SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) June 6, 1997
--------------
MICROLEAGUE MULTIMEDIA, INC.
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(Exact name of registrant as specified in charter)
Pennsylvania 1-11743 23-2563090
- ---------------------- ------------------------ ---------------------
(State or other juris- (Commission File Number) (IRS Employer Identi-
diction of incorporation) fication No.)
1001 Millersville Road, Lancaster, Pennsylvania 17604
- ----------------------------------------------- ----------
(Address of principle executive offices) (Zip Code)
Registrant's telephone number, including area code 717-872-6567
------------
N/A
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(Former name or former address, if changed since last report.)
Exhibit Index appears on Page 23
Item 2. Acquisition or Disposition of Assets.
On June 6, 1997, MicroLeague Multimedia, Inc. (the "Company")
entered into an Acquisition Agreement (the "Acquisition Agreement") with
KidSoft, L.L.C. ("KidSoft"), The Hearst Corporation ("Hearst"), Ameritech
Corporation ("Ameritech"), KidSoft Holdings, Inc., Ameritech KidSoft Holdings,
Inc., KidSoft, Inc., Daniel D. Barry and Lawrence R. Gross pursuant to which the
Company acquired all of the outstanding membership interests of KidSoft, a
leading distributor of children's multimedia education and entertainment
software based in Cupertino, California. In consideration of the acquisition of
such interests, the Company issued an aggregate of 1,450,000 shares of common
stock, $.01 par value per share, of the Company (the "Common Stock") and
warrants (the "Warrants") to purchase 100,000 shares of Common Stock.
Pursuant to the terms of the Acquisition Agreement, in the
event the Company proposes to register any additional shares of its Common Stock
pursuant to the provisions of the Securities Act of 1933, as amended, the
Company is obligated to register the resale of the shares of Common Stock issued
pursuant to the Agreement and the shares of Common Stock issuable upon exercise
of the Warrants, subject to certain exceptions.
Pursuant to the terms of the Acquisition Agreement, the
Company is obligated to elect John Connors, the former President and Chief
Executive Officer of KidSoft, and one representative from each of Hearst and
Ameritech, to the Company's Board of Directors.
Simultaneous with the execution of the Acquisition Agreement,
the Company entered into a Stock Purchase Agreement with Hearst and Ameritech
(the "Stock Purchase Agreement") pursuant to which Hearst and Ameritech
purchased an aggregate of 252,633 shares of Common Stock for $1.2 million. The
Stock Purchase Agreement provides Hearst and Ameritech with registration rights
similar to those outlined above with respect to the shares of Common Stock
purchased thereunder.
Copies of the Acquisition Agreement and the Stock Purchase
Agreement are attached hereto as Exhibits 2.1 and 2.2, respectively.
-2-
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits.
(a) Financial Statements of Businesses Acquired.
KIDSOFT, L.L.C. FINANCIAL STATEMENTS
Report of Independent Accountant
KidSoft, L.L.C. Balance Sheets, December 31, 1996 and December
31, 1995
KidSoft, L.L.C. Statements of Operations for the period from
May 12, 1995 to December 31, 1995 and for the year
ended December 31, 1996
KidSoft, L.L.C. Statements of Members' Capital for the period
from May 12, 1995 to December 31, 1995 and for the
year ended December 31, 1996
KidSoft, L.L.C. Statements of Cash Flows for the period from
May 12, 1995 to December 31, 1995 and for the year
ended December 31, 1996
Notes to KidSoft, L.L.C. Financial Statements
KidSoft, L.L.C. Unaudited Balance Sheet, March 31, 1997
KidSoft, L.L.C. Unaudited Statements of Operations for the
quarters ended March 31, 1997 and March 31, 1996
KidSoft, L.L.C. Unaudited Statements of Cash Flows for the
quarters ended March 31, 1997 and March 31, 1996
(b) Pro Forma Financial Information.
Pro Forma Balance Sheet, March 31, 1997
Pro Forma Statement of Operations for the quarter ended March
31, 1997
Pro Forma Statement of Operations for the year ended December
31, 1996
Pro Forma Statement of Operations for the year ended December
31, 1995
Notes to Unaudited Consolidated Pro Forma Financial
Information
(c) Exhibits.
2.1 Acquisition Agreement, dated as of June 6,
1997, among MicroLeague Multimedia, Inc.,
KidSoft, L.L.C., The Hearst Corporation,
KidSoft Holdings, Inc., Ameritech
Corporation, Ameritech KidSoft Holdings,
Inc., KidSoft, Inc., Daniel D. Barry and
Lawrence R. Gross.
2.2 Stock Purchase Agreement, dated as of June
6, 1997, among MicroLeague Multimedia, Inc.,
The Hearst Corporation and Ameritech
Corporation.
-3-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Members of KidSoft, L.L.C.:
We have audited the accompanying balance sheet of KidSoft, L.L.C. (a Delaware
limited liability company) (the "Company") as of December 31, 1996 and the
related statements of operations, members' capital and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements for KidSoft, L.L.C. for
the period from May 12, 1995 (inception) to December 31, 1995 were audited by
other auditors whose report, dated March 1, 1996, on those statements expressed
an unqualified opinion and included an explanatory paragraph regarding the
uncertainty of the Company's ability to continue as a going concern.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such 1996 financial statements referred to above present fairly,
in all material respects, the financial position of KidSoft, L.L.C. as of
December 31, 1996 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has cumulative net losses as of December 31,
1996 which raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regards to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Deloitte and Touche, LLP
February 28, 1997
(March 20, 1997 as to Note 9)
-4-
KIDSOFT, L.L.C.
(A Delaware Limited Liability Company)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
ASSETS 1996 1995
CURRENT ASSETS:
Cash and equivalents $ 553,348 $ 6,727,765
Accounts receivable, net of allowance for doubtful
accounts of $118,300 and $36,800, respectively 473,139 701,765
Receivable from member 67,821 --
Inventories 2,028,344 928,307
Prepaid and other current assets 582,153 205,653
----------- -----------
Total current assets $ 3,704,805 $ 8,563,490
PROPERTY AND EQUIPMENT, Net 1,247,095 1,943,012
OTHER ASSETS 80,946 94,172
----------- -----------
TOTAL $ 5,032,846 $10,600,674
=========== ===========
LIABILITIES AND MEMBERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable 1,733,832 1,196,617
Accrued expenses 711,951 2,598,992
Deferred revenue and advances 155,000 356,761
Current portion of capital lease obligations 321,898 546,209
----------- -----------
Total current liabilities $ 2,922,681 $ 4,698,579
NOTES PAYABLE TO MEMBERS 1,900,000 --
CAPITAL LEASE OBLIGATIONS 162,626 665,196
----------- -----------
Total liabilities 4,985,307 5,363,775
COMMITMENTS (Notes 5 and 6)
MEMBERS' CAPITAL 47,539 5,236,899
----------- -----------
TOTAL $ 5,032,846 $10,600,674
=========== ===========
See notes to financial statements
-5-
KIDSOFT, L.L.C.
(A Delaware Limited Liability Company)
STATEMENTS OF OPERATIONS
PERIOD FROM MAY 12, 1995 (INCEPTION) TO DECEMBER 31, 1995 AND
YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
1996 1995
NET SALES:
Retail $ 4,714,522 $ 479,530
Direct Marketing 2,362,899 3,660,740
Special markets 2,133,503 -
Online 336,406 -
Publishing - 868,093
------------ -------------
Total net sales $ 9,547,330 $ 5,008,363
COST OF SALES:
Retail 1,321,968 853,431
Direct marketing 1,336,717 1,725,577
Special markets 987,227 -
Online 205,574 -
Publishing - 600,637
------------ -------------
Total cost of sales (exclusive of depreciation and
amortization shown separately below) 3,851,486 3,179,645
GROSS PROFIT 5,695,844 1,828,718
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES
(Exclusive of depreciation and amortization
shown separately below) 10,072,074 10,917,602
DEPRECIATION AND AMORTIZATION 737,136 392,717
------------ -------------
Loss from operations (5,113,366) (9,481,601)
------------ -------------
OTHER EXPENSES:
Loss on disposal of assets (7,915) (255,557)
Interest expense, net (85,023) (51,905)
Other expense, net (6,583) -
------------ -------------
Total other expenses, net (99,521) (307,462)
------------ -------------
NET LOSS ($5,212,887) ($9,789,063)
============ ============
See notes to financial statements.
-6-
KIDSOFT, L.L.C.
(A Delaware Limited Liability Company)
STATEMENTS OF MEMBERS' CAPITAL
PERIOD FROM MAY 12, 1995 (INCEPTION) TO DECEMBER 31, 1995 AND
YEAR ENDED DECEMBER 31, 1996
- -------------------------------------------------------------------------------
KidSoft, Inc. Other Investors Total
Capital contributions, May 12, 1995 ($5,174,038) $20,200,000 $15,025,962
Net loss - ( 9,789,063) ( 9,789,063)
----------- ----------- -----------
Balances, December 31, 1995 ($5,174,038) $10,410,937 $ 5,236,899
Capital contributions 23,527 - 23,527
Net Loss - (5,212,887) ( 5,212,887)
----------- ----------- -----------
Balances, December 31, 1996 ($5,150,511) $ 5,198,050 $ 47,539
============ =========== ===========
See notes to financial statements
-7-
KIDSOFT, L.L.C.
(A Delaware Limited Liability Company)
STATEMENTS OF CASH FLOW
PERIOD FROM MAY 12, 1995 (INCEPTION) TO DECEMBER 31, 1995 AND
YEAR ENDED DECEMBER 31, 1996
- -------------------------------------------------------------------------------
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,212,887) $(9,789,063)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 737,136 392,717
Loss on disposal of fixed assets 7,915 255,557
Changes in assets and liabilities, net of amounts contributed in 1995 by
KidSoft, Inc.:
Accounts receivable 228,626 (132,972)
Receivable from member (67,821) -
Inventories (1,100,037) (749,485)
Prepaid and other current assets (376,500) (125,709)
Accounts payable 537,215 (873,966)
Accrued expenses (1,887,041) 1,923,002
Deferred revenue and advances (201,761) (103,196)
----------- -----------
Net cash used for operating activities $(7,335,155) $(9,203,115)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (91,466) (612,636)
Proceeds from sale of property and equipment 43,332 -
Other assets 13,226 (71,882)
----------- -----------
Net cash used for investing activities $ (35,908) $ (684,518)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under notes payable to members 1,900,000 -
Capital contributions 23,527 16,838,879
Principal payments under capital lease obligations (726,881) (223,481)
------------
Net cash provided by financing activities 1,996,646 16,615,398
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND EQUIVALENTS (6,174,417) 6,727,765
----------- -----------
CASH AND EQUIVALENTS - Beginning of period 6,727,765 -
----------- -----------
CASH AND EQUIVALENTS - End of period $ 553,348 $ 6,727,765
============= ============
SUPPLEMENTAL NONCASH INVESTING
AND FINANCING ACTIVITIES
Purchase of equipment under capital leases $ 1,235,294
Investment of assets and liabilities by
KidSoft, Inc., net of cash $ (5,312,917)
Conversion of bridge loan into investment in KidSoft, L.L.C. $ 3,500,000
Conversion of accrued interest into investment in KidSoft, L.L.C. $ 151,416
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest $ 112,830 $ 17,812
============= ============
See notes to financial statements
-8-
KIDSOFT, L.L.C.
(A Delaware Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM MAY 12, 1995 (INCEPTION) TO DECEMBER 31, 1995 AND
YEAR ENDED DECEMBER 31, 1996
- -------------------------------------------------------------------------------
1. FORMATION AND BUSINESS OF THE COMPANY
KidSoft, L.L.C. (the "Company"), a Delaware limited liability company, was
formed on May 12, 1995 to acquire substantially all of the assets and
liabilities of KidSoft, Inc. as well as to receive additional investments from
outside investors. The Company distributes educational software products for
children through retail channels, mail order, OEM bundling, on-line, CD-ROM
unlock and special promotions.
Investor members in KidSoft, L.L.C. received a percentage interest in the
Company based on the amount invested and the total agreed upon valuation of the
Company at the date of the investment. These percentage interests are adjusted
each time additional capital contributions are received by the Company. At
December 31, 1996, the percentage interests, on a fully diluted basis, are as
follows:
KidSoft, Inc. 52.80%
KidSoft Holdings, Inc. (Hearst Corporation) 29.40
Ameritech KidSoft Holdings, Inc. 17.32
Other investors 0.48
------
100.00%
======
The LLC Agreement (the "Agreement") provides that profits for any fiscal year or
other applicable period shall be allocated first to the investor members
(excluding KidSoft, Inc.) to the extent required and in the proportion required
to cause the cumulative amounts of profits allocated to the investor members to
equal the cumulative amount of preferred distributions, as defined in the
Agreement, distributed or available to be distributed to the investor members;
and second, to KidSoft, Inc. to the extent required so that the cumulative
amounts of profits allocated to KidSoft, Inc. equals the cumulative amount of
the KidSoft preference distributed or available to be distributed to KidSoft,
Inc.; and any remaining balance to the members in proportion to their respective
percentage interests as of the end of the fiscal year or other applicable
period.
Losses for any fiscal year or other applicable period shall be allocated first
to the investor members (excluding KidSoft, Inc.) in accordance with their
respective percentage interests until, for any investor member, such member's
adjusted capital account divided by such member's percentage interest is reduced
to equal KidSoft, Inc.'s per share capital account, and then to the remaining
investor members in proportion to their respective percentage interests in
sequence until each member's per share capital account is reduced to equal
KidSoft Inc.'s per share capital account and, accordingly, the adjusted capital
account balances of all members are in proportion to their respective percentage
interests as to the end of the fiscal year or other applicable period; and any
remaining balance to the members in accordance with the previous allocation
method, but in a manner which will not produce an adjusted capital account
deficit as to such members. To the extent such allocation would result in all
members having an adjusted capital account deficit, such loss shall be allocated
to the members in proportion to their respective percentage interests.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The Company's financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
reported cumulative net losses through December 31, 1996 in the amount of
$15,001,950. In addition, KidSoft, Inc., its predecessor company, has
accumulated losses of $14,264,244 at the date of the transfer of its assets to
KidSoft, L.L.C. Management plans to obtain additional financing or seek a buyer
for the Company (see
-9-
Note 9). The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include the allowance for doubtful
accounts, allowance for obsolete inventory, depreciation, and certain accruals.
Actual results could differ from those estimates.
Concentration of Credit Risk - Financial instruments that potentially subject
the Company to concentration of credit risk consist principally of trade
accounts receivable. The risk is limited due to the fact that the Company's
trade accounts receivable are derived from customers across a broad demographic
base. Management of the Company performs ongoing credit evaluations of its
customers and maintains allowances for doubtful accounts.
Cash and Equivalents - The Company considers all highly liquid instruments
purchased with maturities of three months or less at the date of purchase to be
cash equivalents.
Inventories - Inventories, consisting primarily of CD-ROMs and floppy disks, are
stated at the lower of average cost of market. Consideration is given to
obsolescence, excessive levels, deterioration, and other factors in evaluating
net realizable value.
Property and Equipment - Property and equipment are stated at cost and are
depreciated on a straight-line basis over their estimated useful lives
(generally three to five years). Assets purchased under capital leases are
amortized on a straight-line basis over the shorter of the lease term or the
estimated useful life of the asset.
Revenue Recognition - The Company recognizes revenues from software sold through
retail outlets using the "sell-through" method. Amounts received from retailers
prior to sell-through are deferred until the products are sold by the retailer.
Product revenue from the direct sale of software is recognized upon shipment or
at the time the product is downloaded via CD-ROM unlock. Proceeds from
subscriptions are deferred at the time of sale as deferred subscription revenue
and are included in revenues on a pro rata basis over the terms of the
subscriptions, typically one year. Proceeds from placement of advertisements in
the Company's catalog are recognized upon release of the related issue.
Income Taxes - The financial statements include no provision for income taxes
since the Company's income and losses are reported in the member's separate tax
returns.
Discontinued Activities - During 1995, the Company entered into a plan to
discontinue its telesales and magazine subscription activities. The net cost to
exit these activities was approximately $300,000 which was recorded as of
December 31, 1995. During 1996, the Company transferred its telesales operations
to an unrelated company and discontinued publication of its quarterly KidSoft
Magazine.
Reclassifications - Certain reclassifications have been made to 1995 amounts to
conform to 1996 presentation.
-10-
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following:
1996 1995
Furniture and equipment $1,613,785 $1,684,069
Computer equipment and software 674,377 637,160
Leasehold improvements 235,465 229,852
Automobile 16,436 16,436
----------- -----------
2,542,063 2,567,517
Less accumulated depreciation and amortization (1,294,968) ( 624,505)
----------- -----------
$1,247,095 $1,943,012
========== ==========
4. NOTES PAYABLE TO MEMBERS
At December 31, 1996, the Company had two notes payable from certain members
totaling $1,900,000 bearing interest at prime (8.25% at December 31, 1996) plus
1%. The borrowings are collateralized by all the Company's assets and are due
April 1998.
5. LEASES
The Company leases its facilities under operating leases which expire through
July 1998 and leases certain equipment under capital leases. Under the terms of
the facility leases, the Company is responsible for its proportionate share of
maintenance, taxes, and insurance expenses.
Equipment with a cost of $1,009,119 and net book value of $502,815 at December
1996 (cost of $1,191,390 and net book value of $954,480 at December 31, 1995),
has been leased under capital leases.
As of December 31, 1996, future annual minimum lease payments under capital and
operating leases are as follows:
Capital Leases Operating Leases
1997 $374,593 $365,000
1998 $149,189 $191,000
-------- --------
Total minimum lease payments $523,782 $556,000
========
Less amounts representing interest (39,258)
Present value of minimum lease payments 484,524
Less current portion (321,898)
Capital lease obligations $162,626
========
Total rent expense was $412,000 and $267,000 in 1996 and 1995, respectively.
6. DISTRIBUTION AGREEMENTS
The Company assumed the responsibilities under a marketing agreement entered
into during 1994 between KidSoft, Inc. and a manufacturer of personal computers
whereby the Company's products would be distributed by packaging them with
personal computers equipped with CD-ROM drives.
-11-
In October 1995, the Company entered into an exclusive distribution agreement
for its retail products with an outside distributor. The agreement is for a
three year period for a territory that includes the United States, its
territories and possessions and Puerto Rico. Distribution fees are charged at 9%
of net sales up to $20 million in annual net sales. Net sales in excess of $20
million are assessed distribution fees at a declining rate until all net sales
in excess of $50 million are charged a 5% fee.
Effective April 1, 1996, the Company amended the distribution agreement such
that distribution fees are charged at 6.75% of net sales up to $10 million in
annual net sales. Net sales in excess of $10 million are assessed distribution
fees at a declining rate until all net sales in excess of $15 million are
charged a 5% fee.
7. RELATED PARTY TRANSACTIONS
The Company has entered into an agreement with KidSoft, Inc. whereby KidSoft,
Inc. provides all full and part-time employees to the Company. The Company
reimburses KidSoft, Inc. for all employee-related expenses. The amounts paid to
KidSoft, Inc. under this agreement for the years ended December 31, 1996 and
1995 were $4,049,383 and $4,036,063, respectively. At December 31, 1996, $70,750
was owed to KidSoft under the agreement, which has been included in accrued
expenses.
8. LITIGATION
The Company is involved in litigation arising in the normal course of business.
In the opinion of management, the ultimate resolution of these matters will not
have a material adverse effect on the Company's financial position or results of
operations.
9. SUBSEQUENT EVENT
On March 20, 1997, the Company signed a nonbinding letter of intent with
MicroLeague Multimedia, Inc. This transaction is subject to a due diligence
investigation and business review to be performed by each party. There is no
assurance that the acquisition will be consummated.
* * * * *
-12-
KIDSOFT, L.L.C.
BALANCE SHEET
AS OF MARCH 31, 1997
(Unaudited)
ASSETS
Cash and cash equivalents $ 52,066
Accounts receivable, gross 202,737
Allowance for returns (83,040)
Inventories 1,161,258
Inventory reserve (154,278)
Royalty advances 371,085
Other current assets 141,145
Deferred Tax Asset 0
------------
Total current assets $ 1,690,973
============
Property, plant and equipment, gross 2,530,175
Less: Accumulated Depreciation (1,452,199)
Goodwill 0
Capitalized software costs 0
Intangible assets 0
Other assets 78,839
------------
Total assets $ 2,847,788
============
LIABILITIES & MEMBERS' CAPITAL
Notes payable 0
Current portion of long-term debt 284,382
Deferred revenue 0
Accounts Payable 1,131,356
Cash Overdraft
Other accrued liabilities 222,385
Other current liabilities 93,245
------------
Total current liabilities $ 1,731,368
============
Long-term debt 2,156,752
Deferred income taxes 0
------------
Total liabilities $ 3,888,120
------------
Members' Capital:
Common stock 378,628
Preferred stock 8,739,478
Treasury stock 0
Additional paid-in capital 20,200,000
Accumulated deficiency (30,358,438)
Receivable from Members 0
------------
Total Members' Capital $ (1,040,332)
------------
Total Liabilities and Members' Capital $ 2,847,788
============
-13-
KIDSOFT, L.L.C.
STATEMENT OF OPERATIONS
FOR THE QUARTERS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
1997 1996
---- ----
Net Sales $ 1,281,957 $ 2,024,002
Cost of goods sold 991,632 1,002,050
----------- -----------
Gross Profit 290,325 1,021,952
Operating expenses:
Sales & Marketing 235,502 1,276,509
Operations 425,597 644,973
General & Administration 649,573 904,050
----------- -----------
(Loss) from operations (1,020,347) (1,803,580)
Interest expense -- --
Other expenses, net (67,524) (16,382)
Provision for income taxes -- --
----------- -----------
Income from Continuing Operations (1,087,871) (1,819,962)
----------- -----------
Net (Loss) Income $(1,087,871) $(1,819,962)
=========== ===========
-14-
KIDSOFT, L.L.C.
STATEMENT OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
1997 1996
---- ----
Cash flows used in operating activities:
Net income $ (1,087,871) $ (1,819,962)
Adjustments to reconcile net income to
net cash used in operating activities
Depreciation 157,231 176,509
Amortization 490,315 -
Changes in operating assets and liabilities:
Decrease in accounts receivable 421,263 1,374,291
Decrease in inventories 1,021,364 195,746
Decrease in other current assets 69,923 (268,023)
Decrease in other assets 2,107 -
Decrease in accounts payable (602,476) (359,237)
Decrease in other accrued liabilities (645,315) (2,598,992)
(Decrease) increase in other current liabilities (396,321) 993,382
---------- ----------
Net cash used in operating activities (569,780) (2,306,286)
Cash flows used in investing activities:
Disposition of property, plant and equipment 11,888 -
---------- ----------
Net cash used in investing activities 11,888 -
---------- ----------
Cash flows provided by financing activities:
Net increase (decrease) in long term debt 56,610 (151,210)
---------- ----------
Net decrease in common stock & a.p.i.c - 4,766
---------- ----------
Net cash provided by financing activities 56,610 (146,444)
---------- ----------
Net (decrease) in cash and cash equivalents (501,282) 6,727,765
Cash and cash equivalents, beginning of period 553,348 (2,452,730)
---------- ----------
Cash and cash equivalents, end of period $ 52,066 $ 4,275,035
========== ==========
-15-
(b) PRO FORMA FINANCIAL INFORMATION
The following Pro Forma Consolidated Balance Sheet (unaudited) at March 31, 1997
and Pro Forma Consolidated Statement of Operations (unaudited) for the 3 months
ended March 31, 1997 give pro forma effect to (i) the Registrant's acquisition
of KidSoft, L.L.C. ("KidSoft") as described more fully under Item 2 of the
Report, as if such transaction occurred as of March 31, 1997 for the Pro Forma
Consolidated Balance Sheet and as of January 1, 1997 for the Pro Forma
Consolidated Statement of Operations. This acquisition was treated as a
"purchase" for accounting purposes.
The Pro Forma Consolidated Balance Sheet is based on (i) the Registrant's
historical condensed consolidated balance sheet as of March 31, 1997 (which
reflects the acquisition of Rabbit Ears Productions, Inc. ("Rabbit Ears") on
February 18, 1997), and (ii) KidSoft condensed balance sheet as of March 31,
1997.
The Pro Forma Consolidated Statement of Operations for the year ended December
31, 1996 is based on (i) the Registrant's historical condensed consolidated
statement of operations for the fiscal year ended December 31, 1996 (which
reflects data for Micro Sports, Inc. ("Micro Sports") for the period beginning
October 24, 1996, (ii) Rabbit Ears' audited condensed statement of operations
for the year ended December 31, 1996 and (iii) KidSoft's audited condensed
statement of operations for the year ended December 31, 1996.
The Pro Forma Consolidated Statement of Operations for the year ended December
31, 1995 is based on (i) the Registrant's historical, condensed consolidated
statement of operations for the fiscal year ended December 31, 1995 (which
reflects data for AbleSoft, Inc. ("AbleSoft") for the period beginning October
1, 1995), (ii) AbleSoft's statement of operations for the nine months ended
September 30, 1995, (iii) Micro Sports statement of operations for the year
ended December 31, 1995, (iv) Rabbit Ears' audited condensed statement of
operations for the year ended December 31, 1995, and (v) KidSoft's audited
condensed statement of operations for the year ended December 31, 1995.
The pro forma information does not purport to be indicative of the combined
results of operations or financial position that would have been reported had
these transactions taken place as of March 31, 1997 with respect to the Pro
Forma Consolidated Balance Sheet or as of January 1, 1997 with respect to the
Pro Forma Consolidated Statement of Operations, as the case may be, or future
results of operations or financial position of the Registrant. The Pro Forma
Consolidated Financial Statements should be read in conjunction with the
Registrant's historical financial statements and related notes thereto for the
quarter ended March 31, 1997 on Form 10-QSB and for the year ended December 31,
1996 included in its Annual Report on Form 10-KSB and the historical financial
statements and notes thereto of KidSoft for the years ended December 31, 1996
and 1995 included in the Report under Item 7(a).
-16-
MicroLeague Multimedia, Inc.
Pro Forma Consolidated Balance Sheet
at March 31, 1997
Historical
Pro Forma
Adjustments
ASSETS MicroLeague KidSoft for KidSoft Pro Forma
- ------ ----------- ------- ----------- ---------
(unaudited) (unaudited) (unaudited) (unaudited)
Cash and cash equivalents $ 27,436 $ 52,066 $1,140,159 (2) $ 1,219,661
Accounts receivable, gross 1,567,746 202,737 1,770,483
Allowance for returns (430,000) (83,040) (513,040)
Inventories, net 1,359,013 1,006,980 2,365,993
Royalty advances 91,625 371,085 462,710
Other current assets 79,009 141,145 220,154
Deferred tax asset 80,534 - 80,534
---------- ---------- ---------- -----------
Total current assets 2,775,363 1,690,973 1,140,159 (2) 5,606,495
========== ========== ========== ===========
Property, plant and equipment 895,457 2,530,175 3,425,632
Less: Accumulated Depreciation - (1,452,199) (1,452,199)
Goodwill 3,875,586 - 6,177,832 (1) 10,053,418
Capitalized software costs 63,836 - 63,836
Intangible assets 2,260,414 - 2,260,414
Other assets 50,073 78,839 128,912
---------- ---------- ---------- -----------
Total assets $9,920,729 $2,847,788 $7,317,991 $20,086,308
========== ========== ========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Notes payable $2,130,000 $ - $ 2,130,000
Current portion of long-term 438,626 284,382 723,008
Deferred revenue - - -
Accounts payable 1,888,617 1,131,356 3,019,973
Cash overdraft 59,841 - $ (59,841)(2) -
Other accrued liabilities 833,849 222,385 300,000 (1) 1,356,234
Other current liabilities - 93,245 - 93,245
---------- ---------- ---------- -----------
Total current liabilities 5,350,933 1,731,368 240,159 7,322,460
========== ========== ========== ===========
Long-term debt 683,678 2,156,752 (2,050,000)(1) 790,430
Deferred income taxes 80,534 - - 80,534
---------- ---------- ---------- -----------
Total liabilities 6,115,145 3,888,120 (1,809,841) 8,193,424
========== ========== ========== ===========
Shareholders' equity (deficiency) 3,805,584 (1,040,332) 9,827,832 (1)(2) 11,893,084
---------- ---------- ---------- -----------
Total liabilities and
shareholders' equity $9,920,729 $2,847,788 $7,317,991 $20,086,508
========== ========== ========== ===========
-17-
MicroLeague Multimedia, Inc.
Pro Forma Consolidated Statement Of Operations
for the Three Months ended March 31, 1997
Pro Forma
MicroLeague Adjustments
Consolidated KidSoft KidSoft Pro Forma
------------ ------- ------- ---------
(unaudited) (unaudited) (unaudited)
Net sales $1,190,603 $1,281,957 $ 2,472,560
Cost of goods sold 404,822 991,632 1,396,454
----------- ----------- ---------- -----------
Gross profit 785,781 290,325 1,076,106
Operating expenses:
Product development 354,785 - 354,785
Selling & marketing 206,699 235,502 442,201
Depreciation & amortization 172,751 178,608 351,359
General & administration 234,795 896,562 $ 154,446 (8) 1,285,803
----------- ----------- ---------- -----------
Total operating expenses 969,030 1,310,672 154,446 2,434,148
----------- ----------- -------- -----------
(Loss) from operations (183,249) (1,020,347) (154,446) (1,358,042)
----------- ----------- --------- -----------
Interest expense 31,359 31,359
Other expenses (income), net - 67,524 - 67,524
----------- ----------- --------- -----------
(Loss) before provision
for income taxes (214,608) (1,087,871) (154,446) (1,456,921)
Benefit (provision) for income taxes,
before extraordinary items - - 61,778 (4) 61,778
----------- ----------- ---------- -----------
(Loss) before extraordinary items (214,608) (1,087,871) (92,668) (1,395,147)
(Loss) from operations of discontinue (312,232) - - (312,232)
----------- ----------- ---------- -----------
Net (loss) (526,840) (1,087,871) (92,668) (1,707,379)
=========== =========== ========= ===========
Per share of common stock
Net (loss) per share from continuing (0.05) (0.23)
(Loss) per share from discontinued (0.07) 0.05
----------- -----------
Net (loss) per common share (0.12) (0.28)
=========== ===========
Weighted average common shares
outstanding 4,372,980 6,075,614 (1)(2)
=========== ===========
-18-
MicroLeague Multimedia, Inc.
Consolidated Statement Of Operations
for the Year ended December 31, 1996
MicroLeague
Consolidated Micro Sports Rabbit Ears KidSoft
------------ ------------ ----------- -------
Net Sales $4,087,037 $91,494 $1,968,088 $9,547,330
Cost of goods sold 3,488,509 - 911,610 3,851,486
---------- -------- ---------- ----------
Gross profit 598,528 91,494 1,056,478 5,695,844
Operating expenses:
Product development 1,487,523 - - -
Selling & marketing 1,771,645 - - -
General & admin. 2,307,556 987,586 1,259,405 10,809,210
---------- -------- ---------- ----------
Total operating expenses 5,566,724 987,586 1,259,405 10,809,210
---------- -------- ---------- ----------
(Loss) from operations (4,968,196) (896,092) (202,927) (5,113,366)
---------- -------- ---------- ----------
Interest expense 257,815 3,768 147,101 85,023
Other expenses, net - 9,356 - 14,498
---------- -------- ---------- ----------
Income (Loss) before provision
for income taxes (5,226,011) (909,216) (350,028) (5,212,887)
(Provision) benefit for income
taxes, before extraordinary
items (16,300) - - -
---------- -------- ---------- ----------
(Loss) before extraordinary items (5,242,311) (909,216) (350,028) (5,212,887)
Extraordinary loss on early
extinguishment of debt 340,303 - - -
---------- -------- ---------- ----------
Net (loss) (5,582,614) (909,216) (350,028) (5,212,887)
========== ======== ========== ==========
Per share of common stock
Loss before extraordinary items ($1.46)
Extraordinary items ( 0.10)
----------
Net (loss) ($1.56)
==========
Weighted avg. common
shares outstanding 3,584,722
==========
Pro Forma Pro Forma Pro Forma
Adjustments Adjustments Adjustments
Micro Sports Rabbit Ears KidSoft Pro Forma
------------ ----------- ----------- ---------
(Unaudited) (Unaudited) (Unaudited)
Net Sales $15,693,949
Cost of goods sold - - - 8,251,605
---------- ----------- ----------- -----------
Gross profit - - - 7,442,344
Operating expenses:
Product development 1,487,523
Selling & marketing 1,771,645
General & admin. 223,125(6) 116,845(7) 119,783(8)(9) 16,321,510
---------- ----------- ----------- -----------
Total operating expenses 223,125 116,845 119,783 19,580,678
---------- ----------- ----------- -----------
(Loss) from operations (223,125) (116,845) (119,783) (12,138,334)
---------- ----------- ----------- -----------
Interest expense 493,707
Other expenses, net - - - 23,854
---------- ----------- ----------- -----------
Income (Loss) before provision
for income taxes (223,125) (116,845) (119,783) (12,655,895)
(Provision) benefit for income
taxes, before extraordinary
items 89,250(4) 46,738(4) 47,913(4) 366,801
---------- ----------- ----------- -----------
(Loss) before extraordinary items (133,875) (70,107) (71,870) (12,289,094)
Extraordinary loss on early
extinguishment of debt - - - 340,303
---------- ----------- ----------- -----------
Net (loss) (133,875) (70,107) (71,870) (12,629,397)
========== =========== =========== ===========
Per share of common stock
Loss before extraordinary item (2.21)
Extraordinary items (0.06)
, -----------
Net (loss) ($2.27)
===========
Weighted avg. common
shares outstanding 5,555,453(1)(2)
===========
-19-
MicroLeague Multimedia, Inc.
Consolidated Statement Of Operations
for the Year ended December 31, 1995
MicroLeague
Consolidated AbleSoft Micro Sports Rabbit Ears KidSoft
------------ -------- ------------ ----------- -------
Net Sales $5,010,156 $ 547,206 $185,437 $2,277,242 $5,008,363
Cost of goods sold 2,374,975 156,082 18,481 505,517 3,179,645
---------- --------- ----------- ----------- -----------
Gross profit $2,635,181 391,124 166,956 1,771,725 1,828,718
Operating expenses:
Product development 215,167 - - - -
Selling & marketing 515,882 160,208 - - -
General & admin. 1,555,838 376,655 1,358,673 3,250,659 11,310,319
---------- --------- ----------- ----------- -----------
Total operating expenses 2,286,887 536,863 1,358,673 3,250,659 11,310,319
---------- --------- ----------- ----------- -----------
(Loss) from operations 348,294 (145,739) (1,191,717) (1,478,934) (9,481,601)
---------- --------- ----------- ----------- -----------
Interest expense 224,451 22,844 5,535 65,914 51,905
Other expenses (income), net 41,054 16,295 (75,021) - 255,557
---------- --------- ----------- ----------- -----------
Income (loss) before provision
for income taxes 82,789 (184,878) (1,122,231) (1,544,848) (9,789,063)
Benefit (provision) for income taxes,
before extraordinary items 16,300 - - - -
---------- --------- ----------- ----------- -----------
Net (loss) income $ 99,089 $(184,878) $(1,122,231) $(1,544,848) $(9,789,063)
========== ========= =========== =========== ============
Pro Forma income data as reflect
income taxes for 1995
Income before taxes 82,789
Income tax provision 33,116
----------
49,673
Per share of common stock
Net Income (loss) per common share (0.02)
==========
Weighted avg. common
shares outstanding 2,937,978
==========
Pro Forma Pro Forma Pro Forma Pro Forma
Adjustments Adjustments Adjustments Adjustments
Ablesoft Micro Sports Rabbit Ears KidSoft Pro Forma
----------- ------------ ----------- ----------- ---------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Sales $ 13,028,404
Cost of goods sold 6,234,700
------------
Gross profit 6,793,704
Operating expenses:
Product development - - - - 215,167
Selling & marketing - - - - 676,090
General & admin. 68,091(3) 297,500(6) 116,845(7) 119,783(8)(9) 18,952,363
-------- --------- -------- --------- ------------
Total operating expenses 68,091 297,500 116,845 119,783 19,843,620
-------- --------- -------- --------- ------------
(Loss) from operations (68,091) (297,500) (116,845) (119,783) (13,049,916)
-------- --------- -------- --------- ------------
Interest expense 28,818(5) 399,467
Other expenses (income), net - - - - 237,885
-------- --------- -------- --------- ------------
Income (loss) before provision
for income taxes (96,909) (297,500) (116,845) (119,783) (13,687,268)
Benefit (provision) for income taxes,
before extraordinary items 38,763 119,000 46,738 47,913 467,914
-------- --------- -------- --------- ------------
Net (loss) income $(58,146) $(178,500) $(70,107) $(71,870) $(13,219,354)
======== ========= ======== ========= ============
Pro Forma income data as reflect
income taxes for 1995
Income before taxes
Income tax provision
Per share of common stock
Net Income (loss) per C $(2.53)
============
Weighted avg. common
shares outstanding 5,217,591
============
-20-
Notes to Unaudited Consolidated Pro Forma Financial Information
Note 1 Reflects the excess of the purchase price for the net assets
acquired under the purchase method of accounting for the KidSoft
acquisition as well as eliminate assets and liabilities not assumed
by Registrant. The purchase price allocation for KidSoft is based on
management's preliminary estimates of the fair value of the assets
and liabilities assumed. The final allocation may differ from these
estimates. In addition to the assumed liabilities, the consideration
for the acquisition consists of 1,450,000 shares of the Registrant's
common stock valued at $6,887,500.
Note 2 Also includes the private placement of 252,633 shares of the
Company's common stock to certain of the shareholders of KidSoft for
$1.2 million which was consummated in connection with the
acquisition of KidSoft.
Note 3 Reflects amortization expenses of $56,325 related to $751,000 of
goodwill resulting from the Ablesoft Acquisition, which is being
amortized over 10 years. Also reflects amortization of non-goodwill
intangible assets over the same respective lives.
Note 4 Reflects an estimated tax provision at an assumed rate of 40% on the
consolidated results from operations.
Note 5 Reflects interest expenses on debt incurred in connection with the
Ablesoft acquisition offset by a reduction of interest expenses on
APBA Game Company acquisition debt, which was converted to equity in
1996.
Note 6 Reflects amortization expenses of $282,500 related to goodwill and
licensing fees from the Micro Sports acquisition, which is being
amortized over 10 years. Also reflects depreciation of property,
plant and equipment over 10 years.
Note 7 Reflects amortization expense of $116,845 related to goodwill from
the Rabbit Ears' acquisition, which is being amortized over 20
years.
Note 8 Reflects amortization expense of $617,783 per year related to
goodwill from the KidSoft acquisition, which is being amortized over
10 years.
Note 9 Reflects reduction in personnel costs of $498,000 per year
resulting from the elimination of duplicative functions at KidSoft
and the Company.
-21-
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 hereunto duly authorized.
MICROLEAGUE MULTIMEDIA, INC.
(Registrant)
Date: June 20, 1997 By: /s/ PETER R. FLANAGAN
------------------------------------
Name: Peter R. Flanagan
Title: Chief Financial Officer
-22-
EXHIBIT INDEX
Exhibit No.
- -----------
2.1 Acquisition Agreement, dated as of June 6, 1997, among MicroLeague
Multimedia, Inc., KidSoft, L.L.C., The Hearst Corporation, KidSoft
Holdings, Inc., Ameritech Corporation, Ameritech KidSoft Holdings, Inc.,
KidSoft, Inc., Daniel D. Barry and Lawrence R. Gross.
2.2 Stock Purchase Agreement, dated as of June 6, 1997, among MicroLeague
Multimedia, Inc., The Hearst Corporation and Ameritech Corporation.