U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the interim period ended June 30, 1996
[ ] Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the transition period from to
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Commission file number 333-02148
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MICROLEAGUE MULTIMEDIA, INC.
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(Name of Small Business Issuer in its Charter)
Delaware 23-2563090
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(State of Incorporation) (I.R.S. Employer Identification No.)
750 Dawson Drive
Newark, Delaware 19713
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(Address of Principal Executive Offices) (Zip Code)
(302) 368-9990
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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 August 14, 1996, the registrant had outstanding 3,927,667 shares
of Common Stock, par value $.01 per share.
Transitional Small Business Disclosure Format (check one):
Yes No
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* The issuer became subject to the reporting requirements of the Securities
Exchange Act of 1934 as amended, on May 23, 1996.
MICROLEAGUE MULTIMEDIA, INC.
QUARTERLY REPORT ON FORM 10-QSB FOR THE INTERIM
PERIOD ENDED JUNE 30, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Balance Sheets, June 30, 1996 & December 31, 1995............... 3
Consolidated Statements of Operations, six months ended
June 30, 1996, and June 30, 1995......................................... 4
Consolidated Statements of Operations, quarters ended June 30, 1996 and
1995......................................................................... 5
Consolidated Statements of Cash Flows, six months ended
June 30, 1996 & 1995 .................................................... 6
Notes to Consolidated Financial Statements................................... 7
ITEM 2. Management Discussion and Analysis.................................. 8
PART II. OTHER INFORMATION
ITEM 5. Other Information
ITEM 6. Exhibits
MICROLEAGUE MULTIMEDIA, INC..
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1996 & DECEMBER 31, 1995
ASSETS June 30, 1996 Dec. 31, 1995
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(unaudited)
Cash and cash equivalents $1,190,279 $6,754
Accounts receivable, less allowance
for Sales Returns of $430, 000 1,122,128 1,763,124
and $444,000
Inventories 1,268,913 916,715
Royalty advances 548,717 295,702
Prepaid and other current assets 365,960 247,500
Income tax receivable 415,941 0
Deferred tax asset 342,976 208,300
Total Current Assets 5,254,914 3,438,095
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Property, plant and equipment, net 708,059 425,162
Capitalized software costs 461,678 370,021
Goodwill 733,710 771,210
Intangible assets 191,651 262,638
Other assets 129,265 107,413
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Total assets $7,479,277 $5,374,539
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LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable - bank $0 $2,281,372
Current portion of long-term debt 282,299 391,530
Accounts payable 1,113,522 1,109,625
Other accrued liabilities 381,877 238,813
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Total current liabilities 1,777,698 4,021,340
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Long-term debt 1,095,159 1,019,602
Deferred tax liability 238,671 192,000
Total liabilities 3,111,528 5,232,942
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Commitments and contingencies
Stockholders' equity:
Common Stock 39,297 26,749
Additional Paid-in Capital 7,398,000 2,057,158
Accumulated deficiency (3,069,548) (1,872,380)
Less: receivable from stockholders 0 (69,930)
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Total stockholders's equity 4,367,749 141,597
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Total liabilities and stockholders' equity $7,479,277 $5,374,539
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The accompanying notes are an integral part of the
consolidated financial statements.
3
MICROLEAGUE MULTIMEDIA, INC.
CONSOLIDATED INCOME STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 & JUNE 30, 1995
1996 1995
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(unaudited) (unaudited)
Net sales $1,989,128 $1,318,594
Cost of goods sold 1,308,801 968,140
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Gross profit 680,327 350,454
Operating expenses:
Product development 215,147 76,286
Selling 714,855 267,795
General & Admin 967,563 646,058
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Income from operations (1,217,238) (639,685)
Interest expense 143,574 114,592
Other income, net 0 4,054
Provision for income taxes, before
extraordinary items (367,825) 0
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Income before extraordinary items ($992,987) ($758,331)
Extraordinary items, net of tax effect 204,181 0
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Net (Loss) ($1,197,168) ($758,331)
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Net (Loss) per common share ($0.37) ($0.26)
Weighted average common
shares outstanding 3,227,177 2,901,845
The accompanying notes are an integral part of the
consolidated financial statements.
4
MICROLEAGUE MULTIMEDIA, INC.
CONSOLIDATED INCOME STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 & JUNE 30, 1995
1996 1995
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(unaudited) (unaudited)
Net sales $857,555 $726,640
Cost of goods sold 561,817 574,226
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Gross profit 295,738 188,414
Operating expenses:
Product development 173,619 69,495
Selling 523,756 166,162
General & Admin 450,775 245,398
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Income from operations (852,412) (292,641)
Interest expense 52,957 52,571
Other income, net 0 4,054
Provision for income taxes, before
extraordinary items (283,133) 0
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Income before extraordinary items (622,236) (349,266)
Extraordinary items, net of tax effect 204,181 0
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Net (Loss) ($826,417) ($349,266)
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Net (Loss) per common share
before extraordinary item ($0.18) -
Net (Loss) per common share ($0.24) ($0.12)
Weighted average common
shares outstanding 3,490,928 2,937,978
The accompanying notes are an integral part of the
consolidated financial statements.
5
MICROLEAGUE MULTIMEDIA, INC.
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 & 1995
1996 1995
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(unaudited) (unaudited)
Net loss ($1,197,168) ($758,331)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 323,984 68,399
Provision for doubtful accounts 178,123 275,000
Changes in operating assets and liabilities:
Decrease (Increase) in accounts receivable 341,070 (542,699)
(Increase) in inventories (352,199) (83,988)
(Increase) in royalty advances (253,015) (31,025)
(Increase) in other current assets (669,077) 49,580
(Increase) in other assets (5,021) (481,173)
Increase in accounts payable 3,897 373,092
Increase in other accrued liabilities 189,735 47,394
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Net cash used in operating activities (1,439,670) (1,083,751)
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Cash flows used in investing activities:
Purchase of property, plant and equipment (345,217) (74,401)
Net increase in other assets 0
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Net cash used in investing activities (345,217) (74,401)
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Cash flows provided by financing activities
Payments of receivables by stockholders (69,930) 0
Net borrowings (payments) of long-term debt (33,674) 690,560
Net increase in note payable - bank (2,281,372) 89,500
Net increase in common stock & a.p.i.c. 5,353,388 309,275
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Net cash provided by financing activities 2,968,422 1,089,335
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Net increase in cash and cash equivalents 1,183,525 (68,817)
Cash and cash equivalents, beginning of year 6,754 73,345
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Cash and cash equivalents, end of year $1,190,279 $4,528
Supplemental cash flow disclosures:
Cash paid during the period for interest $87,844 $55,481
Noncash, financing activities:
Conversion of notes payable to common stock $84,023 $237,500
Capital lease obligations 186,282
Bridge loan OID interest expense 249,847
The accompanying notes are an integral part of the
consolidated financial statements.
6
MICROLEAGUE MULTIMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business:
The unaudited interim financial statements for Microleague Multimedia,
Inc. (the "Company") include the operations of APBA Game Company
("APBA") and Ablesoft, Inc. ("Ablesoft"), two interactive multimedia
product companies which were acquired by the Company in 1995, as well as
those of Microleague and Ferraul Corp., doing business as FoxFire
Printing ("FoxFire"). However, these financial statements do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The Company
sells its products primarily through software retailers, mail order,
wholesale clubs and mass market merchandisers throughout the United
States. The Company also provides commercial printing, graphic design
and manufacturing services. 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 and prior
interim period presentation.
2. Inventory
Inventory, net of valuation allowances consisted of the following:
June 30, 1996 December 31, 1995
Raw materials............... $ 68,832 $ 24,695
Work-in-process............. 187,874 86,082
Finished goods.............. 1,012,207 805,938
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Total............... $1,268,913 $916,715
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3. Earnings Per Share
Net income per share of Common Stock for the six months ended June 30,
1996 and 1995 is computed based upon the weighted average number of
shares of Common Stock outstanding during the applicable period plus the
effect of common shares contingently issuable, primarily from the
exercise of stock options and warrants.
4. Stockholders' Equity
During the second quarter of 1996, the Company completed an initial
public offering of 1,173,000 Units consisting of one share of Common
Stock, $.01 par value per Share, and one Redeemable Warrant. Each
Redeemable Warrant entitles the Holder to purchase one Share of Common
Stock of the Company at an exercise price of $6.27 at any time through
May 23, 1999. Each Redeemable warrant will be redeemable at the option
of the Company at a price of $.10 per Redeemable Warrant at any time
upon not less than 45 days' prior written notice, if the last sale price
of the Common Stock exceeds $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.
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5. Extraordinary Items
In February 1996, the Company raised $800,000 through the sale of Bridge
Units, consisting of Bridge Notes due upon the earlier of the
consummation of the public stock offering or 12 months from the date of
issuance and Bridge Warrants to acquire 160,000 shares of Common Stock.
The Bridge Notes were repaid upon the closing of the Offering. The
Company incurred and extraordinary pre-tax charge to earnings in 1996 of
approximately $250,000 relating to deemed interest and deferred
financing costs resulting from its offering in February 1996 of the
Bridge Units.
The Company prepaid promissory notes issued by the Company to the
Interactive Multimedia Limited Partnership and to certain related
parties who own an interest in certain technology relating to two of the
Company's products and who are entitled to receive a royalty equal to
12% of the net cash proceeds from sales of those products. As result of
the prepayment of the notes totaling $224,590 and to terminate the
royalty rights of the aforementioned products, the Company incurred an
extraordinary pre-tax charge of approximately $90,000.
6. Subsequent Event
On July 3, 1996, 78,000 non-qualified stock options were issued to
employees of the Company under the Company's 1996 Equity Compensation
Plan. These options were issued with an exercise price equal to the
Company's closing common stock price on July 3, 1996 and vest in three
equal annual installments beginning on July 3, 1997. These options
expire on July 2, 2006.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations for the Six Months Ended June 30, 1996 as compared to the
Six Months Ended June 30 1995
Net sales increased 50%, or by $700,000, from approximately $1.3 million for the
six months ended June 30, 1995, to approximately $2.0 million for the six months
ended June 30, 1996. The increase is attributable to the Company's multimedia
product revenues, which increased by 91% or approximately $650,000. The
Company's publishing services group also increased its affiliate venture
publishing sales and its commercial printing sales by approximately 4% or
$30,000. As a result of increased sales through retail distribution channels,
the Company in 1996, provided for returns at approximately 18 % of gross sales,
as compared with 15% in 1995.
Costs of goods sold increased by 35%, or $350,000 from approximately $950,000
for the six months ended June 30, 1995, to approximately $1.3 million for the
six months ended June 30, 1996. As a percentage of net sales, cost of goods sold
decreased from approximately 70% in the first six months of 1995 to
approximately 65% for the first six months of 1996. The decrease in cost of
goods sold as a percentage of net sales is a result of an increase in software
sales in the Company's sales mix, which has a higher gross profit margin than
the Company's manufacturing and service sales, as well as a result of improved
efficiencies in production.
Development expenses increased by 190%, or by $140,000 from approximately
$75,000 for the six months ended June 30, 1995, to approximately $215,000 for
the six months ended June 30, 1996. This substantial increase in development
expenses is primarily due to the Company hiring additional development personnel
in 1996 including Ed Ringler, the Company's new vice president of development.
These expenses, which are net of the portion capitalized for software
development, were incurred as part of the Company's goal to improve the
consistency of new product flow. In this regard, the Company is currently
negotiating with Mr. Ringler to acquire the assets of Ringler Studios as well as
negotiating with Asylum Entertainment, Inc. to acquire its assets to upgrade the
Company's internal development capabilities.
Marketing and selling and expenses increased from approximately $250,000 for the
six months ended June 30, 1995 to approximately $700,000 in the six months ended
June 30, 1996. As a percentage of sales, marketing and selling, expenses
increased significantly from approximately 20% for the six months ended June 30,
1995 to approximately 35% for the six months ended June 30, 1996. The
significant increase is primarily due to: the Company attempting to gain more
control over its software distribution channel, breaking into new distribution
outlets through the establishment of private label programs, and establishing
MMI Online, the Company's new revenue center utilizing the Internet. To gain
more control over its primary distribution channel, the Company provided
significant marketing and development funds to retailers in the second quarter
to preserve shelf space for the fourth quarter, which is traditionally the
Company's best quarter for revenues. In terms of private label programs, the
Company entered into an original equipment manufacturer contract with GTE
Interactive in the second quarter, for which no revenue has yet been recognized,
but which the Company believes will produce revenues during the next 18 months.
Selling expenses also increased because of sales and promotional activities
generated during the second quarter of 1996 introducing new products of MMI
Online, the Company's new internet revenue center, designed to both increase
revenues as well as help dampen the impact of seasonality on the Company's
revenues. These products, which include among others, Danny Sheridan's Football
Pool `96 for Windows and APBA Football Challenge `96, will generate revenues in
the third and fourth quarters of 1996. In addition, increased sales personnel
and increased marketing activities to promote the Company's products and brand
names also contributed to the large increase in selling and marketing expenses.
The Company intends to continue to launch new marketing promotions.
9
General and administrative expenses increased by 46%, or by approximately
$300,000, from approximately $650,000 for the six months ended June 30, 1995, to
approximately $950,000 for the six months ended June 30, 1996. This large
increase is primarily due to the Company hiring several personnel in finance and
administration, to facilitate the Company's expansion as well as to assist with
financial reporting. Amortization of goodwill and other intangible assets
related to the Ablesoft acquisition, which occurred on September 30, 1995,
represents 30% or approximately $90,000 of the increase in general and
administrative expenses from the six months ended June 30, 1995 as compared to
the six months ended June 30, 1996. In addition, the Company's establishment of
MMI Online as well as the increase in the Company's development personnel and
resources also contributed to the increase in general and administrative
expenses.
Interest expense increased by 25%, or by approximately $30,000, from
approximately $115,000 for the six months ended June 30, 1995, to approximately
$145,000 for the six months ended June 30, 1996. The increase is a result of the
Company increasing its line of credit facility from $1.9 million at December 31,
1994 to $2.35 million at December 31, 1995, as well as the debt of approximately
$475,000 incurred in connection with the Ablesoft acquisition, and $800,000 in
Bridge Notes issued in February, 1996.
As a result of the Company's acquisition of Ablesoft on September 30, 1995, the
Company converted to a C corporation from an S corporation on October 1, 1995.
Thus, for the six months ended June 30, 1995, the Company was not subject to
federal and state corporate income taxes. The effective tax rate for the six
months ended June 30, 1996 of approximately 27%, is primarily due to the effect
of deferred taxes offsetting the income tax provision at statutory rates.
In connection with the Company's sale of Bridge Notes in February 1996, which
raised approximately $800,000, the Company incurred approximately $250,000 in
deemed interest and deferred financing costs upon the Company's completion of
its initial public offering in May 1996. In addition, the Company also incurred
in May approximately $90,000 relating to premiums over principal relative to the
early retirement of certain partnership debt interests. These extraordinary
items have been reflected net of taxes at statutory rates, which approximate
40%.
Financial Condition
Liquidity and Capital Resources
The Company has historically not been able to generate sufficient cash flow to
fund operations. Prior to 1996, working capital deficiencies were funded
principally through private placements of securities. Prior to the completion of
these private placements, the Company relied primarily on cash flow from
operations and borrowings under its line of credit to finance its operations and
expansion. However, in February 1996, the Company raised an additional $800,000
through the sale of eight Bridge Units, each consisting of $100,000 principal
amount of Bridge Notes due upon the earlier of the consummation of this offering
or 12 months from the date of issuance thereof and Bridge Warrants to acquire
160,000 shares of Common Stock. The Company used these funds to fund its
operations, including product development, sales and marketing and
administrative expenses as well as transaction costs.
10
In May 1996, the Company raised net proceeds of approximately $4,400,000 through
an initial public offering of 1,020,000 units, which were comprised of one
shares of common stock and one common stock purchase warrant. Pursuant to the
offering, in June 1996, the Company raised net proceeds of approximately
$770,000 through the sale of the underwriter's over-allotment option, in which
securities totaling an additional 15% relative to the initial public offering,
or 153,000 units, were sold. The Company has used approximately $2.4 million of
these proceeds to pay down bank debt and the aforementioned bridge loan notes.
The Company intends to use the remaining proceeds to fund product development,
redeem certain partnership interests, and to provide working capital for general
corporate purposes. The Company believes that the net proceeds of this offering,
together with cash on hand and anticipated cash flow from operations, will be
sufficient to meet its needs in connection with its planned business expansion
through the next eight to twelve months. However, the Company's working capital
requirements may change depending upon numerous factors, including without
limitation the anticipated need to finance increased inventory and accounts
receivable arising from the sale and shipment of anticipated new products. The
Company has a bank line of credit facility for $1 million, which is related to
its inventory and accounts receivable, currently in place.
As of June 30, 1996, the Company has payment commitments of approximately
$180,000 under various product development agreements, $620,000 under its
facility and vehicle leases, and $1.9 million under existing employment
agreements with certain officers of the Company.
In the normal course of business, the Company evaluates potential acquisitions
and joint ventures that may complement the Company's business. While the Company
has no present plans, commitments or agreements with respect to any material
potential acquisitions or joint ventures other than as disclosed herein, the
Company may in the future consummate acquisitions or enter into joint ventures
which may require the Company to make additional capital expenditures, and such
expenditures may be significant.
Seasonality
The consumer electronics market is characterized by significant seasonal swings
in demand, which typically peak in the fourth quarter of each year. The seasonal
pattern is due primarily to the increased demand for software during the
year-end holiday buying season. The Company expects its net sales and operating
results to continue to reflect this seasonality. The Company's revenues may also
experience substantial variations as a result of a number of factors, such as
consumer preferences and introduction of competing titles by competitors. There
can be no assurance that the Company will achieve consistent profitability on a
quarterly or annual basis.
Inflation
The Company does not believe that inflation has had a material effect on its
results of operations in recent years. there can be no assurance, however, that
the Company' s business will not be affected by inflation in the future.
11
PART II. OTHER INFORMATION
Item 5. Other information
On May 23, 1996 the Company completed an initial public offering of
1,020,000 units, each unit consisting of one share of common stock
and one redeemable warrant. On June 6, 1996, the Company completed the
sale of the underwriters over-allotment related to the initial public
stock offering in which the Company sold an additional 153,000 units.
The Company received net proceeds of approximately $5.2 million from
the aforementioned sales of securities.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 and Exchange Commission Regulation S-B.
10.31 Employment agreement dated June 27, 1996 between Microleague
Multimedia Inc. and Edward Ringler.
10.32 OEM Affiliate Venture Publishing agreement with GTE Interactive
11. Net loss per share calculations for the six months and the quarter
ended June 30, 1996.
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, this 14th day of August, 1996.
MICROLEAGUE MULTIMEDIA, INC.
By: /s/ Neil B. Swartz
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Neil B. Swartz
Chairman of the Board of Directors &
Chief Executive Officer
By: /s/ Peter R. Flanagan
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Peter R. Flanagan
Vice President and Chief Financial
Officer
13