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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1996
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to _______________
Commission file number 1-11743
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MICROLEAGUE MULTIMEDIA, INC.
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(Name of Small Business Issuer In Its Charter)
Pennsylvania 23-2563090
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1001 Millersville Road, Lancaster, PA 17604
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(Address of Principal Executive Offices) (Zip Code)
(717) 872-6567
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(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name on Each Exchange
Title of Each Class on Which Registered
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__________________________________ ______________________________
__________________________________ ______________________________
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
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(Title of Class)
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(Title of Class)
Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES __X__ NO _____
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X]
[Cover page 1 of 2 pages]
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State the Issuer's revenues for its most recent fiscal year. $4,087,037
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average of the bid and asked prices of such stock, as of a specified date
within the past 60 days. (See definition of affiliate in Rule 12b-2 of the
Exchange Act.) $6,109,748 based on the closing price of such voting stock as
reported on the National Association of Securities Dealers SmallCap System on
April 15, 1997.
State the number of shares outstanding of each of the Issuer's classes
of common equity, as of the latest practicable date. 4,526,268 as of April 15,
1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be utilized in connection with the
Issuer's 1997 Annual Meeting of Shareholders ("1997 Annual Meeting") currently
scheduled to be held in July 1997 are incorporated by reference into Part III
hereof.
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MICROLEAGUE MULTIMEDIA, INC.
Form 10-KSB
INDEX
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Page
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PART I
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Item 1. Description of Business......................................................................... 1
Item 2. Description of Property......................................................................... 18
Item 3. Legal Proceedings............................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders............................................. 19
PART II
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Item 5. Market for Common Equity and Related Stockholder Matters........................................ 19
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................... 20
Item 7. Financial Statements............................................................................ 26
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................................................... 26
PART III
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Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act............................................................. 26
Item 10. Executive Compensation.......................................................................... 26
Item 11. Security Ownership of Certain Beneficial Owners and Management.................................. 26
Item 12. Certain Relationships and Related Transactions.................................................. 27
Item 13. Exhibits, List and Reports on Form 8-K.......................................................... 27
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PART I
Item 1. Description of Business
Cautionary Statement Regarding Forward-looking Statements
This Report contains "forward-looking" statements regarding potential
future events and developments affecting the business of MicroLeague Multimedia,
Inc. (the "Company"). Such statements relate to, among other things, (i)
competition for customers for its products and services; (ii) the uncertainty of
developing or obtaining rights to new products that will be accepted by the
market and the timing of the introduction of new products into the market; (iii)
the limited market life of the Company's products; (iv) the uncertainty of
consummating potential acquisitions or entering into joint ventures; and (v) the
availability of financing to fund working capital and expansion needs.
The Company's ability to predict results or the effect of any pending
events on the Company's operating results is inherently subject to various risks
and uncertainties, including those discussed under "Description of Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Introduction
The Company, a Pennsylvania corporation formed in 1989, is a
brand-oriented publisher of interactive products in various media, including
CD-ROM, board games, audio cassettes and compact discs and children's books, as
well as through the Internet and on public radio. The Company's products are
designed for the entertainment, lifestyle and education segments of both the
personal computer software market and the children/family multimedia market, and
are published under five brand names for four different market segments as
follows:
Brand Market Segment Medium
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MicroLeague Sports(R) Sports Simulation Computer
APBA(R) Sports Simulation Computer/Board Games
Ablesoft(TM) Hobbies/Workplace Computer
Rabbit Ears(R) Children/Family Video/Audio/Books/Computer
General Admission(R) Low Price/High Quality Computer
The Company currently sells over 50 computer software titles in its
existing product lines (of which approximately 25 are products licensed from
other software companies), and is currently developing nine new titles. In
addition, the Company recently acquired 65 children/family titles that are
available in audio, video and book format.
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The following products are currently under development:
<TABLE>
<CAPTION>
Product Licensor Format
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<S> <C> <C>
Sports Illustrated presents Major League Baseball
Microleague Baseball 1997 Players Association CD-ROM
Sports Illustrated presents National Football League
Microleague Football 1998 Players Association, Inc. CD-ROM
Comic Collector Wizard CD-ROM
Car Collector Tuff Stuff CD-ROM
Fantasy Card Collector Inquest CD-ROM
Teachers Toolbox - MacIntosh N/A CD-ROM
APBA(R) Sports Game - Various Board Game
Current Season Card Sets
Rabbit Ears(R)* Various actors, personalities
and musicians Video/Audio/Books
</TABLE>
* The Company expects to re-release six to eight titles each fiscal quarter.
The Company seeks to expand the market for its products by focusing on
brand recognition and focusing on market segments such as sports, hobbies and
children's story telling that permit the Company to sell its products in a
variety of media. 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
products that the Company believes will make its existing brands stronger or
that are in a market segment in which the Company believes it can gain market
share and build brand name recognition.
To compliment the Company's existing software product lines and to gain
greater control over the development of new software products, in October 1996
the Company acquired all of the assets of Micro Sports, Inc. ("Micro Sports"), a
Tennessee-based developer of statistical sports simulation games. 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 in order to leverage the Company's access to retail shelf space
and utilize its direct mail capabilities. The Company's computer products,
substantially all of which are offered on CD-ROM format, are available on the
Microsoft Windows(R) or DOS operating systems. In addition, the Company has
upgraded its existing products and is designing its new products to take
advantage of the growth in the use of the Microsoft Windows 95(R) operating
system. The Company also intends to develop an Internet component for all of its
new software releases and to form strategic relationships with other Web sites
and commercial on-line services which should enhance the distribution of its
products and is in the process of licensing these products to an outside
developer to be published on a MacIntosh platform.
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The Company recently acquired the intellectual property assets of
Rabbit Ears Productions, Inc. ("Rabbit Ears"), a Philadelphia-based
entertainment company that produces family-oriented literature productions in a
variety of media. The Rabbit Ears(R) library consists of 65 stories that are
told by famous actors and personalities with original scores that are written
and performed by well-known musicians. The audio versions of these titles have
been aired on Public Radio International's Rabbit Ears Radio. The Rabbit Ears(R)
brand provides the Company with content that can be repackaged and re-released
to the consumer market. By utilizing the radio program and other media such as
the Internet, the Company presents to the public an opportunity to experience
these stories. The Company intends to produce fourteen new titles for airing on
Rabbit Ears Radio (which is scheduled to begin broadcasts on Public Radio
International in Autumn 1997). Once such shows are created, the Company will
have content to create new products in different media (i.e., animation video,
audio cassettes and book).
The Company sells its products to a broad range of retailers, including
computer superstores, wholesale clubs, mall-based chains, consumer electronics
stores, specialty retailers (children's products stores), office superstores,
software retailers and sells directly to end users through catalog sales. The
Company plans to sell its products through additional outlets such as bookstores
and original equipment manufacturers.
To complement the Company's retail sales, the Company distributes
catalogs quarterly to its 335,000 registered customers. These catalogs focus
primarily on software add-ons or upgrades. In order to extend the life-cycle of
its software products, the Company has implemented target sales and marketing
programs that attempt to maximize sales of older backlist titles under the
General Admission(R) product line in appropriate sales channels primarily by
selling such products at reduced prices.
Development efforts are managed by an internal development staff, which
develops the Company's front line sports products and supervises a network of
independent development contractors. Until October 1996, the Company relied
exclusively on outside developers for new products. Due to the failure of one
such developer to deliver new products to the Company in 1996, however, and the
consequent inability of the Company to release new front-line products in time
for the 1996 holiday season, the Company determined that it needed more reliable
development sources and therefore acquired Micro Sports in October 1996. The
Micro Sports team provides technical expertise in the development of new
products and in facilitating the development of new products through external
developers. Although internal product development tends to be more expensive
than outside development due to higher fixed costs and overhead, the Company has
greater control over the development process and therefore should be able to
establish and maintain a more reliable flow of new products. The Company will
continue to rely on outside developers, however, for certain of its products
when the Company believes that such sources are a dependable and economical
product source.
After a product is developed, a master CD-ROM is delivered 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 Newark, Delaware facility. 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 software industry; however, the
Company currently is negotiating the possible sale of its printing business. See
"-- Services." Warehousing and shipping functions are performed by the Company
at its Lancaster, Pennsylvania and Newark, Delaware facilities.
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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 has become
available that takes full advantage of the power of these personal computers.
Operating system software, such as Microsoft Windows, has made 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(R) at December 18, 1995 and 50% expected to be converted
by year end of 1995. The August 1995 release of Windows 95(R) 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 Best Buy, CompUSA, Computer City, Electronics Boutique, Micro Center,
Egghead Software, Wal-Mart and Office Max. However, computer software is
becoming more of a consumer product sold through standard consumer channels such
as bookstore chains, supermarkets, department stores and discount retailers. 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 has spurred 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. When the
Internet develops 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 product distribution. During 1996, the Company established an
Internet site, MMI Online, which is used to market the Company's products and to
create a forum for users of the Company's products to meet.
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Company Strategy
Based on the Company's view of the development of its industry and the
Company's capabilities, the Company has developed a five-part strategy to expand
its business:
1. Promote the Company's brand names. The Company aggressively promotes
its MicroLeague(R) Sports, APBA(R), Ablesoft(TM), General Admission(R) and
Rabbit Ears(R) brand names in order to encourage customer loyalty and repeat
purchases. The Company believes that its brand name software and multimedia
products are recognized by consumers as high quality products. 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 customers are more likely to purchase additional brand-name
products published by the Company when faced with multiple purchase options. 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 that 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 that can be updated every season with the
most recently completed season's statistics. Further, the Company intends to
continue to develop new updates and 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 that 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 continue to seek to
acquire, products and companies that make the Company's existing brands stronger
or that allow the Company to enter into new market segments and attempt to gain
greater market share. The Company will seek to expand into other market segments
by acquiring 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 it may acquire. Consistent with this
strategy, in October 1996, the Company acquired Micro Sports, a developer of
statistical sports simulation software games, and in February 1997, the Company
acquired Rabbit Ears(R), an entertainment company that sells children's
literature-based productions in various media, such as audio cassette, animation
video and book. Also, in March 1997, the Company signed a letter of intent to
acquire KidSoft, LLC ("KidSoft"), a leading distributor of children's multimedia
education and entertainment software based in Cupertino, California. See
"--Recent and Proposed Acquisitions."
4. Expand distribution into new outlets and media. The Company seeks to
achieve widespread distribution for all of its titles through existing retail
outlets, which include traditional software retailers, mass merchants, consumer
electronic stores and warehouse clubs. The Company plans to gain entry into
bookstores, supermarkets, department stores and other outlets for its products
as marketing opportunities arise. The Company also 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 media
such as the Internet. The Company's direct-mail business enables it to make
repeat sales to customers. The Company intends to promote add-ons and updates to
existing products through direct-mail sales to existing customers across all of
its product lines.
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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(R) line by
implementing targeted marketing and sales programs that 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(R) line after its sales cycle as a front-line full retail product
ends.
Recent and Proposed Acquisitions
In October 1996, the Company acquired all of the assets and assumed
certain liabilities of Micro Sports, a Tennessee-based developer of statistical
sports simulation games, and certain of the assets of M.S. Investments Holdings,
Ltd. ("MSIH"), the parent corporation of Micro Sports, consisting of various
intellectual property rights. In consideration for the purchase of such assets
and assumption of such liabilities, the Company issued to MSIH 308,882 shares of
Common Stock. Following the acquisition, the Company released Sports Illustrated
presents Pro Football 1997, Sports Illustrated presents College Football 1997
and Pro League Baseball, all of which were developed by Micro Sports.
In February 1997, the Company acquired the assets of Rabbit Ears, a
Philadelphia-based entertainment company known for its line of children's
literate-related productions. Rabbit Ears produces stories such as Grammy Award
winners The Elephant's Child and Pecos Bill in many forms, including books,
audio, video and CD-ROM. These stories are narrated, scored and illustrated by
well-known personalities such as Meg Ryan, Mel Gibson, Meryl Streep, Whoopi
Goldberg and Jack Nicholson. In consideration for the purchase of such assets
and assumption of certain liabilities, the Company issued 268,097 shares of
Common Stock and redeemable options to purchase up to 250,000 shares of Common
Stock to Millennium Media Group Holdings, Inc. ("MMG").
In March 1997, the Company signed a letter of intent to acquire
KidSoft, a leading distributor of children's multimedia education and
entertainment software based in Cupertino, California. According to information
supplied by KidSoft, KidSoft had revenues in 1996 of approximately $9.5 million.
Consummation of the KidSoft acquisition is subject to completion of a
satisfactory due diligence review by each party, negotiation and execution of
definitive documentation and other customary closing documents, approval of the
respective boards of directors of each party and satisfaction of other closing
conditions. Accordingly, there can be no assurance that the transaction will be
consummated.
Products and Services
In 1996, the Company's revenues consisted of approximately 64.1%
product sales and approximately 35.9% 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 were derived from its printing division and from
Affiliate Venture Publishing, which provides publishing services to other
software developers. The Company's service sales in 1996 consisted of
approximately 98.8% commercial printing services to non-computer software
companies and 1.2% printing and/or publishing services to computer software
companies.
Products
The Company currently has five brand name product lines: MicroLeague(R)
Sports, APBA(R), Ablesoft(TM), General Admission(R) and Rabbit Ears(R). The
Company's product lines are targeted towards
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customers for use in the entertainment, lifestyle and education segments of the
multimedia 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 contributes to
brand awareness of other titles sold within a particular brand.
Consumer preferences for software and multimedia 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
that achieve market acceptance. In this regard, the Company has attempted to
focus its new product development efforts on products that the Company believes
may have a more extended product life-cycle, such as Sports Illustrated presents
MicroLeague Baseball(R) 6.0, which the Company expects to be able to continue to
sell for longer periods than other products due to periodic updates, as well as
the popular stories of Rabbit Ears(R).
The Company seeks to expand its product market by focusing on brand
recognition and by publishing products in different media that appeal to
different groups of consumers. 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 that 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 computer products work on the popular PC
operating system, Microsoft Windows, and all products currently in development
are intended to be compatible with Windows 95(R).
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 because these products provide opportunities for add-on products after
the initial base product offering. The titles under development include the
Major League Baseball Players Association licensed product, Sports Illustrated
presents MicroLeague Baseball(R) 6.0, a football game with content licensed from
National Football League Players Association, Inc., a college football game and
a hockey game with content licensed from the National Hockey League Players
Association. The Company's licenses with the Major League Baseball Players
Association, National Football League Players Association, Inc., Time and the
National Hockey League Players Association expire on May 31, 1997, February 28,
1999, August 1, 1997 and June 30, 1999, respectively. See "-- Licenses and
Proprietary Rights." The license agreements with the Major League Baseball
Players Association, National Football League Players Association, Inc. and the
National Hockey League Players Association are important to the Company because
they permit the Company to use the names, descriptions and biographical data
relating to various professional baseball, football and hockey players in its
games. These licenses also grant to the Company the right to use the players
association names. Therefore, the Company's ability to manufacture and sell
baseball, football and hockey games using the names and biographical data of
these players is dependent on the continuation of licensing rights. 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 National Football League Players Association,
Inc. 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, National Football League Players
Association, Inc. and National
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Hockey League Players Association 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 to obtain
licenses for its basketball game under development.
The Company is currently selling or developing the following
MicroLeague Sports titles:
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Name Platform Format Status
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MicroLeague Hooves of Thunder Windows 95(R) CD-ROM Released
Sports Illustrated presents
MicroLeague Football 1997 Windows 95(R) CD-ROM Released
Sports Illustrated presents
MicroLeague Baseball(R)6.0 Windows 95(R) CD-ROM Under development; release
expected during second quarter
of 1997
Sports Illustrated presents
MicroLeague Football 1998 Windows 95(R) CD-ROM Under development; release
expected during second quarter
of 1997
</TABLE>
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 1996, APBA's sales mix was
comprised of approximately 53.3% board game products and 46.7% computer game
products. Although APBA and MicroLeague Sports both include 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. 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
or in the process of developing are:
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Name Platform Format Status
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APBA Sideline Sports CD-ROM Windows(R) CD-ROM Released
APBA Baseball for Windows CD Windows(R) CD-ROM Released
APBA Baseball N/A Board Game Released
APBA Football for Windows Windows(R) 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
APBA Football X's and O's for the
Internet Windows 95(R) CD-ROM Under Development
</TABLE>
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Able Soft(TM) Brand
The Company's Able Soft brand is marketed to customers with specific
interests or hobbies. For example, The Card Collector 1997 and Wizard presents
The Comic Collector enable collectors of sports cards or comic books to track
and monitor the value of their inventories. Add-ons for Wizard presents 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 Able Soft titles:
<TABLE>
<CAPTION>
Name Platform Format Status
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<S> <C> <C> <C>
The Comic Collector CD-ROM Windows 95(R) CD-ROM Released
The Card Collector 96 CD-ROM Windows 95(R) CD-ROM Released
Family for Windows 3.5 Windows(R) Disk Released
Teachers Toolbox 3.5 Windows(R) Disk Released
Wizard presents The Comic Collector Windows 95(R) CD-ROM Released
The Card Collector 1997 Windows 95(R) CD-ROM Under development, release expected
during second quarter of 1997.
Teachers Toolbox - MacIntosh MacIntosh(R) CD-ROM Under development, release expected
during second quarter of 1997.
Fantasy Card Windows 95(R) CD-ROM Under development, release expected
during second quarter of 1997.
</TABLE>
Although included in the lifestyle category, Teachers Toolbox is
productivity software that enables teachers to track and maintain records such
as grade histories, attendance and lesson plans as well as to lay out seating
charts and organize class schedules.
General Admission(R) Software Brand
The General Admission(R) product line is targeted at the lower price
point segment of the entertainment market. General Admission(R) 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.
Rabbit Ears(R) Brand
Rabbit Ears(R) is the most recent brand of content added to the
Company's product base. Rabbit Ears(R) is an entertainment brand committed to
the creation, development and marketing of family programming and products.
Rabbit Ears(R) products include a series of video, audio, books and related
products using popular actors, as well as talented illustrators and musicians.
The Rabbit Ears(R) products are offered in various forms, including
book, audio, video and CD- ROM. Such products include more than 60 titles and
relationships with major entertainment personalities including Meg Ryan, Mel
Gibson, Meryl Streep, Whoopi Goldberg, George Winston, Jack Nicholson, Garrison
Keillor and many others, as well as relationships with companies such as Simon &
Schuster, Visa and Macmillan/McGraw-Hill. In January 1997, in a cooperative
effort, CBS aired Rabbit Ears'(R) first live action movie-of-the-week called
Keeping the Promise, a special which was sponsored by Clorox.
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Rabbit Ears(R) products have received numerous awards, including the
following:
o 2 Grammy Awards
o 18 Grammy Award nominations
o 21 Parents' Choice Awards
o 7 Action for Children's Television awards
o A National Education Association Golden Apple Award
o The Humanitas Prize
To stimulate the demand for Rabbit Ears(R) products, the Company plans
to re-package and re- release approximately six to eight titles in each of the
second, third and fourth quarters of 1997, including approximately five stories
that have never been available for purchase. At present, there are sixty-five
titles available for release. The stories scheduled for release during the
second and third quarters of 1997 are:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Annie Oakley Creation
Narration: Keith Carradine Narration: Amy Grant
Music: Los Lobos Music: Bela Fleck and the Flecktones
Illustrations: Fred Warter Illustrations: Stefano Vitale
David & Goliath Davy Crockett
Narration: Mel Gibson Narration: Mel Gibson
Music: Branford Marsalis Music: Branford Marsalis
Illustrations: Douglas Fraser Illustrations: Douglas Fraser
Finn McCoul Fool and the Flying Ship
Narration: Catherine O'Hara Narration: Robin Williams
Music: Boys of the Lough Music: The Klezmer Conservatory Band
Illustrations: Peter de Seve Illustrations: Henrik Drescher
Jack & the Beanstalk John Henry
Narration: Michael Palin Narration: Denzel Washington
Music: David A. Stewart Music: B.B. King
Illustrations: Edward Sorel Illustrations: Barry Jackson
Johnny Appleseed Jonah and the Whale
Narration: Garrison Keillor Narration: Jason Robards
Music: Mark O'Connor Music: George Mgrdician
Illustrations: Stan Olson Illustrations: Jeffrey Smith
Joseph and His Brothers King Midas and the Golden Touch
Narration: Ruben Blades Narration: Michael Caine
Music: Strunz & Farah Music: Ellis Marsalis featuring
Illustrations: Garnet Henderson Yo-Yo Ma
Illustrations: Rodica Prato
Moses in Egypt Noah and the Ark
Narration: Danny Glover Narration: Kelly McGillis
Music: The Sounds of Blackness Music: The Paul Winter Consort
Illustrations: Phil Huling Illustrations: Lori Lohstoeter
White Cat
Narration: Emma Thompson
Music: Joe Jackson
Illustrations: Barbara McClintock
</TABLE>
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<PAGE>
In addition, the Company may enter into a joint venture with Random
House which will produce the audio for The Ugly Duckling (narrated by Cher with
music by Patrick Ball), The Elephant's Child (narrated by Jack Nicholson with
music by Bobby McFerrin) and The Steadfast Tin Soldier (narrated by Jeremy Irons
with music by Mark Isham).
The content of the Rabbit Ears(R) products may be produced in a variety
of media, including, but not limited to, CD-ROM, the Internet and television.
The Company is currently discussing such types of expansion of the Rabbit
Ears(R) brand name into additional media. Likewise, the Company is producing a
new season of Rabbit Ears Radio, which is expected to begin in Autumn 1997.
Services
The services business is operated as a separate division of the
Company. Revenues from the services division comprised approximately 36% of the
Company's total revenue in 1996. Approximately 98.8% of the service revenue in
1996 was derived from providing printing services to non-software companies.
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 $1.4 million in sales in
1996. The Company's largest customer, Yale Materials Handling Corporation, an
equipment manufacturing company, accounted for approximately 18.4% of the
Company's net revenues in 1996 and accounted for approximately 10% of the
Company's net accounts receivables at December 31, 1996. The Company also
provides manufacturing and printing services to other computer software
companies, which generated revenues of approximately $17,000 in 1996.
Through its Affiliate Venture Publishing activities, the Company
provides publishing, manufacturing and marketing services to other software
development companies. The Company provides packaging, graphic design,
manufacturing, distribution, advertising and administration of the product while
capitalizing on the 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.
The Company began offering manufacturing and printing services when it
acquired Ferraul Corp., doing business as Foxfire Printing ("Foxfire") in 1994.
John Ferretti, the sole shareholder of Foxfire, became President, Chief
Operating Officer and Secretary, and a director of the Company in connection
with the acquisition. Mr. Ferretti recently resigned his positions as President,
Chief Operating Officer and Secretary, and as a director, although he continues
to manage the Company's manufacturing and printing operations. The Company has
determined that its services business is ancillary to its core business of
developing and selling interactive multimedia products and therefore is
currently negotiating with Mr. Ferretti the possible repurchase by Mr. Ferretti
of the printing operations. Consummation of any such transaction would be
subject to the negotiation and execution of a definitive purchase agreement and
the satisfaction of customary closing conditions. The revenues and expenses of
the printing business in 1996 were approximately $1.5 million and $2.7 million,
respectively, or approximately 36% and 30%, respectively, of the Company's total
net revenues and operating expenses. Therefore, a sale of this business would
significantly reduce the Company's overhead expenses and, based on 1996 results
of operation, would improve profitability.
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Licenses and Proprietary Rights
Intellectual Property Rights
The Company regards the software that it publishes, the statistical
models that drive 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 Micro League(R), Micro League Baseball(R),
APBA(R), General Admission(R), Affiliate Venture Publishing(R), Fantasy
Manager(R), Ultitainment(R) and Ultimate Cards(R). In addition, the Company has
pending applications for federal trademark registration for Able Soft,
MicroLeague Multimedia(TM), Microleague, Microleague Stylized, MMI, MMI and
Design and MMI Online. The Company's Rabbit Ears(R) subsidiary has thirteen
registrations for its products and three pending applications. There are
numerous copyrights created by the production of Rabbit Ears(R) stories. Under
its agreements with the persons that contribute the creative elements to each
Rabbit Ears(R) story (narrator, musician, illustrator and, in certain cases,
writer), Rabbit Ears(R) owns the copyright in all such elements, with the
following exceptions: (i) Rabbit Ears(R) and Random House, Inc. are co-copyright
owners in the elements that have been contributed to four of the Rabbit Ears(R)
stories; (ii) the copyright in a musical score that contributes to a Rabbit
Ears(R) story is either co-owned by Rabbit Ears(R) and the musician or owned
solely by the musician, but the Company has a perpetual license for broad uses
of the score; and (iii) the copyright in the illustrations used in a small
number of the Rabbit Ears(R) stories are owned by the illustrator, but the
Company has a perpetual license for broad uses of such illustrations.
Except as noted above with respect to the Rabbit Ears(R) products, the
Company owns the copyright in all of the 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. With
respect to certain of its secondary products, the Company jointly owns the
copyright in some of the software used in those products with the 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 certain of its trademarks may be similar in some respect to
trademarks used by others. The Company is aware of at least one party that may
be using one of the Company's marks (General Admission(R)) to identify possibly
related goods. The Company believes that its own use of the pertinent mark
predates the third party's use of its 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 lose goodwill and revenues and incur increased expenses from advertising
under a new name and producing new products and 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.
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<PAGE>
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. Due to 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 than to copy 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 Association, Inc., the National Hockey League Players
Association, 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 Association, Inc., Time
and the National Hockey League Players Association expire on May 31, 1997,
February 28, 1999, April 15, 1998 (baseball) and June 30, 1999, respectively.
The Company also has 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 are 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 Association, Inc. grant to the
Company computer software and board game publishing rights, on a non-exclusive
basis. The Company derived $203,881 and $553,587 in revenue from the Major
League Baseball Players Association license in 1995 and 1996, respectively. The
Company derived $216,260 and $342,662 in revenue from National Football League
Players Association, Inc. license in 1995 and 1996, 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. The Company derived
revenue of $200,150 in 1996 pursuant to the Time license. 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 the Major League
Baseball Players Association, National Football League Players Association,
Inc., the National Hockey League Players Association, 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
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<PAGE>
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 that it can license, repackage, redesign and sell in the United States.
The Company also licenses the international rights to its internally developed
products to foreign companies and has licensed 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.
Historically, the Company has attempted to shift certain of the risks associated
with product development by relying on independent software developers, which
share in the initial cost of developing new products. The Company acquired Micro
Sports in October 1996 in order to decrease its reliance on outside developers
after experiencing problems with one such developer, which adversely affected
the Company's results of operations for 1996. See "-- Introduction" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company believes that by adding the Micro Sports development
team of 13 members, it should be able to develop front-line sports software
products on a more consistent and timely basis.
Once a product is approved for development, a 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 creates 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. Product development
agreements entered into with outside developers typically require the Company to
pay advance royalties when certain milestones are reached. In 1996, the Company
paid approximately $311,000 to outside developers.
The Company's senior marketing and sales staff incorporates new
products into marketing and sales plans and attempts to make preliminary sales
substantially concurrent with product releases. The Company's development,
marketing and sales staffs 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, such as the recent acquisitions of
Micro Sports and Rabbit Ears, and the possible acquisition of KidSoft, as a
source for new products and new product ideas.
-14-
<PAGE>
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 individual consumers and 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, Egghead Software, Wal-Mart and Office Max.
Distributors of the Company's products include Ingram Micro, Navarre and Tech
Data. The Company maintains a list of its approximately 335,000 registered
customers and sends periodic mailings primarily to sell upgrade versions,
add-ons and new products.
The Company utilizes an internal sales staff and four independent sales
representatives to sell to retail accounts. These regional sales representatives
sell the Company's products to major retailers 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
work with buyers in an effort to ensure that retailers are carrying the
appropriate Company products for their 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 of the Company's products.
To complement the Company's retail sales, the Company distributes
catalogs quarterly to its registered customers to generate direct-mail sales.
The Company conducts targeted mailings on a regular basis to over 335,000
registered customers. The Company's sales staff sells add-ons and upgrades and
attempts to sell customers other Company products. The Company also has the
right to use Sports Illustrated(R) customer lists for marketing its existing
products and will, from time to time, rent other lists of potential customers in
an effort to increase sales of existing products. The Company also takes
advantage of its direct-mail operation to sell products not suited for the
retail distribution channel such as add-ons and upgrades and products at lower
price points at the end of their life-cycle. The Company includes marketing and
promotional literature in all of its software products to introduce its software
customers to the Company's direct mail operation. The Company's graphic design
department provides the artwork and layouts of the catalogs, and the Company's
manufacturing division produces the actual catalogs. In the event the
manufacturing division does not have the capacity to produce the catalogs, the
Company contracts with an outside source.
The Company's marketing department is responsible for creating and
executing marketing programs to generate product sales to retailers and
consumers. These programs are generally based on established consumer product
marketing techniques which 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,
catalogs, brochures, advertisements and related materials. The Company's
marketing and sales departments work together to coordinate retail and publicity
programs generally 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.
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<PAGE>
In 1995 and 1996, direct mail sales provided approximately 33% and 17%,
respectively, of the Company's total revenues and more consistent cash flow than
the mass market distribution, since direct mail sales generate cash upon
shipment. In addition, because APBA's existing product base is sports related,
it provides an opportunity to cross-sell MicroLeague Sports(R) products to
APBA(R) customers. The Company also sells Able Soft's products to APBA(R)
customers.
Funds expended for sales and marketing typically aggregate
approximately 20% of gross revenues, which the Company attempts to spread across
multiple titles in a series as it produces upgrades and new titles. The Company
generally sets suggested list prices for its products; however, the Company's
actual wholesale selling prices to most retail outlets typically approximate 45%
less than the Company's suggested list prices. 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 from the Company and 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 customer requests for technical
support have been limited due to the Company's efforts to create high quality,
easy-to-install products. The Company further believes that its in-house support
facilities currently are sufficient to meet anticipated customer technical
support needs in 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 of products in the development stage.
The Company is exposed to returns by distributors, retailers and
consumers. The Company has established reserves for these returns, which were
increased substantially in 1996 and which it believes are adequate based on
product sell-through, inventory levels and historic return rates. The Company
currently has a reserve equal to approximately 35% of outstanding accounts
receivable, as customers typically will partially offset new purchases by
returning products. 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 products 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. For
example, in the third and fourth quarters of 1996, the Company experienced a
significant increase in returns and price protection credits, and therefore
increased reserves, which adversely affected 1996 results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company sells to major accounts on credit, with varying discounts,
return privileges and credit terms that are based on the Company's analysis of
the creditworthiness of the particular customer as well as the sales volume 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. Due to a
decrease in accounts receivable collections in the latter part of 1996, the
Company increased its reserves. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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<PAGE>
Operations
The Company coordinates accounting, purchasing, inventory control,
scheduling, mass market order processing, warehousing and shipping at its
Newark, Delaware facility. The Company is in the process of moving all such
functions except warehousing to its facilities in Lancaster, Pennsylvania. 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 after
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. 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 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 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 The Learning Company (formerly "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
vies 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 with respect to 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, coupled with reduced demand
or distribution channel changes may have a material adverse effect on the
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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 will not materially and
adversely affect its business, operating results and financial condition.
Employees
As of March 31, 1997, the Company and its subsidiaries had 70 full-time
employees. The Company also has between 10 and 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.
Item 2. Description of 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, which 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 6,200 square feet of satellite
warehouse space for approximately $1,950 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.
As part of the Company's acquisition of Micro Sports in October 1996,
the Company entered into a five-year lease for approximately 5,300 square feet
of office space in Chattanooga, Tennessee for approximately $3,333 per month.
The Company utilizes such space for its Tennessee development team.
In the opinion of the Company's management, all such properties are
adequately covered by insurance.
Item 3. Legal Proceedings
Micro League Multimedia, Inc. v. Borta, Inc.
In December 1996, the Company filed a Demand for Arbitration with the
American Arbitration Association against Borta, Inc., with which MicroLeague had
contracted for the development of four sports software games (MicroLeague
Baseball, MicroLeague Football, MicroLeague Basketball and MicroLeague Hockey),
but which were never developed by Borta, Inc. The Company has alleged breach of
contract against Borta, Inc. and is seeking lost profits and expenses in excess
of $1,000,000. Borta, Inc. has filed a response to the Demand for Arbitration
stating that MicroLeague abandoned the contract and alleging a counterclaim
against MicroLeague for an unspecified amount of royalties. The Company has
denied the allegations of the counterclaim and believes it has valid defenses to
such counterclaim.
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Edward Ringler v. Micro League Multimedia, Inc., Neil Swartz and John
Ferretti
In December 1996, the Company, its Chief Executive Officer and former
President were sued in the District Court of Delaware by Edward Ringler, a
former employee, for compensation allegedly owed to the employee under an
employment contract. The Company had terminated the employee for "Cause" as
defined in his employment contract. The Company is defending the action on the
ground that the employee committed offenses that entitled MicroLeague to
terminate his employment and therefore no further compensation is owed. The
Company has filed an answer in which it denies liability to Mr. Ringler and a
counterclaim for failure to return office furniture and a computer system and
related equipment owned by the Company. Under the Company's Bylaws, the Company
is obligated to indemnify the officers and directors of the Company for
liabilities and expenses incurred in connection with actions taken in such
capacities, subject to certain exceptions. Accordingly, the Company will
indemnify Messrs. Swartz and Ferretti for any liabilities and expenses they may
incur arising out of this action.
The Company from time to time is involved in various legal proceedings
with third parties. Management, after review and consultation with counsel,
believes that the disposition of any such litigation would not, individually or
in the aggregate, have a material adverse effect on the Company's financial
position.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to shareholders during the fourth quarter of
1996.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock is listed for trading on the National
Association of Securities Dealers Automated Quotation System SmallCap Market
under the symbol "MLMI." As of March 31, 1997, there were approximately 76
holders of record of the Company's Common Stock. The high and low closing bid
prices for the Company's Common Stock during each fiscal quarter since its
initial public offering in May 1996 (the "Initial Public Offering") were as
follows:
The following table sets forth, for the quarters indicated, the high
and low sales price for the Company's Common Stock as reported on the NASDAQ
SmallCap Market:
High Low
---- ---
Year Ended December 31, 1996
Second Quarter (May 23(1)-June 30).......... $6.75 $6.375
Third Quarter............................... $6.75 $6.375
Fourth Quarter.............................. $7.50 $6.375
- ----------------------
(1) Date of Initial Public Offering.
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Market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions. On April 15, 1997, the closing price of the Company's Common Stock
as reported on the NASDAQ SmallCap Market was $4.375 per share.
Since its inception, the Company has never paid any cash or
stock dividends.
During the fourth quarter of 1996, the Company issued 308,882
shares of unregistered Common Stock to MSIH, the parent corporation of Micro
Sports, in connection with the acquisition of Micro Sports.
Item 6. Management's Discussion and Analysis or Plan of Operations.
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 herein.
General
The Company is a brand-oriented publisher of 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. As of December 31, 1996, the Company had an accumulated
deficit of approximately $7.5 million. The losses in 1989 through 1994 were due
to the Company being financed primarily by debt with significant annual interest
expense as well as 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 been substantially completed. The losses in 1996,
which totaled $5.6 million, resulted primarily from a decrease in net revenues
due to the absence of new front line product releases and significant
investments in products and acquisitions, and increases in cost of goods sold
and operating expenses, which are discussed below. These investments should
contribute to the Company's revenues in future periods.
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 Able Soft, 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 Able Soft was a
tax-free exchange of stock. These acquisitions resulted in the Company recording
goodwill of approximately $790,000, of which approximately $750,000 relates to
Able Soft 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
consolidated facilities in 1996 at an estimated cost of approximately $45,000.
In October 1996, the Company acquired all of the assets of Micro Sports
and certain assets of MSIH, the parent corporation of Micro Sports, consisting
of various intellectual property rights. The acquisition was accounted for by
the purchase method of accounting and resulted in this Company recording
goodwill of approximately $933,000. In consideration of the purchase of such
assets and the
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<PAGE>
assumption of certain liabilities of Micro Sports, the Company issued to MSIH
308,882 shares of Common Stock.
In February 1997, the Company acquired the intellectual property of
Rabbit Ears(R), an entertainment company that sells children's
literature-related productions. The acquisition was accounted for by the
purchase method of accounting and is expected to result in the Company reporting
substantial goodwill. In consideration of the purchase of such assets and
assumption of certain liabilities of Rabbit Ears(R), the Company issued to the
seller an aggregate of 268,097 shares of Common Stock and redeemable options to
purchase up to 250,000 shares of Common Stock.
The Company's interactive multimedia publishing business involves the
development of proprietary content that is published in a variety of media and
the licensing of such products and, in certain instances, other electronic
publishing rights to content. The Company expects to require continued increases
in the number of 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. The Company expects to fund these expenses with a combination of funds
from operations and, to the extent available, borrowings from institutional
lenders and proceeds from the sale of debt and equity securities. See
"--Liquidity and Capital Resources."
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, even though it is not
legally obligated to do so, 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 1996, the Company reduced
sales and increased the allowance for returns and doubtful accounts by $16,000.
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. 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 those products 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 in 1997. Prior to 1996, the
Company's bad debts and uncollected receivables were not material.
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 are treated as prepayments against the aforementioned
royalties. Cash paid for licenses in the form of royalties was approximately
$98,000 in 1995 and $100,000 in 1996. The Company's provision for inventory
obsolescence was $59,271 in 1995 and $62,000 in 1996.
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<PAGE>
Despite the possibility of increased competition in the future for
these licenses, the Company believes new content licenses will become available
as 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 its
products, and the Company attempts to utilize its excess capacity by providing
printing services to outside customers. Historically, however, the printing
group has operated at a loss. In 1996, the printing group had a loss of
approximately $1.3 million based on revenues of $1,468,738 and expenses of
$2,735,855. Accordingly, the Company currently is negotiating for the sale of
this business to the Company's former President and Chief Operating Officer. See
"Description of Business -- Services."
Results of Operations in 1996 compared to 1995
Net revenues decreased $900,000, or 18%, from approximately $5.0
million in 1995 to approximately $4.1 million in 1996. The decrease was
attributable to lower multimedia product sales, which declined approximately
$1,000,000, or 27%, and was partially offset by an increase of approximately
$100,000, or 4%, in commercial printing sales. Multimedia product sales declined
primarily due to the absence of any new front line product releases until late
December 1996. The Company had planned to release in 1996 Sports Illustrated
presents Microleague Baseball 6.0 as well as new basketball, football and hockey
games as new front line products. The Company was unable to release any of these
games on a timely basis, however, due to the failure of an outside developer to
deliver the games to the Company in accordance with the terms of their
development contract. Management believes that the absence of new front line
products contributed significantly to lower sales during the year-end holiday
season, which historically has been the Company's strongest sales period.
See "Description of Business - Litigation."
In an effort to improve the timeliness and consistency of new front
line sports product development, in October 1996, the Company acquired Micro
Sports, a well-established competing developer of statistical sports simulation
computer games. As a result of the acquisition, the Company released in late
December 1996 Sports Illustrated presents MicroLeague Pro Football 1997, Sports
Illustrated presents MicroLeague College Football and Pro League Baseball, all
of which were developed by Micro Sports.
The absence of new front line products in 1996 resulted in higher
product returns and credits for price support on an aggregate basis and as a
percentage of gross sales, increasing from $884,105, or 15%, in 1995 to
$1,080,732, or 20%, in 1996. Front line products typically constitute the
Company's highest quality products and therefore generally represent a lower
percentage of total product returns than its other products. Accordingly, the
Company believes that the development and timely release of new front line
products is essential to limiting product returns as a percentage of gross
sales. The Company has instituted formal distribution policies and restricted
sales of its products to distributors in order to limit the Company's exposure
to product returns.
Cost of goods sold increased $1,100,000, or 47%, from approximately
$2.4 million in 1995 to approximately $3.5 million in 1996. As a percentage of
net revenues, cost of goods sold increased from 47% in 1995 to 85% in 1996. The
increase in cost of goods sold as a percentage of net sales resulted primarily
from a substantial increase in lower priced software sales and commercial
printing sales relative to total net revenues in 1996 versus 1995. Lower priced
software and commercial printing services have a lower gross profit margin than
the Company's front line software products. In addition,
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<PAGE>
the higher product returns and price supports described above reduced net
revenues in 1996 and also contributed to the sharp increase in cost of goods
sold as a percentage of net revenues.
Product development expenses increased $1,100,000 from approximately
$200,000 in 1995 to approximately $1,400,000 in 1996, net of the portion
capitalized for software development. Approximately $1,020,000 of this increase
was due to writing off prepaid development expenses and capitalized software
costs related to the front line sports products planned for 1996, which were not
delivered by an outside developer as discussed above. The balance of the
increase in 1996 development expenses was due to the hiring of additional
development personnel in that year, including David Holt, the Company's Vice
President of Software Development, and the Micro Sports development staff
consisting of approximately 13 persons.
Selling expenses increased from approximately $500,000, or 10% of net
revenues, in 1995 to approximately $1.8 million, or 43% of net revenues, in
1996. The significant increase was primarily due to the Company's efforts to
gain more control over its software distribution channels, including advertising
campaigns and cooperative advertising programs with the Company's retailers to
preserve shelf space for future periods in which the Company will have new front
line products. The increase was also attributable to the Company's efforts to
gain new distribution outlets through the establishment of a private label
program with GTE Interactive, an original equipment manufacturer, and the
Company's establishment of MMI Online, its Internet web site. Approximately
$450,000, or 32%, of the increase in 1996 selling expenses compared to 1995
resulted from higher bad debt expense due to write-offs of certain accounts
receivable and increased reserves relating to the weakened financial positions
of two major customers. Further, selling expenses increased due to the hiring of
additional sales personnel in 1996. The Company believes that its increased
marketing efforts in 1996 should contribute to revenues in 1997 and intends to
continue to launch new marketing promotions. The Company expects that selling
expenses as a percentage of net revenues will decrease as the Company releases
new products, including four new front line products scheduled for release in
the second quarter of 1997. See "Description of Business - Products and
Services."
General and administrative expenses increased $500,000, or 30%, from
approximately $1.8 million in 1995 to approximately $2.3 million in 1996. This
increase was primarily due to the amortization of goodwill and other intangible
assets related to the Able Soft and Micro Sports acquisitions, which were
completed on September 30, 1995 and October 24, 1996, respectively, as well as
hiring personnel in finance and administration to facilitate the Company's
expansion and assist with financial reporting.
Interest expense increased approximately $34,000, or 15%, from
approximately $224,000 in 1995 to approximately $258,000 in 1996. The increase
resulted from increased borrowings in 1996, partially offset by the repayment of
a portion of the Company's outstanding indebtedness using proceeds from the
Initial Public Offering.
As a result of the Company's acquisition of Able Soft, the Company
converted to a C corporation from an S corporation for income tax purposes on
October 1, 1995. Thus, for the nine months ended September 30, 1995, the Company
was not subject to federal and state corporate income taxes. No income tax
benefit has been recognized for financial statement purposes for the year ended
December 31, 1996 due to the Company's inability historically to generate
substantial net income, which is necessary to justify utilization of its
substantial net operating loss credits for tax purposes.
In connection with the Company's sale of bridge notes in February 1996
for $800,000, the Company incurred approximately $250,000 in deemed interest and
deferred financing costs upon completion of the Initial Public Offering in May
1996. In addition, the Company incurred expenses in
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<PAGE>
May 1996 of approximately $90,000 for premiums in excess of principal related to
the early retirement of certain partnership debt interests.
Liquidity and Capital Resources
The Company historically has not been able to generate sufficient cash
flow to fund its operations. Prior to 1996, working capital deficiencies were
funded principally through private placements of securities. Prior to the
completion of these private placements, the Company relied primarily on cash
flow from operations and borrowings under its bank line of credit to finance its
operations and expansion.
In May 1996, the Company raised net proceeds of approximately
$5,000,000 in the Initial Public Offering, which consisted of 1,173,000 units,
each comprised of one share of Common Stock and one Common Stock purchase
warrant. The Company applied approximately $2.8 million of such net proceeds to
repay bank debt, bridge notes issued in February 1996 and notes to a
partnership. The Company applied the remaining net proceeds to fund product
development and to provide working capital for general corporate purposes.
As of December 31, 1996, the Company had payment commitments of
approximately $304,000 under various product development agreements, $1.3
million under its property and vehicle leases, and $1.9 million under existing
employment agreements with certain officers of the Company.
As a result of the costs incurred in connection with the recent
acquisitions of Micro Sports and Rabbit Ears, the Company believes that cash
flow from operations will not be sufficient to meet its needs for working
capital and the expansion of its business. The Company's cash flow from
operations was substantially lower in 1996 than previously anticipated due to
the decrease in net revenues and the increases in cost of goods sold and
operating expenses described above. Cash flow from operations in the first
quarter of 1997 has continued to be less than the Company's working capital
needs.
The Company's working capital needs may increase depending upon
numerous factors, including financing of increased inventory and accounts
receivable arising from the sale and shipment of new products, as well as
additional acquisitions. Accordingly, the Company has continued to borrow under
its bank line of credit and approximately $1.35 million was outstanding as of
March 31, 1997. The Company estimates that in order to fund its working capital
needs for the balance of 1997, it will require approximately $2.0 million of
financing in addition to cash flow from operations. Accordingly, the Company is
seeking additional debt and equity financing.
In late March 1997, the bank providing the Company's $1.5 million line
of credit, which is collateralized by substantially all of the Company's assets,
informed the Company that it would not renew the line of credit, and that the
Company was in violation of a covenant relating to the maintenance of a minimum
level of tangible net worth. The Company immediately began discussions with the
bank to obtain a limited extension of the line of credit and simultaneously
began discussions with other banks to obtain a replacement credit facility. The
line of credit expired on March 31, 1997 and all amounts outstanding thereunder
became immediately due and payable on that date. In April 1997, the bank
agreed in principle not to exercise its remedies under the line of credit until
July 15, 1997 in order to allow the Company an opportunity to arrange for a
new line of credit. Under such agreement in principle, the Company will be
required to make principal payments of $50,000 on the date the parties execute a
definitive agreement, $50,000 on each of May 15, 1997 and June 15, 1997, and all
remaining amounts outstanding under the line of credit on July 15, 1997.
Also, in April 1997, the Company accepted a commitment letter from
another bank that has agreed to provide a $1.5 million line of credit to replace
the Company's expired line of credit. Receipt of funds under the new line of
credit, however, is subject to negotiation and execution of definitive
documentation. While the Company expects to finalize such documentation and
receive such funds shortly, in the event it is unable to do so and cannot obtain
alternative financing by July 15, 1997, the bank that provided the expired line
of credit could declare an event of default and exercise its rights as a secured
lender, including taking control of the Company's assets.
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<PAGE>
Even if the Company obtains a new credit facility, it must raise
additional debt or equity financing in order to fund its working capital needs.
The Company has negotiated the issuance and sale to an institutional investor of
$1,000,000 principal amount of convertible subordinated pay-in-kind secured
debentures and warrants to purchase 85,000 shares of Common Stock for aggregate
consideration of $1,000,000. Completion of the transaction, however, is
conditioned on the Company obtaining a new credit facility on terms acceptable
to the investor. Accordingly, there is no assurance that this transaction will
be completed.
The Company has received a proposal from an investment banking firm
under which such firm would act as placement agent to offer on a best efforts
basis up to $2,000,000 of convertible preferred stock of the Company. The
Company intends to proceed with such offering; however, as a practical matter,
completion of the offering is contingent upon the Company obtaining a new credit
facility on terms that the placement agent believes would be acceptable to
investors. The offering would be made on a best efforts basis, and therefore,
even assuming the Company obtains a new credit facility, there can be no
assurance that the offering will be successful.
On March 24, 1997, the Company announced it had entered into a letter
of intent to acquire KidSoft, a California-based distributor and publisher of
children's multimedia software products. See "Business-Recent and Proposed
Acquisitions." In connection with the acquisition, certain shareholders of
KidSoft have agreed, subject to certain conditions, to purchase in a private
placement up to $2,000,000 of Common Stock. The Company anticipates that, while
a significant portion of the proceeds from this issuance of stock will be used
to integrate KidSoft's California-based operations with the Company's
operations, a substantial amount of the net proceeds will be available for
working capital and general corporate purposes. The Company anticipates that
KidSoft's direct mail and original equipment manufacturer business, which
represent a substantial portion of KidSoft's total revenues, will enable the
Company to substantially improve its cash flow from operations. In addition, the
Company anticipates that all costs incurred in consolidating the companies'
operations will be fully funded by the proceeds of such issuance of stock.
Consummation of the KidSoft acquisition is subject to completion of a
satisfactory due diligence review by each party, negotiation and execution of
definitive documentation and other customary closing documents, approval of the
respective boards of directors of each party and satisfaction of other closing
conditions. Accordingly, there can be no assurance that this transaction will be
completed.
In the normal course of business, the Company evaluates potential
acquisitions and joint ventures that may complement the Company's business. The
Company is currently evaluating a number of opportunities in this regard;
however no commitments or agreements have been reached except for a letter of
intent with respect to KidSoft, which is subject to due diligence and other
conditions described above. Any such acquisitions or joint ventures may require
the Company to make additional capital expenditures, and such expenditures could
be significant.
Seasonality
The interactive multimedia consumer products market is characterized by
significant seasonal swings in demand, which typically peak in the fourth
quarter of each year. The seasonal pattern is due primarily 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. There can be no assurance that the Company will achieve consistent
profitability on a quarterly or annual basis or that any profitability, if
achieved, will be maintained.
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<PAGE>
Inflation
The Company does not believe that inflation has had a material effect
on its results of operations to date. There can be no assurance, however, that
the Company's business will not be affected by inflation in the future.
Item 7. Financial Statements.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
MICROLEAGUE MULTIMEDIA, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants................................................................... F-1
Consolidated Balance Sheets as of December 31, 1995 and December 31, 1996........................... F-2
Consolidated Statements of Income for the years ended December 31, 1995
and December 31, 1996............................................................................. F-3
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995 and December 31, 1996........................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1995
and December 31, 1996............................................................................. F-5
Notes to Consolidated Financial Statements.......................................................... F-6
</TABLE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The information required by this Item is incorporated by
reference from the definitive proxy materials of the Company to be filed with
the Commission in connection with the Company's 1997 Annual Meeting.
Item 10. Executive Compensation
The information required by this Item is incorporated by
reference from the definitive proxy materials of the Company to be filed with
the Commission in connection with the Company's 1997 Annual Meeting.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by
reference from the definitive proxy materials of the Company to be filed with
the Commission in connection with the Company's 1997 Annual Meeting.
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<PAGE>
Item 12. Certain Relationships and Related Transactions
The information required by this Item is incorporated by
reference from the definitive proxy materials of the Company to be filed with
the Commission in connection with the Company's 1997 Annual Meeting.
Item 13. Exhibits, List and Reports on Form 8-K
(a) Financial Statements:
The financial statements filed as part of this annual report
on Form 10-KSB are included in Part II, Item 7.
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1995 and
December 31, 1996
Consolidated Statements of Income for the years ended December
31, 1995 and December 31, 1996
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1995 and December 31, 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and December 31, 1996
Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K
The following Current Report on Form 8-K was filed by the
Company during the fourth quarter of 1996:
Current Report on Form 8-K, dated October 24, 1996,
reporting the acquisition of all of the assets of Micro
Sports and certain of the assets of MSIH and assumption of
certain of the liabilities of Micro Sports.
(c) Exhibits
(3.1) Amended and Restated Bylaws of the Company.
(11.1) Statement re: Computation of Earnings.
(21.1) List of Subsidiaries.
(27.1) Financial Data Schedule.
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<PAGE>
MICROLEAGUE MULTIMEDIA, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
MICROLEAGUE MULTIMEDIA, INC.
Report of Independent Accountants......................................................................... F-1
Consolidated Balance Sheets as of December 31, 1995 and December 31, 1996................................. F-2
Consolidated Statements of Income for the years ended December 31, 1995 and 1996.......................... F-3
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995 and 1996............ F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1996...................... F-5
Notes to Consolidated Financial Statements ............................................................... F-6
</TABLE>
<PAGE>
To the Board of Directors and Stockholders of Microleague Multimedia, Inc.:
We have audited the accompanying consolidated balance sheets of
Microleague Multimedia, Inc. as of December 31, 1995 and 1996 and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years ended December 31, 1995 and 1996. 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, 1995 and 1996 and the results of their
income and their cash flows for the years ended December 31, 1995 and 1996, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Microleague Multimedia, Inc. will continue as a going concern. As discussed in
Note 1 to the financial statements, Microleague Multimedia, Inc. has a working
capital deficiency, loan covenant violations and a loss from operations, all
which raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 21, 1997,
except for the third and fourth paragraphs of Note 5
and the second through the sixth paragraphs of
Note 12 for which the date is April 21, 1997
F-1
<PAGE>
MICROLEAGUE MULTIMEDIA, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................... $ 6,754 $ 22,080
Accounts receivable, net of allowance for returns and
doubtful accounts of $444,000 and $460,000 .................. 1,763,124 867,915
Inventory ................................................... 916,715 1,302,728
Royalty advances ............................................ 295,702 102,100
Prepaid and other current assets ............................ 247,500 83,539
Deferred tax asset .......................................... 208,300 83,300
----------- -----------
Total current assets ..................................... 3,438,095 2,461,662
Fixed assets, net ............................................... 425,162 858,290
Goodwill, net ................................................... 771,210 1,592,301
Capitalized software costs, net ................................. 370,021 73,251
Intangible assets, net .......................................... 262,638 2,307,710
Other assets .................................................... 107,413 57,129
----------- -----------
Total assets .................................................... $ 5,374,539 $ 7,350,343
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital leases ........ $ 391,530 $ 338,626
Notes payable ............................................... 2,281,372 1,800,200
Accounts payable ............................................ 1,109,625 1,488,647
Accrued expenses ............................................ 238,813 723,232
Cash overdraft .............................................. -- 73,068
----------- -----------
Total current liabilities ................................ 4,021,340 4,423,773
Deferred tax liability .......................................... 192,000 83,300
Long-term debt and capital leases, net .......................... 1,019,602 673,085
----------- -----------
Total liabilities ........................................... 5,232,942 5,180,158
----------- -----------
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;
2,674,870 and 4,243,171 shares issued and outstanding ....... 26,749 42,432
Additional paid-in capital .................................. 2,057,158 9,618,747
Warrants .................................................... -- --
Accumulated deficit ......................................... (1,872,380) (7,454,994)
Receivables from stockholders ............................... (69,930) (36,000)
----------- -----------
Total stockholders' equity ............................... 141,597 2,170,185
----------- -----------
Total liabilities and stockholders' equity ............... $ 5,374,539 $ 7,350,343
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-2
<PAGE>
MICROLEAGUE MULTIMEDIA, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Net revenues ..................................... $ 5,010,156 $ 4,087,037
Cost of goods sold ............................... 2,374,975 3,488,509
----------- -----------
Gross profit ................................. 2,635,181 598,528
----------- -----------
Operating expenses:
Product development .......................... 215,167 1,487,523
Selling and marketing ........................ 515,882 1,771,645
General and administrative ................... 1,555,838 2,307,556
----------- -----------
Total operating expenses .................. 2,286,887 5,566,724
----------- -----------
Income (loss) from operations ............. 348,294 (4,968,196)
Interest expense ................................. 224,451 257,815
Other expense .................................... 41,054 --
----------- -----------
Income (loss) before benefit for income taxes and 82,789 (5,226,011)
extraordinary items
Benefit (provision) for income taxes before
extraordinary items ............................ 16,300 (16,300)
----------- -----------
Income (loss) before extraordinary items ..... 99,089 (5,242,311)
----------- -----------
Extraordinary loss on early extinguishment of debt -- 340,303
----------- -----------
Net income (loss) ................................ $ 99,089 $(5,582,614)
=========== ===========
Per share of Common Stock:
Loss before extraordinary items .............. -- $ (1.46)
Extraordinary items .......................... -- (.10)
-----------
Net loss ..................................... -- $ (1.56)
===========
Weighted average common shares outstanding ....... 3,584,722
===========
Pro forma income data (unaudited):
Income before taxes .......................... $ 82,789
Income tax provision at 40% .................. 33,116
-----------
Net income ................................... $ 49,673
===========
Proforma earnings per share ...................... $ .02
===========
Weighted average common shares outstanding ....... 2,937,978
===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
<PAGE>
MICROLEAGUE MULTIMEDIA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
Additional Receivables
Common Paid-in Accumulated from
Shares Stock Capital Deficit Stockholders Total
------ ----- ------- ------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
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
--------- --------- ----------- ------------- ----------- --------
Initial public offering of Common Stock 1,173,000 11,730 4,987,557 4,999,287
Issuance of Common Stock
for acquisitions................... 324,682 3,247 2,096,753 2,100,000
Issuance of Common Stock............. 53,581 536 441,921 442,457
Conversion of notes payable.......... 17,038 170 35,358 35,528
Payments by stockholders............. 33,930 33,930
Net loss............................. (5,582,614) (5,582,614)
--------- --------- ----------- ------------- ----------- --------
Balance, December 31, 1996 4,243,171 $42,432 $9,618,747 $(7,454,994) $(36,000) $2,170,185
========= ======= ========== =========== ======== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
<PAGE>
MICROLEAGUE MULTIMEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Cash Flows from operating activities:
Net income ....................................................... $ 99,089 $(5,582,614)
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization .................................. 201,124 1,504,606
Deferred income taxes .......................................... (16,300) 16,300
Provision for inventory obsolescence ........................... 59,271 62,000
Provision for returns and uncollectible accounts ............... 134,000 16,000
Changes in operating assets and liabilities net of acquisitions:
Accounts receivable .......................................... (1,127,991) 879,190
Inventory .................................................... (208,989) (448,013)
Royalty advances ............................................. (150,164) (430,125)
Prepaid expenses and other current assets .................... (31,231) 163,961
Other assets ................................................. (145,122) 32,703
Accounts payable ............................................. 454,605 379,022
Accrued expenses ............................................. 1,110 145,849
----------- -----------
Net cash used in operating activities ...................... (730,598) (3,261,121)
----------- -----------
Cash flows from investing activities:
Purchases of equipment ........................................... (137,433) (380,414)
Capitalized software costs ....................................... (360,672) (238,220)
----------- -----------
Net cash used for investing activities ..................... (498,105) (618,634)
----------- -----------
Cash flows from financing activities:
Net borrowings under lines of credit ............................. 381,872 (1,181,172)
Payments (borrowings) of receivables from stockholders ........... (23,599) 33,930
Borrowings of long-term debt ..................................... 787,500 89,013
Principal payments of long-term debt and capital leases .......... (558,669) (488,434)
Proceeds from initial public offering ............................ -- 5,928,958
Initial public offering costs .................................... -- (929,671)
Issuance of Common Stock ......................................... 575,008 442,457
----------- -----------
Net cash provided by financing activities .................. 1,162,112 3,895,081
----------- -----------
Net increase (decrease) in cash and cash equivalent ........ (66,591) 15,326
Cash and cash equivalents at beginning of year ..................... 73,345 6,754
----------- -----------
Cash and cash equivalents at end of year ........................... $ 6,754 $ 22,080
=========== ===========
Supplemental disclosure of cash flow information:
=========== ===========
Cash paid for interest ........................................... $ 226,066 $ 365,694
=========== ===========
Noncash financing and investing activities:
=========== ===========
Acquisition notes .............................................. $ 312,783 $ 700,000
=========== ===========
Non-compete agreement .......................................... $ 200,023 $ --
=========== ===========
Capital lease obligations ...................................... $ 18,020 $ 228,507
=========== ===========
Conversion of notes payable to Common Stock .................... $ 175,000 $ 35,528
=========== ===========
Issuance of Common Stock for acquisitions ...................... $ 375,000 $ 2,100,000
=========== ===========
Issuance of Common Stock for services .......................... $ 87,500 $ --
=========== ===========
Original issue discount ........................................ $ -- $ 249,866
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS:
The 1996 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, Micro Sports, Inc. ("Micro Sports"), a sports
simulation software developer acquired in 1996, and Ferraul Corp., doing
business as FoxFire Printing ("FoxFire"). Microleague sells its products
primarily through software retailers, mail order, wholesale clubs and mass
market merchandisers throughout the United States. FoxFire provides commercial
printing, graphic design and manufacturing services. All significant
intercompany accounts and transactions have been eliminated.
GOING CONCERN:
As shown in the accompanying financial statements, the Company has a
working capital deficiency at December 31, 1996, loan covenant violations, and a
loss from operations. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might be necessary if the Company is unable to continue as
a going concern.
Management has undertaken a plan to obtain sufficient capital and execute a
development and marketing plan that will enable the Company to achieve a level
of profitable sales sufficient to support current operations as well as growth
initiatives. For a discussion of certain steps management of the Company has
undertaken to obtain sufficient capital, see Note 12.
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.
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 1995 and 1996, the Company had one customer that accounted for 15% and
18% of revenues, respectively. In 1995 and 1996, the Company's three largest
customers accounted for approximately 29% and 33% of revenues, respectively, and
in the aggregate accounted for approximately 30% and 44% of the Company's
accounts receivable at December 31, 1995 and December 31, 1996, respectively.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
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 1995 and 1996, the Company recognized writedowns to net realizable
value of its inventory of approximately $60,000 and $62,000, respectively.
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, 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 the 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 $360,700 and $225,482 of these costs in the years ended December
31, 1995 and 1996. Total amortization expense related to computer software was
$14,593 and $522,252 (including $399,855 of a write-off to realizable value) in
the years ended December 31, 1995 and 1996.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
INTANGIBLE ASSETS:
The Company has intangible assets resulting from acquisitions as set forth
in the table below. The Company amortizes these intangible assets on the
straight line basis over their estimated useful lives, which do not exceed any
applicable contractual lives.
<TABLE>
<CAPTION>
1995 1996 Estimated useful lives
---------------- ----------------- -------------------------
<S> <C> <C> <C>
Goodwill....................................... $ 792,039 $1,725,519 5 - 10
Accumulated amortization ...................... 20,829 133,218
---------------- -----------------
771,210 1,592,301
================ ================= -------------------------
Licensing Rights .............................. - 2,148,203 5 - 10
---------------- -----------------
Noncompete agreements ......................... 235,023 235,023 7
Trademarks..................................... 31,428 31,428 20
Customer lists and other....................... 30,000 45,000 10
---------------- -----------------
296,451 2,459,654
---------------- -----------------
Accumulated amortization....................... 33,813 151,944
---------------- -----------------
$ 262,638 $2,307,710
================ =================
</TABLE>
Amortization expense was $54,642 in 1995 and $230,520 in 1996.
IMPAIRMENT OF LONG LIVED ASSETS:
Statement of Financial Accounting Standard No. 121, "Impairment of Long
Lived Assets", was adopted on January 1, 1996 with no material impact upon
adoption. The carrying values of long lived assets, which include fixed assets,
computer software and intangibles, are evaluated periodically in relation to the
operating performance and future undiscounted cash flows of the underlying
assets. Adjustments are made if the sum of expected future cash flows is less
than book value.
DEFERRED OFFERING COSTS:
Deferred offering costs, which are included in other assets at December 31,
1995, consist of legal, accounting, consulting and other costs related to the
initial public offering of the Company's Common Stock, which was completed in
May 1996.
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 the 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.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
NOTES PAYABLE AND LONG-TERM DEBT:
FASB Statement No. 107, "Disclosures About Fair Value of Financial
Instrument," requires disclosure of fair value information about financial
instruments, when it is practicable to estimate that value. The carrying amounts
reported in the balance sheet for notes payable and long-term debt approximates
fair value, as a majority of the debt carries variable interest rates and other
terms which approximate fair value.
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 that are capitalized primarily consist of graphic design
and package costs for quarterly catalogs which supersede previously issued
catalogs. 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 $28,487 and $18,455 as of December 31, 1995 and 1996, respectively.
Total advertising expense included in selling and marketing expense was $191,501
and $233,710 for the years ended December 31, 1995 and 1996, respectively.
RESEARCH AND DEVELOPMENT:
Research and development costs are included in general and administrative
expenses in the accompanying statements of operations. These costs were $69,795
and $174,523 in 1995 and 1996, respectively.
INCOME TAXES:
Prior to October 1995, the Company elected to be treated as an S
Corporation (as defined in the Internal Revenue Code (the "Code")). As a result
of this election, federal and state income taxes, if any, on taxable income of
the Company were the responsibility of stockholders. On October 1, 1995, the
Company elected to be recognized as a C Corporation as defined in the Code.
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 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 prior to the Initial Public Offering. Historical earnings per
share is not presented in 1995 as it is not meaningful due to the Company's tax
status.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128 "Earnings Per Share." This Statement
establishes standards for computing and presenting earnings per share (EPS) and
applies to entities with publicly held common stock or potential common stock.
This Statement is effective for financial statements issued for periods ending
after December 15, 1997. Earlier application is not permitted. This Statement
requires restatement of all prior-ended EPS data. The Company is currently
evaluating the impact, if any, adoption of SFAS No. 128 will have on its
financial statements.
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 and $200,000 in the form of a noncompetition agreement. Notes payable of
$175,000 were immediately converted into 84,112 shares of Common Stock. The
remaining notes were converted into 24,070 shares of Common Stock in March 1997.
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 was $375,000, which was paid entirely with 132,252 shares of Common Stock
of the Company. The purchase price reflected 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.
On August 30, 1996, the Company acquired certain assets of Ringler Studios,
a software developer, for 15,835 shares of Common Stock. The purchase price
reflects the issuance of $100,000 in Common Stock.
On October 24, 1996, the Company acquired all of the assets of Micro Sports
and certain of the assets of MSIH and agreed to assume certain of the
liabilities of Micro Sports. Micro Sports is a Tennessee-based developer of
statistical sports simulation software games. In consideration for the purchase
of such assets and assumption of such liabilities, the Company issued an
aggregate of 308,882 shares of the Company's Common Stock. The purchase price
reflected the issuance of $2,000,000 in Common Stock, the assumption of $700,000
in notes payable and the assumption of $472,265 in liabilities which resulted in
the Company recording $2,148,203 in intangibles and $933,480 in goodwill.
These 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 proforma consolidated net sales, net income and net
income per share have been presented as if the acquisitions had occurred on
January 1, 1995:
1995 1996
(Unaudited) (Unaudited)
------------ ------------
Net Sales ................................ $ 5,742,799 $ 4,178,531
Net loss ................................. $(1,494,512) $(6,625,705)
Net loss per share ....................... $ (.46) $ (1.73)
Weighted average shares outstanding ...... $ 3,246,860 $ 3,836,001
Pro forma loss per share presented above have been modified to assume the
Company was a taxable entity in each year.
The pro forma 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.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. INVENTORY:
Inventory, net of valuation allowances of $59,271 and $121,271 in 1995 and
1996, respectively, consisted of the following:
December 31,
-------------------------
1995 1996
--------- ----------
Raw materials ....................... $ 24,695 $ 52,334
Work-in-process ..................... 86,082 63,303
Finished goods ...................... 805,938 1,187,091
--------- ----------
Total .......................... $916,715 $1,302,728
========= ==========
4. FIXED ASSETS:
Fixed assets (including equipment acquired under capitalized leases) at
December 31, 1995 and 1996 consisted of the following:
1995 1996
--------- ----------
Printing equipment .............................. $428,504 $464,678
Computers........................................ 273,374 516,798
Furniture and fixtures .......................... 60,843 289,584
Automobile....................................... 15,469 53,126
--------- ----------
778,190 1,324,186
Less accumulated depreciation and amortization .. 353,028 465,896
--------- ----------
$425,162 $858,290
========= ==========
Computers and equipment under capital leases were $104,474 and $28,919,
respectively, at December 31, 1995 and $104,474 and $394,093, respectively, at
December 31, 1996. Amortization expense on capital leases totaled $27,510 and
$33,890, respectively, for the years ended December 31, 1995 and 1996.
Depreciation expense amounted to $65,573 and $92,938, respectively, for the
years ended December 31, 1995 and 1996, respectively.
5. DEBT AND LINES OF CREDIT:
The Company has a line of credit with a bank that permits borrowings of up
to $1,500,000. Borrowings bear interest at the prime lending rate plus 1.5%, or
9.75%, at December 31, 1996. The line of credit is collateralized by all assets
of the Company. At December 31, 1995 and 1996, $681,372 and $1,100,200,
respectively, was outstanding under the line of credit. In addition, at December
31, 1995, the Company had an additional line of credit collateralized by a
guarantee of one of the Company's directors. At December 31, 1995, approximately
$1,600,000 was outstanding under this facility. This facility was repaid in full
with proceeds from the Initial Public Offering.
In connection with the Company's October 1996 acquisition of Micro Sports,
the Company assumed a $700,000 non-interest bearing note payable, of which
$200,000 was due in December 1996 and remains unpaid to date, to International
Business Machines Corporation. The note is due and payable in full on October 1,
1997.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. DEBT AND LINES OF CREDIT -- (continued)
In late March 1997, the bank informed the Company that it would not renew
the $1.5 million line of credit, which is collateralized by substantially all of
the Company's assets and expired on March 31, 1997, and that the Company was in
violation of a covenant requiring a minimum level of tangible net worth. The
Company immediately began discussions with the bank to obtain a limited
extension of the line of credit and simultaneously began discussions with other
banks to obtain a replacement line of credit. In April 1997, the bank
agreed in principle not to exercise its remedies under the line of credit until
July 15, 1997 in order to allow the Company an opportunity to arrange for a
new line of credit. Under such agreement in principle, the Company will be
required to make principal payments of $50,000 on the date the parties execute a
definitive agreement, $50,000 on each of May 15, 1997 and June 15, 1997, and all
remaining amounts outstanding under the line of credit on July 15, 1997.
Also, in April 1997, the Company accepted a commitment letter from
another bank that has agreed to provide a $1.5 million line of credit to replace
the Company's expired line of credit. Receipt of funds under the new line of
credit, however, is subject to negotiation and execution of definitive
documentation. While the Company expects to finalize such documentation and
receive such funds shortly, in the event it is unable to do so and cannot obtain
alternative financing by July 15, 1997, the bank that provided the expired line
of credit could declare an event of default and exercise its rights as a secured
lender, including taking control of the Company's assets.
Long-term debt obligations as of December 31, 1995 and 1996 consist of the
following:
<TABLE>
<CAPTION>
1995 1996
--------------- --------------
<S> <C> <C>
Third party:
Bank term loan, interest only until June 30, 1996 at the bank's prime rate plus
1%. Principal payable thereafter in 24 monthly installments of $10,000 plus
interest at the bank's prime rate (8 1/4% at December 31, 1996) 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 $ 415,000
Equipment loans payable in monthly installments, including interest at
10.125%, due 1999 (Notes are collateralized by certain equipment) ............... $105,530 71,592
Vendor notes payable at various interest rates ranging from 7.5% to 10%
due March 1996 and 1997 ......................................................... 118,379 35,760
Delaware Economic Development Authority Loan, payable monthly,
including interest at 4.8%, due September 1996 .................................. 59,231 --
Capitalized leases for equipment payable in monthly installments
through May 2000................................................................. 57,187 285,604
Bank term loans payable in monthly installments plus interest at the bank's
prime rate (10.25% at December 31, 1996) plus 2%, due February 1999.............. 61,621 --
--------------- --------------
876,948 807,956
Related party:
Seller notes payable from acquired businesses at 10% interest, due
October 1996 and January 1997 ................................................... 131,783 50,000
Notes payable for covenant not to compete including interest at 8%,
due January 2002 ................................................................ 177,812 153,755
Interactive Multimedia partnership notes payable, due March 1998 ..................... 187,820 --
Notes payable with certain shareholders and a Director at 7% interest,
due April 1998 .................................................................. 36,769 --
--------------- --------------
1,411,132 1,011,711
Less current portion ................................................................. 391,530 338,626
--------------- --------------
$1,019,602 $ 673,085
=============== ==============
</TABLE>
The bank term loan with a balance of $415,000 at December 31, 1996 is
guaranteed by three Directors and two stockholders.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. 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 1997, the shareholder converted this note payable plus accrued interest
into 24,070 shares of Common Stock.
In February 1996, the Company raised $800,000 through the sale of bridge
units, consisting of (i) bridge notes due upon the earlier of the consummation
of a public stock offering by the Company or 12 months from the date of issuance
and (ii) bridge warrants to acquire 160,000 shares of Common Stock. The Bridge
Notes were repaid upon the closing of the Company's Initial Public Offering in
May 1996. The Company incurred an extraordinary pre-tax charge to earnings in
1996 of approximately $250,000 relating to deemed interest and deferred
financing costs resulting from the early repayment of this debt.
In March 1995, the Company borrowed $212,500 from Interactive Multimedia
Partnership whose general partners include an officer of the Company and three
stockholders. In April 1995, the Company borrowed $50,000 from certain
stockholders and a Director of the Company. The loans were repaid early at a
premium of approximately $90,000 during 1996 which has been recorded as an
extraordinary expense.
Aggregate maturities for long-term debt, excluding capital leases, as of
December 31, 1996 for each of the next five years, is as follows:
Year ended
December 31
- ---------------------------
1997 $ 261,402
1998 178,045
1999 162,728
2000 88,093
2001 35,839
Thereafter --
------------
$ 726,107
============
6. STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
Under the Company's Articles of Incorporation, the Board of Directors is
authorized to issue 1,000,000 shares of preferred stock, $.01 par value. As of
December 31, 1996, no shares of preferred stock were outstanding.
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.
On May 23, 1996, the Company completed a public offering of 1,173,000
shares of Common Stock for $5.70 per share. Net proceeds of $4,999,287 from the
Initial Public Offering were net of offering costs payable by the Company of
approximately $929,000. Other stock issuances include 48,092 shares of Common
Stock issued to an investor for $200,000 and 5,489 shares of Common Stock issued
upon the exercise of warrants totalling $10,000.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. STOCKHOLDERS' EQUITY -- (Continued)
STOCK OPTIONS:
The 1996 Equity Compensation Plan (the "Plan") permits the issuance of up
to 410,000 qualified and nonqualified stock options, stock appreciation rights
and grants of restricted stock. Options granted under the Plan will expire no
later than 10 years from their grant dates. During 1996, the Company granted
options to purchase 103,000 shares of Common Stock pursuant to the Plan to
employees, which options vest ratably over a period of three years from the date
of grant. As of December 31, 1996, the range of exercise prices for options
outstanding was 358,931 options at $2.08 to $2.84 and 103,000 options at $6.56
to $6.81. The weighted average remaining contractual life is approximately 9
years. Of the outstanding options, 125,639 were issued prior to the adoption of
the Plan. These options will expire on various dates through 2000.
Effective January 1, 1996 the Company adopted the disclosure-only option
under Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation." The Company continues to use the accounting method
under APB Opinion No. 25 (APB 25) and related interpretations for its employee
stock options. Under APB 25, when the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Pro forma disclosure, as required by SFAS No. 123, regarding net income and
earnings per share has been determined as if the Company had accounted for its
employee stock options under the fair value method of the statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996, respectively; option forfeiture of 0%; risk free
interest rates of 7.8% and 6.3%; no dividends; volatility factors of the
expected market price of the Company's Common Stock of 24.5%; and a weighted
average expected life of the options of three years.
For purposes of pro forma disclosures the estimated fair value of the
options ($157,409 for the 1995 grant and $196,772 for the 1996 grant) is
amortized to expense over the options' vesting period. The initial impact on pro
forma net income may not be representative of compensation expense in future
years, when the effect of the amortization of multiple awards would be reflected
in the pro forma disclosures. The Company's pro forma information follows:
For the years ended
December 31, December 31,
------------ ------------
1995 1996
------------ ------------
Net income (loss)............................ $ 99,089 $(5,582,614)
Estimated pro forma compensation expense
from stock options.........................
1995 grant................................... 157,409 --
1996 grant................................... -- 196,772
Pro forma net loss........................... $(58,320) $(5,779,386)
========= ============
Pro forma loss per share..................... $ (0.02) $ (1.61)
=========== ============
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. STOCKHOLDERS' EQUITY -- (Continued)
A summary of the Company's stock option activity, and related
information is as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
Weighted Weighted
average average
Shares exercise price Shares exercise price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Options outstanding beginning of year.......... 125,639 $1.55 358,931 $2.29
Options granted................................ 233,292 2.68 103,000 6.62
Options exercised.............................. -- -- -- --
Options forfeited.............................. -- -- -- --
------- -------
Options outstanding end of year................ 358,931 $2.29 461,931 $3.26
Exercisable at end of year..................... 358,931 $2.29 383,931 $2.47
Stock options available for future issuance.... -- 307,000
</TABLE>
WARRANTS:
As of December 31, 1996, 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.
In connection with the Company's Initial Public Offering, the Company
issued 1,173,000 units, each consisting of one share of Common Stock and one
warrant to purchase Common Stock (the "Warrants") at an initial exercise price
of $6.27 per share, or 110% of the initial public offering price ($5.70). The
Warrants are exercisable at any time on or before May 23, 1999. The Warrants are
redeemable at the Company's option, in whole but not in part, at a price of $.10
per Warrant at any time if the last sale price of the Common Stock exceeds 140%
of the initial public offering price for not fewer than 10 of 15 consecutive
trading days.
Also in connection with the Initial Public Offering, the Company issued
to the underwriter for the Initial Public Offering warrants (the "Underwriter
Warrants") to purchase up to 102,000 shares of Common Stock and/or 102,000
warrants at an initial exercise price of $7.41 per share.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. LEASES
The Company leases certain of its operating facilities and equipment
under non-cancelable leases expiring at various dates through 2001. At December
31, 1996, aggregate minimum lease commitments are as follows:
<TABLE>
<CAPTION>
Capital Operating
<C> <C> <C>
1997 $119,996 $227,802
1998 102,279 227,487
1999 79,061 223,321
2000 54,085 181,654
2001 21,609 92,252
---------- ----------
Minimum lease payments $377,030 $952,516
======== ========
Less amount representing interest 91,426
Present value of minimum lease payments 285,604
Less current portion 78,797
--------
$206,807
========
</TABLE>
Rent expense as a result of operating leases amounted to approximately
$184,000 and $177,000 for 1995 and 1996, respectively.
8. INCOME TAXES:
The benefit for income taxes consists of the following
1995 1996
---- ----
Deferred federal income tax........... $(14,600) $14,600
Deferred state income tax............. (1,700) 1,700
--------- -------
$(16,300) $16,300
========= =======
The reconciliation of income taxes at the U.S. statutory rate to the
benefit for income taxes for 1995 and 1996 is as follows:
1995 1996
---- ----
U.S. Federal statutory rate ................ $ 38,437 $(1,776,844)
State income taxes net of federal benefit... 11,260 (337,000)
Nondeductible expenses...................... 4,267 39,000
Impact on deferred for change in tax rate... 28,319
Changes in valuation allowance.............. -- 2,062,825
Effect of deferred income taxes due to
change in tax status....................... (70,264) --
-------- ------------
(Benefit) Provision for income taxes........ $(16,300) $ 16,300
========= =============
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. INCOME TAXES -- (Continued)
The tax effects on temporary differences which comprise the deferred
tax assets and liabilities at December 31, 1995 and 1996 are as follows:
1995 1996
---- ----
Deferred tax assets:
Net Operating Losses .................... $ $ 1,816,525
Accounts receivables..................... 182,100 184,000
Inventory................................ 24,300 48,500
Deferred revenue......................... -- 40,000
Accrued expense.......................... -- 29,700
Goodwill................................. -- 27,400
Other.................................... 1,900 --
Total gross deferred tax assets.......... 208,300 2,146,125
Less: valuation allowance -- 2,062,825
----------- ------------
Net deferred tax assets............. 208,300 83,300
Deferred tax liabilities:
Capitalized software..................... 146,000 29,300
Fixed assets............................. 46,000 54,000
192,000 83,300
Net deferred tax asset................... $ 16,300 $ --
========== ============
The Company has established a valuation allowance against its net
deferred tax assets due to the uncertainty surrounding the realization of such
assets pursuant to SFAS No. 109. Management evaluates on a quarterly basis the
recoverability of the deferred tax assets and the level of this valuation
allowance. At such time as it is determined that it is more likely than not that
the deferred tax assets are realizable, the valuation allowance will be reduced.
At December 31, 1996, the Company had net operating loss carry forwards
of approximately $4,299,870 for federal tax purposes expiring in 2011. The net
operating loss carry forwards for state tax purposes is approximately $477,763
and expires in 2000. These carry forwards may be applied as a reduction to
future taxable income of the Company, if any.
9. RELATED PARTY TRANSACTIONS:
In connection with a consulting agreement with an employee-director for
obtaining and managing a printing customer, in June 1995, the Company issued
30,057 shares of stock valued at $62,500 and paid a consulting fee of $64,500.
As a result, the Company has deferred the expenses of the consulting agreement
over the three-year life of the contract. The unamortized portion of $88,000 and
$57,000 is included in other assets at December 31, 1995 and 1996, respectively.
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 and 1996, respectively, there was $69,930 and
$36,000 due from stockholders for outstanding advances. As there are no
definitive repayment terms, this amount has been classified as a reduction of
stockholders' equity.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. RELATED PARTY TRANSACTIONS -- (continued)
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 and $84,000 in 1995 and 1996,
respectively.
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 was
outstanding and included in the Company's long-term debt obligations. During
1996, the Company repaid these loans in full at an additional premium of $90,435
to compensate the noteholders for relinquishing future royalty rights to certain
products in development. This early extinguishment of debt resulted in an
extraordinary expense of $90,435 (see Note 5).
The Company's former general counsel is a stockholder of the Company.
Fees incurred by the Company to such person totaled approximately $36,000 in
1995, of which $25,000 was satisfied by issuing 8,817 shares of Common Stock in
October 1995.
10. COMMITMENTS AND CONTINGENCIES:
Certain licenses and development agreements require advance royalty
payments by the Company that could aggregate up to $304,000 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, one officer and one former officer of the Company
entered into employment agreements with aggregate base compensation of
approximately $690,000 payable over the next three years.
On October 24, 1996, the Company entered into employment agreements
with two employees with aggregate base compensation of approximately $462,000
payable over the next three years.
In December 1996, the Company filed a Demand for Arbitration with the
American Arbitration Association against a software developer, with which the
Company had contracted for the development of four sports software games, but
which were never delivered by the developer. The Company has alleged breach of
contract against the developer and is seeking lost profits and expenses in
excess of $1,000,000. The developer has filed a response to the Demand for
Arbitration stating that the Company abandoned the contract and alleging a
counterclaim against the Company for an unspecified amount of royalties. The
Company has denied the allegations of the counterclaim and believes it has valid
defenses to such counterclaim.
In December 1996, the Company, its Chief Executive Officer and former
President were sued in the District Court of Delaware by a former employee, for
compensation allegedly owed to the employee under an employment contract. The
Company had terminated the employee for "Cause" as defined in his employment
contract. The Company is defending the action on the ground that the employee
committed offenses that entitled the Company to terminate his employment and
therefore no further compensation is owed. The Company has filed an answer in
which it denies liability to the employee and a counterclaim for failure to
return office furniture and a computer system and related equipment owned by the
Company. Under the Company's Bylaws, the Company is obligated to indemnify the
officers and directors of the Company for liabilities and expenses incurred in
connection with actions taken in such capacities, subject to certain exceptions.
Accordingly, the Company will indemnify the officers for any expenses they may
incur arising out of this action.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES -- (continued)
Certain claims and litigation have arisen against the Company in the
ordinary course of its business. The Company believes that all claims and
lawsuits against the Company are without merit, and the Company intends to
vigorously contest such disputes. In the opinion of management, the likelihood
of a materially adverse outcome in such disputes is remote and the outcome of
such disputes will not have a material adverse effect, if any, on its financial
position, results of operations or liquidity, as reported in these financial
statements. However, depending on the amount and timing of any unfavorable
resolution of these matters, it is possible that the Company's future results of
operations or cash flows could be materially affected in a particular period.
11. BUSINESS SEGMENT INFORMATION:
The Company and its subsidiaries operate principally in two industries:
multimedia products and printing services. Multimedia products include the
operations of APBA, Able Soft and Rabbit Ears which are engaged in the
development and distribution of sports game simulation and other software and
family/children entertainment products. Printing services include the operations
of FoxFire, which provides commercial printing, graphic design and manufacturing
services to software and non-computer software companies. The following table
sets forth certain financial information regarding the Company's multimedia
products and printing services:
1995 1996
---- ----
Net sales
Multimedia Products........................... 3,602,025 2,618,299
Printing Services............................. 1,408,131 1,468,738
Consolidated.................................. 5,010,156 4,087,037
Operating Profits (Losses)
Multimedia Products........................... 361,160 (3,775,426)
Printing Services............................. (12,866) (1,192,770)
Consolidated.................................. 348,294 (4,968,196)
Identifiable Assets
Multimedia Products........................... 4,646,061 6,540,810
Printing Services............................. 728,478 809,533
Consolidated.................................. 5,374,539 7,350,343
Depreciation Expense
Multimedia Products........................... 76,012 53,493
Printing Services............................. 17,071 39,445
Consolidated.................................. 93,083 92,938
Capital Expenditures
Multimedia Products........................... 147,129 117,951
Printing Services............................. 73,646 261,872
Consolidated.................................. 220,775 379,823
12. SUBSEQUENT EVENTS
On February 18, 1997, the Company acquired all of the assets and agreed
to assume certain of the liabilities of Rabbit Ears Productions, Inc. ("Rabbit
Ears"). Rabbit Ears is a Philadelphia-based entertainment company known for its
line of children's literature-related products. In consideration for the
purchase of such assets and assumption of such liabilities, the Company issued
268,097 shares of the Company's Common Stock. In addition, the Company issued to
the shareholder of Rabbit Ears(R) options to purchase 125,000 shares of Common
Stock at an exercise price of $7.46 per share (the "First Options") and options
to purchase 125,000 shares of Common Stock at an exercise price of $8.95 per
share (the "Second Options"). The First Options are exercisable through February
16, 1999. The Second Options are exercisable through February 16, 2000. The
First and Second Options are redeemable by the Company, at $.01 per share, at
any time after the last sale price of the Common Stock exceeds $10.44 per share
and $12.53 per share, respectively, for not fewer than 15 consecutive trading
days.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. SUBSEQUENT EVENTS -- (continued)
On March 18, 1997, the Company's Board of Directors approved the
disposition of the Company's commercial printing business to the Company's
former President and Chief Operating Officer. Completion of the transaction is
subject to the negotiation and execution of definitive documentation and other
closing documents and satisfaction of certain closing conditions. The Company
does not anticipate a loss from this disposition.
On March 19, 1997, the Company commenced negotiating the issuance and
sale to an institutional investor of $1,000,000 principal amount of convertible
subordinated secured debentures and warrants to purchase 85,000 shares of Common
Stock for aggregate consideration of $1,000,000. Completion of the transaction,
however, is conditioned on the Company obtaining a new line of credit on terms
acceptable to the investor. Accordingly, there is no assurance that this
transaction will be completed.
On March 24, 1997, the Company announced it had entered into a letter
of intent to acquire KidSoft, a California-based distributor and publisher of
children's multimedia software products. The letter of intent calls for the
Company to issue 1,629,630 shares of Common Stock to the shareholders of
KidSoft. In addition, the Company shall grant warrants to purchase 100,000
shares of Common Stock. In connection with the acquisition, certain shareholders
of KidSoft have agreed, subject to certain conditions, to purchase in a private
placement up to $2,000,000 of Common Stock. Consummation of the KidSoft
acquisition is subject to completion of a satisfactory due diligence review by
each party, negotiation and execution of definitive documentation and other
customary closing documents, approval of the respective boards of directors of
each party and satisfaction of other closing conditions.
On April 6, 1997, the Company received a proposal from an investment
banking firm under which such firm would act as placement agent to offer on a
best efforts basis up to $2,000,000 of convertible preferred stock of the
Company. The Company intends to proceed with such an offering; however, as a
practical matter, completion of the offering is contingent upon the Company
obtaining a new credit facility on terms that the placement agent believes would
be acceptable to investors. The offering would be made on a best efforts basis,
and therefore, even assuming the Company obtains a new credit facility, there
can be no assurance that the offering will be successful.
On April 15, 1997, the Company accepted a commitment letter from a bank
that has agreed to provide a line of credit sufficient to repay all amounts
outstanding under the Company's existing line of credit. Receipt of funds under
the new line of credit, however, is subject to the negotiation and execution of
definitive documentation. See Note 5.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Lancaster,
Commonwealth of Pennsylvania on April 18, 1997.
MICROLEAGUE MULTIMEDIA, INC.
By: /s/ Neil B. Swartz
---------------------------------------------
Neil B. Swartz, Chairman, Chief Executive
Officer and Director
-----------------------
In accordance with the Securities Exchange Act of 1934, this Report has
been duly signed on April 18, 1997 by the following persons in the capacities
indicated.
Name Title
---- -----
/s/ Neil B. Swartz Chairman, Chief Executive Officer and Director
- ---------------------------
Neil B. Swartz
/s/ Ruly R. Carpenter, III Director
- ---------------------------
Ruly R. Carpenter, III
/s/ Donald Gleklen Director
- ---------------------------
Donald Gleklen
/s/ W. Thacher Longstreth Director
- ---------------------------
W. Thacher Longstreth
/s/ Carl Shaifer Director
- ---------------------------
Carl Shaifer
/s/ Wayne Weisman Director
- ---------------------------
Wayne Weisman
/s/ Peter R. Flanagan Vice President and Chief Financial Officer
- ---------------------------
Peter R. Flanagan (Principal Financial and Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit No.
- -----------
3.1 Amended and Restated Bylaws
11.1 Statement re: Computation of Per Share Earnings
21.1 List of Subsidiaries
27.1 Financial Data Schedules
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED BYLAWS
OF
MICROLEAGUE MULTIMEDIA, INC.
(a Pennsylvania Registered Corporation)
ARTICLE I
Offices and Fiscal Year
Section 1.01 Registered Office. The registered office of the
corporation in the Commonwealth of Pennsylvania shall be c/o CT System Lancaster
County and the registered office of the corporation shall be deemed for venue
and official publication purposes to be located in Lancaster, County, until
otherwise established by an amendment of the articles of incorporation (the
"articles") or by the board of directors and a record of such change is filed
with the Pennsylvania Department of State in the manner provided by law.
Section 1.02 Other Offices. The corporation may also have offices at
such other places within or without the Commonwealth of Pennsylvania as the
board of directors may from time to time appoint or the business of the
corporation may require.
Section 1.03 Fiscal Year. The fiscal year of the corporation shall
begin on the first day of January in each year.
ARTICLE II
Notice--Waivers--Meetings Generally
Section 2.01 Manner of Giving Notice.
(a) General Rule. Whenever written notice is required to be
given to any person under the provisions of the Business Corporation Law or by
the articles or these bylaws, it may be given to the person either personally or
by sending a copy thereof by first class or express mail, postage prepaid, or by
telegram (with messenger service specified), telex or TWX (with answerback
received) or courier service, charges prepaid, or by facsimile transmission, to
the address (or to the telex, TWX, facsimile or telephone number) of the person
appearing on the books of the corporation or, in the case of directors, supplied
by the director to the corporation for the purpose of notice. If the notice is
sent by mail, telegraph or courier service, it shall be deemed to have been
given to the person entitled thereto when deposited in the United States, mail
or with a telegraph office or courier service for delivery to that person or, in
the case of telex or TWX, when dispatched or, in the case of facsimile
transmission, when received. A notice of meeting shall specify the place, day
and hour of the meeting and any other information required by any other
provision of the Business Corporation Law, the articles or these bylaws.
(b) Bulk Mail. If the corporation has more than 30
shareholders, notice of any regular or special meeting of the shareholders, or
any other notice required by the Business Corporation
-1-
<PAGE>
Law or by the articles of these bylaws to be given to all shareholders or to all
holders of a class or series of shares, may be given by any class of postpaid
mail if the notice is deposited in the United States mail at least 20 days prior
to the day named for the meeting or any corporate or shareholder action
specified in the notice.
(c) Adjourned Shareholder Meetings. When a meeting of
shareholders is adjourned, it shall not be necessary to give any notice of the
adjourned meeting or of the business to be transacted at an adjourned meeting,
other than by announcement at the meeting at which the adjournment is taken,
unless the board fixes a new record date for the adjourned meeting in which
event notice shall be given in accordance with Section 2.03.
Section 2.02 Notice of Meetings of Board of Directors. Notice of a
regular meeting of the board of directors need not be given, Notice of every
special meeting of the board of directors shall be given to each director by
telephone or in writing at least 24 hours (in the case of notice by telephone,
telex, TWX or facsimile transmissions) or 48 hours (in the case of notice by
telegraph, courier service or express mail) or five days (in the case of notice
by first class mail) before the time at which the meeting is to be held. Every
such notice shall state the time and place of the meeting. Neither the business
to be transacted at, nor the purpose of, any regular or special meeting of the
board need be specified in a notice of the meeting.
Section 2.03 Notice of Meetings of Shareholders.
(a) General Rule. Except as otherwise provided in Section
2.01(b), written notice of every meeting of the shareholders shall be given by,
or at the direction of, the secretary or other authorized person to each
shareholder of record entitled to vote at the meeting at least (1) ten days
prior to the day named for a meeting (and, in case of a meeting called to
consider a merger, consolidation, share exchange or division, to each
shareholder of record not entitled to vote at the meeting) called to consider a
fundamental change under 15 Pa. C.S. Chapter 19 or (2) five days prior to the
day named for the meeting in any other case. If the secretary neglects or
refuses to give notice of a meeting, the person or persons calling the meeting
may do so, in the case of it special meeting of shareholders, the notice shall
specify the general nature of the business to be transacted.
(b) Notice of Action by Shareholders on Bylaws. In the case of
a meeting of shareholders that has as one of its purposes action on the bylaws,
written notice shall be given to each shareholder that the purpose, or one of
the purposes, of the meeting is to consider the adoption, amendment or repeal of
the bylaws. There shall be included in, or enclosed with, the notice a copy of
the proposed amendment or a summary of the changes to be effected thereby.
(c) Notice of Action by Shareholders on Fundamental Change. In
the case of a meeting of the shareholders that has as one of its purposes action
with respect to any fundamental change under 15 Pa. C.S. Chapter 19, each
shareholder shall be given, together with written notice of the meeting, a copy
or summary of the amendment or plan to be considered at the meeting in
compliance with the provisions of Chapter 19.
(d) Notice of Action by Shareholders Giving Rise to Dissenters
Rights. In the case of a meeting of the shareholders that has as one of its
purposes action that would give rise to dissenters rights under the provisions
of 15 Pa. C.S. Subchapter 15D, each shareholder shall be given, together with
written notice of the meeting:
-2-
<PAGE>
(1) statement that the shareholders have a right to
dissent and obtain payment of the fair value of their shares
by complying with the provisions of Subchapter 15D (relating
to dissenters rights); and
(2) copy of Subchapter 15D.
Section 2.04 Waiver of Notice.
(a) Written Waiver. Whenever any written notice is required to
be given under the provisions of the Business Corporation Law, the articles or
these bylaws, a waiver thereof in writing, signed by the person or persons
entitled to the notice, whether before or after the time stated therein, shall,
be deemed equivalent to the giving of the notice. Neither the business to be
transacted at, nor the purpose of, a meeting need be specified in the waiver of
notice of the meeting.
(b) Waiver by Attendance. Attendance of a person at any
meeting shall, constitute a waiver of notice of the meeting except where a
person attends a meeting for the express purpose of objecting, at the beginning
of the meeting, to the transaction of any business because the meeting was not
lawfully called or convened.
Section 2.05 Modification of Proposal Contained in Notice. Whenever the
language of a proposed resolution is included in a written notice of a meeting
required to be given under the provisions of the Business Corporation Law or the
articles or these bylaws, the meeting considering the resolution may without
further notice adopt it with such clarifying or other amendments as do not
enlarge its original purpose.
Section 2.06 Exception to Requirement of Notice.
(a) General Rule. Whenever any notice or communication is
required to be given to any person under the provisions of the Business
Corporation Law or by the articles or these bylaws or by the terms of any
agreement or other instrument or as a condition precedent to taking any
corporate action and communication with that person is then unlawful, the giving
of the notice or communication to that person shall not be required.
(b) Shareholders Without Forwarding Addresses. Notice or other
communications need not be sent to any shareholder with whom the corporation has
been unable to communicate for more than 24 consecutive months because
communications to the shareholder are returned unclaimed or the shareholder has
otherwise failed to provide the corporation with a current address. Whenever the
shareholder provides the corporation with a current address, the corporation
shall commence sending notices and other communications to the shareholder in
the same manner as to other shareholders.
Section 2.07 Use of Conference Telephone and Similar Equipment. Any
director may participate in any meeting of the board of directors, and the board
of directors may provide by resolution with respect to a specific meeting or
with respect to a cuss of meetings that one or more persons may participate in a
meeting of the shareholders of the corporation, by means of conference telephone
or similar communications equipment by means of which all persons participating
in the meeting cm bear each other. Participation in a meeting pursuant to this
section shall constitute presence in person at the meeting.
-3-
<PAGE>
ARTICLE III
Shareholders
Section 3.01 Place of Meeting. All meetings of the shareholders of the
corporation shall be held at the registered office of the corporation unless
another place is designated by the board of directors in the notice of a
meeting.
Section 3.02 Annual Meeting. The board of directors may fix and
designate the date and time of the annual meeting of the shareholders, but if no
such date and time is fixed and designated by the board, the meeting for any
calendar year shall be held on the Second Monday of April in such year, if not a
legal holiday under the laws of Pennsylvania, and, if a legal holiday, than on
the next succeeding business day, not a Saturday, at 10:00 o'clock A.M. and at
said meeting the shareholders then entitled to vote shall elect directors and
shall transact such other business as may properly be brought before the
meeting. If the annual meeting shall not have been called and held within six
months after the designated time, any shareholder may call the meeting at any
time thereafter.
Section 3.03 Special Meetings. Special meetings of the shareholders may
be called at any time by resolution of the board of directors, which may fix the
date, time and place of the meeting. If the board does not fix the date, time or
place of the meeting, it shall be the duty of the secretary to do so. A date
fixed by the secretary shall not be more than 60 days after the date of the
adoption of the resolution of the board calling the special meeting.
Section 3.04 Quorum and Adjournment.
(a) General Rule. A meeting of shareholders of the corporation
duly called shall not be organized for the transaction of business unless a
quorum is present. The presence of shareholders entitled to cast at least a
majority of the votes that all shareholders are entitled to cast on a particular
matter to be acted upon at the meeting shall constitute a quorum for the
purposes of consideration and action on the matter. Shares of the corporation
owned, directly or indirectly, by it and controlled, directly or indirectly, by
the board of directors of this corporation, as such, shall not be counted in
determining the total number of outstanding shares for quorum purposes at any
given time.
(b) Withdrawal of a Quorum. The shareholders present at a duly
organized meeting can continue to do business until adjournment notwithstanding
the withdrawal of enough shareholders to leave less than a quorum.
(c) Adjournments Generally. Any regular or special meeting of
the shareholders, including one at which directors are to be elected and one
which cannot be organized because a quorum has not attended, may be adjourned
for such period and to such place as the shareholders present and entitled to
vote shall direct.
(d) Electing Directors at Adjourned Meeting. Those
shareholders entitled to vote who attend a meeting called for the election of
directors that has been previously adjourned for lack of a quorum although less
than a quorum as fixed in this section, shall nevertheless constitute a quorum
for the purpose of electing directors.
(e) Other Action in Absence of Quorum. Those shareholders
entitled to vote who attend a meeting of shareholders that has been previously
adjourned for one or more periods aggregating
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at least 15 days because of an absence of a quorum, although less than a quorum
as fixed in this section, shall nevertheless constitute a quorum for the purpose
of acting upon any matter set forth in the notice of the meeting if the notice
states that those shareholders who attend the adjourned meeting shall
nevertheless constitute a quorum for the purpose of acting upon the matter.
Section 3.05 Action by Shareholders. Except as otherwise provided in
the Business Corporation Law or the articles or these bylaws, whenever any
corporate action is to be taken by vote of the shareholders of the corporation,
it shall be authorized upon receiving the affirmative vote of a majority of the
votes cast by all shareholders entitled to vote thereon and, if any shareholders
are entitled to vote thereon as a class, upon receiving the affirmative vote of
a majority of the votes cast by the shareholders entitled to vote as a class.
Section 3.06 Organization. At every meeting of the shareholders, the
chairman of the board, if there be one, or, in the case of vacancy in office or
absence of the chairman of the board, one of the following persons present in
the order stated: the vice chairman of the board, if them be one, the president,
the vice presidents in their order of rank and seniority, or a person chosen by
vote of the shareholders present, shall act as chairman of the meeting. The
secretary or, in the absence of the secretary, an assistant secretary, or, in
the absence of both the secretary and assistant secretaries, a person appointed
by the chairman of the meeting, shall act as secretary of the meeting.
Section 3.07 Voting Rights of Shareholders. Unless otherwise provided
in the articles, every shareholder of the corporation shall be entitled to one
vote for every share standing in the name of the shareholder on the books of the
corporation.
Section 3.08 Voting and Other Action by Proxy.
(a) General Rule.
(1) every shareholder entitled to vote at a meeting
of shareholders may authorize another person to act for the
shareholder by proxy.
(2) The presence of, or vote or other action at a
meeting of shareholders by a proxy of a shareholder shall
constitute the presence of, or vote or action by the
shareholder.
(3) Where two or more proxies of a shareholder are
present, the corporation shall, unless otherwise expressly
provided in the proxy, accept as the vote of all shares
represented thereby the vote cast by a majority of them and,
if a majority of the proxies cannot agree whether the shares
represented shall be voted or upon the manner of voting the
shares, the voting of the shares shall be divided equally
among those persons.
(b) Execution and Filing. Every proxy shall be executed in
writing by the shareholder or by the duly authorized attorney-in-fact of the
shareholder and filed with the secretary of the corporation. A telegram, telex,
cablegram, datagram or similar transmission
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from a shareholder or attorney-in-fact, or a photographic, facsimile or similar
reproduction of a writing executed by a shareholder or attorney-in-fact:
(1) may be treated as properly executed for purposes
of this subsection; and
(2) shall be so treated if it sets forth a
confidential and unique identification number or other mark
furnished by the corporation to the shareholder for the
purposes of a particular meeting or transaction.
(c) Revocation. A proxy, unless coupled with an interest,
shall be revocable at will, notwithstanding any other agreement or any provision
in the proxy to the contrary, but the revocation of a proxy shall not be
effective until written notice thereof has been given to the secretary of the
corporation. An unrevoked proxy shall not be valid after three years from the
date of its execution unless a longer time is expressly provided therein. A
proxy shall not be revoked by the death or incapacity of the maker unless,
before the vote is counted or the authority is exercised, written notice of the
death or incapacity is given to the secretary of the corporation.
(d) Expenses. The corporation shall pay the reasonable
expenses of solicitation of votes, proxies or consents of shareholders by or on
behalf of the board of directors or its nominees for election to the board,
including solicitation by professional proxy solicitors and otherwise.
Section 3.09 Voting by Fiduciaries and Pledgees. Shares of the
corporation standing in the name of a trustee or other fiduciary and shares held
by an assignee for the benefit of creditors or by a receiver may be voted by the
trustee, fiduciary, assignee or receiver. A shareholder whose shares are pledged
shall be entitled to vote the shares until the shares have been transferred into
the name of the pledgee, or a nominee of the pledgee, but nothing in this
section shall affect the validity of a proxy given to a pledgee or nominee.
Section 3.10 Voting by Joint Holders of Shares.
(a) General Rule. Where shares of the corporation are held
jointly or as tenants in common by two or more persons, as fiduciaries or
otherwise:
(1) if only one or more of such persons is present in
person or by proxy, all of the shares standing in the names of
such persons shall be deemed to be represented for the purpose
of determining a quorum and the corporation shall accept as
the vote of all the shares the vote cast by a joint owner or a
majority of them; and
(2) if the persons are equally divided upon whether
the shares held by them shall be voted or upon the manner of
voting the shares, the voting of the shares shall be divided
equally among the persons without prejudice to the rights of
the joint owners or the beneficial owners thereof among
themselves.
(b) Exception. If there has been filed with the secretary of
the corporation a copy, certified by an attorney at law to be correct, of the
relevant portions of the agreement under which the shares are held or the
instrument by which the trust or estate was created or the order of court
appointing them or of an order of court directing the voting of the shares, the
persons specified
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as having such voting power in the document latest in date of operative effect
so filed, and only those persons, shall be entitled to vote the shares but only
in accordance therewith.
Section 3.11 Voting by Corporations.
(a) Voting by Corporate Shareholders. Any corporation that is
a shareholder of this corporation may vote at meetings of shareholders of this
corporation by any of its officers or agents, or by proxy appointed by any
officer or agent, unless some other person, by resolution of the board of
directors of the other corporation or a provision of its articles or bylaws, a
copy of which resolution or provision certified to be correct by one of its
officers has been filed with the secretary of this corporation, is appointed its
general or special proxy in which case that person shall be entitled to vote the
shares.
(b) Controlled Shares. Shares of this corporation owned,
directly or indirectly, by it and controlled, directly or indirectly, by the
board of directors of this corporation, as such, shall not be voted at any
meeting and shall not be counted in determining the total number of outstanding
shares for voting purposes at any given time.
Section 3.12 Determination of Shareholders of Record.
(a) Fixing Record Date. The board of directors may fix a time
prior to the date of any meeting of shareholders as a record date for the
determination of the shareholders entitled to notice of, or to vote at, the
meeting, which time, except in the case of an adjourned meeting, shall be not
more than 90 days prior to the date of the meeting of shareholders. Only
shareholders of record on the date fixed shall be so entitled notwithstanding
any transfer of shares on the books of the corporation after any record date
fixed as provided in this subsection. The board of directors may similarly fix a
record date for the determination of shareholders of record for any other
purpose. When a determination of shareholders of record has been made as
provided in this section for purposes of a meeting, the determination shall
apply to any adjournment thereof unless the board fixes a new record date for
the adjourned meeting.
(b) Determination When a Record Date is Not Fixed. If a record
date is not fixed:
(1) The record date for determining
shareholders entitled to notice of or to vote at a
meeting of shareholders shall be at the close of
business on the day next preceding the day on watch
notice is given.
(2) The record date for determining
shareholders for any other purpose shall be at the
close of business on the day on which the board of
directors adopts the resolution relating thereto.
(c) Certification by Nominee. The board of directors may adopt
a procedure whereby a shareholder of the corporation may certify in writing to
the corporation that all or a portion of the shares registered in the name of
the shareholder are held for the account of a specified person or persons. Upon
receipt by the corporation of a certification complying with the procedure, the
persons specified in the certification shall be deemed, for the purposes am
forth in the
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certification, to be the holders of record of the number of shares specified in
place of the shareholder making the certification.
Section 3.13 Voting Lists.
(a) General Rule. The officer or agent having charge of the
transfer books for shares of the corporation shall make a complete list of the
shareholders entitled to vote at any meeting of shareholders, arranged in
alphabetical order, with the address of and the number of shares held by each.
The list shall be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any shareholder during the whole time
of the meeting for the purposes thereof except that, if the corporation has
5,000 or more shareholders, in lieu of the making of the list the corporation
may make the information therein available at the meeting by any other means.
(b) Effect of List. Failure to comply with the requirements of
this section shall not affect the validity of any action taken at a meeting,
prior to a demand at the meeting by any shareholder entitled to vote thereat to
examine the list. The original share register or transfer book, or a duplicate
thereof kept in the Commonwealth of Pennsylvania, shall be prima facie evidence
as to who are the shareholders entitled to examine the list or share register or
transfer book or to vote at any meeting of shareholders.
Section 3.14 Judges of Election.
(a) Appointment. In advance of any meeting of shareholders of
the corporation, the board of directors may appoint judges of election, who need
not be shareholders, to act at the meeting or any adjournment thereof. If judges
of election are not so appointed, the presiding officer of the meeting may, and
on the request of any shareholder shall, appoint judges of election at the
meeting. The number of judges shall be one or three. A person who is a candidate
for an office to be filled at the meeting shall not act as a judge.
(b) Vacancies. In case any person appointed as a judge fails
to appear or fails or refuses to act, the vacancy may be filled by appointment
made by the board of directors in advance of the convening of the meeting or at
the meeting by the presiding officer thereof.
(c) Duties. The judges of election shall determine the number
of shares outstanding and the voting power of each, the shares represented at
the meeting, the existence of a quorum, and the authenticity, validity and
effect of proxies, receive votes or ballots, hear and determine all challenges
and questions in any way arising in connection with nominations by shareholders
or the right to vote, count and tabulate all votes, determine the result and do
such acts as may be proper to conduct the election or vote with fairness to all
shareholders. The judges of election shall perform their duties impartially, in
good faith, to the best of their ability and as expeditiously as is practical.
If there are three judges of election, the decision, act or certificate of a
majority shall be effective in all respects as the decision, act or certificate
of all.
(d) Report. On request of the presiding officer of the meeting
or of any shareholder, the judges shall make a report in writing of any
challenge or question or matter determined by them, and execute a certificate of
any fact found by them. Any report or certificate made by them shall be prima
facie evidence of the facts stated therein.
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Section 3.15 Minors as Security Holders. The corporation may treat a
minor who holds shares or obligations of the corporation as having capacity to
receive and to empower others to receive dividends, interest, principal and
other payments or distributions, to vote or express consent or dissent and to
make elections and exercise rights, relating to such shares or obligations
unless, in the case of payments or distributions on shares, the corporate
officer responsible for maintaining the list of shareholders or the transfer
agent of the corporation or, in the case of payments or distributions on
obligations, the treasurer or paying officer or agent has received written
notice that the holder is a minor.
Section 3.16 Notifications of Nominations and Proposed Business.
Subject to the rights of holders of any class or series of preferred shares, (a)
nominations for the election of directors, and (b) business to be brought before
any shareholder meeting may be made or proposed by or at the direction of the
Chairman, the President or by the Board of Directors or a proxy committee
appointed by the Board of Directors, or by any shareholder entitled to vote in
the election of directors generally, However, any such shareholder may nominate
one or more persons for election as directors at a meeting or propose business
to be brought before a meeting, only if such shareholder has given timely notice
in proper written form of intent to make such nomination or nominations or to
propose such business. To be timely, a shareholder's notice must be received by
the corporation not less than 70 days nor more than 90 days prior to the first
anniversary of the previous year's annual meeting (or, in the case of a special
meeting, not earlier than the 90th day before such meeting and not later than
the later of (i) the 70th day prior to such meeting and (ii) the 10th day
following the day on which notice of the meeting was mailed or public
announcement of the date of such meeting was made, whichever first occurs). To
be in proper written form, a shareholder's notice to the corporation shall set
forth:
(i) the name and address of the shareholder who intends to
make the nominations or propose the business and, as the case may
be, of the person or persons to be nominated or the business to
be proposed;
(ii) a representation that the shareholder is a holder of
record of shares of the corporation entitled to vote at such
meeting and, if applicable, intends to appear in person or by
proxy at the meeting to nominate the person or persons specified
in the notice or to make the proposal to the meeting;
(iii) a description of all arrangements or understandings
between the shareholder and each nominee and any other person or
persons (naming such person or person) pursuant to which the
nomination or nominations are to be made by the shareholder, or
the business is to be proposed;
(iv) such other information regarding each nominee or each
matter of business to be proposed by such shareholder as would be
required to be included in a proxy statement filed pursuant to
the proxy rules of the Securities and Exchange Commission had the
nominee been nominated, or intended to be nominated, or the
matter
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been proposed, or intended to be proposed by the Board of
Directors; and
(v) if applicable, the consent of each nominee to serve as
director of the Corporation if so elected.
The chairman of the meeting may refuse to acknowledge the
nomination of any person or the proposal of any business not made in compliance
with the foregoing procedures.
ARTICLE IV
Board of Directors
Section 4.01 Powers; Personal Liability.
(a) General Rule. Unless otherwise provided by statute, all
powers vested by law in the corporation shall be exercised by or under the
authority of, and the business and affairs of the corporation shall be managed
under the direction of, the board of directors.
(b) Personal Liability of Directors.
(1) A director shall not be personally liable, as
such, for monetary damages (including, without limitation, any
judgment, amount paid in settlement, penalty, punitive damages
or expense of any nature (including, without limitation,
attorneys' fees and disbursements)) for any action taken, or
any failure to take any action, unless:
(i) the director has breached or failed to
perform the duties of his or her office under
Subchapter 17B of the Pennsylvania Business
Corporation Law or any successor provision; and
(ii) the breach or failure to perform
constitutes self-dealing, willful misconduct or
recklessness.
(2) The provisions of paragraph (1) shall. not apply
to the responsibility or liability of a director pursuant to
any criminal statute, or the liability of a director for the
payment of taxes pursuant to local, State or Federal law.
(The provisions of this subsection (b) were first adopted by the shareholders of
the corporation on March 19, 1996.)
(c) Notation of Dissent. A director of the corporation who is
present at a meeting of the board of directors, or of a committee of the board,
at which action on any corporate matter is taken on which the director is
generally competent to act, shall be presumed to have assented to the action
taken unless his or her dissent is entered in the minutes of the meeting or
unless the director files his or her written dissent to the action with the
secretary of the meeting before the adjournment thereof or transmits the dissent
in writing to the secretary of the corporation immediately after the adjournment
of the meeting. The right to dissent shall not apply to a director
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who voted in favor of the action. Nothing in this section shall bar a director
from asserting that minutes of the meeting incorrectly omitted his or her
dissent if, promptly upon receipt of a copy of such minutes, the director
notifies the secretary, in writing, of the asserted omission or inaccuracy.
Section 4.02 Qualifications and Selection of Directors.
(a) Qualifications. Each director of the corporation shall be
a natural person of full age who need not be a resident of the Commonwealth of
Pennsylvania or a shareholder of the corporation.
(b) Election of Directors. In elections for directors, voting
need not be by ballot, unless required by vote of the shareholders before the
voting for the election of directors begins. The candidates receiving the
highest number of votes from each class or group of classes, if any, entitled to
elect directors separately up to the number of directors to be elected by the
class or group of classes shall be elected. If at any meeting of shareholders,
directors of more than one class are to be elected, each class of directors
shall be elected in a separate election.
Section 4.03 Number and Term of Office.
(a) Number. The board of directors shall consist of such
number of directors, not less than 3 nor more than 10, as may be determined from
time to time by resolution of the board of directors.
(b) Term of Office. Each director shall hold office until the
expiration of the term for which he or she was selected and until a successor
has been selected and qualified or until his or her earlier death, resignation
or removal. A decrease in the number of directors shall not have the effect of
shortening the term of any incumbent director.
(c) Resignation. Any director may resign at any time upon
written notice to the corporation. The resignation shall be effective upon
receipt thereof by the corporation or at such subsequent time as shall be
specified in the notice of resignation.
(d) Classified Board of Directors. The directors shall be
divided into three classes, Class I, Class II and Class III with respect to
their terms of office. All classes shall be as nearly equal in number as
reasonably possible. Subject to such limitations, when the number of directors
is changed, any newly-mated directorship or any decrease in directorships shall.
be apportioned among the classes by action of the Board of Directors. The terms
of office of the initial classes of directors elected on or after the date
Bylaws containing this Section 4.03(d) are approved by the shareholders of the
corporation shall be as follows:
(1) Class I shall expire at the annual meeting of
shareholders to be held in 1997;
(2) Class II shall expire at the annual meeting of
shareholders to be held in 1998; and
(3) Class III shall expire at the annual meeting of
shareholders to be held in 1999;
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At each annual meeting of shareholders, commencing with the annual meeting to be
held in 1997, the successors of the class of directors whose term expires at
such meeting shall be elected to hold office for a term expiring at the annual
meeting of shareholders held in the third year of their elections.
Section 4.04 Vacancies.
(a) General Rule. Vacancies in the board of directors,
including vacancies resulting from an increase in the number of directors, may
be filled by a majority vote of the remaining members of the board though less
than a quorum, or by a sole remaining director, and each person so selected
shall be a director to serve until the next selection of the class for which
such director has been chosen, and until a successor has been selected and
qualified or until his or her earlier death, resignation or removal.
(b) Action by Resigned Directors. When one or more directors
resign from the board effective at a future date, the directors then in office,
including those who have so resigned, shall have power by the applicable vote to
fill the vacancies, the. vote thereon to take effect when the resignations
become effective.
Section 4.05 Removal of Directors.
(a) Removal by the Shareholders. The entire board of
directors, or any class of the board, or any individual director may be removed
from office by vote of the shareholders entitled to vote thereon only for cause.
In case the board or a class of the board or any one or more directors are so
removed, new directors may be elected at the same meeting. The repeal of a
provision of the articles or these bylaws prohibiting, or the addition of a
provision to the articles or bylaws permits the removal by the shareholders of
the board, a class of the board or a director without assigning any cause shall
not apply to any incumbent director during the balance of the term for which he
was selected.
(b) Removal by the Board. The board of directors may declare
vacant the office of a director who has been judicially declared of unsound mind
or who has been convicted of an offense punishable by imprisonment for a term of
more than one year or if, within 60 days after notice of his or her selection,
the director does not accept the office either in writing or by attending a
meeting of the board of directors.
Section 4.06 Place of Meetings. Meetings of the board of directors may
be hold at such place within or without the Commonwealth of Pennsylvania as the
board of directors may from time to time appoint or as may be designated in the
notice of the meeting.
Section 4.07 Organization of Meetings. At every meeting of the board of
directors, the chairman of the board, if there be one, or, in the case of a
vacancy in the office or absence of the chairman of the board, one of the
following officers present in the order stated; the vice chairman of the board,
if there be one, the president, the vice presidents in their order of rank and
seniority, or a person chosen by a majority of the directors present, shall act
as chairman of the meeting. The secretary or, in the absence of the secretary,
an assistant secretary, or, in the absence of the secretary and the assistant
secretaries, any person appointed by the chairman of the meeting, shall act as
secretary of the meeting.
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Section 4.08 Regular Meetings. Regular meetings of the board of
directors shall be held at such time and place as shall be designated from time
to time by resolution of the board of directors.
Section 4.09 Special Meetings. Special meetings of the board of
directors shall be held whenever called by the chairman or by two or more of the
directors.
Section 4.10 Quorum of and Action by Directors.
(a) General Rule. Majority of the directors, in office of the
corporation shall be necessary to constitute a quorum for the transaction of
business and the acts of a majority of the directors present and voting at a
meeting at which a quorum is present shall be the acts of the board of
directors.
(b) Action by Written Consent. Any action required or
permitted to be taken at a meeting of the directors may be taken without a
meeting if, prior or subsequent to the action, a consent or consents thereto by
all of the directors in office is filed with the secretary of the corporation.
Section 4.11 Executive and Other Committees.
(a) Establishment and Powers. The board of directors may, by
resolution adopted by a majority of the directors in office, establish one or
more committees to consist of one or more directors of the corporation. Any
committee, to the extent provided in the resolution of the board of directors,
shall have and may exercise all of the powers and authority of the board of
directors except that a committee shall not have any power or authority as to
the following:
(1) The submission to shareholders of any action
requiring approval of shareholders under the Business
Corporation Law.
(2) The creation or filling of vacancies in the board
of directors.
(3) The adoption, amendment or repeal of these
bylaws.
(4) The amendment or repeal of any resolution of the
board that by its terms is amendable or repealable only by the
board.
(5) Action on matters committed by a resolution of
the board of directors to another committee of the board.
(b) Alternate Committee Members. The board may designate one
or more directors as alternate members of any committee who may replace any
absent or disqualified member at any meeting of the committee or for the
purposes of any written action by the committee. In the absence or
disqualification of a member and alternate member or members of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not constituting a quorum, may unanimously appoint another
director to act at the meeting in the place of the absent or disqualified
members.
(c) Term. Each committee of the board shall serve at the
pleasure of the board.
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(d) Committee Procedures. The term "board of directors" or
"board" when used in any provision of these bylaws relating to the organization
or procedures of or the manner of taking action by the board of directors, shall
be construed to include and refer to any executive or other committee of the
board.
Section 4.12 Compensation. The board of directors shall have the
authority to fix the compensation of directors for their services as directors
and a director may be a salaried officer of the corporation.
ARTICLE V
Officers
Section 5.01 Officers Generally.
(a) Number, Qualifications and Designation. The officers of
the corporation shall be a president, one or more vice presidents, a secretary,
a treasurer, and such other officers as may be elected in accordance with the
provisions of Section 5.03. Officers may but need not be directors or
shareholders of the corporation. The president and secretary shall be natural
persons of full age. The treasurer may be a corporation, but if a natural person
shall be of full age. The board of directors may elect from among the members of
the board a chairman of the board and a vice chairman of the board who shall be
officers of the corporation. Any number of offices may be held by the same
person.
(b) Bonding. The corporation may secure the fidelity of any or
all of its officers by bond or otherwise.
(c) Standard of Care. In lieu of the standards of conduct
otherwise provided by law, officers of the corporation shall be subject to the
same standards of conduct, including standards of care and loyalty and rights of
justifiable reliance, as shall at the time be applicable to directors of the
corporation. An officer of the corporation shall not be personally liable, as
such to the corporation or its shareholders for monetary damages (including,
without limitation, any judgments, amount paid in settlement, penalty, punitive
damages or expense of any nature (including without limitation, attorneys fees
and disbursements)) for any action taken, or any failure to take any action,
unless the officer has breached or failed to perform the duties of his or her
office under the articles of incorporation, these bylaws, or the applicable
provisions of law and the breach or failure to perform constitutes self-dealing,
willful misconduct or recklessness. The provisions of this subsection shall not
apply to the responsibility or liability of an officer pursuant to any criminal
statute or for the payment of taxes pursuant to local, state or federal law.
Section 5.02 Election, Term of Office and Resignations.
(a) Election and Term of Office. The officers of the
corporation, except those elected by delegated authority pursuant to Section
5.03, shall be elected annually by the board of directors, and each such officer
shall hold office for a term of one year and until a successor has been selected
and qualified or until his or her earlier death, resignation or removal.
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(b) Resignations. Any officer may resign at any time upon
written notice to the corporation. The resignation shall be effective upon
receipt thereof by the corporation or at such subsequent time as may be
specified in the notice of resignation.
Section 5.03 Subordinate Officers, Committees and Agents. The board of
directors may from time to time elect such other officers and appoint such
committees, employees or other agents as the business of the corporation may
require, including one or more assistant secretaries, and one or more assistant
treasurers, each of whom shall hold office for such period, have such authority,
and perform such duties as are provided in these bylaws, or as the board of
directors may from time to time determine. The board of directors may delegate
to any officer or committee the power to elect subordinate officers and to
retain or appoint employees or other agents, or committees thereof, and to
prescribe the authority and duties of such subordinate officers, committees,
employees or other agents.
Section 5.04 Removal of Officers and Agents. Any officer or agent of
the corporation may be removed by the board of directors with or without cause.
The removal shall be without prejudice to the contract rights, if any, of any
person so removed. Election or appointment of an officer or agent shall not of
itself create contract rights.
Section 5.05 Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification, or any other cause, may be filled by the
board of directors or by the officer or committee to which the power to fill
such office has been delegated pursuant to Section 5.03, as the case may be, and
if the office is one for which these bylaws prescribe a term, shall be filled
for the unexpired portion of the term.
Section 5.06 Authority.
(a) General Rule. All officers of the corporation, as between
themselves and the corporation, shall have such authority and perform such
duties in the management of the corporation as may be provided by or pursuant to
resolutions or orders of the board of directors or, in the absence of
controlling provisions in the resolutions or orders of the board of directors,
as may be determined by or pursuant to these bylaws.
(b) Chief Executive Officer. The chairman of the board or the
president, as designated from time to time by the board of directors, shall be
the chief executive officer of the corporation.
Section 5.07 The Chairman and Vice Chairman of the Board. The chairman
of the board or in the absence of the chairman, the vice chairman of the board,
shall preside at all meetings of the shareholders and of the board of directors,
and shall perform such other duties as may from time to time be requested by the
board of directors.
Section 5.08 The President. The president shall have general
supervision over the business and operations of the corporation, subject
however, to the control of the board of directors and, if the chairman of the
board is the chief executive officer of the corporation, the chairman of the
board. The president shall sign, execute, and acknowledge, in the name of the
corporation, deeds, mortgages, bonds, contracts or other instruments, authorized
by the board of directors, except in cases where the signing and execution
thereof shall be expressly delegated by the board of directors,
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or by these bylaws, to some other officer or agent of the corporation; and, in
general, shall perform all duties incident to the office of president and such
other duties as from time to time may be assigned by the board of directors and,
if the chairman of the board is the chief executive officer of the corporation,
the chairman of the board.
Section 5.09 The Vice Presidents. The vice presidents shall perform the
duties of the president in the absence of the president and such other duties as
may from time to time be assigned to them by the board of directors or the
president.
Section 5.10 The Secretary. The secretary or assistant secretary shall
attend all meetings of the shareholders and of the board of directors and all
committees thereof and shall record all the votes of the shareholders and of the
directors and the minutes of the meetings of the shareholders and of the board
of directors and of committees of the board in a book or books to be kept for
that purpose; shall see that notices are given and records and reports property
kept and filed by the corporation as required by law; shall be the custodian of
the seal of the corporation and see that it is affixed to all documents to be
executed on behalf of the corporation under its seal; and, in general, shall
perform all duties incident to the office of secretary, and such other duties as
may from time to time be assigned by the board of directors or the president.
Section 5.11 The Treasurer. The treasurer or an assistant treasurer
shall have or provide for the custody of the funds or other property of the
corporation; shall collect and receive or provide for the collection and receipt
of moneys earned by or in any manner due to or received by the corporation shall
deposit all funds in his or her custody as treasurer in such banks or other
places of deposit as the board of directors may from time to time designate;
shall, whenever so required by the board of directors, render an account showing
all transactions as treasurer, and the financial condition of the corporation;
and, in general, shall discharge such other duties as may from time to time be
assigned by the board of directors or the president.
Section 5.12 Salaries. The salaries of the officers elected by the
board of directors shall be fixed from time to time by the board of directors or
by such officer as may be designated by resolution of the board. The salaries or
other compensation of any other officers, employees and other agents shall be
fixed from time to time by the officer or committee to which the power to elect
such officers or to retain or appoint such employees or other agents has been
delegated pursuant to Section 5.03. No officer shall be prevented from receiving
such salary or other compensation by reason of the fact that the officer is also
a director of the corporation.
ARTICLE VI
Certificates of Stock, Transfer, Etc.
Section 6.01 Share Certificates.
(a) Form of Certificates. Certificates for shares of the
corporation shall be in such form as approved by the board of directors or by
officers of the corporation designated by the Board of Directors, and shall
state that the corporation is incorporated under the laws of the Commonwealth of
Pennsylvania, the name of the person to whom issued, and the number and class of
shares and the designation of the series (if any) that the certificate
represents. If the corporation is authorized to issue shares of more than one
class or series, certificates for shares of the corporation
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<PAGE>
shall set forth upon the face or back of the certificate (or shall state an the
face or back of the certificate that the corporation will furnish to any
shareholder upon request and without charge), a full or summary statement of the
designations, voting rights, preferences, limitations and special rights of the
shares of each class or series authorized to be issued so far as they have been
fixed and determined and the authority of the board of directors to fix and
determine the designations, voting rights, preferences, limitations and special
rights of the classes and series of shares of the corporation.
(b) Share Register. The share register or transfer books and
blank share certificates shall be kept by the secretary or by any transfer agent
or registrar designated by the board of directors for that purpose.
Section 6.02 Issuance. The share certificates of the corporation shall
be numbered and registered in the share register or transfer books of the
corporation as they are issued. They shall be executed in such manner as the
board of directors shall determine. In case any officer, transfer agent or
registrar who has signed or authenticated, or whose facsimile signature or
authentication has been placed upon, any share certificate shall have ceased to
be such officer, transfer agent or registrar because of death, resignation or
otherwise, before the certificate is issued, the certificate may be issued with
the same effect as if the officer, transfer agent or registrar had not ceased to
be such at the date of its issue. The provisions of this Section 6.02 shall be
subject to any inconsistent or contrary agreement in effect at the time between
the corporation and any transfer agent or registrar.
Section 6.03 Transfer. Transfers of shares shall be made on the share
register or transfer books of the corporation upon surrender of the certificate
therefor, endorsed by the person named in the certificate or by an attorney
lawfully constituted in writing. No transfer shall be made inconsistent with the
provisions of the Uniform Commercial Code, 13 Pa. C.S. Sections 8101 et seq.,
and its amendments and supplements.
Section 6.04 Record Holder of Shares. The corporation shall be entitled
to treat the person in whose name any share or shares of the corporation stand
on the books of the corporation as the absolute owner thereof and shall not be
bound to recognize any equitable or other claim to, or interest in, such share
or shares on the part of any other person.
Section 6.05 Lost, Destroyed or Mutilated Certificates. The holder of
any shares of the corporation shall immediately notify the corporation of any
loss, destruction or mutilation of the certificate therefor, and the board of
directors may, in its discretion, cause a new certificate or certificates to be
issued to such holder, in case of mutilation of the certificate, upon the
surrender of the mutilated certificate or, in case of loss or destruction of the
certificate, upon satisfactory proof of such loss or destruction and, if the
board of directors shall, so determine, the deposit of a bond in such form and
in such sum, and with such surety or sureties, as it may direct.
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ARTICLE VII
Indemnification of Directors, Officers and
Other Authorized Representatives
(The provisions of this Article VII were first adopted by
the shareholders of the corporation on March 19, 1996.)
Section 7.01 Scope of Indemnification.
(a) General Rule. The corporation shall indemnify an
indemnified representative against any liability incurred in connection with any
proceeding in which the indemnified representative may be involved as a party or
otherwise by reason of the fact that such person is or was serving in an
indemnified capacity, including, without limitation, liabilities resulting from
any actual or alleged breach or neglect of duty, error, misstatement or
misleading statement, negligence, gross negligence or act giving rise to strict
or products liability, except:
(1) where such indemnification is expressly
prohibited by applicable law;
(2) where the conduct of the indemnified
representative has been finally determined pursuant to Section
7.06 or otherwise:
(i) to constitute willful misconduct or
recklessness within the meaning of 15 Pa. C.S.
ss.1746(b) or any superseding provision of law
sufficient in the circumstances to bar
indemnification against liabilities arising from the
conduct; or
(ii) to be based upon or attributable to the
receipt by the indemnified representative from the
corporation of a personal benefit to which the
indemnified representative is not legally entitled;
or
(3) to the extent such indemnification has been
finally determined in a final adjudication pursuant to Section
7.06 to be otherwise unlawful.
(b) Partial Payment. If an indemnified representative is
entitled to indemnification in respect of a portion, but not all, of any
liabilities to which such person may be subject, the corporation shall indemnify
such indemnified representative to the maximum extent for such portion of the
liabilities.
(c) Presumption. The termination of a proceeding by judgment,
order, settlement or conviction or upon a plea of nolo contenders or its
equivalent shall not of itself create a presumption that the indemnified
representative is not entitled to indemnification.
(d) Definitions. For purposes of this Article:
(1) "indemnified capacity" means any and all past,
present and fixture service by an indemnified representative
in one or more capacities as a director, officer, employee or
agent of the corporation, or, at the request of the
corporation, as a directors officer, employee, agent,
fiduciary or trustee of another corporation, partnership,
joint venture, trust, employee benefit plan or other entity or
enterprise;
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<PAGE>
(2) "indemnified representative" means any and all
directors and officers of the corporation and any other person
designed as an indemnified representative by the board of
directors of the corporation (which may, but need not, include
any person serving at the request of the corporation, as a
director, officer, employee, agent, fiduciary or trustee of
another corporation, partnership, joint venture, trust,
employee benefit plan or other entity or enterprise);
(3) "liability" means any damage, judgment, amount
paid in settlement, fine, penalty, punitive damages, excise
tax assessed with respect to an employee benefit plan, or cost
or expense of any nature (including, without limitation,
attorneys' fees and disbursements); and
(4) "proceeding" means any threatened, pending or
completed action, suit, appeal or other proceeding of any
nature, whether civil, criminal, administrative or
investigative, whether formal or informal, and whether brought
by or in the right of the corporation, a class of its security
holders or otherwise.
Section 7.02 Proceedings Initiated by Indemnified Representatives.
Notwithstanding any other provision of this Article, the corporation shall not
indemnify under this Article an indemnified representative for any liability
incurred in a proceeding initiated (which shall not be deemed to include counter
claims or affirmative defenses) or participated in as an intervenor or amicus
curiae by the person seeking indemnification unless such initiation of or
participation in the proceeding is authorized, either before or after its
commencement, by the affirmative vote of a majority of the directors in office.
This section does not apply to reimbursement of expenses incurred in
successfully prosecuting or defending an arbitration under Section 7.06 or
otherwise successfully prosecuting or defending the rights of an indemnified
representative granted by or pursuant to this Article.
Section 7.03 Advancing Expenses. The corporation shall pay the expenses
(including attorneys' fees and disbursements) incurred in good faith by an
indemnified representative in advance of the final disposition of a proceeding
described in Section 7.01 or the initiation of or participation in which is
authorized pursuant to Section 7.02 upon receipt of an undertaking by or on
behalf of the indemnified representative to repay the amount if it is ultimately
determined pursuant to Section 7.06 that such person is not entitled to be
indemnified by the corporation pursuant to this Article. The financial ability
of an indemnified representative to repay an advance shall not be a prerequisite
to the making of such advance.
Section 7.04 Securing of Indemnification Obligations. To further
effect, satisfy or secure the indemnification obligations provided herein or
otherwise, the corporation may maintain insurance, obtain a letter of credit,
act as self-insurer, create a reserve, trust escrow, cash collateral or other
fund or account, enter into indemnification agreements, pledge or grant a
security interest in any assets or properties of the corporation, or use any
other mechanism or arrangement whatsoever in such amounts, at such costs, and
upon such other term and conditions as the board of directors shall deem
appropriate. Absent fraud, the determination of the board of directors with
respect to such amounts, costs, terms and conditions shall be conclusive against
all security holders, officers and directors and shall not be subject to
voidability.
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<PAGE>
Section 7.05 Payment of Indemnification. An indemnified representative
shall be entitled to indemnification within 30 days after a written request for
indemnification has been delivered to the secretary of the corporation.
Section 7.06 Arbitration.
(a) General Rule. Any dispute related to the right to
indemnification, contribution or advancement of expenses as provided under this
Article, except with respect to indemnification for liabilities arising under
the Securities Act of 1933 that the corporation has undertaken to submit to a
court for adjudication, shall be decided only by arbitration in the metropolitan
area in which the principal executive offices of the corporation are located at
the time, in accordance with the commercial arbitration rules then in effect of
the American Arbitration Association, before a panel of three arbitrators, one
of whom shall be selected by the corporation, the second of whom shall be
selected by the indemnified representative and the third of whom shaft be
selected by the other two arbitrators. In the absence of the American
Arbitration Association, or if for any reason arbitration under the arbitration
rules of the American Arbitration Association cannot be initiated, and if one of
the parties fails or refuses to select an arbitrator or the arbitrators selected
by the corporation and the indemnified representative cannot agree on the
selection of the third arbitrator within 30 days after such time as the
corporation and the indemnified representative have each been notified of the
selection of the other's arbitrator, the necessary arbitrator or arbitrators
shall be selected by the presiding judge of the court of Senate jurisdiction in
such metropolitan area.
(b) Qualifications of Arbitrators. Each arbitrator selected as
provided herein is required to be or have been a director or executive officer
of a corporation whose shares of common stock were listed during at least one
year of such service on the Now York Stock Exchange or the American Stock
Exchange or quoted on the National Association of Securities Dealers Automated
Quotations System.
(c) Burden of Proof. The party or parties challenging the
right of an indemnified representative to the benefits of this Article shall
have the burden of proof.
(d) Expenses. The corporation shall reimburse an indemnified
representative for the expense (including attorneys' fees and disbursements)
incurred in successfully prosecuting or defending such arbitration.
(e) Effect. Any award entered by the arbitrators shall be
final, binding and nonappealable and judgment may be entered thereon by any
party in accordance with applicable law in any court of competent jurisdiction,
except that the corporation shaft be entitled to interpose as a defense in any
such judicial enforcement proceeding any prior final judicial determination
adverse to the indemnified representative under Section 7.01(a)(2) in a
proceeding not directly involving indemnification under this Article. This
arbitration provision shall be specifically enforceable.
Section 7.07 Contribution. If the indemnification provided for in this
Article or otherwise is unavailable for any reason in respect of any liability
or portion thereof, the corporation shall contribute to the liabilities to which
the indemnified representative may be subject in such proportion as is
appropriate to reflect the intent of this Article or otherwise.
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<PAGE>
Section 7.08 Mandatory Indemnification of Directors, Officers, etc. To
the extent that an authorized representative of the corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding refined to in Sections 1741 or 1742 of the Business Corporation Law
or in defense of any claim, issue or matter therein, such person shall be
indemnified against expenses (including attorneys' fees and disbursements)
actually and reasonably incurred by such person in connection therewith.
Section 7.09 Contract Rights; Amendment or Repeal. All rights under
this Article shall be downed a contract between the corporation and the
indemnified repressive pursuant to which the corporation and each indemnified
representative intend to be legally bound. Any repeal, amendment or modification
hereof shall be prospective only and shall not affect any rights or obligations
then existing.
Section 7.10 Scope of Article. The rights granted by this Article shall
not be deemed exclusive of any other rights to which those seeking
indemnification, contribution or advancement of expenses may be entitled under
any statute, agreement, vote of shareholder or disinterested directors or
otherwise, both as to action in an indemnified capacity and as to action in any
other capacity. The indemnification, contribution and advancement of expenses
provided by or granted pursuant to this Article shall continue as to a person
who has ceased to be an indemnified representative in respect of matters arising
prior to such time, and shall inure to the benefit of the heirs, executors,
administrators and personal representatives of such a person.
Section 7.11 Reliance on Provisions. Each person who shall act as an
indemnified representative of the corporation shall be deemed to be doing so in
reliance upon the rights of indemnification, contribution and advancement of
expenses provided by this Article.
Section 7.12 Interpretation. The provisions of this Article are
intended to constitute bylaws authorized by 15 Pa. C.S, ss.1746.
ARTICLE VIII
Miscellaneous
Section 8.01 Corporate Seal. The corporation shall have a corporate
seal in the form of a circle containing the name of the corporation, the year of
incorporation and such other details as may be approved by the board of
directors. The affixation of the corporate seal shall not be necessary to the
valid execution, assignment or endorsement by the corporation of any instrument
or other document.
Section 8.02 Checks. All checks, notes, bills of exchange or other
similar orders in writing shall be signed by such one or more officers or
employees of the corporation as the board of directors may from time to time
designate.
Section 8.03 Contracts.
(a) General Rule. Except as otherwise provided in the Business
Corporation Law in the caw of transactions that require action by the
shareholders, the board of directors may
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authorize any officer or agent to enter into any contract or to execute or
deliver any instrument on behalf of the corporation, and such authority may be
general or confined to specific instances.
(b) Statutory Form of Execution of Instruments. Any note,
mortgage, evidence of indebtedness, contract or other document, or any
assignment or endorsement thereof, executed or entered into between the
corporation and any other person, when signed by one or more officers or agents
having actual or apparent authority to sign it, or by the president or vice
president and secretary or assistant secretary or treasurer or assistant
treasurer of the corporation, shall be held to have been properly executed for
and in behalf of the corporation, without prejudice to the rights of the
corporation against any person who shall have executed the instrument in excess
of his or her actual authority.
Section 8.04 Interested Directors or Officers; Quorum.
(a) General Rule. A contract or transaction between the
corporation and one or more of its directors or officers or between the
corporation and another corporation, partnership, joint venture, trust or other
enterprise in which one or more of its directors or officers are directors or
officers or have a financial or other interest, shall not be void or voidable
solely for that reason, or solely because the director or officer is present at
or participates in the meeting of the board of directors that authorizes the
contract or transaction, or solely because his, her or their votes are counted
for that purpose, if:
(1) the material facts as to the relationship or
interest and as to the contract or transaction are disclosed
or are known to the board of directors and the board
authorizes the contract or transaction by the affirmative
votes of a majority of the disinterested directors even though
the disinterested directors am less than a quorum;
(2) the material facts as to his or her relationship
or interest and as to the contract or transaction are
disclosed or are known to the shareholders entitled to vote
thereon and the contract or transaction is specifically
approved in good faith by vote of those shareholders; or
(3) the contract or transaction is fair as to the
corporation as of the time it is authorized, approved or
ratified by the board of directors or the shareholders.
(b) Quorum. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the board which authorizes
a contract or transaction specified in subsection (a).
Section 8.05 Deposits. All funds of the corporation shall be deposited
from time to time to the credit of the corporation in such banks, trust
companies or other depositaries as the board of directors may approve or
designate, and all such funds shall be withdrawn only upon checks signed by such
one or more officers or employees of the corporation as the board of directors
shall from time to time designate.
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<PAGE>
Section 8.06 Corporate Records.
(a) Required Records. The corporation shall keep complete and
accurate books and records of account, minutes of the proceedings of the
incorporators, shareholders and directors and a share register giving the names
and addresses of all shareholders and the number and class of shares held by
each. The share register shall be kept at either the registered office of the
corporation in the Commonwealth of Pennsylvania or at its principal place of
business wherever situated or at the office of its registrar or transfer agent.
Any books, minutes or other records may be in written form or any other form
capable of being converted into written form within a reasonable time.
(b) Right of Inspection. Every shareholder shall upon written
verified demand stating the purpose thereat have a right to examine in person or
by agent or attorney, during the usual hours for business for any proper
purpose, the share register, books and records of account, and records of the
proceedings of the incorporators, shareholders and directors and to make copies
or extracts therefrom. A proper purpose shall mean a purpose reasonably related
to the interest of the person as a shareholder. In every instance where an
attorney or other agent is the person who seeks the right of inspection, the
demand shall be accompanied by a verified power of attorney or other writing
that authorizes the attorney or other agent to so act on behalf of the
shareholder. The demand shall be directed to the corporation at its registered
office in the Commonwealth of Pennsylvania or at its principal place of business
wherever situated.
Section 8.07 Amendment of Bylaws. These bylaws may be amended or
repealed, or new bylaws may be adopted, either (i) by vote of the shareholders
at any duly organized annual or special meeting of shareholders, or (ii) with
respect to those matters that are not by statute committed expressly to the
shareholders and regardless of whether the shareholders have previously adopted
or approved the bylaw being amended or repealed, by vote of a majority of the
board of directors of the corporation in office at any regular or special
meeting of directors, Any change in these bylaws shall take effect when adopted
unless otherwise provided in the resolution effecting the change. See Section
2.03(b) (relating to notice of action by shareholders on bylaws).
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EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF EARNINGS
<TABLE>
<CAPTION>
(In thousands, except per share data)
Three Months Ended Twelve Months Ended
December 31, December 31,
------------------------------ ------------------------------
Primary and Fully Diluted 1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Average shares outstanding 4,157,138 2,937,978 3,584,722 2,937,978
Net effect of common stock equivalents -- -- -- --
------------- ------------- ------------- -------------
Total 4,157,138 2,937,978 3,584,722 2,937,978
============= ============= ============= =============
Net income $(3,811,951) $ 978,362 $(5,582,614) $ 99,089
Per share earnings: $ (.92) $ .33 $ (1.56) $ .02
============= ============= ============= =============
</TABLE>
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Name Jurisdiction of Incorporation
---- -----------------------------
APBA Game Company Pennsylvania
Ablesoft, Inc. Virginia
REP Acquisition Corporation Delaware
REP Holdings Company, Inc. (d/b/a Rabbit Ears) Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,327,915
<ALLOWANCES> (460,000)
<INVENTORY> 1,302,728
<CURRENT-ASSETS> 2,461,662
<PP&E> 1,324,186
<DEPRECIATION> 465,896
<TOTAL-ASSETS> 7,350,343
<CURRENT-LIABILITIES> 4,423,773
<BONDS> 0
0
0
<COMMON> 42,432
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,350,343
<SALES> 4,087,037
<TOTAL-REVENUES> 4,087,037
<CGS> 3,488,509
<TOTAL-COSTS> 3,488,509
<OTHER-EXPENSES> 5,566,724
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 257,815
<INCOME-PRETAX> (5,226,011)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,226,011)
<DISCONTINUED> 0
<EXTRAORDINARY> (340,303)
<CHANGES> 0
<NET-INCOME> (5,582,614)
<EPS-PRIMARY> $(1.56)
<EPS-DILUTED> 0
</TABLE>
