<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: September 30, 1997 Commission File Number: 0-19463
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MICROPROSE, INC.
----------------
Exact Name of registrant as specified in its charter
DELAWARE 52-1728656
- ------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
Incorporation or organization) Number)
2490 MARINER SQUARE LOOP, SUITE 100, ALAMEDA, CA 94501
- ------------------------------------------------- -------------
(Address of Principal Executive Offices) (Zip Code)
(510) 864-4440
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
28,534,217 shares of Common Stock were outstanding as of October 31, 1997.
<PAGE>
MICROPROSE, INC.
TABLE OF CONTENTS
Page
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Part I - Financial Information
------------------------------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at September 30 and
March 31, 1997 3
Consolidated Statements of Operations for the three and
six months ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the six
months ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II - Other Information
---------------------------
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 21
Exhibits 22
2
<PAGE>
MICROPROSE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, March 31,
1997 1997
------------- -----------
(UNAUDITED)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 34,959 $ 47,110
Accounts receivable, less allowances of $5,330 and $6,568
at September 30 and March 31, 1997, respectively 8,598 7,891
Inventories 2,060 4,042
Prepaid royalties 5,488 2,139
Other current assets 1,292 1,958
------------ -----------
Total current assets 52,397 63,140
Property, plant and equipment, net 7,924 7,802
Goodwill, net 699 892
Investments 3,445 6,050
Other assets 3,401 2,421
------------ -----------
$ 67,866 $ 80,305
------------ -----------
------------ -----------
Liabilities, Redeemable Preferred Stock and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,808 $ 3,508
Salaries, wages and related accruals 4,411 6,337
Royalties payable 1,844 1,840
Current portion of redeemable preferred stock 2,702 -
Other current liabilities 6,383 7,122
------------ -----------
Total current liabilities 19,148 18,807
Other liabilities 1,327 1,280
Long-term debt 32,445 32,739
------------ -----------
Total liabilities 52,920 52,826
------------ -----------
Redeemable preferred stock, $0.001 par value, 4,000 shares designated
Series A issued and outstanding, redemption and liquidation amount
of $5,400 and $5,260 at September 30 and March 31, 1997, respectively,
net of current portion 3,179 5,881
Stockholders' equity:
Preferred stock, $0.001 par value, 9,000 shares authorized (of which
4,000 shares have been designated Series A), 16 Series B-1 convertible
shares issued and outstanding at March 31, 1997 - -
Common stock, $0.001 par value, 40,000 shares authorized, 28,430 and
28,287 shares issued and outstanding at September 30 and March 31,
1997, respectively 29 29
Additional paid-in capital 143,049 142,558
Accumulated deficit (130,550) (120,468)
Foreign currency translation adjustment (761) (521)
------------ -----------
Total stockholders' equity 11,767 21,598
------------ -----------
$ 67,866 $ 80,305
------------ -----------
------------ -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
3
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MICROPROSE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------------- ------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenue $ 19,199 $ 27,413 $ 32,779 $ 40,485
Cost of revenue 8,003 10,186 13,781 15,085
---------- ---------- ---------- ----------
Gross profit 11,196 17,227 18,998 25,400
Operating expenses:
Sales and marketing 4,715 5,011 8,896 9,593
General and administrative 1,979 3,772 5,152 7,444
Research and development 6,202 6,215 12,065 11,903
---------- ---------- ---------- ----------
Total operating expenses 12,896 14,998 26,113 28,940
---------- ---------- ---------- ----------
Operating income (loss) (1,700) 2,229 (7,115) (3,540)
Interest expense, net (121) (154) (272) (635)
Other income (expense), net 51 (244) (2,695) 1,823
---------- ---------- ---------- ----------
Income (loss) before extraordinary item (1,770) 1,831 (10,082) (2,352)
Extraordinary item, net of tax effect - 879 - 3,547
---------- ---------- ---------- ----------
Net income (loss) $ (1,770) $ 2,710 $ (10,082) $ 1,195
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Per share data:
Income (loss) before extraordinary item $ (0.06) $ 0.06 $ (0.36) $ (0.09)
Extraordinary item, net of tax effect - 0.03 - 0.13
---------- ---------- ---------- ----------
Net income (loss) $ (0.06) $ 0.09 $ (0.36) $ 0.04
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Number of shares used in computation of
per share data 28,365 28,214 28,335 26,674
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
4
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MICROPROSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
---------------------------
1997 1996
----------- ----------
<S> <C> <C>
Operating Activities:
Net income (loss) $ (10,082) $ 1,195
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,018 2,021
Gain on the sale of investment in FASA - (1,895)
Loss on the write-down of investment in TEN 2,605 -
Extraordinary gain on extinguishment of long-term debt - (3,547)
Changes in assets and liabilities:
Accounts receivable (780) 1,471
Inventories 1,966 1,439
Prepaid royalties (3,968) (933)
Other current assets 596 921
Other assets (492) 166
Accounts payable 320 (2,727)
Salaries, wages and related accruals (1,919) 684
Royalties payable 25 1,269
Other current liabilities (850) 362
Other liabilities 132 -
----------- ----------
Net cash provided by (used in) operating activities (10,429) 426
Investing Activities:
Acquisitions of property, plant and equipment (1,560) (1,491)
Acquisition of certain net assets of Leisuresoft GmbH, net of cash acquired - (447)
Proceeds from sale of investment in FASA Interactive Technologies - 570
Investment in Virtual World Entertainment Group, Inc. - (570)
----------- ----------
Net cash used in investing activities (1,560) (1,938)
Financing activities:
Extinguishment of debt - (2,959)
Proceeds from issuance of common stock, net of issuance costs 491 10,003
Repayments under notes and lines of credit (402) (499)
Principal payments on capital lease obligations (141) (275)
----------- ----------
Net cash provided by (used in) financing activities (52) 6,270
Effect of exchange rate changes on cash (110) (202)
----------- ----------
Increase (decrease) in cash and cash equivalents (12,151) 4,556
Cash and cash equivalents at beginning of period 47,110 35,369
----------- ----------
Cash and cash equivalents at end of period $ 34,959 $ 39,925
----------- ----------
----------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
5
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MICROPROSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements are the unaudited historical financial
statements of MicroProse, Inc. (formerly Spectrum HoloByte, Inc.) and
subsidiaries (the "Company") and reflect all adjustments (consisting only of
normal recurring accruals) that, in the opinion of management, are necessary
for a fair presentation of interim period results. The consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1997, as filed with the Securities
and Exchange Commission on June 30, 1997. The March 31, 1997 consolidated
balance sheet included herein was derived from audited financial statements,
but does not include all disclosures, including notes, required by generally
accepted accounting principles.
The results of operations for the current interim period are not necessarily
indicative of results to be expected for the entire current year or other
future interim periods.
On October 5, 1997, the Company entered into a definitive agreement to merge
with GT Interactive Software Corp. ("GT"), a Delaware corporation and a
developer, publisher and distributor of entertainment software for personal
computers and certain console platforms. Under the terms of the proposed
transaction, each of the Company's outstanding common shares will be
exchanged for 0.700 shares of GT common stock and additionally, each of the
Company's outstanding convertible preferred shares will be exchanged for one
share of GT's newly created series of convertible preferred stock. The
transaction is intended to be treated as a tax free reorganization pursuant
to the provisions of Section 368 of the Internal Revenue Code of 1986 and a
pooling of interests for accounting purposes.
For the purposes of presentation, the Company has indicated its interim
fiscal periods as ended on September 30, 1997 and 1996 and its prior fiscal
year as ended on March 31, 1997. As the Company's annual fiscal period is
accounted for on a 52-53 week year, the interim period financial statements
included herein represent interim results through September 28, 1997 and
September 29, 1996 and the end of the prior fiscal year included herein
represents amounts as of March 30, 1997.
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year's presentation. These
reclassifications had no effect on previously reported net income (loss) or
stockholders' equity.
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost or market on a first-in,
first-out (FIFO) basis. Inventories at September 30 and March 31, 1997
consisted of (IN THOUSANDS):
September 30, March 31,
1997 1997
------------- ---------
Raw materials $ 439 $ 413
Finished goods 1,621 3,629
------------- ---------
$ 2,060 $ 4,042
------------- ---------
------------- ---------
NOTE 3. INVESTMENT
In fiscal 1996 and 1997, the Company made minority equity investments of $2.6
million in Total Entertainment Network, Inc. ("TEN"). These cost-basis
investments were made pursuant to an investment and licensing arrangement
whereby the Company committed to allow certain of the Company's future titles
to be played over the Total Entertainment Network. In conjunction with the
planned refinancing of TEN, the Company recorded a $2.6 million charge in the
first quarter of fiscal 1998 to write-down its investment as management
estimated that a decline in fair value had occurred that was other than
temporary in nature. The charge was included in other income and expense in
the accompanying consolidated statement of operations.
6
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MICROPROSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. FOREIGN EXCHANGE
The Company enters into foreign exchange forward contracts to hedge
certain foreign currency denominated balances against changes in rates
of exchange. These contracts, which require the Company to exchange
foreign currencies, generally mature within three months. Contracts
that are inversely correlated to the risk of the hedged item and are
designated and effective as a hedge of transactions for which a firm
commitment has been attained qualify for hedge accounting. Gains and
losses on these contracts are deferred and recognized in income in the
same period that the underlying transactions are settled. If an
instrument ceases to qualify for hedge accounting, any subsequent gains
and losses are recognized as income in the current period. The Company
does not use any derivatives for trading or speculative purposes.
NOTE 5. PREFERRED STOCK
At September 30, 1997, there were 4,000,000 shares of Series A
convertible preferred stock ("Series A Stock") outstanding. The Series
A Stock is convertible into 196,078 shares of common stock, accrues
dividends at an annual rate of 7%, and is redeemable for $1.00 per
share plus all accumulated but unpaid dividends. In September 1997, the
Company received a written request to redeem 50% of the outstanding
Series A Stock. The Company anticipates that the redemption of these
shares will be made in the quarter ending December 1997. The remaining
50% of the outstanding Series A Stock will become redeemable in
September 1998.
In September 1997, all outstanding shares of Series B-1 preferred stock
(16,045) were converted into an equivalent number of common shares.
NOTE 6. NET INCOME (LOSS) PER SHARE
Net income (loss) per share has been computed using the weighted
average number of common shares and common equivalents (when dilutive)
outstanding during each period. Net income (loss) has been adjusted
for cumulative but undeclared dividends on Series A preferred stock.
NOTE 7. RECENT PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share," which specifies the computation, presentation and
disclosure requirements for earnings per share. SFAS No. 128 supersedes
Accounting Principles Board Opinion No. 15 and is effective for
financial statements issued for periods ending after December 15, 1997.
The Company will report its earnings per share in accordance with this
standard beginning with the three-month period ending December 31,
1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which requires disclosure of all changes in stockholders'
equity except those resulting from investments or contributions by
stockholders. SFAS No. 130 is effective for the Company for fiscal
years beginning after December 15, 1997. The Company does not expect
this pronouncement to materially impact the Company's results of
operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which requires disclosure
about operating segments in annual financial statements and selected
information in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas
and major customers. This statement supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise" and is effective for
fiscal years beginning after December 15, 1997. The Company is
evaluating the requirements of SFAS No. 131 and the effects, if any, on
the Company's current reporting and disclosures.
7
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MICROPROSE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
consolidated historical financial information and the notes thereto
included in Item 1 of this Quarterly Report and Management's Discussion
and Analysis of Financial Condition and Results of Operations contained
in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1997, as filed with the Securities and Exchange Commission on
June 30, 1997.
This Quarterly Report on Form 10-Q contains forward-looking statements which
involve risks and uncertainties. The Company may, from time to time, make
oral forward-looking statements. The factors discussed in "Risk Factors"
below are important factors that could cause actual results to differ
materially from those projected in any such forward-looking statements.
OVERVIEW
MicroProse, Inc. ("the Company") derives revenue primarily from publishing
and distributing entertainment software. This software is generally published
by the Company for the following platforms:
- - Compact-Disc Read-Only Memory ("CD-ROM") for the personal computer
("PC").
- - Videogame consoles, which include 32-bit "next-generation"
systems.
In addition, the Company generates revenue from the licensing of its
products to third-party publishers and the distribution of third-party
software and related products.
See additional discussion in "Risk Factors" below.
OPERATING RESULTS
Consolidated net revenue generated in North America and the rest of the
world consisted of the following (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
% of Consolidated
Amount Net Revenue
-------------------------- --------------------------
Three months ended September 30: 1997 1996 % change 1997 1996
-------------------------- ---------- --------------------------
<C> <C> <C> <C> <C> <C>
North America $ 8,498 $ 7,541 12.7% 44.3% 27.5%
International 10,701 19,872 -46.2% 55.7% 72.5%
-------------------------- --------------------------
Consolidated $ 19,199 $ 27,413 -30.0% 100.0% 100.0%
-------------------------- --------------------------
-------------------------- --------------------------
Six months ended September 30:
North America $ 11,933 $ 14,786 -19.3% 36.4% 36.5%
International 20,846 25,699 -18.9% 63.6% 63.5%
-------------------------- --------------------------
Consolidated $ 32,779 $ 40,485 -19.0% 100.0% 100.0%
-------------------------- --------------------------
-------------------------- --------------------------
</TABLE>
The following table sets forth the components of net revenue in dollars and
as a percentage of total net
8
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MICROPROSE, INC.
revenue (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
% of Consolidated
Amount Net Revenue
-------------------------- --------------------------
Three months ended September 30: 1997 1996 % change 1997 1996
-------------------------- ---------- --------------------------
<C> <C> <C> <C> <C> <C>
CD-ROM $ 14,814 $ 21,868 -32.3% 77.2% 79.8%
Videogame 586 2,141 -72.6% 3.1% 7.8%
Licensing/OEM 1,867 1,059 76.3% 9.7% 3.8%
Distribution 1,478 2,212 -33.2% 7.7% 8.1%
Floppy disk and other 454 133 241.4% 2.3% 0.5%
-------------------------- --------------------------
Consolidated $ 19,199 $ 27,413 -30.0% 100.0% 100.0%
-------------------------- --------------------------
-------------------------- --------------------------
Six months ended September 30:
CD-ROM $ 25,659 $ 30,807 -16.7% 78.3% 76.1%
Videogame 862 4,762 -81.9% 2.6% 11.8%
Licensing/OEM 2,947 2,571 14.6% 9.0% 6.3%
Distribution 2,602 2,212 17.6% 7.9% 5.5%
Floppy disk and other 709 133 433.1% 2.2% 0.3%
-------------------------- --------------------------
Consolidated $ 32,779 $ 40,485 -19.0% 100.0% 100.0%
-------------------------- --------------------------
-------------------------- --------------------------
</TABLE>
The decline in net revenue for the second quarter of fiscal 1998 as compared
with the same period in fiscal 1997 was due principally to the prior year's
successful launch of GRAND PRIX II. This title accounted for $16.0 million of
net revenue in the second quarter of fiscal 1997, 85% of which originated in
Europe. In the second quarter of fiscal 1998, the Company released three new
titles, X-COM: APOCALYPSE, 7TH LEGION and MAGIC THE GATHERING: SPELLS OF THE
ANCIENTS and two compilations which generated approximately $8.5 million
combined. The decline in net revenue for the first six months of fiscal 1998
was due largely to strong sales in the prior year of GRAND PRIX II and SID
MEIER'S CIVILIZATION II (which was released in the fourth quarter of fiscal
1996). SID MEIER'S CIVILIZATION II generated $13.6 million of net revenue
during the first six months of fiscal 1997.
The decline in videogame revenue in the second quarter and first six
months of fiscal 1998 was due to the release of two console titles in
the prior year as compared to no titles released in fiscal 1998. The
two fiscal 1997 titles (both for the Sony PlayStation) were TOP GUN:
FIRE AT WILL and GUNSHIP 2000. The increase in second quarter
license/OEM revenue was due to the addition of domestic and
international licensing agreements for certain PC titles.
Distribution revenue includes shipments of computer software and
related products published or manufactured by third parties and
distributed by the Company. Substantially all the distribution revenue
generated in the second quarter and first six months of fiscal 1998 was
related to shipments by Leisuresoft, which was acquired at the end of
the first quarter of fiscal 1997.
Gross profit consisted of the following (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
% of Consolidated
Amount Net Revenue
-------------------------- --------------------------
1997 1996 % change 1997 1996
-------------------------- ---------- --------------------------
<S> <C> <C> <C> <C> <C>
Three months ended September 30 $ 11,196 $ 17,227 -35.0% 58.3% 62.8%
-------------------------- --------------------------
-------------------------- --------------------------
Six months ended September 30 $ 18,998 $ 25,400 -25.2% 58.0% 62.7%
-------------------------- --------------------------
-------------------------- --------------------------
</TABLE>
9
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MICROPROSE, INC.
Gross profit as a percent of consolidated net revenue declined in the second
quarter due principally to the reversal of certain reserves in the prior year
related to the sale of previously reserved inventories. The decline in gross
profit as a percentage of consolidated net revenue in the first six months of
fiscal 1998 was due primarily to the consolidation of Leisuresoft's
lower-margin wholesale operations. Additionally, the prior year included
lower product costs due to the volume discounts realized on GRAND PRIX II and
SID MEIER'S CIVILIZATION II.
Partially offsetting the decreases in gross profit in the second
quarter and first six months of fiscal 1998 was a reduction in
shipments of lower-margin Sony PlayStation titles. The Company believes
that gross profit could be adversely impacted in future periods by an
increased proportion of distribution revenue, increased license
royalties and competitive pricing pressures.
The following table sets forth operating expenses, interest and other
income (expense) and extraordinary items (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
% of Consolidated
Amount Net Revenue
-------------------------- --------------------------
Three months ended September 30: 1997 1996 % change 1997 1996
-------------------------- ---------- --------------------------
<C> <C> <C> <C> <C> <C>
Sales and marketing $ 4,715 $ 5,011 -5.9% 24.6% 18.3%
General and administrative 1,979 3,772 -47.5% 10.3% 13.7%
Research and development 6,202 6,215 -0.2% 32.3% 22.7%
-------------------------- --------------------------
Total operating expenses $ 12,896 $ 14,998 -14.0% 67.2% 54.7%
-------------------------- --------------------------
-------------------------- --------------------------
Interest and other expense $ (70) $ (398) -82.4% -0.4% -1.5%
-------------------------- --------------------------
-------------------------- --------------------------
Extraordinary item, net of tax effect $ - $ 879 -100.0% 0.0% 3.2%
-------------------------- --------------------------
-------------------------- --------------------------
Six months ended September 30:
Sales and marketing $ 8,896 $ 9,593 -7.3% 27.2% 23.7%
General and administrative 5,152 7,444 -30.8% 15.7% 18.4%
Research and development 12,065 11,903 1.4% 36.8% 29.4%
-------------------------- --------------------------
Total operating expenses $ 26,113 $ 28,940 -9.8% 79.7% 71.5%
-------------------------- --------------------------
-------------------------- --------------------------
Interest and other income (expense) $ (2,967) $ 1,188 - -9.1% 2.9%
-------------------------- --------------------------
-------------------------- --------------------------
Extraordinary item, net of tax effect $ - $ 3,547 -100.0% 0.0% 8.8%
-------------------------- --------------------------
-------------------------- --------------------------
</TABLE>
The decrease in sales and marketing expense in the second quarter and
first six months of fiscal 1998 was largely due to a decline in variable
marketing costs, the consolidation of certain redundant domestic sales
and marketing functions and a reduction of trade show costs. The
reduction in variable marketing costs was due primarily to higher fiscal
1997 promotional expenditures related to the launch of SID MEIER'S
CIVILIZATION II (released late in fiscal 1996) and GRAND PRIX II
(released in the second quarter of fiscal 1997). Partially offsetting
these decreases was an increase in cooperative marketing costs related
to the new titles released in the second quarter of fiscal 1998.
The reduction in general and administrative expense in the second
quarter and first six months of fiscal 1998 was due primarily to
decreased charges for bad debt expense. The bad debt provision for the
first six months of fiscal 1997 included charges of $1.7 million due to
concerns regarding the credit-worthiness of certain domestic
distributors. Additionally, legal, audit and incentive compensation
costs were lower in the second quarter of fiscal 1998 due to a reduction
in external consulting costs and lower profits.
The increase in research and development costs during the first six
months of fiscal 1998 was due to additional outside labor costs
incurred related to STAR TREK: GENERATIONS and recruiting and
relocation costs related to certain
10
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MICROPROSE, INC.
management positions. These increases were partially offset by a reduction
in the write-off of development advances associated with cancelled product
development projects.
The change in other income (expense) was due primarily to the following
factors: 1) in the first quarter of fiscal 1998, a $2.6 million charge
was recorded to write-down the Company's equity investment in Total
Entertainment Network, Inc. due to management's determination that a
decline in fair value had occurred that was other than temporary in
nature, 2) a $1.9 million gain was recorded in the first quarter of the
prior year related to the sale of the Company's investment in FASA
Interactive Technologies, Inc., 3) lower interest costs were incurred in
the first six months of fiscal 1998 due to a reduction in borrowings
under Notes, and 4) a net foreign currency transaction gain was recorded
in the second quarter of fiscal 1998 related to favorable exchange rates
secured on forward contracts.
The extraordinary items recorded in the prior year reflect the gains
realized upon the repurchase and the conversion to equity of a portion
of the Company's Notes at a discount from face value.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased to $33.2 million and cash decreased to $35.0
million during the first six months of fiscal 1998. The main uses of
cash and cash equivalents in fiscal 1998 to date were to fund operating
losses, short-term royalty advances and bonuses earned in fiscal 1997.
The Company has authorized 9,000,000 shares of preferred stock, $0.001
par value, of which 4,000,000 shares are designated Series A redeemable
preferred stock ("Series A Stock"). At September 30 and March 31, 1997,
there were 4,000,000 shares of Series A Stock outstanding. The Series A
Stock is convertible into 196,078 shares of common stock and accrues
dividends at an annual rate of 7%. Preferred stockholders receive one
vote for each common share into which their preferred shares are
convertible. The Series A Stock is redeemable for $1.00 per share plus
all accumulated but unpaid dividends (total redemption of $5.4 million
as of September 30, 1997) (i) at any time by the Company, (ii)
commencing on September 24, 1997, for up to 50% of the Series A Stock
upon written demand of holders of the majority of Series A Stock, or
(iii) in its entirety commencing on September 24, 1998, upon written
demand of holders of the majority of Series A Stock. In September 1997,
the Company received a written request to redeem 50% of the outstanding
Series A Stock. The Company anticipates that the redemption of these
shares will be made in the quarter ending December 1997. The remaining
50% of the outstanding Series A Stock will become redeemable in
September 1998.
Management believes that existing cash and cash equivalents, together
with cash generated from operations, will be sufficient to meet the
Company's liquidity and capital needs for at least the next 12 months.
RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING
THE COMPANY AND ITS BUSINESS PROSPECTS.
STRATEGIC BUSINESS COMBINATION. In October 1997, the Company entered
into a definitive agreement to merge with GT Interactive Software Corp.
("GT"). The Company expects the merger to be completed in the quarter
ending December 31, 1997, subject to regulatory and stockholder
approval. There can be no assurance that the proposed merger will be
successfully consummated, or that the benefits of the merger
anticipated by the two companies will be realized. Furthermore, there
can be no assurance that Company's distributors and potential customers
will continue their current buying patterns without regard to the
announced merger, and any significant delay or reduction in orders
could have a materially adverse effect on the Company's business and
results of operations. In addition, there can be no assurance that the
Company will be able to retain its key product development, technical
and management personnel. The loss of certain key employees could have
a material and adverse effect on the Company's business.
In the event the merger is not completed, the effect of public
announcements of such a failure may materially and
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MICROPROSE, INC.
adversely affect (a) the Company's sales and operating results (b) the
Company's ability to attract and retain key product development, technical
and management personnel, (c) progress of certain development projects and
(d) the trading price of the Company's Common Stock. In addition, it would
take the Company a substantial amount of time before it is operating at full
capacity again due to the significant resources it has allocated to
completing the merger transaction. Such a delay could have a material and
adverse effect on the Company's business, operating results and financial
condition.
In the event that the merger is not completed for certain reasons
specified in the agreement with GT, the Company could be obligated to
pay GT a fee of $8,000,000 and make expense reimbursement or damage
payments to GT in an amount not to exceed $1,500,000.
OPERATING RESULTS. The Company reported net losses for the second
quarter and first six months of fiscal 1998 of $1.8 million, or $0.06
per share, and $10.1 million or $0.36 per share, respectively. Although
the Company reported net income for the year ended March 31, 1997 of
$8.0 million or $0.28 per share, the Company had net losses of
approximately $39.8 million, $18.1 million and $58.5 million for fiscal
years 1996, 1995 and 1994, respectively. There can be no assurance that
the Company's business strategies and tactics will be successful or that
the Company will be able to generate profitability in future quarterly
or annual periods.
FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY. The Company's operating
results have varied significantly in the past, and are expected to vary
significantly in the future. This variability is a result of factors such
as: 1) volume shipments of significant new products, 2) the degree of market
acceptance of the Company's products, 3) the introduction of products
competitive with those of the Company, 4) the timing and market acceptance of
new hardware and software product introductions, 5) the size and growth rate
of the consumer software market, 6) the seasonality of sales, 7) development
and promotional expenses relating to the introduction of new products or new
versions of existing products, 8) product returns and markdowns, 9) changes
in pricing policies by the Company and its competitors, 10) the accuracy of
retailers' forecasts of consumer demand, 11) the timing of orders from major
customers, 12) order cancellations, 13) delays of shipment, and 14)
write-offs of advance royalty payments. Because a majority of the unit sales
for a product typically occurs in the first 90 to 120 days following the
introduction of the product, the Company's revenue may increase significantly
in a period in which a major product introduction occurs and may decline in
following periods or in periods in which there are no major product
introductions. The Company's expenses are based, in part, on expected future
revenue. Certain overhead and product development expenses are fixed and do
not vary directly in relation to revenue. Consequently, if net revenue is
below expectations, the Company's operating results are likely to be
materially and adversely affected. In certain past periods the Company's
revenue or operating results were below the expectations of, and certain new
products were not introduced when anticipated by, public market analysts and
investors. These circumstances could recur in future periods, and in such
event, the prices of the Company's common stock and Notes would likely be
materially and adversely affected.
The entertainment software business is highly seasonal. Typically, net
revenue is highest during the last calendar quarter (which includes the
holiday buying season), declines in the first calendar quarter, is lowest in
the second and increases in the third calendar quarter. This seasonal pattern
is due primarily to the increased demand for entertainment software products
during the year-end holiday buying season. The Company's net revenue,
however, is largely dependent on releases of major new products and, as such,
may not necessarily reflect the seasonal patterns of the industry as a whole.
The Company expects that its net revenue and operating results will continue
to fluctuate significantly in the future.
SIGNIFICANT LEVERAGE. As of September 30, 1997, the Company had outstanding
indebtedness for borrowed funds of approximately $33.8 million and cumulative
manditorily redeemable preferred stock of $5.9 million. This substantial
leverage will have several important consequences for the Company's future
operations, including the following: (i) a substantial portion of the
Company's cash flows from operations will be dedicated to the payment of
interest on, and principal of, its indebtedness; (ii) the Company's ability
to obtain
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MICROPROSE, INC.
additional financing in the future for capital expenditures, acquisitions,
general corporate purposes or other purposes may be impaired; and (iii) the
Company's ability to withstand competitive pressures, adverse economic
conditions and adverse changes in governmental regulations and to make
acquisitions or otherwise take advantage of significant business
opportunities that may arise may be negatively impacted.
The Company, in the future, may enter into lines of credit or other borrowing
arrangements, any of which would add to the total outstanding indebtedness of
the Company. The Company's ability to meet its debt service obligations and
to reduce its total indebtedness will be dependent upon the Company's future
performance, which will be subject to financial, business and other factors
affecting the operations of the Company, many of which are beyond its
control. If the Company is unable to generate sufficient cash flow from
operations in the future to service its debt, it may be required to convert
or refinance all or a portion of such debt, including the Notes (see below),
or to obtain additional financing. However, there can be no assurance that
any refinancing would be possible or that any additional financing could be
obtained.
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS; PRODUCT DELAYS. A significant
portion of the Company's fiscal year revenue is generated by products
introduced during that fiscal year. The Company depends on both the
timely introduction of successful new products or sequels to existing
products to replace declining revenue from older products and continued
revenue from back-catalogue products. If for any reason revenue from new
products or other activities fails to replace declining revenue from
existing products, or if revenue from back-catalogue titles declines
significantly, the Company's business, operating results and financial
condition may be materially and adversely affected. In order to
maintain or grow its current revenue levels, the Company believes it
will be necessary to develop or obtain rights to new products that
achieve and sustain market acceptance, are developed for the appropriate
platforms and are introduced in a timely manner. The Company is
continuing to devote considerable resources toward the development of
new products and has secured rights to intellectual properties and
technologies owned by third parties. As is typical in the industry,
while the Company maintains internally developed release schedules,
there can be no assurance that new products under development will be
released on schedule or at all, that third party technology will be
delivered or completed on schedule, or that the Company's products will
generate significant revenue. Historically, the Company has frequently
missed product release schedules. To the extent that major new products
are not released on schedule, both net revenue and gross profit are
likely to be materially and adversely affected. In addition, as access
to distribution channels and retail shelf space becomes increasingly
competitive, the Company's ability to produce and bring to market new
and compelling products in a timely fashion plays an increasingly
important role in the Company's ability to retain adequate access to
these channels and retail shelf space.
The Company's current production schedules contemplate that the Company will
commence shipments of a number of new products in fiscal 1998 and 1999. As
with any software product, however, until all aspects of the development and
initial distribution of a game are completed, there can be no assurance of
its release date. Release dates will vary depending on quality assurance
testing and other development factors. If the Company were unable to commence
volume shipments of a significant new product during the scheduled quarter,
the Company's revenue and earnings would likely be materially and adversely
affected in that quarter. In the past, the Company has experienced
significant delays in the introduction of certain new products. It is likely
in the future that certain new products will not be released in accordance
with the Company's internal development schedule or the expectations of
public market analysts and investors. A significant delay in the introduction
of, or the presence of a defect in, one or more new products could have a
material adverse effect on the ultimate success of such products and on the
Company's business, operating results and financial condition, particularly
in the quarter in which such products are scheduled to be introduced.
The process of developing software products such as those offered by
the Company is extremely complex and is expected to become more complex
and expensive in the future as consumers demand products with more
sophisticated and elaborate multimedia features and as new platforms
and technologies are supported. At the same time, the introduction of
new technologies and competitive products, the increase in competition
for retail shelf space among software products and other factors may
cause the effective lives of the Company's products to become shorter
and the Company's ability to introduce new products on a timely basis
to become increasingly important. As the Company intends to focus its
resources on a smaller number of titles, its
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MICROPROSE, INC.
exposure to the risks of delays of any one title will increase.
UNCERTAINTY OF MARKET ACCEPTANCE; UNPREDICTABLE PRODUCT LIFE CYCLES. Consumer
preferences for entertainment software products are continually and rapidly
changing and are extremely difficult to predict. Few entertainment software
products achieve sustained market acceptance, for example, beyond one holiday
buying season. There can be no assurance that new products introduced by the
Company will achieve any significant degree of market acceptance, or that
acceptance, if achieved, will be sustained for any significant period.
Further, there can be no assurance that such products will not be subject to
changes in consumer preferences or that product life cycles will be
sufficient to permit the Company to recover development and other associated
costs. In addition, sales of any single title of the Company's entertainment
software products will decline over time. A majority of the unit sales for a
product typically occurs in the first 90 to 120 days after the product is
introduced. Therefore, the Company cannot rely on the sales of current
products to sustain its business in the future. Failure of new products or
platforms to achieve or sustain market acceptance would have a material and
adverse effect on the Company's business, operating results and financial
condition. In addition, the Company does not carry significant inventory of
its new products. As a result, significant production delays would have a
material and adverse effect on the Company's business and operating results.
Further, if demand for a particular product is greater than anticipated, the
Company may not have sufficient inventory to meet customer demands.
COMPETITION. The entertainment software industry is intensely competitive and
in the process of consolidation. The Company's competitors vary in size from
very small companies with limited resources to very large corporations with
greater financial, marketing and product development resources than those of
the Company. The Company competes primarily with other developers of PC
entertainment and video game entertainment software. Significant competitors
of the Company in the entertainment software industry include Electronic
Arts, CUC International, Lucas Arts, Interplay, GT Interactive, Acclaim
Entertainment, Broderbund Software, and Virgin Interactive. The success of
one or more of these companies or the entry and participation of new
companies, including diversified entertainment companies, may adversely
affect the Company's future performance. The availability of significant
financial resources has become a major competitive factor in the
entertainment software industry, principally as a result of the technical
sophistication of advanced multimedia computer game products requiring
substantial investments in research and development and the increasing need
to license products and rights to use other intellectual properties from
third parties. Also, competitors with large product lines and popular titles
typically have greater leverage with retailers and distributors and other
customers who may be willing to promote titles with less consumer appeal in
addition to such competitors' most popular titles.
Many of the Company's competitors are developing on-line interactive computer
games that will be competitive with the Company's products. As competition
increases, significant price competition and reduced profit margins may
result. In addition, competition from new technologies may reduce demand in
markets in which the Company has traditionally competed. Prolonged price
competition or reduced demand as a result of competing technologies would
have a material and adverse effect on the Company's business, financial
condition and operating results. There can be no assurance that the Company
will continue to compete successfully against current or future competitors
or that competitive pressures faced by the Company will not materially and
adversely affect its business, operating results and financial condition.
Retailers of the Company's products typically have a limited amount of shelf
space and promotional resources, and there is intense competition among
consumer software producers for adequate levels of shelf space and
promotional support from retailers. To the extent that the number of consumer
software products and computer platforms increases, this competition for
shelf space may intensify. Due to increased competition for limited shelf
space, retailers and distributors are increasingly in a better position to
negotiate favorable terms of sale, including promotional discounts and
product return policies. Retailers often require software publishers to pay
fees in exchange for preferred shelf space. The Company's products constitute
a relatively small percentage of a retailer's sales volume, and there can be
no assurance that retailers will continue to purchase the Company's products
or provide the Company's products with adequate levels of shelf space and
promotional support.
As more consumers own multimedia PCs, the distribution channels for
entertainment software have changed,
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MICROPROSE, INC.
and are expected to continue to change, to increasingly depend on mass
merchandisers, on-line services and the Internet to reach the broader market.
In addition, while this trend has increased the number of distribution
channels, it has intensified competition for shelf space because these new
channels generally carry only top-selling titles. In addition, other types of
retail outlets and methods of product distribution, such as on-line services
and the Internet, may become important in the future, and it will be
important for the Company to gain access to these channels of distribution.
There can be no assurance that the Company will gain such access or that the
Company's access will allow the Company to maintain its historical levels of
sales volume.
CONCENTRATION OF CUSTOMER BASE; RISK OF CUSTOMER BUSINESS FAILURE; PRODUCT
RETURNS. The Company principally sells its products to retailers and
distributors, who in turn resell the products to consumers. During the three
and six-month periods ended September 30, 1997, sales to the top ten such
customers represented approximately 55% and 53%, respectively, of the
Company's net revenue. Sales are typically made on credit, with terms that
vary depending upon the customer and the nature of the product. The Company
does not require collateral to secure payment. Retailers and distributors
compete in a volatile industry and are subject to the risk of business
failure. The business failure of a significant distributor or customer could
have a material and adverse effect on the Company's business, operating
results and financial condition.
The Company is exposed to the risk of product returns from distributors and
retailers. The Company currently maintains a stock balancing policy that
allows distributors and retailers to return products subject to certain
conditions. The Company provides reserves for returns that it believes are
adequate, and the Company's agreements with various customers place certain
limits on product returns. However, new product introductions by the Company
or its competitors, or changes in consumer demand from that anticipated,
could cause customers to seek to return inventory to the Company. Due to the
unpredictability of consumer demand and the uncertainties associated with a
rapidly changing market, there can be no assurance that the Company or its
customers will be able to forecast demand accurately. Any significant amount
of product returns or markdowns could have a material and adverse effect on
the Company's business, operating results and financial condition.
DEPENDENCE UPON STRATEGIC RELATIONSHIPS. The Company's business strategy
relies to a significant extent on its strategic relationships with other
companies and on its alliances with key developers. Certain agreements allow
third parties to approve a product prior to its release, and therefore,
subject the product to delay. There can be no assurance that these
relationships will be successful or that the Company will continue to
maintain and develop strategic relationships, or that licenses between the
Company and any third party will be renewed or extended at their expiration
dates. The Company's failure to renew or extend a key license or maintain its
strategic relationships could materially and adversely affect the Company's
business, operating results and financial condition. In addition, under
certain key license agreements, the Company must obtain approval on a timely
basis from the licensor in order to market products it develops under the
license. There can be no assurance that the Company will obtain such
approval, and failure to do so could have a material and adverse effect on
the Company's operating results, financial condition and business prospects.
The Company has made certain minority equity investments that it believes
will provide future access to products, technologies or distribution
channels. Management performs ongoing evaluations of the future realization
of these investments, and charges any declines in value that are other than
temporary in nature to other expense in its quarterly Consolidated Statements
of Operations. A write down of one or more of these investments could have a
material adverse impact on the Company's operating results and financial
condition.
CHANGES IN TECHNOLOGY AND PRODUCT PLATFORMS. The market for entertainment
software, including entertainment software platforms, is undergoing rapid
technological change. As a result, the Company must continually anticipate
and adapt its products to emerging platforms and evolving consumer
preferences. The introduction of new platforms and technologies can render
existing products obsolete and unmarketable. Development of entertainment
software products for new hardware platforms requires substantial investments
in research and development for technologies such as enhanced sound,
digitized speech, music
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MICROPROSE, INC.
and video and requires the Company to anticipate and develop products for
those platforms that will ultimately be successful. Such research and
development efforts, which generally require 12 to 24 months, must occur well
in advance of the release of new platforms in order to introduce products on
a timely basis following the release of such platforms. In addition, the
Company expects that the trend toward more complex multimedia products and
increasing product development costs will continue for the foreseeable future.
Although the Company intends to develop and market games for certain advanced
and emerging platforms, these development and marketing efforts may require
greater financial and technical resources than those currently possessed by
the Company. In addition, there can be no assurance that the platforms for
which the Company develops products will achieve market acceptance and, as a
result, there can be no assurance that the Company's development efforts with
respect to such new platforms will lead to marketable products or products
that generate sufficient revenue to offset research and development costs
incurred in connection with their development. There can be no assurance that
the Company will be successful in developing and marketing products for new
platforms. Failure to develop products for new platforms that achieve
significant market acceptance may have a material and adverse effect on the
Company's business, operating results and financial condition. The Company is
developing games that may be played interactively over on-line services and
the Internet, but there can be no assurance that the market for networked
videogame play will evolve or develop as anticipated. Consumer preferences
change continually and are extremely difficult to predict. Even if a market
for networked videogame play develops, no assurance can be given that the
Company's products will meet the requirements of such market and achieve
market acceptance.
The Company is heavily dependent on the success of the entertainment software
developed for use on the PC. However, there are multiple, competing and
incompatible formats being introduced in this new market. There can be no
assurance that the Company's strategy of developing primarily for the PC or
the other platforms the Company chooses to support ultimately will be
successful. The development, marketing and distribution of products for game
consoles the Company chooses to support will involve substantial investment
and risks. The Company believes that the principal target audience for game
consoles may be younger than the Company's traditional customers, and there
can be no assurance that the Company's products will be successful with this
different audience. In addition, the Company anticipates that products in the
game console market will require substantially greater expenditures for
marketing, advertising and inventory buildup, often before the market
acceptance of a product is known. Inventory will be two or more times more
expensive as a result of license fees that are required to be prepaid to the
manufacturers of the hardware platforms. Further, game console products will
be sold through channels that overlap with, but are somewhat different from,
the retail channels currently utilized by the Company, and the Company will
be competing in distribution against much larger organizations with greater
financial resources. There can be no assurance that the Company will be
successful in marketing and distributing software for game consoles.
RISK OF SOFTWARE ERRORS OR FAILURES. Software products as complex as those
offered by the Company may contain undetected errors when first introduced or
when new versions are released. In the past, the Company has discovered
software errors in certain of its product offerings after their introduction
and has experienced delays or lost revenue during the period required to
correct these errors. The Company's products must maintain compatibility with
certain hardware, software and accessories. Any changes that result in
incompatibility could result in significant product returns and customer
service costs. In particular, the PC hardware environment is characterized by
a wide variety of nonstandard peripherals (such as sound and graphics cards)
and configurations that make prerelease testing for programming or
compatibility errors very difficult and time consuming. There can be no
assurance that, despite testing by the Company, errors will not be found in
new products or releases after commencement of commercial shipments,
resulting in loss of or delay in market acceptance, which could have a
material and adverse effect on the Company's business, operating results and
financial condition. The risk of undetected product errors can be expected to
increase as products and their development processes become more complex and
as growing competition leads to increased pressure to reduce time to market.
DEPENDENCE ON KEY PERSONNEL; MANAGEMENT CHANGES. The Company's future
success depends in large part
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MICROPROSE, INC.
on the continued service of its key product development, technical and
management personnel and on its ability to continue to attract, motivate and
retain highly qualified employees, including additional management personnel.
The loss of certain key employees could have a material and adverse effect on
the Company's business. In addition, the Company depends on teams of
programmers, game designers and artists. Competition for these skilled
employees is intense, and the loss of the services of key development
personnel could have a material and adverse effect upon the Company's current
business, new product development efforts and prospects. There can be no
assurance that qualified personnel can be readily identified and hired
wherever necessary, that any new personnel will be successfully integrated
into the Company, its operations and culture, or that new personnel, if
hired, will improve the Company's business, operations or operating results.
The Company does not currently have key person life insurance on any
employees.
USE OF INDEPENDENT SOFTWARE DEVELOPERS. In addition to marketing
internally developed software, the Company also markets entertainment
software created in whole or in part by independent software developers.
The cost to retain independent developers is increasing in the form of
guaranteed advances and royalties. Additionally, the Company has less
control over the scheduling and the quality of work of independent
contractors than that of its own employees. Furthermore, the Company's
agreements to publish and market certain independent software
developers' titles will terminate after specified dates unless renewed.
The Company's business and future operating results will depend in part
on the Company's continued ability to attract and maintain relationships
with skilled independent software developers, and to enter into and
renew product development agreements with such developers. There can be
no assurance that the Company will be able to maintain such
relationships or enter into and renew such agreements. In addition,
there can be no assurance that future products which incorporate
software developed by third parties will be released in accordance with
internal delivery schedules or at all.
INTERNATIONAL REVENUE. International net revenue represented approximately
56%, 64%, 64%, and 49% of the Company's net revenue for the three and
six-month periods ended September 30, 1997, and for fiscal years 1997 and
1996, respectively. The Company expects that international net revenue will
continue to account for a significant portion of its net revenue in future
periods. International revenue is subject to inherent risks, including
unexpected changes in regulatory requirements, tariffs and other economic
barriers, fluctuating exchange rates, difficulties in staffing and managing
foreign operations and the possibility of difficulty in accounts receivable
collection. The Company attempts to minimize its exposure to currency
fluctuations by entering into forward currency contracts, however, there can
be no assurance that the Company will be successful at mitigating currency
risks. In some markets, localization of the Company's products is essential
to achieve market penetration. The Company may incur substantial costs and
experience delays in localizing its products, and there can be no assurance
that any localized product will ever generate significant revenue. These or
other factors could have a material and adverse effect on the Company's
future international revenue and, consequently, on the Company's business,
operating results and financial condition.
RECOVERY OF PREPAID ROYALTIES AND GUARANTEES. The Company, from time to
time, enters into agreements with licensors of intellectual property and
developers of games that involve royalty advances and guaranteed minimum
royalty payments. If the sales volumes of products subject to such
arrangements are not sufficient to recover such advances and guarantees,
the Company will be required to write-off unrecovered portions of such
payments. In certain instances, the Company has been required to
write-off a material portion of these advances in past fiscal quarters
and, if the Company must write-off additional portions of such advances
or accrue for the guarantees, its results of operations may be
materially and adversely affected.
INTELLECTUAL PROPERTY. The Company regards the software that it owns or
licenses as proprietary and relies primarily on a combination of copyrights,
trade secret laws, patent and trademark laws, nondisclosure agreements and
other copy protection methods to protect its proprietary rights to its
products. It is the Company's policy that all employees and third-party
developers sign nondisclosure agreements. There can be no assurance that
these measures will be sufficient to protect the Company's intellectual
property rights against infringement. The Company owns or licenses various
trademarks and copyrights. However, the Company has only standard "shrink
wrap" license agreements or no license agreements at all with the end users
of its products and does not copy-protect its software. The Company relies
largely on the copyright laws to prevent unauthorized distribution of its
software. Existing copyright laws afford only limited protection. It may be
possible for unauthorized third parties to copy the Company's products or to
reverse engineer or
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MICROPROSE, INC.
otherwise obtain and use information that the Company regards as proprietary.
Policing unauthorized use of the Company's products is difficult, and
software piracy can be expected to be a persistent problem. Further, the laws
of certain countries in which the Company's products are, or may be,
distributed do not protect the Company's products and intellectual rights to
the same extent as the laws of the United States.
The Company believes that its products, trademarks and other proprietary
rights do not infringe on the proprietary rights of third parties. As the
number of entertainment software products in the industry increases, the
Company believes that software increasingly will become the subject of claims
that such software infringes upon the rights of others. From time to time,
the Company has received communications from parties asserting that features
or content of certain of its products may infringe upon intellectual property
rights of such parties. The Company believes such claims have been without
merit. To date, no such claims have had an adverse effect on the Company's
ability to develop, market or sell its products. There can be no assurance
that existing or future infringement claims against the Company will not
result in costly litigation or require the Company to license the
intellectual property rights of parties. There can be no assurance that such
licenses will be available on reasonable terms or at all.
NASDAQ LISTING. The Company was notified in February 1996 by The Nasdaq
Stock Market ("NASDAQ") that the Company was no longer in compliance
with the net tangible assets requirement of the National Association of
Securities Dealers' ByLaws for listing on The Nasdaq National Market.
NASDAQ granted the Company a temporary exemption from the net tangible
assets requirement. The exemption required that the Company achieve
compliance with the listing on or before July 12, 1996.
The Company regained compliance with The Nasdaq National Market listing
requirements as of the end of the fiscal quarter ended June 30, 1996.
There can be no assurance that the Company will be able to maintain
compliance with the listing requirements of The Nasdaq National Market
in the future. If the Company is unable to maintain compliance, it may
qualify for listing under The Nasdaq SmallCap Market. If for any reason
the Company is unable to achieve and maintain compliance with the
SmallCap listing requirements and is delisted from both The Nasdaq
National Market and The Nasdaq SmallCap Market, the holders of the
Company's 6.5% Convertible Subordinated Notes Due 2002 (the "Notes")
would be entitled to require the Company to repurchase all or any
portion of such holders' Notes for cash at a price equal to the
principal amount plus accrued interest. In such event, the Company's
business, results of operations and financial condition would likely be
materially and adversely affected.
VOLATILITY OF PRICE OF STOCK AND NOTES. There has been a history of
significant volatility in the market prices of companies engaged in the
entertainment software industry, including the Company. It is likely
that the market price of the Company's common stock will continue to be
highly volatile and the price of the Company's Notes will also be
subject to such fluctuations. Factors such as the timing and market
acceptance of new product introductions by the Company, the introduction
of new products by the Company's competitors, loss of key personnel of
the Company, variations in quarterly operating results or changes in
market conditions in the entertainment software industry may have a
significant impact on the market price of the Company's common stock and
the Notes. In the past, the Company has experienced fluctuations in its
operating results, and it is likely that in some future quarter the
Company's revenue or operating results will be below the expectations
of, and certain new products will not be introduced when anticipated by,
public market analysts and investors. In such event, the price of the
Company's common stock would likely be materially adversely affected.
Volatility in the price of the Company's common stock, changes in
prevailing interest rates and changes in perceptions of the Company's
creditworthiness may in the future adversely affect the price of the
Notes.
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MICROPROSE, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No material developments occurred with regard to legal proceedings in
this quarter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) THE FOLLOWING EXHIBITS ARE FILED HEREWITH:
Exhibit
Number Description
- ------- --------------------------------------------------------------
3.1+ Certificate of Incorporation of the Registrant
3.2+ Amended Bylaws of Registrant
4.1+ Specimen Common Stock Certificate of the Registrant
4.2+ Warrants issuable to the Grotech Investors and Corporate
Venture Partners, L.P., dated as of October 17, 1991
4.3+ Form of Warrant issuable to Paragon Investors, dated July
1992
4.4+ Form of Warrant, issued to Ince & Co. (incorporated by
reference to Exhibit 2.3 of Spectrum HoloByte, Inc.'s
Quarterly Report on Form 10-Q, File No. 0-19463, filed on
December 31, 1994)
4.5+ Registration Rights Agreement, dated June 12, 1995 by and
among Spectrum HoloByte, Inc. and Stephen Barcia and Maria
Barcia (incorporated by reference to Exhibit 2.3 of Spectrum
HoloByte, Inc.'s Current Report on Form 8-K, File No. 0-19463,
filed on June 27, 1995)
4.6+ Registration Rights Agreement, dated as of May 16, 1995, by
and among Spectrum HoloByte, Inc. and IPWEL LTD (incorporated
by reference to Exhibit 4.7 of Spectrum HoloByte, Inc.'s
Registration on Form S-3, File No. 33-94580, filed October
24, 1995)
4.7+ Registration Rights Agreement, dated as of May 16, 1995, by
and among Spectrum HoloByte, Inc. and GFL Advantage Fund
Limited (incorporated by reference to Exhibit 4.8 of Spectrum
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MICROPROSE, INC.
Exhibit
Number Description
- ------- --------------------------------------------------------------
HoloByte, Inc.'s Registration on Form S-3, File No. 33-94580,
filed October 24, 1995)
4.8+ Registration Rights Agreement, dated as of August 28, 1995,
by and among Spectrum HoloByte, Inc. and GFL Advantage Fund
Limited (incorporated by reference to Exhibit 4.9 of Spectrum
HoloByte, Inc.'s Registration on Form S-3, File No. 33-94580,
filed October 24, 1995)
4.9+ Registration Rights Agreement, dated as of June 27, 1995, by
and among Spectrum HoloByte, Inc. and Banque Scandinave en
Suisse (incorporated by reference to Exhibit 4.10 of Spectrum
HoloByte, Inc.'s Registration on Form S-3, File No. 33-94580,
filed October 24, 1995)
4.10+ Registration Rights Agreement, dated as of August 25, 1995,
by and among Spectrum HoloByte, Inc. and PJP International,
Ltd. (incorporated by reference to Exhibit 4.11 of Spectrum
HoloByte, Inc.'s Registration on Form S-3, File No. 33-94580,
filed October 24, 1995)
4.11+ Registration Rights Agreement, dated as of May 16, 1995, by
and among Spectrum HoloByte, Inc. and Tanner, Owen & Co.
Incorporated (incorporated by reference to Exhibit 4.12 of
Spectrum HoloByte, Inc.'s Registration on Form S-3, File No.
33-94580, filed October 24, 1995)
4.12+ Registration Rights Agreement, dated as of September 6, 1995,
by and among Spectrum HoloByte, Inc. and Tanner, Owen & Co.
Incorporated (incorporated by reference to Exhibit 4.13 of
Spectrum HoloByte, Inc.'s Registration on Form S-3, File No.
33-94580, filed October 24, 1995)
4.13+ Indenture, dated as of September 15, 1995, between Spectrum
HoloByte, Inc. and Chemical Trust Company of California
(incorporated by reference to Exhibit 3 of Spectrum HoloByte,
Inc.'s Current Report on Form 8-K, File No. 0-19463, filed
October 17, 1995)
4.14+ Registration Rights Agreement, dated as of September 26,
1995, by and among Spectrum HoloByte, Inc. and Robertson,
Stephens & Company, L.P., Jefferies & Company, Inc. and Piper
Jaffray Inc. (incorporated by reference to Exhibit 4 of
Spectrum HoloByte, Inc.'s Current Report on Form 8-K, File
No. 0-19463, filed October 17, 1995)
4.15+ Certificate of Designation for Series B Convertible Preferred
Stock
4.16+ Certificate of Designation for Series B-1 Convertible
Preferred Stock
10.1+ Form of Purchase Agreement, by and between Spectrum HoloByte,
Inc. and certain investors, effective June 26, 1996
(incorporated by reference to Exhibit 4.3 of Spectrum
HoloByte, Inc.'s Registration on Form S-3, File No. 333-08385,
filed July 18, 1996)
11.1 Statement Re: Computation of Net Income (Loss) Per Share
27.1 Statement Re: Financial Data Schedule
+ Previously filed.
(b) REPORTS ON FORM 8-K:
October 15, 1997 - Item 5 - Other events - Reporting that MicroProse,
Inc. had entered into an Agreement and Plan of Merger with GT
Interactive Software Corp. and Swan Acquisition Corp. (a wholly owned
subsidiary of GT Interactive Software Corp.).
20
<PAGE>
MICROPROSE, INC.
SIGNATURES
Pursuant to the requirements 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, on October 13, 1997.
MICROPROSE, INC.
By: /s/ Stephen M. Race
--------------------------------------
Stephen M. Race
CHIEF EXECUTIVE OFFICER, ACTING CHIEF
FINANCIAL OFFICER AND DIRECTOR
21
<PAGE>
Exhibit 11.1
MICROPROSE, INC.
Statement Re: Computation of Net Income (Loss) Per Share
(In thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------------- --------------------------
1997 1996 1997 1996
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Income (loss) before extraordinary item $ (1,770) $ 1,831 $ (10,082) $ (2,352)
Cumulative preferred dividend (70) (70) (140) (140)
---------- --------- ----------- ----------
Income (loss) for the purpose of calculating the income
(loss) per share before extraordinary item (1,840) 1,761 (10,222) (2,492)
Extraordinary item, net of tax effect - 879 - 3,547
---------- --------- ----------- ----------
Net income (loss) for the purpose of
calculating the income (loss) per share $ (1,840) $ 2,640 $ (10,222) $ 1,055
---------- --------- ----------- ----------
---------- --------- ----------- ----------
Per share data:
Income (loss) before extraordinary item $ (0.06) $ 0.06 $ (0.36) $ (0.09)
Extraordinary item, net of tax effect - 0.03 - 0.13
---------- --------- ----------- ----------
Net income (loss) $ (0.06) $ 0.09 $ (0.36) $ 0.04
---------- --------- ----------- ----------
---------- --------- ----------- ----------
Number of shares used in computation of
per share data 28,365 28,214 28,335 26,674
---------- --------- ----------- ----------
---------- --------- ----------- ----------
</TABLE>
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 34,959
<SECURITIES> 0
<RECEIVABLES> 13,928
<ALLOWANCES> 5,330
<INVENTORY> 2,060
<CURRENT-ASSETS> 52,397
<PP&E> 20,279
<DEPRECIATION> 12,355
<TOTAL-ASSETS> 67,866
<CURRENT-LIABILITIES> 19,148
<BONDS> 32,445
3,179<F1>
0
<COMMON> 143,078
<OTHER-SE> (131,311)
<TOTAL-LIABILITY-AND-EQUITY> 67,866
<SALES> 29,832
<TOTAL-REVENUES> 32,779
<CGS> 13,781
<TOTAL-COSTS> 13,781
<OTHER-EXPENSES> 14,048
<LOSS-PROVISION> (10)
<INTEREST-EXPENSE> (272)
<INCOME-PRETAX> (10,082)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,082)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,082)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> (0.36)
<FN>
<F1>Net of current portion ($2,702)
</FN>
</TABLE>
