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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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FORM 10-QSB
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE SECURITIES EXCHANGE ACT OF 1934
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For the interim period ended September 30, 1997
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
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For the transition period from - to .
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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
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(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 September 30, 1997, the registrant had outstanding 6,102,183
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 SEPTEMBER 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
<S> <C>
Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996................................3
Consolidated Statements of Operations for the nine months ended
September 30, 1997 and September 30, 1996.............................................................4
Consolidated Statements of Operations for the three months ended
September 30, 1997 and September 30, 1996.............................................................5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and September 30, 1996.............................................................6
Notes to Consolidated Financial Statements..................................................................7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................................10
PART II. OTHER INFORMATION...............................................................................15
ITEM 2. Changes in Securities...........................................................................15
ITEM 6. Exhibits and Reports on Form 8-K................................................................16
</TABLE>
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MICROLEAGUE MULTIMEDIA, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
(unaudited)
================ ===============
<S> <C> <C>
ASSETS
Cash and cash equivalents $0 $22,080
A/R, less provision for doubtful accounts and returns of 511,531 867,915
$850,347 and $460,019
Inventories, net 394,167 1,302,728
Royalty advances, net 282,219 102,100
Prepaid and other current assets 118,819 83,539
Deferred tax asset 80,534 83,300
---------------- ---------------
Total current assets 1,387,270 2,461,662
---------------- ---------------
Property, plant and equipment, net 1,079,542 858,290
Capitalized software costs 69,363 73,251
Goodwill, net 6,732,660 1,592,301
Intangible assets 6,236,991 2,307,710
Other assets 89,839 57,129
---------------- ---------------
Total assets 15,595,665 7,350,343
---------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable 3,750,886 1,488,647
Cash overdraft 69,043 73,068
Bank line of credit 1,474,056 1,100,200
Current portion of long-term debt 895,609 1,038,626
Other accrued liabilities 1,563,356 723,232
---------------- ---------------
Total current liabilities 7,752,950 4,423,773
---------------- ---------------
Long-term debt 2,566,728 673,085
Deferred tax liability 80,534 83,300
---------------- ---------------
Total liabilities 10,400,212 5,180,158
STOCKHOLDER'S EQUITY:
Common Stock 62,755 42,432
Treasury Stock (1,750) --
Additional Paid-in Capital 18,292,201 9,618,747
Bridge warrants 150,000 --
Accumulated deficiency (13,271,753) (7,454,994)
Less: receivable from stockholders (36,000) (36,000)
---------------- ---------------
Total stockholder's equity 5,195,453 2,170,185
================ ===============
Total liabilities and stockholder's equity $15,595,665 $7,350,343
================ ===============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
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MICROLEAGUE MULTIMEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
(unaudited) (unaudited)
=========== ===========
<S> <C> <C>
Net sales $ 3,245,257 $ 1,847,255
Cost of goods sold 2,055,292 1,071,048
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Gross profit 1,189,965 776,207
Operating expenses:
Product development 811,150 305,038
Selling & Marketing 1,829,141 1,064,702
Depreciation and amortization 959,377 321,326
General & Administrative 2,604,213 906,070
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(Loss) from operations (5,013,916) (1,820,929)
Interest expense 182,414 159,785
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(Loss) from continuing operations before income taxes (5,196,330) (1,661,144)
Benefit for income taxes, before extraordinary items -- 767,328
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(Loss) from continuing operations, before extraordinary items (5,196,330) (365,102)
Gain (loss) on extraordinary items, net 144,934 (204,181)
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Gain (loss) from continuing operations (5,051,396) (569,283)
Discontinued operations (Note 4):
(Loss) from operations of discontinued segment (849,425) (754,742)
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Net (Loss) ($5,900,821) $(2,172,309)
=========== ===========
Net (loss) per common share from continuing operations $ (0.99) $ (.34)
=========== ===========
Net gain (loss) per common share from extraordinary items $ .02 $ (.06)
=========== ===========
Net (loss) per common share from discontinued segment $ (.16) $ (.21)
=========== ===========
Net (loss) per common share $ (1.13) $ (.61)
=========== ===========
Weighted average common shares outstanding 5,206,735 3,547,963
=========== ===========
</TABLE>
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 SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Three Months Ended September 30,
1997 1996
(unaudited) (unaudited)
=========== ===========
<S> <C> <C>
Net sales $ 855,472 $ 544,994
Cost of goods sold 1,162,934 432,605
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Gross profit (307,462) 112,389
Operating expenses:
Product development 245,934 89,891
Selling & Marketing 1,170,879 487,198
Depreciation and amortization 516,704 153,201
General & Administrative 1,793,880 382,447
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(Loss) from operations (4,034,859) (1,000,348)
Interest expense 99,947 16,211
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(Loss) from continuing operations before income taxes (4,134,806) (1,016,559)
Benefit for income taxes, before extraordinary items -- 399,503
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(Loss) from continuing operations, before extraordinary items $ (4,134,806) $ (617,056)
Gain (loss) on extraordinary items, net -- --
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Gain (loss) from continuing operations (4,134,806) (617,056)
Discontinued operations (Note 4):
(Loss) from operations of discontinued segment (14,117) (126,857)
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Net (loss) (4,148,923) (743,913)
=========== ===========
Net (loss) per common share from continuing operations $ (.68) $ (.15)
=========== ===========
Net gain (loss) per common share from extraordinary items $ -- $ --
=========== ===========
Net (loss) per common share from discontinued segment $ -- $ (.03)
=========== ===========
Net (loss) per common share $ (.68) $ (.18)
=========== ===========
Weighted average common shares outstanding 6,094,897 4,179,078
=========== ===========
</TABLE>
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 NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
(unaudited) (unaudited)
============ ============
<S> <C> <C>
Cash flows used in operating activities:
Net loss $(5,900,823) $(1,770,663)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 959,377 401,646
Provision for doubtful accounts 390,328 381,114
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (33,944) 496,001
Decrease (increase) in inventories 908,561 (625,004)
Decrease (increase) in royalty advances (180,119) (546,481)
Decrease (increase) in prepaid and other current assets (35,280) (976,820)
Decrease (increase) in other assets (99,307) (291,890)
Increase in accounts payable 2,262,239 107,603
(Decrease) increase in accrued expenses 836,099 130,428
(Decrease) increase in deferred tax liabilities (2,766) --
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Net cash used in operating activities (895,635) (2,694,066)
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Cash flows used in investing activities:
Purchase of property, plant and equipment 518,521 (388,944)
Cash acquired in purchase 109,041 --
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Net cash used in investing activities 627,562 (388,944)
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Cash flows provided by financing activities:
Payments of receivables by stockholders -- (33,930)
Net increase (decrease) in note payable - bank 373,856 (2,013,372)
Net borrowings (payments) of long-term debt 1,750,626 (320,981)
Net increase (decrease) in additional paid in capital 84,007 --
Net issuance of common stock (707,372) 5,325,030
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Net cash provided by financing activities 1,501,117 3,076,256
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Net decrease in cash and cash equivalents (22,080) (6,754)
Cash and cash equivalents, beginning of period 22,080 6,754
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Cash and cash equivalents, end of period 0 0
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Supplement cash flow disclosures:
Cash paid during the period for interest 182,414 179,371
------------ ------------
Noncash, financing activities:
Conversion of notes payable to common stock -- 84,023
------------ ------------
Capital lease obligations 59,417 186,282
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</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
6
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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(R), APBA(R), AbleSoft(R), Rabbit Ears(R), KidSoft(R), and General
Admission(TM). Until June 9, 1997, the Company also provided 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, 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), and KidSoft, a California-based distributor and publisher of children's
multimedia software acquired in June 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 June 6, 1997, the Company acquired KidSoft, L.L.C. ("KidSoft"), a
California-based distributor and publisher of children's multimedia software
products. The Company issued 1,450,000 shares of Common Stock to the members
of KidSoft and granted warrants to purchase 100,000 shares of Common Stock to
certain of such members. The warrants to purchase 100,000 shares of Common
Stock have an exercise price of $4.75 per share and are exercisable through
June 5, 2002.
7
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3. Inventory
Inventory, net of valuation allowances, consisted of the following:
September 30, 1997 December 31,
1996
Raw materials..................... $52,334
Work-in-progress.................. 63,303
Finished goods.................... 394,167 1,187,091
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$394,167 $1,302,728
======== ==========
4. Discontinued Operations
Effective June 9, 1997, the Company sold the assets and certain liabilities of
its commercial printing division to the Company's former President and Chief
Operating Officer. In consideration for such sale, the Company received
175,000 shares of its common stock. The Company retained approximately $1.2
million of accounts payable pertaining to the commercial printing division.
There was no sales activity from the commercial printing division during the
third quarter; however, expenses incurred prior to and received after the sale
totaled $14,117 for the three months ended September 30, 1997. Net sales from
the commercial printing division were approximately $957,900 and $1,178,962
for the nine months ended September 30, 1997 and 1996, respectively. Cost of
goods sold for the printing division in such nine month periods was
approximately $1,128,000 and $1,057,188 for the nine months ended September
30, 1997 and 1996, respectively, and the aggregate other expenses for this
division were $679,317 and $876,516, respectively. As a result, the commercial
printing division incurred losses of $849,425 and $754,742 in the nine months
ended September, 30 1997 and 1996, respectively.
5. Notes Payable
In late March 1997, the bank ("Original Bank") providing the Company's $1.5
million line of credit, which was 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 certain financial covenant.
On June 5, 1997, the Company entered into a demand line of credit from a new
bank sufficient to repay all amounts outstanding under the Company's earlier
line of credit. The new line of credit is collateralized by all of the assets
of the Company and the personal guarantee of one of the Company's directors.
The new line of credit bears interest at the bank's prime rate plus 1.5% and
matures in May 1998. As of September 30, 1997, there was $1,474,056
outstanding on the line of credit with $25,944 available.
In September 1997, a certain term note with outstanding principal amount of
approximately $345,000 became payable to the Original Bank. The term note is
unsecured, is guaranteed by three directors and two shareholders. Interest
continues to accrue on such note at the rate of prime plus 2% per year and is
payable monthly. The Company is currently negotiating the refinancing of said
note.
8
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6. Subordinated Debt
On June 5, 1997, the Company issued and sold to Penn Janney Opportunities
Fund, L.P. ("Penn Janney") $1,000,000 aggregate principal amount of
convertible subordinated secured debenture and warrants to purchase 100,000
shares of Common Stock for aggregate consideration of $1,000,000. The
debenture, which matures in eighteen months, bears interest at a rate of 12%
per annum, which interest is payable quarterly either in cash or by issuance
of an additional debenture(s) equal to the amount of interest due. The
debenture is secured by a second position on all of the assets of the Company.
The warrants to purchase Common Stock are exercisable at the lower of 85% of
fair market value per share as of the date of such warrant or the trading day
immediately preceding the date of exercise.
On September 1, 1997, the Company offered to investors certain Convertible
Term Notes of which the proceeds would be used for general corporate purposes,
including working capital. The term notes, which requires a minimum investment
of $100,000, matures on September 1, 1998. The term notes, bears interest at a
rate of 12% per annum, which interest is payable quarterly either in cash or
by issuance of in-kind of additional Convertible Term Notes with these same
terms equal to the amount of interest due. The outstanding principal and
interest will be convertible, at purchaser's option, at any time on or before
the Maturity Date into shares of Common Stock at a conversion price equal to
$2.00 per share or if the Company issues a note, debenture or other debt
instrument convertible into the common stock of the Company, or issues a
warrant, option or other instrument or agreement giving the holder the right
to purchase the common stock of the Company at any time on or before November
3, 1997, the Company shall notify each holder of a Convertible Term Note of
all material terms thereof, and then at the option of each such holder, from
and after the time of any such issuance, the conversion price for such
Lender's Convertible Term Note shall be either the conversion price set forth
above or the conversion price or exercise price set forth in any such
debenture, note, instrument, warrant, option or agreement. As of September 30,
1997, the Company issued and sold $875,000 aggregate principal amount of said
Convertible Term Notes.
7. Earnings Per Share
Net loss per share is computed using the weighted average number of shares of
Common Stock outstanding. Common equivalent shares from stock options and
warrants are excluded from the computation as their effect is antidilutive.
8. 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.
9
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In April 1997, one of the Company's officers exercised an option to acquire
24,070 shares of Common Stock at a cost of $50,000.
On June 6, 1997, certain shareholders of KidSoft purchased 252,631 shares of
the Company's Common Stock, in a private placement, for total proceeds of
approximately $1.2 million at $4.75 per share.
On June 9, 1997, as part of the disposition of the Company's commercial
printing division, the Company received 175,000 of its outstanding shares into
its Treasury. Accordingly, the Treasury stock is accounted for under the cost
method.
9. Statement of Financial Accounting Standards Not Yet Adopted
In March 1997, the Financial Accounting Standards Board ("FASB") 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.
In June 1997, the FASB issued SFAS No. 130, "Comprehensive Income". SFAS No.
130 becomes effective for fiscal years beginning after December 15, 1997 and
requires reclassification of earlier financial statements for comparative
purposes. SFAS No. 130 requires that changes in the amounts of certain items,
including foreign currency translation adjustments and gains and losses on
certain securities be shown in the financial statements. SFAS No. 130 does not
require a specific format for the financial statement in which comprehensive
income is reported, but does require that an amount representing total
comprehensive income be reported in that statement. Management has not yet
determined the effect, if any, of the adoption of SFAS No. 130 on the
consolidated financial statements.
Also in June 1997, the FASB issued SFAS No. 131. "Disclosures about Segments
of an Enterprise and Related Information." This Statement will change the way
public companies report information about segments of their business in annual
financial statements and requires them to report selected segment information
in the quarterly reports issued to stockholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues and its major
customers. The Statement is effective for fiscal years beginning after
December 15, 1997. Management has not yet determined the effect, if any, of
the adoption of SFAS No. 131 on the consolidated financial statements.
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; (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
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availability of financing to fund working capital and expansion needs, and
(vi) the uncertainty of reducing the Company's operating costs and generating
positive cash flow.
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 Nine Months Ended September 30, 1997 as compared
to the Nine Months Ended September 30, 1996.
Net sales from continuing operations increased approximately $1,398,000 or
76%, from approximately $1,847,300 in the nine months ended September 30, 1996
to approximately $3,245,300 in the nine months ended September 30, 1997 due to
increases in multimedia product sales. The significant increase was primarily
attributable to the new sports products and the new Teacher's Tool Box Deluxe
released by the Company in the second and third quarter of 1997, respectively.
Direct mail sales were approximately $862,600 or 27% of net sales, in the nine
months ended September 30, 1997 as compared to approximately $1,044,700 or 57%
of net sales, for the nine months ended September 30, 1996. The decrease in
the direct business was due to timing of the baseball add-on products
releasing in the fourth quarter of 1996 instead of the first quarter of 1997.
In addition, KidSoft catalog sales were lower than expected due to product
unavailability for its customers primarily due to credit restraints set by the
software vendors.
As described in Note 4 to the accompanying financial statements, the Company
disposed of its commercial printing business on June 9, 1997. There was no
sales activity of the commercial printing division during the third quarter;
however, there were expenses incurred, but not received, prior to the sales
completion amounting to $14,100. Net sales of the commercial printing division
were approximately $958,000 for the nine months ended September 30, 1997 and
$1,179,000 for the nine months ended September 30, 1996. Cost of goods sold
for the printing division in such quarters were approximately $1,128,000 and
$1,057,000, respectively, and aggregate other expenses for this division were
$669,300 and $876,500, respectively. As a result, the commercial printing
division incurred losses of $849,400 and $754,700 in the nine months ended
September 30, 1997 and 1996, respectively. The 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 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 nine months ended September 30,
1997 and 1996 relates only to the Company's continuing operations without
regard to the printing business.
Cost of goods sold increased by approximately $984,300 from approximately
$1,071,000 for the nine months ended September 30, 1996 to approximately
$2,055,300 for the nine months ended September 30, 1997. The increase is
primarily due to higher sales in 1997 and an increase in inventory reserves of
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approximately $500,000. Excluding the adjustment to increase the inventory
reserves, the cost of goods sold as a percentage of net sales decreased
approximately 13% compared to prior period.
Development expense increased by approximately $506,200 from approximately
$305,000 for the nine months ended September 30, 1996 to approximately
$811,200 for the nine months ended September 30, 1997. This significant
increase was primarily due to the Company's acquisition of Micro Sports, a
software developer, in October 1996. To date, completion of a working model of
the Company's products and general release have substantially coincided. As a
result, the Company has not capitalized any software development costs since
such costs have not been significant.
Selling and marketing expenses increased by approximately $764,400, or 72%,
from approximately $1,064,700 for the nine months ended September 30, 1996 to
approximately $1,829,100 for the nine months ended September 30, 1997. The
increase was primarily a result of certain direct marketing and sales
promotion expenses. Selling and marketing, as a percentage of net sales were
58% and 56% for the nine months ended September 30, 1996 and September 30,
1997, respectively. The decrease was primarily due to reduced marketing
programs resulting from delay in funding from capital raising efforts.
General and administrative expenses increased by approximately $1,698,400 or
187%, from approximately $906,000 for the nine months ended September 30, 1996
to $2,604,400 for the nine months ended September 30, 1997. This increase was
primarily due to additional costs in operations as a result of the Company's
two acquisitions in 1997 and the Company's acquisition of Micro Sports in
October 1996, as well as unusually high professional fees attributed to the
Company's changing bank relationship and legal costs for capital raising
efforts. During the nine months ended September 30, 1997, non-recurring
expenses attributable to the above noted acquisitions were approximately
$520,000 and $670,000 for professional fees and operations outside of
Pennsylvania, respectively. The Company is in the process of closing and or
reducing operations outside of Pennsylvania.
Depreciation and amortization expense increased by approximately $638,100, or
199%, from approximately $321,300 for the nine months ended September 30, 1996
to $959,400 for the nine months ended September 30, 1997. This increase was
due primarily to the increased amortization of intangible assets resulting
from the Micro Sports, Rabbit Ears, and KidSoft acquisitions.
Interest expense increased by approximately $22,600, or 14%, from
approximately $159,800 for the nine months ended September 30, 1996, to
$182,400 for the nine months ended September 30, 1997.
For the nine months ended September 30, 1996, the Company provided for federal
and state corporate income taxes at an estimated effective tax rate of 30%.
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
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
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applied the remaining net proceeds to fund product development and to provide
working capital for general corporate purposes.
On June 6, 1997, the Company acquired KidSoft and assumed KidSoft's current
liabilities in excess of current assets of approximately $1,690,000. In
connection with the acquisition, certain shareholders of KidSoft purchased in
a private placement approximately $1,200,000 of the Company's Common Stock.
The Company anticipates that, 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, and any remaining amount of the net
proceeds will be available for working capital and general corporate purposes.
In June 1997, the Company issued to Penn Janney Opportunities Fund, L.P.
$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.
In September 1997, the Company issued to various investors $875,000 aggregate
principal amount of convertible subordinated debentures and warrants with a
maturity date of September 1, 1998.
As of September 30, 1997, the Company had payment commitments of approximately
$30,000 under various product development agreements, $406,200 under its
property and vehicle leases, and $1,215,000 under existing employment
agreements with certain officers of the Company.
Primarily as a result of the costs incurred in connection with the recent
acquisitions of Micro Sports, Rabbit Ears and KidSoft, the Company believes
that cash flow from operations will not be sufficient to meet its short term
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. Revenues were adversely affected in 1996, in
part, because the Company did not release any premier products. Cash flow from
operations in the nine months of 1997 continued to be less than the Company's
working capital needs. For the third quarter of 1997, the Company's loss
before interest, taxes, depreciation and amortization, a customary measure for
operating cash flow, was approximately $4,054,500 (excluding the Company's
printing operations). For the nine months ended September 30, 1997, inventory,
accounts receivable and restructuring reserves were increased by approximately
$1,250,000. The Company expects cash flow from operations to be less than the
Company's expenses in the fourth quarter of 1997. The Company continued to
borrow under its bank line of credit of $1.5 million during the third quarter
of 1997 and approximately $1,474,100 was outstanding as of September 30, 1997.
The Company's net cash used in operating activities was approximately $895,000
for the nine months ended September 30, 1997 compared to $2,694,000 for the
nine months ended September 30, 1996. A significant portion of the operating
activities in prior year was attributable to the Company's printing
operations. The 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.
In late March 1997, the bank providing the Company's $1.5 million line of
credit, which was 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
13
<PAGE>
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.
On June 5, 1997, the Company entered into a new banking relationship that
provided the Company a $1.5 million line of credit to replace the Company's
existing line of credit facility. The new line of credit, collateralized by
substantially all of the Company's assets and the personal guarantee of the
Company's Chief Executive Officer, matures at the end of May 1998.
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 a significant amount of funding in addition to
cash flow from operations. The Company intends to obtain additional funding in
the form of debt and/or equity. There can be no assurances that the Company
will be able to obtain such additional funding, or if obtained, that such
amount will be adequate for the Company's purposes.
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. 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 audio, video and computer software products 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.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
On February 18, 1997, the Company issued 268,097 shares of Common Stock, at
par value $.01 per share, in consideration for the acquisition of Rabbit Ears.
In connection with the acquisition, the
14
<PAGE>
Company also granted an aggregate of 15,000 shares of Common Stock to the two
founders of Rabbit Ears.
In April 1997, one of the Company's officers exercised an option to acquire
24,070 shares of Common Stock at a cost of $50,000.
On June 5, 1997, the Company issued to Penn Janney Opportunities Fund, L.P. a
certain convertible subordinated secured debenture in the face amount of
$1,000,000 and a warrant to purchase 100,000 shares of common stock, for an
aggregate consideration of $1,000,000. The debenture is convertible into
common stock, and the warrants are exercisable into common stock, at the lower
of $3.59 or 85% of fair market value per share as of the trading day
immediately preceding the date of conversion or exercise, as the case may be
(the "Formula Value"). The warrant expires on April 24, 2002. There were no
underwriting discounts or commissions. The securities were issued in reliance
upon Section 4(2) of the Securities Act of 1933, as amended ("Section 4(2)").
On June 6, 1997, the Company sold 252,631 shares of its Common Stock to Hearst
Corporation and Ameritech Corporation, at the price of $4.75 per share, for an
aggregate of approximately $1,200,000. There were no underwriting discounts or
commissions. The shares were issued in reliance upon Section 4(2).
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 September 30, 1997:
Current Report on Form 8-K/A, dated February 18, 1997, reporting certain
financial information in connection with the Company's acquisition of certain
of the assets of Rabbit Ears Productions, Inc.
Current Report on Form 8-K, dated June 6, 1997, reporting the Company's
acquisition of KidSoft, L.L.C. (the "KidSoft Acquisition") together with
certain financial information required to be filed in connection with the
KidSoft Acquisition.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized, this 20th day of November, 1997.
MICROLEAGUE MULTIMEDIA, INC.
By: /s/ Neil B. Swartz
--------------------------------------
Neil B. Swartz
Chief Executive Officer
By: /s/ Laurie Gee
---------------------------------------
Laurie Gee
Chief Financial Officer
16
<PAGE>
EXHIBIT INDEX
- -------------
Exhibit No.
- -----------
11.1 Statement re: Computation of Earnings Per Share
27.1 Financial Data Schedule
17
<PAGE>
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
Nine Months Ended
September 30,
===========================
1997 1996
------------ ------------
Primary and Fully Diluted
Average shares outstanding 5,206,735 3,547,963
Net effect of common stock equivalents -- --
------------ ------------
Total 5,206,735 3,547,963
============ ============
Net loss (5,900,823) (2,172,309)
============ ============
Per share (loss): (1.13) (0.61)
============ ============
Three Months Ended
September 30,
===========================
1997 1996
------------ ------------
Primary and Fully Diluted
Average shares outstanding 4,179,078 6,094,897
Net effect of common stock equivalents -- --
------------ ------------
Total 4,179,078 6,094,897
============ ============
Net loss (743,913) (4,148,923)
============ ============
Per share (loss): (0.18) (.68)
============ ============
18
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,361,878
<ALLOWANCES> (850,347)
<INVENTORY> 394,167
<CURRENT-ASSETS> 1,387,270
<PP&E> 1,079,542
<DEPRECIATION> 959,377
<TOTAL-ASSETS> 15,595,665
<CURRENT-LIABILITIES> 7,752,950
<BONDS> 0
0
0
<COMMON> 62,755
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 15,595,665
<SALES> 3,245,257
<TOTAL-REVENUES> 3,245,257
<CGS> 2,055,292
<TOTAL-COSTS> 2,055,292
<OTHER-EXPENSES> 5,244,504
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 182,414
<INCOME-PRETAX> (5,196,330)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,196,330)
<DISCONTINUED> (849,425)
<EXTRAORDINARY> 144,934
<CHANGES> 0
<NET-INCOME> (5,900,823)
<EPS-PRIMARY> (1.13)
<EPS-DILUTED> (1.13)
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