UNITED STATES SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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FORM 10-QSB
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE SECURITIES EXCHANGE ACT OF 1934
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For the interim period ended June 30, 1997
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
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For the transition period from - to .
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Commission File Number 1-11743
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MICROLEAGUE MULTIMEDIA, INC.
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(Exact name of Small Business Issuer in its charter)
Pennsylvania 23-2563090
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1001 Millersville Road, Lancaster, Pennsylvania 17604
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(Address of principal executive offices)
(717) 872-6567
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes No X
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As of July 31, 1997, the registrant had outstanding 6,102,183 shares of
Common Stock, par value $.01 per share.
Transitional Small Business Disclosure Format (check one):
Yes No X
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MICROLEAGUE MULTIMEDIA, INC.
QUARTERLY REPORT ON FORM 10-QSB FOR THE INTERIM
PERIOD ENDED JUNE 30, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996.............................................3
Consolidated Statements of Operations for the six months ended
June 30, 1997 and June 30, 1996..........................................................................4
Consolidated Statements of Operations for the three months ended
June 30, 1997 and June 30, 1996..........................................................................5
Consolidated Statements of Cash Flows for the six months ended
June 30, 1997 and June 30, 1996..........................................................................6
Notes to Consolidated Financial Statements........................................................................7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.....................................................................................10
PART II. OTHER INFORMATION..............................................................................13
ITEM 2. Changes in Securities..........................................................................13
ITEM 6. Exhibits and Reports on Form 8-K...............................................................14
2
MICROLEAGUE MULTIMEDIA, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND DECEMBER 31, 1996
ASSETS
June 30, 1997 December 31,
(unaudited) 1996
============= =============
Cash and cash equivalents $ 238,580 $ 22,080
Accounts receivable, less allowance 1,088,383 867,915
for Sales Returns of $474,000 and $460,000
Inventories 1,119,079 1,302,728
Royalty advances 305,463 102,100
Prepaid and other current assets 221,343 83,539
Deferred tax asset -- 83,300
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Total current assets 2,972,848 2,461,662
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Property, plant and equipment, net 1,256,547 858,290
Capitalized software costs 69,363 73,251
Goodwill, net 11,052,135 1,592,301
Intangible assets 2,227,779 2,307,710
Other assets 184,060 57,129
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Total assets 17,762,732 7,350,343
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LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable 1,893,119 1,800,200
Current portion of long-term debt 429,444 338,626
Accounts payable 3,109,667 1,488,647
Cash overdraft -- 73,068
Other accrued liabilities 1,461,189 723,232
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Total current liabilities 6,893,419 4,423,773
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Long-term debt 1,528,486 673,085
Deferred tax liability 80,534 83,300
Commitments and contingencies
Total liabilities 8,502,439 5,180,158
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Stockholder's equity:
Common Stock 62,756 42,432
Treasury Stock (892,500) --
Additional Paid-in Capital 19,182,951 9,618,747
Bridge warrants 150,000 --
Accumulated deficiency (9,206,914) (7,454,994)
Less: receivable from stockholders (36,000) (36,000)
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Total stockholder's equity 9,260,293 2,170,185
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Total liabilities and stockholder's equity $ 17,762,732 $ 7,350,343
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The accompanying notes are an integral part of the consolidated
financial statements.
3
MICROLEAGUE MULTIMEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
Six Months Ended June 30,
1997 1996
(unaudited) (unaudited)
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Net sales $ 2,118,782 $ 1,289,149
Cost of goods sold 658,949 638,444
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Gross profit 1,459,833 650,705
Operating expenses:
Product development 565,216 215,147
Selling 658,263 564,391
Depreciation and amortization 404,944 168,125
General & Administrative 804,618 292,395
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(Loss) from operations (973,208) (589,353)
Interest expense 88,338 143,574
(Loss) from continuing operations before income taxes (1,061,546) (732,927)
Benefit for income taxes, before extraordinary items 367,825
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(Loss) from continuing operations (1,061,546) (365,102)
Gain (loss) on extraordinary items, net 144,934 (204,181)
Discontinued operations (Note 4):
(Loss) from operations of discontinued segment (835,308) (627,885)
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Net (loss) $(1,751,920) $(1,197,168)
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Net (loss) per common share from continuing operations $ (.23) $ (.11)
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Net gain (loss) per common share from extraordinary items $ .03 $ (.06)
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Net (loss) per common share from discontinued segment $ (.18) $ (.20)
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Net (loss) per common share $ (.38) $ (.37)
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Weighted average common shares outstanding 4,662,695 3,227,177
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The accompanying notes are an integral part of the consolidated
financial statements.
4
MICROLEAGUE MULTIMEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
Three Months Ended June 30,
1997 1996
(unaudited) (unaudited)
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Net sales $ 928,179 $ 475,080
Cost of goods sold 254,127 264,074
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Gross profit 674,052 211,006
Operating expenses:
Product development 210,431 160,146
Selling 451,564 418,084
Depreciation and amortization 232,193 47,139
General & Administrative 569,823 36,430
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(Loss) from operations (789,959) (450,793)
Interest expense 56,979 98,265
(Loss) from continuing operations before income taxes (846,938) (549,058)
Benefit for income taxes, before extraordinary items 333,634
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(Loss) from continuing operations $ (846,938) $ (215,424)
Gain (loss) on extraordinary items, net 144,934 (204,181)
Discontinued operations (Note 4):
(Loss) from operations of discontinued segment (523,076) (406,812)
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Net (loss) (1,225,080) (826,417)
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Net (loss) per common share from continuing operations $ (.17) $ (.06)
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Net gain (loss) per common share from extraordinary items $ .03 $ (.06)
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Net (loss) per common share from discontinued segment $ (.10) $ (.12)
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Net (loss) per common share $ (.24) $ (.24)
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Weighted average common shares outstanding 5,026,979 3,490,928
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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, 1997 AND JUNE 30, 1996
Six Months Ended June 30,
1997 1996
(unaudited) (unaudited)
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Cash flows used in operating activities:
Net loss $(1,751,920) $(1,197,168)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 404,944 323,984
Provision for doubtful accounts 178,123
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (159,395) 341,070
Decrease (increase) in inventories 898,539 (352,199)
Decrease (increase) in royalty advances (84,055) (253,015)
Decrease (increase) in prepaid and other current assets 3,339 (669,076)
Decrease (Increase) in other assets 465,273 (5,021)
Increase in accounts payable 249,352 3,897
(Decrease) increase in accrued expenses (131,512) 189,735
(Decrease) increase in deferred tax liabilities (2,766) --
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Net cash used in operating activities (108,201) (1,439,670)
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Cash flows used in investing activities:
Purchase of property, plant and equipment 178,645 (345,217)
Cash acquired in purchase 109,041 --
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Net cash used in investing activities 287,686 (345,217)
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Cash flows provided by financing activities:
Payments of receivables by stockholders -- (69,930)
Net increase (decrease) in note payable - bank 92,919 (2,281,372)
Net borrowings (payments) of long-term debt 651,468 (33,674)
Net issuance of common stock (707,372) 5,353,388
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Net cash provided by financing activities 37,015 2,968,412
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Net increase in cash and cash equivalents 216,500 1,183,525
Cash and cash equivalents, beginning of period 22,080 6,754
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Cash and cash equivalents, end of period 238,580 1,190,279
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Supplement cash flow disclosures:
Cash paid during the period for interest 74,556 87,844
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Noncash, financing activities:
Conversion of notes payable to common stock -- 84,023
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Capital lease obligations 62,621 186,282
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6
MICROLEAGUE MULTIMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Microleague Multimedia, Inc. (the "Company") sells its products primarily
through software retailers, mail order, wholesale clubs and mass market
merchandisers throughout the United States under the brand names Microleague
Sports(R), APBA(R), AbleSoft(R), Rabbit Ears(R), KidSoft(R), and General
Admission(TM). Until June 9, 1997, the Company also provided commercial
printing, graphic design and manufacturing services through its printing
division, known as Foxfire Printing (see Note 4).
The unaudited interim financial statements for the Company include the
operations of Micro Sports, Inc. ("Micro Sports"), a sports simulation software
developer acquired in October 1996, Rabbit Ears Productions, Inc. ("Rabbit
Ears"), a Philadelphia-based entertainment company known for its line of
children's literature based products acquired in February 1997 (see Note 2), and
KidSoft, a California-based distributor and publisher of children's multimedia
software acquired in June 1997 (see Note 2). The financial statements presented
herein do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. All
significant intercompany accounts and transactions have been eliminated. In the
opinion of management, all adjustments which are of a normal and recurring
nature necessary for a fair presentation of these financial statements have been
included.
Certain accounts have been reclassified from the prior year interim period
presentation.
2. Acquisitions
On February 18, 1997, the Company acquired all of the assets and agreed to
assume certain of the liabilities of Rabbit Ears, a Philadelphia-based
entertainment company known for its line of children's literature-related
products. In consideration for the acquisition, the Company issued 268,097
shares of the Company's common stock, par value $.01 per share (the "Common
Stock"). In connection with the acquisition, the Company also granted an
aggregate of 15,000 shares of Common Stock to the two founders of Rabbit Ears.
In addition, the Company issued to the seller options to purchase 125,000 shares
of Common Stock at an exercise price of $7.46 per share (the "First Options")
and options to purchase 125,000 shares of Common Stock at an exercise price of
$8.95 per share (the "Second Options"). The First Options are exercisable
through February 16, 1999. The Second Options are exercisable through February
16, 2000. The First and Second Options are redeemable by the Company, at $0.01
per share, at any time after the last sale price of the Common Stock (as
reported by the principal exchange on which the Common Stock is traded) exceeds
$10.44 per share and $12.53 per share, respectively, for not fewer than 15
consecutive trading days.
On June 6, 1997, the Company acquired KidSoft, L.L.C. ("KidSoft"), a
California-based distributor and publisher of children's multimedia software
products. The Company issued 1,450,000 shares of Common Stock to the members of
KidSoft and granted warrants to purchase 100,000 shares of Common Stock to
certain of such members. The warrants to purchase 100,000 shares of Common Stock
have an exercise price of $4.75 per share and are exercisable through June 5,
2002.
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3. Inventory
Inventory, net of valuation allowances, consisted of the following:
June 30, 1997 December 31, 1996
Raw materials............................................ $52,334
Work-in-progress......................................... 63,303
Finished goods........................................... 1,119,079 1,187,091
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Total........................................... $1,119,079 $1,302,728
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4. Discontinued Operations
Effective June 9, 1997, the Company sold the assets and certain liabilities of
its commercial printing division to the Company's former President and Chief
Operating Officer. In consideration for such sale, the Company received 175,000
shares of its common stock. The Company retained approximately $1.2 million of
accounts payable pertaining to the commercial printing division.
Net sales from the commercial printing division were approximately $957,900 and
$700,000 for the six months ended June 30, 1997 and 1996, respectively. Cost of
goods sold for the printing division in such six month periods was approximately
$1,128,000 and $670,000 for the six months ended June 30, 1997 and 1996,
respectively, and the aggregate other expenses for this division were $665,200
and $657,000, respectively. As a result, the commercial printing division
incurred losses of $835,300 and $627,000 in the six months ended June, 30 1997
and 1996, respectively.
5. Notes Payable
In late March 1997, the bank ("Original Bank") providing the Company's $1.5
million line of credit, which was collateralized by substantially all of the
Company's assets, informed the Company that it would not renew the line of
credit, and that the Company was in violation of a certain financial covenant.
On June 5, 1997, the Company entered into a demand line of credit from a new
bank sufficient to repay all amounts outstanding under the Company's earlier
line of credit. The new line of credit is collateralized by all of the assets of
the Company and the personal guarantee of one of the Company's directors. The
new line of credit bears interest at the bank's prime rate plus 1.5% and matures
in May 1998. As of June 30, 1997, there was $1,193,109 outstanding on the line
of credit with $306,891 available.
The Company remains obligated to the Original Bank under a certain term note in
the outstanding principal amount of approximately $360,000 as of June 30, 1997.
Interest accrues on such note at the rate of prime plus 2% per year and is
payable monthly. The term note is unsecured, is guaranteed by three directors
and two shareholders, and is due and payable during September 1997.
6. Subordinated Debt
On June 5, 1997, the Company issued and sold to Penn Janney Opportunities Fund,
L.P. ("Penn Janney") $1,000,000 aggregate principal amount of convertible
subordinated secured debenture and warrants to purchase 100,000 shares of Common
Stock for aggregate consideration of $1,000,000. The debenture, which matures in
eighteen months, bears interest at a rate of 12% per annum, which interest is
payable quarterly either on cash or by issuance of an additional debenture(s)
equal to the amount of interest due.
8
The debenture is secured by a second position on all of the assets of the
Company. The warrants to purchase Common Stock are exercisable at the lower of
85% of fair market value per share as of the date of such warrant or the trading
day immediately preceding the date of exercise.
7. Earnings Per Share
Net loss per share is computed using the weighted average number of shares of
Common Stock outstanding. Common equivalent shares from stock options and
warrants are excluded from the computation as their effect is antidilutive.
8. Stockholders' Equity
During the second quarter of 1996, the Company completed an initial public
offering (the "Initial Public Offering") of 1,173,000 units consisting of one
share of Common Stock and one redeemable warrant. Each redeemable warrant
entitles the holder to purchase one share of Common Stock of the Company at an
exercise price of $6.27 at any time through May 23, 1999. Each redeemable
warrant is redeemable at the option of the Company at a price of $.10 per
redeemable warrant at any time upon not less than 45 days' prior written notice,
if the last sale price of the Common Stock exceeds $8.00 for not fewer than 10
of the 15 consecutive trading days ending on the third trading day prior to the
date on which the notice of redemption is given.
In the first quarter of 1997, one of the Company's officers exercised an option
to acquire 24,070 shares of Common Stock at a cost of $50,000. Such shares of
Common Stock were issued in April 1997.
On June 6, 1997, certain shareholders of KidSoft purchased 252,631 shares of the
Company's Common Stock, in a private placement, for total proceeds of
approximately $1.2 million at $4.75 per share.
On June 9, 1997, as part of the disposition of the Company's commercial printing
division, the Company received 175,000 of its outstanding shares into its
Treasury. Accordingly, the Treasury stock is accounted for under the cost
method.
9. Statement of Financial Accounting Standards Not Yet Adopted
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 128 "Earnings Per Share." This
Statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This Statement is effective for financial statements issued for
periods ending after December 15, 1997. Earlier application is not permitted.
This Statement requires restatement of all prior-ended EPS data. The Company is
currently evaluating the impact, if any, adoption of SFAS No. 128 will have on
its financial statements.
In June 1997, the FASB issued SFAS No. 130, "Comprehensive Income". SFAS No. 130
becomes effective for fiscal years beginning after December 15, 1997 and
requires reclassification of earlier financial statements for comparative
purposes. SFAS No. 130 requires that changes in the amounts of certain items,
including foreign currency translation adjustments and gains and losses on
certain securities be shown in the financial statements. SFAS No. 130 does not
require a specific format for the financial statement in which comprehensive
income is reported, but does require that an amount representing total
comprehensive income be reported in that statement. Management has not yet
determined the effect, if any, of the adoption of SFAS No. 130 on the
consolidated financial statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This Statement will change the way
public companies report information about segments of their business in annual
financial statements and requires them to report selected segment information in
their quarterly reports issued to stockholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. The Statement is effective for fiscal years beginning after December
15, 1997. Management has not yet determined the effect, if any, of the adoption
of SFAS No. 131 on the consolidated financial statements.
Cautionary Statement Regarding Forward-looking Statements
This Report contains "forward-looking" statements regarding potential
future events and developments affecting the business of the Company. Such
statements relate to, among other things, (i) competition for customers; (ii)
the uncertainty of developing or obtaining rights to new products that will be
accepted by the market and the timing of the introduction of new products into
the market; (iii) the
9
limited market life of the Company's products; (iv) the uncertainty of
consummating potential acquisitions; and (v) the availability of financing to
fund working capital and expansion needs, and (vi) the uncertainty of reducing
the Company's operating costs and generating positive cash flow.
The Company's ability to predict results or the effect of any pending
events on the Company's operating results is inherently subject to various risks
and uncertainties, including those discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations for the Six Months Ended June 30, 1997 as compared to the
Six Months Ended June 30, 1996.
Net sales from continuing operations increased approximately $830,000
or 64%, from approximately $1,289,000 in the six months ended June 30, 1996 to
approximately $2,119,000 in the six months ended June 30, 1997 due to increases
in multimedia product sales. The significant increase was primarily attributable
to the new sports products released by the Company in the second quarter of
1997. Despite the significant increase in net sales, the provision for sales
returns declined in the six months ended June 30, 1997 compared to the six
months ended June 30, 1996 due to increased sales of higher margin and more
consistent products in 1997, which traditionally have fewer returns and less
price protection allowances. Direct mail sales were approximately $522,000, or
25% of net sales, in the six months ended June 30, 1997 as compared to
approximately $799,000, or 61% of net sales, for the six months ended June 30,
1996. The decrease in the direct business was due to baseball add-on products
releasing in the fourth quarter of 1996 instead of the first quarter of 1997, as
those annual add-on products were released last year in the first quarter of
1996.
As described in Note 4 to the accompanying financial statements, the
Company disposed of its commercial printing business on June 9, 1997. Net sales
of the commercial printing division were approximately $958,000 for the six
months ended June 30, 1997 and $700,000 for the six months ended June 30, 1996.
Cost of goods sold for the printing division in such quarters were approximately
$1,128, 000 and $670,000, respectively, and aggregate other expenses for this
division were $655,200 and $657,000, respectively. As a result, the commercial
printing division incurred losses of $835,300 and $627,000 in the six months
ended June 30, 1997 and 1996, respectively. The disposition of the commercial
printing business is expected to improve the Company's gross profit margins
since printing services generally have a lower gross profit margin than the
Company's multimedia products. The disposition also is expected to improve the
Company's operating expenses. The printing business is classified as a
discontinued operation in the financial statements and therefore the following
discussion of results of operations for the six months ended June 30, 1997 and
1996 relates only to the Company's continuing operations without regard to the
printing business.
Cost of goods sold increased by approximately $20,000 from
approximately $640,000 for the six months ended June 30, 1996 to approximately
$659,000 for the six months ended June 30, 1997. As a percentage of net sales,
cost of goods sold decreased from approximately 49% in the six months ended June
30, 1996 to approximately 31% in the first quarter of 1997. The decrease in cost
of goods sold as a percentage of net sales resulted from the increase in the
sales of front-line multimedia products versus
10
budget products as the front-line products typically have a higher profit margin
than the Company's budget products.
Development expense increased by approximately $350,000 from
approximately $215,000 for the six months ended June 30, 1996 to approximately
$565,000 for the six months ended June 30, 1997. This significant increase was
due to the Company's acquisition of Micro Sports, a software developer, in
October 1996. In addition, a significant amount of the development expense
incurred during the second quarter of 1997 related to products that are planned
for release later in 1997. The Company had only one new product reach
technological feasibility and release during the first six months of 1997. The
Company expects its development expenses in the second half of 1997 will
approximate the development expenses incurred in the first half of 1997. To
date, completion of a working model of the Company's products and general
release have substantially coincided. As a result, the Company has not
capitalized any software development costs since such costs have not been
significant.
Selling and marketing expenses increased by approximately $94,000, or
17%, from approximately $565,000 for the six months ended June 30, 1996 to
approximately $658,000 for the six months ended June 30, 1997. The increase was
primarily a result of certain direct marketing and sales promotion expenses,
which expenses preceded product release schedules. As a percentage of net sales,
selling and marketing expenses remained relatively constant on a dollar basis,
but on a percentage basis decreased from 44% in the first six months of 1996 to
approximately 31% for the first six months in 1997 due to the increase in sales.
General and administrative expenses increased by approximately $512,000
or 175%, from approximately $292,000 for the six months ended June 30, 1996 to
$805,000 for the six months ended June 30, 1997. This increase was primarily due
to an increase in administrative personnel as a result of the Company's
acquisition of KidSoft in June 1997 and the Company's acquisition of Micro
Sports in October 1996, as well as unusually high professional fees
attributed to the Company's changing bank relationship.
Depreciation and amortization expense increased by approximately
$236,000, or 140%, from approximately $168,000 for the six months ended June
30, 1996 to $405,000 for the six months ended June 30, 1997. This increase was
due primarily to the increased amortization of intangible assets resulting from
the Micro Sports, Rabbit Ears, and KidSoft acquisitions.
Interest expense decreased by approximately $55,000, or 38%, from
approximately $143,000 for the six months ended June 30, 1996, to $83,000 for
the six months ended June 30, 1997. The decrease reflected interest expense of
$240,000 incurred in the first six months of 1996 in connection with bridge loan
financing in which the Company issued units consisting of promissory notes and
warrants to purchase Common Stock. Such sum was deemed to be original issue
discount related to the value of the warrants and therefore treated as interest
expense with respect to the notes. The notes were repaid at the end of the
second quarter of 1996 with a portion of the proceeds from the Initial Public
Offering.
For the six months ended June 30, 1996, the Company provided for
federal and state corporate income taxes at an estimated effective tax rate of
30%. The Company reversed this tax benefit in the fourth quarter of 1996,
however, due to doubts as to the Company's ability to utilize such tax benefits.
The Company does not intend to recognize a tax benefit until it achieves
profitability on a quarterly basis.
Liquidity and Capital Resources
In May 1996, the Company raised net proceeds of approximately
$5,000,000 in the Initial Public Offering, which consisted of 1,173,000 units,
each comprised of one share of Common Stock and one
11
Common Stock purchase warrant. The Company applied approximately $2.8 million of
such net proceeds to repay bank debt, bridge notes issued in February 1996 and
notes to a partnership. The Company applied the remaining net proceeds to fund
product development and to provide working capital for general corporate
purposes.
On June 6, 1997, the Company acquired KidSoft and assumed KidSoft's
current liabilities in excess of current assets of approximately $1,690,000. In
connection with the acquisition, certain shareholders of KidSoft purchased in a
private placement approximately $1,200,000 of the Company's Common Stock. The
Company anticipates that, a significant portion of the proceeds from this
issuance of Common Stock will be used to integrate KidSoft's California-based
operations with the Company's operations, and any remaining amount of the net
proceeds will be available for working capital and general corporate purposes.
From the acquisition date of KidSoft on June 6, 1997 through the end of the
second quarter, no material revenues were derived from KidSoft to offset cash
used to meet expenses associated with the KidSoft business, which were
approximately $300,000. The Company anticipates that KidSoft's direct mail and
original equipment manufacturer business, which represent a substantial portion
of KidSoft's total revenues, will enable the Company to improve its cash flow
from operations.
In June 1997, the Company issued to Penn Janney Opportunities Fund,
L.P. $1,000,000 aggregate principal amount of convertible subordinated secured
debentures and warrants to purchase 100,000 shares of Common Stock for aggregate
consideration of $1,000,000.
As of June 30, 1997, the Company had payment commitments of
approximately $60,000 under various product development agreements, $1,162,000
under its property and vehicle leases, and $1,215,000 under existing employment
agreements with certain officers of the Company.
Primarily as a result of the costs incurred in connection with the
recent acquisitions of Micro Sports, Rabbit Ears and KidSoft, the Company
believes that cash flow from operations will not be sufficient to meet its short
term needs for working capital and the expansion of its business. The Company's
cash flow from operations was substantially lower in 1996 than previously
anticipated due to decreases in net revenues and increases in cost of goods sold
and operating expenses. Revenues were adversely affected in 1996, in part,
because the Company did not release any premier products. Cash flow from
operations in the first and second quarters of 1997 continued to be less than
the Company's working capital needs. For the second quarter of 1997, the
Company's loss before interest, taxes, depreciation and amortization, a
customary measure for operating cash flow, was only $568,000 (excluding the
Company's printing operations). The Company expects cash flow from operations to
be less than the Company's expenses in the third quarter of 1997. The Company
continued to borrow under its bank line of credit of $1.5 million during the
second quarter of 1997 and approximately $1,193,000 was outstanding as of June
30, 1997.
During the first six months of 1997, the Company's net cash used in
operating activities was approximately $108,000. A large portion of such amount,
however, was attributable to the Company's printing operations. The disposition
of the printing operations and the Company's concentration on selling higher
margin products are important aspects of the Company's strategy to reduce cash
used in operations.
In late March 1997, the bank providing the Company's $1.5 million line
of credit, which was collateralized by substantially all of the Company's
assets, informed the Company that it would not renew the line of credit, and
that the Company was in violation of a covenant relating to the maintenance of
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a minimum level of tangible net worth. The Company immediately began discussions
with the bank to obtain a limited extension of the line of credit and
simultaneously began discussions with other banks to obtain a replacement credit
facility. The line of credit expired on March 31, 1997 and all amounts
outstanding thereunder became immediately due and payable on that date. On May
1, 1997, the bank agreed not to exercise its remedies under the line of credit
until July 15, 1997 in order to allow the Company an opportunity to arrange for
a new line of credit.
On June 5, 1997, the Company entered into a new banking relationship
that provided the Company a $1.5 million line of credit to replace the Company's
existing line of credit facility. The new line of credit, collateralized by
substantially all of the Company's assets and the personal guarantee of the
Company's Chairman of the Board of Directors, matures at the end of May 1998.
The Company estimates that in order to fund its working capital needs
for the next twelve months (not including any increases that may arise as a
result of acquisitions), it will require a significant amount of funding in
addition to cash flow from operations. The Company intends to obtain additional
funding in the form of debt and/or equity. There can be no assurances that the
Company will be able to obtain such additional funding, or if obtained, that
such amount will be adequate for the Company's purposes.
In the normal course of business, the Company evaluates potential
acquisitions and other business arrangements that may complement the Company's
business. The Company is currently evaluating a number of opportunities in this
regard; however, no commitments or agreements have been reached. Any such
acquisitions or joint ventures may require the Company to make additional
capital expenditures, and such expenditures could be significant.
Seasonality
The interactive multimedia consumer products market is characterized by
significant seasonal swings in demand, which typically peak in the fourth
quarter of each year. The seasonal pattern is due primarily to the increased
demand for audio, video and computer software products during the year-end
holiday buying season. The Company expects its net sales and operating results
to continue to reflect this seasonality. There can be no assurance that the
Company will achieve consistent profitability on a quarterly or annual basis or
that any profitability, if achieved, will be maintained.
Inflation
The Company does not believe that inflation has had a material effect
on its results of operations to date. There can be no assurance, however, that
the Company's business will not be affected by inflation in the future.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
On June 5, 1997, the Company issued to Penn Janney Opportunities Fund,
L.P. a certain convertible subordinated secured debenture in the face amount of
$1,000,000 and a warrant to purchase 100,000 shares of common stock, for an
aggregate consideration of $1,000,000. The debenture is convertible into common
stock, and the warrants are exercisable into common stock, at the lower of $3.59
or 85% of fair market value per share as of the trading day immediately
preceding the date of
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conversion or exercise, as the case may be (the "Formula Value"). The warrant
expires on April 24, 2002. There were no underwriting discounts or commissions.
The securities were issued in reliance upon Section 4(2) of the Securities Act
of 1933, as amended ("Section 4(2)").
On June 6, 1997, the Company sold 252,631 shares of its Common Stock to
Hearst Corporation and Ameritech Corporation, at the price of $4.75 per share,
for an aggregate of approximately $1,200,000. There were no underwriting
discounts or commissions. The shares were issued in reliance upon Section 4(2).
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
11.1 Statement re: Computation of Per Share Earnings
27.1 Financial Data Schedules
(b) The Company filed the Following Current Reports on Form 8-K for the
quarter ended June 30, 1997:
Current Report on Form 8-K/A, dated February 18, 1997, reporting
certain financial information in connection with the Company's acquisition of
certain of the assets of Rabbit Ears Productions, Inc.
Current Report on Form 8-K, dated June 6, 1997, reporting the Company's
acquisition of KidSoft, L.L.C. (the "KidSoft Acquisition") together with certain
financial information required to be filed in connection with the KidSoft
Acquisition.
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 19th day of August, 1997.
MICROLEAGUE MULTIMEDIA, INC.
By: /s/ Neil B. Swartz
------------------------------------------
Neil B. Swartz
Chairman of the Board of Directors and
Chief Executive Officer
By: /s/ Laurie Gee
------------------------------------------
Laurie Gee
Vice President and Chief Financial Officer
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EXHIBIT INDEX
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Exhibit No.
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11.1 Statement re: Computation of Per Share Earnings
27.1 Financial Data Schedules
15