Warrant (and the exercise of
the First Colonial Warrants obtainable upon exercise of the Underwriter's
Warrant), such number of authorized but unissued shares of Common Stock as are
sufficient to permit the exercise in full of the Redeemable Warrants and the
Underwriter's Warrant (and the exercise in full of the First Colonial Warrants
obtainable upon exercise of the Underwriter's Warrant).
The shares of Common Stock acquired upon exercise of the
Redeemable Warrants and the Underwriter's Warrants (and the exercise of the
First Colonial Warrants obtainable upon exercise of the Underwriter's Warrant),
when issued and sold pursuant to the Redeemable Warrants and the Underwriter's
Warrant (and the exercise of the First Colonial Warrants obtainable upon
exercise of the Underwriter's Warrant), respectively, will be validly issued,
fully paid and nonassessable and free of any preemptive or similar rights. The
Redeemable Warrants conform to the description thereof in the Registration
Statement and the Prospectus.
The number of options and warrants outstanding to purchase
Common Stock (including upon conversion or exercise of any security, but
excluding the securities issued pursuant to the Offering and the Bridge
Financing) is equal to or less than 20% of the Company's outstanding Common
Stock, on a fully-diluted basis, and the Company does not currently intend to
permit the number of shares of Common Stock purchasable under options and
warrants (including upon conversion or exercise of any security) to exceed 20%
of the Company's outstanding Common Stock, on a fully-diluted basis.
(g) There are no legal or governmental proceedings
pending or, to the knowledge of the Company after reasonable investigation,
threatened, against the Company or any of the Subsidiaries, or to which the
Company or any of the Subsidiaries, or to which any of their respective
properties, is subject, that are required to be described in the Registration
Statement or the Prospectus but are not described as required, or that, if
decided adversely to the Company or any Subsidiary, could reasonably be expected
to have a Material Adverse Effect; and the aggregate of all pending or
threatened legal, equitable or governmental proceedings to which the Company or
any Subsidiary is or may be a party or which affect any of their properties that
are not described in the Registration Statement or the Prospectus, including
ordinary routine litigation incidental to their business, would not reasonably
be expected to have a Material Adverse Effect.
There are no agreements, contracts, indentures, leases or
other instruments that are required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the Registration
Statement that are not so described or filed, respectively. Neither the Company
(14)
<PAGE>
nor any Subsidiary is involved in any strike, job action or labor dispute with
any group of employees, and, to the Company's knowledge, after reasonable
investigation, no such action or dispute is threatened or imminent.
(h) Neither the Company nor any of the Subsidiaries
is (i) in violation of its Articles or Certificate of Incorporation or by-laws
or other organizational documents, or of any law, ordinance, administrative or
governmental rule or regulation applicable to the Company or any of the
Subsidiaries or of any decree of any court or governmental agency or body having
jurisdiction over the Company or any of the Subsidiaries or their respective
property, except where any such violation or violations in the aggregate would
not have a Material Adverse Effect or (ii) in default in any material respect in
the performance of any, or in default in any respect in the performance of any
material, obligation, agreement or condition contained in any bond, debenture,
note or any other evidence of indebtedness or in any agreement, indenture, lease
or other instrument to which the Company or any of the Subsidiaries is a party
or by which any of them or any of their respective properties may be bound,
except as expressly disclosed in the Registration Statement and the Prospectus,
and there does not exist with respect to any such bond, debenture, note, other
evidence of indebtedness, agreement, indenture, lease or other instrument any
state of facts which constitutes an event of default, as defined in such
documents, or which, with notice or lapse of time or both, would constitute such
an event of default.
(i) The Company has all requisite power and
authority to execute, deliver and perform its obligations under this Agreement,
the Financial Advisory Services Agreement, the Redeemable Warrants and the
Underwriter's Warrant. The execution and delivery of, and the performance by the
Company of its obligations under, this Agreement, the Financial Advisory
Services Agreement, the Redeemable Warrants and the Underwriter's Warrant have
been duly and validly authorized by the Company. This Agreement, the Financial
Advisory Services Agreement, the Redeemable Warrants and the Underwriter's
Warrant have been duly executed and delivered by the Company and constitute, and
the First Colonial Warrants will be duly executed and delivered by the Company
and will constitute, the valid and legally binding agreements of the Company,
enforceable against the Company in accordance with their respective terms,
except as the enforcement hereof and thereof may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors' rights
generally, and subject to the applicability of general principles of equity, and
except, in the case of this Agreement, as rights to indemnity and contribution
hereunder may be limited by Federal or state securities laws or principles of
public policy.
(15)
<PAGE>
(j) Neither (i) the issuance, offer, sale or
delivery of the Primary Shares, the Redeemable Warrants, the Warrant Shares, or
the Underwriter's Warrant (including the shares of Common Stock and First
Colonial Warrants, including the shares of Common Stock issuable upon exercise
of the First Colonial Warrants), (ii) the execution, delivery or performance of
this Agreement, the Financial Advisory Services Agreement, the Redeemable
Warrants and the Underwriter's Warrant by the Company, nor (iii) the
consummation by the Company of the transactions contemplated hereby and thereby,
(A) requires any consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative agency
or other governmental body, agency or official (except such as may be required
for the registration of (x) the Common Stock, the Redeemable Warrants, and the
Warrant Shares under the Act and the Exchange Act, all of which have been or
will be effected in accordance with this Agreement, and (y) the Underwriter's
Warrant, and the shares of Common Stock and the First Colonial Warrants
(including the shares of Common Stock issuable upon exercise of the First
Colonial Warrants) comprising the Underwriter's Warrant, under the Act and the
Exchange Act, which will be effected in accordance with the terms of the
Underwriter's Warrant, and except for compliance with the securities or Blue Sky
laws of various jurisdictions) or (B) conflicts or will conflict with or
constitutes or will constitute a breach of, or a default under, the Certificate
or Articles of Incorporation or by-laws or other organizational documents, of
the Company or any of the Subsidiaries or (C) conflicts or will conflict with or
constitutes or will constitute a breach of, or a default under any agreement,
indenture, lease or other instrument to which the Company or any of the
Subsidiaries is a party or by which any of them or any of their respective
properties may be bound, or (D) violates or will violate any statute, law,
regulation, Permit (as hereinafter defined) or filing or judgment, injunction,
order or decree applicable to the Company or any of the Subsidiaries or any of
their respective properties, or (E) will result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the Company or
any of the Subsidiaries pursuant to the terms of any agreement or instrument to
which any of them is a party or by which any of them may be bound or to which
any of the property or assets of any of them is subject.
(k) Coopers & Lybrand, L.L.P. which has certified
certain financial statements of the Company and its consolidated subsidiaries
and delivered its reports with respect to the audited consolidated financial
statements included in the Registration Statement and the Prospectus (or any
amendment or supplement thereto), are independent public accountants as required
by the Act.
(l) The financial statements and notes forming part
of the Registration Statement and the Prospectus (and any amendment or
supplement thereto), comply in all material respects with the requirements of
(16)
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the Act and present fairly in all material respects the consolidated financial
position, results of operations and changes in shareholders' equity and cash
flows of the Company and Subsidiary on the basis stated in the Registration
Statement at the respective dates or for the respective periods to which they
apply; such statements and notes have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the time periods
reported on; and the other financial and statistical information and data set
forth in the Registration Statement and the Prospectus (and any amendment or
supplement thereto) is fairly presented in all material respects and, to the
extent such information and data is derived from the financial books and records
of the Company, is prepared on a basis consistent with such financial statements
and the books and records of the Company.
(m) Except as expressly disclosed by information
contained in the Registration Statement or the Prospectus (or any amendment or
supplement thereto), subsequent to the respective dates as of which such
information is given in the Registration Statement or the Prospectus (or any
amendment or supplement thereto), as the case may be (i) neither the Company nor
any of the Subsidiaries has (A) incurred any liability or obligation, direct or
contingent, or entered into any transaction not in the ordinary course of
business, or that is material to the Company or any Subsidiary, (B) declared or
paid any dividend or made any distribution of or with respect to any shares of
its capital stock or (C) redeemed, purchased or otherwise acquired or agreed to
redeem, purchase or otherwise acquire any shares of its stock and (ii) there has
not been any material change in the capital stock, or material increase in the
short-term or long-term debt of the Company or any Subsidiary, or any material
adverse change, or any development involving or which could reasonably be
expected to have a Material Adverse Effect.
(n) Each of the Company and the Subsidiaries has
good and marketable title to all property and non-material assets described in
the Prospectus as being owned by it (other than assets disposed of in the
ordinary course of business), free and clear of all liens, claims, security
interests or other encumbrances except (i) such as are expressly described in
the Registration Statement and the Prospectus or in a document filed as an
exhibit to the Registration Statement, (ii) liens for current taxes and
assessments not yet due and payable, and (iii) liens imposed by law, such as
mechanics' liens, which were incurred in good faith in the ordinary course of
business and do not and will not have a Material Adverse Effect, and all the
property described in the Prospectus as being held under lease by the Company or
a Subsidiary is held by it under valid, subsisting and enforceable leases, with
only such exceptions as in the aggregate are not materially burdensome and do
not interfere in any material respect with the conduct of the business of the
Company or any Subsidiary.
(17)
<PAGE>
(o) The Company has not distributed and, prior to
the later to occur of the Closing Date and completion of the distribution of the
Primary Shares and the Redeemable Warrants, will not distribute any
advertisements, brochures, or other offering material in connection with the
offering and sale of the Primary Shares or the Redeemable Warrants, other than
the Registration Statement, the Prepricing Prospectus, the Prospectus or other
materials, if any, permitted by the Act. Neither the Company nor any of its
Subsidiaries has taken, nor will it take, directly or indirectly, any action
designed to or which reasonably might be expected to cause or result in, or
which has constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the Common Stock or the Redeemable
Warrants, to facilitate the sale or resale of any of the Primary Shares or the
Redeemable Warrants or Warrant Shares, or for any other reason.
(p) The Company and each Subsidiary and each
officer and director of the Company and each Subsidiary have all permits,
licenses, certificates, franchises and authorizations of governmental or
regulatory authorities ("Permits") as are necessary to own and lease their
respective properties and conduct their businesses in the manner described in
the Prospectus, subject to such qualifications as may be set forth in the
Prospectus, except where the failure to have such Permits would not have a
Material Adverse Effect; except as disclosed in the Prospectus, the Company and
each Subsidiary has conducted, and the Company and each Subsidiary are
conducting, their business in compliance with such Permits and all applicable
federal, state, local and foreign laws, rules and regulations, except where the
failure to conduct such business in compliance with such Permits or such laws,
rules and regulations would not have a Material Adverse Effect. The Company and
each Subsidiary has fulfilled and performed in all material respects all their
respective obligations with respect to the Permits, neither the Company nor any
Subsidiary has received any notice of proceedings relating to the revocation,
modification or termination of any Permit, and no event has occurred which
allows, or after notice or lapse of time would allow, revocation or termination
thereof or results in any other material impairment of the rights of the holder
of any such Permit, subject in each case to such qualification as may be set
forth in the Prospectus and except to the extent any such revocation or
termination would not have a Material Adverse Effect. Except as disclosed in the
Prospectus, to the best knowledge of the Company, after reasonable
investigation, no change in any laws or regulations is pending which could
reasonably be expected to be adopted and if adopted, could reasonably be
expected to have, individually or in the aggregate with all such changes, a
Material Adverse Effect.
(q) Since January 1, 1991, the Company and each of
its Subsidiaries has filed all material reports, registrations and statements,
(18)
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together with any amendments required to be made with respect thereto, that they
were required to file with any regulatory commission, agency or authority. As of
their respective dates, such reports, registrations and statements complied in
all material respects with all of the rules and regulations promulgated by the
applicable commission, agency or authority. The Company and its Subsidiaries
maintain their books and records in accordance in all material respects with all
applicable laws, rules and regulations.
(r) The Company and each Subsidiary maintains a
system of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(s) Neither the Company nor any of the Subsidiaries
nor, to the Company's knowledge, after reasonable investigation, any employee or
agent of the Company or of any Subsidiary has made any payment of funds of the
Company or any Subsidiary or received or retained any funds in violation of any
law, rule or regulation, which payment, receipt or retention of funds is of a
character required to be disclosed in the Prospectus.
(t) Except as disclosed in the Prospectus, the
Company and each of the Subsidiaries have filed all tax returns required to be
filed, which returns are true and correct in all material respects, and neither
the Company nor any Subsidiary is in default in the payment of any taxes which
were payable pursuant to such returns or any assessments with respect thereto,
except such as are being contested in good faith and which, if the result of all
such contests were adverse to the Company and the Subsidiaries, would not have a
Material Adverse Effect.
(u) No holder of any security of the Company has
the right (other than in connection with the "Bridge Warrant" as described in
the Prospectus or a right which has been waived in writing) to have any security
owned by such holder included in the Registration Statement or to demand
registration of any security owned by such holder during the period ending
eighteen months after the date of the Prospectus. Each shareholder of the
Company has delivered to the Underwriter his enforceable written agreement that
he will not, for a period of eighteen months after the date of the Prospectus,
sell, offer to sell, contract to sell or otherwise dispose of any shares of
Common Stock of the Company (or any securities convertible into or exercisable
(19)
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or exchangeable for Common Stock or of which Common Stock is a part), owned by
such shareholder, without the prior written consent of the Underwriter.
(v) The Company and the Subsidiaries own or
possess, or can acquire on reasonable terms, all patents, patent applications,
trademarks, service marks, trade names, licenses, copyrights and proprietary
information currently employed by them in connection with, or necessary for the
conduct of, their respective businesses, and neither the Company nor any such
Subsidiary has received any notice of infringement of or conflict with asserted
rights, and after reasonable investigation the Company does not believe that the
Company or any Subsidiary is in violation of any rights, of any third party with
respect to any of the foregoing which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a Material
Adverse Effect.
(w) The Company is not and, upon the sale of the
Primary Shares and Redeemable Warrants to be issued and sold in accordance
herewith and the application of the net proceeds to the Company of such sales as
described in the Prospectus under the caption "Use of Proceeds," will not be an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
(x) No transaction has occurred between or among
the Company or any Subsidiary, on the one hand, and any of their respective
officers, directors, or five percent shareholders or any affiliate or affiliates
of any such officer, director, or five percent shareholder collectively on the
other hand that is required to be described in, and is not described in, the
Registration Statement and the Prospectus.
8. Further Representations and Warranties and Certain
Covenants of the Company. The Company represents, warrants (and as to paragraphs
(b), (c), (d) and (e), covenants for a period of three years from the date
hereof) to the Underwriter that:
(a) The Company has not incurred any direct or
indirect liability or obligation for finder's fees or any similar fees on behalf
of or payable by the Company or the Underwriter in connection with the Offering
or any other transaction, past, present or contemplated, between or among the
Company and the Underwriter, and the Company agrees to indemnify and hold
harmless the Underwriter from and against any loss or damage (including costs
and expenses of investigation, and reasonable legal and other professional fees)
arising therefrom if the Company has, in fact, incurred any such liability or
obligation.
(20)
<PAGE>
(b) The Company shall use its best efforts to limit
the number of options and warrants outstanding to purchase Common Stock
(including upon conversion or exercise of any security but excluding the
securities pursuant to the Offering and the Bridge Financing) to not more than
20% of the Company's outstanding Common Stock, on a fully-diluted basis, for a
three year period following the effective date of the Prospectus, without the
consent of the Underwriter, which consent shall not unreasonably be withheld,
provided that this covenant shall not require the Company to cancel, or require
the holder to exercise, any currently outstanding option or warrant.
(c) The Company shall invite a representative of
First Colonial (which representative shall be subject to the Company's
reasonable approval) to attend all meetings of the Board of Directors of the
Company and each committee of the Board of Directors for a period of three years
beginning on the date of the first such meeting after the Closing Date; provided
however, such representative shall first have delivered to the Company a
confidentiality agreement reasonably satisfactory to the Company.
(d) The Company shall not cause or permit its Common
Stock or the Redeemable Warrants or the Underwriter's Warrant to be delisted,
without the prior approval of the Underwriter, unless required by Nasdaq.
(e) The Company shall use a registrar and transfer
agent reasonably acceptable to the Underwriter.
9. Indemnification and Contribution. (a) The Company agrees
to indemnify and hold harmless the Underwriter and each person, if any, who
controls the Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act, from and against any and all losses, claims, damages,
liabilities and expenses (including reasonable costs of investigation, and
attorneys and other professional fees) arising out of or based upon (i) any
untrue statement or alleged untrue statement made by the Company in this
Agreement or (ii) any untrue statement or alleged untrue statement of a material
fact contained in any Prepricing Prospectus or in the Registration Statement or
the Prospectus or in any amendment or supplement to any of the foregoing, or
arising out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except insofar as such losses, claims, damages, liabilities or
expenses arise out of or are based upon any untrue statement or omission or
alleged untrue statement or omission which has been made therein or omitted
therefrom in reliance upon and in conformity with the information relating to
such Underwriter and which was furnished in writing to the Company by or on
behalf of such Underwriter expressly for use in connection therewith; provided,
(21)
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however, that the indemnification contained in this Section 9(a) with respect to
any Prepricing Prospectus shall not inure to the benefit of any Underwriter (or
to the benefit of any person controlling such Underwriter) on account of any
such loss, claim, damage, liability or expense arising from the sale of the
Initial Shares or the Initial Warrants by the Underwriter to any person if a
copy of the Prospectus shall not have been delivered or sent to such person
within the time required by the Act and the regulations thereunder, and the
untrue statement or alleged untrue statement or omission or alleged omission of
a material fact contained in such Prepricing Prospectus was corrected in the
Prospectus, provided that the Company has delivered the Prospectus to the
Underwriter in requisite quantity on a timely basis to permit such delivery or
sending.
In addition to its other obligations under this Section
9(a), the Company agrees that, as an interim measure during the pendency of any
claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in this Section 9(a), it will reimburse the Underwriter on a monthly
basis for all reasonable legal or other professional fees or other out-of-pocket
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Company's obligation to reimburse the Underwriter for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriter shall
promptly return any such improper payment to the Company, together with
interest, compounded daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit standing) announced
from time to time by CoreStates Bank, N.A. (the "Prime Rate"). Any such interim
reimbursement payments which are not made to the Underwriter within 30 days of a
request for reimbursement shall bear interest at the Prime Rate from the date of
such request. This indemnity agreement shall be in addition to any liabilities
which the Company, or any remedies which the Underwriter, may otherwise have.
(b) If any action, suit or proceeding shall be
brought against the Underwriter or any person controlling the Underwriter in
respect of which indemnity may be sought against the Company, the Underwriter or
such controlling person shall promptly notify the Company, and the Company shall
promptly assume the defense thereof, including the employment of counsel and
payment of all fees and expenses. The Underwriter or any such controlling person
shall have the right to employ separate counsel in any such action, suit or
proceeding and to participate in the defense thereof, but the fees and expenses
(22)
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of such separate counsel shall be at the expense of the Underwriter or such
controlling person, as the case may be, unless (i) the Company has agreed in
writing to pay such fees and expenses, (ii) the Company has failed promptly to
assume the defense and employ counsel, or (iii) the named parties to any such
action, suit or proceeding (including any impleaded parties) include both the
Underwriter or such controlling person and the Company and the Underwriter or
such controlling person shall have been advised by its counsel (which counsel is
reasonably satisfactory to the Company) that representation of such indemnified
party and the Company by the same counsel would be inappropriate under
applicable standards of professional conduct (whether or not such representation
by the same counsel has been proposed) due to actual or potential differing
interests between them (in which case the Company shall not have the right to
assume the defense of such action, suit or proceeding on behalf of the
Underwriter or such controlling person). It is understood, however, that the
Company shall, in connection with any one such action, suit or proceeding or
separate but substantially similar or related actions, suits or proceedings in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of only one
separate firm of attorneys (in addition to any local counsel) at any time for
the Underwriter and controlling persons not having actual or potential differing
interests with the Underwriter or among themselves, which firm shall be
designated in writing by the Underwriter, and that all such fees and expenses
shall be reimbursed on a monthly basis as provided in Section 9(a) hereof. The
Company shall not be liable for any settlement of any such action, suit or
proceeding effected without the Company's written consent, but if settled with
such written consent, or if there shall be a final judgment for the plaintiff in
any such action, suit or proceeding, the Company agrees to indemnify and hold
harmless the Underwriter, to the extent provided in Section 9(a), and any such
controlling person from and against any loss, claim, damage, liability or
expense by reason of such settlement or judgment.
(c) The Underwriter agrees to indemnify and hold
harmless the Company, its directors and its officers who sign the Registration
Statement, and any person who controls the Company within the meaning of Section
15 of the Act or Section 20 of the Exchange Act to the same extent as the
indemnity from the Company to the Underwriter set forth in Section 9(a) hereof,
but only with respect to information relating to the Underwriter furnished in
writing by or on behalf of the Underwriter expressly for use in the Registration
Statement, the Prospectus or any Prepricing Prospectus, or any amendment or
supplement to any of the foregoing, or the omission of any information relating
to the Underwriter and required to be disclosed by Item 508 of Regulation S-B
promulgated under the Act. If any action, suit or proceeding shall be brought
against the Company, any of its directors, any such officer or any such
(23)
<PAGE>
controlling person based on the Registration Statement, the Prospectus or any
Prepricing Prospectus, or any amendment or supplement thereto, and in respect of
which indemnity may be sought against the Underwriter pursuant to this Section
9(c), the Underwriter shall have the rights and duties given to the Company by
Section 9(b) above (except that if the Company shall have assumed the defense
thereof the Underwriter shall not be required to do so, but may employ separate
counsel therein and participate in the defense thereof, but the fees and
expenses of such counsel shall be at the Underwriter's expense), and the
Company, its directors, any such officer, and any such controlling person shall
have the rights and duties given to the Underwriter by Section 9(b) above.
(d) If the indemnification provided for in this
Section 9 is unavailable to an indemnified party under Sections 9(a) or 9(c)
hereof in respect of any losses, claims, damages, liabilities or expenses
referred to therein as a result of any finding, determination or order that such
indemnification is illegal or contrary to public policy or for any other reason,
then an indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriter on the other hand from the offering
of the Primary Shares and the Initial Warrants, or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company on the one
hand and the Underwriter on the other in connection with the statements or
omissions that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriter on the
other shall be deemed to be in the same proportion as the total net proceeds
from the Offering (before deducting expenses) received by the Company bear to
the total underwriting discounts and commissions received by the Underwriter, in
each case as set forth in the table on the cover page of the Prospectus;
provided that, in the event that the Underwriter shall have purchased any
Over-allotment Shares or Over-allotment Warrants hereunder, any determination of
the relative benefits received by the Company or the Underwriter from the
Offering shall include the net proceeds (before deducting expenses) received by
the Company, and the underwriting discounts and commissions received by the
Underwriter, from the sale of such Over-allotment Shares and Over-allotment
Warrants, in each case computed on the basis of the respective amounts set forth
in the notes to the table on the cover page of the Prospectus. The relative
fault of the Company on the one hand and the Underwriter on the other hand shall
be determined by reference to, among other things, whether the untrue or alleged
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untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or by the Underwriter on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
(e) The Company and the Underwriter agree that it
would not be just and equitable if contribution pursuant to this Section 9 were
determined by a pro rata allocation or by any other method of allocation that
does not take account of the equitable considerations referred to in Section
9(d) above. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages, liabilities and expenses referred to in Section
9(d) above shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 9, the Underwriter
shall not be required to contribute any amount in excess of the amount by which
the discounts and commissions received by the Underwriter in connection with the
Offering exceed the amount of any damages which the Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(f) It is agreed that any controversy arising out
of the operation of the interim reimbursement arrangements set forth in Section
9(a) above, including the amounts of any requested reimbursement payments and
the method of determining such amounts, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration shall be commenced by
service of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration shall not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to such demand or notice
shall be authorized to do so. Such arbitration shall be limited to the operation
of the interim reimbursement provisions contained in Section 9(a) above and
shall not resolve the ultimate propriety or enforceability of the other
obligations created by this Section 9.
(g) The indemnity and contribution agreements con-
tained in this Section 9 and the representations, warranties agreements and
covenants of the Company set forth in this Agreement shall remain operative and
in full force and effect, regardless of (i) any investigation made by or on
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behalf of the Underwriter or any person controlling the Underwriter, the
Company, its directors or officers, or any person controlling the Company, (ii)
acceptance of any Primary Shares or Redeemable Warrants and payment therefor
hereunder, or (iii) any termination of this Agreement. A successor to the
Underwriter or any person controlling the Underwriter, or to the Company, its
directors or officers, or any person controlling the Company, are intended to
benefit from, and shall be entitled to the benefits of, the indemnity,
contribution and reimbursement agreements contained in this Section 9.
10. Conditions of Underwriter's Obligations. The
obligations of the Underwriter to purchase the Primary Shares and the
Redeemable Warrants hereunder are subject to the following
conditions:
(a) If, at the time this Agreement is executed and
delivered, it is necessary for the registration statement or a post effective
amendment thereto to be declared effective before the offering of the Primary
Shares and the Redeemable Warrants may commence, the registration statement or
such post-effective amendment shall have become effective not later than 5:30
PM, Philadelphia time, on the date hereof, or at such later date and time as
shall be consented to in writing by the Underwriter, and all filings, if any,
required by Rules 424 and 430A or other applicable rules promulgated under the
Act shall have been timely made; no stop order suspending the effectiveness of
the registration statement shall have been issued and no proceeding for that
purpose shall have been instituted or, to the knowledge of the Company or the
Underwriter, threatened by the Commission, and any request of the Commission or
of the Underwriter for additional information (to be included in the
registration statement or the prospectus or otherwise) shall have been complied
with to the satisfaction of the Commission and the Underwriter.
(b) Subsequent to the effective date of this Agree-
ment, there shall not have occurred any material and adverse change, or any
development involving a prospective such change, in or affecting the condition
(financial or other), business, prospects, properties, net worth, or results of
operations of the Company or the Subsidiaries not contemplated by the specific
language of the Prospectus, or any adverse and material change in market
conditions, which, in the opinion of the Underwriter, would adversely affect the
securities market generally.
(c) The Underwriter shall have received on the
Closing Date an opinion of Morgan, Lewis & Bockius LLP, special counsel for the
Company, dated the Closing Date and addressed to the Underwriter, to the effect
that:
(26)
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(i) The Company is a corporation duly
incorporated and validly existing in good standing under the laws of the
Commonwealth of Pennsylvania with full corporate power and authority to own,
lease and operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto). The Company is duly registered and qualified to conduct its business
and is in good standing as a foreign corporation in each jurisdiction or place
where the nature of its properties or the conduct of its business requires such
registration or qualification, except where the failure so to register or
qualify or to be in good standing does not have a Material Adverse Effect.
(ii) Each Subsidiary is a corporation duly
incorporated and validly existing and in good standing under the laws of the
respective jurisdiction of its organization, with full corporate power and
authority to own, lease, and operate its properties and to conduct its business
as described in the Registration Statement and the Prospectus (and any amendment
or supplement thereto); each Subsidiary is duly registered and qualified to
conduct its business and is in good standing as a foreign corporation in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or qualify or to be in good standing does not have a Material
Adverse Effect; and all the outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable, and to the knowledge of such counsel, are wholly owned by the
Company directly or indirectly through Subsidiaries, free and clear of any
security interest, lien, adverse claim, equity or other encumbrance, except as
described in the Prospectus and there are no (i) existing preemptive rights
under any Subsidiary's Certificate or Articles of Incorporation or applicable
law or (ii) similar rights that entitle or will entitle any person other than
the Company to acquire any shares of any Subsidiary.
(iii) The authorized, issued and
outstanding capital stock of the Company is as set forth under the caption
"Capitalization" in the Prospectus; and the authorized capital stock of the
Company conforms in all material respects as to legal matters to the description
thereof contained in the Prospectus under the caption "Description of Capital
Stock." All the shares of capital stock of the Company outstanding prior to the
issuance of the Initial Shares and the Initial Warrants to be issued and sold by
the Company hereunder have been duly authorized and validly issued, are fully
paid and nonassessable and free of any (A) preemptive rights under the Company's
Certificate or Articles of Incorporation or applicable Pennsylvania law or (B)
to the knowledge of such counsel, and except as set forth in the Prospectus,
similar rights that entitle any person to acquire any shares of Common Stock (or
any securities convertible into or exercisable or exchangeable for such Common
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Stock or of which such Common Stock is a part) upon the issuance thereof by the
Company.
(iv) The Primary Shares and the Redeemable
Warrants to be issued and sold to the Underwriter and the Warrant Shares
underlying the Redeemable Warrants, and the Underwriter's Warrant (and the First
Colonial Shares and the First Colonial Warrants, and the shares of Common Stock
underlying the First Colonial Warrants) to be issued and sold to First Colonial
by the Company hereunder and thereunder have been duly authorized and, when
issued and delivered to the Underwriter (or First Colonial) against payment
therefor in accordance with the terms hereof, will be validly issued, fully paid
and nonassessable and free of any (A) preemptive rights under the Company's
Articles of Incorporation or applicable Pennsylvania law and (B) to the
knowledge of such counsel, any similar rights that entitle or will entitle any
person to acquire any Common Stock (or any securities convertible into or
exercisable or exchangeable for such Common Stock or of which Common Stock is a
part) upon the issuance thereof by the Company. The Common Stock and the
Redeemable Warrants have been approved for quotation on the Nasdaq SmallCap
Market. To the knowledge of such counsel, except as disclosed in the
Registration Statement and the Prospectus, there is no outstanding option,
warrant or other right calling for the issuance of, and no commitment, plan or
arrangement to issue, any share of capital stock of the Company or any security
convertible into, exercisable for, or exchangeable for capital stock of the
Company or of which Common Stock is a part. Except as described in this
Agreement, the Registration Statement and the Prospectus, such counsel does not
know of any holder of any securities of the Company or any other person who has
the right, contractual or otherwise, to cause the Company to sell or otherwise
issue to such holder, or to permit such holder to underwrite the sale of, or
receive any remuneration or other consideration in connection with the issuance
or sale of, any of the Company Securities or the right to have any Common Stock
or other securities of the Company included in the Registration Statement or the
right, as a result of the filing of the Registration Statement, to require
registration under the Securities Act of any shares of Common Stock or other
securities of the Company.
(v) The Redeemable Warrants, the
Underwriter's Warrant and the First Colonial Warrants conform in all material
respects to the description thereof contained in the Registration Statement and
the Prospectus.
(vi) The forms of certificates for the
Common Stock and the Redeemable Warrants conform to the requirements of
applicable Pennsylvania law; the certificates evidencing the Common Stock and
the Redeemable Warrants are in due and proper legal form and have been duly
authorized for issuance by the Company.
(28)
<PAGE>
(vii) The Registration Statement and all
post-effective amendments thereto, if any, have become effective under the Act
and, to the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose are pending before or contemplated by the Commission; and any
required filing of the Prospectus pursuant to Rule 424(b) has been made in
accordance with Rule 424(b).
(viii) The Company has all necessary
corporate power and authority to enter into this Agreement and the other
agreements, instruments and documents contemplated hereby, to issue, sell and
deliver the Company Securities as provided herein, and this Agreement and each
such other agreement, instrument and document have been duly authorized,
executed and delivered by the Company and are valid, legal and binding
agreements of the Company, enforceable against the Company in accordance with
their respective terms, except (A) as enforcement of rights to indemnity and
contribution hereunder may be limited by federal or state securities laws or
principles of public policy and (B) subject to the qualification that the
enforceability of the Company's obligations hereunder may be limited by
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, and
other laws relating to or affecting creditors' rights generally and by general
equitable principles.
(ix) Neither the offer, sale or delivery
of the Company Securities, the execution, delivery or performance by the Company
of this Agreement, the Financial Advisory Services Agreement or the
Underwriter's Warrant, compliance by the Company with the provisions hereof or
thereof nor consummation by the Company of the transactions contemplated hereby
or thereby, conflicts or will conflict with or constitutes or will constitute a
breach of, or a default under, the Certificate or Articles of Incorporation or
by-laws or other organizational documents of the Company or any of the
Subsidiaries or the knowledge of such counsel any agreement, indenture, lease or
other instrument to which the Company or any of the Subsidiaries is a party or
by which any of them or any of their respective properties is bound, or to the
knowledge of such counsel will result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any of the
Subsidiaries pursuant to the terms of any agreement or instrument to which any
of them is a party or by which any of them may be bound or to which any of the
property or assets of any of them is subject, nor will any such action result in
any violation of any existing law or regulation, or any ruling (assuming
compliance with all applicable state securities and Blue Sky laws), judgment,
injunction, order or decree known to such counsel, applicable to the Company,
the Subsidiaries or any of their respective properties.
(x) No consent, approval, authorization or
other order of, or registration or filing with, any court, regulatory body,
(29)
<PAGE>
administrative agency or other governmental body, agency, or official is
required on the part of the Company (except as have been obtained under the Act
and the Exchange Act or such as may be required under state securities or Blue
Sky law governing the purchase and distribution of the Company Securities as to
which such counsel need not express an opinion) for the valid issuance and sale
of the Shares, the Redeemable Warrants and the Underwriter's Warrant to the
Underwriter as contemplated by this Agreement, or for the public offering and
sale of the Shares and the Redeemable Warrants as contemplated by Section 3
hereof.
(xi) The Registration Statement and the
Prospectus (including Incorporated Documents) and any supplements or amendments
thereto (except for the financial statements and the notes thereto and the
schedules and other financial and statistical data included therein, as to which
such counsel need not express any opinion) comply as to form in all material
respects with the requirements of the Act and, with respect to Incorporated
Documents, the Exchange Act.
(xii) To the knowledge of such counsel,
(A) other than as described or contemplated in the Prospectus (or any supplement
thereto), there are no legal or governmental proceedings pending or threatened
against the Company or any of the Subsidiaries, or to which the Company or any
of the Subsidiaries or any of their property, is subject, which are required to
be described in the Registration Statement or Prospectus (or any amendment or
supplement thereto) and (B) there are no agreements, contracts, indentures,
leases or other instruments that are required to be described in the
Registration Statement or the Prospectus (or any amendment or supplement
thereto) or to be filed as an exhibit to the Registration Statement that are not
so described or filed, as required.
(xiii) Neither the Company nor any of its
Subsidiaries is in violation of its respective Certificate or Articles of
Incorporation or by-laws or other organizational documents and, to such
counsel's knowledge, no event of default exists, and no event has occurred which
with the giving of notice or lapse of time, or both, would constitute an event
of default, in the due performance and observance of any term, covenant or
condition by the Company or any Subsidiary of any indenture, mortgage, deed of
trust, note, lease or any other agreement or instrument to which the Company or
any Subsidiary is a party or by which they or any of them or their assets or
properties or businesses may be bound or affected.
(xiv) To the knowledge of such counsel,
neither the Company nor any of the Subsidiaries is in violation of any law,
ordinance, administrative or governmental rule or regulation applicable to the
Company or any of the Subsidiaries or the property of any of them, or of any
decree of any court or governmental agency or body having jurisdiction over the
(30)
<PAGE>
Company or any of the Subsidiaries or the property of any of them, except to the
extent that any such violation would not have a Material Adverse Effect.
(xv) The Company and each of the
Subsidiaries have full corporate power and authority, and to the knowledge of
such counsel such Permits as are necessary under applicable law, to own their
respective properties and to conduct their respective businesses as now being
conducted as described in the Prospectus, subject to such qualifications as may
be set forth in the Prospectus and except where the failure to have such
Permits, individually or in the aggregate, would not have a Material Adverse
Effect.
(xvi) The statements in the Registration
Statement and Prospectus, under the caption "Description of Securities" present
fairly in all material respects the information required to be shown with
respect to the applicable provisions of Item SB-2.
(xvii) Such counsel have participated in
the preparation of the Registration Statement and the Prospectus, including
review and discussion of the contents thereof, and (although such counsel is not
passing upon and does not assume sole responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement and Prospectus (except as provided above with respect to clause (xvi)
of this Section 10(c)) nothing has come to the attention of such counsel that
has caused them to believe that the Registration Statement at the time the
Registration Statement became effective, or the Prospectus, as of its date and
as of the Closing Date or the Option Closing Date, as the case may be, contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading or that
any amendment or supplement to the Prospectus, as of its respective date, and as
of the Closing Date or the Option Closing Date, as the case may be, contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading (it being understood that nothing contained herein shall be deemed to
constitute an opinion of such counsel on, and such counsel need express no
opinion with respect to, the financial statements and the notes thereto and the
schedules and other financial and statistical data included in the Registration
Statement or the Prospectus and information furnished in writing by the
Underwriter specifically for inclusion in the Registration Statement and
Prospectus).
The opinion of such counsel shall be limited to the laws of
the United States and the Commonwealth of Pennsylvania.
(31)
<PAGE>
(d) The Underwriter shall have received on the
Closing Date an opinion of Mesirov Gelman Jaffe Cramer & Jamieson, counsel for
the Underwriter, dated the Closing Date, and addressed to the Underwriter, with
respect to the matters referred to in clauses (iv) (only the first sentence
thereof, other than subclause (B.) thereof), (vii), and (xi) (other than with
respect to the Incorporated Documents) of the foregoing Section 10(c), matters
related to the validity of the Shares, the Registration Statement and the
Prospectus, and such other matters as the Underwriter may request.
(e) The Underwriter shall have received from
Coopers & Lybrand, L.L.P. a letter or letters dated, respectively, the date
hereof, the Closing Date, and the Option Closing Date in form and substance
satisfactory to the Underwriter, to the effect that:
(i) they are independent accountants with
respect to the Company and its consolidated subsidiary within the meaning of the
Act and the applicable rules and regulations thereunder;
(ii) in their opinion, the audited
consolidated financial statements examined by them and included in the
Registration Statement and the Prospectus comply in all material respects with
the applicable accounting requirements of the Act and the related published
rules and regulations;
(iii) on the basis of a reading of the
latest available interim unaudited consolidated financial statements of the
Company and its consolidated subsidiaries, a reading of the unaudited amounts
for total revenues, income from operations, net income, and net income per share
for the periods subsequent to December 31, 1995 and of the unaudited
consolidated financial statements of the Company and its consolidated
subsidiaries for the periods from which such amounts are derived, carrying out
certain specified procedures (which do not constitute an examination made in
accordance with generally accepted auditing standards), a reading of the minute
books of the shareholders, the board of directors and any committees thereof of
the Company and each of its consolidated Subsidiaries, and inquiries of certain
officials of the Company and its consolidated Subsidiaries who have
responsibility for financial and accounting matters, nothing came to their
attention that caused them to believe that:
(A) the unaudited amounts for
revenues and total and per share amounts of pro forma net income included in the
Registration Statement and the Prospectus, do not agree in a material manner
with the amounts set forth in any unaudited consolidated financial statements
for those same periods or are not in material conformity with generally accepted
accounting principles applied on a basis substantially consistent with that of
the corresponding amounts in the audited consolidated financial statements
(32)
<PAGE>
included in the Registration Statement and the Prospectus; and
(B) at a specific date not more
than five business days prior to the date of such letter, there were any
material changes in the capital stock or long-term debt of the Company and its
consolidated Subsidiaries or any material decreases in net current assets or
shareholders' equity of the Company and its consolidated subsidiaries, in each
case compared with amounts shown on the consolidated balance sheet included in
the Registration Statement and the Prospectus, or for the period from January 1,
1996 to such specified date there were any material decreases, as compared with
the corresponding period for the prior year, in total revenues, income from
operations, net income, or net income per share of the Company and its
consolidated Subsidiary, except in all instances for changes, decreases or
increases set forth in such letter; and
(iv) they have carried out certain
specified procedures, not constituting an audit, with respect to certain
amounts, percentages and financial information that are derived from the general
accounting records of the Company and its consolidated Subsidiary and are
included in the Registration Statement and the Prospectus under the captions
"Prospectus Summary," "Summary Consolidated Financial Data," "The Company," "Use
of Proceeds," "Capitalization," "Dilution," "Selected Consolidated Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations," "Business," "Management," "Certain Transactions," and in Part II
to the Registration Statement, and have compared such amounts, percentages and
financial information with such records of the Company and its consolidated
Subsidiaries and with information derived from such records and have found them
to be in agreement; and
(v) they have performed certain other
procedures as a result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to accounting,
financial or statistical information derived from the general accounting records
of the Company) set forth in the Registration Statement and the Prospectus and
specified by the Underwriter agrees with the accounting records of the Company.
In the event that the letters referred to above set forth
any such changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriter that (A) such letters shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Underwriter deems such explanation unnecessary, and (B) such changes, decreases
or increases do not, in the sole judgment of the Underwriter, make it
impractical or inadvisable to proceed with the purchase and delivery of the
Shares or Redeemable Warrants as contemplated by the Registration Statement, as
amended as of the date hereof.
(33)
<PAGE>
References to the Registration Statement and the Prospectus
in this Section 10(e) are to such documents as amended and supplemented at the
date of such respective letter required to be delivered by Coopers & Lybrand,
L.L.P. hereunder.
(f) (i) No stop order suspending the effectiveness
of the Registration Statement shall have been issued and no proceedings for that
purpose shall have been taken or, to the knowledge of the Company, shall be
contemplated by the Commission or any state securities board, bureau, commission
or agency at or prior to the Closing Date; (ii) there shall not have been any
change in the capital stock of the Company nor any material increase in the
short-term or long-term debt of the Company (other than in the ordinary course
of business) from that set forth in or contemplated by specific language in the
Registration Statement or the Prospectus (or any amendment or supplement
thereto); (iii) there shall not have been, since the respective dates as of
which information is given in the Registration Statement and the Prospectus (or
any amendment or supplement thereto), except as may otherwise be stated in the
Registration Statement and Prospectus (or any amendment or supplement thereto),
any material adverse change in the condition (financial or other), business,
prospects, properties, net worth, or results of operations of the Company or any
Subsidiary, or in the conditions in any financial market; (iv) the Company and
the Subsidiaries shall not have any liabilities or obligations, direct or
contingent (whether or not in the ordinary course of business), that are
material to the Company or any Subsidiary, other than those reflected in the
Registration Statement or the Prospectus (or any amendment or supplement
thereto); and (v) all the representations and warranties of the Company
contained in this Agreement shall be true and correct on and as of the date
hereof, and on and as of the Closing Date and the Option Closing Date as if made
on and as of the Closing Date and the Option Closing Date, and the Underwriter
shall have received a certificate, dated the Closing Date and the Option Closing
Date and signed by the chief executive officer and the chief accounting officer
of the Company (or such other officers as are acceptable to the Underwriter),
confirming the matters set forth in this Section 10(f) and in Section 10(g)
hereof.
(g) The Company shall not have failed at or prior
to the Closing Date and the Option Closing Date to have performed or complied
with any of its agreements herein contained and required be performed or
complied with by it hereunder at or prior to the Closing Date and Option Closing
Date, as the case may be.
(h) The Underwriter shall have received from each
person who is a director or officer of the Company or a shareholder of the
(34)
<PAGE>
Company an agreement to the effect that such person will not, directly or
indirectly without the prior written consent of the Underwriter, for a period of
eighteen months from the date of the Prospectus, sell, offer to sell, contract
to sell or otherwise dispose of any shares of Common Stock of the Company (or
any securities convertible into or exercisable or exchangeable for such Common
Stock or of which Common Stock is a part) owned by such person, and that each
such person shall offer First Colonial the right of first refusal to act as
broker for any sales (whether under Rule 144 or otherwise) of any Common Stock
(or any securities convertible into or exercisable or exchangeable for Common
Stock or of which Common Stock is a part) for the one year period following the
end of the lock-up period and thereafter, for a period of four years following
such one year period, provide First Colonial with prior notice of any sales to
be made of any such securities, whether under Rule 144 or otherwise.
(i) The Company shall have furnished or caused to
be furnished to the Underwriter such further certificates and documents as the
Underwriter shall have reasonably requested.
(j) The Company shall have executed and delivered
to First Colonial the Underwriter's Warrant and the Financial Advisory Services
Agreement.
(k) The Company shall have executed and delivered
to the Underwriter at the Closing Date and each Option Closing Date, a
certificate of the Chief Financial Officer relating to the matters set forth in
paragraph (f)(v) above.
(l) Any event or development relating to or
involving the Company or any officer or director of the Company which makes any
statement made in the Prospectus untrue or which, in the opinion of the Company
and its counsel or the Underwriter and its counsel, requires the making of any
addition to or change in the Prospectus in order to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances in which they were made, not misleading.
All such opinions, certificates, letters and other documents
will be in compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to the Underwriter and its counsel.
Any representation and warranty contained in any certificate
or document signed by any officer of the Company and delivered to the
Underwriter, or to counsel for the Underwriter, shall be deemed a representation
and warranty by the Company to the Underwriter as to the statements made
therein.
(35)
<PAGE>
The obligations of the Underwriter to purchase any
Over-allotment Shares or Over-allotment Warrants hereunder are subject to the
satisfaction on and as of any Option Closing Date of the conditions set forth in
this Section 10, except that, if any Option Closing Date is other than the
Closing Date, the certificates, opinions and letters referred to in paragraphs
(c) through (f) and paragraphs (h) and (j) shall be dated the Option Closing
Date in question and the opinions and letters called for by paragraphs (c), (d)
and (e) shall be revised to reflect the sale of Over-allotment Shares and the
Over-allotment Warrants.
11. Expenses. The Company agrees to pay the costs and
expenses associated with the following matters and all other costs and expenses
incident to the performance by it of its obligations hereunder, whether or not
the transactions contemplated herein are consummated or this Agreement is
terminated pursuant to Section 12 or 13 hereof: (i) the preparation, printing or
reproduction, and filing with the Commission, the National Association of
Securities Dealers, Inc. ("NASD") and each state securities or Blue Sky board,
bureau or agency designated by the Underwriter, of the registration statement
(including financial statements and exhibits thereto), each Prepricing
Prospectus, the Prospectus and each amendment or supplement to any of them; (ii)
the printing (or reproduction) and delivery (including postage, air freight
charges and charges for counting and packaging) of such copies of the
Registration Statement, each Prepricing Prospectus, the Prospectus, and all
amendments or supplements to any of them as may be reasonably requested for use
in connection with the offering and sale of the Shares and the Redeemable
Warrants; (iii) the preparation, printing, authentication, issuance and delivery
of certificates for the Shares and the Redeemable Warrants, including any stamp
taxes in connection with the original issuance and sale of the Shares or the
Redeemable Warrants; (iv) the printing (or reproduction) and delivery of this
Agreement, the Underwriter's Questionnaire and other similar Underwriter's
documents, the preliminary and supplemental Blue Sky Memoranda and all other
agreements or documents printed (or reproduced) and delivered in connection with
the offering of the Shares or the Redeemable Warrants; (v) the registration of
the Shares and the Redeemable Warrants and any other Company Securities under
the Act; (vi) the registration or qualification of the Shares and the Redeemable
Warrants for offer and sale under the securities or Blue Sky laws of the several
states as provided in Section 5(g) hereof (including the reasonable fees,
expenses and disbursements of counsel for the Underwriter relating to the
preparation of the preliminary and supplemental Blue Sky Memoranda and such
registration and qualification); (vii) the filing fees with the Commission, the
NASD and each state securities or Blue Sky board, bureau or agency designated by
the Underwriter, and the fees, disbursements and other charges of counsel for
the Underwriter in connection with all such filings; (viii) the listing of the
Shares and the Redeemable Warrants on the Nasdaq SmallCap Market; and (ix) the
(36)
<PAGE>
fees and expenses of the Company's accountants and the fees and expenses of
counsel (including local and special counsel) for the Company except as to the
costs of Underwriter's counsel incurred in connection with approval of
Underwriter's compensation hereunder as fair and reasonable in accordance with
the regulations of the NASD.
If this Agreement is terminated by the Underwriter because
of the failure of the Company to satisfy any of the conditions set forth in
Section 10, the Company shall reimburse the Underwriter for all of its
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriter.
12. Effective Date of Agreement. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the Registration Statement or a post-effective amendment thereto to be
declared effective before the offering of the Primary Shares or the Redeemable
Warrants may commence, when notification of the effectiveness of the
Registration Statement or such post-effective amendment has been released by the
Commission. Until such time as this Agreement shall have become effective, it
may be terminated by the Company, by notifying the Underwriter, or by the
Underwriter by notifying the Company.
Any notice under this Section 12 may be given by telegram,
telecopy or telephone but shall be subsequently confirmed by letter.
13. Termination of Agreement. This Agreement shall be
subject to termination in the Underwriter's absolute discretion, without
liability on the part of the Underwriter to the Company, by notice to the
Company, if prior to the Closing Date or any Option Closing Date (if different
from the Closing Date and then only as to Over-allotment Shares or
Over-allotment Warrants), as the case may be, (i) trading in securities
generally on the New York Stock Exchange, American Stock Exchange or Nasdaq
shall have been suspended or materially limited, (ii) a general moratorium on
commercial bank- ing activities in New York shall have been declared by either
Federal or state authorities, (iii) there shall have occurred any outbreak or
escalation of hostilities or other international or domestic calamity or crisis,
or (iv) there shall have occurred any change in political, financial or economic
conditions, the effect of which on the financial markets of the United States is
such as to make it, in the Underwriter's sole unfettered judgment, impracticable
or inadvisable to commence or continue the offering of the Primary Shares or the
Redeemable Warrants at the offering price to the public set forth on the cover
page of the Prospectus or to enforce contracts for the resale of the Primary
Shares or the Redeemable Warrants by the Underwriter. Notice of such termination
may be given to the Company by telegram, telecopy or telephone and shall be
subsequently confirmed by letter.
(37)
<PAGE>
14. Information Furnished by the Underwriter. The statements
set forth in the last paragraph on the cover page and in the second and fourth
paragraphs under the caption "Underwriting" in any Prepricing Prospectus and in
the Prospectus, constitute the only information furnished by or on behalf of the
Underwriter as such information is referred to in Sections 7(b) and 9 hereof.
15. Miscellaneous. Except as otherwise provided in Sections
5, 12 and 13 hereof, notice given pursuant to any provision of this Agreement
shall be in writing and shall be delivered (i) if to the Company, at the office
of the Company at 750 Dawson Drive, Newark, Delaware 19713, Attention: Mr. Neil
Swartz, President and Chief Executive Officer, with a copy to Morgan, Lewis &
Bockius LLP, 2000 One Logan Square, Philadelphia, Pennsylvania 19103-6993,
Attention: John F. Bales, III, Esquire; or (ii) if to the Underwriter, in care
of First Colonial Securities Group, Inc., 10 Lake Center Executive Park, 401
North Route 73 - Suite 202, Marlton, New Jersey 08053, Attention: Ben
Lichtenberg, Director of Investment Banking, with a copy to Mesirov Gelman Jaffe
Cramer & Jamieson, 1735 Market Street, Philadelphia, Pennsylvania 19103-7598,
Attention: Steven B. King, Esquire.
This Agreement has been and is made solely for the benefit
of the Underwriter, the Company, its directors and officers, and the controlling
persons referred to in Section 9 hereof and their respective successors and
assigns, to the extent provided herein, and no other person shall acquire or
have any right under or by virtue of this Agreement. Neither the term
"successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any Underwriter of any Common Stock or Redeemable
Warrants in such purchaser's status as such purchaser.
16. Applicable Law; Counterparts. This Agreement shall be
governed by and construed in accordance with the laws of the State of New Jersey
applicable to contracts made and to be performed within the State of New Jersey
without giving effect to the conflict of laws principles thereof.
This Agreement may be signed in various counterparts which
together shall constitute one and the same instrument. If signed in
counterparts, this Agreement shall not become effective unless at least one
(38)
<PAGE>
counterpart hereof shall have been executed and delivered on behalf of each
party hereto.
Please confirm that the foregoing correctly sets forth the
agreement between the Company and the Underwriter by signing in the place
indicated below.
Very truly yours,
MICROLEAGUE MULTIMEDIA, INC.
By:
-------------------------------------
Neil Swartz, Chairman
Confirmed as of the date first above written.
FIRST COLONIAL SECURITIES GROUP, INC.
By:
-----------------------------------------------
Ben Lichtenberg, Director of Investment Banking
(39)
<PAGE>
SCHEDULE I
SUBSIDIARIES
Name Address Jurisdiction of Incorporation
- ---- ------- -----------------------------
<PAGE>
2000 One Logan Square Morgan, Lewis
& Bockius LLP
Philadelphia, PA 19103-6993
COUNSELORS AT LAW
215-963-5000
Fax: 215-963-5299
May 23, 1996
Microleague Multimedia, Inc.
750 Dawson Drive
Newark, DE 19713
Re: Microleague Multimedia, Inc.
Registration Statement on Form SB-2 (No. 333-02148)
Ladies and Gentlemen:
We have acted as counsel to Microleague Multimedia, Inc., a Pennsylvania
corporation (the "Company"), in connection with the preparation of the subject
Registration Statement on Form SB-2 (the "Registration Statement") filed with
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended (the "Act") relating to the registration by the Company
of (i) 1,173,000 shares (the "Shares") of Common Stock, par value $.01 per
share, of the Company (the "Common Stock"), which includes 153,000 shares
purchasable by the underwriter, solely for the purpose of covering
overallotments, (ii) redeemable warrants (the "Redeemable Warrants") to purchase
up to 1,173,000 shares of Common Stock, which includes 153,000 Redeemable
Warrants purchasable by the underwriter, solely for the purpose of covering
overallotments, (iii) the Common Stock issuable upon exercise of the Redeemable
Warrants, (iv) warrants issued to the Underwriter to purchase 102,000 shares of
Common Stock and 102,000 Redeemable Warrants (the "Underwriter's Warrants"), (v)
the Common Stock issuable upon exercise of the Underwriter's Redeemable
Warrants, (vi) the redeemable warrants (the "Underwriter's Redeemable Warrants")
issuable upon exercise of the Underwriter's Warrants and (vi) the Common Stock
issuable upon exercise of the Underwriter's Redeemable Warrants issuable upon
exercise of the Underwriter's Warrants.
Capitalized terms used herein, unless defined herein or the context indicates
otherwise, shall have the meaning set forth in the Registration Statement.
In rendering the opinion set forth below, we have reviewed (a) the Registration
Statement and the exhibits thereto; (b) the Company's Amended and Restated
Articles of Incorporation; (c) the Company's Bylaws, as amended; (d) certain
records of the Company's corporate proceedings as reflected in its minute and
stock books; (e) the draft of the Underwriting Agreement; (f) the Warrant
Agreement; (g) the Underwriter's Warrant
<PAGE>
Microleague Multimedia, Inc.
May 23, 1996
Page 2
Agreement; and (h) such records, documents, statutes and decisions as we have
deemed relevant. In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity with the original of all documents submitted to us as copies
thereof.
Subject to the foregoing, it is our opinion that:
1. The Shares have been duly and validly authorized by the Company and,
when and to the extent issued by the Company in the manner contemplated
in the Registration Statement, will be legally issued, fully paid and
non-assessable shares of Common Stock of the Company.
2. The Redeemable Warrants have been duly and validly authorized by the
Company and, when and to the extent issued by the Company in the manner
contemplated in the Registration Statement, will constitute the valid
and binding obligation of the Company to issue and sell the Common
Stock issuable upon exercise of the Warrants in accordance with their
terms.
3. The Common Stock issuable upon exercise of the Redeemable Warrants has
been duly and validly authorized by the Company and, when and to the
extent issued by the Company in the manner contemplated by the
Registration Statement upon exercise of the Redeemable Warrants, will
be legally issued, fully paid and non-assessable shares of Common Stock
of the Company.
4. The Underwriter's Warrants have been duly and validly authorized by the
Company and, when and to the extent issued by the Company in the manner
contemplated by the Underwriting Agreement which appears as Exhibit 1.1
to the Registration Statement, will constitute the valid and binding
obligation of the Company to issue and sell the Common Stock issuable
upon exercise of the Underwriter's Warrants in accordance with their
terms.
5. The Common Stock issuable upon exercise of the Underwriter's Warrants
has been duly and validly authorized by the Company and, when and to
the extent issued by the Company in the manner contemplated by the
Underwriter's Warrant Agreement which appears as Exhibit 4.4 to the
Registration Statement (the "Underwriter's Warrant Agreement"), will be
legally issued, fully paid and non-assessable shares of Common Stock of
the Company.
<PAGE>
Microleague Multimedia, Inc.
May 23, 1996
Page 3
6. The Underwriter's Redeemable Warrants issuable upon exercise of the
Underwriter's Warrants have been duly and validly authorized by the
Company and, when and to the extent issued by the Company in the manner
contemplated by the Underwriter's Warrant Agreement, will constitute
the valid and binding obligation of the Company to issue and sell the
Common Stock issuable upon exercise of the Underwriter's Redeemable
Warrants in accordance with their terms.
7. The Common Stock issuable upon exercise of the Underwriter's Redeemable
Warrants has been duly and validly authorized by the Company and, when
and to the extent issued by the Company in the manner contemplated by
the Underwriter's Warrant Agreement, will be legally issued, fully paid
and non-assessable shares of Common Stock of the Company.
We hereby consent to the use of this opinion as Exhibit 5.1 to the Registration
Statement and to the reference to this firm under the caption "Legal Matters."
In giving such opinion, we do not thereby admit that we are acting within the
category of persons whose consent is required under Section 7 of the Act or the
rules or regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
<PAGE>
Coopers | Coopers & Lybrand L.L.P.
& Lybrand |
| a professional serviceS firm
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 3 to Form SB-2 Registration
Statement of our report, which includes an explanatory paragraph noting the
Company's change in method of accounting for barter credit arrangements, dated
February 19, 1996 except for Note 7, Note 11 and Note 13 which is dated March 1,
1996, on our audit of the financial statements of Microleague Multimedia, Inc.
We also consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts."
/S/ Coopers & Lybrand L.L.P.
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Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
May 23, 1996
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this Registration Statement on Form SB-2 of our
report dated January 26, 1996, relating to the financial statements of APBA Game
Company, and to the reference to our Firm under the caption "Experts" in the
Prospectus.
Stockton Bates & Company, P.C.
- --------------------------------
Certified Public Accountants
Lancaster, Pennsylvania
May 23, 1996
<PAGE>
JOSEPH S. GERBINO
CERTIFIED PUBLIC ACCOUNTANT
TEL: 908-964-8300
FAX: 908-964-9090
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
I hereby constent to the use in this Registratio Statement on from SB-2 of my
report dated May 15, 1996, relating to the financial statements of Ablesoft,
Inc., and to the reference to my Firm under the jcaption "Experts" in the
Prospectus.
/s/ JOSEPH S. GERBINO
- --------------------
JOSEPH S. GERBINO
Union, NJ 07083
May 23, 1996
