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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the interim period ended March 31, 1997
OR
TRANSITION REPORT PURSUANT TO 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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(Exact name of Small Business Issuer in its charter)
Pennsylvania 23-2563090
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1001 Millersville Road, Lancaster, Pennsylvania 17604
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(Address of principal executive offices)
(717) 872-6567
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for 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 No X
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As of May 1, 1996, the registrant had outstanding 4,568,740 shares of
Common Stock, par value $.01 per share.
Transitional Small Business Disclosure Format (check one):
Yes No X
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MICROLEAGUE MULTIMEDIA, INC.
QUARTERLY REPORT ON FORM 10-QSB FOR THE INTERIM
PERIOD ENDED MARCH 31, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996....... 3
Consolidated Statements of Operations for the three months ended
March 31, 1997 and March 31, 1996........................................ 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and March 31, 1996........................................ 5
Notes to Consolidated Financial Statements................................... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........................... 9
PART II. OTHER INFORMATION..................................................13
ITEM 6. Exhibits and Reports on Form 8-K.....................................13
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MICROLEAGUE MULTIMEDIA, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1997 AND DECEMBER 31, 1996
ASSETS March 31, 1997 December 31, 1996
(unaudited)
============== =================
Cash and cash equivalents $ 27,436 $ 22,080
Accounts receivable, less allowance
for Sales Returns of $430,000 and $460,000 1,137,746 867,915
Inventories 1,359,013 1,302,728
Royalty advances 91,625 102,100
Prepaid and other current assets 79,009 83,539
Deferred tax asset 80,534 83,300
---------- ----------
Total Current Assets 2,775,363 2,461,662
---------- ----------
Property, plant and equipment, net 895,457 858,290
Capitalized software costs 63,836 73,251
Goodwill, net 3,875,586 1,592,301
Intangible assets 2,260,414 2,307,710
Other assets 50,073 57,129
---------- ----------
Total assets 9,920,729 7,350,343
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable - bank 2,130,000 1,800,200
Current portion of long-term debt 438,626 338,626
Accounts payable 1,888,617 1,488,647
Cash overdraft 59,841 73,068
Other accrued liabilities 833,849 723,232
---------- ----------
Total current liabilities 5,350,933 4,423,773
---------- ----------
Long-term debt 683,678 673,085
Deferred tax liability 80,534 83,300
Commitments and contingencies -- --
Total liabilities 6,115,145 5,180,158
---------- ----------
Stockholder's equity:
Common Stock 45,628 42,432
Additional Paid-in Capital 11,777,451 9,618,747
Accumulated deficiency (7,981,495) (7,454,994)
Less: receivable from stockholders (36,000) (36,000)
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Total stockholder's equity 3,805,584 2,170,185
---------- ----------
Total liabilities and stockholder's equity $9,920,729 $7,350,343
========== ==========
The accompanying notes are an integral part of
the consolidated financial statements.
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MICROLEAGUE MULTIMEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996
1997 1996
(unaudited) (unaudited)
========== ===========
Net sales $1,190,603 $ 814,069
Cost of goods sold 404,822 374,370
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Gross profit 785,781 439,699
Operating expenses:
Product development 354,785 55,001
Selling 206,699 146,307
Depreciation and amortization 172,751 120,986
General & Administrative 234,795 255,965
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(Loss) from operations (183,249) (138,560)
Interest expense 31,359 45,309
Other income, net -- --
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(Loss) from continuing operations before income taxes (214,608) (183,869)
Benefit for income taxes, before extraordinary items -- 34,191
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(Loss) from continuing operations (214,608) (149,678)
Discontinued operations (Note 4):
(Loss) from operations of discontinued segment (312,232) (221,073)
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Net (loss) $ (526,840) $ (370,751)
========== ===========
Net (loss) per common share from continuing
operations $ (0.05) $ (0.05)
========== ===========
Net (loss) per common share from discontinued
segment $ (0.07) $ (0.08)
=========== ===========
Net loss per common share $ (0.12) $ (0.13)
========== ===========
Weighted average common shares outstanding 4,372,980 2,937,978
========== ===========
The accompanying notes are an integral part of
the consolidated financial statements.
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MICROLEAGUE MULTIMEDIA, INC.
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996
1997 1996
(unaudited) (unaudited)
=========== ===========
Cash flows used in operating activities:
Net loss $ (526,840) $ (370,751)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 195,927 140,301
Provision for doubtful accounts 108,864 170,421
Changes in operating assets and liabilities:
(Increase) Decrease in accounts receivable (378,695) 152,513
(Increase) in inventories (6,285) (181,888)
Decrease (increase) in royalty advances 10,475 (90,621)
Decrease (increase) in prepaid and other current assets 4,530 (49,849)
Decrease (increase) in deferred tax assets 2,766 (94,080)
(Increase) in other assets (26,770) (275,060)
Increase in accounts payable 399,970 4,952
Decrease in accrued expenses (164,044) (42,722)
Decrease (increase) in deferred tax liabilities (2,766) 9,388
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Net cash used in operating activities (382,868) (627,396)
---------- ----------
Cash flows used in investing activities:
Purchase of property, plant and equipment (13,469) (85,237)
Capitalized software costs (8,527) (41,155)
---------- ----------
Net cash used in investing activities (21,996) (126,392)
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Cash flows provided by financing activities:
Payments of receivables by stockholders -- (250)
Net (decrease) in cash overdraft (13,227) --
Net increase in note payable - bank 329,800 460,926
Net borrowings (payments) of long-term debt 43,647 (84,956)
Issuance of common stock 50,000 371,314
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Net cash provided by financing activities 410,220 747,034
---------- ----------
Net increase in cash and cash equivalents 5,356 (6,754)
Cash and cash equivalents, beginning of period 22,080 6,754
---------- ----------
Cash and cash equivalents, end of period 27,436 0
---------- ----------
Supplement cash flow disclosures:
Cash paid during the period for interest 48,886 95,874
---------- ----------
Noncash, financing activities:
Conversion of notes payable to common stock -- 31,783
---------- ----------
Capital lease obligations 66,946 84,333
---------- ----------
Issuance of common stock - acquisition $2,111,900 --
---------- ----------
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MICROLEAGUE MULTIMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business:
MicroLeague Multimedia, Inc. (the "Company") sells its products
primarily through software retailers, mail order, wholesale clubs and
mass market merchandisers throughout the United States under the brand
names MicroLeague Sports, APBA, AbleSoft, Rabbit Ears and General
Admission. The Company also provides commercial printing, graphic
design and manufacturing services through its printing division, known
as FoxFire Printing (see Note 4).
The unaudited interim financial statements for the Company include the
operations of Micro Sports, Inc. ("Micro Sports"), a sports simulation
software developer acquired in October 1996 and Rabbit Ears
Productions, Inc. ("Rabbit Ears"), a Philadelphia-based entertainment
company known for its line of children's literature based products
acquired in February 1997 (see Note 2). The financial statements
presented herein do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. All significant intercompany accounts and
transactions have been eliminated. In the opinion of management, all
adjustments which are of a normal and recurring nature necessary for a
fair presentation of these financial statements have been included.
Certain accounts have been reclassified from the prior year interim
period presentation.
2. Acquisitions
On February 18, 1997, the Company acquired all of the assets and agreed
to assume certain of the liabilities of Rabbit Ears, a
Philadelphia-based entertainment company known for its line of
children's literature-related products. In consideration for the
acquisition, the Company issued 268,097 shares of the Company's common
stock, par value $.01 per share (the "Common Stock"). In connection
with the acquisition, the Company also granted an aggregate of 15,000
shares of Common Stock to the two founders of Rabbit Ears. In addition,
the Company issued to the seller 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 $0.01 per share, at any time after
the last sale price of the Common Stock (as reported by the principal
exchange on which the Common Stock is traded) exceeds $10.44 per share
and $12.53 per share, respectively, for not fewer than 15 consecutive
trading days.
On March 24, 1997, the Company announced it had entered into a letter
of intent to acquire KidSoft, L.L.C. ("KidSoft"), a California-based
distributor and publisher of children's multimedia software products.
The letter of intent contemplates that the Company will issue an
aggregate of up to 1,450,000 shares of Common Stock to the members of
KidSoft and grant warrants to purchase 100,000 shares of Common Stock
to certain of such members. Consummation of the acquisition of KidSoft
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.
6
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3. Inventory
Inventory, net of valuation allowances, consisted of the following:
March 31, 1997 December 31, 1996
-------------- -----------------
Raw materials............... $52,731 $52,334
Work-in-process............. 74,601 63,303
Finished goods.............. 1,231,681 1,187,091
---------- ----------
Total................. $1,359,013 $1,302,728
========== ==========
4. Discontinued Operations
On March 18, 1997, the Company's Board of Directors approved the
disposition of the Company's commercial printing division 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.
Net sales from the commercial printing division were approximately
$564,000 and $318,000 for the quarters ended March 31, 1997 and 1996,
respectively. Cost of goods sold for the printing division in such
quarters was approximately $528,000 and $281,000, respectively, and
aggregate other expenses for this division were $349,000 and $258,000,
respectively. As a result, the commercial printing division incurred
losses of $312,000 and $221,000 in the first quarter of 1997 and 1996,
respectively.
At March 31, 1997, assets for the commercial printing division included
approximately $444,000 in accounts receivable, $380,000 in property,
plant and equipment and $53,000 in inventory. At March 31, 1997,
liabilities for the commercial printing division included approximately
$226,000 in accounts payable, $50,000 in other accrued expenses and
$258,000 in long-term debt and capitalized leases.
5. Earnings Per Share
Net income per share of Common Stock for the three months ended March
31, 1997 and 1996 is computed based upon the weighted average number of
shares of Common Stock outstanding during the applicable period plus
the effect of common shares contingently issuable, primarily from the
exercise of stock options and warrants.
6. Stockholders' Equity
During the second quarter of 1996, the Company completed an initial
public offering (the "Initial Public Offering") of 1,173,000 units
consisting of one share of Common Stock and one redeemable warrant.
Each redeemable warrant entitles the holder to purchase one share of
Common Stock of the Company at an exercise price of $6.27 at any time
through May 23, 1999. Each redeemable warrant is redeemable at the
option of the Company at a price of $.10 per redeemable warrant at any
time upon not less than 45 days' prior written notice, if the last sale
price of the Common Stock exceeds $8.00 for not fewer than 10 of the 15
consecutive trading days ending on the third trading day prior to the
date on which the notice of redemption is given.
In the first quarter of 1997, one of the Company's officers exercised
an option to acquire 24,070 shares of Common Stock at a cost of
$50,000. Such shares of Common Stock were issued in April 1997.
7
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7. Subsequent Events
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. On May 1, 1997, the
bank agreed 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, the Company was
required to make a principal payment of $50,000 plus principal
payments, if any, that may be required to remain in compliance with an
agreed upon borrowing base formula. Additionally, the Company is
required to make a principal payment of $50,000 on each of May 15, 1997
and June 15, 1997. All remaining amounts outstanding are due July 15,
1997.
On April 6, 1997, the Company signed an agreement with an investment
banking firm under which such firm will act as placement agent to offer
on a best efforts basis up to $2,000,000 of convertible preferred stock
of the Company. The offering will be made on a best efforts basis, and
therefore, there can be no assurance that the offering will be
successful. The Company believes that the success of the offering will
depend, in part, on its ability to arrange for a new line of credit.
On April 15, 1997, the Company accepted a commitment letter from a bank
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. The Company and the bank
currently are in the process of negotiating such documentation and the
Company believes that the transaction will be completed by the end of
May 1997, although there can be no assurance in this regard.
On April 25, 1997, the Company closed a portion of a transaction
pursuant to which the Company agreed to issue and sell to Penn Janney
Opportunities Fund, L.P. ("Penn Janney") $1,000,000 aggregate principal
amount of convertible subordinated secured debentures and warrants to
purchase 100,000 shares of Common Stock for aggregate consideration of
$1,000,000. The Company received proceeds from Penn Janney of $200,000
on April 25, 1997 and an additional $300,000 on May 5, 1997. Completion
of the remaining portion of this transaction, however, is conditioned
on the Company obtaining a new line of credit on terms acceptable to
Penn Janney. Accordingly, there is no assurance that the remainder of
the transaction will be completed.
8. Statement of Financial Accounting Standards Not Yet Adopted
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.
8
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Cautionary Statement Regarding Forward-looking Statements
This Report contains "forward-looking" statements regarding potential
future events and developments affecting the business of 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; 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations for the Three Months Ended March 31, 1997 as compared to
the Three Months Ended March 31, 1996.
As described in Note 4 to the accompanying financial statements, the
Company's Board of Directors has approved the disposition of the Company's
commercial printing division. Net sales of the commercial printing division were
approximately $564,000 for the quarter ended March 31, 1997 and $318,000 for the
quarter ended March 31, 1996. Cost of goods sold for the printing division in
such quarters was approximately $528,000 and $281,000, respectively, and
aggregate other expenses for this division were $349,000 and $258,000,
respectively. As a result, the commercial printing division incurred losses of
$312,000 and $221,000 in the first quarter of 1997 and 1996, respectively. The
planned disposition of the commercial printing business is expected to improve
the Company's gross profit margins since printing services generally have a
lower gross profit margin than the Company's multimedia products. The
disposition also is expected to improve the Company's liquidity by reducing
operating expenses. The printing business is classified as a discontinued
operation in the financial statements and therefore the following discussion of
results of operations for the first quarter of 1997 and 1996 relates only to the
Company's continuing operations without regard to the printing business.
Net sales increased approximately $377,000, or 46%, from approximately
$814,000 in the quarter ended March 31, 1996 to approximately $1,191,000 in the
quarter ended March 31, 1997 due to increases in multimedia product sales. The
significant increase was primarily attributable to the new sports products
released by the Company in the fourth quarter of 1996, as well as the new
release of Wizard Presents The Comic Collector in the first quarter of 1997. The
increase was offset by the provision for the sales return and price protection
allowance of approximately $110,000. Despite the significant increase in net
sales, the provision declined in the first quarter of 1997 compared to the
provision of approximately $170,000 in the first quarter of 1996 due to
increased sales of higher margin and more consistent products in 1997, which
traditionally have fewer returns and less price protection allowances. Direct
mail sales were approximately $282,000, or 23% of net sales, in the quarter
ended March 31, 1997 as compared to approximately $532,000, or 65% of net sales,
for the quarter ended March 31, 1996. Direct sales in the first quarter of 1996
were unusually high because new APBA baseball card sets were shipped in that
quarter rather than in the last quarter of 1995.
Cost of goods sold increased by approximately $31,000, or 8%, from
approximately $374,000 for the quarter ended March 31, 1996 to approximately
$405,000 for the quarter ended March 31, 1997, primarily as a result of
increases in material and labor costs associated with the increase in multimedia
product sales. As a percentage of net sales, cost of goods sold decreased from
approximately 46% in the first quarter of 1996 to approximately 34% in the first
quarter of 1997. The decrease in cost of goods sold as a percentage of net sales
resulted from the increase in sales of multimedia products, which have a higher
profit margin than the Company's other products and services.
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Development expense increased by approximately $300,000 from
approximately $55,000 for the first quarter of 1996 to approximately $355,000
for the first quarter of 1997. This significant increase was due to the
Company's acquisition of Micro Sports, a software developer, in October 1996. In
addition, a significant amount of the development expense incurred during the
first quarter related to products that are planned for release later in 1997.
The Company had only one new product to reach technological feasibility and
release during the first quarter of 1997. The Company expects its development
expenses in each of the remaining quarters of 1997 will approximate the
development expenses incurred in the first quarter of 1997.
Selling and marketing expenses increased by approximately $61,000, or
42%, from approximately $146,000 for the first quarter of 1996 to approximately
$207,000 for the first quarter of 1997. The increase was primarily a result of
hiring additional marketing personnel as well as implementing additional sales
promotions in the first quarter of 1997. As a percentage of net sales, selling
and marketing expenses remained relatively constant at 18% and 17%,
respectively.
General and administrative expenses decreased by approximately $21,000,
or 8%, from approximately $256,000 for the first quarter of 1996 to $235,000 for
the first quarter of 1997. This decrease was primarily due to a reduction in
administrative personnel in the Company's multimedia products group.
Depreciation and amortization expense increased by approximately
$51,000, or 43%, from approximately $121,000 for the quarter ended March 31,
1996 to $173,000 for the quarter ended March 31, 1997. This increase was due
primarily to the amortization of intangible assets resulting from the Micro
Sports and Rabbit Ears acquisitions.
Interest expense decreased by approximately $14,000, or 31%, from
approximately $45,000 for the first quarter of 1996, to $31,000 for the first
quarter of 1997. The decrease reflected interest expense of $26,000 incurred in
the first quarter of 1996 in connection with bridge loan financing in which the
Company issued units consisting of promissory notes and warrants to purchase
common stock. Such sum was deemed to be original issue discount related to the
value of the warrants and therefore treated as interest expense with respect to
the notes. The notes were repaid in the second quarter of 1996 with a portion of
the proceeds from the Initial Public Offering.
For the first quarter of 1996, the Company provided for federal and
state corporate income taxes at an estimated effective tax rate of 20%. The
Company reversed this tax benefit in the fourth quarter of 1996, however, due to
doubts as to the Company's ability to utilize such tax benefits. The Company
does not intend to recognize a tax benefit until it achieves profitability on a
quarterly basis.
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.
10
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As of March 31, 1997, the Company had payment commitments of
approximately $275,000 under various product development agreements, $1.1
million under its property and vehicle leases, and $1.8 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
decreases in net revenues and increases in cost of goods sold and operating
expenses. Cash flow from operations in the first quarter of 1997 has continued
to be less than the Company's working capital needs. Accordingly, the Company
continued to borrow under its bank line of credit during the first quarter of
1997 and approximately $1.4 million was outstanding as of March 31, 1997.
During the first quarter of 1997, the Company's net cash used in
operating activities was approximately $383,000. Substantially all of such
amount, however, was attributable to the Company's printing operations. The
proposed disposition of the printing operations and the Company's concentration
on selling higher margin products are important aspects of the Company's
strategy to reduce cash used in operations and ultimately to generate positive
cash flow.
The Company expects that its working capital needs for at least the
balance of 1997 will increase due to various factors, including the
implementation of certain marketing programs, the hiring of additional
administrative personnel, increased costs of development of products, and the
financing of increased inventory and accounts receivable arising from the sale
and shipment of new products. The Company's working capital needs may increase
further if the Company consummates additional acquisitions. The Company
estimates that in order to fund its working capital needs for the next twelve
months (not including any increases that may arise as a result of acquisitions),
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. On May 1, 1997, the bank agreed
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, the Company was required to make a principal payment of
$50,000 plus principal payments, if any, that may be required to remain in
compliance with an agreed upon borrowing base formula. Additionally, the Company
is required to make a principal payment of $50,000 on each of May 15, 1997 and
June 15, 1997. All remaining amounts outstanding are due July 15, 1997.
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. In connection with the acquisition,
certain shareholders of KidSoft have agreed, subject to certain conditions, to
purchase in a private placement up to $1,200,000 of the Company's Common Stock.
The Company anticipates that, while a significant portion of the proceeds from
this issuance of Common 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
11
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total revenues, will enable the Company to substantially improve its cash flow
from operations. 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.
On April 6, 1997, the Company signed an agreement with an investment
banking firm under which such firm will act as a placement agent to offer on a
best efforts basis up to $2,000,000 of convertible preferred stock of the
Company. There can be no assurance that the offering will be successful. The
Company believes that the success of the offering will depend, in part, on its
ability to arrange for a new line of credit.
On April 15, 1997, the Company accepted a commitment letter from a bank
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. The Company and the bank currently are in the process of
negotiating such documentation and the Company believes that the transaction
will be completed by the end of May 1997.
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.
In April 1997, the Company closed a portion of a transaction pursuant to which
the Company agreed to issue and sell to Penn Janney $1,000,000 aggregate
principal amount of convertible subordinated pay-in-kind secured debentures and
warrants to purchase 100,000 shares of Common Stock for aggregate consideration
of $1,000,000. On April 25, 1997, the Company received proceeds from Penn Janney
of $200,000 and on May 5, 1997, the Company received an additional $300,000.
Completion of the remaining portion of this transaction, however, is conditioned
on the Company obtaining a new credit facility on terms acceptable to Penn
Janney or the closing of the KidSoft acquisition. Accordingly, there is no
assurance that this transaction will be completed.
In the normal course of business, the Company evaluates potential
acquisitions and other business arrangements 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.
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.
12
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
11.1 Statement re: Computation of Per Share Earnings
27.1 Financial Data Schedules
(b) The Company filed the Following Current Reports on Form 8-K
for the quarter ended March 31, 1997:
Current Report on Form 8-K/A, dated January 7, 1997, reporting certain
financial information in connection with the Company's acquisition of all of the
assets of Micro Sports, Inc. and certain of the assets of M.S. Investments
Holdings, Ltd. and assumption of certain labilities of Micro Sports, Inc.
Current Report on Form 8-K, dated February 18, 1997, reporting the
acquisition of assets of Rabbit Ears Productions, Inc.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, this 14th day of May, 1997.
MICROLEAGUE MULTIMEDIA, INC.
By: /s/ Neil B. Swartz
----------------------------------------
Neil B. Swartz
Chairman of the Board of Directors and
Chief Executive Officer
By: /s/ Peter R. Flanagan
----------------------------------------
Peter R. Flanagan
Vice President and Chief Financial Officer
14
<PAGE>
EXHIBIT INDEX
Exhibit No.
- -----------
11.1 Statement re: Computation of Per Share Earnings
27.1 Financial Data Schedules
15
<PAGE>
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF EARNINGS
Three Months Ended
March 31,
==========================
1997 1996
--------- -----------
Primary and Fully Diluted
Average shares outstanding 4,372,980 2,756,667
Net effect of common stock equivalents -- 181,311
---------- ----------
Total 4,372,980 2,937,978
========== ==========
Net loss $ (526,501) $ (370,751)
========== ===========
Per share (loss): $ (0.12) $ (0.13)
========== ===========
16
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
<CASH> 27,436
<SECURITIES> 0
<RECEIVABLES> 1,567,746
<ALLOWANCES> (430,000)
<INVENTORY> 1,359,013
<CURRENT-ASSETS> 2,775,363
<PP&E> 1,404,901
<DEPRECIATION> (509,444)
<TOTAL-ASSETS> 9,920,729
<CURRENT-LIABILITIES> 5,350,933
<BONDS> 0
0
0
<COMMON> 45,671
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,920,729
<SALES> 1,190,603
<TOTAL-REVENUES> 1,190,603
<CGS> 404,822
<TOTAL-COSTS> 404,822
<OTHER-EXPENSES> 969,030
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,359
<INCOME-PRETAX> (214,608)
<INCOME-TAX> 0
<INCOME-CONTINUING> (214,608)
<DISCONTINUED> (312,232)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (526,840)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
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