<PAGE> 1
SCHEDULE 14C
(RULE 14C-101)
INFORMATION REQUIRED IN INFORMATION STATEMENT
SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(c)
OF THE SECURITIES EXCHANGE ACT OF 1934
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Information Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14c-5(d)(2))
[X] Definitive Information Statement
</TABLE>
INFOGRAMES, INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant(s))
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[ ] Fee computed on the table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE> 2
INFOGRAMES, INC.
417 FIFTH AVENUE
NEW YORK, NEW YORK 10016
(212) 726-6500
------------------------
INFORMATION STATEMENT
GENERAL INFORMATION
YOUR VOTE IS NOT REQUIRED
WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY
INTRODUCTION
This Information Statement (this "Information Statement") is being mailed
on or about September 12, 2000 by Infogrames, Inc., a Delaware corporation (the
"Company"), to all holders of record at the close of business on September 6,
2000 (the "Record Date") of the Company's common stock, par value $0.01 per
share ("Company Common Stock"), to describe the proposed merger (the "Merger")
of INA Merger Sub, Inc., a California corporation and wholly-owned subsidiary of
the Company ("Merger Sub"), with and into Infogrames North America, Inc., a
California corporation ("INA"). In the Merger, California U.S. Holdings, Inc., a
California corporation ("CUSH"), which is the sole stockholder of INA, will
receive 28 million shares of Company Common Stock in exchange for all the shares
of common stock of INA, no par value ("INA Common Stock"), it owned prior to the
Merger. In connection with the Merger, Infogrames Entertainment SA, a
corporation organized under French law that owns 100% of the outstanding capital
stock of CUSH ("Parent"), has agreed to convert the debt outstanding under the
Company's credit agreement with Parent into Company Common Stock, and to
exercise all of the warrants held by Parent or CUSH for Company Common Stock.
Upon completion of the Merger and the transactions contemplated in connection
therewith, CUSH will be the beneficial owner of approximately 88.8% of the
Company (85.5% on a fully-diluted basis). The Company plans to complete the
Merger on October 2, 2000 or soon thereafter.
On June 26, 2000, the Company effected a one-for-five reverse stock split
of the Company Common Stock. Except as otherwise noted, references to share
prices and the number of shares of Company Common Stock in this Information
Statement reflect the reverse stock split effected in June.
As of the Record Date, there were 20,354,438 shares of Company Common Stock
outstanding. CUSH held 12,625,993 shares of Company Common Stock and other
securities convertible into approximately 7,682,304 shares of Company Common
Stock, representing in the aggregate approximately 63.2% of the Company Common
Stock on a fully diluted basis. After careful consideration and upon the
recommendation of a Special Committee comprised of the independent members of
the Board of Directors, the Company's Board of Directors approved and authorized
the Agreement and Plan of Merger, dated as of September 6, 2000, among the
Company, Merger Sub, Parent, CUSH and INA (the "Merger Agreement") and the
transactions contemplated therein. A copy of the Merger Agreement is attached as
Exhibit A hereto. CUSH, as the sole stockholder of INA, has approved the Merger
by signing a written stockholder's consent on September 6, 2000. Also, CUSH, as
majority stockholder of the Company, approved the Merger by signing a separate
written stockholder's consent on September 6, 2000. Such majority approval and
consent are sufficient under California and Delaware corporate law and the
requirements of the Nasdaq National Market to effectuate and complete the
Merger. Accordingly, the Merger Agreement will not be submitted to other
stockholders of the Company for a vote, and this Information Statement is being
furnished to stockholders solely to provide them with certain information in
accordance with the requirements of Delaware law and the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and the regulations promulgated
thereunder, including Regulation 14C. WE ARE NOT ASKING YOU FOR A PROXY AND YOU
ARE REQUESTED NOT TO SEND US A PROXY.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE FAIRNESS OR MERITS OF THE TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF
THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
The date of this Information Statement is September 12, 2000.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Introduction................................................ i
Summary of Information Statement............................ 1
Questions and Answers for Infogrames, Inc. Stockholders..... 1
Selected Historical and Pro Forma Financial Information..... 5
Infogrames, Inc. Common Stock and Dividend Policy........... 8
INA Common Stock and Dividend Policy........................ 8
The Companies............................................... 9
The Merger.................................................. 16
The Merger Agreement........................................ 27
Material Contracts Between the Parties or Their
Affiliates................................................ 30
Description of Capital Stock................................ 32
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 33
Security Ownership of Certain Beneficial Owners and
Management................................................ 51
Financial and Other Information............................. 53
Miscellaneous............................................... 53
</TABLE>
EXHIBITS
Exhibit A: Agreement and Plan of Merger
Exhibit B: Audited Financial Statements of Infogrames, Inc.
Exhibit C: Audited Financial Statements of Infogrames North America, Inc. and
Infogrames
Entertainment, Inc.
Exhibit D: Pro Forma Consolidating Financial Statements of Infogrames, Inc. and
Infogrames
North America, Inc. for the Period Ended June 30, 2000
Exhibit E: Fairness Opinion from Lehman Brothers Inc., dated September 6, 2000
ii
<PAGE> 4
SUMMARY OF INFORMATION STATEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS INFORMATION STATEMENT. REFERENCE IS MADE TO, AND THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE
IN THIS INFORMATION STATEMENT AND THE EXHIBITS ATTACHED HERETO. CROSS-REFERENCES
IN THIS SUMMARY ARE TO CAPTIONS IN THIS INFORMATION STATEMENT. STOCKHOLDERS OF
THE COMPANY ARE URGED TO READ AND CAREFULLY CONSIDER THIS INFORMATION STATEMENT
IN ITS ENTIRETY.
QUESTIONS AND ANSWERS FOR INFOGRAMES, INC. STOCKHOLDERS
Q: WHY ARE THE COMPANIES PROPOSING TO MERGE?
A: The Company is proposing to acquire INA through the Merger because we
believe the resulting combination will create a stronger, more competitive
company capable of achieving greater financial strength, operational
efficiencies, earnings power and growth potential than the Company would
have on its own. See "The Merger -- Background to the Merger" and "The
Merger -- Reasons for the Merger."
Q: WHO ARE THE PARTIES TO THE TRANSACTION?
A: Infogrames, Inc. (formerly GT Interactive Software Corp.,) is a Delaware
corporation with its principal offices located at 417 Fifth Avenue, New
York, NY 10016. Infogrames, Inc. is a leading worldwide developer, publisher
and distributor of interactive entertainment software for use on PCs, the
Sony PlayStation(R) and Nintendo(R) 64 platforms and is currently developing
software for new platforms such as Sony PlayStation 2. The Company also is a
leader in certain sub-segments of the "edutainment" software market,
including the fast-growing children's education and leisure entertainment
segments. See "The Companies -- About Infogrames, Inc."
Infogrames North America, Inc. is a California corporation with its principal
offices located at 5300 Stevens Creek Boulevard, San Jose, California 95129.
INA develops and publishes interactive entertainment software for the video
game market across a variety of platforms, including the Sony PlayStation(R)
and PlayStation(R) 2, Nintendo(R) 64, Nintendo(R) Game Boy(R) Color, Sega(R)
Dreamcast(R), and personal computers. Game franchises published by INA
include Test Drive(R), V-Rally(R), Independence War(R), Unreal(R),
Hardball(R), and Alone in the Dark(R). INA is also known for its long list of
well-known licenses including Warner Bros. Looney Tunes(R), Mission:
Impossible(R), Le Mans 24 Hours(R), AM General Hummer(R), and Dodge(R) Viper.
See "The Companies -- About Infogrames North America, Inc."
Infogrames Entertainment SA, a corporation organized under French law with
principal offices located at 82-84, rue du ler mars 1943, 69628 Villeur-banne
cedex France, is a leading worldwide developer, publisher and distributor of
interactive entertainment software, listed on the Paris Stock Exchange.
California U.S. Holdings, Inc., a California corporation, is a wholly-owned
subsidiary of Infogrames Entertainment SA, with its principal offices located
at 5300 Stevens Creek Boulevard, San Jose, California 95129. CUSH is a
holding company for Parent's operations in the U.S.
INA Merger Sub, Inc., a California corporation, is a newly formed
wholly-owned subsidiary of Infogrames Inc., formed solely for purposes of the
Merger.
Q: HOW WILL THE MERGER OCCUR?
A: Prior to the Merger, CUSH owned approximately 62% of the outstanding Company
Common Stock and 100% of INA. As part of the Merger, the Company will create
Merger Sub, a wholly-owned subsidiary of the Company, that will merge into
and with INA, and INA will be the successor or surviving corporation. Upon
completion of the Merger, the Company will own 100% of INA and CUSH will no
longer directly own INA. CUSH will indirectly have an interest in INA
through its majority interest in the Company. In
1
<PAGE> 5
consideration for CUSH selling INA to the Company, the Company will issue
and CUSH will receive 28 million shares of Company Common Stock. In
addition, Parent has agreed to convert the debt outstanding under the
Company's credit agreement with Parent into Company Common Stock and to
exercise all of the Warrants held by Parent or CUSH for Company Common
Stock. Therefore, CUSH will own approximately 88.8% of the outstanding
shares of the Company (85.5% on a fully diluted basis) upon completion of
the acquisition and conversion of the outstanding Company debt under the
credit agreement and exercise of the Warrants. See "The Merger."
The following diagrams show the structure of the Company before, during and
after the Merger:
[FLOWCHART]
Q: IS THERE AN AGREEMENT GOVERNING THE MERGER?
A: Yes. The Company, Merger Sub, Parent, CUSH and INA entered into a Merger
Agreement dated as of September 6, 2000. The Merger Agreement provides,
among other things, for the terms and conditions of the merger of Merger Sub
into and with INA at the closing.
The Merger Agreement and other related matters are more fully described
herein, and a copy of the Merger Agreement is attached hereto as Exhibit A.
The Merger is a complex transaction. Although we are not requesting your
vote on the Merger, stockholders of the Company should consider carefully
the matters discussed in this Information Statement. See "The Merger
Agreement."
Q: DID THE COMPANY'S BOARD OF DIRECTORS RECEIVE AN OPINION FROM ITS FINANCIAL
ADVISOR?
A: Yes. The Company's financial advisor, Lehman Brothers Inc., delivered to the
Special Committee of the Board of Directors its written opinion dated as of
September 6, 2000, that, as of the date of such opinion, and based upon and
subject to the assumptions, limitations and qualifications set forth
therein, the consideration to be paid by the Company in the Merger,
including the conversion of the outstanding debt under the Company's credit
agreement in connection with the Merger, is fair, from a financial point of
2
<PAGE> 6
view, to the Company and, accordingly, to the stockholders of the Company
other than Parent and its affiliates. The full text of the written opinion
of the financial advisor is attached as Exhibit E to this Information
Statement and should be read carefully in its entirety to understand the
procedures followed, the assumptions made, matters considered and
limitations on the review undertaken in providing the opinion. The opinion
of Lehman Brothers Inc. is directed to the Special Committee of the Board of
Directors of the Company, and this opinion does not address the prices at
which the Company Common Stock may trade prior to or trade after the
proposed Merger. See "The Merger -- Opinion of the Company's Financial
Advisor."
Q: CAN THE MERGER AGREEMENT BE TERMINATED?
A: The Merger Agreement may be terminated by either the Company or Parent under
certain circumstances. See "The Merger Agreement -- Termination or
Abandonment of Merger."
Q: WHAT WILL HAPPEN TO INA AFTER THE MERGER IS CONSUMMATED?
A: After the consummation of the Merger, INA will become a wholly-owned
subsidiary of the Company and the former holder of INA Common Stock will no
longer possess a direct interest in INA. The Company currently intends that
INA will remain a corporate entity and will retain all of its directors and
officers. See "The Merger."
Q: CAN I EXERCISE APPRAISAL RIGHTS?
A: No. Stockholders of the Company are not entitled to appraisal rights under
Section 262 of the General Corporation Law of the State of Delaware as to
shares owned by them. See "The Merger -- Dissenters' Rights of Appraisal."
Q: WHAT WILL BE THE EFFECT OF THE MERGER ON THE STOCKHOLDERS OF THE COMPANY?
A: After the Merger, you will have the same number of shares of Company Common
Stock you have now. However, your interest will be diluted after the Merger
as a result of the Company's issuing additional shares to CUSH, the sole INA
stockholder. See "The Merger -- Principal Effects of the Merger/Change in
Control; Federal Income Tax Consequences and Absence of Any Ruling by the
IRS."
Q: WHAT WILL THE INA COMMON STOCKHOLDER RECEIVE IN THE MERGER?
A: When the Merger is completed, CUSH, the sole holder of INA Common Stock,
will receive 28,000,000 shares of Company Common Stock in exchange for all
the outstanding shares of INA Common Stock. In addition, CUSH will receive
approximately 19,531,250 shares of Company Common Stock in connection with
the conversion of the outstanding debt of the Company owed to Parent under
the Company's credit agreement, and 955,000 shares of Company Common Stock
from the exercise of the warrants held by Parent and CUSH. See "The
Merger -- Interests of Certain Persons in the Merger."
Q: WHAT APPROVAL IS REQUIRED FOR THE MERGER?
A: The Nasdaq National Market requires the approval of the stockholders of the
Company in connection with any acquisition of the stock or assets of another
company if the Company will be issuing stock that will have voting power
greater than or equal to 20% of currently outstanding voting stock. Because
the Company will issue 28,000,000 shares of Company Common Stock in exchange
for all the outstanding shares of INA Common Stock (approximately 135% of
the currently outstanding Company Common Stock), the stockholders of the
Company are required to approve the Merger.
3
<PAGE> 7
Q: WHY ISN'T A MEETING OF STOCKHOLDERS BEING HELD?
A: Delaware law allows stockholders to act by written consent instead of
holding a meeting of stockholders, unless prohibited by the Certificate of
Incorporation. The Company's Certificate of Incorporation does not prohibit
stockholder action by written consent. See "The Merger -- Stockholder
Action."
Q: IS MY VOTE REQUIRED TO APPROVE THE MERGER?
A: No. The affirmative vote of a majority of the votes entitled to be cast by
the holders of all outstanding shares as of the record date is required to
approve and adopt the Merger Agreement. CUSH, as holder of approximately 62%
of the outstanding Company Common Stock, has approved the Merger by written
consent dated September 6, 2000. APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT IS ASSURED WITHOUT THE VOTE OF ANY OTHER STOCKHOLDER. See "The
Merger -- Stockholder Action."
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: The Company and INA are working toward completing the Merger as quickly as
possible. We plan to complete the Merger on October 2, 2000 or soon
thereafter. See "The Merger -- Closing and Closing Date."
Q: ARE ANY REGULATORY APPROVALS REQUIRED?
A: No material consent, approval, waiver or authorization of, notice to or
declaration or filing with any government or political entity is required
other than (a) the filing of the Certificate of Merger with the Secretary of
State of the State of California and (b) if required, customary filings with
the Securities and Exchange Commission or the Nasdaq National Market. See
"Need for Regulatory Approval."
Q: WHAT TYPE OF ACCOUNTING TREATMENT WILL THE MERGER RECEIVE?
A: The Merger will be accounted for on an "as-if-pooled" basis on the date of
common control of the Company and INA. These entities have been under common
control since December 16, 1999 and will be treated similar to a pooling of
interest from that date.
Q: WHO WILL BE THE OFFICERS AND DIRECTORS OF INA FOLLOWING THE MERGER?
A: Following the Merger, the officers and directors of INA will continue to
hold their respective positions in INA, as a wholly-owned subsidiary of the
Company. See "Management of the Combined Companies After the Merger."
Q: WILL I BE TAXED ON THE MERGER?
A: The Company's stockholders and the sole INA stockholder will not recognize
gain or loss for United States federal income tax purposes as a result of
the Merger. All stockholders are urged to consult their own tax advisors to
determine their particular tax consequences. It is a condition to the Merger
that the Company and INA receive a legal opinion to the effect that the
Merger will constitute a "reorganization" within the meaning of Section
368(a) of the Internal Revenue Code. See "Federal Income Tax Consequences
and Absence of Any Ruling from the IRS."
Q: WHOM SHOULD I CALL WITH QUESTIONS?
A: The Company's stockholders should call John D. Menditto, Investor Relations
Manager, at (212) 726-4294, with any questions about the Merger.
4
<PAGE> 8
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
INFOGRAMES, INC. HISTORICAL FINANCIAL INFORMATION. The following table
sets forth selected consolidated financial information with respect to the
Company for the periods indicated. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Infogrames, Inc." and the consolidated financial
statements and related notes of the Company attached hereto as Exhibit B. The
selected financial information for the years ended December 31, 1996 and 1997,
the three months ended March 31, 1997 and 1998, the fiscal years ended March 31,
1999 and 2000 and the three months ended June 30, 1999 and 2000, is as follows:
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31, MARCH 31, JUNE 30,
------------------- ---------------------- -------------------- ----------------------
1996 1997 1997 1998 1999 2000 1999 2000
-------- -------- ----------- -------- -------- --------- ----------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues....................... $365,490 $530,677 $93,381 $105,767 $572,342 $ 375,569 $121,325 $ 32,983
Cost of goods sold................. 214,580 315,134 57,883 57,092 329,959 296,301 62,143 16,150
-------- -------- ------- -------- -------- --------- -------- --------
Gross profit....................... 150,910 215,543 35,498 48,675 242,383 79,268 59,182 16,833
Selling and distribution
expenses......................... 76,235 98,689 16,538 24,467 147,499 147,814 33,876 16,829
General and administrative
expenses......................... 31,157 46,611 8,623 10,655 66,616 87,113 11,761 16,146
Research and development........... 5,633 13,824 2,397 10,866 76,870 66,574 16,366 9,582
Royalty advance write-off.......... -- 73,821 -- -- -- -- -- --
Restructuring and other charges.... -- -- -- -- 17,479 37,948 -- 11,081
Purchased research and
development...................... -- 11,008 -- -- 5,000 -- -- --
SingleTrac retention bonus......... -- 2,400 -- -- 1,680 -- -- --
Amortization of goodwill........... 1,092 1,295 347 636 3,349 3,110 888 561
-------- -------- ------- -------- -------- --------- -------- --------
Operating income (loss)............ 36,793 (32,105) 7,593 2,051 (76,110) (263,291) (3,709) (37,366)
Interest expense................... -- (1,010) -- (557) (5,108) (17,167) (1,959) (3,318)
Other income (loss)................ 3,974 (1,065) 247 (832) (207) (793) (293) (384)
-------- -------- ------- -------- -------- --------- -------- --------
Income (loss) before provision for
(benefit from) income taxes...... 40,767 (34,180) 7,840 662 (81,425) (281,251) (5,961) (41,068)
Total provision for (benefit from)
income taxes..................... 15,628 (9,157) 3,386 304 (29,628) 40,882 (2,109) 876
-------- -------- ------- -------- -------- --------- -------- --------
Net income (loss) from continuing
operations....................... 25,139 (25,023) 4,454 358 (51,797) (322,133) (3,852) (41,944)
Discontinued operations
Loss from operations of OZM...... -- -- -- -- (3,531) -- -- --
Loss on disposal of OZM.......... -- -- -- -- (15,510) (477) -- --
-------- -------- ------- -------- -------- --------- -------- --------
Loss from discontinued
operations..................... -- -- -- -- (19,041) (477) -- --
-------- -------- ------- -------- -------- --------- -------- --------
Net income (loss) before
extraordinary item............... 25,139 (25,023) 4,454 358 (70,838) (322,610) (3,852) (41,944)
Extraordinary item
Gain on early extinguishment of
debt (net of tax of $1,312).... -- -- -- -- -- 1,888 -- --
-------- -------- ------- -------- -------- --------- -------- --------
Net income (loss) before dividends
on preferred stock............... 25,139 (25,023) 4,454 358 (70,838) (320,722) (3,852) --
Less dividends on preferred
stock............................ -- -- -- -- 226 -- 600 --
-------- -------- ------- -------- -------- --------- -------- --------
Net income (loss) attributable to
common stockholders.............. $ 25,139 $(25,023) $ 4,454 $ 358 $(71,064) $(320,722) $ (4,452) $(41,944)
======== ======== ======= ======== ======== ========= ======== ========
Basic income (loss) per share from
continuing operations............ $ 1.89 $ (1.87) $ 0.33 $ 0.03 $ (3.72) $ (19.58) $ (0.31) $ (2.03)
Basic loss per share from
discontinued operations.......... -- -- -- -- $ (1.37) $ (.03) -- --
Basic income per share from
extraordinary item............... -- -- -- -- -- 0.11 -- --
-------- -------- ------- -------- -------- --------- -------- --------
Basic income (loss) per share...... $ 1.89 $ (1.87) $ 0.34 $ 0.03 $ (5.10) $ (19.50) $ (0.31) $ (2.03)
Weighted average shares
outstanding(1)................... 13,278 13,396 13,279 13,588 13,931 16,451 14,574 20,680
======== ======== ======= ======== ======== ========= ======== ========
Diluted income (loss) per share
from continuing operations....... $ 1.84 $ (1.87) $ 0.33 $ 0.03 $ (3.73) $ (19.58) $ (0.31) $ (2.03)
Diluted income (loss) per share
from discontinued operations..... -- -- -- -- $ (1.37) $ (0.03) -- --
Diluted income per share from
extraordinary item............... -- -- -- -- -- 0.11 -- --
-------- -------- ------- -------- -------- --------- -------- --------
Diluted income (loss) per share.... $ 1.84 $ (1.87) $ 0.33 $ 0.03 $ (5.10) $ (19.50) $ (0.31) $ (2.03)
Weighted average shares
outstanding(1)................... 13,663 13,396 13,472 13,677 13,931 16,451 14,574 20,680
======== ======== ======= ======== ======== ========= ======== ========
</TABLE>
---------------
(1) Reflects the one-for-five reverse stock split approved by the Company's
Board of Directors which was effected on June 26, 2000. All periods have
been restated to reflect the reverse stock split.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, JUNE 30,
-------------------- --------------------- ---------
1996 1997 1999 2000 2000
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments........ $ 76,584 $ 39,713 $ 13,512 $ 19,587 $ 12,302
Working capital (deficit)................................... 113,652 77,965 131,770 (104,834) (138,922)
Total assets................................................ 308,794 370,165 438,911 159,207 114,779
Total debt.................................................. 1,415 54,619 98,750 169,526 197,863
Stockholders' equity (deficit).............................. 152,138 134,241 127,133 (154,219) (199,965)
</TABLE>
5
<PAGE> 9
INFOGRAMES NORTH AMERICA, INC. HISTORICAL FINANCIAL INFORMATION. The
following table sets forth selected consolidated financial information with
respect to INA for the periods indicated. This information should be read in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Infogrames North America, Inc." and the
financial statements and related notes of INA and Infogrames Entertainment, Inc.
attached hereto as Exhibit C.
<TABLE>
<CAPTION>
(IN 000'S)
----------------------------
FISCAL YEAR ENDED JUNE 30,
----------------------------
1998 1999 2000
------ ------- -------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Total revenues............................................ 27,722 50,121 72,049
Loss from operations...................................... (8,770) (18,910) (47,458)
Provision for income taxes................................ -- -- 375
Net loss per common share -- basic and diluted............ (9,374) (19,076) (50,942)
Gain or loss per common share(l).......................... (93.74) (190.76) (509.42)
BALANCE SHEET DATA:
Total assets.............................................. 17,556 64,318 59,018
Long-term obligations..................................... 5,078 11,537 25,000
Net stockholders' equity (deficit)........................ 4,128 34,129 (42,255)
Cash dividends............................................ -- -- --
</TABLE>
---------------
(1) 100 shares outstanding in 1998, 1999 and 2000.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION. The
following unaudited pro forma condensed combined financial information of the
Company has been derived from, or prepared on a basis consistent with, the
audited financial statements and related notes of Infogrames, Inc. and the
audited financial statements and related notes of INA attached hereto as
Exhibits B and C, respectively, and should be read in conjunction with such
historical financial statements. The pro forma financial information reflects
the adjustments that will result from the Merger as if it had occurred as of the
beginning of the periods presented with respect to pro forma statements of
operations data and as of the balance sheet date with respect to pro forma
balance sheet data. The following pro forma financial information is presented
for analysis purposes only and does not purport to indicate the results which
actually would have been obtained if the Merger had been effectuated on the
dates indicated, or of the results which may be obtained in the future. This
information should be read in conjunction with the information listed in Exhibit
D.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED JUNE 30, 2000:
Net revenues.............................................. $298,981
Loss from operations...................................... ($346,470)
Interest and other expense................................ ($21,694)
Net loss from continuing operations....................... ($409,700)
Net loss.................................................. ($407,689)
Basic and diluted loss per share from continuing
operations............................................. ($5.80)
Basic and diluted loss per share.......................... ($5.78)
BALANCE SHEET DATA AS OF JUNE 30, 2000:
Total assets.............................................. $173,357
Long-term obligations..................................... $126,559
Net stockholders' equity.................................. ($242,200)
</TABLE>
6
<PAGE> 10
COMPARATIVE PER SHARE DATA. We have summarized below the per share
information of Infogrames, Inc. and Infogrames North America, Inc. on a
historical and pro forma combined basis, each as adjusted for stock splits. The
information should be read in conjunction with the historical financial
statements and related notes to those financial statements of Infogrames, Inc.
and Infogrames North America, Inc. that are included in this Information
Statement.
You should be aware that this pro forma information may not be indicative
of what actual results will be in the future or what the results would have been
for the periods presented.
FOR THE TWELVE MONTHS ENDED JUNE 30, 2000
<TABLE>
<S> <C>
Net loss per share from continuing operations:
Infogrames, Inc. ......................................... ($20.49)
Infogrames North America, Inc. ........................... ($509.42)
Pro Forma Combined........................................ ($5.78)
Book value per share:
Infogrames, Inc. ......................................... ($11.82)
Infogrames North America, Inc. ........................... ($760,450.00)
Pro Forma Combined........................................ ($7.01)
</TABLE>
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INFOGRAMES, INC. COMMON STOCK AND DIVIDEND POLICY
The Company Common Stock is traded on the Nasdaq National Market under the
symbol "GTIS". Upon consummation of the Merger, the Company intends to change
its trading symbol to "IFGM". The high and low sale prices for the Company
Common Stock as reported by the Nasdaq National Market for the fiscal years
ended March 31, 1999 and 2000 and the three month transition period ended June
30, 2000 are summarized below. These prices reflect inter-dealer quotations
without retail markup, markdown or commissions and do not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1999
First Quarter............................................. $55 5/8 $35
Second Quarter............................................ $45 $22 1/2
Third Quarter............................................. $37 3/16 $18 3/4
Fourth Quarter............................................ $29 1/16 $19 3/8
Fiscal 2000
First Quarter............................................. $22 1/2 $13 3/4
Second Quarter............................................ $18 7/16 $12 13/16
Third Quarter............................................. $15 15/16 $ 8 9/32
Fourth Quarter............................................ $21 1/4 $ 9 3/8
Three Month Period Ended June 30, 2000...................... $18 3/4 $ 5 1/8
</TABLE>
On September 6, 2000, the last reported sale price of the Company Common
Stock on the Nasdaq National Market was 6.781. As of August 30, 2000, there were
approximately 7,160 beneficial owners of Company Common Stock.
The Company currently anticipates that it will retain all of its future
earnings for use in the expansion and operation of its business and does not
anticipate paying any cash dividends on the Company Common Stock in the
foreseeable future. In addition, the payment of cash dividends may be limited by
financing agreements entered into by the Company in the future.
INA COMMON STOCK AND DIVIDEND POLICY
Shares of INA Common Stock are not publicly traded and no public market
exists therefor. As of the date of this Information Statement, there were 1000
shares of INA Common Stock authorized, of which one hundred shares were issued
and outstanding. All such outstanding shares were held by CUSH. See "Security
Ownership of Certain Beneficial Owners and Management -- Infogrames North
America, Inc."
Dividends are payable on INA Common Stock when, as and if declared by the
Board of Directors of INA. INA has never declared or paid dividends on INA
Common Stock.
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THE COMPANIES
ABOUT INFOGRAMES, INC.
The Company incorporates by reference its Transitional Report on Form 10-K
for the three months ended June 30, 2000 filed with the SEC on September 11,
2000. Such report contains much of the information on the Company contained
herein but in a more detailed form, and that which follows is, in large part, an
abbreviated version of the information contained in that report. That report is
publicly available and accessible on the SEC's database known as "EDGAR" and can
be accessed on the Internet via "www.sec.gov" with the Company's stock symbol,
"GTIS".
The Company is a leading worldwide developer, publisher and distributor of
interactive entertainment software for use on personal computers (PCs), the Sony
PlayStation and Nintendo 64 platforms and is currently developing software for
new platforms such as the Sony PlayStation 2. During calendar year 1999, the
Company had the fifth highest U.S. market share in number of units sold in the
PC software game category. The Company is also a leader in certain sub-segments
of the "edutainment" software market, including the fast growing children's
education and leisure entertainment segments. According to PC Data, in 1999, the
Company's Humongous studio ranked as the number three publisher in the U.S.
market for PC education software on the basis of units sold.
In May 2000, in connection with the acquisition by Parent of a majority
stake in the Company, the Company changed its name from GT Interactive Software
Corp. to Infogrames, Inc. and announced that all of its products will be
marketed under the Infogrames brand. The Company believes that the Infogrames
brand is well respected in the interactive entertainment software industry and
that this new branding strategy will strengthen the Company's image with
customers and the industry as a whole.
The Company has two reportable segments: publishing and distribution.
Publishing relates to the development (both internally and externally) and sale
of interactive entertainment software for the children's education, leisure
entertainment and gaming enthusiast markets. Distribution relates to the sale by
the Company of its own and third-party published software to various mass
merchants and other retailers.
The Company's publishing business consists of three divisions: Children's,
Leisure and Frontline. The Company's Children's Division develops and publishes
children's educational and entertainment software for the personal computer. The
Company's Leisure Division develops and publishes lower-priced PC entertainment,
reference and productivity titles for mass market consumption. The Company's
Frontline Division develops, internally and through third-party developers, and
publishes cutting edge new release entertainment software for the gaming
enthusiast for use on multiple hardware platforms.
The Company distributes both its own and third-party published software
through an established distribution network. The Company believes that it is one
of the few software publishers that sells its products directly to substantially
all of the major retailers of computer software in the U.S. The Company's
distribution division also markets older titles to retailers, extending the
economic life of those products. The Company believes it is one of the largest
distributors of consumer software to mass merchants in the U.S. The Company
supplies consumer software (including its own and third-party published
software) to approximately 2,470 Wal-Mart stores, approximately 2,096 Kmart
stores and approximately 921 Target stores. The Company also distributes
consumer software to other major retailers including Office Depot, Best Buy,
CompUSA, AAFES, Sam's Club and Babbage's.
ABOUT INFOGRAMES NORTH AMERICA, INC.
INA was incorporated in 1984 as Accolade, Inc. ("Accolade"). On April 15,
1999, CUSH acquired all of INA's outstanding capital stock pursuant to an
Agreement and Plan of Reorganization among Accolade, Parent, CUSH, I Merger Sub,
Inc. and certain shareholders of Accolade named therein for aggregate
consideration of approximately $48.5 million. On October 21, 1999, Accolade
changed its name to Infogrames North America, Inc. On March 1, 2000, INA and
Infogrames Entertainment, Inc., a wholly owned subsidiary of CUSH ("IEI"),
merged pursuant to a merger agreement under which INA was the surviving
corporation.
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INA develops and publishes interactive entertainment software for the video
game market across a variety of platforms, including the Sony PlayStation(R) and
PlayStation(R) 2, Nintendo(R) 64, Nintendo(R) Game Boy(R) Color, Sega(R)
Dreamcast(R), and personal computers. Game franchises published by INA include
Test Drive(R), V-Rally(R), Independence War(R), Unreal(R), Hardball(R), and
Alone in the Dark(R). INA is also known for its long list of well-known licenses
including Warner Bros. Looney Tunes(R), Mission: Impossible(R), Le Mans 24
Hours(R), AM General Hummer(R), and Dodge(R) Viper.
INA's strategy has been to focus on the development and publication of high
quality interactive entertainment software games on multiple platforms for
worldwide distribution, independent from any particular technological standards.
INA works closely with all major interactive entertainment hardware
manufacturers, including Microsoft, Nintendo, Sega, and Sony.
INA is a wholly-owned subsidiary of Parent, a leading worldwide developer,
publisher and distributor of interactive entertainment software, based in Lyon,
France. INA is the publisher in the North American market of Infogrames's
European catalogue of products. The INA catalogue of products currently is
published and distributed outside of North America primarily by Parent and its
subsidiaries. In North America, products published by INA are distributed by the
Company on a non-exclusive basis. See "Material Contracts Between the Parties or
their Affiliates -- Other Agreements -- Infogrames North America, Inc".
THE INTERACTIVE ENTERTAINMENT BUSINESS
The North American market for interactive entertainment has evolved and
grown considerably during the last few years to the point that some products are
considered by many to have attained "mass market" appeal. The interactive
entertainment products sold by INA are contained on video game cartridges and
optical discs (CD-ROM and DVD-ROM). However, INA's business may evolve as more
video games and interactive leisure content becomes available on the Internet,
digital television and mobile telephones.
The interactive entertainment business can be divided into three primary
segments: development, publishing and distribution.
The development segment consists primarily of creating a "gold master" or
master software which will be industrially duplicated into the consumer version.
Multi-disciplinary teams develop the product using a wide range of expertise,
including game design, interactive scenarios, mathematical simulation, computer
programming, screen graphics, character animation, artificial intelligence and
sound illustration. INA uses both internal development teams and external teams
made up of employees of independent, third party developers. In either case,
outside specialists are commonly used for specific tasks.
Publishing includes analyzing the market by relevant segments, including
age group, genre, platform, and price, and determining the expectations of the
end consumers. It includes funding and directing internal or external
development teams and creating and acquiring content through original designs or
licensing arrangements. Publishing also includes building and marketing brands
and long term franchises, marketing, communication, pricing and manufacturing of
finished products.
Distribution consists of the sales and physical delivery of the finished
products to consumers, either directly via on-line orders or through
distributors and retailers. This segment of the business relies on logistical
expertise and a dedicated sales force.
The creation of interactive entertainment products proceeds through several
stages:
- A design phase to determine the technical and financial feasibility of a
project and to evaluate what the internal and external resources may be
needed by looking at the originality desired, the pre-positioning of the
product in the market, the technical environment and the product's
anticipated financial profitability.
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- A development phase results in the creation of the master software which
will be used later in the manufacturing phase. In addition to the actual
programming, a quality control program is undertaken by a group of
independent in-house testers to assure technical compatibility and the
technical quality of the master software. These testers also fine-tune
the gameplay.
- A marketing phase that consists of preparing the product for
commercialization includes determining the positioning, the name, the
branding, the price of the product, organizing its publication (such as,
visual identity, packaging conception and creation, instruction manual
conception and creation) and its marketing (public relations, advertising
campaign, promotions, etc.).
- A manufacturing phase that includes duplicating the original master
software, printing the instruction manuals and packaging, and assembling
the final goods. All the creative aspects of the packaging
(illustrations, colors, promotional text, etc.) are typically performed
by the publisher, but certain stages of manufacturing (such as,
photoengraving, printing duplication of CD-ROMs, and the production of
cassettes) are delegated to subcontractors, subject to the control of the
publisher. The console manufacturers retain extensive control of the
production of their proprietary cartridges.
- A sales and distribution phase that consists of the sales and physical
distribution of the finished products.
INFOGRAMES NORTH AMERICA, INC. PUBLISHING LINE
INA publishes interactive entertainment software under the Infogrames brand
in a variety of formats. These formats include the cartridges and compact discs
needed for video game consoles, such as the Nintendo Game Boy, the Nintendo 64,
the Sony Playstation and the Sega Dreamcast. These formats also include the
CD-ROM and DVD-ROM for personal computers.
Three hardware manufacturers currently dominate the video games console
market: Nintendo, Sega and Sony. INA's strategy has been to develop and to
publish its interactive entertainment contents on all formats provided by those
manufacturers, thus encouraging a balanced approach in terms of publishing as
well as product portfolio management.
INA anticipates that the next generation of consoles will include the Sony
Playstation 2, the Microsoft Xbox, the Nintendo Dolphin and the Nintendo Game
Boy Advance. In accordance with industry analysts' reports and hardware
manufacturers' announcements, INA expects the Sony Playstation 2 to be released
during the Fall of 2000, the Nintendo Game Boy Advance to be released during the
Spring of 2001, and the Microsoft Xbox and the Nintendo Dolphin to be released
during the Fall of 2001. INA intends to maintain its multi-platform publishing
strategy on next generation consoles and to take advantage of its key brands and
franchises.
INA also operates on the interactive entertainment market for personal
computers, through publishing original PC games or by converting console video
games into a format that can be used on a personal computer.
Recently, INA has been focusing on its key licenses and franchises. Its
approach has been to segment the market and its publishing line by categories:
sports and racing, childhood heroes and action/adventure; by age group and
origin of content; and original versus licensed. Together with a multi-platform
publishing strategy, INA believes this diversified approach lowers its exposure
to changes in market segments by balancing its product portfolio. Some of the
INA franchises are original and have been created or acquired by INA or by
Parent. Other franchises have been acquired through licensing agreements.
Certain publishing rights to original or licensed properties controlled by
INA include:
- Sports and Racing category: Transworld, Ronaldo, Actua Soccer, UEFA
Striker, Actua Tennis, Boarder Zone, V-Rally, Test Drive, Demolition
Racer, Le Mans, Harley Davidson,
- Heroes category: The Looney Tunes, Wacky Races, Superman, the Smurfs,
Asterix & Obelix, Lucky Luke and Tintin,
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- Mission: Impossible, Conan the Barbarian, Unreal, Motor Mayhem, Alone in
the Dark, Terminator, Outcast and Independence War.
INA has been focusing on funding the development and marketing of
high-quality products using its key franchises on both existing platforms and
next generation platforms: these products currently include Xtreme Sports for
Dreamcast, Transworld Surfing for Playstation 2 and Xbox, Transworld
Skateboarding for Playstation 2 and Xbox, Test Drive for Color Game Boy,
Playstation 2 and Xbox, Test Drive Off Road for Playstation 2 and Xbox, Looney
Tunes Racing for Playstation and Color Game Boy, Motor Mayhem for Playstation 2,
Conan the Barbarian for Xbox, Demolition Racer for Dreamcast, Unreal Tournament
for Dreamcast and Playstation 2, Terminator 1 and 2 for Playstation 2 and Xbox.
Through the diversity of its products and through a carefully balanced
publishing approach across all platforms, INA has always tried to protect itself
to the extent reasonably practicable against changes in the market. Under the
current interactive entertainment market transition from 32 bits and 64 bit
consoles to 128 bit consoles, INA has maintained its investments in research and
development and acquisition of licenses. These efforts are aimed at creating a
catalogue of titles available for the next generation consoles for which INA
anticipates greater market penetration than previous generation platforms.
INFOGRAMES NORTH AMERICA, INC. ORGANIZATIONAL STRUCTURE
INA is internally organized in three business units and a corporate service
unit. The business units encompass the product development, licensing and
marketing organization of the following types of products: (i) sports and racing
products, based in San Jose, California, (ii) children's products, based in
Woodland Hills, California, and (iii) action and adventure products, based in
San Jose, California. This structure focuses each business unit on long-term
publishing strategies, brand and franchise building and guarantees a strong
marketing input throughout every phase of the products' creation. The corporate
service unit, based in San Jose, California, includes management of finance,
human resources, legal, quality assurance, hardware manufacturer relationships,
manufacturing and inventories management, corporate communications, information
technology and management information systems.
Prior to January 31, 2000, INA had been selling its products to the retail
channel, either through its own sales force, or through non-exclusive sales
agents. During the period starting November 16, 1999 and ending June 30, 2000,
INA's products were sold in the North American market by the Company, acting as
a sales agent on behalf of INA. During this period, INA managed the
manufacturing process, inventories, shipments, invoicing, accounts receivable
and cash collection for its published products. Effective July 1, 2000, INA
entered into an affiliated label agreement with the Company, under which the
Company presents and sells INA products to retailers, collects the purchase
orders, manages inventories, shipments, invoicing and cash collection. INA still
controls and manages the manufacturing and the inventories for its products.
This agreement allows INA to focus on its core publishing business, while taking
advantage of its relationships with hardware manufacturers from a manufacturing
and inventory management standpoint (see "Material Contracts Between the Parties
or their Affiliates -- Other Agreements -- Infogrames North America, Inc.").
COMPETITION
INA's main competitors include, among others, Acclaim, Activision, Capcom,
Eidos, Electronic Arts, Hasbro Interactive, Havas Interactive, Interplay,
Konami, Midway, Take 2 Interactive, THQ and 3DO.
RISK FACTORS
Through operating in the interactive entertainment market, INA is subject
to various market risks and uncertainties. Some of these risks are:
Fluctuations in quarterly operating results
INA has experienced and may continue to experience significant quarterly
fluctuations in net sales and operating results due to a variety of factors,
including fluctuations in the mix of products with varying profit
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margins, the size and growth rate of the consumer software market, market
acceptance of INA's products and those of its competitors, development and
promotional expenses relating to the introduction of new products or
enhancements of existing products, projected and actual changes in computing
platforms, the timing and success of product introductions by INA and its
competitors, product returns, changes in pricing policies by INA and its
competitors, the accuracy of retailers' forecasts of consumer demand, the timing
of orders from major customers, order cancellations and delays in shipment. In
addition, delays in the introduction of new titles could result in material
fluctuations of operating results.
INA has experienced, and expects to experience in the future, significant
fluctuations in its quarterly net sales and operating results as a result of
such factors. In response to competitive pressures, INA may take certain pricing
or marketing actions that could materially and adversely affect INA's business,
operating results and financial condition. INA's expense levels are based, in
part, on its expectations of future sales and, as a result, operating results
may be disproportionately adversely affected by a decrease in sales or a failure
to meet INA's sales expectations.
Defective published products may result in higher customer-support costs
and product returns. Further, the interactive entertainment software business is
seasonal. Net sales are typically significantly higher during the fourth
calendar quarter, due primarily to the increased demand for consumer software
during the year-end holiday buying season. Net sales in other quarters are
generally lower and vary significantly.
Dependence on new products and product-enhancements
INA's success in the publishing business depends on the timely introduction
of successful new products or enhancements of existing products to replace
declining revenues from older products. Consumer preferences for software
products are difficult to predict, and few consumer software products achieve
sustained market acceptance. If revenues from new products or enhancements were
to fail to replace declining revenues from existing products, INA's business,
operating results and financial condition could be adversely affected.
Potential for delay in product distribution
The process of developing software products such as those offered by INA is
extremely complex and is expected to become more complex and expensive in the
future as new platforms and technologies are created. A significant delay in the
introduction of one or more new products or enhancements could have a material
adverse effect on the ultimate success of such products and on INA's business,
operating results and financial condition, particularly in view of the
seasonality of INA's business.
Reliance on third-party software developers
A significant portion of INA's published products have been licensed from,
or developed by, independent software developers. Due primarily to the increased
demand for consumer software programs and to the technology changes from 32 bits
and 64 bits to 128 bits consoles, the payment of advances and guaranteed
royalties to independent developers has increased and may continue to increase.
INA's success depends in part on its continued ability to obtain and renew
product development agreements with independent software developers. As
independent developers are in high demand, there can be no assurance that
independent developers, including those which have developed products for INA in
the past, will be available to develop products for INA in the future. Many
independent developers have limited financial resources, which could expose INA
to the risk that such developers may go out of business prior to completing a
project. In addition, because INA's published products are often developed with
outside developers, INA cannot always control the timing of the introduction of
its products. While INA maintains production liaisons with independent
developers, there can be no assurance that new products developed by third-party
developers whose products are published by INA will be introduced on schedule or
at all, within acceptable quality guidelines or that they will achieve market
acceptance. INA's success is also dependent in part on its ability to obtain
content for its products from external sources. There can be no assurance that
INA will be able to obtain or renew product development agreements, or to obtain
such content, on favorable terms, or at all.
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Changing products platforms
The consumer software market is characterized by rapidly changing
technology, particularly with respect to product platforms. INA must continually
anticipate the emergence of, and adapt its products to, popular platforms for
consumer software. When INA chooses to publish or develop a product for a new
platform, it may be required to make a substantial development investment one to
three years in advance of the proposed shipments of products on that platform.
If INA invests in the development of a product for a platform that does not
achieve significant market penetration, INA's planned revenues from that product
will be adversely affected and it may not recover its development investment. If
INA does not choose to publish or co-develop for a platform that achieves
significant market success, INA's revenue growth may also be adversely affected.
International sales
INA expects that international sales will account for a significant portion
of its net sales in the future. International sales are subject to inherent
risks, including unexpected changes in regulatory requirements, tariffs and
other barriers, fluctuating exchange rates, potential political instability,
difficulties installing and managing foreign operations and difficulty in
collecting accounts receivable. In addition, acceptance of INA's products in
certain markets has required, and may in the future require extensive,
time-consuming and costly modifications to localize the products. Software
piracy presents a particularly acute problem in certain international markets
such as South America, the Middle East, the Pacific Rim and the Far East, and
the laws of foreign jurisdictions may not protect INA's proprietary rights to
the same extent as the laws of the United States. There can be no assurance that
these or other factors will not have a material adverse effect on INA's future
international sales and, consequently, on INA's business, operating results and
financial condition.
Reliance on hit titles
A significant percentage of INA's net sales has been attributable to a
limited number of titles. INA's business, operating results and financial
condition could be materially and adversely affected if INA does not publish an
adequate number of successful titles in each fiscal quarter.
Competition
The market for consumer software products is highly competitive. Only a
small percentage of products introduced in the consumer software market achieve
any degree of sustained market acceptance. Competition is based primarily upon
price, access to retail shelf space, product enhancements, ability to operate on
popular platforms, availability of titles, new product introductions, marketing
support and distribution systems. Many of the companies with which INA currently
competes or may compete in the future have comparable or greater financial,
technical, marketing, sales and customer support resources, larger and more
seasoned internal development teams, greater name recognition and a larger
customer base, than INA. In addition, INA believes that large software
companies, media companies and film studios are increasing their focus on the
interactive entertainment and edutainment software markets and, as a result of
their financial and other resources, name recognition and customer base, may
become significant competitors of INA. Moreover, in a number of geographic
markets, certain of the titles offered by INA, including various hit titles, are
offered on a limited number of platforms and compete with the same titles
offered by INA's competitors on other platforms. Current and future competitors
with greater financial resources than INA may be able to carry larger
inventories, undertake more extensive marketing campaigns, adopt more aggressive
pricing policies and make higher offers or guarantees to software developers and
licensors than INA. The market is also extremely competitive with respect to
access to third party developers and content providers. This competition is
based primarily on breadth of distribution, development funding, reputation and
royalty rates. To the extent that competitors maintain or achieve greater title
portfolio breadth, title rights for popular platforms, or access to third party
developers and content providers, or price, shelf access, marketing support,
distribution or other selling advantages, INA could be materially and adversely
affected. New hardware platforms and electronic delivery systems may be
introduced into the software market and potential new competitors may enter the
software development and publishing market, resulting in greater competition for
INA. There can be no assurance that INA will have the resources required to
respond effectively to market or technological changes
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or to compete successfully with current or future competitors or that
competitive pressures faced by INA will not materially and adversely affect its
business, operating results and financial condition.
Dependence on key personnel
The continued success of INA depends to a significant extent upon the
continued performance and contribution of its senior management and on its
ability to continue to attract, motivate and retain highly qualified employees.
The loss of the services of any of INA's senior management could have a material
adverse effect on INA's business, operating results and financial condition.
Competition for highly skilled employees with technical, management, marketing,
sales, product development and other specialized training is intense, and there
can be no assurance that INA will be successful in attracting and retaining such
personnel. Specifically, INA may experience increased costs in order to attract
and retain skilled employees. INA's failure to attract additional qualified
employees or to retain the services of key personnel could materially and
adversely affect INA's business, operating results and financial condition.
Product returns
INA accepts product returns or provides markdowns or other credits on
varying terms in the event that the customer holds excess inventory of INA's
products. Software products as complex as those published by INA may contain
undetected errors when first introduced or when new versions are released. It is
INA's practice to accept returns of defective or damaged products at any time.
At the time of product shipment, INA establishes a return reserve which covers
expected future returns and, if necessary, price protection. This estimate of
the potential for future returns of products is based on historical return
rates, seasonality of sales, retailer inventories of INA's products and other
factors. Product returns that exceed INA's reserves, or loss of or delay in
market acceptance of a new product as a result of software failures or
otherwise, could materially and adversely affect INA's business, operating
results and financial condition. Although INA maintains reserves which it
believes to be adequate with respect to product returns and price reductions,
there can be no assurance that actual returns to INA will not exceed these
reserves.
Manufacturing risks
The production of INA's published products involves duplicating software
programs onto CD-ROM disks, DVD-ROM disks and cartridges, printing user manuals
and product packaging materials, and packaging finished products. Each of the
foregoing activities is performed for INA by third parties, including Sony, Sega
and Nintendo for their respective formats. In addition, these services may not
be available from multiple parties and at multiple sites and there can be no
assurance that an interruption in the manufacture of INA's products will not
occur and, if it does occur, that it could be remedied without undue delay and
without materially and adversely affecting INA's business, operating results or
financial condition.
Intellectual property and proprietary rights
INA sells a significant portion of its published software under licenses
from independent developers and, in such cases, does not acquire the copyrights
for the underlying work. INA relies primarily on a combination of trademark,
copyright, trade secret and other proprietary rights laws, license agreements,
employee and third-party nondisclosure agreements and other methods to protect
its proprietary rights and the rights of its co-developers. Unauthorized copying
occurs within the software industry, and if a significant amount of unauthorized
copying of INA's published products or products distributed by it were to occur,
INA's business, operating results and financial condition could be materially
and adversely affected. Also, as the number of software products in the industry
increases and the functionality of these products further overlaps, software
developers and publishers may increasingly become subject to infringement
claims. There can be no assurance that third parties will not assert
infringement claims against INA in the future with respect to current or future
products. There has been substantial litigation in the industry regarding
patent, copyright, trademark and other intellectual property rights. Any such
claims or litigation, with or without merit, could be costly and cause a
diversion of management's attention, which could have a material adverse effect
on INA's business, operating results and financial condition.
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THE MERGER
THE FOLLOWING INFORMATION WITH RESPECT TO THE PROPOSED MERGER IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE COMPLETE TEXT OF THE MERGER AGREEMENT, AS
AMENDED, A COPY OF WHICH IS ATTACHED TO THIS INFORMATION STATEMENT AS EXHIBIT A
AND INCORPORATED BY REFERENCE HEREIN.
The Merger Agreement was entered into on September 6, 2000. Pursuant to the
Merger Agreement, the Company proposes to acquire INA through the use of a
reverse triangular merger. The Company has created a wholly-owned subsidiary,
Merger Sub, that will merge with and into INA. Upon completion of the Merger,
INA will remain as the surviving company but will be the wholly-owned subsidiary
of the Company. CUSH, the sole stockholder in INA prior to the Merger, will
receive 28,000,000 shares of Company Common Stock in exchange for the shares it
presently holds in INA. In addition, CUSH will receive approximately 19,531,250
shares of Company Common Stock in connection with the conversion of all of the
debt owed to Parent under the Company's credit agreement with Parent, and
955,000 shares of Company Common Stock upon exercise of all of the warrants held
by Parent and CUSH. In connection with the Merger, Parent and the Company will
enter into an agreement (the "Distribution Agreement") to provide distribution
through the Company of Parent's products in the United States and Canada in
exchange for 30% of the gross profit on such products.
Upon consummation of the Merger and the other transactions contemplated by
the Merger Agreement, CUSH will own approximately 61,112,243 shares or
approximately 88.8% of the then issued and outstanding shares of Company Common
Stock (85.2% on a fully diluted basis), and the other holders of Company Common
Stock at the effective time of the Merger will own approximately 7,728,445
shares or approximately 11.2% of the then issued and outstanding shares of
Company Common Stock.
BACKGROUND OF THE MERGER
The Infogrames Transaction
On June 29, 1999, the Company announced that it had hired Bear Stearns &
Co. to seek a recapitalization, merger or sale of the Company because management
of the Company believed that in a consolidating industry, its existing capital
resources were not adequate to carry out the Company's long-term objectives.
During the latter half of 1999, the Company experienced cash flow problems and
determined that it would be in the best interests of its stockholders to sell or
otherwise recapitalize the Company. After an extensive auction process, with no
viable alternatives in light of its circumstances, the Company entered into a
Securities Purchase Agreement, dated as of November 15, 1999 (the "Securities
Purchase Agreement"), with Parent and CUSH.
Pursuant to the Securities Purchase Agreement, on December 16, 1999, the
Company issued to CUSH and CUSH acquired from the Company: (i) 5,714,286 shares
of Company Common Stock, at a purchase price of $8.75 per share, and (ii) a 5%
subordinated convertible note in the aggregate principal amount of
$60,587,206.72, which as of September 30, 2000 will be convertible into an
aggregate of 6,812,795 shares of Company Common Stock at a conversion price of
$9.25 per share, subject to antidilution adjustments (such transaction, the
"Infogrames Transaction").
Concurrently with the consummation of the Infogrames Transaction, CUSH
acquired (i) an aggregate of 6,711,707 shares of Company Common Stock from
Joseph J. Cayre, Kenneth Cayre, Stanley Cayre, Jack J. Cayre, their children and
various associated trusts (together, the "Cayre family") for an aggregate
purchase price of $25 million and (ii) subordinated notes of the Company in the
principal amount of $10 million, plus accrued interest, held by the Cayre
family. Joseph J. Cayre, Kenneth Cayre, Stanley Cayre and Jack J. Cayre are
former directors of the Company. Also concurrently with the consummation of the
Infogrames Transaction, CUSH acquired from General Atlantic Partners 54, L.P.
and GAP Coinvestment Partners II, L.P. warrants to purchase 900,000 shares of
Company Common Stock, at an exercise price of $0.05 per share, for nominal
consideration.
After consummation of the Infogrames Transactions, Parent and CUSH
beneficially owned an aggregate of approximately 20.1 million shares of Company
Common Stock on a fully diluted basis, or 71.7% of the
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<PAGE> 20
voting securities of the Company. In addition, certain members of the Company's
Board of Directors resigned and appointees of Parent were named to the Board of
Directors of the Company.
Subsequent to the Infogrames Transaction, the Company has relied on
financial and other support from Parent pursuant to the terms of certain
agreements entered into by the parties, including a service agreement for the
provision by Parent of certain management and support services to the Company on
a cost plus expenses basis, and an agreement for the assumption, as of February
15, 2000, by Parent of the interest of First Union National Bank, as agent for a
syndicate of banks, in the Company's then existing credit agreement, which
Parent and the Company amended to provide up to $125 million in loans to the
Company (the "Credit Agreement"). In connection with the assumption by Parent of
the Credit Agreement, warrants to acquire 45,000 shares of the Company's Common
Stock, at an exercise price of $0.05 per share, which were previously to be
issued to the banks, were issued to Parent.
Since the Infogrames Transaction, the Company has made a significant effort
to reorganize and refocus its distribution and value/leisure lines. In
connection with its restructuring and reorganization, the Company decided to
concentrate its efforts in North America. Effective December 31, 1999, pursuant
to the Infogrames Transaction, the Company began the process of closing its
European operations. Because of Parent's strong European presence, the Company
entered into an agreement with Parent to provide distribution of the Company's
products in Europe and, effective July 1, 2000, in Australia, in exchange for
30% of the gross profit on such products. The Company believes that full-time
operations in Europe are no longer necessary or efficient and that it will be
able to access European markets through the strong distribution channels of
Parent while concentrating its resources in other strategic areas.
Also in connection with the Company's restructuring and reorganization, for
the period from November 16, 1999 through June 30, 2000, the Company was granted
the non-exclusive right in the U.S. and Canada to act as the sales agent for INA
for INA's products, pursuant to which the Company received 3% of net receipts
for such products. The parties subsequently entered into an affiliated label
agreement for the period from July 1, 2000 to June 30, 2001 providing for
payment to the Company of 15% of net revenue for sales, distribution, credit and
collection services (the "Affiliated Label Agreement").
In addition, in May 2000, in connection with the acquisition by Parent of
its majority stake in the Company, the Company changed its name from GT
Interactive Software Corp. to Infogrames, Inc. and announced that all of its
products will be marketed under the Infogrames brand. In connection with the
name change Parent granted the Company a non-exclusive, royalty-free license to
use the name Infogrames, which license may not be canceled on less than
one-year's notice unless the Company breaches its obligations under the license.
Pursuant to this license, all of the Company's products will be marketed under
the Infogrames brand. The Company believes that the Infogrames brand is well
respected in the interactive entertainment software industry and that this new
branding strategy will strengthen the Company's image with customers and the
industry as a whole.
The INA Merger
On February 10, 2000, the Board of Directors of the Company appointed a
Special Committee comprised of independent members of the Board of Directors to
consider ways of integrating the North American operations of Parent and the
Company.
On March 9, 2000, Parent submitted to the Special Committee a non-binding
proposal to combine INA with the Company pursuant to the terms of a draft
agreement and plan of merger. From March 10, 2000 to approximately April 25,
2000, Parent and the Company and their respective representatives conducted
initial due diligence and discussed the terms of the proposed transaction but
were unable to reach an agreement at such time on material terms of the proposed
transaction. In addition, based on such initial due diligence and discussions
with potential financial advisors of the Special Committee, the Special
Committee determined that additional data from INA and the Company and
additional audited financial statements of INA were required in order to
properly assess the proposal. Among other things, the Special Committee
indicated that an important factor in its analysis, in addition to the exchange
ratio of any transaction, would be the strength of the pro forma balance sheet
and available working capital of the combined enterprise.
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<PAGE> 21
On June 27, 2000, the Board of Directors of the Company discussed the
proposed transaction and the current status of the Company's business and
operations and agreed to continue negotiations with Parent with respect to its
previously submitted proposal.
Both the Company and INA thereafter continued the preparation of financial
statements and related data which would be the basis for further analysis and
discussion of the proposed transaction, and the Company and the Special
Committee discussed the proposal and diligence process with potential financial
advisors.
In July 2000, the Special Committee decided to retain Lehman Brothers Inc.
("Lehman Brothers") to act as financial advisor in connection with the proposed
transaction. Beginning August 2, 2000, the Special Committee and Parent and
their respective representatives conducted additional due diligence and
continued to negotiate the terms of the proposal previously submitted by Parent.
On September 6, 2000, Lehman Brothers rendered a written fairness opinion
to the Special Committee that, as of the date of such opinion, and based upon
and subject to the assumptions, limitations and qualifications set forth
therein, the consideration to be paid by the Company in the Merger, including
the conversion of the outstanding debt under the Company's Credit Agreement in
connection with the Merger, is fair, from a financial point of view, to the
Company and, accordingly, to the stockholders of the Company other than Parent
and its affiliates. On September 6, 2000, the Special Committee recommended to
the Board of Directors that the Board of Directors accept the proposal of Parent
to combine INA with the Company pursuant to the negotiated terms of the Merger
Agreement. After discussing the recommendation with the Special Committee, the
Board of Directors approved the terms of the Merger Agreement and determined
that the Merger is advisable and in the best interests of the Company and the
stockholders of the Company.
REASONS FOR THE MERGER
In approving the Merger Agreement and the transactions contemplated
thereby, the Company's Board of Directors considered a number of factors. The
principal factors considered include but are not limited to the following:
- The Board's evaluation of the Company's business, future prospects,
financial condition and the limited nature of the Company's current
operations. In particular, the Board concluded that the Company was
unlikely to make substantial profits or otherwise grow significantly from
its current operations. Based upon the Board's evaluation of the
Company's business, financial condition and operations, the Board
concluded that combining INA with the Company's existing operations
offered greater potential for increasing stockholder value.
- The Board's evaluation of the business, financial condition, operations
and prospects of INA and its conclusion that the acquisition of the
capital stock of INA offered a realistic possibility of increasing the
Company's stockholder value. The Board's conclusion that the Merger
offers a realistic possibility of increasing stockholder value was based
upon the following assessments: (i) increased economies of scale and cost
reduction in sales, distribution and corporate overhead; (ii) a broader
product portfolio and consequent risk reduction; (iii) increased market
strength with vendors and customers; and (iv) increased financial
strength for the Company as a result of the reduction of debt.
- The Board's determination that the number of shares of Company Common
Stock to be issued to CUSH fairly reflects the value of INA. The Board's
determination was based upon (i) the value of the Company's principal
financial and non-financial assets (primarily the Company's cash,
investments, deferred tax assets, liquidity, and status as a public
company); (ii) the aggregate market value of the shares of Company Common
Stock (recognizing that the Company Common Stock has experienced
significantly reduced trading prices during the past years); (iii) its
evaluation of the current and forecasted revenues and earnings of INA;
(iv) its estimate of the value of INA based upon revenues, earnings,
projected growth and market potential; and (v) its assessment of the
relative and potential value of INA's products in the entertainment
software industry as a whole.
- The Special Committee's unanimous recommendation that the Board approve
the Merger Agreement and the Merger, and the fact that (i) the Special
Committee consisted of directors who are neither
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<PAGE> 22
designees of Parent or its affiliates nor officers of the Company, and
(ii) the Special Committee retained and was advised by independent legal
and financial advisors.
- The fact that the Special Committee received an opinion from Lehman
Brothers that, as of the date of such opinion, and based upon and subject
to the assumptions, limitations and qualifications set forth therein, the
consideration to be paid by the Company in the Merger, including the
conversion of the outstanding debt under the Company's Credit Agreement
in connection with the Merger, is fair, from a financial point of view,
to the Company and, accordingly, to the stockholders of the Company other
than Parent and its affiliates, based on Lehman Brothers analysis
described below under "Opinion of the Company's Financial Advisor."
- In connection with the Merger, the current outstanding debt under the
Credit Agreement of the Company would be converted into equity, which
would have a positive effect on the balance sheet of the Company.
- The execution of the Distribution Agreement in connection with the
Merger, which will provide for the distribution through the Company of
Parent's products in the United States, Canada, and their territories and
possessions in exchange for 30% of the gross profit on such products.
Such rights are currently held by INA.
- In connection with the Merger, Parent and the Company will enter into a
credit arrangement, whether directly with Parent or one of its
affiliates, through INA's existing credit agreement or with a third
party, to provide for a line of credit to the Company of $50 million.
After considering each of the principal factors described above, the Board
of Directors determined that the Merger was advisable and in the best interests
of the Company and its stockholders and that the Company should proceed to
effectuate the Merger at the earliest possible date. The Board's analysis was
based upon the factors described above, utilizing the information available to
the Board at the time of its decision, and the final consideration was
determined through arms-length negotiations between the Company and Parent. The
Board did not rely on any single factor described above, assign relative weights
to the factors considered by it, or develop any conclusion as to how any factor,
taken alone, supported its determination, because, in view of the wide variety
of factors considered in connection with its evaluation of the Merger, the Board
did not find it practicable or productive to assign relative weights to or
otherwise quantify each of the facts considered in reaching its determination
regarding the fairness of the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
CUSH is the sole stockholder of INA. Because of this, CUSH will be the only
entity that will receive any of the Common Stock issued pursuant to the Merger
Agreement. While CUSH owned approximately 62% of the outstanding capital stock
of the Company prior to the Merger (63.2% on a fully diluted basis), CUSH will
own a total of approximately 88.8% upon the conclusion of the Merger (85.5% on a
fully diluted basis). The actual number of shares owned by the other
stockholders of the Company will not be reduced, but their percentage interest
will be substantially reduced.
The parties negotiated the terms of the Merger on an arms-length basis. To
that end, the Special Committee (comprised of disinterested members of the Board
of Directors) was formed to represent the interests of the stockholders of the
Company other than CUSH. The Special Committee received a fairness opinion from
its financial advisor, Lehman Brothers, that, as of the date of such opinion and
based upon and subject to the assumptions, limitations and qualifications set
forth therein, the consideration to be paid by the Company in the Merger,
including the conversion of the outstanding debt under the Company's credit
agreement in connection with the Merger, is fair, from a financial point of
view, to the Company and, accordingly, to the stockholders of the Company other
than Parent and its affiliates.
STOCKHOLDER ACTION
Section 228 of the Delaware General Corporation Law ("DGCL") permits
stockholders to approve any action that would be taken at any annual or special
meeting without a meeting by written consent of the
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<PAGE> 23
holders of the minimum number of votes that would be necessary to authorize the
action at a meeting. With regard to the Merger, CUSH holds approximately 62% of
the outstanding Company Common Stock and is therefore able to approve the Merger
without the consent of any other stockholder.
PRINCIPAL EFFECTS OF THE MERGER/CHANGE OF CONTROL
The Merger, if consummated, will materially affect the Company, INA and
their respective stockholders. Among other effects, consummation of the Merger
would result in the following principal advantages to the Company, INA or their
respective stockholders: (i) the operating and financial results of the Company
will include those of INA; (ii) the Company will be positioned to pursue growth
in the expanding and changing gaming industry; (iii) increased economies of
scale and cost reduction in sales, distribution and corporate overhead; (iv) a
broader product portfolio and consequent risk reduction; (v) increased market
strength with vendors and customers; and (vi) increased financial strength for
the Company as a result of the reduction of debt; and (vii) the Merger will
qualify as a reorganization under Section 368(a) of the Internal Revenue Code of
1986, as amended (the "Code"). See "Pro Forma Consolidating Financial Statements
of Infogrames, Inc. and Infogrames North America, Inc." attached as Exhibit D.
The Merger, if consummated, would result in the following disadvantages to
the Company, INA or their respective stockholders: (i) the existing holders of
the Company Common Stock (other than CUSH) will experience immediate and
substantial dilution, resulting in a reduction in their collective interest in
the Company from approximately 39% to approximately 11.2%; and (ii) negotiation
of the terms of the Merger has required significant management resources of the
Company and INA and consummation of the Merger will require additional
management time and resources, which may disrupt the operations of the Company,
including the operations presently conducted by INA, and may affect the
operating results of both companies.
CLOSING AND CLOSING DATE
The closing of the Merger (the "Closing") is anticipated to occur on or
after October 2, 2000, or on such other date as the parties shall agree,
provided that all conditions to the obligations of the parties to consummate the
Merger have been satisfied or waived, including (i) the execution of an
amendment to the registration rights agreement between the Company and CUSH;
(ii) the execution of the Distribution Agreement between the Company and Parent;
(iii) the conversion of the outstanding amounts under the credit agreement
between the Company and Parent into shares of Company Common Stock; (iii)
receipt by the Company and INA of a legal opinion to the effect that the Merger
should be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code; (iv) the filing and mailing of this
Information Statement; (v) the exercise of the warrants held by Parent and CUSH
for shares of Company Common Stock; and (vi) other customary closing conditions,
including, without limitation, the truthfulness and accuracy of the parties'
respective representations and warranties, the absence of any material adverse
change in the business condition of the respective parties, confirmation that
the consummation of the Merger Agreement and the transactions contemplated
thereby will not violate any law or regulation and will not result in the
creation of any lien or encumbrance on the respective properties of the Company
or those of INA, the receipt of all material third-party consents and approvals,
and the absence of any litigation which would have a material adverse effect on
the business condition of the respective parties. The date on which the Closing
occurs is hereinafter referred to as the "Closing Date." The filing of the
Certificate of Merger setting forth the terms and conditions of the Merger (the
"Certificate of Merger") with the Secretary of State of the State of California
is expected to be made as soon as practicable after the twentieth calendar day
following the mailing of this Information Statement to stockholders of the
Company. See "The Merger Agreement."
MANAGEMENT OF THE COMBINED COMPANIES AFTER THE MERGER
Following consummation of the Merger, the officers and directors of INA
will continue to hold their respective positions in INA, as a wholly-owned
subsidiary of the Company. The Company will provide employee benefit plans for
the employees of INA or will maintain INA's existing plans.
20
<PAGE> 24
ACCOUNTING TREATMENT
The Merger will be accounted for on an "as-if-pooled" basis on the date of
common control of the Company and INA. The entities have been under common
control since December 16, 1999 and will be treated similar to a pooling of
interests from that date.
DISSENTERS' RIGHTS OF APPRAISAL
No appraisal rights are or will be available under the DGCL in connection
with the Merger as presently contemplated, because Section 262(b) of the DGCL
states that no appraisal rights are available for the shares of any class of
stock of a constituent corporation in a merger or consolidation if such shares
are listed on a national securities exchange at the record date fixed to
determine the stockholders entitled to vote at the meeting of stockholders to
act upon the agreement of merger or consolidation. The shares of the Company
Common Stock are listed on the Nasdaq National Market.
FEDERAL INCOME TAX CONSEQUENCES AND ABSENCE OF ANY RULING FROM THE IRS
It is anticipated that the Merger will be treated as a tax-free
reorganization under Section 368(a) of the Code. Accordingly, no gain or loss
will be recognized by the Company, the holders of Company Common Stock, INA or
CUSH as a result of the consummation of the Merger. As a condition to Closing,
the Company and INA will receive an opinion of legal counsel, dated the Closing
Date, to the effect that the Merger should be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code.
The parties have no intention of requesting a ruling from the IRS in
connection with the Merger. Qualification of the Merger as a "reorganization"
will be subject to certain assumptions and qualifications and will be based on
the truth and accuracy of certain representations made by the Company, INA and
CUSH.
THE FOREGOING IS ONLY A SUMMARY OF THE FEDERAL INCOME TAX CONSEQUENCES AND
IS NOT TO BE CONSTRUED AS TAX ADVICE. NO RULING FROM THE INTERNAL REVENUE
SERVICE HAS BEEN OR WILL BE OBTAINED BY THE COMPANY. STOCKHOLDERS SHOULD CONSULT
THEIR OWN TAX ADVISERS OR TAX COUNSEL REGARDING THE TAX CONSEQUENCES OF THE
MERGER.
NEED FOR REGULATORY APPROVAL
Other than complying with its disclosure and filing obligations with the
SEC, there is no state or federal regulatory agency that the Company is aware of
which has the power to prevent this transaction from closing or which would
otherwise have authority to approve this transaction in advance of closing.
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
The Board of Directors of the Company engaged Lehman Brothers to act as its
financial advisor in connection with the Merger. On September 6, 2000, Lehman
Brothers confirmed in writing its oral opinion rendered to the Special Committee
of the Board of Directors of the Company that, as of the date of the opinion,
and based upon and subject to the assumptions, limitations and qualifications
set forth therein, the consideration to be paid by the Company in the Merger,
including the conversion of the outstanding debt under the Credit Agreement in
connection with the Merger, was fair, from a financial point of view, to the
Company and, accordingly, to the stockholders of the Company other than Parent
and its affiliates.
THE FULL TEXT OF LEHMAN BROTHERS' WRITTEN OPINION DATED SEPTEMBER 6, 2000
(THE "LEHMAN BROTHERS OPINION") IS INCLUDED AS EXHIBIT E TO THIS INFORMATION
STATEMENT. STOCKHOLDERS MAY READ THE LEHMAN BROTHERS OPINION FOR A DISCUSSION OF
THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE, FACTORS CONSIDERED AND LIMITATIONS OF
THE REVIEW UNDERTAKEN BY LEHMAN BROTHERS IN ARRIVING AT SUCH OPINION. THE LEHMAN
BROTHERS OPINION IS FOR THE USE AND BENEFIT OF THE SPECIAL COMMITTEE OF THE
BOARD OF DIRECTORS OF THE COMPANY AND THE BOARD OF DIRECTORS OF THE COMPANY AND
WAS RENDERED TO THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS OF THE COMPANY
IN CONNECTION WITH THEIR CONSIDERATION OF THE PROPOSED MERGER AND ONLY ADDRESSES
THE
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<PAGE> 25
FAIRNESS, FROM THE FINANCIAL POINT OF VIEW, TO THE COMPANY AND, ACCORDINGLY, TO
THE STOCKHOLDERS OF THE COMPANY OTHER THAN PARENT AND ITS AFFILIATES, OF THE
CONSIDERATION TO BE PAID BY THE COMPANY. IN ADDITION, LEHMAN BROTHERS EXPRESSES
NO OPINION AS TO THE PRICES AT WHICH SHARES OF COMPANY COMMON STOCK MAY TRADE AT
ANY TIME PRIOR TO OR FOLLOWING THE CONSUMMATION OF THE MERGER, AND THIS OPINION
SHOULD NOT BE VIEWED AS PROVIDING ANY ASSURANCE THAT THE MARKET VALUE OF THE
SHARES OF COMPANY COMMON STOCK OWNED BY THE STOCKHOLDERS OF THE COMPANY AFTER
CONSUMMATION OF THE MERGER WILL BE IN EXCESS OF THE MARKET VALUE OF THE SHARES
OF COMPANY COMMON STOCK OWNED BY SUCH STOCKHOLDERS PRIOR TO SUCH CONSUMMATION.
The Lehman Brothers Opinion was provided for the information and assistance
of the Special Committee of the Board of Directors of the Company in connection
with its consideration of the Merger. Lehman Brothers was not requested to opine
as to, and the Lehman Brothers Opinion does not address, the Company's
underlying business decision to proceed with or effect the Merger.
In arriving at its opinion, Lehman Brothers reviewed and analyzed:
(1) the Merger Agreement and the specific terms of the Merger,
(2) publicly available information concerning the Company that Lehman
Brothers believed to be relevant to its analysis, including the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 2000, and a
Transitional 10-K report for the period from March 31, 2000 to June 30,
2000 including the audited and unaudited financial statements contained in
such reports,
(3) financial and operating information with respect to the business,
operations and prospects of the Company and INA furnished to Lehman
Brothers by the Company and INA, including (i) a preliminary draft of the
audited financial statements of INA for the fiscal years ended June 30,
1998, 1999 and 2000, (ii) a preliminary draft of the audited financial
statements of Accolade for the fiscal years ended March 31, 1998 and 1999
and the period from April 1, 1999 through April 15, 1999, and (iii)
projections for INA and the Company prepared by the respective managements
of INA and the Company,
(4) a comparison of the historical financial results and present
financial condition of INA and the Company with those of other companies
that Lehman Brothers deemed relevant,
(5) a trading history of the Company Common Stock from September 1999
to the present and a comparison of that trading history with those of other
companies that Lehman Brothers deemed relevant,
(6) a comparison of the financial terms of the Merger with the
financial terms of certain other recent transactions that Lehman Brothers
deemed relevant, and
(7) the potential pro forma effect of the Merger on the future
financial performance of the Company, including the financial benefits of
the cancellation of $125 million of indebtedness and the operating
synergies and strategic benefits expected to result from a combination of
the businesses of the Company and INA.
In addition, Lehman Brothers had discussions with the management teams of
the Company and INA concerning their respective businesses, operations, assets,
financial condition and prospects and undertook such other studies, analyses and
investigations as it deemed appropriate.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by Lehman
Brothers without assuming any responsibility for independent verification of
such information and it further relied upon the assurances of management of the
Company that they are not aware of any facts or circumstances that would make
such information inaccurate or misleading. With respect to the financial
projections of the Company and INA, upon advice of the Company and INA
respectively, Lehman Brothers assumed that such projections have been reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of the respective managements of the Company and INA as to the future
financial performance of the companies and that the Company and INA will perform
substantially in accordance with such projections. In arriving at its opinion,
Lehman Brothers conducted only a limited physical inspection of the properties
and facilities of the Company and INA and did not make or obtain any evaluations
or appraisals of the assets or liabilities of the Company or
22
<PAGE> 26
INA. Upon advice of the Company and its legal and accounting advisors, Lehman
Brothers assumed that the Merger will be a tax-free transaction to the Company
and its stockholders. Lehman Brothers' opinion necessarily is based upon market,
economic and other conditions as they exist on, and can be evaluated as of, the
date of the Lehman Brothers Opinion.
In arriving at its opinion, Lehman Brothers did not ascribe a specific
value to INA or the Company, but rather made its determination as to the
fairness, from a financial point of view, to the Company and, accordingly, to
the stockholders of the Company other than Parent and its affiliates, of the
consideration to be paid by the Company on the basis of financial and
comparative analyses. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial and
comparative analysis and the application of those methods to the particular
circumstances, and therefore, such an opinion is not readily susceptible to
summary description. Furthermore, in arriving at its opinion, Lehman Brothers
did not attribute any particular weight to any analysis or factor considered by
it, but rather made qualitative judgements as to the significance and relevance
of each analysis and factor. Accordingly, Lehman Brothers believes that its
analyses must be considered as a whole and that considering any portion of such
analyses and factors, without considering all analyses and factors as a whole,
could create a misleading or incomplete view of the process underlying its
opinion. In its analyses, Lehman Brothers made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of the Company and INA. None of
the Company, INA, Lehman Brothers or any other person assumes responsibility if
future results are materially different from those discussed. Any estimates
contained in these analyses were not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than as set forth therein. In addition, analyses relating to the value
of businesses do not purport to be appraisals or to reflect the prices at which
businesses actually may be sold.
The following is a summary of the material financial analyses used by
Lehman Brothers in connection with providing its opinion to the Special
Committee of the Board of Directors of the Company. Some of the summaries of
financial analyses include information presented in tabular format. In order to
fully understand the financial analyses used by Lehman Brothers, the tables must
be read together with the text of each summary. The tables alone do not
constitute a complete description of the financial analyses. In particular, you
should note that in applying the various valuation methods to the particular
circumstances of the Company, INA, and the Merger, Lehman Brothers made
qualitative judgments as to the significance and relevance of each analysis and
factor. In addition, Lehman Brothers made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of the Company and INA.
Accordingly, the analyses listed in the tables and described below must be
considered as a whole. Considering any portion of such analyses and of the
factors considered, without considering all analyses and factors, could create a
misleading or incomplete view of the process underlying the Lehman Brothers
Opinion.
Comparable Company Trading Analysis. The comparable company trading
analysis provides a market valuation benchmark based on the common stock trading
multiples of selected comparable companies. For this analysis, Lehman Brothers
reviewed the public stock market trading multiples for selected companies that
Lehman Brothers deemed comparable to INA and the Company. Lehman Brothers first
calculated and then applied various financial multiples and ratios to both the
Company and INA in order to estimate the value of each company based on the
selected comparable companies using INA's and the Company's projected debt minus
cash as of September 30, 2000.
The primary multiple derived by Lehman Brothers was enterprise value,
calculated as the sum of the aggregate market value, as of September 5, 2000, of
the outstanding common stock of an enterprise plus its debt and preferred stock
(the "Enterprise Value") less cash divided by its total revenues. Lehman
Brothers made these determinations for the year of 2001 based on financial
forecasts prepared by the respective managements of the Company and INA, and for
the comparable companies for the same periods using projections from
publicly-available sources.
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<PAGE> 27
Lehman Brothers selected a group of companies from the universe of possible
companies that it deemed to be the most comparable based on financial and
operating characteristics. The group of selected comparable companies consisted
of 3DO Company, Activision, Inc. ("Activision"), Midway Games Inc., Take Two
Interactive Software, Inc. and THQ Inc. The following table presents the average
revenue multiples used in the comparable company trading analysis:
<TABLE>
<CAPTION>
MEAN COMPARABLES
ENTERPRISE VALUE TO:
--------------------
<S> <C>
2000 Revenue................................................ 1.39x
2001 Revenue................................................ 0.95x
</TABLE>
<TABLE>
<CAPTION>
MEDIAN COMPARABLES
ENTERPRISE VALUE TO:
--------------------
<S> <C>
2000 Revenue................................................ 1.21x
2001 Revenue................................................ 1.00x
</TABLE>
Lehman Brothers applied the comparable companies, 2000 and 2001 multiples
to the Company's and INA's actual financial figures for the fiscal year 2000 and
projections for the fiscal year 2001 to obtain estimated comparable values for
INA and the Company, respectively. The following table presents the range of
implied equity values based on the trading multiples of the group of comparable
companies:
<TABLE>
<CAPTION>
AGGREGATE EQUITY VALUE
LOW - HIGH
----------------------
IN MILLIONS
<S> <C>
INA......................................................... $69 - $105
Company..................................................... $ 5 - $178
</TABLE>
Because of the inherent differences of the businesses, operations,
financial conditions and prospects of INA and the Company and the businesses,
operations, financial conditions and prospects of the companies included in the
group of comparable companies, Lehman Brothers believed that it was
inappropriate to, and therefore did not, rely solely on the quantitative results
of the analysis, and accordingly, also made qualitative judgments concerning
differences between the financial and operating characteristics of INA, the
Company and the companies in the comparable company group that would affect the
public trading values of INA, the Company and such comparable companies.
Historical Stock Performance. Lehman Brothers reviewed and analyzed recent
and historical market prices for the Company Common Stock. Lehman Brothers
observed that based on the price on September 5, 2000, and the average prices
for the ten-day and thirty-day periods preceding that date, the equity values
for the Company were as follows:
<TABLE>
<CAPTION>
10-DAY 30-DAY
AGGREGATE EQUITY VALUE OF THE COMPANY BASED ON: CLOSING PRICE AVERAGE AVERAGE
----------------------------------------------- ------------- ------- -------
IN MILLIONS
<S> <C> <C> <C>
As of 9/5/2000......................................... $140 $143 $137
</TABLE>
Discounted Cash Flow Analysis. The discounted cash flow analysis provides
a net present valuation of management projections of the projected after-tax
unlevered free cash flows (defined as operating cash flow available after
working capital, capital spending, tax and other operating requirements) based
upon the Company's and INA's financial projections. Utilizing such financial
forecasts, Lehman Brothers calculated a range of present values for INA and the
Company using a range of after-tax discount rates from 14% to 16% and a terminal
value based upon a range of multiples of its estimated revenues in 2005 from
1.3x to 1.5x. The following table presents the range of implied equity values of
INA and the Company based on the range of discount rates and the terminal
values.
<TABLE>
<CAPTION>
AGGREGATE EQUITY VALUE
LOW - HIGH
----------------------
IN MILLIONS
<S> <C>
INA......................................................... $133 - $183
Company..................................................... $ 16 - $89
</TABLE>
24
<PAGE> 28
Private Market Valuation Analysis. Lehman Brothers reviewed and analyzed
certain financial, operating and stock market information relating to the
following selected comparable transactions in the interactive entertainment
industry (acquiror and target):
- Activision and Expert Software, Inc.
- Titus Interactive S.A. and Interplay Entertainment Corp.
- Activision and Head Games
- Eidos PLC ("Eidos") and Crystal Dynamics
- Eidos and Pyro & Proein
- Electronic Arts Inc. and Maxis, Inc.
- Hasbro, Inc. and Microprose, Inc.
- Parent and Gremlins
- Parent and Accolade, Inc.
To the extent that the relevant information was publicly available, Lehman
Brothers calculated the multiples of Enterprise Value to current year revenues
at the time of the transaction based on the transaction prices paid for the
target companies. The mean and median of the multiple ranges for the selected
transactions that Lehman Brothers deemed relevant to this analysis are
summarized below:
<TABLE>
<CAPTION>
PRIVATE MARKET COMPARABLES
ENTERPRISE VALUE TO CURRENT YEAR REVENUE:
-----------------------------------------
<S> <C>
Mean........................................................ 1.59x
Median...................................................... 1.20x
</TABLE>
Lehman Brothers applied the comparable transaction multiples to the
Company's and INA's projections for the fiscal year 2001 to obtain estimated
comparable values for INA and the Company, respectively. The following table
presents the range of implied equity values based on the comparable transaction
multiples:
<TABLE>
<CAPTION>
AGGREGATE EQUITY VALUE
LOW - HIGH
----------------------
IN MILLIONS
<S> <C>
INA......................................................... $130 - $178
Company..................................................... $ 65 - $157
</TABLE>
No transaction used in the private market valuation analysis described
above is identical to the merger and none of the constituent companies are
identical to INA or the Company. Accordingly, any analysis of the selected
comparison transactions necessarily involved complex considerations and
judgments concerning differences in financial and operating characteristics and
other factors that would impact the comparison between the Merger versus such
transactions selected for this analysis.
Lehman Brothers is an internationally recognized investment banking firm
and, as part of its investment banking activities, is regularly engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The Special Committee of the Board
of Directors of the Company selected Lehman Brothers to render an opinion in
connection with the Merger based upon Lehman Brothers' expertise and reputation.
Pursuant to the terms of an engagement letter dated July 31, 2000 between
the Company and Lehman Brothers, the Company agreed:
(a) to pay Lehman Brothers a fee of $500,000, payable upon Lehman
Brothers' presentation to the Special Committee of its valuation
presentation with respect to the Merger;
25
<PAGE> 29
(b) to pay Lehman Brothers an additional fee of $500,000, payable upon
the delivery by Lehman Brothers of the Lehman Brothers Opinion to the
Special Committee; and
(c) to reimburse Lehman Brothers for all its expenses incurred in
connection with this assignment and indemnify Lehman Brothers for certain
liabilities and expenses that may arise out of its engagement by the
Company and the rendering of the Lehman Brothers Opinion including
liabilities under federal securities laws.
In the ordinary course of its business, Lehman Brothers may actively trade
in the debt or equity securities of Parent and the Company for its own account
and for the accounts of its customers and, accordingly, may at any time hold a
long or short position in such securities.
PROPERTY INVOLVED IN THE TRANSACTION
Other than shares of each company to be exchanged, there is no property to
be transferred in the Merger by and among the various stockholders. The
transaction solely contemplates an exchange of stock of both companies with no
"boot" or property being involved in, or subject to, the transaction. See
discussion above titled "Federal Income Tax Consequences and Absence of Any
Ruling."
26
<PAGE> 30
THE MERGER AGREEMENT
EFFECTIVE DATE AND TIME OF THE MERGER
The Merger will become effective upon confirmation of the filing of the
Certificate of Merger with the Secretary of State of the State of California or
at another subsequent date or time as agreed upon by the parties and specified
in the Certificate of Merger (the "Effective Time"). The Certificate of Merger
is expected to be filed as soon as practicable twenty days after the mailing of
this Information Statement to stockholders of the Company and the satisfaction
or waiver of each of the conditions to consummation of the Merger. See
"-- Conditions to the Merger" and "-- Termination or Abandonment of Merger."
REPRESENTATIONS AND WARRANTIES
Under the Merger Agreement, INA, Parent, CUSH, the Company and Merger Sub
have made a number of representations and warranties to each other that are
customary for transactions of this nature. INA has represented and warranted,
among other things, as to its due organization, its possession of the authority
necessary to enter into the Merger Agreement and consummate the Merger, its
capitalization, its financial condition, its compliance with governmental laws
and regulations, the absence of material litigation, the absence of defaults
under material orders, judgments, agreements, licenses and the like, and the
absence of material adverse changes in INA's business since June 30, 2000. It is
a condition to the obligations of the Company and Merger Sub to consummate the
Merger that the representations and warranties of INA be true and correct
(without giving effect to any limitation as to materiality) except to the extent
that any breach would have a material adverse effect on INA or materially and
adversely affect the ability of INA to consummate the Merger as of the Closing
Date.
The Company and Merger Sub jointly and severally made similar
representations and warranties as to their due organization, their possession of
the authority necessary to enter into the Merger Agreement and to consummate the
Merger, their capitalization, their financial condition, their compliance with
governmental laws and regulations, the absence of material litigation, the
absence of defaults under material orders, judgments, agreements, licenses and
the like, and the absence of material adverse changes in their businesses since
March 31, 2000. It is a condition to the obligations of INA to consummate the
Merger that the representations and warranties of the Company and Merger Sub be
true and correct (without giving effect to any limitation as to materiality)
except to the extent that any breach would have a material adverse effect on the
Company or materially and adversely affect the ability of the Company or Merger
Sub to consummate the Merger as of the Closing Date.
CUSH and Parent, jointly and severally, represented and warranted, among
other things, as to their due organization and their possession of the authority
necessary to enter into the Merger Agreement and consummate the Merger. CUSH
made a series of representations and warranties relating to its acquisition of
the shares of Company Common Stock in the Merger. These representations and
warranties are intended to assure the Company of the suitability of the Company
Common Stock for investment by CUSH, the ability of CUSH to assess the risks
associated with the Merger and the intentions of CUSH to hold the shares of the
Company Common Stock to be acquired by it in the Merger for investment purposes,
and for its own account, without a present view to the further distribution of
such shares.
CONDITIONS TO THE MERGER
The obligations of the Company and INA to consummate the Merger are subject
to the satisfaction or waiver of various conditions contained in the Merger
Agreement, including: (i) the absence of any outstanding injunction, restraining
order or decree from a governmental authority that restrains or prohibits the
Merger; (ii) that all the parties have performed and complied with all of their
covenants and agreements thereunder in all material respects; and (iii) other
customary closing conditions, including without limitation, the truthfulness and
accuracy of the parties' respective representations and warranties and the
receipt of all material third-party consents and approvals.
27
<PAGE> 31
CERTAIN COVENANTS
Under the Merger Agreement, the Company and INA have agreed to carry on
their respective businesses in the same manner as conducted prior to the
execution of the Merger Agreement, to use their best efforts to preserve
substantially intact their business organization, to retain their present
officers and employees and to preserve the present commercial relationships with
third parties with which the Company and INA do significant business and not to
take certain actions (including changing their articles of incorporation or
bylaws, issuing securities, reclassifying capital stock, entering into or
modifying material transactions, modifying management compensation, incurring
indebtedness, selling or disposing of certain assets and similar actions)
without the prior written approval of the other party.
DISTRIBUTION AGREEMENT
The Merger Agreement provides that, at or prior to the closing of the
Merger, the Company and Parent will enter into the Distribution Agreement, which
will provide for the distribution by the Company of Parent's products in the
United States, Canada, and their territories and possessions, pursuant to which
the Company will pay Parent 30% of the gross profit on such products, retaining
70% of gross profits for the Company.
CONVERSION OF DEBT INTO COMPANY COMMON STOCK
Under the Merger Agreement, at or prior to the closing of the Merger, all
outstanding amounts under the Credit Agreement between the Company and Parent
will be converted into Company Common Stock at a conversion price per share
equal to the average closing sale price of the Company Common Stock for the
thirty days immediately preceding the date of the Merger Agreement, which was
$6.40 per share. CUSH will receive approximately 19,531,250 shares of Company
Common Stock upon conversion of the Credit Agreement.
EXERCISE OF WARRANTS
Under the Merger Agreement, all of the warrants held by Parent and CUSH
(the "Warrants") will be exercised for an aggregate of 955,000 shares of Company
Common Stock at $0.05 per share in accordance with their respective terms.
CREDIT ARRANGEMENTS
The Merger Agreement provides that, at or prior to the effective time of
the Merger, Parent and the Company will enter into a credit arrangement, either
directly with Parent or one of its affiliates, through INA's existing credit
agreement or with a third party, to provide for a line of credit to the Company
of $50 million on such customary terms and conditions as may be agreed by the
parties thereto. In addition, all intercompany debt of INA will be canceled.
APPROVAL OF THE GRANTING OF REGISTRATION RIGHTS IN CONNECTION WITH THE MERGER
The Company has agreed in the Merger Agreement to further amend and restate
the Amended and Restated Registration Rights Agreement, dated as of February 15,
2000, between the Company and CUSH to include the Company Common Stock acquired
by CUSH pursuant to the Merger Agreement, including the Company Common Stock
issued upon conversion of the Credit Agreement and exercise of the Warrants.
TERMINATION OR ABANDONMENT OF MERGER
The Merger Agreement may be terminated at any time prior to the Effective
Time, (i) by mutual agreement of Parent and the Company; (ii) by Parent or the
Company, if the Merger has not been consummated by December 31, 2000, unless the
parties extend this date by written agreement; (iii) by Parent or the Company,
if any governmental authority has issued an order or taken any other action that
permanently restrains, enjoins or otherwise prohibits the consummation of the
Merger; (iv) by the Company, if Parent, CUSH or INA fail to comply with any
covenant or agreement contained in the Merger Agreement in any
28
<PAGE> 32
material respect or if any of the representations or warranties of Parent, CUSH
or INA are untrue or incorrect to the extent the effect of such breach would
have a material adverse effect on Parent or CUSH or materially adversely affect
the ability of Parent, CUSH or INA to consummate the Merger; and (v) by the
Parent, if the Company or Merger Sub fails to perform any material obligation in
any material respect or to comply with any covenant or agreement contained in
the Merger Agreement in any material respect or if any of the representations or
warranties of the Company or Merger Sub are untrue or incorrect to the extent
the effect of such breach would have a material adverse effect on the Company or
materially adversely affect the ability of the Company or Merger Sub to
consummate the Merger. See "Certain Covenants."
INDEMNIFICATION
The Merger Agreement provides (i) that Parent and CUSH will indemnify,
defend and hold harmless the Company and its affiliates (the "Buyer Group") for
any breach of any covenant or representations and warranties by Parent, CUSH or
INA; and (ii) the Company will indemnify, defend and hold harmless, the Parent,
CUSH and INA and their affiliates (the "Seller Group") for any breach of any
covenant or representations and warranties by the Company or Merger Sub. The
indemnification that each party may be liable for is limited in certain
respects. The parties will not be obligated to make any indemnification payment
until the aggregate damages sustained by Buyer Group or Parent Group, as the
case may be, exceed on a cumulative basis $5,000,000 (the "Basket"). Each party
will only be liable for the cumulative damages in excess of the Basket.
29
<PAGE> 33
MATERIAL CONTRACTS BETWEEN THE PARTIES OR THEIR AFFILIATES
THE CUSH ACQUISITION OF GT INTERACTIVE SOFTWARE
On December 16, 1999, pursuant to the Securities Purchase Agreement, the
Company issued to CUSH and CUSH acquired from the Company: (i) 5,714,286 shares
of Common Stock, at a purchase price of $8.75 per share and (ii) a 5%
subordinated convertible note in the aggregate principal amount of
$60,587,206.72, which as of September 30, 2000 will be convertible into an
aggregate of 6,812,795 shares of Common Stock at a conversion price of $9.25 per
share, subject to antidilution adjustments.
Concurrently with the consummation of the Infogrames Transaction, CUSH
acquired an aggregate of 6,711,707 shares of Common Stock from the Cayre family
for an aggregate purchase price of $25 million and subordinated notes of the
Company in the principal amount of $10 million, plus accrued interest, held by
the Cayre family. Joseph J. Cayre, Kenneth Cayre, Stanley Cayre and Jack J.
Cayre are former directors of the Company. In connection with the purchase of
Company Common Stock from the Cayre family, the members of the Cayre family
granted Parent an irrevocable proxy to vote the 1.3 million shares of Company
Common Stock retained by them for the election and removal of directors of the
Company as Parent in its absolute discretion determines to be appropriate. The
Cayre family retains the right to transfer any of the 1.3 million shares of
Company Common Stock that it still owns, and upon transfer, Parent will no
longer have the right to vote such shares.
Also concurrently with the consummation of the Infogrames Transaction, CUSH
acquired from General Atlantic Partners 54, L.P. and GAP Coinvestment Partners
II, L.P. (together, "GAP") warrants to purchase 900,000 shares of Common Stock,
at an exercise price of $0.05 per share, for nominal consideration.
In addition, pursuant to a Securities Exchange Agreement, dated as of
November 15, 1999, by and among the Company and GAP, the Company issued to GAP
non-interest-bearing subordinated convertible notes in the aggregate principal
amount of $50 million, which are convertible into an aggregate of 2,500,000
shares of Common Stock at a conversion price of $20.00 per share, subject to
antidilution adjustments, in exchange for 120,000 shares of the Company's Series
A Convertible Preferred Stock with a liquidation preference of $30 million and
subordinated notes of the Company in the principal amount of $20 million, plus
accrued interest, held by GAP.
After consummation of the above described transactions, Parent and CUSH
beneficially owned an aggregate of approximately 20.1 million shares of Common
Stock on a fully diluted basis, or approximately 71.7% of the voting securities
of the Company. The Parent acquired these securities using funds from its
working capital.
OTHER AGREEMENTS
Infogrames Entertainment SA
In connection with the Infogrames Transaction, the Company entered into an
agreement with Parent, effective as of December 16, 1999, pursuant to which
Parent provides distribution of the Company's products in Europe, and effective
July 1, 2000 in Australia, pursuant to which the Company is entitled to receive
30% of the gross profit on such products.
In connection with the Infogrames Transaction, the Company entered into an
agreement with Parent pursuant to which Parent provides certain management and
support services, including financial, legal and administrative personnel and
services, to the Company on a costs plus expenses basis. The Services Agreement
expires on December 31, 2000, unless earlier terminated or extended by the
parties.
As of February 15, 2000, Parent, through CUSH, entered into an agreement
with First Union National Bank, as agent for a syndicate of banks, pursuant to
which Parent assumed the banks' interest in the Company's Credit Agreement. In
connection with the assumption by Parent of the Credit Agreement, warrants to
acquire 45,000 shares of the Company Common Stock, at an exercise price of $0.05
per share, which were previously to be issued to the banks, were issued to
Parent.
30
<PAGE> 34
In connection with change of the Company's name to Infogrames, Inc., the
Company entered into an agreement, effective as of May 10, 2000, pursuant to
whether the Company has received from Parent a non-exclusive, royalty-free
license to use the name "Infogrames", which license may not be canceled on less
than one year's notice unless the Company breaches its obligations under the
license.
During the three month period ended June 30, 2000, the Company purchased
$1.2 million of product from Parent, of which $1.1 million remains payable,
representing approximately 1% of total products purchased by the Company for
such period.
Infogrames North America, Inc.
In connection with the Infogrames Transaction, for the period from November
16, 1999 through June 30, 2000, the Company was granted the non-exclusive right
in the U.S. and Canada to act as the sales agent for INA for INA's products
pursuant to which the Company received 3% of net receipts for such products. The
parties subsequently entered into the Affiliated Label Agreement for the period
from July 1, 2000 to June 30, 2001 providing for payment to the Company of 15%
of net revenue for sales, distribution, credit and collection services.
Transactions between Infogrames UK Limited and GT Interactive Software
(Europe) Limited.
GT Interactive Software (Europe) Limited ("GT UK"), a wholly-owned
subsidiary of the Company, entered into a number of transactions with Infogrames
UK Limited ("Infogrames UK") relating to the consolidation of its operations
with Infogrames UK. Fixed assets having a net book value of $722,000 were
transferred to Infogrames UK for $626,000. Inventory having a cost of $270,000
was transferred at original cost. Infogrames UK agreed to assume the ongoing
costs of running GT UK's office from March 1, 2000, including the salary costs
of a number of employees who transferred to Infogrames UK. The lease on the UK
office was formally assigned to Infogrames UK in June 2000, although the rent
for this office has been borne by Infogrames UK from March 1, 2000. $38,000 of
such rent was re-charged to Infogrames UK for the month of March 2000. A
deferred rent liability of $203,000 arising from an initial rent free period on
the office was transferred to Infogrames UK.
31
<PAGE> 35
DESCRIPTION OF CAPITAL STOCK
DESCRIPTION OF THE CAPITAL STOCK OF INFOGRAMES, INC.
On the Record Date, the Company had 20,354,438 shares of Company Common
Stock issued and outstanding, held by approximately 7,160 beneficial holders.
The Certificate of Incorporation of the Company (the "Articles"), authorizes the
issuance of 300,000,000 shares of Company Common Stock, par value $0.01 per
share. Except as otherwise required by law, each share of Company Common Stock
entitles the stockholder to one vote on each matter which stockholders may vote
on at all meetings of stockholders of the Company. Holders of Company Common
Stock are not entitled to cumulative voting in the election of directors.
Holders of Company Common Stock do not have subscription or conversion rights
and there are no redemption or sinking fund provisions applicable thereto.
Shares of Company Common Stock are entitled to share equally and ratably in
dividends paid from the funds legally available for the payment thereof, when,
as and if declared by the Board of Directors of the Company. The declaration of
dividends, however, is subject to the discretion of the Board of Directors.
Holders of Company Common Stock are also entitled to share ratably in the assets
of the Company available for distribution to holders of Company Common Stock
after payment of liabilities of the Company upon liquidation or dissolution of
the Company, whether voluntary or involuntary. All the outstanding shares of
Company Common Stock are fully paid and nonassessable. The Company has no
present intention of paying any cash dividends on Company Common Stock and plans
to retain any earnings to finance the development and expansion of its
operations. The payment of cash dividends also may be restricted by a number of
other factors, including future earnings, capital requirements and the financial
condition of the Company, and restrictions on the payment of dividends imposed
under Delaware law.
The shares of Company Common Stock proposed to be issued to CUSH in
connection with the Merger will not be registered under the Securities Act, and
thus will be restricted securities. Restricted securities may not be resold
unless they are registered under the Securities Act or sold pursuant to an
applicable exemption from registration. Each certificate representing the
Company Common Stock issued in the Merger to CUSH will be imprinted with a
legend restricting transfer unless and until an appropriate exemption from
registration can be obtained. The Company has agreed to amend the Registration
Rights Agreement already executed by CUSH and the Company covering other Company
Common Stock held by CUSH to include the shares received in connection with the
Merger.
DESCRIPTION OF THE CAPITAL STOCK OF INFOGRAMES NORTH AMERICA, INC.
Shares of INA Common Stock are not publicly traded and no public market
exists therefor. As of the date hereof, there were a total of 100 shares of INA
Common Stock issued and outstanding, all of which are owned by CUSH.
Dividends are payable on INA Common Stock when, as and if declared by the
Board of Directors of INA. INA has never declared or paid dividends on INA
Common Stock. Upon consummation of the Merger, the Company will become the sole
stockholder of INA shares.
32
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INFOGRAMES, INC.
OVERVIEW
The Company develops, publishes, and distributes interactive entertainment
for the children's education ("edutainment"), leisure entertainment, and gaming
enthusiast's markets for a variety of platforms. The Company employs a portfolio
approach to achieve a broad base of published products across most major
consumer software categories. Since it commenced operations in February 1993,
the Company has experienced rapid growth and its product and customer mix has
changed substantially.
Publishing and distribution are the two major activities of the Company.
Publishing is divided into Frontline, Leisure and Children's publishing. Because
each of these product categories has different associated costs, the Company's
margins have depended and will depend, in part, on the percentage of net
revenues attributable to each category. In addition, a particular product's
margin may depend on whether it has been internally or externally developed and
on what platforms it is published. Further, the Company's margins may vary
significantly from quarter to quarter depending on the timing of its new
published product releases. To the extent that mass merchants require greater
proportions of third-party software products, some of which may yield lower
margins, the Company's operating results may be impacted accordingly.
The worldwide interactive entertainment software market is comprised
primarily of software for two distinct platforms: PCs and dedicated game
consoles. The market has grown dramatically in recent years with its growth
driven by the increasing installed base of multimedia PCs and current generation
game console systems. In addition, the development of enabling multimedia
technologies, the proliferation of software titles, the development of new and
expanding distribution channels and the emergence of a strong international
market for interactive entertainment software have spurred the rapid expansion
of the interactive entertainment market.
There has been an increased rate of change and complexity in the
technological innovations affecting the Company's products, coupled with
increased competitiveness for shelf space and buyer selectivity. The market for
Frontline titles has become increasingly hit-driven, which has led to higher
production budgets, more complex development processes, longer development
cycles and generally shorter product life cycles. The importance of the timely
release of hit titles, as well as the increased scope and complexity of the
product development and production process, have increased the need for
disciplined product development processes that limit cost and schedule overruns.
This in turn has increased the importance of leveraging the technologies,
characters or storylines of such hit titles into additional interactive
entertainment software products in order to spread development costs among
multiple products. In this environment, the Company is determined to achieve a
balance between development done by its own internal development studios and by
third-party developers.
Along with its industry competitors, the Company had historically
capitalized royalties advanced to third-party developers as a prepayment in
current assets and evaluated the realization of these royalty advances on a
quarterly basis. The market changes noted above have made it extremely difficult
to determine the likelihood of individual product acceptance and success. As a
result, in the quarter ended December 31, 1997, the Company expensed royalty
advances of $73.8 million on products that were in development or on sale. In
connection with this change in the dynamics of the marketplace, the Company
changed its accounting, beginning on January 1, 1998, for future royalty
advances, treating such costs as research and development expenses, which are
expensed as incurred. Multi-year output advances will continue to be capitalized
as royalty advances and expensed over the development periods, in accordance
with generally accepted accounting principles.
The distribution channels for interactive software have changed
significantly in recent years. Traditionally, consumer software was sold through
specialty stores. Today, consumer software is increasingly sold through mass
merchants such as Wal-Mart, Kmart and Target, as well as major retailers,
including Office
33
<PAGE> 37
Depot, Best Buy, CompUSA, AAFES, Sam's Club and Babbage's. The Internet and
on-line networks also present a new channel through which publishers and
distributors can distribute their products to end-users.
Sales are recorded net of expected future returns. Higher than anticipated
returns were experienced in the last fiscal year, and management has taken a
substantial provision for price protection as stated below. Management
continually assesses and re-evaluates the rate of returns and price protection
based on business conditions and market factors.
In 1998, the Company acquired One Zero Media, Inc. ("OZM"), Reflections
Interactive Limited ("Reflections"), Legend and Home Software Benelux B.V.
("Homesoft"). Financial results of these companies have been included in the
Company's Consolidated Financial Statements for the period since the
acquisitions, which were accounted for as purchases. At March 31, 1999, OZM is
accounted for as a discontinued operation, as it was the Company's intention to
sell OZM. OZM was sold on July 28, 1999 for $5.2 million in cash. This resulted
in an additional loss for the three months ended September 30, 1999 from
discontinued operations of $0.5 million. The initial loss recorded in the prior
fiscal year of $19.0 million included a provision of $5.0 million for operating
losses during the phase-out period.
Effective January 1, 1998, the Company changed its fiscal year from
December 31 to March 31. Effective April 1, 2000, the Company changed its fiscal
year from March 31 to June 30. Accordingly, the discussion of financial results
set forth below compares the three month period ended June 30, 2000 to the three
month period ended June 30, 1999, the twelve months ended March 31, 2000 to the
twelve months ended March 31, 1999, the twelve months ended March 31, 1999 to
the twelve months ended March 31, 1998, the three months ended March 31, 1998 to
the three months ended March 31, 1997 and the twelve months ended December 31,
1997 to the twelve months ended December 31, 1996.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
operations data as a percentage of net revenues for each of the years in the two
years ended December 31, 1997, the three months ended March 31, 1998, the twelve
months ended March 31, 1999 and 2000, which is derived from the audited
consolidated financial statements of the Company. The consolidated financial
information for the three months ended March 31, 1997, the twelve months ended
March 31, 1998 and the three months ended June 30, 1999 is derived from the
unaudited financial statements of the Company.
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31, MARCH 31, JUNE 30,
------------- ------------------- --------------------------- --------------------
1996 1997 1997 1998 1998 1999 2000 1999 2000
----- ----- ----------- ----- ----------- ----- ----- ----------- ------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold......... 58.7 59.4 62.0 54.0 57.9 57.7 78.9 51.2 49.0
----- ----- ----- ----- ----- ----- ----- ----- ------
Gross profit............... 41.3 40.6 38.0 46.0 42.1 42.3 21.1 48.8 51.0
Selling and distribution
expenses................. 19.9 18.6 17.7 23.1 19.6 25.8 39.4 27.9 31.0
General and administrative
expenses................. 9.5 8.8 9.2 10.1 9.0 11.6 23.2 9.7 49.0
Research and development... 1.5 2.6 2.6 10.3 4.1 13.4 17.7 13.5 29.0
Royalty advance
write-off................ -- 13.9 -- -- 13.6 -- -- -- --
Restructuring and other
charges.................. -- -- -- -- -- 3.1 10.1 -- 33.6
Purchased research and
development.............. -- 2.1 -- -- 2.0 0.9 -- -- --
SingleTrac retention
bonus.................... -- 0.4 -- -- 0.4 0.3 -- -- --
Amortization of goodwill... 0.3 0.2 0.4 0.6 0.3 0.6 0.8 0.7 1.7
----- ----- ----- ----- ----- ----- ----- ----- ------
Operating income (loss).... 10.1 (6.0) 8.1 1.9 (6.9) (13.4) (70.1) (3.1) (113.3)
Interest expense........... -- (0.2) -- (0.5) (0.3) (0.8) (4.6) (1.6) (10.0)
</TABLE>
34
<PAGE> 38
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31, MARCH 31, JUNE 30,
------------- ------------------- --------------------------- --------------------
1996 1997 1997 1998 1998 1999 2000 1999 2000
----- ----- ----------- ----- ----------- ----- ----- ----------- ------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Other income (loss)........ 1.1 (0.2) 0.3 (0.8) (0.4) (0.1) (0.2) (0.2) (1.2)
----- ----- ----- ----- ----- ----- ----- ----- ------
Income (loss) before
provision for (benefit
from) Income taxes....... 11.2 (6.4) 8.4 0.6 (7.6) (14.3) (74.9) (4.9) (124.5)
Provision for (benefit
from) income taxes....... 4.3 (1.7) 3.6 0.3 (2.2) (5.2) 10.9 (1.7) (3.0)
Net income (loss) from
continuing operations.... 6.9 (4.7) 4.8 0.3 (5.4) (9.1) (85.8) (3.2) (127.1)
Discontinued operations:
Loss from operations of
OZM.................... -- -- -- -- -- (0.6) -- -- --
Loss on disposal of
OZM.................... -- -- -- -- -- (2.7) (0.1) -- --
----- ----- ----- ----- ----- ----- ----- ----- ------
Loss from discontinued
operations............. -- -- -- -- -- (3.3) (0.1) -- --
----- ----- ----- ----- ----- ----- ----- ----- ------
Net income (loss) before
extraordinary item..... 6.9 (4.7) 4.8 0.3 (5.4) (12.4) (85.9) (3.2) (127.1)
Extraordinary item:
Gain on early
extinguishment of debt,
net of tax............. -- -- -- -- -- -- 0.5 -- --
----- ----- ----- ----- ----- ----- ----- ----- ------
Net income (loss) before
dividends on preferred
stock.................... 6.9 (4.7) 4.8 0.3 (5.4) (12.4) (85.4) (3.2) (127.1)
Less dividends on
preferred stock........ -- -- -- -- -- -- -- (0.5) --
----- ----- ----- ----- ----- ----- ----- ----- ------
Net income (loss)
attributable to common
stockholders............. 6.9% (4.7)% 4.8% 0.3% (5.4)% (12.4)% (85.4)% (3.7)% (127.1)%
===== ===== ===== ===== ===== ===== ===== ===== ======
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Net revenues for the three months ended June 30, 2000 decreased
approximately $88.3 million, or 73.0%, to $33.0 million from $121.3 million in
the comparable 1999 period. This decrease is attributable to the restructuring
of the Company's publishing business, the acquisition by Parent of a controlling
interest in the Company and the subsequent decision to downsize its distribution
business. Additionally, some of the Company's larger retail customers are
purchasing consumer software directly from several large publishers, which was
previously sold through the Company.
Total publishing revenue decreased 47.0% to $27.0 million in 2000 from
$50.9 million in the comparable 1999 period. Approximately 89.6% of such
revenues related to PC product revenues and 10.4% of such revenues related to
console games in 2000, as compared to 34.0% and 66.0%, respectively, in the
comparable 1999 period.
While the consumer software business is typically seasonal, the granting of
price protection and returns of products in 2000 were greater than anticipated.
As consumer pricing has become more competitive, the Company is finding more
frequently that it is necessary to offer mark-downs for products which have not
yet sold through to the consumer, or to accept a higher level of returns of
product that are not selling at retail, or both.
A significant portion of the Company's revenues in any quarter are
generally derived from software first released in that quarter or in the
immediately preceding quarter.
Cost of goods sold for 2000 decreased approximately $46.0 million, or
74.0%, to $16.2 million from $62.1 million in the comparable 1999 period. Cost
of goods sold as a percentage of net revenues decreased to 49.0%
35
<PAGE> 39
in 2000 as compared to 51.2% in the comparable 1999 period. The decrease was due
to a lower overall sales volume, offset by a change in the mix of products sold,
resulting in lower sales of third-party product, which bears a higher cost than
published product, both domestically and internationally.
Gross profit decreased from $59.2 million (48.8% of net revenues) in the
comparable 1999 period to $16.8 million (51.0% of net revenues) for the three
months ended June 30, 2000. This decrease primarily is due to reduced sales
volume and change in cost of goods sold as described above. Gross profit is
primarily impacted by the percentage of sales of CD software as compared to the
percentage of sales of cartridge software. Gross profit may also be impacted
from time to time by the percentage of foreign sales, and the level of returns
and price protection and concessions to retailers and distributors. The
Company's margins on sales of CD software (currently, PlayStation, PCs and
Dreamcast) are higher than those on cartridge software (currently, Nintendo 64
and Game Boy Color) as a result of significantly lower CD software product
costs.
Selling and distribution expenses primarily include shipping expenses,
sales and distribution labor expenses, advertising and promotion expenses and
distribution facilities costs. During 2000, these expenses decreased
approximately $17.0 million, or 50.3%, to $16.8 million from $33.9 million in
the comparable 1999 period. Selling and distribution expenses as a percentage of
net revenues for 2000 increased to 31.0% as compared to 27.9% in the comparable
1999 period. The increase, as a percentage of net revenues, was due to lower
overall sales volume, and the increase in co-op advertising costs incurred
during the current period. This was partially offset by the reduction of freight
costs due to decreased sales volume in the current period.
General and administrative expenses primarily include personnel expenses,
facilities costs, professional expenses and other overhead charges. These
expenses in 2000 increased approximately $4.4 million, or 37.2%, to $16.1
million from $11.8 million in the comparable 1999 period. General and
administrative expenses as a percentage of net revenues increased to 49.0% in
2000 from 9.7% in the comparable 1999 period. This increase was due primarily to
additional costs associated with management's reorganization of operations as a
result of the acquisition of controlling interest in the Company by Parent.
Research and development expenses primarily includes payment of royalty
advances to third-party developers on products that are currently in development
and direct costs of internally developing and producing a title, such as
salaries and other related costs. These expenses in 2000 decreased approximately
$6.8 million, or 41.5%, to $9.6 million from $16.4 million in the comparable
1999 period. Research and development, as a percentage of net revenues,
increased to 29.0% in 2000 from 13.5% in the comparable 1999 period. The
increase in research and development expenses as a percentage of net revenues is
primarily due to the decrease in overall sales volume despite the Company
entering into fewer new contracts with external developers. Research and
development expenses of the Company's internal development studios, which
primarily include Humongous, Legend and Reflections, decreased to $9.6 million
in 2000 from $10.7 million in the comparable 1999 period.
Restructuring and other charges of approximately $11.1 million, recorded in
2000, relates to a reorganization and refocus by the Company as a result of the
Infogrames SA transaction, as well as the Company's reorganization of its
Frontline publishing business. Approximately $0.4 million relates to the write-
off of goodwill, $9.4 million of impaired assets and transition rent, and $1.3
million related to the planned severance of 49 employees, primarily
administrative and product development functions. The remaining employees to be
terminated received notification prior to the fiscal year ended June 30, 2000,
with terminations scheduled to be effective over the subsequent three months.
Management expects to complete the Company's reorganization by September 30,
2000. During the three months ended June 30, 2000, 62 employees were terminated
under the restructuring plan.
Amortization of goodwill for 2000 decreased approximately $0.3 million, or
36.8%, to $0.6 million from $0.9 million in the comparable 1999 period. This
decrease is attributable to the lower amortization expense as a result of the
write-off of all goodwill, other than the Legend and Reflections studios, in
connection with the Company's reorganization plans.
Interest expense increased approximately $1.3 million during 2000 to $3.3
million from $2.0 million in the comparable 1999 period. The increase was
attributable to the increase in interest costs associated with
36
<PAGE> 40
increased borrowings under the Credit Agreement. and amortization of deferred
financing costs relating to the Credit Agreement and the subordinated notes held
by Parent.
The Company's effective tax rate for 2000 was 2% compared to 35% in the
comparable 1999 period. The decrease in the rate is attributable to the Company
not providing a tax benefit for losses in the current period, offset by the
Company's requirement to pay alternative minimum tax.
TWELVE MONTHS ENDED MARCH 31, 2000 COMPARED TO TWELVE MONTHS ENDED MARCH 31,
1999
Net revenues for fiscal 2000 decreased approximately $196.8 million, or
34.4%, to $375.6 million from $572.3 million in fiscal 1999. This decrease is
attributable to the restructuring of the Company's publishing business, the
acquisition by Parent of a controlling interest in the Company and the Company's
decision to downsize its distribution business, whereby substantially less
product was shipped in the last four months of the fiscal year. Additionally,
some of the Company's larger retail customers continue to purchase consumer
software directly from several large publishers whose software was previously
sold through the Company.
Total publishing revenue decreased 15.7% to $252.3 million in fiscal 2000
from $299.4 million in fiscal 1999. Approximately 55% of such revenues related
to PC product revenues and 45% of such revenues related to console game revenues
in fiscal 2000, as compared to 58% and 42%, respectively, in fiscal 1999.
While the consumer software business is typically seasonal, the granting of
price protection and returns of products in fiscal 2000 exceeded expectations.
As consumer pricing has become more competitive, the Company is finding more
frequently that it is necessary to offer mark-downs for products which have not
yet sold through to the consumer, or to accept a higher level of returns of
product that are not selling at retail, or both. A large portion of aging
customer chargebacks relating to price protection, co-op advertising and
uncollectible accounts were reserved for in fiscal 2000.
A significant portion of the Company's revenues in any quarter are
generally derived from software first released in that quarter or in the
immediately preceding quarter.
Cost of goods sold for fiscal 2000 decreased approximately $33.7 million,
or 10.2%, to $296.3 million from $330.0 million in fiscal 1999. Cost of goods
sold as a percentage of net revenues increased to 78.9% in fiscal 2000 as
compared to 57.7% in fiscal 1999. The increase, as a percentage of net revenues,
was due to lower overall sales volume, coupled with substantial reserves for
unsellable product, particularly third-party product, which bears a higher cost
than published product, both domestically and internationally.
Gross profit decreased from $242.4 million (42.3% of net revenues) for the
year ended March 31, 1999 to $79.3 million (21.1% of net revenues) for the year
ended March 31, 2000. This decrease primarily is due to reduced sales volume and
higher cost of goods sold as described above. Gross profit is primarily impacted
by the percentage of sales of CD software as compared to the percentage of sales
of cartridge software. Gross profit may also be impacted from time to time by
the percentage of foreign sales, and the level of returns and price protection
and concessions to retailers and distributors. The Company's margins on sales of
CD software (currently, PlayStation, PCs and Dreamcast) are higher than those on
cartridge software (currently, Nintendo 64 and Game Boy Color) as a result of
significantly lower CD software product costs.
Selling and distribution expenses primarily include shipping expenses,
sales and distribution labor expenses, advertising and promotion expenses and
distribution facilities costs. During fiscal 2000, these expenses increased
approximately $0.3 million, or 0.2%, to $147.8 million from $147.5 million in
fiscal 1999. Selling and distribution expenses as a percentage of net revenues
for fiscal 2000 increased to 39.4% as compared to 25.8% in fiscal 1999. The
increase, as a percentage of net revenues, was due to lower overall sales
volume, and the increase in co-op advertising costs due to the write-down of
receivables. This was partially offset by the reduction of freight costs due to
decreased sales volume.
General and administrative expenses primarily include personnel expenses,
facilities costs, professional expenses and other overhead charges. These
expenses in fiscal 2000 increased approximately $20.5 million, or 30.8%, to
$87.1 million from $66.6 million in fiscal 1999. General and administrative
expenses as a percentage of net revenues increased to 23.2% in fiscal 2000 from
11.6% in fiscal 1999. This increase was due primarily to
37
<PAGE> 41
an increase in salary expense relating to the severance packages of several
senior officers during the fiscal year, the write-off of uncollectible account
receivables, and additional costs incurred associated with management's
reorganization of operations as a result of the acquisition of a controlling
interest in the Company by Parent.
Research and development expenses primarily includes payment of royalty
advances to third-party developers on products that are currently in development
and direct costs of internally developing and producing a title such as salaries
and other related costs. These expenses in fiscal 2000 decreased approximately
$10.3 million, or 13.4%, to $66.6 million from $76.9 million in fiscal 1999.
Research and development, as a percentage of net revenues, increased to 17.7% in
fiscal 2000 from 13.4% in fiscal 1999. The decrease in research and development
expenses is primarily due to the Company entering into fewer new contracts with
external developers, partially offset by a $7.8 million earned-out royalty
payment to Reflections for the title Driver during the three months ended
September 30, 1999, which was paid in cash and Common Stock. Research and
development expenses of the Company's internal development studios, which
primarily include Humongous, Legend and Reflections, increased to $45.7 million
in fiscal 2000 from $34.9 million in fiscal 1999.
Restructuring and other charges of approximately $37.9 million, recorded in
the third and fourth quarters of fiscal 2000, relate to a reorganization of the
Company's Frontline publishing business, the shutdown of a substantial portion
of European publishing operations and outsourcing and down-sizing of the
Company's distribution and assembly functions. Approximately $17.6 million
relates to the write-off of goodwill as a result of the consolidation of the
value distribution division and the Company's publishing division, $12.1 million
relates to the shutdown of European operations, including the write-off of all
goodwill other than that relating to the Reflections studio, $6.1 million
relates to impaired assets and $2.1 million relates to the planned severance of
221 employees, primarily administrative functions. The remaining employees to be
terminated received notification prior to the fiscal year ended March 31, 2000,
with terminations scheduled to be effective over the subsequent three months.
Management expects to complete the Company's reorganization by September 30,
2000. As of March 31, 2000, 88 employees were terminated under the restructuring
plan.
Amortization of goodwill for fiscal 2000 decreased approximately $0.2
million, or 7.1%, to $3.1 million from $3.3 million in fiscal 1999. This
decrease is attributable to the lower amortization expense as a result of the
write-off of all goodwill, other than the Legend and Reflections studios, in
connection with the Company's reorganization plans.
Interest expense increased approximately $12.1 million during fiscal 2000
to $17.2 million from $5.1 million in fiscal 1999. The increase was partially
attributable to the increase in interest costs associated with increased
borrowings under the Old Credit Agreement (as defined below) and the Credit
Agreement. The amortization of deferred financing costs relating to the Credit
Agreement and the subordinated notes held by General Atlantic Partners, LLC
(together with its affiliates, "GAP") and members of the Cayre family also
contributed to the increase in interest and other income (expense), net.
The Company's effective tax rate for fiscal 2000 was 15% compared to 36% in
fiscal 1999. The valuation allowance increased by $134,591 in fiscal 2000,
consisting of a valuation allowance of $48,806 for the beginning deferred tax
asset balance and a valuation allowance of $85,785 for the net change in the
deferred tax asset during the year. Such valuation allowance was necessary due
to the current year operating results and the terminated plans to sell certain
of the Company's businesses which would have resulted in the utilization of the
deferred tax asset. A full valuation allowance has been recorded against the net
deferred tax asset since it is more likely than not that such assets will not be
realized in the foreseeable future.
Pursuant to Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations -- Reporting Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB 30"), as of March 31, 2000, the Consolidated Financial
Statements of the Company reflect the planned disposal of OZM as a discontinued
operation. Accordingly, the revenues, costs and expenses, assets and
liabilities, and cash flows of this business have been excluded from the
respective captions in the Consolidated Balance Sheets, Consolidated Statements
of Operations, Consolidated Statements of Comprehensive Income and Consolidated
Statements of Cash Flows, and have been reported through its planned date of
disposition as "Loss from discontinued operations." As of March 31,
38
<PAGE> 42
1999, OZM was accounted for as a discontinued operation and was sold in July
1999. This resulted in a loss from discontinued operations of $19.5 million,
$0.5 million of which is recognized in the fiscal year 2000.
The gain on early extinguishment of debt of $3.2 million ($1.3 million net
of tax) relates to the net gain recognized on the issuance of subordinated
convertible notes in exchange for shares of Series A Convertible Preferred Stock
("Preferred Stock") and subordinated notes of the Company held by GAP and the
write-off of deferred financing costs associated with warrants issued in
connection with the assumption of the Credit Agreement and warrants issued to
GAP and subsequently acquired by Parent concurrent with the Parent transaction
on December 16, 1999.
TWELVE MONTHS ENDED MARCH 31, 1999 COMPARED TO TWELVE MONTHS ENDED MARCH 31,
1998
Net revenues for fiscal 1999 increased approximately $29.3 million, or
5.4%, to $572.3 million from $543.1 million in the twelve months ended March 31,
1998. This growth in net revenues was attributable to increases in net revenues
of Children's publishing, Leisure publishing and Distribution of $23.2 million,
or 108%, $12.5 million, or 39%, and $12.3 million, or 5%, respectively. The
increase in Children's net revenue is attributable to the release of Blue's
Clues related titles during fiscal 1999. The increase in Leisure's net revenue
is attributable to the increased and continuing success of Deer Hunter, Deer
Hunter II and Rocky Mountain Trophy Hunter. The increase in Distribution net
revenues for fiscal 1999 is primarily due to an increase in the number of stores
supplied and serviced by the Company.
These increases are offset by a reduction in Frontline net revenue of $18.7
million, or 8%. The decrease is largely attributable to a $13.5 million, or 71%
decrease in royalty income.
Cost of goods sold for fiscal 1999 increased approximately $15.6 million,
or 5.0%, to $330.0 million from $314.3 million in the twelve months ended March
31, 1998. Cost of goods sold as a percentage of net revenues decreased to 57.7%
in fiscal 1999 as compared to 57.9% in the twelve months ended March 31, 1998.
Excluding increased charges for obsolete inventory between the periods, the cost
of goods percentage would have been 55.4% of net revenue in fiscal 1999. This
decrease is primarily a result of increased sales in the Children's and Leisure
categories of publishing.
Selling and distribution expenses primarily include shipping expenses,
sales and distribution labor expenses, advertising and promotion expenses and
distribution facilities costs. During fiscal 1999, these expenses increased
approximately $40.9 million, or 38.3%, to $147.5 million from $106.7 million in
the twelve months ended March 31, 1998. Selling and distribution expenses as a
percentage of net revenues for fiscal 1999 increased to 25.8% as compared to
19.6% in the twelve months ended March 31, 1998. The increase, as a percentage
of net revenues, was primarily attributable to the increase of print advertising
worldwide to support the new and existing releases of the Company's published
product and increased cooperative advertising, and increased premium freight
costs due to higher unit volume and the expense of consolidating inventory of
the Company's Plymouth, MN distribution center into its Edison, NJ distribution
center, as compared to the twelve months ended March 31, 1998. The overall
increase was also attributable to increased sales volume.
General and administrative expenses primarily include personnel expenses,
facilities costs, professional expenses and other overhead charges. These
expenses in fiscal 1999 increased approximately $18.0 million, or 37.0%, to
$66.6 million from $48.6 million in the twelve months ended March 31, 1998.
General and administrative expenses as a percentage of net revenues increased to
11.6% in fiscal 1999 from 9.0% in the twelve months ended March 31, 1998. This
increase was due primarily to increased depreciation associated with the
expansion of the Company's worldwide facilities and the implementation of
enterprise software to enhance the Company's management information systems
worldwide, the increase in bad debt expenses, additional legal and accounting
fees incurred as part of the discontinued private placement of senior
subordinated debt and the write-off of an equity investment.
Research and development primarily includes payment for royalty advances to
third-party developers on products that are currently in development and direct
costs of internally developing and producing a title such as salaries and other
related costs. These expenses in fiscal 1999 increased approximately $54.6
million, or 244.8%, to $76.9 million from $22.3 million in the twelve months
ended March 31, 1998. Research and
39
<PAGE> 43
development, as a percentage of net revenues, increased to 13.4% in fiscal 1999
from 4.1% in the twelve months ended March 31, 1998. This increase is primarily
due to the change in accounting effective January 1, 1998, whereby royalty
advances on products that are currently in development are expensed as incurred,
and the additional headcount attributable to increased in-house development
capacity. Research and development of the Company's internal development
studios, which, during the relevant periods, primarily included SingleTrac,
Cavedog, Humongous, Legend, Reflections and Bootprint increased to $34.9 in
fiscal 1999 from $17.6 million in the twelve months ended March 31, 1998.
Excluding the impact of the change in accounting, research and development
expenses would have increased $28.2 million from $48.7 million to $76.9 million,
or 58%.
Restructuring charges of approximately $17.5 million, recorded in the
fourth quarter of fiscal 1999, relate to a reorganization of the Company's
Frontline publishing business, a contemplated relocation of corporate
headquarters to California and outsourcing of the Company's distribution
function. Approximately $9.8 million relates to the planned severance of 135
employees, $7.1 million relates to impaired assets and $0.6 million relates to
rent for the transition period. This reorganization was announced on March 19,
1999, and was expected to be completed by March 19, 2000.
The charge for royalty advance write-off of $73.8 million during the twelve
months ended March 31, 1998 represents a change in estimate and accounting
whereby royalty advances on products that were currently in development or on
sale were expensed. In connection with this change, the Company prospectively
expensed royalty advances in a manner comparable with internal software
development costs, which are expensed to research and development as incurred.
In connection with the acquisitions of SingleTrac in October 1997 and
Reflections in December 1998, the Company incurred charges of $11.0 million and
$5.0 million, respectively, for purchased research and development. In addition,
the Company incurred a charge of $2.4 million and $1.7 million in the twelve
months ended March 31, 1998 and fiscal 1999, respectively, for a retention bonus
for the SingleTrac employees, which was based on the achievement of certain
performance goals.
Merger costs consist of legal, accounting and other professional fees
incurred by the Company for the canceled acquisition of MicroProse, Inc., during
the twelve months ended March 31, 1998.
Amortization of goodwill increased approximately $1.8 million, or 111.4% in
fiscal 1999, to $3.3 million from $1.6 million in the twelve months ended March
31, 1998. This increase is attributable to the purchases of Reflections,
Homesoft, Prism and Legend in fiscal 1999.
Interest and other expenses increased approximately $1.6 million during
fiscal 1999 to $5.3 million from $3.7 million in the twelve months ended March
31, 1998. This increase was primarily attributable to the increase in interest
costs associated with borrowings under the Company's then existing Revolving
Credit Agreement.
The Company's effective tax rate for fiscal 1999 was 36% compared to 30% in
the twelve months ended March 31, 1998. The increased rate is attributable to
the lower proportion of non-deductible expenses, primarily purchased research
and development and goodwill, in 1999.
In February 1999, certain partnerships affiliated with GAP purchased from
the Company 0.6 million shares of the Preferred Stock for an aggregate purchase
price of $30.0 million. These shares of Preferred Stock accumulated dividends at
8.0% and were convertible into 6.0 million shares of Common Stock (not adjusted
to reflect the one-for-five reverse stock split effected on June 20, 2000) at a
conversion price of $5 per share.
The Preferred Stock was exchanged for convertible notes in connection with
the Parent transaction in December 1999. See Note 2 in the Consolidated
Financial Statements included herein.
Pursuant to APB 30, the Consolidated Financial Statements of the Company
reflect the planned disposal of OZM as a discontinued operation. Accordingly,
the revenues, costs and expenses, assets and liabilities, and cash flows of this
business have been excluded from the respective captions in the Consolidated
Balance Sheets, Consolidated Statements of Operations, Consolidated Statements
of Comprehensive Income and Consolidated Statements of Cash Flows, and have been
reported through its planned date of disposition as
40
<PAGE> 44
"Loss from discontinued operations." As of March 31, 1999, OZM is accounted for
as a discontinued operation and it is the Company's present intention to sell
OZM, resulting in an anticipated loss from discontinued operations of $19.0
million. The loss from operations of OZM represents net expenses of $4.6 million
on net revenues of $1.1 million. The loss on disposal of OZM includes a
provision of $5.0 million for operating losses during the phase-out period, and
is primarily attributable to the write-off of goodwill of approximately $18.3
million. There is no tax benefit recorded on the loss from discontinued
operations, as OZM has historically generated net losses.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Net revenues for 1998 increased approximately $12.4 million, or 13.3%, to
$105.8 million from $93.4 million in the comparable 1997 period. This growth in
net revenues was primarily attributable to a 49% increase in publishing revenue
which includes Frontline, Children's and Leisure. Frontline net revenue
increased $9.4 million, or 36%, from $26.4 million to $35.9 million, as a result
of the sales of Duke Nukem titles for the PlayStation, Nintendo 64 and the PC,
Hexen for Nintendo 64, OddWorld: Abe's Oddysee for the PlayStation, Total
Annihilation for the PC, East Meets West, and Quake for Nintendo 64,
internationally. Leisure publishing's net revenue increased $4.1 million, or
103% as a result of continued strong sales of Deer Hunter and Wild Turkey Hunt
for the PC. Children's net revenue increased $2.6 million or 120% as a result of
newly released titles such as Freddi Fish 3: The Case of the Stolen Conch Shell.
The overall increase in net revenues was partially offset by the decrease in
distribution net revenues to $57.1 million, or 54% of net revenues, in 1998 from
$60.8 million, or 65% of net revenues, in the comparable 1997 period, as a
result of Wal-Mart purchasing software directly from several publishers whose
software was previously sold to Wal-Mart by the Company.
Cost of goods sold primarily includes costs of purchased products. Cost of
goods sold for 1998 decreased approximately $0.8 million, or 1.4%, to $57.1
million from $57.9 million in the comparable 1997 period. Cost of goods sold as
a percentage of net revenues decreased to 54.0% in 1998 as compared to 62.0% in
the comparable 1997 period. The decrease, as a percentage of net revenues, was
primarily due to the Company's change in accounting with respect to royalty
advances, resulting in the expensing of such advances to research and
development as incurred, rather than recouping such advances based on sales.
Additionally, the Company's overall sales mix of its published product, which
generally have higher margins, increased to 46% of net revenues in 1998 compared
to 35% in the comparable 1997 period. The decrease in cost of goods sold was
partially offset by the higher sales of console titles, which generally have
higher costs than PC titles. Console titles accounted for 45% of published
product revenue in 1998 compared to 17% during the comparable 1997 period.
Selling and distribution expenses primarily include shipping expenses,
sales and distribution labor expenses, advertising and promotion expenses and
distribution facilities costs. During 1998 these expenses increased
approximately $7.9 million, or 47.9%, to $24.5 million from $16.5 million in the
comparable 1997 period. Selling and distribution expenses as a percentage of net
revenues for 1998 increased to 23.1% as compared to 17.7% in the comparable 1997
period. The increase, as a percentage of net revenues, was primarily
attributable to the increase of print advertising worldwide to support the new
and existing releases of the Company's published product and increased
cooperative advertising associated with higher published Frontline revenues as
compared to the comparable 1997 period. The overall increase was also
attributable to increased sales volume.
General and administrative expenses primarily include personnel expenses,
facilities costs, professional expenses and other overhead charges. These
expenses in 1998 increased approximately $2.0 million, or 23.6%, to $10.7
million from $8.6 million in the comparable 1997 period. General and
administrative expenses as a percentage of net revenues increased to 10.1% in
1998 from 9.2% in the comparable 1997 period. This increase was due primarily to
additional personnel required to support the expansion of the Company's
publishing operations and the related amortization associated with the expansion
of the Company's worldwide facilities and the implementation of enterprise
software to enhance the Company's management information systems worldwide.
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<PAGE> 45
Research and development expenses primarily include payment for royalty
advances to third-party developers on products that are currently in development
and direct costs of internally developing and producing a title such as salaries
and other related costs. These expenses in 1998 increased approximately $8.5
million, or 353.3%, to $10.9 million from $2.4 million in the comparable 1997
period. Research and development expenses as a percentage of net revenues
increased to 10.3% in 1998 from 2.6% in the comparable 1997 period. This
increase is primarily due to the change in accounting effective for the three
months ended March 31, 1998, whereby royalty advances on products that are
currently in development or on sale are expensed as incurred, and the additional
headcount attributable to increased in-house development capacity primarily the
result of the SingleTrac acquisition.
Interest and other income (expense), net, decreased approximately $1.6
million during 1998 to an expense of $1.4 million from income of $0.2 million in
the comparable 1997 period. This decrease was primarily attributable to the
decrease in short-term investments and the increase in interest costs associated
with borrowings under the Company's credit agreement.
The Company's effective tax rate for 1998 was 46% compared to 43% in the
comparable 1997 period. The increase is attributable to the higher proportion of
nondeductible expenses, primarily goodwill, in the current period.
TWELVE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1996
Net revenues increased approximately $165.2 million, or 45.2%, to $530.7
million in 1997 from $365.5 million in 1996. Publishing's net revenues increased
by $113.3 million from $152.4 million to $265.7 million or 74%. This growth in
net revenues was primarily attributable to an increase in Frontline net revenue
of $100.9 from $120.5 million to $221.4 million or 84%. The release of newly
published titles, both domestically and internationally, which included
OddWorld: Abe's Oddysee for the PlayStation, Duke Nukem 3D for Nintendo 64 and
the PlayStation, Hexen for Nintendo 64 and the PlayStation and Total
Annihilation for the PC. The international release of Doom II, Mortal Kombat
Trilogy, San Francisco Rush, NBA Hangtime and Mace for Nintendo 64, the domestic
release of Shadow Warrior for the PC, Critical Depth for the PlayStation, Blood
for the PC and Courier Crisis for the PlayStation, as well as the continuing
strong sales of Duke Nukem 3D and Quake and an increase in royalty income (from
licensing of certain of the Company's products in selected international
markets) also contributed to the growth in net revenues. Children's net revenue
increased $5.6 million from $11.1 million to $16.7 million or 50% primarily as a
result of the release of Putt Putt(R) Travels Through Time(TM). Leisure's net
revenue increased $6.8 million, from $20.8 million to $27.6 million, or 33%, as
a result of increased sales of Deer Hunter, Sportsmen's Paradise and Duke 3D
shareware. Distribution's net revenue increased $53.0 million from $213 million
to $265 million, or 25%, as a result of increases in sales from its existing
mass merchant shelf space and an increase in the number of mass merchant stores
supplied and serviced by the Company. This increase was partially offset by the
reduction in revenues resulting from Wal-Mart's decision in the second half of
1997 to purchase products directly from five publishers whose products had been
previously distributed by the Company.
Cost of goods sold primarily includes costs of purchased products and
royalties paid to software developers. Cost of goods sold increased
approximately $100.6 million, or 46.9%, to $315.1 million in 1997 from $214.6
million in 1996. Cost of goods sold as a percentage of net revenues increased to
59.4% in 1997 as compared to 58.7% in 1996. The increase of 0.7% was primarily
due to the decline in the average wholesale price of the Company's value priced
products and an increase in the sales of Nintendo 64 titles, which have lower
margins. This increase was mostly offset by a shift in the Company's overall
sales mix toward its published products which increased to an aggregate of
approximately 50% of net revenue in 1997 compared to approximately 42% during
1996 and a change in product mix within the products distributed for third
parties to higher margin products.
Selling and distribution expenses primarily include shipping expenses,
sales and distribution labor expenses, advertising and promotion expenses and
distribution facilities costs. These expenses increased approximately $22.5
million, or 29.5%, to $98.7 million in 1997 from $76.2 million in 1996. The
increase is attributable to the overall increase in sales volume. Selling and
distribution expenses as a percentage of net
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<PAGE> 46
revenues for 1997 decreased to 18.6% as compared to 19.9% for 1996. This
decrease was primarily attributable to the reduction of freight as a percentage
of net revenues and the Company realizing greater economies of scale.
General and administrative expenses primarily include personnel expenses,
facilities costs, professional expenses and other overhead charges. These
expenses in 1997 increased approximately $15.4 million, or 46.6%, to $45.6
million in 1997 from $31.2 million in 1996. General and administrative expenses
as a percentage of net revenues decreased to 8.6% in 1997 from 9.5% in 1996.
This increase in expenses was due primarily to additional personnel required to
support the expansion of the Company's research, development and publishing
operations, an increase in the reserve for bad debts and an increase in
depreciation expense due to the write-off of the leasehold improvements at the
Company's former headquarters.
Research and development expenses primarily include direct costs of
developing and producing a title such as salaries and other related costs. These
expenses in 1997 increased approximately $8.2 million, or 145.4%, to $13.8
million from $5.6 million in 1996. Research and development expenses as a
percentage of net revenues increased to 2.6% in 1997 from 1.5% in 1996. This
increase is primarily due to the in-house development of Humongous titles.
The charge for royalty advance write-off of $73.8 million during 1997
represents a change in estimate and accounting whereby royalty advances on
products that are currently in development or on sale were expensed. In
connection with this change, the Company will prospectively expense royalty
advances in a manner comparable with internal software development costs, which
are expensed as incurred.
In connection with the acquisition of SingleTrac, the Company incurred a
charge of $11.0 million for purchased research and development. In addition, the
Company incurred a charge of $2.4 million for a retention bonus for the
SingleTrac employees, which was based on the achievement of certain performance
goals. Pursuant to the SingleTrac purchase agreement, the Company structured a
retention oriented bonus pool of up to approximately $10.0 million in cash and
Common Stock, which was distributed to SingleTrac employees based on the
achievement of certain performance goals of SingleTrac during calendar year
1998.
Merger costs consist of legal, accounting and other professional fees
incurred by the Company for the canceled acquisition of MicroProse, Inc., during
1997 and to complete other acquisitions and for the Company's canceled secondary
stock offering during 1996.
Interest and other income (expense), net, decreased approximately $6.0
million during 1997. This decrease was primarily attributable to the decrease in
short-term investments and cash balances and the interest costs associated with
borrowings under the Company credit agreement.
The Company's effective tax rate, as a percentage of pre-tax income (loss),
decreased in 1997 to 27% compared to 38% in 1996 due to the non-deductible
one-time charge related to the acquisition of in-process research and
development during the year.
For 1997, the net loss was $25.0 million, or $1.87 per share, compared to
net income of $25.1 million, or $1.84 per share for 1996, with earnings per
share for both 1997 and 1996 calculated based on the basic method. Excluding
one-time charges resulting from the charge for the royalty advance expense,
purchased research and development, the retention bonus for the SingleTrac
employees and the merger costs, the Company would have recognized net income of
$33.9 million or $0.51 per share. Exclusive of the one-time charge for merger
costs, net income for 1996 would have been $27.3 million or $0.40 per share.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company's working capital deficit was $138.9
million compared to a working capital surplus of $32.4 million at June 30, 1999.
Cash and cash equivalents were $12.3 million at June 30, 2000 compared to $7.8
million at June 30, 1999.
During the three months ended June 30, 2000, $22.8 million was provided by
financing activities. The cash flow from financing activities primarily was used
to fund $32.3 million for net cash used in operating activities which resulted
from operating losses, and a reduction in the accounts payable balance (for past
due
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<PAGE> 47
accounts). This was offset by a decline in receivables due to a reduction in
volume of revenues and the write-off of aging customer chargebacks relating to
price protection, co-op advertising and uncollectible accounts. Approximately
$0.8 million in cash was used in investing activities to purchase property and
equipment, primarily additional computer hardware and software for the
development of internal systems.
The Company does not currently have any material commitments with respect
to any capital expenditures.
On January 21, 1997, the Company entered into a revolving credit agreement
(as amended, the "Old Credit Agreement") with certain banks expiring on December
31, 1998. On September 11, 1998, the borrowings under the Old Credit Agreement
were repaid and the Old Credit Agreement was terminated.
Simultaneously, on September 11, 1998, the Company entered into the Credit
Agreement with First Union National Bank, as agent for a syndicate of banks
(collectively, the "Banks"), as subsequently amended, expiring on March 31,
2000. Under the Credit Agreement, the Company borrowed approximately $71 million
for ongoing working capital requirements, letters of credit and other general
corporate purposes, secured by domestic accounts receivable and inventory and
other assets of the Company. To induce the Banks to amend the Credit Agreement,
the Company issued on June 29, 1999 to the Banks warrants to purchase, at an
exercise price of $0.05 per share, an aggregate of 150,000 shares of the
Company's Common Stock. Of these, warrants to purchase 55,000 shares of Common
Stock were immediately exercisable, warrants to purchase 50,000 shares of Common
Stock became exercisable on October 31, 1999 and warrants to purchase the
remaining 45,000 shares of Common Stock (the "Bank Warrants") became exercisable
on February 28, 2000 if the Credit Agreement was not repaid prior to that date.
As of February 15, 2000, Parent entered into an agreement with the Banks,
pursuant to which Parent assumed the Banks' interest in the Credit Agreement. In
connection with the assumption by Parent of the Credit Agreement, (i) the
maturity date was extended from March 31, 2000 to June 30, 2000, (ii) the
interest rate, which was the Prime Rate plus 1.0% or LIBOR plus 2.5% at the
option of the Company, was set at LIBOR plus 2.5%, (iii) a $250,000 amendment
fee, which would have been payable to the Banks on March 31, 2000 unless the
Credit Agreement was refinanced by February 16, 2000, was reduced to $125,000
and paid to Parent, (iv) certain mandatory prepayment restrictions and
operational covenants were revised to be less restrictive and (v) revisions were
made to provide alternative letter of credit facilities to the Company. In
addition, in connection with the assumption of the Credit Agreement by Parent,
the Bank Warrants were surrendered and canceled and warrants to acquire 45,000
shares of Common Stock, at an exercise price of $0.05 per share, were issued to
Parent.
On June 29, 2000, Parent and the Company amended the Credit Agreement to
increase the aggregate commitment available under the facility to $125 million
and to extend the maturity date to September 30, 2000.
At June 30, 2000, the Company had outstanding debt of approximately $98.5
million, representing borrowings under the Credit Agreement, and no letters of
credit outstanding.
The Company expects continued volatility in the use of cash due to varying
seasonal, receivable payment cycles and quarterly working capital needs to
finance its publishing businesses and corporate plan of reorganization.
The Company believes that existing cash, cash equivalents and short-term
investments, together with cash expected to be generated from operations, cash
available under the Credit Agreement and continued financial support from Parent
will be sufficient to fund the Company's operations and cash flows for the next
twelve months.
The Company is also party to various litigations arising in the course of
its business, the resolution of none of which, the Company believes, will have a
material adverse effect on the Company's liquidity, financial condition and
results of operations.
The Company entered into a Merger Agreement with INA, a company under
common control, on September 6, 2000. The Company will acquire INA through the
creation of a wholly-owned subsidiary that
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<PAGE> 48
will merge with and into INA, with INA surviving the Merger. Upon completion of
the Merger, INA will be a wholly-owned subsidiary of the Company.
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires companies to recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. The Company will adopt SFAS No. 133 in fiscal 2001,
in accordance with the deferral provision in SFAS No. 137. The adoption of SFAS
No. 133 will not have a material effect on the Company's financial statements.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company is required to adopt SAB 101 no later than the fourth quarter of
fiscal 2001. Infogrames, Inc. is currently evaluating the impact of SAB 101 on
the Company's results of operations and financial position.
In March 2000, the FASB issued Interpretation No. 44 (FIN No. 44),
Accounting for Certain Transactions involving Stock Compensation -- an
Interpretation of APB 25. FIN No. 44 clarifies (i) the definition of employee
for purposes of applying APB Opinion No. 25, (ii) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (iii) the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award, and (iv) the accounting for an exchange of stock compensation
awards in a business combination. FIN No. 44 is effective July 1, 2000, but
certain conclusions in this interpretation cover specific events that occur
after either December 15, 1998, or January 12, 2000. The adoption of certain of
the conclusions of FIN No. 44 covering events occurring during the period after
December 15, 1998 or January 12, 2000 did not have a material effect on the
Company's financial position and results of operations. The Company does not
expect that the adoption of the remaining conclusions will have a material
effect on the financial position or results of operations.
EURO CONVERSION
As part of the European Economic and Monetary Union (EMU), a single
currency (the "Euro") will replace the national currencies of most of the
European countries in which the Company conducts business. The conversion rates
between the Euro and the participating nations' currencies have been fixed
irrevocably as of January 1, 1999, with the participating national currencies
being removed from circulation between January 1, and June 30, 2002 and replaced
by Euro notes and coinage. During the "transition period" from January 1, 1999
through December 31, 2001, public and private entities as well as individuals
may pay for goods and services using either checks, drafts, or wire transfers
denominated in Euros or the participating country's national currency.
Under the regulations governing the transition to a single currency, there
is a "no compulsion, no prohibition" rule which states that no one is obliged to
utilize the Euro until the notes and coinage have been introduced on January 1,
2002. In keeping with this rule, the Company is Euro "compliant" (able to
receive Euro denominated payments and able to invoice in Euros as requested by
vendors and suppliers, respectively) as of January 1, 1999 in the affected
countries. Full conversion of all affected country operations to the Euro is
expected to be completed by the time national currencies are removed from
circulation. Phased conversion to the Euro is currently underway and the effects
on revenues costs and various business strategies are being assessed. The cost
of software and business process conversion is not expected to be material.
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INFOGRAMES NORTH AMERICA, INC.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 65.1% 68.2% 76.9%
----- ----- -----
Gross profit................................................ 34.9% 31.8% 23.1%
Operating expenses:
Selling and marketing....................................... 32.6% 28.9% 16.0%
General and administrative expenses......................... 16.2% 11.1% 12.9%
Research and development.................................... 27.2% 8.7% 8.7%
In-process research and development......................... 0.0% 7.9% 0.0%
Amortization of intangible assets........................... 17.8% 13.7% 17.5%
Write-down of intangible assets............................. 7.7% 0.0% 0.0%
Other operating income, net................................. -0.8% -0.8% -0.4%
----- ----- -----
Total operating expenses.................................... 100.8% 69.6% 54.7%
----- ----- -----
Loss from operations........................................ -65.9% -37.7% -31.6%
Interest income............................................. 0.0% 1.3% 0.2%
Interest income -- related party............................ 0.0% 0.1% 0.2%
Interest expense............................................ -1.7% -0.8% -0.5%
Interest expense -- related party........................... -2.7% -0.9% -2.0%
----- ----- -----
Loss before income taxes.................................... -70.2% -38.1% -33.8%
Provision for income taxes.................................. 0.5% 0.0% 0.0%
----- ----- -----
Net loss.................................................... -70.7% -38.1% -33.8%
===== ===== =====
</TABLE>
OVERVIEW
INA was incorporated in 1984 as Accolade, Inc. ("Accolade"). On April 15,
1999, CUSH acquired all of INA's outstanding capital stock pursuant to an
Agreement and Plan of Reorganization among Accolade, Parent, CUSH, I Merger Sub,
Inc. and certain shareholders of Accolade named therein for aggregate
consideration of approximately $48.5 million. On October 21, 1999, Accolade
changed its name to Infogrames North America, Inc. On March 1, 2000, INA and
Infogrames Entertainment, Inc., a wholly owned subsidiary of CUSH ("IEI"),
merged pursuant to a merger agreement under which INA was the surviving
corporation.
INA develops and publishes interactive entertainment software for the video
game market across a variety of platforms, including the Sony PlayStation(R) and
PlayStation(R) 2, Nintendo(R) 64, Nintendo(R) Game Boy(R) Color, Sega(R)
Dreamcast(R), and personal computers. Game franchises published by INA include
Test Drive(R), V-Rally(R), Independence War(R), Unreal(R), Hardball(R), and
Alone in the Dark(R). INA is also known for its long list of well-known licenses
including Warner Bros. Looney Tunes(R), Mission: Impossible(R), Le Mans 24
Hours(R), AM General Hummer(R), and Dodge(R) Viper.
RESULTS OF OPERATIONS
Twelve months ended June 30, 2000 compared to twelve months ended June 30,
1999
Net revenues for fiscal year 2000 increased approximately $21.9 million or
43.8%, to $72.0 million from $50.1 million in fiscal 1999. This growth in net
revenues was attributable to the consolidation of Accolade's North American
publishing net revenues of $30.8 million. A significant portion of revenues
generated by Accolade's North American publishing during fiscal year 2000 was
attributable to the release in October 1999 of Test Drive Off Road 4 for the
Playstation, PC and Game Boy platforms, in November 1999 of Test Drive 6
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<PAGE> 50
for the Playstation, Dreamcast, PC and Game Boy platform and the release in
November 1999 of Slave Zero for the Dreamcast and PC platform.
This increase in net revenues has been partially offset by a reduction of
$8.9 million, or 17.8% to $41.0 million from $49.9 million in the net revenues
generated by Infogrames Entertainment, Inc.'s North American publishing. This
decrease is primarily attributable to the decrease in revenues generated by
Mission: Impossible for the Nintendo 64, from approximately $25.0 million during
fiscal year 1999 or approximately 49.9% of the total revenues, to $1.0 million
during fiscal year 2000. See "Infogrames North America Risk factors -- Reliance
on hit titles."
Cost of goods sold for fiscal 2000 increased approximately $12.7 million,
or approximately 37.2%, to $46.9 million from $34.2 million. Cost of goods sold
as a percentage of net revenues decreased to 65.1% as compared to 68.2% in
fiscal 1999. This decrease is due to changes in the reduction in the percentage
of products sold on higher royalty rate platforms, specifically a reduction in
the portion attributable to the sales of products for the Nintendo 64 platform.
Selling and marketing expenses primarily include the expenses of
advertising and promotion, the sales and marketing organization, shipping and
distribution. During fiscal 2000 these expenses increased approximately $9.0
million, or 61.8%, to $23.5 million from $14.5 million in fiscal 1999. The
increase was primarily attributable to the increase in the number of products
released in fiscal 2000 compared to fiscal 1999, from 16 to 67, to the increase
in the size of the marketing and public relations organization and to the
increase in television, print and other advertising to $12.5 million from $9.1
million in fiscal 1999. Selling and marketing expenses increased as a percentage
of net revenues to 32.6% as compared to 28.9% in fiscal 1999.
General and administrative expenses primarily included personnel expenses,
facilities costs, professional expenses and overhead charges. These expenses in
fiscal 2000 increased approximately $6.1 million, or 109.8% to $11.7 million
from $5.6 million in fiscal 1999. This increase was primarily a consequence of
the consolidation of Accolade, both expenses relating directly to the
acquisition and expenses due to the increased size of the organization and of
the management. In particular, salaries increased $2.0 million, from $0.7
million in fiscal 1999 to $2.7 million in fiscal 2000, insurance expenses
increased $0.9 million, from $0.1 million in fiscal 1999 to $1.0 million in
fiscal 2000, legal and professional fees increased $0.8 million, from $0.5
million in fiscal 1999 to $1.3 million in fiscal 2000 and management fees
invoiced by Parent for consulting and management support increased $0.8 million,
from $0.2 million in fiscal 1999 to $1.0 million in fiscal 2000.
Research and development expenses primarily include payment for royalty
advances to third party developers on products that are currently in development
and direct costs of internally developing and producing a title such as salaries
and other related costs. These expenses in fiscal 2000 increased approximately
$15.2 million or 348.9% to $19.6 million from $4.4 million in fiscal 1999. This
increase was primarily due to the increase in internal development capability
resulting from the combination with Accolade and the increase in advances paid
to external developers as the company began to prepare for the arrival of next
generation platforms by investing in more products with the higher development
budgets.
In 1999, INA recorded a one-time in-process research and development charge
of $3.9 million for purchased in-process research and development related to the
Accolade acquisition. This charge related to the portion of these products,
excluding existing technology, that had not reached technological feasibility,
had no alternative future use and for which successful development was
uncertain. No such charge was made in 2000.
Amortization of intangible assets increased approximately $5.9 million, or
87.5%, in fiscal 2000 to $12.8 million from $6.9 million, as a consequence of
the combination with Accolade. In fiscal 2000, the Company also wrote-off
approximately $5.6 million of the remaining intangible assets relating to the
creation of the company under the provisions of Statement of Financial
Accounting Standards No. 121.
Interest expenses increased approximately $2.3 million during fiscal year
2000 to $3.1 million from $0.8 million in fiscal 1999. This increase was
attributable to the increase in interest costs associated with increased
borrowings under the lines of credit with Banque Nationale de Paris and
increased borrowings under the credit facility agreement with Parent.
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<PAGE> 51
Twelve months ended June 30, 1999 compared to twelve months ended June 30,
1998
Net revenues for fiscal year 1999 increased approximately $22.4 million or
80.8%, to $50.1 million from $27.7 million in fiscal 1998. This growth in net
revenues was attributable to the release in July 1998 of Mission: Impossible for
the Nintendo 64 that generated approximately $25.0 million in revenues during
fiscal year 1999.
Cost of goods sold for fiscal 1999 increased approximately $12.9 million,
or approximately 60.2%, to $34.2 million from $21.3 million. Cost of goods sold
as a percentage of net revenues decreased to 68.2% as compared to 76.9% in
fiscal 1998. This decrease is mainly due to the reductions in average markdowns
and discounts due to the successful sales of Mission: Impossible and to the
reduction in the percentage of products sold on higher royalty rate platforms,
specifically a reduction in the portion attributable to the sales of products
for the Nintendo 64 and Game Boy platform.
Selling and marketing expenses primarily include the expenses of
advertising and promotion, the sales and marketing organization, shipping and
distribution. During fiscal 1999 these expenses increased approximately $10.1
million, or 226.2%, to $14.5 million from $4.4 million in fiscal 1998. The
increase was primarily attributable to the increase in television, print, movie
trailers and other advertising in connection with the launch of Mission:
Impossible and to the movie trailer campaign promoting the launch of a Looney
Tunes line of products in June 1999. Advertising costs increased approximately
$6.9 million, or 293.8%, to $9.2 million from $2.3 million in fiscal 1998. For
the same reasons, selling and marketing expenses increased as a percentage of
net revenues to 28.9% as compared to 16.0% in fiscal 1999.
General and administrative expenses primarily included personnel expenses,
facilities costs, professional expenses and overhead charges. These expenses in
fiscal 1999 increased approximately $2.0 million, or 56.3% to $5.6 million from
$3.6 million in fiscal 1998. This increase was primarily a consequence of the
increased size of the organization and of the management. General and
administrative expenses decreased as a percentage of net revenues to 11.1% as
compared to 12.9% in fiscal 1998.
Research and development expenses primarily include payment for royalty
advances to third party developers on products that are currently in development
and direct costs of internally developing and producing a title such as salaries
and other related costs. These expenses in fiscal 1999 increased approximately
$2.0 million or 81.3% to $4.4 million from $2.4 million in fiscal 1998. Of this
increase, $3.9 million can be attributed to the combination with Accolade and
the associated internal development expenses and advances paid to external
developers. This increase has been partially offset by a reduction of $1.9
million, to $0.5 million from $2.4 million in the research and development
expenses attributable to the completion of the development of Mission:
Impossible.
In 1999, INA recorded a one-time in-process research and development charge
of $3.9 million for purchased in-process research and development related to the
Accolade acquisition. This charge related to the portion of these products,
excluding existing technology, that had not reached technological feasibility,
had no alternative future use and for which successful development was
uncertain. No such charge was made in 1998.
Amortization of intangible assets increased approximately $2.1 million, or
41.5%, in fiscal 1999 to $6.9 million from $4.8 million in fiscal 1998 as a
consequence of the combination with Accolade.
Interest expenses increased approximately $0.2 million during fiscal year
1999 to $0.8 million from $0.6 million in fiscal 1998. This increase was
attributable to the increase in weighted average outstanding debt during 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, INA's working capital deficit was ($53.4) million
compared to ($7.6) million at June 30, 1999. Cash and cash equivalents were $1.2
million at June 30, 2000 compared to $1.2 million at June 30,1999.
During the twelve months ended June 30, 2000, $41.7 million was provided by
financing activities. INA repaid $8.5 million of its revolving line of credit
with Banque de Ile de France (BDEI) representing the entire
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<PAGE> 52
principal balance and entered into a new revolving line of credit agreement with
Banque National De Paris, as further described below, for a $35 million line of
credit. Borrowings as of June 30, 2000 were approximately $31.1 million. The
cash flow from financing activities was primarily used to fund $37.3 million of
net cash used in operating activities which resulted from operating losses, and
an increase in accounts receivable. Approximately $4.6 million in cash was used
in investing activities to purchase $3.6 million in investments and $2.0 million
in property and equipment, partially offset by $1.1 million in proceeds from the
sale of investments.
INA has commitments related to operating leases of $1.2 million and advance
royalty payments under certain royalty agreements of $7.6 million. These advance
royalty payments are not guaranteed and are dependent in part on the delivery of
contracted services of the licensor.
On March 20, 2000, INA entered into a revolving line of credit agreement
with Banque Nationale de Paris expiring on September 30, 2000. In July 1999, the
principal borrowings under the BDEI agreement were repaid and the agreement was
terminated.
INA has an agreement with the Parent from which it used borrowing proceeds
to fund operations. As of June 30, 2000, INA had outstanding debt of
approximately $26.2 million under this agreement.
On March 1, 2000, Ocean International Limited, a related party, transferred
its investment in Infogrames Entertainment Inc. to Infogrames North America,
Inc. in an exchange for a $25.0 million promissory note. This promissory note
expires on March 1, 2005.
At June 30, 2000, INA had total outstanding debt of $88.1 million
representing borrowings mentioned above, as well as various inter-company
agreements.
Additionally, INA is involved in various claims and legal actions arising
in the ordinary course of business, the ultimate resolution of which management
believes will not be material to INA's liquidity, financial condition or results
of operations.
INA expects the continued volatility in the use of cash due to varying
seasonal payment cycles and working capital needs to finance its business
activities.
INA believes that existing cash, cash equivalents, and short term
investments, together with cash available under the revolving line of credit
agreement and continued financial support from Parent will be sufficient to fund
INA's operations and cash flows through fiscal 2001.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INFOGRAMES, INC.
Due to the global nature of the Company's operations, the Company is
subject to the exposures that arise from foreign exchange rate fluctuations. The
Company's objective in managing its exposure to foreign currency fluctuations is
to minimize net earnings volatility associated with foreign exchange rate
changes. The Company may enter into foreign currency forward exchange contracts
to hedge foreign currency transactions which are primarily related to certain
receivables denominated in foreign currencies. The Company's hedging activities
do not subject it to exchange rate risk because gains and losses on these
contracts offset losses and gains on the assets, liabilities and transactions
being hedged.
The Company is not exposed to material future earnings or cash flow
exposures from changes in interest rates on long-term obligations since the
majority of the Company's long-term obligations are at fixed rates.
INFOGRAMES NORTH AMERICA, INC.
INA is subject to market risks associated with foreign exchange rate
fluctuations and has sought to address such risks through strategies similar to
those used by the Company.
49
<PAGE> 53
CHANGE OF ACCOUNTANTS
On March 20, 2000, the Company's Board of Directors appointed Deloitte &
Touche LLP as its independent accountants, replacing Arthur Andersen LLP (the
"Former Accountants").
During the Company's two most recent fiscal years, there were no
disagreements with the Former Accountants on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of the Former
Accountants, would have caused them to make reference to the subject matter of
the disagreement in their report. None of the Former Accountants' reports on the
Company's financial statements for either of the past two years contained an
adverse opinion or disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope, or accounting principles.
50
<PAGE> 54
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
INFOGRAMES, INC.
The following table sets forth information, as of May 15, 2000, concerning
the Company Common Stock beneficially owned by (i) each director and nominee of
the Company, (ii) the Company's Chief Executive Officer, its two most highly
compensated executive officers as of March 31, 2000 and its two other most
highly paid executive officers during the fiscal year ended March 31, 2000 and
all executive officers and directors as a group and (iii) each stockholder known
by the Company to be the beneficial owner of more than 5% of the outstanding
Company Common Stock. Unless otherwise indicated in the footnotes to the table,
the beneficial owners named have, to the knowledge of the Company, sole voting
and dispositive power with respect to the shares beneficially owned, subject to
community property laws where applicable. The number of shares of Company Common
Stock reflects the one-for-five reverse stock split effected on June 26, 2000.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL
OWNERSHIP OF
SHARES OF
NAME OF BENEFICIAL OWNER COMMON STOCK(1) PERCENTAGE**
------------------------ ----------------- ------------
<S> <C> <C>
General Atlantic Partners, LLC.............................. 3,985,705(2) 17.2
3 Pickwick Plaza, Greenwich, CT 06830
Steven A. Denning........................................... 3,985,705(3) 17.2
California U.S. Holdings, Inc............................... 20,368,296(4) 71.8
84, rue du ler Mars 1943,
Villeurbanne, 69100 France
Infogrames Entertainment SA................................. 20,368,296(5) 71.8
84, rue du ler Mars 1943,
Villeurbanne, 69100 France
Bruno Bonnell............................................... 20,368,296(5) 71.8
Thomas Schmider............................................. 20,368,296(5) 71.8
Thomas A. Heymann........................................... 112,500(6) *
Ann E. Kronen............................................... 0(7) *
Denis Guyennot.............................................. 0(8) *
Charles F. Bond............................................. 6,200(9) *
Harry M. Rubin.............................................. 115,546(10) *
John T. Baker IV............................................ 0(11) *
David J. Fremed............................................. 340(12) *
All executive officers and directors as a group (9
persons).................................................. 24,588,587(13) 79.0%
</TABLE>
---------------
* Less than 1%
** As of May 15, 2000, 20,675,233 shares of Company Common Stock were
outstanding, excluding shares issuable upon exercise or conversion of
outstanding options, warrants, convertible notes and other convertible
securities.
(1) For purposes of this table, beneficial ownership of securities is defined
in accordance with the rules of the SEC and means generally the power to
vote or exercise investment discretion with respect to securities,
regardless of any economic interests therein. Except as otherwise
indicated, the beneficial owners of shares of Company Common Stock listed
above have sole investment and voting power with respect to such shares,
subject to community property laws where applicable. In addition, for
purposes of this table, a person or group is deemed to have "beneficial
ownership" of any shares that such person has the right to acquire by July
14, 2000. For purposes of calculating the percentage of outstanding shares
held by each person listed above, any shares which such person has the
right to acquire by July 14, 2000
51
<PAGE> 55
are deemed to be outstanding, but not for the purpose of calculating the
percentage ownership of any other person.
(2) Includes (i) 836,909 shares held by General Atlantic Partners 16, L.P.
("GAP 16"), 418,455 shares held by General Atlantic Partners 19, L.P. ("GAP
19"), 129,541 shares held by GAP Coinvestment Partners, L.P. ("GAP
Coinvestment") and 100,800 shares held by General Atlantic Partners II,
L.P. ("GAP II"), and (ii) 2,040,600 shares of Company Common Stock issuable
upon conversion of a convertible note held by General Atlantic Partners 54,
L.P. ("GAP 54") and 59,400 shares of Company Common Stock issuable upon
conversion of a convertible note held by GAP Coinvestment Partners II, L.P.
("GAP Coinvestment II"). The general partner of GAP 16, GAP 19, GAP II and
GAP 54 is General Atlantic Partners, LLC, a Delaware limited liability
company. The managing members of General Atlantic Partners, LLC are also
the general partners of GAP Coinvestment and GAP Coinvestment II. Mr.
Denning, a director of the Company, is the Executive Managing Member of
General Atlantic Partners, LLC and a general partner of GAP Coinvestment
and GAP Coinvestment II. Mr. Denning disclaims beneficial ownership of
shares owned by GAP 16, GAP 19, GAP 54 and GAP Coinvestment, GAP
Coinvestment II and GAP II, except to the extent of his pecuniary interest
therein.
(3) See footnote 2.
(4) Includes a proxy for the vote of 260,000 shares of Company Common Stock
held by the Cayre family; 955,000 shares of Company Common Stock issuable
upon exercise of warrants; and 6,727,304 shares of Company Common Stock
issuable upon conversion of a convertible note. Parent may be deemed to
beneficially own all of the shares held by CUSH because CUSH is a
wholly-owned subsidiary of Parent. Mr. Bruno Bonnell may be deemed to
beneficially own all of the shares held by CUSH because he is the Chairman
of the Board of Directors, President and Chief Executive Officer of Parent.
Mr. Thomas Schmider may be deemed to beneficially own all of the shares
held by CUSH because he is the Managing Director of Parent. Each of Mr.
Bonnell and Mr. Schmider disclaims beneficial ownership of such shares.
(5) See footnote 4. Messrs. Bonnell and Schmider were elected to serve as
members of the Board of Directors of the Company on December 16, 1999. Mr.
Bonnell was elected Chairman of the Board and Chief Executive Officer of
the Company effective February 11, 2000. Mr. Bonnell is the beneficial
owner of approximately 9% of Parent. Mr. Schmider is the beneficial owner
of approximately 8% of Parent.
(6) Mr. Heymann is a Director of the Company. Mr. Heymann resigned as Chairman
of the Board and Chief Executive Officer of the Company effective February
11, 2000. Represents 112,500 shares underlying options exercisable within
60 days.
(7) Ms. Kronen is a Director of the Company.
(8) Mr. Guyennot is a Director and the President and Chief Operating Officer of
the Company.
(9) Mr. Bond resigned as President, Value Products, Close-Outs Division
effective January 31, 2000. Represents 6,200 shares underlying options
exercisable within 60 days.
(10) Mr. Rubin is President, International Division of the Company. Represents
115,546 shares underlying options exercisable within 60 days.
(11) Mr. Baker resigned as President and Chief Operating Officer of the Company
effective February 18, 2000.
(12) Mr. Fremed is Senior Vice President, Finance and Chief Financial Officer of
the Company. Represents 340 shares owned by Mr. Fremed.
(13) See footnote 1. Includes (i) 955,000 shares issuable upon the exercise of
warrants to purchase Common Stock; (ii) 6,727,304 shares issuable upon
conversion of the note held by CUSH; (iii) 2,500,000 shares issuable upon
conversion of the notes held by GAP Coinvestment II and GAP 54; and (iv)
34,246 shares subject to options exercisable within 60 days.
52
<PAGE> 56
INFOGRAMES NORTH AMERICA, INC.
CUSH owns 100% of the outstanding capital stock of INA and has sole voting
and dispositive power with respect to its shares.
FINANCIAL AND OTHER INFORMATION
Attached hereto as Exhibit B are the Company's audited financial statements
as set forth in the Company's Transition Report for the Three Months Ended June
30, 2000 on Form 10-K, filed with the Commission on September 11, 2000.
Attached hereto as Exhibit C is certain audited financial information on
INA and IEI for the twelve month periods ended June 30, 2000, 1999 and 1998.
Attached hereto as Exhibit D are certain pro forma combined financial
information on both companies as of June 30, 2000.
MISCELLANEOUS
FORWARD-LOOKING STATEMENTS
When used in this Information Statement, the words "intends," "expects,"
"plans," "estimates," "projects," "believes," "anticipates" and similar
expressions are intended to identify forward-looking statements. Except for
historical information contained herein, the matters discussed and the
statements made herein concerning the Company's future prospects are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Although the Company believes that its plans, intentions and
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such plans, intentions or expectations will be achieved.
There can be no assurance that future results will be achieved, and actual
results could differ materially from the forecast and estimates. Important
factors that could cause actual results to differ materially include, but are
not limited to, worldwide business and industry conditions (including consumer
buying and retailer ordering patterns), adoption of new hardware systems,
product delays, changes in research and development spending, software
development requirements and their impact on product launches, Company customer
relations, retail acceptance of the Company's published and third-party titles,
competitive conditions and other risk factors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the directors and executive
officers of the Company and persons who beneficially own more than ten percent
of the Common Stock (collectively, the "Reporting Persons") to report their
ownership of and transactions in the Common Stock to the SEC. Copies of these
reports are also required to be supplied to the Company. The Company believes,
upon a review of the copies of such reports received by the Company and written
representations furnished by the Reporting Persons to the Company, that during
the three months ended June 30, 2000 the Reporting Persons complied with all
applicable Section 16(a) reporting requirements.
TRANSFER AGENT AND REGISTRAR FOR INFOGRAMES, INC.
The transfer agent and registrar for the Company Common Stock is American
Stock Transfer and Trust Company.
WHERE YOU CAN FIND MORE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the SEC. Reports, proxy statements and other information filed
by the Company, including the Transition Report on Form 10-K for the Three
Months
53
<PAGE> 57
Ended June 30, 2000, incorporated herein by reference, can be inspected and
copied at the public reference facilities at the SEC's office at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at the SEC's
Regional Office at Seven World Trade Center, Suite 1300, New York, New York
10048, and at the SEC's Regional Office at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C., at prescribed rates. Such reports, proxy statements and
other information concerning Digital can also be inspected and copied at the
offices of The National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, D.C. 20006. Such material may also be accessed electronically
by means of the SEC's home page on the Internet at http://www.sec.gov.
By Order of the Board of Directors
/s/ BRUNO BONNELL
--------------------------------------
Bruno Bonnell
Chairman and Chief Executive Officer
54
<PAGE> 58
EXHIBITS TO INFORMATION STATEMENT
<TABLE>
<S> <C>
Exhibit A: Agreement and Plan of Merger
Exhibit B: Audited Financial Statements of Infogrames, Inc.
Exhibit C: Audited Financial Statements of Infogrames North America,
Inc. and Infogrames Entertainment, Inc.
Exhibit D: Pro Forma Consolidating Financial Statements of Infogrames,
Inc. and Infogrames North America, Inc. for the Period Ended
June 30, 2000
Exhibit E: Fairness Opinion from Lehman Brothers Inc., dated September
6, 2000
</TABLE>
55
<PAGE> 59
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
<PAGE> 60
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
INFOGRAMES, INC.
INA MERGER SUB, INC.,
INFOGRAMES ENTERTAINMENT SA,
CALIFORNIA U.S. HOLDINGS, INC.
AND
INFOGRAMES NORTH AMERICA, INC.
DATED AS OF SEPTEMBER 6, 2000
<PAGE> 61
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I DEFINITIONS
Section 1.1. Certain Definitions......................................... A-1
Section 1.2. Terms Generally............................................. A-5
ARTICLE II THE MERGER AND RELATED MATTERS; CONVERSION OF SECURITIES
Section 2.1. Merger; Effective Time...................................... A-5
Section 2.2. Effects of the Merger....................................... A-6
Section 2.3. Articles of Incorporation of Surviving Corporation A-6
Section 2.4. Bylaws of the Surviving Corporation......................... A-6
Section 2.5. Directors and Officers of Surviving Corporation............. A-6
Section 2.6. Closing..................................................... A-6
Section 2.7. Conversion of Securities.................................... A-6
Section 2.8. Delivery of Shares.......................................... A-6
Section 2.9. Changes in Buyer Common Stock............................... A-6
Section 2.10. Registration Rights......................................... A-7
Section 2.11. Information Statement....................................... A-7
Section 2.12. Distribution Agreement...................................... A-7
Section 2.13. Credit Agreement............................................ A-7
Section 2.14. Exercise of Warrants........................................ A-8
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 3.1. Organization and Good Standing.............................. A-8
Section 3.2. Capitalization.............................................. A-8
Section 3.3. Subsidiaries................................................ A-8
Section 3.4. Authorization; Binding Agreement............................ A-9
Section 3.5. Governmental Approvals...................................... A-9
Section 3.6. No Violations............................................... A-9
Section 3.7. Company Financial Statements................................ A-9
Section 3.8. Absence of Certain Changes or Events........................ A-10
Section 3.9. No Undisclosed Liabilities.................................. A-10
Section 3.10. Compliance with Laws........................................ A-10
Section 3.11. Permits..................................................... A-10
Section 3.12. Litigation.................................................. A-10
Section 3.13. Contracts................................................... A-11
Section 3.14. Employee Benefit Plans...................................... A-11
Section 3.15. Taxes and Returns........................................... A-12
Section 3.16. Intellectual Property....................................... A-13
Section 3.17. Labor Matters............................................... A-14
Section 3.18. Limitation on Business Conduct.............................. A-14
Section 3.19. Property.................................................... A-15
</TABLE>
i
<PAGE> 62
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 3.20. Environmental Matters....................................... A-15
Section 3.21. Insurance................................................... A-16
Section 3.22. Finders and Investment Bankers.............................. A-16
Section 3.23. Full Disclosure............................................. A-16
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND CUSH
Section 4.1. Organization and Good Standing.............................. A-16
Section 4.2. Authorization; Binding Agreement............................ A-17
Section 4.3. Governmental Approvals...................................... A-17
Section 4.4. No Violations............................................... A-17
Section 4.5. Securities Laws............................................. A-17
Section 4.6. Disclosure Documents........................................ A-18
Section 4.7. Finders and Investment Bankers.............................. A-18
ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER AND
MERGER SUB
Section 5.1. Organization and Good Standing.............................. A-18
Section 5.2. Capitalization.............................................. A-18
Section 5.3. Subsidiaries................................................ A-19
Section 5.4. Authorization; Binding Agreement............................ A-20
Section 5.5. Governmental Approvals...................................... A-20
Section 5.6. No Violations............................................... A-20
Section 5.7. Securities Filings.......................................... A-20
Section 5.8. Buyer Financial Statements.................................. A-21
Section 5.9. Absence of Certain Changes or Events........................ A-21
Section 5.10. No Undisclosed Liabilities.................................. A-21
Section 5.11. Compliance with Laws........................................ A-21
Section 5.12. Permits..................................................... A-22
Section 5.13. Litigation.................................................. A-22
Section 5.14. Contracts................................................... A-22
Section 5.15. Employee Benefit Plans...................................... A-22
Section 5.16. Taxes and Returns........................................... A-24
Section 5.17. Intellectual Property....................................... A-24
Section 5.18. Buyer Securities............................................ A-25
Section 5.19. Labor Matters............................................... A-26
Section 5.20. Limitation on Business Conduct.............................. A-26
Section 5.21. Property.................................................... A-26
Section 5.22. Environmental Matters....................................... A-26
Section 5.23. Insurance................................................... A-27
Section 5.24. Finders and Investment Bankers.............................. A-27
Section 5.25. Fairness Opinion............................................ A-27
Section 5.26. Takeover Statutes........................................... A-27
Section 5.27. Full Disclosure............................................. A-28
</TABLE>
ii
<PAGE> 63
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 5.28. Year 2000................................................... A-28
Section 5.29. Expenses.................................................... A-28
ARTICLE VI ADDITIONAL COVENANTS
Section 6.1. Conduct of Business by the Company Pending the Merger....... A-28
Section 6.2. Conduct of Business by Buyer and Merger Sub Pending the A-30
Merger......................................................
Section 6.3. Confidentiality............................................. A-31
Section 6.4. Notification of Certain Matters............................. A-32
Section 6.5. Access and Information...................................... A-32
Section 6.6. Reasonable Best Efforts..................................... A-32
Section 6.7. Public Announcements........................................ A-33
Section 6.8. Business Opportunities...................................... A-33
Section 6.9. Employment Arrangements..................................... A-33
Section 6.10. Tax Sharing Agreement....................................... A-34
Section 6.11. Credit Arrangements......................................... A-34
ARTICLE VII CONDITIONS TO CLOSING
Section 7.1. Conditions Precedent to Obligations of Buyer, Merger Sub and A-34
the Company.................................................
Section 7.2. Conditions Precedent to Obligation of the Company........... A-35
Section 7.3. Conditions Precedent to Obligations of Buyer and Merger A-35
Sub.........................................................
ARTICLE VIII TERMINATION
Section 8.1. Termination Events.......................................... A-36
Section 8.2. Effect of Termination....................................... A-36
ARTICLE IX INDEMNIFICATION
Section 9.1. Indemnification by the Parent and CUSH...................... A-37
Section 9.2. Indemnification by Buyer.................................... A-37
Section 9.3. Certain Limitations......................................... A-37
Section 9.4. Indemnification Procedures.................................. A-38
Section 9.5. Exclusive Remedy............................................ A-40
Section 9.6. Mitigation.................................................. A-40
ARTICLE X MISCELLANEOUS
Section 10.1. Parties in Interest......................................... A-41
Section 10.2. Assignment.................................................. A-41
Section 10.3. Notices..................................................... A-41
Section 10.4. Expenses.................................................... A-42
Section 10.5. Amendments and Waivers...................................... A-42
Section 10.6. Exhibits and Disclosure Schedule............................ A-42
Section 10.7. Headings.................................................... A-42
Section 10.8. Construction................................................ A-42
Section 10.9. Entire Agreement............................................ A-43
Section 10.10. Severability................................................ A-43
</TABLE>
iii
<PAGE> 64
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 10.11. Governing Law............................................... A-43
Section 10.12. Consent to Jurisdiction..................................... A-43
Section 10.13. Counterparts................................................ A-43
</TABLE>
SCHEDULES
<TABLE>
<S> <C>
COMPANY'S DISCLOSURE SCHEDULE
3.2 Capitalization
3.3 Subsidiaries
3.6 No Violations
3.8 Absence of Certain Changes or Events
3.9 Undisclosed Liabilities
3.11 Permits
3.12 Litigation
3.13 Material Contracts
3.14 Employee Benefit Plans
3.15 Tax Matters
3.16 Intellectual Property
3.17 Labor Matters
3.18 Conduct of Business
3.19 Property
3.20 Environmental Matters
BUYER'S DISCLOSURE SCHEDULE
5.2 Capitalization
5.3 Subsidiaries
5.6 No Violations
5.7 Securities Filings
5.9 Absence of Certain Changes or Events
5.10 Undisclosed Liabilities
5.12 Permits
5.13 Litigation
5.14 Material Contracts
5.15 Employee Benefit Plans
5.16 Tax Matters
5.17 Intellectual Property
5.19 Labor Matters
5.20 Conduct of Business
5.21 Property
5.22 Environmental Matters
5.28 Year 2000
</TABLE>
iv
<PAGE> 65
AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger dated as of September 6, 2000 by and among
Infogrames, Inc., a Delaware corporation ("Buyer"), INA Merger Sub, Inc., a
California corporation and wholly-owned subsidiary of Buyer ("Merger Sub"),
Infogrames Entertainment SA, a French societe anonyme ("Parent"), California
U.S. Holdings, Inc., a California corporation and wholly-owned subsidiary of
Parent ("CUSH"), and Infogrames North America, Inc., a California corporation
and wholly-owned subsidiary of CUSH (the "Company").
WITNESSETH:
WHEREAS, the Boards of Directors of Buyer, Parent and the Company each have
determined that it is advisable and in the best interests of their respective
stockholders for Merger Sub to merge with and into the Company, with the Company
surviving, on the terms and subject to the conditions set forth herein (the
"Merger");
WHEREAS, CUSH, as the majority stockholder of Buyer, has approved the
Merger and the transactions contemplated hereby; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the parties hereto, intending to become legally
bound, hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1. Certain Definitions. As used in this Agreement, the following
terms shall have the following meanings:
"Action" means any action, suit or proceeding by or before any court or
other Governmental Authority.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"Agreement" means this Agreement and Plan of Merger, including all Exhibits
and Schedules (including the Company's Disclosure Schedule and Buyer's
Disclosure Schedule) hereto, as the same may be amended, modified or
supplemented from time to time in accordance with its terms.
"Basket" has the meaning set forth in Section 9.3(b).
"Business Day" means weekdays other than those on which banking
institutions in New York City are not open for the transaction of normal banking
business.
"Buyer" has the meaning set forth in the preamble to this Agreement.
"Buyer Bylaws" means the Bylaws of Buyer, as amended to the date hereof.
"Buyer Charter" means the Amended and Restated Certificate of Incorporation
of Buyer, as amended to the date hereof.
"Buyer Common Stock" has the meaning set forth in Section 5.2.
"Buyer Employee Plans" has the meaning set forth in Section 5.15(a).
"Buyer Financial Statements" has the meaning set forth in Section 5.8.
A-1
<PAGE> 66
"Buyer Group" has the meaning set forth in Section 9.1.
"Buyer Intellectual Property Rights" has the meaning set forth in Section
5.17.
"Buyer Material Contracts" has the meaning set forth in Section 5.14.
"Buyer Options" has the meaning set forth in Section 5.2.
"Buyer Permits" has the meaning set forth in Section 5.12.
"Buyer Preferred Stock" has the meaning set forth in Section 5.2.
"Buyer Securities Filings" has the meaning set forth in Section 5.7.
"Buyer Warrants" has the meaning set forth in Section 5.2.
"Buyer's Disclosure Schedule" means the disclosure schedule delivered by
Buyer to the Company on the date hereof.
"Certificate of Merger" means the articles of merger with respect to the
Merger, containing the provisions required by, and executed in accordance with,
the GCLC in form and substance reasonably acceptable to the Parties.
"Closing" has the meaning set forth in Section 2.6.
"Closing Date" has the meaning set forth in Section 2.6.
"COBRA" means the Consolidated Omnibus Budget Reconciliation Act of 1985,
as amended.
"Code" has the meaning set forth in the recitals to this Agreement.
"Company" has the meaning set forth in the preamble to this Agreement.
"Company Bylaws" means the Bylaws of the Company, as amended to the date
hereof.
"Company Charter" means the Articles of Incorporation of the Company, as
amended to the date hereof.
"Company Common Stock" means the Company's common stock, no par value.
"Company Domain Names" has the meaning set forth in Section 3.16(f).
"Company Employee Plans" has the meaning set forth in Section 3.14(a).
"Company Financial Statements" has the meaning set forth in Section 3.7.
"Company Intellectual Property" has the meaning set forth in Section
3.16(a)(ii).
"Company Material Contracts" has the meaning set forth in Section 3.13.
"Company Permits" has the meaning set forth in Section 3.11.
"Company Products" has the meaning set forth in Section 3.16(e).
"Company Registered Intellectual Property" has the meaning set forth in
Section 3.16(a)(iii).
"Company's Disclosure Schedule" means the Company's disclosure schedule
delivered by the Company to Buyer on the date hereof, as the same may be
amended, modified or supplemented from time to time in accordance with the terms
of this Agreement.
"Consents" means consents, approvals, exemptions, waivers, authorizations,
filings, registrations and notifications.
"CUSH" has the meaning set forth in the preamble to this Agreement.
"Damages" means all losses, Liabilities, claims, damages, payments, Taxes,
Liens, costs and expenses (including costs and expenses of Actions, amounts paid
in connection with any assessments, judgments or settlements relating thereto,
interest and penalties recovered by a third party with respect thereto and
out-of
A-2
<PAGE> 67
pocket expenses and reasonable attorneys' fees and expenses reasonably incurred
in defending against, appealing or settling any such Actions).
"DGCL" means the Delaware General Corporation Law, as amended to the date
hereof.
"Deed" has the meaning set forth in Section 5.3.
"Distribution Agreement" has the meaning set forth in Section 2.12.
"Edmondson" has the meaning set forth in Section 5.3.
"Effective Time" has the meaning set forth in Section 2.1(b).
"Enforceability Exceptions" means (i) applicable bankruptcy, insolvency,
reorganization, moratorium, and other Laws of general application, heretofore or
hereafter enacted or in effect, affecting the rights and remedies of creditors
generally, and (ii) the exercise of judicial or administrative discretion in
accordance with general equitable principles, particularly as to the
availability of the remedy of specific performance or other injunctive relief.
"Environmental Claims" has the meaning set forth in Section 3.20(e)(i).
"Environmental Laws" has the meaning set forth in Section 3.20(e)(ii).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" has the meaning set forth in Section 3.14(a).
"Form 10-K" has the meaning set forth in Section 5.7.
"GCLC" has the meaning set forth in Section 2.1.
"Governmental Authority" has the meaning set forth in Section 3.5.
"Governmental Consent" has the meaning set forth in Section 3.5.
"Indemnified Claim" has the meaning set forth in Section 9.4(f).
"Indemnified Party" means the Party seeking and entitled to be indemnified
under the terms and provisions of Article IX of this Agreement.
"Indemnifying Party" means the Party from whom indemnification is being
sought under the terms and provisions of Article IX of this Agreement.
"Indemnity Reduction Amounts" has the meaning set forth in Section 9.3(c).
"Information Statement" has the meaning set forth in Section 2.11(a).
"Injunction" means any permanent or preliminary injunction or restraining
order or other similar order issued or entered by any court or Governmental
Authority.
"Intellectual Property" has the meaning set forth in Section 3.16(a)(i).
"Laws" means all applicable laws, statutes, constitutions, rules,
regulations, judgments, rulings, orders, decrees, awards and injunctions of
Governmental Authorities.
"Liability" means any liability (whether known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due), including
any liability for Taxes.
"Lien" means any mortgage, pledge, lien, encumbrance, charge or other
security interest, other than (a) mechanic's, materialmen's, workmen's,
repairmen's and similar Liens, including all statutory Liens, arising or
incurred in the ordinary course of business, (b) Liens for Taxes, assessments
and other governmental charges not yet due and payable or, if due, (1) not
delinquent or (2) being contested in good faith through appropriate proceedings,
(c) purchase money Liens and Liens securing rental payments under capital lease
arrangements, (d) pledges or deposits under workers' compensation legislation,
unemployment
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insurance Laws or similar Laws, (e) good faith deposits in connection with bids,
tenders, leases, contracts or other agreements, including rent security
deposits, (f) pledges or deposits to secure public or statutory obligations or
appeal bonds, (g) Liens referred to in the Company Financial Statements or in
Buyer Financial Statements, as the case may be, (h) Liens referred to in any
Schedule hereto, (i) other Liens not incurred in connection with the borrowing
of money which do not interfere with or impair, in any material respect, the
present operation of the business of the Company or of Buyer, as the case may
be, and (j) in the case of property owned or held by the Company or any of its
Subsidiaries or held by Buyer or any of its Subsidiaries, as the case may be,
easements, covenants and other restrictions which do not materially impair the
current use, occupancy or value of the property subject thereto.
"Litigation" has the meaning set forth in Section 3.12.
"Material Adverse Effect" means, when used in connection with Buyer or any
Buyer Subsidiary, the Company or any Company Subsidiary or Parent or any of its
Subsidiaries, as the case may be, any change, effect or circumstance that,
individually or when taken together with all other such changes, effects or
circumstances that have occurred prior to the date of determination of the
occurrence of the Material Adverse Effect, is or is reasonably likely to be
materially adverse to the business, assets (including intangible assets),
financial condition or results of operations of Buyer and its Subsidiaries,
taken as a whole, the Company and its Subsidiaries, taken as a whole, or Parent
and its Subsidiaries, taken as a whole, as the case may be; provided, however,
that (a) any change, effect or circumstance relating to conditions affecting the
United States economy generally or the economy of any nation or region in which
such entity or any of its Subsidiaries conducts business that is material to the
business of such entity and its Subsidiaries, taken as a whole, shall not be
taken into account in determining whether there has been or would be a "Material
Adverse Effect" on or with respect to such entity; (b) any change, effect or
circumstance relating to conditions generally affecting the entertainment
software industry, and not affecting such entity in a materially
disproportionate manner, shall not be taken into account in determining whether
there has been or would be a "Material Adverse Effect" on or with respect to
such entity; and (c) any change, circumstance or effect caused by the
announcement or pendency of this Agreement, or the transactions contemplated
hereby shall not be taken into account in determining whether there has been or
would be a "Material Adverse Effect" on or with respect to such entity unless
such change, circumstance or effect has resulted, or reasonably would be
expected to result, in a substantial impairment to such entity's ability to
continue to develop, produce, sell or distribute the products that are material
to such entity's business in substantially the same manner as it has prior to
the date of this Agreement.
"Materials of Environmental Concern" has the meaning set forth in Section
3.20(e)(iii).
"Merger" has the meaning set forth in the recitals to this Agreement.
"Merger Consideration" has the meaning set forth in Section 2.7(b).
"Merger Sub" has the meaning set forth in the preamble to this Agreement.
"NASD" means the National Association of Securities Dealers, Inc.
"NASDAQ" means a distinct tier of The Nasdaq Stock Market comprised of
securities that meet the requirements of and are authorized as Nasdaq National
Market securities.
"Parent" has the meaning set forth in the preamble to this Agreement.
"Parent Group" has the meaning set forth in Section 9.2.
"Parent Information" has the meaning set forth in Section 4.6.
"Parties" or "parties" means Buyer, Merger Sub, Parent, CUSH and the
Company or, with respect to the giving of notices, approvals and waivers
pursuant to this Agreement, means Buyer and the Company.
"Person" means an individual, partnership, limited liability partnership,
corporation, limited liability company, association, joint stock company, trust,
estate, joint venture, unincorporated organization, or governmental entity (or
any department, agency, or political subdivision thereof).
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"RIL" has the meaning set forth in Section 5.3.
"RIL Partnership Property" has the meaning set forth in Section 5.3.
"RIL/Edmondson Partnership" has the meaning set forth in Section 5.3.
"SEC" means the Securities and Exchange Commission.
"Second Amended and Restated Registration Rights Agreement" has the meaning
set forth in Section 2.10.
"Securities" has the meaning set forth in Section 4.5(a).
"Securities Act" means the Securities Act of 1933, as amended, or any
successor law.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any successor law.
"Merger Sub" has the meaning set forth in the preamble to this Agreement.
"Subsidiary" means any "subsidiary" (as such term is defined in Rule 1-02
of Regulation S-X of the SEC) of such Person.
"Surviving Corporation" has the meaning set forth in Section 2.1.
"Tax" has the meaning set forth in Section 3.15(b).
"Tax Return" has the meaning set forth in Section 3.15(b).
"Third Party Claim" has the meaning set forth in Section 9.4(a).
Section 1.2. Terms Generally. The definitions in Section 1.1 shall apply
equally to both the singular and plural forms of the terms defined. Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words "include", "includes" and "including" shall
be deemed to be followed by the phrase "without limitation". The words "herein",
"hereof" and "hereunder" and words of similar import refer to this Agreement in
its entirety and not to any part hereof unless the context shall otherwise
require. All references herein to Articles, Sections, Exhibits, the Company's
Disclosure Schedule and Buyer's Disclosure Schedule shall be deemed references
to Articles and Sections of, and Exhibits and the Company's Disclosure Schedule
and Buyer's Disclosure Schedule to this Agreement unless the context shall
otherwise require. Unless the context shall otherwise require, any references to
any agreement or other instrument or statute or regulation are to it as amended
and supplemented from time to time (and, in the case of a statute or regulation,
to any successor provisions). Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. Any
reference in this Agreement to a "day" or a number of "days" (without explicit
reference to "Business Days") shall be interpreted as a reference to a calendar
day or number of calendar days. If any action is to be taken or given on or by a
particular calendar day, and such calendar day is not a Business Day, then such
action may be deferred until the next Business Day.
ARTICLE II
THE MERGER AND RELATED MATTERS; CONVERSION OF SECURITIES
Section 2.1. Merger; Effective Time.
(a) Upon the terms and subject to the satisfaction or waiver of the
conditions hereof, and in accordance with the applicable provisions of this
Agreement and the General Corporation Law of California (the "GCLC"), Merger Sub
shall merge with and into the Company, and the Company shall be the successor or
surviving corporation (the "Surviving Corporation") in the Merger.
(b) Subject to the provisions of this Agreement, as soon as practicable on
the Closing Date, the parties shall file the Certificate of Merger executed in
accordance with the relevant provisions of the GCLC and shall
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make all other filings or recordings required under the GCLC and any other
applicable Laws to effectuate the Merger. The Merger shall become effective at
such time as the Certificate of Merger is duly filed with the Secretary of State
of the State of California or at such other subsequent date or time as is agreed
upon by the parties and specified in the Certificate of Merger, such time being
referred to herein as the "Effective Time."
Section 2.2. Effects of the Merger. From and after the Effective Time, the
Merger shall have the effects set forth in the GCLC. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time, all the
properties, rights, privileges, powers and franchises of the Company and Merger
Sub shall vest in the Surviving Corporation, and all debts, liabilities,
obligations and duties of the Company and Merger Sub shall become the debts,
liabilities, obligations and duties of the Surviving Corporation.
Section 2.3. Articles of Incorporation of Surviving Corporation. At the
Effective Time, pursuant to the Certificate of Merger, the Company Charter shall
become the Articles of Incorporation of the Surviving Corporation until
thereafter amended in accordance with the terms thereof and applicable Law.
Section 2.4. Bylaws of the Surviving Corporation. At the Effective Time,
the Company Bylaws shall be the Bylaws of the Surviving Corporation until
thereafter amended in accordance with the terms thereof, the Articles of
Incorporation of the Surviving Corporation and applicable Law.
Section 2.5. Directors and Officers of Surviving Corporation. The
directors and officers of the Company at the Effective Time shall, from and
after the Effective Time, be the directors and officers of the Surviving
Corporation until their respective successors are duly elected or appointed and
qualified in accordance with the Articles of Incorporation and Bylaws of the
Surviving Corporation, or as otherwise provided by applicable Law.
Section 2.6. Closing. Unless this Agreement shall have been terminated
pursuant to Article VIII and subject to the satisfaction or, when permissible,
waiver of the conditions set forth in Article VII, the closing of the
transactions contemplated by this Agreement (the "Closing") shall take place (i)
at the offices of Chadbourne & Parke LLP, 30 Rockefeller Plaza, New York, New
York 10112, commencing at 10:00 a.m. local time on the day (the "Closing Date")
which is one Business Day after the date on which the last of the conditions set
forth in Article VII (other than any such conditions which by their terms are
not capable of being satisfied until the Closing Date) is satisfied or, when
permissible, waived, or (ii) on such other date and/or at such other time and/or
place as the Parties may mutually determine.
Section 2.7. Conversion of Securities. At the Effective Time, by virtue of
the Merger and without any action on the part of any holder of any capital stock
of the Company:
(a) Any shares of capital stock of the Company which are held
immediately prior to the Effective Time by any Person other than CUSH, if
any, automatically shall be canceled.
(b) The aggregate shares of Company Common Stock held by CUSH
immediately prior to the Effective Time automatically shall be converted
into and represent the right to receive in the aggregate twenty-eight
million (28,000,000) shares of Buyer Common Stock (the "Merger
Consideration").
(c) Each issued and outstanding share of capital stock of Merger Sub
automatically shall be converted into and become one validly issued, fully
paid and non-assessable share of common stock, no par value per share, of
the Surviving Corporation.
Section 2.8. Delivery of Shares. At or promptly after the Effective Time,
Buyer shall deliver or cause to be delivered to CUSH one or more certificates,
registered in CUSH's name, representing that number of shares of Buyer Common
Stock equal to the Merger Consideration.
Section 2.9. Changes in Buyer Common Stock. If, after the date hereof and
prior to the Effective Time, Buyer Common Stock shall be recapitalized or
reclassified or Buyer shall effect any stock dividend, stock split, or reverse
stock split of Buyer Common Stock or otherwise effect any transaction that
changes Buyer Common Stock into any other securities or any other dividend or
distribution shall be made on Buyer Common Stock (or such other securities),
then the shares of Buyer Common Stock to be delivered under this Agreement to
CUSH shall be appropriately and equitably adjusted to the kind and amount of
shares of stock
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and other securities and property which CUSH would have been entitled to receive
had such shares been issued and outstanding as of the record date for
determining stockholders entitled to participate in such corporate event.
Section 2.10. Registration Rights. At or prior to the Effective Time,
Buyer and CUSH shall cause the Amended and Restated Registration Rights
Agreement, dated as of February 15, 2000, between Buyer and CUSH to be further
amended and restated to include the Buyer Common Stock acquired by CUSH
hereunder (the "Second Amended and Restated Registration Rights Agreement").
Section 2.11. Information Statement
(a) Preparation of Information Statement. Buyer shall, as promptly as
practicable after the date hereof, prepare and file all filings and mailings
required by the Securities Exchange Act, including all filings and mailings
required by Section 14(c) of the Securities Exchange Act and Regulation 14C
promulgated thereunder, and shall prepare and file with the SEC an Information
Statement on Schedule 14C (or any successor form), in form and substance
reasonably satisfactory to the Company and its counsel (the "Information
Statement"), in connection with the transactions contemplated hereby. Each Party
agrees to use its reasonable best efforts to cooperate with each other Party in
connection with the preparation and filing of the Information Statement,
including providing information to the other Party with respect to itself as may
be reasonably required in connection therewith. Each of Buyer and the Company
shall use its reasonable best efforts to respond to any comments of the SEC and
to cause the Information Statement to be mailed to Buyer's stockholders at the
earliest practicable time. Buyer also shall use its reasonable best efforts to
take any action required to be taken under any applicable state securities or
blue sky Laws in connection with the issuance of the Buyer Common Stock,
including all actions to obtain required approvals and clearances with respect
thereto.
(b) SEC Comments; Amendments and Supplements. Each of Buyer and the
Company shall notify the other Party promptly of the receipt of any comments of
the SEC or its staff and of any request by the SEC or its staff or any other
governmental officials for amendments or supplements to the Information
Statement or any other filing or for additional information, and will supply the
other Party with copies of all correspondence between it and any of its
representatives, on the one hand, and the SEC or its staff or any other
governmental officials, on the other hand, with respect to the Information
Statement, the Merger or any other filing relating thereto. The Information
Statement and such other filings shall comply in all material respects with all
applicable requirements of Law. If at any time prior to the Effective Time, any
event shall occur relating to Buyer or the Company, as the case may be, or their
respective Subsidiaries or any of their respective officers, directors,
employers or Affiliates which should be described in an amendment or supplement
to the Information Statement or any other filing, Buyer or the Company, as the
case may be, shall inform the other Party promptly after becoming aware of such
event and cooperate in filing with the SEC or its staff or any other government
officials, and/or mailing to stockholders of Buyer, such amendment or
supplement.
Section 2.12. Distribution Agreement. At or prior to the Effective Time,
(i) Buyer and Parent shall enter into a distribution agreement (the
"Distribution Agreement") to provide for the distribution of Parent's products
in the United States, Canada, and their territories and possessions, on
substantially similar terms as the Distribution Agreement, dated as of December
16, 1999, as amended, between Buyer and Parent for the distribution of Buyer's
products in Europe and Australia, and (ii) Parent and the Company shall cause
the existing License Agreement effective as of January 1, 2000, between the
Company and Infogrames Multimedia SA to be terminated without penalty.
Section 2.13. Credit Agreement. At or prior to the Effective Time, Buyer
and Parent shall cause all outstanding amounts under the $125 million credit
agreement between Buyer and Parent (the "$125 Million Credit Agreement") to be
converted into validly issued, fully paid and non-assessable shares of Common
Stock, at a conversion price per share equal to the average closing sales price
of the Common Stock on the NASDAQ for the thirty (30) trading days immediately
prior to the date hereof (such shares of Common Stock, the "Credit Stock"), and
a certificate for the Credit Stock to be issued in the name of CUSH.
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Section 2.14. Exercise of Warrants. At or prior to the Effective Time,
Buyer and Parent shall cause all outstanding warrants held by Parent and CUSH
(the "Warrants") to be exercised in full for 955,000 validly issued, fully paid
and non-assessable shares of Common Stock (the "Warrant Stock") in accordance
with their respective terms and conditions, and a certificate (or certificates)
for the Warrant Stock to be issued in the name of CUSH.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Buyer and Merger Sub, except as set
forth in the Company's Disclosure Schedule, as follows:
Section 3.1. Organization and Good Standing. Except as set forth in
Schedule 3.1 of the Company's Disclosure Schedule, the Company and each of the
Company Subsidiaries is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation and has
all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted. The Company and
each of the Company Subsidiaries is duly qualified or licensed and in good
standing to do business in each jurisdiction in which the character of the
property owned, leased or operated by it or the nature of the business conducted
by it makes such qualification or licensing necessary, except where the failure
to be so duly qualified or licensed and in good standing would not have a
Material Adverse Effect on the Company. Except as set forth in Schedule 3.1 of
the Company's Disclosure Schedule, the Company has previously made available to
Buyer accurate and complete copies of the organizational documents, as currently
in effect, of the Company and each of the Company Subsidiaries.
Section 3.2. Capitalization. As of the date hereof, the authorized capital
stock of the Company consists of 1,000 shares of Company Common Stock. No other
capital stock of the Company is authorized or issued. CUSH is the sole
beneficial and record owner of all of the outstanding shares of Company Common
Stock. All issued and outstanding shares of the Company Common Stock are duly
authorized, validly issued, fully paid and non-assessable and were issued free
of preemptive rights and in compliance with all applicable Laws. Except as set
forth in Schedule 3.2 of the Company's Disclosure Schedule or as otherwise
contemplated by this Agreement, as of the date hereof, there are no outstanding
rights, subscriptions, warrants, puts, calls, unsatisfied preemptive rights,
options or other agreements to which the Company or any Company Subsidiary is a
party, of any kind relating to any of the outstanding, authorized but unissued
or treasury shares of the capital stock or any other security of the Company,
and there is no authorized or outstanding security of any kind convertible into
or exchangeable for any such capital stock or other security. Except as set
forth in Schedule 3.2 of the Company's Disclosure Schedule, there are no
obligations, contingent or other, of the Company or any Company Subsidiary to
repurchase, redeem or otherwise acquire any shares of the Company Common Stock
or the capital stock of any Company Subsidiary or to provide funds to or make
any investment (in the form of a loan, capital contribution or otherwise) in any
such Company Subsidiary or any other entity. Except as set forth in Schedule 3.2
of the Company's Disclosure Schedule, there are no registration rights, and to
the best knowledge of the Company, there are no voting trusts, proxies or other
agreements or understandings with respect to the voting rights of any class of
the Company's capital stock.
Section 3.3. Subsidiaries. Schedule 3.3 of the Company's Disclosure
Schedule sets forth the name and jurisdiction of incorporation of each Company
Subsidiary, each of which is wholly owned by the Company except for directors'
qualifying shares and except as otherwise set forth in Schedule 3.3 of the
Company's Disclosure Schedule. All of the capital stock and other interests of
the Company Subsidiaries so held by the Company are owned by it or a Company
Subsidiary as set forth in Schedule 3.3 of the Company's Disclosure Schedule,
free and clear of any Liens. All of the outstanding shares of capital stock of
each of the Company Subsidiaries directly or indirectly held by the Company are
duly authorized, validly issued, fully paid and non-assessable and were issued
free of preemptive rights and in compliance with all applicable Laws. No equity
securities or other interests of any of the Company Subsidiaries are or may
become required to be issued or purchased by reason of any options, warrants,
rights to subscribe to, puts, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into or exchangeable for,
shares of any
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capital stock of any Company Subsidiary, and there are no contracts,
commitments, understandings or arrangements by which any Company Subsidiary is
bound to issue additional shares of its capital stock, or options, warrants or
rights to purchase or acquire any additional shares of its capital stock or
securities convertible into or exchangeable for such shares. Except as set forth
in Schedule 3.3 of the Company's Disclosure Schedule, the Company does not
directly or indirectly own any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for any equity or similar
interest in, any corporation, partnership, joint venture or other business
association or entity, with respect to which interest the Company has invested
or is required to invest $20,000 or more or for which the Company or any Company
Subsidiary has liability which is not limited.
Section 3.4. Authorization; Binding Agreement. The Company has all
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly and validly authorized by the Company's Board of Directors
and approved by CUSH, as the sole stockholder of the Company. No other corporate
proceedings on the part of the Company or any Company Subsidiary are necessary
to authorize the execution and delivery of this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by the Company and, assuming the valid authorization,
execution and delivery of this Agreement by the other Parties, constitutes the
legal, valid and binding agreement of the Company, enforceable against the
Company in accordance with its terms, subject to the Enforceability Exceptions.
Section 3.5. Governmental Approvals. No material consent, approval, waiver
or authorization of, notice to or declaration or filing with ("Governmental
Consent") any nation or government, any state or other political subdivision
thereof or any entity, authority or body exercising executive, legislative,
judicial or regulatory functions of or pertaining to government, including,
without limitation, any governmental or regulatory authority, agency,
department, board, commission or instrumentality, any court, or tribunal
("Governmental Authority"), on the part of the Company or any of the Company
Subsidiaries is required in connection with the execution or delivery by the
Company of this Agreement or the consummation by the Company of the transactions
contemplated hereby other than (a) the filing of the Certificate of Merger with
the Secretary of State of the State of California in accordance with the GCLC,
(b) if required, customary filings with the SEC for transactions of the type
contemplated hereby, including all filings and mailings required by Section
14(c) of the Securities Exchange Act and Regulation 14C promulgated thereunder,
(c) if required, filings or consents under any applicable foreign antitrust
requirements, and (d) filings, waivers or consents pursuant to the rules and
regulations of NASDAQ.
Section 3.6. No Violations. Except as set forth in Schedule 3.6 of the
Company's Disclosure Schedule, the execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby and compliance by the
Company with any of the provisions hereof will not (a) conflict with or result
in any breach of any provision of the Company Charter or Company Bylaws or the
organizational documents of any of the Company Subsidiaries, (b) require any
Consent under or result in a violation or breach of, or constitute (with or
without notice or lapse of time or both) a default (or give rise to any right of
termination, cancellation or acceleration) under any of the terms, conditions or
provisions of, any Company Material Contract, (c) result in the creation or
imposition of any material Lien upon any of the assets of the Company or any
Company Subsidiary or (d) subject solely to obtaining the Governmental Consents
from Governmental Authorities referred to in Section 3.5 hereof, violate in any
material way any applicable provision of any Law to which the Company or any
Company Subsidiary or its assets or properties is subject.
Section 3.7. Financial Statements. The Company has previously delivered to
Buyer audited consolidated balance sheets of the Company and its Subsidiaries as
of June 30, 2000, and the related consolidated statements of operations,
stockholders' equity and cash flows for the fiscal year then ended (the "Company
Financial Statements"). The Company Financial Statements have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis (except as may be indicated therein or in the notes thereto) and present
fairly, in all material respects, the financial position of the Company and the
Company Subsidiaries as at the dates thereof and the results of their operations
and cash flows for the periods
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then ended subject, in the case of the unaudited interim financial statements,
to normal year-end audit adjustments, any other adjustments described therein.
Section 3.8. Absence of Certain Changes or Events.
(a) Except as set forth in Schedule 3.8(a) of the Company's Disclosure
Schedule, since June 30, 2000, through the date of this Agreement, there has not
been: (i) any event that has had or would have a Material Adverse Effect on the
Company; (ii) any declaration, payment or setting aside for payment of any
dividend or other distribution or any redemption or other acquisition of any
shares of capital stock or securities of the Company by the Company; (iii) any
damage or loss involving an amount in excess of $100,000 to any material asset
or property (without reference to the Company Intellectual Property), whether or
not covered by insurance; (iv) any change by the Company in accounting
principles or practices; (v) any material revaluation by the Company of any of
its assets, including writing down the value of inventory or writing off notes
or accounts receivable other than in the ordinary course of business; (vi) any
sale of property (without reference to the Company Intellectual Property) of the
Company or any Company Subsidiary with the value in excess of $100,000, except
for sale of inventory in the ordinary course of business; or (vii) any
acquisition, merger, recapitalization or reorganization involving the Company or
any Company Subsidiary.
(b) Except as set forth in Schedule 3.8(b) of the Company's Disclosure
Schedule, neither the Company nor any of the Company Subsidiaries: (i) has since
June 30, 2000, amended any Company Employee Plan in a manner that would
reasonably be expected to increase the cost to the Company or any Company
Subsidiary of maintaining such Company Employee Plan in excess of $100,000 in
the aggregate annually; or (ii) has any announced plan or commitment to create
any additional Company Employee Plan or to make any modification or change to
any existing Company Employee Plan that would, in either case, reasonably be
expected to materially increase the benefits payable to employees or former
employees of the Company or any Company Subsidiary.
Section 3.9. No Undisclosed Liabilities. Except as set forth in Schedule
3.9 of the Company's Disclosure Schedule, neither the Company nor any Company
Subsidiary has any liabilities (absolute, accrued, contingent or otherwise),
except liabilities (a) in the aggregate adequately provided for in the Company's
audited balance sheet (including any related notes thereto) as of June 30, 2000,
or of the type not required under generally accepted accounting principles to be
reflected on a balance sheet and incurred since June 30, 2000 in the ordinary
course of business, (b) in an aggregate amount of less than $500,000 and not
required under generally accepted accounting principles to be reflected on a
balance sheet, or (c) incurred under the terms of this Agreement.
Section 3.10. Compliance with Laws. The business of the Company and each
of the Company Subsidiaries has been operated in material compliance with all
Laws applicable thereto.
Section 3.11. Permits. Except as set forth in Schedule 3.11 of the
Company's Disclosure Schedule, (a) the Company and the Company Subsidiaries have
all permits, certificates, licenses, approvals and other authorizations from
Governmental Authorities required in connection with the operation of their
respective businesses (collectively, "Company Permits"), (b) neither the Company
nor any Company Subsidiary is in violation of any Company Permit and (c) no
proceedings are pending or, to the knowledge of the Company, threatened, to
revoke or limit any Company Permit, except, in the case of each of clauses (a),
(b) and (c) above, those the absence or violation of which would not create a
liability or obligation of the Company of more than $100,000.
Section 3.12. Litigation. Except as set forth in Schedule 3.12 of the
Company's Disclosure Schedule, there is no suit, action or proceeding
("Litigation") pending or, to the knowledge of the Company, threatened (and
involving an amount in excess of $100,000) against the Company or any of the
Company Subsidiaries, nor is there any judgment, decree, injunction, rule or
order of any Governmental Authority outstanding against the Company or any
Company Subsidiary. Except as set forth in Schedule 3.12 of the Company's
Disclosure Schedule, to the best knowledge of the Company, no investigation or
review by any Governmental Authority is pending or threatened against the
Company or any Company Subsidiary.
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Section 3.13. Contracts. Schedule 3.13 of the Company's Disclosure
Schedule contains a complete list of all loan agreements and financing
agreements, all equipment lease financing agreements and all other contracts and
agreements involving obligations of the Company or any Company Subsidiary in
excess of $100,000, true and complete copies of which have been made available
to Buyer (collectively, the "Company Material Contracts"). Except as set forth
in Schedule 3.13 of the Company's Disclosure Schedule, all the Company Material
Contracts are valid and binding and are in full force and effect and enforceable
against the Company or such Company Subsidiary and, to the knowledge of the
Company, the other parties thereto in accordance with their respective terms,
subject to the Enforceability Exceptions. Except as set forth in Schedule 3.13
of the Company's Disclosure Schedule, neither the Company nor any Company
Subsidiary is in material violation or breach of or default under any such
Company Material Contract. To the best knowledge of the Company, no party (other
than the Company or the Company Subsidiaries) is in material violation or breach
of or default under any Company Material Contract.
Section 3.14. Employee Benefit Plans
(a) Schedule 3.14(a) of the Company's Disclosure Schedule lists all
employee pension benefit plans (as defined in Section 3(2) of ERISA), all
employee welfare benefit plans (as defined in Section 3(1) of ERISA) and all
other employee benefit plans, programs or arrangements, including, without
limitation, any bonus, stock option, stock purchase, incentive, deferred
compensation, supplemental retirement, severance and other similar fringe or
employee benefit plans, programs or arrangements, and any employment, executive
compensation or severance agreements, in any case that are now or have been
maintained or contributed to by, or with respect to which contribution is or was
required to be made by, the Company, any Company Subsidiary or any other entity
(whether or not incorporated) that is a member of a controlled group including
the Company or which is under common control with the Company (an "ERISA
Affiliate") within the meaning of Section 414(b), (c), (m) or (o) of the Code or
Section 4001(a)(14) or (b) of ERISA, for the benefit of any current or former
employee, officer or consultant (or to any dependent or beneficiary thereof) of
the Company or any ERISA Affiliate ("Company Employee Plans").
(b) Prior to the date of this Agreement, the Company has provided, or made
available, to Buyer or Buyer's counsel, to the extent applicable with respect to
any Company Employee Plan, copies of: (i) each written Company Employee Plan
document and each related trust Company agreement, insurance or other funding
contract and a written summary of any unwritten Company Employee Plan; (ii) each
current summary plan description prepared for such Company Employee Plan; (iii)
the most recent annual report on Form 5500 filed with the Department of Labor
and the Internal Revenue Service with respect to each Company Employee Plan; and
(iv) the most recent favorable determination letter issued for each Company
Employee Plan intended to be a qualified plan under Section 401(a) of the Code.
(c) None of the Company Employee Plans provides health or welfare benefits
to any person following his or her termination of employment other than in
accordance with Section 4980B of the Code or Part 6 of Subtitle B of Title I of
ERISA or any other similar benefits continuation law.
(d) Each Company Employee Plan has been established and maintained
substantially in accordance with its terms and in substantial compliance with
applicable law (including ERISA and the Code).
(e) No Company Employee Plan is subject to Title IV of ERISA and, to the
best knowledge of the Company, no facts exist as a result of which the Company
or any Company Subsidiary could be subject to liability under Title IV of ERISA.
(f) Except as set forth in Schedule 3.14(f) of the Company's Disclosure
Schedule, with respect to each Company Employee Plan, all payments due from the
Company or any Company Subsidiary to date have been made when due, and all
amounts properly accrued to date or as of the Closing as liabilities of the
Company or any Company Subsidiary that have not been paid have been properly
recorded on the books of the appropriate entity. With respect to each Company
Employee Plan that is funded wholly or partially through an insurance policy,
all premiums required to have been paid to date under the insurance policy have
been paid and all premiums required to be paid under the insurance policy
through the Closing will have been paid on or before the Closing.
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(g) Except as set forth in Schedule 3.14(g) of the Company's Disclosure
Schedule, the Company has not received any written notice of, and is not
otherwise aware of, any actions, claims (other than routine claims for
benefits), lawsuits or arbitrations pending or, to the best knowledge of the
Company, threatened with respect to any Company Employee Plan (including against
any fiduciary of any Company Employee Plan) which, in the aggregate, would have
a Material Adverse Effect on the Company. With respect to each Company Employee
Plan, there has been no prohibited transaction, breach of fiduciary duty or
Internal Revenue Service audit and no such audit is pending.
(h) Except as set forth in Schedule 3.14(h) of the Company's Disclosure
Schedule, the consummation of the transactions contemplated by this Agreement
will not: (i)(A) result in an increase in the amount of or (B) accelerate the
vesting or timing of payment of, any benefits or compensation payable in respect
of any employee of, or independent contractor to, the Company or any Company
Subsidiary; (ii) cause any payment or other consideration that is owed or may
become due to any director, officer, employee, contractor or agent of the
Company to be nondeductible to the Company or subject to tax under Code Section
280G or 4999; or (iii) cause or permit the termination of any employment
contract or other arrangement with any director, officer, employee, contractor
or agent of the Company.
(i) Schedule 3.14(i) of the Company's Disclosure Schedule contains a list
of all existing employment agreements with "change of control" provisions to
which the Company is a party.
(j) With respect to any Company Employee Plan that is subject to Section
302 of ERISA or Section 412 of the Code, the Company has not received written
notice of and is otherwise not aware of any "accumulated funding deficiency" as
defined in either of such Sections, whether or not waived.
(k) Each Company Employee Plan that is intended to qualify under Code
Section 401(a) has received a favorable determination letter from the IRS with
respect to its qualification covering all amendments required to comply with
Code Section 401(a) other than amendments for which the remedial amendment
period has not expired.
(l) Each Company Employee Plan that provides health, medical, accident or
life insurance benefits is fully insured.
3.15. Taxes and Returns.
(a) Except as set forth in Schedule 3.15 of the Company's Disclosure
Schedule:
(i) the Company and each of the Company Subsidiaries has timely filed,
or caused to be timely filed, all Tax Returns required to be filed by it,
and all such tax returns are true, complete and correct in all respects,
and has timely paid, collected or withheld, or caused to be paid, collected
or withheld, all material amounts of Taxes required to be paid, collected
or withheld, other than such Taxes for which adequate reserves in the
Company Financial Statements have been established;
(ii) the Company and each of the Company Subsidiaries have made
adequate provision in the Company Financial Statements for all Taxes
payable by the Company or any Company Subsidiary for which no Tax Return
has yet been filed;
(iii) there are no claims or assessments pending against the Company
or any of the Company Subsidiaries for any alleged deficiency in any Tax,
and the Company has not been notified in writing of any proposed Tax claims
or assessments against the Company or any of the Company Subsidiaries
(other than in each case, claims or assessments for which adequate reserves
in the Company Financial Statements have been established or which are
immaterial in amount);
(iv) neither the Company nor any of the Company Subsidiaries has
executed any waivers or extensions of any applicable statute of limitations
to assess any Taxes; and there are no outstanding requests by the Company
or any of the Company Subsidiaries for any extension of time within which
to file any material Tax Return or within which to pay any Taxes shown to
be due on any Tax Return;
(v) the statute of limitations period for assessment of federal income
taxes has expired for all taxable years through March 31, 1996; and
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(vi) to the best knowledge of the Company, (A) there are no Liens for
Taxes on the assets of the Company or any of the Company Subsidiaries
except for statutory Liens for current Taxes not yet due and payable and
(B) neither the Company nor any Company Subsidiary is liable for any Tax
imposed on any other person, except as the result of the application of
Income Tax Regulations Section 1.1502-6 (and any comparable provision of
any state, local, foreign or provincial jurisdiction) to the affiliated
group of which the Company is the common parent.
(b) For purposes of this Agreement, the term "Tax" shall mean any federal,
state, local, foreign or provincial income, gross receipts, property, sales,
use, license, excise, franchise, employment, payroll, alternative or add-on
minimum, ad valorem, transfer or excise tax, or any other tax, custom, duty,
governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest or penalty imposed by any Governmental Authority. The
term "Tax Return" shall mean a report, return or other information (including
any attached schedules or any amendments to such report, return or other
information) required to be supplied to or filed with a governmental entity with
respect to any Tax, including an information return, claim for refund, amended
return or declaration or estimated Tax.
(c) Except as set forth in Schedule 3.15 of the Company's Disclosure
Schedule, neither the Company nor any Company Subsidiary is currently under
examination or audit by any Governmental Authority with respect to any Tax.
3.16. Intellectual Property.
(a) For the purposes of this Agreement, the following terms have the
following definitions:
(i) "Intellectual Property" shall mean any or all of the following and
all rights in, arising out of, or associated therewith: (A) all United
States, international and foreign patents and applications therefor; (B)
all inventions (whether patentable or not), invention disclosures,
improvements, trade secrets, proprietary information, know how, technology,
technical data, customer lists, proprietary processes and formulae, all
source and object code, structures, display screens, layouts, development
tools and all tangible or electronic documentation and media constituting,
describing or relating to the above, including, without limitation,
manuals, memoranda and records; (C) all copyrights, copyrights
registrations and applications therefor; and (D) all trade names, common
law trademarks and service marks, trademark and service mark registrations
and applications therefor throughout the world.
(ii) "Company Intellectual Property" shall mean that Intellectual
Property owned by, licensed to, or used by the Company. Section 3.16(a)(ii)
of the Company's Disclosure Schedule sets forth all Company Intellectual
Property as described in clauses (a)(i)(A), (C) and (D).
(iii) "Company Registered Intellectual Property" means those United
States, international and foreign: (a) patents and patent applications
(including provisional applications, continuations and continuations in
part); (b) registered trademarks and service marks, applications to
register trademarks or service marks, intent-to-use applications, or other
registrations or applications related to trademarks or service marks; and
(c) registered copyrights and applications for copyright registration that
the Company owns. All of the foregoing are listed in Section 3.16(a)(iii)
of the Company's Disclosure Schedule.
(b) Section 3.16(b) of the Company's Disclosure Schedule lists all
non-routine proceedings or actions known to the Company before any court,
tribunal (including the United States Patent and Trademark Office or equivalent
authority anywhere in the world) related to any Company Intellectual Property.
Except as set forth in Section 3.16(b) of the Company's Disclosure Schedule, no
Company Intellectual Property is the subject of any proceeding or outstanding
decree, order, judgment, agreement, or stipulation restricting in any manner the
use, transfer, or licensing thereof by the Company or which may affect the
validity, use or enforceability of such Company Intellectual Property, nor has
the Company received any notice of any threat to commence any such proceeding,
the result of which if determined adversely to the Company would have a Material
Adverse Effect on the Company.
(c) Except as set forth in Section 3.16(c) of the Company's Disclosure
Schedule, with respect to each item of Company Registered Intellectual Property,
necessary registration, maintenance and renewal fees in
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connection with such Company Registered Intellectual Property have been or will
be made through the Closing and all necessary documents and certificates in
connection with such Company Registered Intellectual Property have been filed or
will be with the relevant patent, trademark or copyright authorities in the
United States or abroad for the purposes of maintaining such Company Registered
Intellectual Property, except where the failure to so file would not have a
Material Adverse Effect on the Company.
(d) As of the date hereof, the Company has acquired the rights necessary to
use, market, distribute, sell or license the Company Products as such Company
Products are used, marketed, distributed, sold or licensed in its business as
presently conducted, except where the failure to have such rights would not have
a Material Adverse Effect on the Company.
(e) To the Company's knowledge, neither the manufacture, development,
publication, marketing, license, sale, distribution or use by the Company of any
software products currently being licensed, produced or sold by the Company or
currently under development by or for the Company (the "Company Products")
violates any license or agreement between the Company and any third party or
infringes any Intellectual Property right, moral right or right of publicity or
privacy of any third party, and there is, to the knowledge of the Company, no
pending or threatened claim or litigation contesting the validity, ownership or
right to make, use, market, distribute, sell, license or dispose of any Company
Intellectual Property or Company Products, nor has the Company received any
written notice (that has not been resolved) asserting that, nor does the Company
have any knowledge that, any Company Intellectual Property or Company Products
or the proposed use, marketing, distribution, sale, license or disposition
thereof conflicts or will conflict with or violate any license or agreement
between the Company and any third party or infringe any Intellectual Property
rights, moral rights or rights of publicity or privacy of any third party except
for violations, claims, litigations, conflicts or infringements that would not
have a Material Adverse Effect on the Company. Section 3.16(e) of the Company's
Disclosure Schedule sets forth a list of all Company Products.
(f) Section 3.16(f) of the Company's Disclosure Schedule sets forth a list
of all Internet domain names used by the Company in its business (collectively,
the "Company Domain Names"). The Company has, and after the Effective Time the
Surviving Corporation will have, a valid registration and all material rights
(free of any material restriction) in and to the Company Domain Names,
including, without limitation, all rights necessary to continue to conduct the
Company's business as it is currently conducted.
3.17. Labor Matters. Except as set forth in Schedule 3.17 of the Company's
Disclosure Schedule, (a) there are no controversies pending or, to the best
knowledge of the Company, threatened, between the Company and any of its
employees, which controversies would have a Material Adverse Effect on the
Company; (b) neither the Company nor any of the Company Subsidiaries is a party
to any material collective bargaining agreement or other labor union contract
applicable to persons employed by the Company or the Company Subsidiaries, nor,
as of the date of this Agreement, does the Company or any of the Company
Subsidiaries know of any activities or proceedings of any labor union to
organize any such employees; (c) neither the Company nor any of the Company
Subsidiaries has any knowledge of any strikes or material slowdowns, work
stoppages, lockouts, or threats thereof, by or with respect to any employees of
the Company or any of the Company Subsidiaries; (d) there are no material
outstanding or, to the best knowledge of the Company, threatened, lawsuits,
claims or charges in any forum with respect to the Company's compliance with
laws regarding antidiscrimination, wrongful termination, termination in
violation of public policy, unpaid overtime, breach of contract or any other
claimed employee rights; and (e) the Company and the Company Subsidiaries have
complied in all material respects with all reporting, disclosure and other
requirements with respect to safety, affirmative action, drug and alcohol
testing, Workers Adjustment and Restraining Notification Act and any other
applicable labor and employment laws or regulations.
3.18. Limitation on Business Conduct. Except as set forth in Schedule 3.18
of the Company's Disclosure Schedule, neither the Company nor any of the Company
Subsidiaries is a party to, or has any obligation under, any contract or
agreement, written or oral, which contains any covenants currently or
prospectively limiting in any material respect the freedom of the Company or any
of the Company Subsidiaries to engage in any line of business or to compete with
any entity.
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3.19. Property. Except as set forth in Schedule 3.19 of the Company's
Disclosure Schedule, each of the Company and each of the Company Subsidiaries
owns the properties and assets that it purports to own free and clear of all
Liens, except for Liens which arise in the ordinary course of business and do
not materially impair the Company's or the Company Subsidiaries' ownership or
use of such properties or assets, or Liens for Taxes not yet due. The Company
owns no real property. The Company has made available to Buyer true and complete
copies of all of its leases of property. With respect to the property and assets
it leases, the Company, the Company Subsidiaries, and to the best of the
Company's knowledge, each of the other parties thereto, is in material
compliance with such leases, and the Company or the Company Subsidiaries, as the
case may be, hold a valid leasehold interest free of any Liens, except those
referred to above. The rights, properties and assets presently owned, leased or
licensed by the Company and the Company Subsidiaries include all rights,
properties and assets necessary to permit the Company and the Company
Subsidiaries to conduct their business in all material respects in the same
manner as their businesses have been conducted prior to the date hereof. Neither
the Company nor any Company Subsidiary is in material violation of any zoning,
building or safety ordinance, regulation or requirement or other law or
regulation applicable to the operation of owned or leased properties, nor, as of
the date of this Agreement, has the Company or any Company Subsidiary received
any notice of such a violation with which it has not complied.
3.20. Environmental Matters.
(a) Except as set forth in Schedule 3.20(a) of the Company's Disclosure
Schedule, the Company and the Company Subsidiaries are in material compliance
with the Environmental Laws, which compliance includes the possession by the
Company and the Company Subsidiaries of all material permits and governmental
authorizations required under applicable Environmental Laws, and compliance in
all material respects with the terms and conditions thereof, except in each case
where such non-compliance would not have a Material Adverse Effect on the
Company. Neither the Company nor any of the Company Subsidiaries has received
any written communication from a Governmental Authority that alleges that the
Company or any of the Company Subsidiaries is not in such material compliance,
and there are no circumstances that may prevent or interfere with such
compliance in the future, except where such non-compliance would not have a
Material Adverse Effect on the Company.
(b) Except as set forth in Schedule 3.20(b) of the Company's Disclosure
Schedule, there are no Environmental Claims, including claims based on "arranger
liability," pending or, to the knowledge of the Company, threatened against the
Company or any of the Company Subsidiaries or against any person or entity whose
liability for any Environmental Claim the Company or any of the Company
Subsidiaries has retained or assumed either contractually or by operation of
law, except for such Environmental Claims that would not have a Material Adverse
Effect on the Company.
(c) Except as set forth in Schedule 3.20(c) of the Company's Disclosure
Schedule, to the knowledge of the Company and the Company Subsidiaries, there
are no past or present actions, inactions, activities, circumstances,
conditions, events or incidents, including the release, emission, discharge,
presence or disposal of any Material of Environmental Concern by the Company and
the Company Subsidiaries and, to the knowledge of the Company and the Company
Subsidiaries, by third parties, that would form the basis of any Environmental
Claim against the Company or any of the Company Subsidiaries or against any
person or entity whose liability for any Environmental Claim the Company or any
of the Company Subsidiaries have retained or assumed either contractually or by
operation of law, except for such Environmental Claims that would not have a
Material Adverse Effect on the Company.
(d) Except as set forth in Schedule 3.20(d) of the Company's Disclosure
Schedule, the Company is in compliance in all material respects with
Environmental Laws as they relate to (i) any on-site or off-site locations where
the Company or any of the Company Subsidiaries has stored, disposed or arranged
for the disposal of Materials of Environmental Concern for itself (but not on
behalf of others) or (ii) any underground storage tanks located on property
owned or leased by the Company or any of the Company Subsidiaries. To the
knowledge of the Company, there is no asbestos contained in or forming part of
any building, building component, structure or office space owned or leased by
the Company or any of the Company Subsidiaries. To the knowledge of the Company,
no polychlorinated biphenyls (PCB's) or PCB-
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containing items are used or stored at any property owned or leased by the
Company or any of the Company Subsidiaries. The Company hereby represents that
it has occupied properties only for the purpose of office space or warehousing
non-hazardous materials.
(e) For purposes of this Agreement:
(i) "Environmental Claim" means any written claim, action, cause of
action, investigation or notice by any person or entity alleging potential
liability (including potential liability for investigatory costs, cleanup
costs, governmental response costs, natural resources damages, property
damages, personal injuries, or penalties) arising out of, based on or
resulting from (x) the presence, or release into the environment, of any
Material of Environmental Concern at any location, whether or not owned or
operated by the respective Party or any of its Subsidiaries, or (y)
circumstances forming the basis of any violation, or alleged violation, of
any Environmental Law.
(ii) "Environmental Laws" means all federal, state, local and foreign
laws or regulations relating to pollution or protection of human health and
the environment (including ambient air, surface water, ground water, land
surface or sub-surface strata), including laws and regulations relating to
emissions, discharges, releases or threatened releases of Materials of
Environmental Concern, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Materials of Environmental Concern.
(iii) "Materials of Environmental Concern" means chemicals,
pollutants, contaminants, hazardous materials, hazardous substances and
hazardous wastes, toxic substances, petroleum and petroleum products that
are regulated under the Environmental Laws.
3.21. Insurance. The Company maintains insurance that provides adequate
coverage for normal risks incident to the business of the Company and the
Company Subsidiaries and their respective properties and assets and in character
and amount comparable to that carried by persons engaged in similar businesses,
except where the nature of potential liabilities that may reasonably be expected
to arise in the course of the Company's business would, in the exercise of
prudent business judgment, require additional amounts or types of insurance
coverage, in which case the Company maintains such additional coverage. The
insurance polices maintained by the Company are with reputable insurance
carriers, have no premium delinquencies and are in full force and effect. Copies
of all such insurance policies have been made available to Buyer.
3.22 Finders and Investment Bankers. Neither the Company nor any of its
officers or directors has employed any broker, finder or financial advisor or
otherwise incurred any liability for any brokerage fees, commissions, or
financial advisors' or finders' fees in connection with the transactions
contemplated hereby, other than pursuant to an agreement with Lazard Freres &
Co. LLC.
3.23. Full Disclosure. No statement contained in any certificate or
schedule, including, without limitation, the Company's Disclosure Schedule,
furnished or to be furnished by the Company or the Company Subsidiaries to Buyer
in, or pursuant to the provisions of, this Agreement contains or shall contain
any untrue statement of a material fact or omits or will omit to state any
material fact necessary, in the light of the circumstances under which it was
made, in order to make the statements herein or therein not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND CUSH
Parent and CUSH, jointly and severally, represent and warrant to Buyer and
Merger Sub as follows:
Section 4.1. Organization and Good Standing. Each of Parent and CUSH is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has all requisite corporate power
and authority to own, lease and operate its properties and to carry on its
business as now being conducted. Each of Parent and CUSH is duly qualified or
licensed and in good standing to do business in each jurisdiction in which the
character of the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification or licensing necessary, except
where the failure
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to be so duly qualified or licensed and in good standing would not have a
Material Adverse Effect on Parent. Parent has previously made available to Buyer
accurate and complete copies of the organizational documents, as currently in
effect, of Parent and CUSH. CUSH is a wholly-owned subsidiary of Parent.
Section 4.2. Authorization; Binding Agreement. Each of Parent and CUSH has
all requisite corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized by all necessary
corporate action on the part of Parent and CUSH (including by CUSH as the sole
stockholder of the Company), and no other corporate proceedings on the part of
Parent or CUSH are necessary to authorize the execution and delivery of this
Agreement or to consummate the transactions contemplated hereby. This Agreement
has been duly and validly executed and delivered by each of Parent and CUSH and,
assuming the valid authorization, execution and delivery of this Agreement by
the other Parties, constitutes the legal, valid and binding agreement of each of
Parent and CUSH, enforceable against each of them in accordance with its terms,
subject to the Enforceability Exceptions.
Section 4.3. Governmental Approvals. No Governmental Consent from any
Governmental Authority on the part of Parent or CUSH is required in connection
with the execution or delivery by Parent and CUSH of this Agreement or the
consummation by Parent and CUSH of the transactions contemplated hereby other
than (a) the filing of the Certificate of Merger with the Secretary of State of
the State of California in accordance with the GCLC, (b) if required, customary
filings with the SEC for transactions of the type contemplated hereby, including
all filings and mailings required by Section 14(c) of the Securities Exchange
Act and Regulation 14C promulgated thereunder, (c) if required, filings or
consents under any applicable foreign antitrust requirements, and (d) filings,
waivers or consents pursuant to the rules and regulations of NASDAQ.
Section 4.4. No Violations. The execution and delivery of this Agreement,
the consummation of the transactions contemplated hereby and compliance by
Parent and CUSH with any of the provisions hereof will not (a) conflict with or
result in any breach of any provision of the organizational documents of Parent
or CUSH, (b) require any Consent under or result in a violation or breach of, or
constitute (with or without notice or lapse of time or both) a default (or give
rise to any right of termination, cancellation or acceleration) under any of the
terms, conditions or provisions of, any material contract of Parent or CUSH, (c)
result in the creation or imposition of any material Lien upon any of the assets
of Parent or CUSH or (d) subject solely to obtaining the Governmental Consents
from Governmental Authorities referred to in Section 4.3 hereof, violate in any
material way any applicable provision of any Law to which Parent or CUSH or
their respective its assets or properties is subject.
Section 4.5. Securities Laws.
(a) The shares of Buyer Common Stock to be issued to CUSH upon consummation
of the transactions contemplated hereby (the "Securities") are being acquired by
CUSH for its own account pursuant to this Agreement and not for any other
Person, and for investment only and with no intention of distributing or
reselling such Securities or any part thereof or any interest therein in any
transaction that would be in violation of the securities laws of the United
States of America, or any state thereof; without prejudice, however, to the
rights of CUSH at all times to sell or otherwise dispose of all or any part of
the Securities under an effective registration statement or applicable exemption
from registration under the Securities Act and any applicable state securities
law.
(b) CUSH is an "accredited investor" as that term is defined in Rule 501
under the Securities Act and has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of an
investment in the Securities. By reason of CUSH's business or financial
experience, it is a sophisticated investor which has the capacity to protect its
interest in connection with the transactions contemplated hereby and has
sufficient knowledge and experience in financial and business matters to
evaluate properly the merits and risks of the Securities and the related
transactions contemplated hereby.
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(c) CUSH has been provided with copies of the Buyer Securities Filings and
a copy of Buyer's Disclosure Schedule and has had the opportunity to request any
exhibits filed as part of any such document.
(d) CUSH hereby acknowledges that Buyer has made available to it the
opportunity to ask questions and receive answers from Buyer concerning the terms
and conditions under which the Securities will be issued to it.
(e) CUSH agrees that, so long as required by law, certificates evidencing
any of the Securities and any securities issued in exchange for or in respect
thereof shall bear a legend substantially to the following effect:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR UNDER THE SECURITIES OR BLUE SKY LAWS OF ANY OTHER
COUNTRY, STATE OR OTHER JURISDICTION, AND MAY NOT BE OFFERED, SOLD,
PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF WITHIN THE UNITED STATES OR
TO, OR FOR THE ACCOUNT OR BENEFIT OF, UNITED STATES PERSONS, EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
AND OTHER APPLICABLE LAWS OR PURSUANT TO AN EXEMPTION FROM SUCH ACT OR
OTHER LAWS."
(f) The foregoing representations in this Section 4.5 are made for purposes
of compliance with the exemptions from registration under the Securities Act and
shall not in any way affect the rights of Parent or CUSH in connection with this
Agreement, including, without limitation, their ability to rely on the
representations and warranties of Buyer and Merger Sub set forth in this
Agreement.
4.6. Disclosure Documents. None of the information supplied by Parent,
CUSH, the Company or their respective officers, directors representatives,
agents or employees (the "Parent Information") in writing specifically for
inclusion in the Information Statement filed in connection with this
transaction, will, at the time such documents are filed with the SEC or first
mailed to Buyer's stockholders, contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading or necessary to correct any statement in any earlier communication
with respect to the Merger and the transactions contemplated hereby which has
become false or misleading.
4.7. Finders and Investment Bankers. None of Parent, CUSH or any of their
respective officers or directors has employed any broker, finder or financial
advisor or otherwise incurred any liability for any brokerage fees, commissions,
or financial advisors' or finders' fees in connection with the transactions
contemplated hereby, other than pursuant to an agreement with Lazard Freres &
Co. LLC.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER AND MERGER SUB
Buyer and Merger Sub jointly and severally represent and warrant to the
Company, except as set forth in Buyer's Disclosure Schedule, as follows:
Section 5.1. Organization and Good Standing. Each of Buyer and Buyer
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as now being conducted. Each of Buyer and Buyer
Subsidiaries is duly qualified or licensed and in good standing to do business
in each jurisdiction in which the character of the property owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification or licensing necessary, except where the failure to be so duly
qualified or licensed and in good standing would not have a Material Adverse
Effect on Buyer. Buyer has previously made available to the Company accurate and
complete copies of the organizational documents, as currently in effect, of
Buyer and each Buyer Subsidiary.
Section 5.2. Capitalization. As of August 30, 2000, the authorized capital
stock of Buyer consists of (a) 300,000,000 shares of common stock, par value
$0.01 per share, of Buyer ("Buyer Common Stock") and
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(b) 5,000,000 shares of preferred stock of Buyer ("Buyer Preferred Stock"), of
which 600,000 have been designated as Series A Convertible Preferred Stock. As
of August 30, 2000, (i) 20,686,638 shares of Buyer Common Stock were issued and
outstanding, (ii) no shares of Buyer Preferred Stock were issued and
outstanding, (iii) 332,200 shares of Buyer Common Stock and no shares of Buyer
Preferred Stock were issued and held in the treasury of Buyer, (iv) no shares of
Buyer Common Stock or Buyer Preferred Stock were held by any Buyer Subsidiary,
(v) 1,316,235 shares of Buyer Common Stock were reserved for future issuance
upon exercise of warrants (the "Buyer Warrants"), (vi) 9,227,304 shares were
reserved for issuance upon conversion of outstanding notes (the "Buyer Notes"),
(vii) 200,000 shares of Buyer Common Stock are authorized for issuance under
Buyer's 1998 Employee Stock Purchase Plan ("Buyer Stock Purchase Option"), of
which 57,257 shares have been issued, (viii) 3,160,000 shares of Buyer Common
Stock are authorized for issuance under Buyer's 1995 Stock Incentive Plan and
1997 Stock Incentive Plan, of which 2,166,565 options ("Buyer Options") are
outstanding, and (ix) 3,000,000 shares of Buyer Common Stock are authorized for
issuance under Buyer's 2000 Stock Incentive Plan, of which no options have been
issued. No change in the capitalization of Buyer has occurred between August 30,
2000 and the date hereof, except for the issuance of shares upon the exercise or
lapse of Buyer Options and Buyer Stock Purchase Options. No other capital stock
of Buyer is authorized or issued. All issued and outstanding shares of Buyer
Common Stock are duly authorized, validly issued, fully paid and non-assessable
and were issued free of preemptive rights and in compliance with all applicable
Laws. Except as set forth in Schedule 5.2 of Buyer's Disclosure Schedule or as
otherwise contemplated by this Agreement, as of the date hereof, there are no
outstanding rights, subscriptions, warrants, puts, calls, unsatisfied preemptive
rights, options (except for options outstanding as of the date hereof) or other
agreements to which Buyer or any Buyer Subsidiary is a party, of any kind
relating to any of the outstanding, authorized but unissued or treasury shares
of the capital stock or any other security of Buyer, and there is no authorized
or outstanding security of any kind convertible into or exchangeable for any
such capital stock or other security. Except as set forth in Schedule 5.2 of
Buyer's Disclosure Schedule, there are no obligations, contingent or other, of
Buyer or any of its Subsidiaries to repurchase, redeem or otherwise acquire any
shares of Buyer Common Stock or the capital stock of any of its Subsidiaries or
to provide funds to or make any investment (in the form of a loan, capital
contribution or otherwise) in any of its Subsidiaries or any other entity.
Except as set forth in Schedule 5.2 of Buyer's Disclosure Schedule or as
otherwise contemplated by this Agreement, there are no registration rights, and
to the best knowledge of Buyer, there are no voting trusts, proxies or other
agreements or understandings with respect to the voting rights of any class of
Buyer's capital stock.
Section 5.3. Subsidiaries. Schedule 5.3 of Buyer's Disclosure Schedule
sets forth the name and jurisdiction of incorporation of each Buyer Subsidiary,
each of which is wholly owned by Buyer except for directors' qualifying shares
and except as otherwise set forth in Schedule 5.3 of Buyer's Disclosure
Schedule. All of the capital stock and other interests of Buyer Subsidiaries so
held by Buyer are owned by it or a Buyer Subsidiary as set forth in Schedule 5.3
of Buyer's Disclosure Schedule, free and clear of any Liens with respect
thereto, except as set forth in Schedule 5.3 of Buyer's Disclosure Schedule. All
of the outstanding shares of capital stock of each of Buyer Subsidiaries
directly or indirectly held by Buyer are duly authorized, validly issued, fully
paid and non-assessable and were issued free of preemptive rights and in
compliance with all applicable Laws. No equity securities or other interests of
any of Buyer Subsidiaries are or may become required to be issued or purchased
by reason of any options, warrants, rights to subscribe to, puts, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of any capital stock of any Buyer
Subsidiary, and there are no contracts, commitments, understandings or
arrangements by which any Buyer Subsidiary is bound to issue additional shares
of its capital stock, or options, warrants or rights to purchase or acquire any
additional shares of its capital stock or securities convertible into or
exchangeable for such shares. Except as set forth in Schedule 5.3 of Buyer's
Disclosure Schedule, Buyer does not directly or indirectly own any equity or
similar interest in, or any interest convertible into or exchangeable or
exercisable for any equity or similar interest in, any corporation, partnership,
joint venture or other business association or entity, with respect to which
interest Buyer has invested or is required to invest $20,000 or more or for
which Buyer or any Buyer Subsidiary has liability which is not limited.
Reflections Interactive Limited ("RIL"), a wholly owned subsidiary of Buyer, has
obtained, in accordance with the terms of the Deed of Partnership dated December
4, 1998, between RIL and
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Martin Lee Edmondson ("Edmondson"), as amended by the amendment dated September
23, 1999 (the "Deed"), all right, title and interest in the business, property
and assets (the "RIL Partnership Property") of the partnership created under the
Deed (the "RIL/Edmondson Partnership"), free and clear of any Lien, except for
obtaining the consent of the landlord with respect to the assignment to RIL of
the lease to Edmondson of certain real property. Edmondson has no right to
receive, either currently or in the future, any income, capital or other payment
from Buyer or any Buyer Subsidiary (including without limitation RIL) other than
(i) payments that may or have become due in the future under the terms of the
Service Agreement, annexed to the Escrow Deed, by and among Buyer, RIL and
Edmondson, dated December 4, 1998, and (ii) any expenses to be borne by Buyer in
accordance with the terms of the registration rights agreement between Buyer and
Edmondson dated December 23, 1998.
Section 5.4. Authorization; Binding Agreement. Each of Buyer and Merger
Sub has all requisite corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized (including for
purposes of the DGCL Section 203) by Buyer's Board of Directors and a majority
of its directors who do not have any financial interest in the transactions
contemplated hereby, and by CUSH, as the majority stockholder of Buyer, and no
other corporate proceedings on the part of Buyer or any Buyer Subsidiary are
necessary to authorize the execution and delivery of this Agreement or to
consummate the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by each of Buyer and Merger Sub and, assuming
the valid authorization, execution and delivery of this Agreement by the other
Parties, constitutes the legal, valid and binding agreement of Buyer,
enforceable against Buyer and Merger Sub in accordance with its terms, subject
to the Enforceability Exceptions.
Section 5.5. Governmental Approvals. No Governmental Consent from any
Governmental Authority on the part of Buyer or any of Buyer Subsidiaries is
required in connection with the execution or delivery by Buyer of this Agreement
or the consummation by Buyer of the transactions contemplated hereby other than
(a) the filing of the Certificate of Merger with the Secretary of State of the
State of California in accordance with the GCLC, (b) if required, customary
filings with the SEC for transactions of the type contemplated hereby, including
all filings and mailings required by Section 14(c) of the Securities Exchange
Act and Regulation 14C promulgated thereunder, (c) if required, filings or
consents under any applicable foreign antitrust requirements, and (d) filings,
waivers or consents pursuant to the rules and regulations of NASDAQ.
Section 5.6. No Violations. Except as set forth in Schedule 5.6 of Buyer's
Disclosure Schedule, the execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby and compliance by Buyer
with any of the provisions hereof will not (a) conflict with or result in any
breach of any provision of the Buyer Charter or Buyer Bylaws or the
organizational documents of any Buyer Subsidiaries, (b) require any Consent
under or result in a violation or breach of, or constitute (with or without
notice or lapse of time or both) a default (or give rise to any right of
termination, cancellation or acceleration) under any of the terms, conditions or
provisions of, any Buyer Material Contract, (c) result in the creation or
imposition of any material Lien upon any of the assets of Buyer or any Buyer
Subsidiary or (d) subject solely to obtaining the Governmental Consents from
Governmental Authorities referred to in Section 5.5 hereof, violate in any
material way any Law to which Buyer or any Buyer Subsidiary or its assets or
properties are subject.
Section 5.7. Securities Filings. Buyer has made available to Parent and
the Company true and complete copies of (a) its Annual Report on Form 10-K, as
amended, for the fiscal year ended March 31, 2000, as filed with the SEC (the
"Form 10-K"), (b) its proxy statements relating to all of the meetings of
stockholders (whether annual or special) of Buyer since December 16, 1999, as
filed with the SEC, and (c) all other reports, statements and registration
statements and amendments thereto (including, without limitation, Quarterly
Reports on Form 10-Q, as amended, and Current Reports on Form 8-K, as amended)
filed by Buyer with the SEC since December 16, 1999 and prior to the date
hereof. The reports and statements set forth in clauses (a) through (c) above,
and those subsequently provided or required to be provided to the Company
pursuant to this Agreement, are referred to collectively herein as the "Buyer
Securities Filings." Except as set forth in Schedule 5.7 of Buyer's Disclosure
Schedule, as of their respective dates, or as of the
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date of the last amendment thereof, if amended after filing and prior to the
date hereof, each of Buyer Securities Filings was prepared in all material
respects in accordance with the requirements of the Securities Exchange Act, as
the case may be, and none of Buyer Securities Filings contained or, as to Buyer
Securities Filings subsequent to the date hereof, will contain, any untrue
statement of a material fact or omitted or, as to Buyer Securities Filings
subsequent to the date hereof, will omit, to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
Section 5.8. Buyer Financial Statements. The audited consolidated
financial statements and unaudited interim financial statements of Buyer
included in Buyer Securities Filings filed prior to the date hereof (the "Buyer
Financial Statements") have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis (except as may be indicated
therein or in the notes thereto) and present fairly, in all material respects,
the financial position of Buyer and Buyer Subsidiaries as at the dates thereof
and the results of their operations and cash flows for the periods then ended
subject, in the case of the unaudited interim financial statements, to normal
year-end audit adjustments, any other adjustments described therein and the fact
that certain information and notes have been condensed or omitted in accordance
with the Securities Exchange Act.
Section 5.9. Absence of Certain Changes or Events.
(a) Except as set forth on Schedule 5.9(a) of Buyer's Disclosure Schedule,
since March 31, 2000, through the date of this Agreement, there has not been:
(A) any event that has had or would have a Material Adverse Effect on Buyer; (B)
any declaration, payment or setting aside for payment of any dividend or other
distribution or any redemption or other acquisition of any shares of capital
stock or securities of Buyer by Buyer; (C) any damage or loss involving an
amount in excess of $100,000 to any material asset or property (without
reference to Buyer Intellectual Property Rights), whether or not covered by
insurance; (D) any change by Buyer in accounting principles or practices; (E)
any material revaluation by Buyer of any of its assets, including writing down
the value of inventory or writing off notes or accounts receivable other than in
the ordinary course of business; or (F) any sale of property (without reference
to Buyer Intellectual Property Rights) of Buyer or any Buyer Subsidiary with the
value in excess of $100,000, except for sale of inventory in the ordinary course
of business.
(b) Except as set forth on Schedule 5.9(b) of Buyer's Disclosure Schedule,
neither Buyer nor any of Buyer Subsidiaries: (i) has since March 31, 2000,
amended any Buyer Employee Plan in a manner that would reasonably be expected to
increase the cost to Buyer or any Buyer Subsidiary of maintaining such Buyer
Employee Plan in excess of (A) $500,000 in the aggregate annually, or (B)
$100,000 with respect to officers of Buyer or any Buyer Subsidiary, except as to
benefits they share generally with all employees of Buyer or any Buyer
Subsidiary, as applicable; or (ii) has any announced plan or commitment to
create any additional Buyer Employee Plan or to make any modification or change
to any existing Buyer Employee Plan that would, in either case, reasonably be
expected to materially increase the benefits payable to employees or former
employees of Buyer or any Buyer Subsidiary.
Section 5.10. No Undisclosed Liabilities. Except as set forth in the Form
10-K or Schedule 5.10 of Buyer's Disclosure Schedule, neither Buyer nor any
Buyer Subsidiary has any liabilities (absolute, accrued, contingent or
otherwise), except liabilities (a) in the aggregate adequately provided for in
Buyer's audited balance sheet (including any related notes thereto) as of March
31, 2000 included in the Form 10-K or of the type not required under generally
accepted accounting principles to be reflected on the balance sheet and incurred
since March 31, 2000 in the ordinary course of business, (b) in an aggregate
amount of less than $500,000 and not required under generally accepted
accounting principles to be reflected on the balance sheet, (c) disclosed on
Buyer's Disclosure Schedule or of a type described in the representations and
warranties of Buyer in this Article V and not required to be disclosed on
Buyer's Disclosure Schedule, or (d) incurred under the terms of this Agreement.
Section 5.11. Compliance with Laws. The business of Buyer and each of
Buyer Subsidiaries has been operated in material compliance with all Laws
applicable thereto.
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Section 5.12. Permits. Except as set forth in Schedule 5.12 of Buyer's
Disclosure Schedule, (a) Buyer and Buyer Subsidiaries have all permits,
certificates, licenses, approvals and other authorizations from Governmental
Authorities required in connection with the operation of their respective
businesses (collectively, "Buyer Permits"), (b) neither Buyer nor any Buyer
Subsidiary is in violation of any Buyer Permit and (c) no proceedings are
pending or, to the knowledge of Buyer, threatened, to revoke or limit any Buyer
Permit, except, in the case of each of clauses (a), (b) and (c) above, those the
absence or violation of which would not create a liability or obligation of
Buyer of more than $100,000.
Section 5.13. Litigation. Except as set forth in Schedule 5.13 of Buyer's
Disclosure Schedule, there is no Litigation pending or, to the knowledge of
Buyer, threatened (and involving an amount in excess of $100,000) against Buyer
or any of Buyer Subsidiaries, nor is there any judgment, decree, injunction,
rule or order of any Governmental Authority outstanding against Buyer or any
Buyer Subsidiary. Except as set forth in Schedule 5.13 of Buyer's Disclosure
Schedule, to the best knowledge of Buyer, no investigation or review by any
Governmental Authority is pending or threatened against Buyer or any Buyer
Subsidiary.
Section 5.14. Contracts. Schedule 5.14 of Buyer's Disclosure Schedule
contains a complete list of all loan agreements and financing agreements, all
equipment lease financing agreements and all other contracts and agreements
since December 16, 1999 involving obligations of Buyer or any Buyer Subsidiary,
to the knowledge of Buyer, in excess of $100,000 and not executed on behalf of
Parent, the Company or Buyer by either Bruno Bonnell or Denis Guyennot as an
executive officer of Parent, the Company or Buyer, true and complete copies of
which have been made available to the Company. Neither Buyer nor any of Buyer
Subsidiaries is a party or is subject to any note, bond, mortgage, indenture,
contract, lease, license, agreement or instrument that is required to be
described in or filed as an exhibit to any Buyer Securities Filing filed prior
to the date of this Agreement (collectively with those agreements listed in
Schedule 5.14 of Buyer's Disclosure Schedule, the "Buyer Material Contracts")
that is not so described in or filed as required by the Securities Act or the
Securities Exchange Act, as the case may be. Except as set forth in Schedule
5.14 of Buyer's Disclosure Schedule, all Buyer Material Contracts are valid and
binding and are in full force and effect and enforceable against Buyer or such
Buyer Subsidiary and, to the knowledge of Buyer, the other parties thereto in
accordance with their respective terms, subject to the Enforceability
Exceptions. Except as set forth in Schedule 5.14 of Buyer's Disclosure Schedule,
to the knowledge of Buyer neither Buyer nor any Buyer Subsidiary is in material
violation or breach of or default under any such Buyer Material Contract. To the
knowledge of Buyer, no party (other than Buyer or Buyer Subsidiaries) is in
material violation or breach of or default under any Buyer Material Contract.
Section 5.15. Employee Benefit Plans.
(a) Copies have been made available to the Company, Parent or Parent's
counsel of all employee pension benefit plans (as defined in Section 3(2) of
ERISA), all employee welfare benefit plans (as defined in Section 3(1) of ERISA)
and all other employee benefit plans, programs or arrangements, including,
without limitation, any bonus, stock option, stock purchase, incentive, deferred
compensation, supplemental retirement, severance and other similar fringe or
employee benefit plans, programs or arrangements, and any employment, executive
compensation or severance agreements, in any case that are now or have been
maintained or contributed to by, or with respect to which contribution is or was
required to be made by, Buyer, any Buyer Subsidiary or any other entity (whether
or not incorporated) that is an ERISA Affiliate of Buyer within the meaning of
Section 414(b), (c), (m) or (o) of the Code or Section 4001(a)(14) or (b) of
ERISA, for the benefit of any current or former employee, officer or consultant
(or any dependent or beneficiary thereof) of Buyer or any ERISA Affiliate
("Buyer Employee Plans").
(b) Prior to the date of this Agreement, Buyer has provided, or made
available, to the Company, Parent or Parent's counsel, to the extent applicable
with respect to any Buyer Employee Plan, copies of: (i) each written Buyer
Employee Plan document and each related trust agreement, insurance or other
funding contract; (ii) each current summary plan description prepared for such
Buyer Employee Plan and a written summary of any unwritten Buyer Employee Plan;
(iii) the most recent annual report on Form 5500 filed with the Department of
Labor and the Internal Revenue Service with respect to each Buyer Employee Plan;
and
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(iv) the most recent favorable determination letter issued for each Buyer
Employee Plan intended to be a qualified plan under Section 401(a) of the Code.
(c) None of the Buyer Employee Plans provides retiree health or welfare
benefits to any person following his or her termination of employment other than
in accordance with Section 4980B of the Code or Part 6 of Subtitle B of Title I
of ERISA or any other similar benefits continuation law.
(d) Each Buyer Employee Plan has been established and maintained
substantially in accordance with its terms and in substantial compliance with
applicable law (including ERISA and the Code).
(e) No Buyer Employee Plan is subject to Title IV of ERISA and, to the best
knowledge of Buyer, no facts exist as a result of which Buyer or any Buyer
Subsidiary could be subject to liability under Title IV of ERISA.
(f) With respect to each Buyer Employee Plan, all payments due from Buyer
or any Buyer Subsidiary to date have been made when due, and all amounts
properly accrued to date or as of the Closing as liabilities of Buyer or any
Buyer Subsidiary that have not been paid have been properly recorded on the
books of the appropriate entity. With respect to each Buyer Employee Plan that
is funded wholly or partially through an insurance policy, all premiums required
to have been paid to date under the insurance policy have been paid and all
premiums required to be paid under the insurance policy through the Closing will
have been paid on or before the Closing.
(g) Except as disclosed in Schedule 5.15(g) of Buyer's Disclosure Schedule,
Buyer has not received any written notice of, and is not otherwise aware of, any
actions, claims (other than routine claims for benefits), lawsuits or
arbitrations pending or, to the best knowledge of Buyer, threatened with respect
to any Buyer Employee Plan (including against any fiduciary of any Buyer
Employee Plan) which, in the aggregate, would have a Material Adverse Effect on
Buyer. With respect to each Buyer Employee Plan, there has been no prohibited
transaction, breach of fiduciary duty or Internal Revenue Service audit and no
such audit is pending.
(h) Copies have been made available to the Company, Parent or Parent's
counsel of a true and complete list of each person who holds any outstanding
option to purchase shares of capital stock of Buyer or any Buyer Subsidiary as
of the date hereof, together with: (i) the number of shares of capital stock
subject to each such option; (ii) the exercise price-per-share of such option;
(iii) the vesting schedule of such option; and (iv) a statement of whether each
such option is intended to qualify as an incentive stock option within the
meaning of Section 422 of the Code.
(i) Except as disclosed in Schedule 5.15(i) of Buyer's Disclosure Schedule,
the consummation of the transactions contemplated by this Agreement will not:
(i)(A) result in an increase in the amount of or (B) accelerate the vesting or
timing of payment of, any benefits or compensation payable in respect of any
employee of, or independent contractor to, Buyer or any Buyer Subsidiary; (ii)
cause any payment or other consideration that is owed or may become due to any
director, officer, employee, contractor or agent of Buyer to be nondeductible to
Buyer or subject to tax under Code Section 280G or 4999; or (iii) cause or
permit the termination of any employment contract or other arrangement with any
director, officer, employee, contractor or agent of Buyer.
(j) With respect to any Buyer Employee Plan that is subject to Section 302
of ERISA or Section 412 of the Code, Buyer has not received written notice of
and is otherwise not aware of any "accumulated funding deficiency" as defined in
either of such Sections, whether or not waived.
(k) Each Buyer Employee Plan that is intended to qualify under Code Section
401(a) has received a favorable determination letter from the IRS with respect
to its qualification covering all amendments required to comply with Code
Section 401(a) other than amendments for which the remedial amendment period has
not expired.
(l) Each Buyer Employee Plan that provides health, medical, accident or
life insurance benefits is fully insured.
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5.16. Taxes and Returns.
(a) Except as set forth in Schedule 5.16(a) of Buyer's Disclosure Schedule:
(i) Buyer and each of Buyer Subsidiaries has timely filed, or caused
to be timely filed, all Tax Returns required to be filed by it, and all
such tax returns are true, complete and correct in all respects, and has
timely paid, collected or withheld, or caused to be paid, collected or
withheld, all material amounts of Taxes required to be paid, collected or
withheld, other than such Taxes for which adequate reserves in Buyer
Financial Statements have been established;
(ii) Buyer and each of Buyer Subsidiaries have made adequate provision
in Buyer Financial Statements for all Taxes payable by Buyer or any Buyer
Subsidiary for which no Tax Return has yet been filed;
(iii) there are no claims or assessments pending against Buyer or any
of Buyer Subsidiaries for any alleged deficiency in any Tax, and Buyer has
not been notified in writing of any proposed Tax claims or assessments
against Buyer or any of Buyer Subsidiaries (other than in each case, claims
or assessments for which adequate reserves in Buyer Financial Statements
have been established or which are immaterial in amount);
(iv) neither Buyer nor any of Buyer Subsidiaries has executed any
waivers or extensions of any applicable statute of limitations to assess
any Taxes; and there are no outstanding requests by Buyer or any of Buyer
Subsidiaries for any extension of time within which to file any material
Tax Return or within which to pay any Taxes shown to be due on any Tax
Return;
(v) the statute of limitations period for assessment of federal income
taxes has expired for all taxable years through February 28, 1995;
(vi) to the best knowledge of Buyer, (A) there are no liens for Taxes
on the assets of Buyer or any of Buyer Subsidiaries except for statutory
liens for current Taxes not yet due and payable and (B) neither Buyer nor
any Buyer Subsidiary is liable for any Tax imposed on any other person,
except as the result of the application of Income Tax Regulations Section
1.1502-6 (and any comparable provision of any state, local, foreign or
provincial jurisdiction) to the affiliated group of which Buyer is the
common parent.
(b) Except as set forth in Schedule 5.16(b) of Buyer's Disclosure Schedule,
neither Buyer nor any Buyer Subsidiary is currently under examination or audit
by any Governmental Authority with respect to any Tax.
5.17. Intellectual Property.
(a) Buyer or Buyer Subsidiaries own, license or otherwise possess legally
enforceable rights to use, sell and transfer all material copyrights developed
internally by Buyer or Buyer Subsidiaries, and any applications therefor, and
all material trade secrets that are used in the respective businesses of Buyer
and Buyer Subsidiaries as currently conducted, except as disclosed on Schedule
5.17(a)(i) of Buyer's Disclosure Schedule. To Buyer's best knowledge, Buyer or
Buyer Subsidiaries own, license, or otherwise possess legally enforceable rights
to use, sell and transfer all material patents, trademarks, trade names, service
marks and copyrights developed by third parties, and any applications therefor,
technology, know-how, source code, object code, domain names and tangible or
intangible proprietary information or materials that are used in the respective
businesses of Buyer and Buyer Subsidiaries as currently conducted, except as
disclosed on Schedule 5.17(a)(ii) of Buyer's Disclosure Schedule. Schedule
5.17(a)(iii) of Buyer's Disclosure Schedule contains a complete list of each
patent, trademark, service mark and copyright, as to which Buyer or a Buyer
Subsidiary has become the registered owner, of each application for patent,
trademark, service mark and copyright registration filed by or on behalf of
Buyer or a Buyer Subsidiary, and of each agreement with a third party, to the
knowledge of Buyer, involving an amount in excess of $100,000 that grants Buyer
or a Buyer Subsidiary any rights to make, use, sell, modify, create derivative
works of, sublicense or otherwise distribute the intellectual property of a
third party, in each case subsequent to December 16, 1999, true and complete
documentation of which has been delivered to the Company, Parent or Parent's
counsel. For the purposes of this Agreement, "Buyer Intellectual Property
Rights" means all patents, trademarks, trade names, service
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marks, copyrights, and applications therefor, technology, know-how, trade
secrets, source code, object code, domain names and tangible or intangible
proprietary information or materials that are used in the respective businesses
of Buyer and Buyer Subsidiaries as currently conducted.
(b) To the knowledge of Buyer, there are no valid grounds for any bona fide
claims (i) that the business of Buyer or any of Buyer Subsidiaries infringes on
or otherwise violates any copyright of another based on works developed
internally by Buyer or a Buyer Subsidiary or any trade secret of another; (ii)
that the business of Buyer or any of Buyer Subsidiaries willfully infringes on
or otherwise willfully violates, or infringes on or otherwise violates, any
patent, trademark or service mark of another; (iii) against the use by Buyer or
a Buyer Subsidiary of any copyrights internally developed by Buyer or a Buyer
Subsidiary or trade secrets used in the business of Buyer or a Buyer Subsidiary
as currently conducted or as proposed to be conducted; (iv) against the use by
Buyer or any of Buyer Subsidiaries of any trademarks, trade names, patents,
technology, know-how or source code or object code used in the business of Buyer
or any of Buyer Subsidiaries as currently conducted or as proposed to be
conducted; (v) challenging the ownership, validity or effectiveness of any of
the copyrights in works internally developed by Buyer or Buyer Subsidiaries or
any applications therefor or of any material trade secret of Buyer or a Buyer
Subsidiary; (vi) challenging the ownership, validity or effectiveness of any of
the patents, registered and material unregistered trademarks, service marks and
trade names, and any applications therefor or of any material trade secret of
Buyer or any of Buyer Subsidiaries; or (vii) challenging the license or legally
enforceable right to use any patents, trademarks, service marks, trade secrets
or copyrights of a third party by Buyer or Buyer's Subsidiaries, except, in the
case of each of clauses (i), (ii), (iii), (iv), (v), (vi) and (vii) above, as
disclosed on Schedule 5.17(b) of Buyer's Disclosure Schedule.
(c) All material patents, registered trademarks, service marks, copyrights
and material trade secrets owned by Buyer and used in the business of Buyer are
valid and subsisting. To Buyer's knowledge, all material patents, registered
trademarks, service marks, copyrights and material trade secrets licensed by
Buyer and used in the business of Buyer are valid and subsisting. Except as set
forth in Schedule 5.17(c), the rights, title and ownership of Buyer Intellectual
Property Rights by Buyer and Buyer Subsidiaries herein, are not subject to any
encumbrances, charges, liens, indentures, security interests or claims of any
kind.
(d) Except as set forth (i) in the portions identified with specificity of
the specified Buyer Securities Filings filed prior to the date of this Agreement
listed on Schedule 5.17(d)(i) of Buyer's Disclosure Schedule or (ii) in Schedule
5.17(d)(ii) of Buyer's Disclosure Schedule, to Buyer's knowledge, there is no
material unauthorized use, infringement or misappropriation of any of Buyer
Intellectual Property Rights or material trade secret of Buyer by any third
party, including any employee or former employee of Buyer or any of Buyer
Subsidiaries.
(e) Except as set forth in Schedule 5.17(e) of Buyer's Disclosure Schedule,
the execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby will not constitute a breach of any
instrument or agreement governing any Buyer Intellectual Property Rights or
material trade secret; will not cause the forfeiture or termination or give rise
to a right of forfeiture or termination of any Buyer Intellectual Property
Rights or material trade secret of Buyer; nor impair the right of the Surviving
Corporation, after the Closing Date, to use, sell or license any Buyer
Intellectual Property Rights or material trade secret.
(f) Buyer and Buyer Subsidiaries have taken reasonable and practicable
steps designed to safeguard and maintain their proprietary rights in all Buyer
Intellectual Property Rights and the secrecy and confidentiality of their trade
secrets. To Buyer's knowledge, no current or prior officers, employees or
consultants of Buyer or Buyer Subsidiaries claim or have a right to claim an
ownership interest in any Buyer Intellectual Property Rights or trade secret as
a result of having been involved in the development or licensing of such Buyer
Intellectual Property Rights or trade secret while employed by or consulting to
Buyer.
5.18. Buyer Securities.
(a) The Securities have been duly authorized and, when issued and paid for
pursuant to the terms of this Agreement, will be duly and validly issued, fully
paid and non-assessable, and will be free and clear of all Liens
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and restrictions, other than restrictions on transfer imposed by the Securities
Act and state securities laws, including without limitation "blue sky" laws.
(b) Subject to the accuracy of Parent and CUSH' representations appearing
in Section 4.5 hereof, the offer, issue and sale of the Securities are and will
be exempt from the registration and prospectus delivery requirements of the
Securities Act, and have been registered or qualified (or are exempt from
registration and qualification) under the registration, permit or qualification
requirements of all applicable state securities laws.
5.19. Labor Matters. Except as set forth in Schedule 5.19 of Buyer's
Disclosure Schedule, (a) there are no controversies pending or, to the best
knowledge of Buyer, threatened, between Buyer and any of its employees, which
controversies would have a Material Adverse Effect on Buyer; (b) neither Buyer
nor any of Buyer Subsidiaries is a party to any material collective bargaining
agreement or other labor union contract applicable to persons employed by Buyer
or Buyer Subsidiaries, nor, as of the date of this Agreement, does Buyer or any
of Buyer Subsidiaries know of any activities or proceedings of any labor union
to organize any such employees; (c) neither Buyer nor any of Buyer Subsidiaries
has any knowledge of any strikes or material slowdowns, work stoppages,
lockouts, or threats thereof, by or with respect to any employees of Buyer or
any of Buyer Subsidiaries; (d) there are no material outstanding or, to the best
knowledge of Buyer, threatened, lawsuits, claims or charges in any forum with
respect to Buyer's compliance with laws regarding antidiscrimination, wrongful
termination, termination in violation of public policy, unpaid overtime, breach
of contract or any other claimed employee rights; and (e) Buyer and Buyer
Subsidiaries have complied in all material respects with all reporting,
disclosure and other requirements with respect to safety, affirmative action,
drug and alcohol testing, Workers Adjustment and Retraining Notification Act and
any other applicable labor and employment laws or regulations.
5.20. Limitation on Business Conduct. Except as set forth in Schedule 5.20
of Buyer's Disclosure Schedule, neither Buyer nor any of Buyer Subsidiaries is a
party to, or has any obligation under, any contract or agreement, written or
oral, which contains any covenants currently or prospectively limiting in any
material respect the freedom of Buyer or any of Buyer Subsidiaries to engage in
any line of business or to compete with any entity.
5.21. Property. Except as set forth in Schedule 5.21 of Buyer's Disclosure
Schedule, each of Buyer and each of Buyer Subsidiaries owns the properties and
assets that it purports to own free and clear of all Liens, except for Liens
which arise in the ordinary course of business and do not materially impair
Buyer's or Buyer Subsidiaries' ownership or use of such properties or assets,
and Liens for Taxes not yet due. Buyer owns no real property. Buyer has made
available to the Company true and complete copies of all of its leases of
property. With respect to the property and assets it leases, Buyer, Buyer
Subsidiaries, and to the best of Buyer's knowledge, each of the other parties
thereto, is in material compliance with such leases, and Buyer or Buyer
Subsidiaries, as the case may be, hold a valid leasehold interest free of any
Liens, except those referred to above. The rights, properties and assets
presently owned, leased or licensed by Buyer and Buyer Subsidiaries include all
rights, properties and assets necessary to permit Buyer and Buyer Subsidiaries
to conduct their business in all material respects in the same manner as their
businesses have been conducted prior to the date hereof. Neither Buyer nor any
Buyer Subsidiary is in material violation of any zoning, building or safety
ordinance, regulation or requirement or other law or regulation applicable to
the operation of owned or leased properties, nor, as of the date of this
Agreement, has Buyer or any Buyer Subsidiary received any notice of such a
violation with which it has not complied.
5.22. Environmental Matters.
(a) Except as set forth in Schedule 5.22(a) of Buyer's Disclosure Schedule,
Buyer and Buyer Subsidiaries are in material compliance with the Environmental
Laws, which compliance includes the possession by Buyer and Buyer Subsidiaries
of all material permits and governmental authorizations required under
applicable Environmental Laws, and compliance in all material respects with the
terms and conditions thereof, except in each case where such non-compliance
would not have a Material Adverse Effect on Buyer. Neither Buyer nor any of
Buyer Subsidiaries has received any written communication from a Governmental
Authority that alleges that Buyer or any of Buyer Subsidiaries is not in such
material compliance, and there
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are no circumstances that may prevent or interfere with such compliance in the
future, except where such non-compliance would not have a Material Adverse
Effect on Buyer.
(b) Except as set forth in Schedule 5.22(b) of Buyer's Disclosure Schedule,
there are no Environmental Claims, including claims based on "arranger
liability," pending or, to the knowledge of Buyer, threatened against Buyer or
any of Buyer Subsidiaries or against any person or entity whose liability for
any Environmental Claim Buyer or any of Buyer Subsidiaries has retained or
assumed either contractually or by operation of law, except for such
Environmental Claims that would not have a Material Adverse Effect on Buyer.
(c) Except as set forth in Schedule 5.22(c) of Buyer's Disclosure Schedule,
to the knowledge of Buyer and Buyer Subsidiaries, there are no past or present
actions, inactions, activities, circumstances, conditions, events or incidents,
including the release, emission, discharge, presence or disposal of any Material
of Environmental Concern by Buyer and Buyer Subsidiaries and, to the knowledge
of Buyer and Buyer Subsidiaries, by third parties, that would form the basis of
any Environmental Claim against Buyer or any of Buyer Subsidiaries or against
any person or entity whose liability for any Environmental Claim Buyer or any of
Buyer Subsidiaries have retained or assumed either contractually or by operation
of law, except for such Environmental Claims that would not have a Material
Adverse Effect on Buyer.
(d) Except as set forth in Schedule 5.22(d) of Buyer's Disclosure Schedule,
Buyer is in compliance in all material respects with Environmental Laws as they
relate to (i) any on-site or off-site locations where Buyer or any of Buyer
Subsidiaries has stored, disposed or arranged for the disposal of Materials of
Environmental Concern for itself (but not on behalf of others) or (ii) any
underground storage tanks located on property owned or leased by Buyer or any of
Buyer Subsidiaries. To the knowledge of Buyer, there is no asbestos contained in
or forming part of any building, building component, structure or office space
owned or leased by Buyer or any of Buyer Subsidiaries. To the knowledge of
Buyer, no polychlorinated biphenyls (PCB's) or PCB-containing items are used or
stored at any property owned or leased by Buyer or any of Buyer Subsidiaries.
Buyer hereby represents that it has occupied properties only for the purpose of
office space or warehousing non-hazardous materials.
5.23. Insurance. Buyer maintains insurance that provides adequate coverage
for normal risks incident to the business of Buyer and Buyer Subsidiaries and
their respective properties and assets and in character and amount comparable to
that carried by persons engaged in similar businesses, except where the nature
of potential liabilities that may reasonably be expected to arise in the course
of Buyer's business would, in the exercise of prudent business judgment, require
additional amounts or types of insurance coverage, in which case Buyer maintains
such additional coverage. The insurance polices maintained by Buyer are with
reputable insurance carriers, have no premium delinquencies and are in full
force and effect. Copies of all such insurance policies have been made available
to the Company.
5.24. Finders and Investment Bankers. Neither Buyer nor any of its
officers or directors has employed any broker, finder or financial advisor or
otherwise incurred any liability for any brokerage fees, commissions, or
financial advisors' or finders' fees in connection with the transactions
contemplated hereby, other than pursuant to an agreement with Lehman Brothers
Inc.
5.25. Fairness Opinion. Buyer's Special Committee of the Board of
Directors has received from its financial advisor, Lehman Brothers Inc., a
written opinion addressed to it relating to the fairness from a financial point
of view of the transaction contemplated hereby. A true and complete copy of such
opinion has been delivered to the Company.
5.26. Takeover Statutes. The Board of Directors of Buyer has approved this
Agreement and the consummation of the transactions contemplated hereby and such
approval constitutes approval of the Merger and the other transactions
contemplated hereby by the Board of Directors of Buyer under the provisions of
Section 203 of the DGCL such that Section 203 of the DGCL does not apply to the
Merger and the acquisition of the Securities by CUSH and the other transactions
contemplated hereby. To the best knowledge of Buyer, no other state takeover
statute is applicable to the Merger and the transactions contemplated hereby.
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5.27. Full Disclosure. No statement contained in any certificate or
schedule, including, without limitation, Buyer's Disclosure Schedule, furnished
or to be furnished by Buyer or Buyer Subsidiaries to Parent or the Company in,
or pursuant to the provisions of, this Agreement, contains or shall contain any
untrue statement of a material fact or omits or will omit to state any material
fact necessary, in the light of the circumstances under which it was made, in
order to make the statements herein or therein not misleading.
5.28. Year 2000. Except as set forth in Schedule 5.28 of Buyer's
Disclosure Schedule, the disclosure under the heading "Year 2000 Compliance"
contained in Buyer's Form 10-K is accurate and in compliance with applicable law
in all material respects.
5.29. Expenses. Buyer has provided Parent with a good faith estimate of
all costs and expenses paid, payable or to be payable by Buyer in connection
with the transactions contemplated hereby, including, without limitation, any
amounts that will come due as a result of the consummation of the transactions
contemplated hereby.
ARTICLE VI
ADDITIONAL COVENANTS
Section 6.1. Conduct of Business by the Company Pending the Merger.
(a) Unless Buyer shall otherwise consent in writing and except as expressly
contemplated by this Agreement or in the Company's Disclosure Schedule, during
the period from the date of this Agreement to the Effective Time:
(i) the Company shall conduct, and it shall cause the Company
Subsidiaries to conduct, its or their businesses in the ordinary course and
consistent with past practice, and the Company shall, and it shall cause
the Company Subsidiaries to, use its or their reasonable best efforts to
preserve substantially intact its business organization, to keep available
the services of its present officers and employees and to preserve the
present commercial relationships of the Company and the Company
Subsidiaries with persons with whom the Company or the Company Subsidiaries
do significant business; and
(ii) without limiting the generality of the foregoing, neither the
Company nor any of the Company Subsidiaries will:
(A) amend or propose to amend the Company Charter or Company
Bylaws;
(B) authorize for issuance, issue, grant, sell, pledge, dispose of
or propose to issue, grant, sell, pledge or dispose of any shares of, or
any options, warrants, commitments, subscriptions or rights of any kind
to acquire or sell any shares of, the capital stock or other securities
of the Company or any of the Company Subsidiaries, including, but not
limited to, any securities convertible into or exchangeable for shares
of stock of any class of the Company or any of the Company Subsidiaries,
except for (a) the issuance of shares pursuant to the exercise of
options outstanding on the date of this Agreement in accordance with
their present terms, and (b) the issuance of shares upon the exercise of
warrants outstanding on the date of this Agreement in accordance with
their present terms;
(C) split, combine or reclassify any shares of its capital stock or
declare, pay or set aside any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock, other than dividends or distributions to the Company or a
Company Subsidiary, or directly or indirectly redeem, purchase or
otherwise acquire or offer to acquire any shares of its capital stock or
other securities;
(D) create, incur or assume any indebtedness for borrowed money or
issue any debt securities, other than in the ordinary course of
business;
(E) (1) assume, guarantee, endorse (other than endorsement for
collection or deposit in the ordinary course of business) or otherwise
become liable or responsible (whether directly, indirectly,
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contingently or otherwise) for the obligations of any person (other than
the Company or a Company Subsidiary); (2) make any capital expenditures
or make any advances or capital contributions to, or investments in, any
other person (other than to a Company Subsidiary); (3) voluntarily incur
any material liability or obligation (absolute, accrued, contingent or
otherwise); or (4) sell, transfer, mortgage, pledge or otherwise dispose
of, or encumber, or agree to sell, transfer, mortgage, pledge or
otherwise dispose of or encumber, any assets or properties, real,
personal or mixed, material to the Company and the Company Subsidiaries
taken as a whole other than (x) to secure debt permitted under paragraph
(D) or (y) the sale of inventory in the ordinary course of business;
(F) increase in any manner the compensation of any of its officers
or employees or enter into, establish, amend or terminate any
employment, consulting, retention, change in control, collective
bargaining, bonus or other incentive compensation, profit sharing,
health or other welfare, stock option or other equity, pension,
retirement, vacation, severance, deferred compensation or other
compensation or benefit plan, policy, agreement, trust, fund or
arrangement with, for or in respect of, any stockholder, officer,
director, employee, consultant or affiliate other than, in any such case
referred to above, as may be required by Law or as required pursuant to
the terms of agreements in effect on the date of this Agreement and
other than arrangements with new employees (other than employees who
will be officers of the Company) hired in the ordinary course of
business and providing for compensation and other benefits consistent
with those provided for similarly situated employees of the Company as
of the date hereof;
(G) alter through merger, liquidation, reorganization,
restructuring or in any other fashion the corporate structure or
ownership of the Company or any Company Subsidiary;
(H) except as may be required as a result of a change in law, and
with prior written notice to Buyer, change any of the accounting
principles or practices used by it;
(I) make any tax election which is inconsistent with past practice
or settle or compromise any Tax liability in excess of $75,000;
(J) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business of liabilities of less than $25,000
reflected or reserved against in the financial statements (including the
notes thereto) of the Company, or covered by insurance;
(K) enter into, amend, modify or terminate any contract, agreement,
commitment or other understanding involving: (1) annual payments, or
property with a value, of (x) $75,000 or more, ($100,000 or more in the
case of purchase orders) if the place of performance is the United
States, or (y) $100,000 or more if the place of performance is outside
the United States, (2) a term of more than one (1) year or (3) the
assignment, transfer, sale or exclusive license of copyrights,
trademarks or other intellectual property;
(L) take or cause to be taken any action that would disqualify the
Merger as a "reorganization" within the meaning of Section 368(a) of the
Code; or
(M) take, or agree in writing or otherwise to take, any of the
foregoing actions or any action which would make any of the
representations or warranties of the Company contained in this Agreement
untrue or incorrect in any material respect at or prior to the Effective
Time.
(b) The Company shall, and the Company shall cause each of the Company
Subsidiaries to, (i) comply with all Laws applicable to it, to any of its
properties, assets or business or to the consummation of the transactions
contemplated hereby, and to maintain in full force and effect all Company
Permits necessary for its business, and (ii) send a message by email by the
opening of business on September 7, 2000 to all of their respective employees
notifying them of the provisions of this Section 6.1 and directing them not to
take any action in contravention of this Section 6.1.
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Section 6.2. Conduct of Business by Buyer and Merger Sub Pending the
Merger.
(a) Unless Parent shall otherwise consent and except as expressly
contemplated by this Agreement or in Buyer's Disclosure Schedule, during the
period from the date of this Agreement to the Effective Time:
(i) Buyer shall conduct, and it shall cause the Buyer Subsidiaries to
conduct, its or their businesses in the ordinary course and consistent with
past practice, and Buyer shall, and it shall cause the Buyer Subsidiaries
to, use its or their reasonable best efforts to preserve substantially
intact its business organization, to keep available the services of its
present officers and employees and to preserve the present commercial
relationships of Buyer and the Buyer Subsidiaries with persons with whom
Buyer or the Buyer Subsidiaries do significant business; and
(ii) without limiting the generality of the foregoing, and except as
contemplated herein, neither Buyer nor any of the Buyer Subsidiaries will:
(A) amend or propose to amend the Buyer Charter or Buyer Bylaws;
(B) authorize for issuance, issue, grant, sell, pledge, dispose of
or propose to issue, grant, sell, pledge or dispose of any shares of, or
any options, warrants, commitments, subscriptions or rights of any kind
to acquire or sell any shares of, the capital stock or other securities
of Buyer or any of the Buyer Subsidiaries, including, but not limited
to, any securities convertible into or exchangeable for shares of stock
of any class of Buyer or any of the Buyer Subsidiaries, except for (a)
the issuance of shares pursuant to the exercise of Buyer Options
outstanding on the date of this Agreement in accordance with their
present terms, and (b) the issuance of shares upon the exercise of Buyer
Warrants outstanding on the date of this Agreement in accordance with
their present terms;
(C) split, combine or reclassify any shares of its capital stock or
declare, pay or set aside any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock, other than dividends or distributions to Buyer or a Buyer
Subsidiary, or directly or indirectly redeem, purchase or otherwise
acquire or offer to acquire any shares of its capital stock or other
securities;
(D) create, incur or assume any indebtedness for borrowed money or
issue any debt securities, other than in the ordinary course of business
or pursuant to any credit agreement as in effect on the date hereof
(except as provided in clause (2) of paragraph (E) below);
(E) (1) assume, guarantee, endorse (other than endorsement for
collection or deposit in the ordinary course of business) or otherwise
become liable or responsible (whether directly, indirectly, contingently
or otherwise) for the obligations of any person (other than Buyer or a
Buyer Subsidiary); (2) make any capital expenditures or make any
advances or capital contributions to, or investments in, any other
person (other than to a Buyer Subsidiary); (3) voluntarily incur any
material liability or obligation (absolute, accrued, contingent or
otherwise); or (4) sell, transfer, mortgage, pledge or otherwise dispose
of, or encumber, or agree to sell, transfer, mortgage, pledge or
otherwise dispose of or encumber, any assets or properties, real,
personal or mixed, material to Buyer and the Buyer Subsidiaries taken as
a whole other than (x) to secure debt permitted under paragraph (D) or
(y) the sale of inventory in the ordinary course of business;
(F) increase in any manner the compensation of any of its officers
or employees or enter into, establish, amend or terminate any
employment, consulting, retention, change in control, collective
bargaining, bonus or other incentive compensation, profit sharing,
health or other welfare, stock option or other equity, pension,
retirement, vacation, severance, deferred compensation or other
compensation or benefit plan, policy, agreement, trust, fund or
arrangement with, for or in respect of, any stockholder, officer,
director, employee, consultant or affiliate other than, in any such case
referred to above, as may be required by Law or as required pursuant to
the terms of agreements in effect on the date of this Agreement and
other than arrangements with new employees (other than employees who
will be officers of Buyer) hired in the ordinary course of business and
providing for
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compensation and other benefits consistent with those provided for
similarly situated employees of Buyer as of the date hereof;
(G) alter through merger, liquidation, reorganization,
restructuring or in any other fashion the corporate structure or
ownership of Buyer or any Buyer Subsidiary;
(H) except as may be required as a result of a change in law or as
required by the SEC, and with prior written notice to Parent, change any
of the accounting principles or practices used by it;
(I) make any tax election which is inconsistent with past practice
or settle or compromise any Tax liability in excess of $75,000;
(J) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business of liabilities of less than $25,000
reflected or reserved against in the financial statements (including the
notes thereto) of Buyer, or covered by insurance;
(K) enter into, amend, modify or terminate any contract, agreement,
commitment or other understanding involving: (1) annual payments, or
property with a value, of (x) $75,000 or more, ($100,000 or more in the
case of purchase orders) if the place of performance is the United
States, or (y) $100,000 or more if the place of performance is outside
the United States, (2) a term of more than one (1) year or (3) the
assignment, transfer, sale or exclusive license of copyrights,
trademarks or other intellectual property;
(L) take or cause to be taken any action that would disqualify the
Merger as a "reorganization" within the meaning of Section 368(a) of the
Code; and
(M) take, or agree in writing or otherwise to take, any of the
foregoing actions or any action which would make any of the
representations or warranties of Buyer contained in this Agreement
untrue or incorrect in any material respect at or prior to the Effective
Time.
(b) Buyer shall, and Buyer shall cause each of the Buyer Subsidiaries to,
(i) comply with all Laws applicable to it, to any of its properties, assets or
business or to the consummation of the transactions contemplated hereby, and to
maintain in full force and effect all Buyer Permits necessary for its business,
(ii) promptly furnish the Company with copies of all notices and correspondence
or other information to or from any party in connection with matters relating to
Buyer's credit agreements and (iii) send a message by email by the opening of
business on September 7, 2000 to all of their respective employees notifying
them of the provisions of this Section 6.2 and directing them not to take any
action in contravention of this Section 6.2.
(c) During the period from the date of this Agreement to the Effective
Time, Merger Sub shall not engage in any activities of any nature except in
connection with the consummation of the Merger.
Section 6.3. Confidentiality.
(a) Unless (i) otherwise expressly provided in this Agreement, (ii)
required by applicable Law or any listing agreement with, or the rules and
regulations of, NASDAQ or any other applicable securities exchange or the NASD,
(iii) necessary to secure any required Consents as to which the other Party has
been advised or (iv) consented to in writing by the other Parties, all
information (whether oral or written) and documents furnished in connection
herewith together with analyses, compilations, studies or other documents
prepared by the Party which contain or otherwise reflect such information shall
be kept strictly confidential by the Parties and their respective officers,
directors, employees and agents. Prior to any disclosure permitted pursuant to
the preceding sentence, the Party intending to make such disclosure shall
consult with the other Parties regarding the nature and extent of the
disclosure. Nothing contained herein shall preclude disclosures to the extent
necessary to comply with accounting, SEC and other disclosure obligations
imposed by applicable Law. In the event the transactions contemplated by this
Agreement are not consummated, each Party shall return to the other Parties any
documents furnished by the other Parties and all copies thereof that any of them
may have made and will hold in confidence any information obtained from the
other Parties except to the extent (A) such Party is required to disclose such
information by Law or such disclosure is necessary or desirable in
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connection with the pursuit or defense of a claim, (B) such information was
known by such Party prior to such disclosure (and provided that, except with
respect to information referred to in the following clause (C), such Party shall
have advised the other Parties of such knowledge upon or promptly after its
receipt of such information) or was thereafter developed or obtained by such
Party independent of such disclosure or (C) such information is or becomes
generally available to the public other than by breach of this Section 6.3(a)
(or, to such Party's knowledge, breach of a confidentiality agreement with
another Party). Prior to any disclosure of information pursuant to the exception
in clause (A) of the preceding sentence, the Party intending to disclose the
same shall so notify the Party which provided the same in order that such Party
may seek a protective order or other appropriate remedy should it choose to do
so.
(b) Buyer, Parent and the Company further acknowledge that certain of the
business and activities of each of them is competitive with business and
activities of the other party, and each of them therefore agrees that it will
not seek to obtain any competitive or other business advantage over the other
party as a result of the information or documents so received by it in
connection herewith, each party acknowledging that such use would be unfair and
materially detrimental to the other party, provided that the provisions of this
Section 6.3(b) shall not apply to information referred to in clause (C) of
Section 6.3(a) hereof.
Section 6.4. Notification of Certain Matters. Each Party shall give prompt
notice to other Parties if any of the following occur after the date of this
Agreement: (a) receipt of any notice or other communication in writing from any
third party alleging that the Consent of such third party is or may be required
in connection with the transactions contemplated by this Agreement, provided
that such Consent would have otherwise been required to have been disclosed in
this Agreement; (b) receipt of any material notice or other communication from
any Governmental Authority (including, but not limited to, the NASD, NASDAQ or
any other securities exchange) in connection with the transactions contemplated
by this Agreement; (c) the occurrence of an event which would be reasonably
likely to have a Material Adverse Effect on such Party; or (d) the commencement
or threat of any Litigation involving or affecting such Party or any of its
Subsidiaries, or any of their respective properties or assets, or, to such
Party's knowledge, any employee, agent, director or officer, in his or her
capacity as such, of such Party or any of its Subsidiaries.
Section 6.5. Access and Information. Between the date of this Agreement
and the Effective Date, and without intending by this Section 6.5 to limit any
of the other obligations of the Parties under this Agreement, each Party will
give, and shall direct its accountants and legal counsel to give, the other
Parties and their respective authorized representatives (including, without
limitation, their respective financial advisors, accountants and legal counsel),
at reasonable times and without undue disruption to or interference with the
normal conduct of the business and affairs of such Party, access as reasonably
required in connection with the transactions provided for in this Agreement to
all offices and other facilities and to all contracts, agreements, commitments,
books and records of or pertaining to the Company and Company Subsidiaries, and
Buyer and the Buyer Subsidiaries, as the case may be, and will furnish such
other Parties with (a) such financial and operating data and other information
with respect to the business and properties of the Company and Company
Subsidiaries, and Buyer and the Buyer Subsidiaries, as the case may be, as such
other Parties may from time to time reasonably request in connection with such
transactions, and (b) with respect to Buyer, a copy of each material report,
schedule and other document filed or received by Buyer or any of Buyer
Subsidiaries with or from the SEC, the NASD or NASDAQ.
Section 6.6. Reasonable Best Efforts. Subject to the terms and conditions
herein provided, each Party agrees to use reasonable best efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective as promptly as
practicable the transactions contemplated by this Agreement, including, but not
limited to, obtaining all Consents from Governmental Authorities and other third
parties required for the consummation of the transactions contemplated by this
Agreement. Upon the terms and subject to the conditions hereof, each Party
agrees to use reasonable best efforts to take, or cause to be taken, all actions
and to do, or cause to be done, all things necessary to satisfy the other
conditions of the Closing set forth herein. Each Party will not take, nor permit
any of its Subsidiaries to take, any action or to enter into any agreement which
is inconsistent with the rights granted to the other Parties in this Agreement
or which may adversely affect the consummation of the transactions contemplated
hereby. Notwithstanding the foregoing, neither Parent nor any of its Affiliates
shall
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be required to divest or hold separate or otherwise take or commit to take any
action that materially limits its freedom of action with respect to, or its
ability to retain, any of the businesses or assets of Parent or any of its
Affiliates.
Section 6.7. Public Announcements. So long as this Agreement is in effect,
each Party shall not, and shall use reasonable efforts to cause its Affiliates
not to, issue or cause the publication of any press release or any other
announcement with respect to the transactions contemplated hereby without the
consent of the other Parties (such consent not to be unreasonably withheld or
delayed), except where such release or announcement is required by applicable
Law or pursuant to any applicable listing agreement with, or rules or
regulations of, the NASD or NASDAQ, or any stock exchange on which shares of a
Party's capital stock are listed, in which case such Party, prior to making such
announcement, will consult with the other Parties regarding the same.
Section 6.8. Business Opportunities.
(a) Competition. Buyer acknowledges that Parent and its Affiliates engage
in the same or similar activities or lines of business as Buyer and have an
interest in the same area of business opportunities. Buyer agrees that Parent
and its Affiliates shall have the right to (a) engage in the same or similar
business activities or lines of business as Buyer, (b) do business with any
client or customer of Buyer and (c) employ or otherwise engage any officer or
employee of Buyer if (i) prior to employment by Buyer such person was an
officer, director or employee of Parent or an Affiliate thereof, or (ii) such
employment or engagement by Parent or its Affiliate would not harm Buyer in any
significant manner, and neither Parent nor any Affiliate thereof, nor any
officer or director of Parent or such Affiliate, shall be liable to Buyer by
reason of any such activities of Parent or its Affiliates or of such person's
participation therein.
(b) Business Opportunities. In the event that (a) Parent or any of its
Affiliates, or (b) any officer, director or employee of Buyer who is also an
officer, director or employee of Parent or any Affiliate thereof, acquires
knowledge of a potential transaction or matter which may be a business
opportunity for both Buyer and Parent or any of its Affiliates, such business
opportunity shall belong only to Parent and not to Buyer, and any such officer,
director or employee of Buyer shall treat such business opportunity as belonging
only to Parent and not to Buyer, subject to the following sentence. In the case
of clause (b) of the preceding sentence, Parent shall determine in good faith
whether, based on the circumstances under which such person acquired his
knowledge, such business opportunity instead was offered to such person solely
in his capacity as an officer, director or employee of Buyer ("Buyer Capacity").
For purposes of the foregoing determination, there shall be a presumption that
such business opportunity was offered to such person in his capacity as an
officer, director or employee of Parent or any Affiliate thereof. In the event
Parent determines that it was so offered to such person in his Buyer Capacity,
such business opportunity shall belong only to Buyer and not to Parent and such
officer, director or employee shall treat such business opportunity as belonging
only to Buyer and not to Parent. With respect to any business opportunity
belonging to Parent pursuant to this Section 6.8(b), Parent shall decide how to
allocate and pursue such business opportunity based on its sole determination of
what is in the best interests of Parent's stockholders. Parent's good faith
determination of the allocation of business opportunities pursuant to this
Section shall be conclusive and binding for all purposes.
Section 6.9. Employment Arrangements. From and after the Effective Time,
with respect to the employees of the Company, Buyer will, or will cause the
Surviving Corporation to, provide employee benefit plans to such employees of
the Company on such terms as mutually agreed by Buyer and the Company; provided,
however, that nothing herein shall preclude any change in any such employee
benefit plan effective on a prospective basis that is permitted pursuant to the
terms of the applicable employee benefit plan and applicable Law. To the extent
permitted by the terms of such plans or other arrangements, the Company's
performance in respect of any performance plan or other programs shall be
calculated without taking into account any expenses or costs directly associated
with or arising as a result of the transactions contemplated by this Agreement
or any non-recurring charges that would not reasonably be expected to have been
incurred had the transactions contemplated by this Agreement not occurred. With
respect to any plans assumed by Buyer as of the Effective Time or established by
Buyer as a replacement of a Company Employee Plan, to the extent a Company
employee becomes eligible to participate in any such plans, Buyer shall grant to
such employee
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from and after the Effective Time, credit for all service with the Company and
its Affiliates and predecessors (and any other service credited under similar
predecessor employee benefit plans) prior to the Effective Time for eligibility
to participate, benefit accrual and vesting purposes, including for purposes of
eligibility and participation under severance policies and plans, including the
calculation of such employee's "years of continuous service," to the extent such
service was credited under the respective benefit plans and severance policies
on the Closing Date, and the employees shall not be subject to any waiting
periods or limitations on benefits for pre-existing conditions under such plans,
including any group health and disability plans, except to the extent such
employees were subject to such limitations under the respective benefit plans on
the Closing Date. Such employees shall also receive credit under the applicable
health plans for deductibles, co-payments and out-of-pocket maximums paid under
the respective benefit plans prior to the Closing Date.
The provisions of this Section 6.9 are not intended to be for the benefit
of or otherwise enforceable by any third party, including, without limitation,
any employee of the Company, or any Company Subsidiary, or any collective
bargaining unit or employee organization.
Section 6.10. Tax Sharing Agreement. The Parties intend to enter into a
tax sharing agreement which will provide that Buyer will be included in the
consolidated federal income tax return of CUSH and that Buyer's share of taxes
will be determined as if Buyer were a stand alone corporation filing its own
federal income tax return.
Section 6.11. Credit Arrangements. At or prior to the Effective Time,
Parent and Buyer shall enter into a credit arrangement, whether directly with
Parent or one of its affiliates, through the Company's existing credit agreement
or with a third party, to provide for a line of credit to Buyer of $50 million
on such customary terms and conditions as may be agreed by the parties thereto.
In addition, Parent shall cause all intercompany debt of the Company to be
canceled at or prior to the Effective Time.
ARTICLE VII
CONDITIONS TO CLOSING
Section 7.1. Conditions Precedent to Obligations of Buyer, Merger Sub,
Parent and the Company. The respective obligations of each Party to consummate
the transactions contemplated by this Agreement are subject to the satisfaction
(or, where legally permissible, waiver by such Party) at or prior to the
Effective Time of each of the following conditions:
(a) No Adverse Order. There shall be no Injunction, restraining order
or decree of any nature of any Governmental Authority of competent
jurisdiction that is in effect that restrains or prohibits the consummation
of the transactions contemplated hereby, or permits such consummation only
subject to any condition or restriction that has or would have a Material
Adverse Effect on Parent, the Company or Buyer, as the case may be. Each
Party shall use all reasonable efforts to have any of the foregoing
vacated, dismissed or withdrawn by the Closing.
(b) Governmental Consents. All Governmental Consents listed in
Section 3.5, Section 4.3, and Section 5.5 shall have been obtained, except
for such Governmental Consents the failure of which to have been obtained
does not and would not, individually or in the aggregate, have a Material
Adverse Effect on Parent, the Company or Buyer, as the case may be.
(c) Information Statement. The Information Statement shall have been
mailed to Buyer's stockholders and all applicable periods under Regulation
14C of the Securities Exchange Act shall have passed, and no action, suit,
proceeding or investigation by the SEC with respect to the Information
Statement shall have been initiated and be continuing, and all necessary
approvals under state securities Laws or the Securities Act or Securities
Exchange Act relating to the issuance of the shares of Buyer Common Stock
shall have been received.
(d) Amended and Restated Registration Rights Agreement. The Second
Amended and Restated Registration Rights Agreement shall have been duly and
validly executed and delivered by the parties thereto.
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(e) Distribution Agreement. The Distribution Agreement shall have
been duly and validly executed and delivered by the parties thereto.
(f) Credit Agreement. The $125 Million Credit Agreement shall have
been converted into Common Stock in accordance with the terms set forth in
Section 2.13 hereof.
(g) Warrants. The Warrants shall have been exercised for shares of
Common Stock in accordance with their respective terms.
Section 7.2. Conditions Precedent to Obligation of the Company. The
obligation of the Company to consummate the transactions contemplated by this
Agreement is subject to the satisfaction (or waiver by the Company) at or prior
to the Effective Time of each of the following additional conditions:
(a) Accuracy of Buyer's and Merger Sub's Representations and
Warranties. Each of the representations and warranties of Buyer and Merger
Sub contained in this Agreement shall be true and correct (without giving
effect to any limitation as to "materiality," "material adverse effect" or
similar qualifying language set forth therein) except to the extent that
any breach (either individually or in the aggregate with all other such
breaches) would not have a Material Adverse Effect on Buyer or materially
and adversely affect the ability of Buyer or Merger Sub to consummate the
transactions contemplated by this Agreement; and the Company shall have
received a certificate signed by a duly authorized executive officer of
Buyer confirming the foregoing as of the Closing Date.
(b) Covenants and Agreements of Buyer. Each of Buyer and Merger Sub
shall have performed and complied with all of its covenants and agreements
hereunder in all material respects through the Closing; and the Company
shall have received a certificate signed by a duly authorized executive
officer of Buyer confirming the foregoing as of the Closing Date.
(c) Tax Opinion. The Company and Buyer shall have received an opinion
of Chadbourne & Parke LLP, dated the Closing Date, to the effect that the
Merger should be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code. In
rendering such opinion, Chadbourne & Parke LLP may receive and rely upon
representations contained in certificates of Buyer, Merger Sub, the Company
and others, in each case in form and substance reasonably acceptable to
Chadbourne & Parke LLP.
Section 7.3. Conditions Precedent to Obligations of Buyer and Merger
Sub. The obligation of each of Buyer and Merger Sub to consummate the
transactions contemplated by this Agreement is subject to the satisfaction (or
waiver by Buyer) at or prior to the Effective Time of each of the following
additional conditions:
(a) Accuracy of the Company's Representations and Warranties. Each of
the representations and warranties of the Company contained in this
Agreement shall be true and correct (without giving effect to any
limitation as to "materiality," "material adverse effect" or similar
qualifying language set forth therein) except to the extent that any breach
(either individually or in the aggregate with all other such breaches)
would not have a Material Adverse Effect on the Company or materially and
adversely affect the ability of the Company to consummate the transactions
contemplated by this Agreement; and Buyer shall have received a certificate
signed by a duly authorized executive officer of Company confirming the
foregoing as of the Closing Date.
(b) Covenants and Agreements of the Company. The Company shall have
performed and complied with all of its covenants and agreements hereunder
in all material respects through the Closing; and Buyer shall have received
a certificate signed by a duly authorized executive officer of the Company
confirming the foregoing as of the Closing Date.
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ARTICLE VIII
TERMINATION
Section 8.1. Termination Events. Without prejudice to other remedies which
may be available to the Parties by law or this Agreement, this Agreement may be
terminated and the transactions contemplated hereby may be abandoned at any time
prior to the Effective Time:
(a) by mutual written consent of Parent and Buyer;
(b) by either Parent or Buyer by giving written notice to the other
Party if the Closing shall not have occurred by December 31, 2000, unless
extended by written agreement of the Parties; provided that the Party
seeking termination pursuant to this subsection (b) is not in default or
breach hereunder and provided, further, that the right to terminate this
Agreement under this clause (b) shall not be available to any Party whose
failure to fulfill any obligation under this Agreement has been the cause
of, or resulted in, the failure of the Closing to occur on or before such
date;
(c) by either Parent or Buyer by giving written notice to the other
Party if any Governmental Authority shall have issued an order, decree or
ruling or taken any other action permanently restraining, enjoining or
otherwise prohibiting the consummation of any of the transactions
contemplated by this Agreement, and such order, decree, ruling or other
action shall not be subject to appeal or shall have become final and
unappealable;
(d) by Buyer if: (i) as of such time of determination, any of the
representations and warranties of Parent, CUSH or the Company contained in
this Agreement shall not be true and correct (without giving effect to any
limitation as to "materiality," "material adverse effect" or similar
qualifying language set forth therein) except to the extent the effect of
such breach (either individually or in the aggregate with all other such
breaches) would not have a Material Adverse Effect on Parent or CUSH or
materially adversely affect the ability of Parent, CUSH, or the Company to
consummate the transactions contemplated hereby, or (ii) Parent, CUSH or
the Company shall have failed to perform in any material respect any
material obligation or to comply in any material respect with any material
agreement or covenant of Parent, CUSH or the Company under this Agreement,
and, in the case of (i), such untruth or incorrectness is incapable of
being cured or is not cured within fifteen (15) days, and in the case of
(ii), such failure is incapable of being cured or is not cured within five
(5) days, after the giving of written notice by Buyer to Parent and the
Company;
(e) by Parent, if: (i) as of such time of determination, any of the
representations and warranties of the Buyer and Merger Sub contained in
this Agreement shall not be true and correct (without giving effect to any
limitation as to "materiality," "material adverse effect" or similar
qualifying language set forth therein) except to the extent the effect of
such breach (either individually or in the aggregate with all other such
breaches) would not have a Material Adverse Effect on Buyer or materially
adversely affect the ability of Buyer or Merger Sub to consummate the
transactions contemplated hereby, or (ii) Buyer and Merger Sub shall have
failed to perform in any material respect any material obligation or to
comply in any material respect with any material agreement or covenant of
Buyer or Merger Sub under this Agreement, and, in the case of (i), such
untruth or incorrectness is incapable of being cured or is not cured within
fifteen (15) days, and in the case of (ii), such failure is incapable of
being cured or is not cured within five (5) days, after the giving of
written notice by Parent to Buyer.
Section 8.2. Effect of Termination. In the event of any termination of
this Agreement pursuant to Section 8.1, all rights and obligations of the
Parties hereunder shall terminate without any Liability on the part of any Party
or its Subsidiaries and Affiliates in respect thereof, except that (a) the
obligations of the Parties under Section 6.3, Section 6.7, Section 10.3, Section
10.4, Section 10.11 and Section 10.12 of this Agreement shall remain in full
force and effect and (b) such termination shall not relieve either Party of any
Liability for any breach of this Agreement.
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ARTICLE IX
INDEMNIFICATION
Section 9.1. Indemnification by Parent and CUSH. Following the Closing and
subject to the terms and conditions of this Article IX, Parent and CUSH, jointly
and severally, will indemnify, defend and hold harmless Buyer, each Subsidiary
and Affiliate of Buyer and each of their respective employees, directors and
officers (collectively, the "Buyer Group") from and against, and will pay or
reimburse, as the case may be, Buyer Group for, any and all Damages actually
incurred by any member of Buyer Group based upon or arising out of (i) any
breach of any covenant or agreement of Parent, CUSH or the Company contained in
this Agreement or (ii) any breach of any of Parent, CUSH or the Company's
representations and warranties contained in this Agreement.
Section 9.2. Indemnification by Buyer. Following the Closing and subject
to the terms and conditions of this Article IX, Buyer will indemnify, defend and
hold harmless Parent, each Subsidiary and Affiliate of the Parent and each of
their respective employees, directors and officers (collectively, the "Parent
Group") from and against, and will pay or reimburse, as the case may be, Parent
Group for, any and all Damages actually incurred by any member of Parent Group
based upon or arising out of (i) any breach of any covenant or agreement of
Buyer or Merger Sub contained in this Agreement or (ii) any breach of any of
Buyer or Merger Sub's representations and warranties contained in this
Agreement.
Section 9.3. Certain Limitations.
(a) Each and every representation and warranty of Parent, CUSH and the
Company or Buyer and Merger Sub contained in this Agreement (other than the
representations and warranties with respect to brokers' fees contained in
Section 3.22, Section 4.7 and Section 5.24 and Buyer's representations and
warranties with respect to the Securities contained in Section 5.18) will
survive the Closing Date solely for purposes of Section 9.1 and Section 9.2
until one year after the Closing Date and then expire. Buyer's
representations and warranties with respect to the Securities contained in
Section 5.18 will survive the Closing Date solely for purposes of Section
9.2 without time limitation. The representations and warranties with
respect to brokers' fees contained in Section 3.22, Section 4.7 and Section
5.24 will survive the Closing Date solely for purposes of Section 9.1 and
Section 9.2 until, and will expire when, all applicable statutes of
limitation in respect of such brokers' fees have expired.
(b) Notwithstanding anything contained herein to the contrary, Parent
and Buyer shall not be obligated to make any indemnification payment under
Section 9.1 or Section 9.2, as the case may be, unless and until the
aggregate Damages sustained by Buyer Group or Parent Group, as the case may
be, exceed on a cumulative basis $5,000,000 (the "Basket"), at which point
Parent or Buyer, as the case may be, shall be obligated to indemnify Buyer
Group or Parent Group, as the case may be, from and against all cumulative
Damages in excess of the Basket.
(c) The amount which an Indemnifying Party is or may be required to
pay to an Indemnified Party in respect of Damages for which indemnification
is provided under this Agreement will be reduced by any amounts actually
received (including amounts received under insurance polices) by or on
behalf of the Indemnified Party from third parties (such amounts are
referred to herein as "Indemnity Reduction Amounts"). If any Indemnified
Party receives any Indemnity Reduction Amounts in respect of an Indemnified
Claim for which indemnification is provided under this Agreement after the
full amount of such Indemnified Claim has been paid by an Indemnifying
Party or after an Indemnifying Party has made a partial payment of such
Indemnified Claim and such Indemnity Reduction Amounts exceed the remaining
unpaid balance of such Indemnified Claim, then the Indemnified Party will
promptly remit to the Indemnifying Party an amount equal to the excess (if
any) of (i) the amount theretofore paid by the Indemnifying Party in
respect of such Indemnified Claim, less (ii) the amount of the indemnity
payment that would have been due if such Indemnity Reduction Amounts in
respect thereof had been received before the indemnity payment was made. An
insurer or other third party who would otherwise be obligated to pay any
claim shall not be relieved of the responsibility with respect thereto or,
solely by virtue of the indemnification provisions hereof, have any
subrogation rights with respect thereto, it being
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expressly understood and agreed that no insurer or any other third party
shall be entitled to any benefit they would not be entitled to receive in
the absence of the indemnification provisions by virtue of the
indemnification provisions hereof. Parent and Buyer, as appropriate, will,
or will cause each Indemnified Party to, use its reasonable best efforts to
pursue promptly any claims or rights it may have against all third parties
which would reduce the amount of Damages for which indemnification is
provided under this Agreement.
(d) Notwithstanding anything contained herein to the contrary, no
member of Parent Group and no member of Buyer Group will be entitled after
the Closing to any recovery under this Agreement for its own special,
punitive, consequential, incidental or indirect damages or lost profits;
provided, however, that nothing herein shall prevent any member of Parent
Group or Buyer Group from being indemnified for all components of awards
against them in claims by third parties, including special, punitive,
consequential, incidental or indirect damages or lost profits components of
such claims.
(e) In the event that, prior to Closing, the officers of any Party to
this Agreement obtain actual knowledge of any breach of warranty or
misrepresentation of another Party, such first-named Party shall
immediately notify the other Party thereof and shall afford the other Party
a reasonable period of time, not to exceed 45 days, in which to cure such
breach or take such action as may be appropriate to correct the
circumstances giving rise to the breach of warranty or misrepresentation.
If a Party fails to notify the other Party in accordance with this Section
9.3(e), such nondisclosing Party shall be deemed to have waived its rights
to indemnification with respect to such undisclosed matter under this
Agreement.
(f) The amount of Damages for which indemnification is provided under
this Agreement shall be (i) increased to take account of any Tax cost
incurred (grossed up for such increase) by the Indemnified Party arising
from the receipt of indemnity payments hereunder (unless such indemnity
payment is treated as an adjustment to the purchase price for tax purposes)
and (ii) reduced to take account of any Tax benefit realized by the
Indemnified Party arising from the incurrence or payment of any such
Damages. In computing the amount of any such Tax costs or Tax benefit, the
Indemnified Party will be deemed to be subject (A) to the applicable
federal and/or local country income taxes at the maximum statutory rate
then in effect and (B) to state and local Taxes (if applicable) at a
combined state and local tax rate of 6%, which will be tax effected at such
maximum federal rate. Any indemnity payment made pursuant to this Agreement
will be treated as an adjustment to the purchase price for tax purposes
unless a determination (as defined in Section 1313 of the Code) or a
similar event under foreign tax law with respect to the Indemnified Party
causes any such payment not to constitute an adjustment to the purchase
price for United States federal income tax purposes or foreign tax
purposes, as the case may be.
(g) The obligations of each Party to indemnify, defend and hold
harmless the other Party and other Persons pursuant to this Article IX
shall terminate (a) with respect to Section 9.1(i) and Section 9.2(i), upon
the expiration of all applicable statutes of limitations and (b) with
respect to Sections 9.1(ii) and 9.2(ii), when the applicable representation
or warranty expires pursuant to Section 9.3(a); provided, however, that
such obligations to indemnify, defend and hold harmless shall not terminate
with respect to any individual item as to which an Indemnified Party shall
have, before the expiration of the applicable period, previously made a
claim by delivering a notice (stating in reasonable detail the basis of
such claim) to the Indemnifying Party.
Section 9.4. Indemnification Procedures.
(a) If any claim or demand is made against an Indemnified Party with
respect to any matter, or any Indemnified Party shall otherwise learn of an
assertion or of a potential claim, by any Person who is not a Party (or an
Affiliate thereof) (a "Third Party Claim") which may give rise to a claim
for indemnification against an Indemnifying Party under this Agreement,
then the Indemnified Party shall promptly notify the Indemnifying Party in
writing and in reasonable detail of the Third Party Claim (including the
factual basis for the Third Party Claim, and, to the extent known, the
amount of the Third Party Claim); provided, however, that no delay on the
part of the Indemnified Party in notifying the Indemnifying Party will
relieve the Indemnifying Party from any obligation hereunder unless (and
then solely to the extent) the Indemnifying Party is actually prejudiced as
a result thereof (except that the Indemnifying Party will
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not be liable for any expenses incurred during the period in which the
Indemnified Party failed to give such notice); it being understood and
agreed that the failure of the Indemnified Party to so notify the
Indemnifying Party prior to settling a Third Party Claim (whether by paying
a claim or executing a binding settlement agreement with respect thereto)
or the entry of a judgment or issuance of an award with respect to a Third
Party Claim shall constitute actual prejudice to the Indemnifying Party's
ability to defend against such Third Party Claim. Thereafter, the
Indemnified Party will deliver to the Indemnifying Party, promptly after
the Indemnified Party's receipt thereof, copies of all notices and
documents (including court papers) received or transmitted by the
Indemnified Party relating to the Third Party Claim.
(b) The Indemnifying Party will have the right to participate in or to
assume the defense of the Third Party Claim (in either case at the expense
of the Indemnifying Party) with counsel of its choice reasonably
satisfactory to the Indemnified Party. The Indemnifying Party will be
liable for the reasonable fees and expenses of counsel employed by the
Indemnified Party for any period during which the Indemnifying Party has
failed to assume the defense thereof (other than during any period in which
the Indemnified Party shall have failed to give notice of the Third Party
Claim as provided above). Should the Indemnifying Party so elect to assume
the defense of a Third Party Claim, the Indemnifying Party will not be
liable to the Indemnified Party for any legal or other expenses
subsequently incurred by the Indemnified Party in connection with the
defense thereof; provided, however, that, if the Parties reasonably agree
that a conflict of interest exists in respect of such claim, such
Indemnified Party will have the right to employ separate counsel reasonably
satisfactory to the Indemnifying Party to represent such Indemnified Party
and in that event the reasonable fees and expenses of such separate counsel
(but not more than one separate counsel for all Indemnified Parties) shall
be paid by such Indemnifying Party. If the Indemnifying Party is conducting
the defense of the Third Party Claim the Indemnified Party, at its sole
cost and expense, may retain separate counsel, and participate in the
defense of the Third Party Claim, it being understood that the Indemnifying
Party will control such defense.
(c) No Indemnifying Party will consent to any settlement, compromise
or discharge (including the consent to entry of any judgment) of any Third
Party Claim without the Indemnified Party's prior written consent (which
consent will not be unreasonably withheld); provided, however, that, if the
Indemnifying Party assumes the defense of any Third Party Claim, the
Indemnified Party will agree to any settlement, compromise or discharge of
such Third Party Claim which the Indemnifying Party may recommend and which
by its terms obligates the Indemnifying Party to pay the full amount of
Damages in connection with such Third Party Claim and unconditionally
releases the Indemnified Party completely from all Liability in connection
with such Third Party Claim); provided, however, that the Indemnified Party
may refuse to agree to any such settlement, compromise or discharge (x)
that provides for injunctive or other nonmonetary relief affecting the
Indemnified Party or (y) that, in the reasonable opinion of the Indemnified
Party, would otherwise materially adversely affect the Indemnified Party.
Whether or not the Indemnifying Party shall have assumed the defense of a
Third Party Claim, the Indemnified Party will not admit any liability,
consent to the entry of any judgment or enter into any settlement or
compromise with respect to the Third Party Claim without the prior written
consent of the Indemnifying Party (which consent will not be unreasonably
withheld).
(d) If the Indemnifying Party assumes the defense of any Third Party
Claim, the Indemnifying Party will keep the Indemnified Party informed of
all material developments relating to or in connection with such Third
Party Claim. If the Indemnifying Party chooses to defend a Third Party
Claim, the Parties will cooperate in the defense thereof (with the
Indemnifying Party being responsible for all reasonable out-of-pocket
expenses of the Indemnified Party (other than for the fees and expenses of
its counsel) in connection with such cooperation), which cooperation will
include the provision to the Indemnifying Party of records and information
which are reasonably relevant to such Third Party Claim, and making
employees available on a mutually convenient basis to provide additional
information and explanation of any material provided hereunder.
(e) Any claim on account of Damages for which indemnification is
provided under this Agreement which does not involve a Third Party Claim
will be asserted by reasonably prompt written notice (but in
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any event within the relevant period specified in Section 9.3(a)) given by
the Indemnified Party to the Indemnifying Party.
(f) In the event of payment in full by an Indemnifying Party to any
Indemnified Party in connection with any claim (an "Indemnified Claim"),
such Indemnifying Party will be subrogated to and will stand in the place
of such Indemnified Party as to any events or circumstances in respect of
which such Indemnified Party may have any right or claim relating to such
Indemnified Claim against any claimant or plaintiff asserting such
Indemnified Claim or against any other Person. Such Indemnified Party will
cooperate with such Indemnifying Party in a reasonable manner, and at the
cost and expense of such Indemnifying Party, in prosecuting any subrogated
right or claim.
Section 9.5. Exclusive Remedy. The remedies set forth in this Article IX
shall be the sole and exclusive remedy with respect to any and all claims
relating, directly or indirectly, to the subject matter of this Agreement.
Without limiting the generality of the foregoing and subject to Article IX,
Buyer and Parent hereby waive, to the fullest extent permitted under applicable
Law, any and all rights, claims and causes of action it or any of their
respective Subsidiaries or Affiliates may have against the other Party or any of
its Subsidiaries and Affiliates with respect to the subject matter of this
Agreement, whether arising under or based upon any federal, state, provincial,
local or foreign statute, Law, ordinance, rule, regulation or common law.
Section 9.6. Mitigation. Buyer and Parent shall cooperate with each other
with respect to resolving any claim or liability with respect to which one Party
is obligated to indemnify the other Party hereunder, including by making
commercially reasonable efforts to mitigate or resolve any such claim or
liability. In the event that Buyer and Parent shall fail to make such
commercially reasonable efforts to mitigate or resolve any claim or liability,
then notwithstanding anything else to the contrary contained herein, the other
Party shall not be required to indemnify any Person for any Damages that could
reasonably be expected to have been avoided if Buyer or Parent, as the case may
be, had made such efforts.
A-40
<PAGE> 105
ARTICLE X
MISCELLANEOUS
Section 10.1. Parties in Interest. Except as provided in Article IX and
this Section 10.1, nothing in this Agreement, whether express or implied, shall
be construed to give any Person, other than the Parties or their respective
successors and permitted assigns, any legal or equitable right, remedy, claim or
benefit under or in respect of this Agreement.
Section 10.2. Assignment. This Agreement shall be binding upon and inure
to the benefit of the Parties and their respective successors and permitted
assigns. No Party may assign either this Agreement or any of its rights,
interests, or obligations hereunder without the express prior written consent of
the other Party, and any attempted assignment, without such consent, shall be
null and void.
Section 10.3. Notices. All notices and other communications required or
permitted to be given by any provision of this Agreement shall be in writing and
sent by hand or overnight courier, or by facsimile transmission (with
acknowledgment received), charges prepaid and addressed to the intended
recipient as follows, or to such other addresses or numbers as may be specified
by a Party from time to time by like notice to the other Party:
If to Parent, CUSH or the Company:
Infogrames Entertainment SA
84, rue du 1er Mars 1943
Villeurbanne, 69100
France
Attention: Thomas Schmider
Telecopy: (011 33) 472 655116
Confirm: (011 33) 472 655000
And
Attention: Frederic Monnereau
Telecopy: (011 33) 472 655062
Confirm: (011 33) 472 655000
with a copy to:
Chadbourne & Parke LLP
30 Rockefeller Plaza
New York, NY 10112
Attn.: Dennis J. Friedman, Esq.
Telecopy: (212) 541-5369
Confirm: (212) 408-5100
If to Buyer or Merger Sub:
Infogrames, Inc.
417 Fifth Avenue
New York, New York 10016
Attention: David J. Fremed
Telecopy: (212) 679-3424
Confirm: (212) 726-6500
A-41
<PAGE> 106
with a copy to:
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
Attention: David P. Levin, Esq.
Telecopy: (212) 715-8000
Confirm: (212) 715-9100
All notices and other communications given in accordance with the
provisions of this Agreement shall be deemed to have been given and received
when delivered by hand or transmitted by facsimile (with acknowledgment
received), or one Business Day after the same are sent by a reliable overnight
courier service, with acknowledgment of receipt.
Section 10.4. Expenses. Unless otherwise provided herein, each of the
Parties agrees to pay, without right of reimbursement from the other, all costs
and expenses incurred by it incident to the performance of its obligations
hereunder, including, without limitation, SEC filing fees and associated
printing costs, the fees and disbursements of counsel, accountants, financial
advisors, experts and consultants employed by the respective Parties in
connection with the transactions contemplated hereby, whether or not the
transactions contemplated by this Agreement are consummated.
Section 10.5 Amendments and Waivers. This Agreement may not be amended,
supplemented or otherwise modified except in a written instrument executed by
the Parties. No waiver by either Party of any default, misrepresentation, or
breach of warranty or covenant hereunder, whether intentional or not, shall be
deemed to extend to any prior or subsequent default, misrepresentation, or
breach of warranty or covenant hereunder or affect in any way any rights arising
by virtue of any prior or subsequent such occurrence. No waiver by either Party
of any of the provisions hereof shall be effective unless explicitly set forth
in writing and executed by the Party sought to be charged with such waiver.
Section 10.6. Exhibits and Disclosure Schedule.
(a) All Exhibits and Schedules attached hereto are hereby incorporated
herein by reference and made a part hereof. Any matter which is clearly
disclosed pursuant to any Section of or Schedule or Exhibit to this Agreement
(or any section of any Schedule or Exhibit to this Agreement) or in Buyer SEC
Filings or Buyer Financial Statements or the Company Financial Statements, as
the case may be, in such a way as to make reasonably apparent its relevance or
applicability to any representation made elsewhere in this Agreement or to the
information called for by any other Section of or Schedule or Exhibit to this
Agreement (or any other section of any Schedule or Exhibit to this Agreement)
shall be deemed to be an exception to such representations and to be disclosed
with respect to all Sections of and Schedules and Exhibits to this Agreement
(and all sections of all Schedules and Exhibits to this Agreement),
notwithstanding the omission of a reference or cross-reference thereto.
(b) Neither the specification of any dollar amount in any representation
nor the mere inclusion of any item in an Exhibit or Schedule as an exception to
a representation or warranty shall be deemed an admission by a Party that such
item represents an exception or material fact, event or circumstance or that
such item is reasonably likely to result in a Material Adverse Effect on Parent,
the Company or Buyer, as the case may be.
Section 10.7. Headings. The table of contents and section headings
contained in this Agreement are for reference purposes only and shall not be
deemed a part of this Agreement or affect in any way the meaning or
interpretation of this Agreement.
Section 10.8. Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement.
A-42
<PAGE> 107
Section 10.9. Entire Agreement. This Agreement (including the Company's
Disclosure Schedule, Buyer's Disclosure Schedule and the Exhibits hereto)
constitutes the entire agreement among the Parties with respect to the subject
matter hereof and supersede any prior understandings, negotiations, agreements,
or representations among the Parties of any nature, whether written or oral, to
the extent they relate in any way to the subject matter hereof.
Section 10.10. Severability. If any provision of this Agreement or the
application of any such provision to any Person or circumstance shall be
declared by any court of competent jurisdiction to be invalid, illegal, void or
unenforceable in any respect, all other provisions of this Agreement, or the
application of such provision to Persons or circumstances other than those as to
which it has been held invalid, illegal, void or unenforceable, shall
nevertheless remain in full force and effect and will in no way be affected,
impaired or invalidated thereby. Upon such determination that any provision, or
the application of any such provision, is invalid, illegal, void or
unenforceable, the Parties shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the Parties as closely as
possible to the fullest extent permitted by applicable Law in an acceptable
manner to the end that the transactions contemplated hereby are fulfilled to the
greatest extent possible.
Section 10.11. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK
APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE,
WITHOUT REGARD TO THE CONFLICTS OF LAW RULES OF SUCH STATE.
Section 10.12. Consent to Jurisdiction. Each of the Parties irrevocably
submits to the exclusive jurisdiction of (i) state courts of the State of New
York and (ii) any federal court located in the State of New York for the
purposes of any suit, action or other proceeding arising out of or relating to
this Agreement or any transaction contemplated hereby (and agrees not to
commence any action, suit or proceeding relating hereto except in such courts).
Each of the Parties further agrees that service of any process, summons, notice
or document hand delivered or sent to such Party's respective address set forth
in Section 10.3 will be effective service of process for any action, suit or
proceeding in Delaware with respect to any matters to which it has submitted to
jurisdiction as set forth in the immediately preceding sentence. Each of the
Parties irrevocably and unconditionally waives any objection to the laying of
venue of any action, suit or proceeding arising out of or relating to this
Agreement or the transactions contemplated hereby in (i) state courts of the
State of New York or (ii) any federal court located in the State of New York,
and hereby further irrevocably and unconditionally waives and agrees not to
plead or claim in any such court that any such action, suit or proceeding
brought in any such court has been brought in an inconvenient forum.
Notwithstanding the foregoing, each Party agrees that a final judgment in any
action or proceeding so brought shall be conclusive and may be enforced by suit
on the judgment in any jurisdiction or in any other manner provided in law or in
equity.
Section 10.13. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
A-43
<PAGE> 108
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed as of the date first above written.
INFOGRAMES, INC.
By: /s/ DAVID J. FREMED
------------------------------------
Name: David J. Fremed
Title: Chief Financial Officer
INA MERGER SUB, INC.
By: /s/ DAVID J. FREMED
------------------------------------
Name: David J. Fremed
Title: Chief Financial Officer
INFOGRAMES ENTERTAINMENT SA
By: /s/ BRUNO BONNELL
------------------------------------
Name: Bruno Bonnell
Title: Chief Executive Officer
CALIFORNIA U.S. HOLDINGS, INC.
By: /s/ BRUNO BONNELL
------------------------------------
Name: Bruno Bonnell
Title: Chief Executive Officer
INFOGRAMES NORTH AMERICA, INC.
By: /s/ YVES LEGRIS
------------------------------------
Name: Yves Legris
Title: Chief Operating Officer
A-44
<PAGE> 109
EXHIBIT B
INFOGRAMES, INC.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
AND FINANCIAL STATEMENTS
<PAGE> 110
INFOGRAMES, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Infogrames, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Infogrames,
Inc. and its subsidiaries (the "Company") as of March 31, 2000 and June 30, 2000
and the related consolidated statements of operations and comprehensive (loss)
income, stockholders' equity (deficit) and cash flows for the year ended March
31, 2000 and the three months ended, June 30, 2000. Our audits also included the
consolidated financial statement schedule listed in the index at Item 14. These
consolidated financial statements and the consolidated financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the consolidated financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Infogrames, Inc.
and its subsidiaries as of March 31, 2000 and June 30, 2000 and the consolidated
results of their operations and their cash flows for the year ended March 31,
2000 and the three months ended, June 30, 2000 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
As discussed in Note 1 to the Consolidated Financial Statements, the
Company changed its method of accounting for future royalty advances effective
January 1, 1998, treating such costs as research and development expenses.
/s/ Deloitte & Touche LLP
New York, New York
September 8, 2000
B-1
<PAGE> 111
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Infogrames, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheet of Infogrames,
Inc., formerly GT Interactive Software Corp. (a Delaware corporation) and
subsidiaries as of March 31, 1999 and the related consolidated statements of
operations, comprehensive (loss) income, stockholders' equity (deficit) and cash
flows for year ended December 31, 1997, for the three months ended March 31,
1998 and for the year ended March 31, 1999. 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Infogrames, Inc. and
subsidiaries as of March 31, 1999 and the results of their operations and cash
flows for the year ended December 31, 1997, for the three months ended March 31,
1998 and for the year ended March 31, 1999, in conformity with accounting
principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to the
financial statements and supplementary data is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
New York, New York
June 29, 1999
(EXCEPT WITH RESPECT TO THE REVERSE STOCK SPLIT DISCUSSED IN NOTE 1, AS TO WHICH
THE DATE IS JUNE 29, 2000)
B-2
<PAGE> 112
INFOGRAMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
--------------------- JUNE 30,
1999 2000 2000
-------- --------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 13,407 $ 19,587 $ 12,302
Short-term investments................................. 105 -- --
Receivables, net....................................... 110,019 37,001 22,456
Inventories, net....................................... 158,208 38,179 30,907
Royalty advances....................................... 9,195 -- --
Deferred income taxes.................................. 36,142 -- --
Income taxes receivable................................ 1,973 2,550 1,357
Prepaid expenses and other current assets.............. 12,947 10,096 7,241
-------- --------- ---------
Total current assets................................... 341,996 107,413 74,263
Property and equipment, net.............................. 36,808 25,761 15,094
Investments.............................................. 7,412 9,293 8,237
Goodwill, net of accumulated amortization of $5,078,
$2,564 and $2,945, respectively........................ 34,194 8,047 7,067
Deferred income taxes.................................... 12,664 -- --
Other assets............................................. 5,837 8,693 10,118
-------- --------- ---------
Total assets........................................... $438,911 $ 159,207 $ 114,779
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable....................................... $152,556 $ 87,926 $ 64,515
Accrued liabilities.................................... 35,505 37,123 33,071
Revolving credit facility.............................. -- 71,698 98,543
Royalties payable...................................... 18,515 14,487 15,972
Deferred income........................................ 173 -- 58
Income taxes payable................................... 2,569 55 --
Due to related party................................... 908 958 1,026
-------- --------- ---------
Total current liabilities.............................. 210,226 212,247 213,185
Long-term debt........................................... 98,750 97,828 99,320
Other long-term liabilities.............................. 2,802 3,351 2,239
-------- --------- ---------
Total liabilities...................................... 311,778 313,426 314,744
-------- --------- ---------
Commitments and contingencies
Stockholders' equity (deficit):
Series A convertible preferred stock, $0.01 par, 5,000
shares authorized, 600 shares issued and
outstanding, stated at liquidation preference of $50
per share as of March 31, 1999, 0 shares issued and
outstanding as of March 31, 2000 and June 30,
2000(1)............................................. 30,000 -- --
Common stock, $0.01 par, 150,000 shares authorized,
14,555, 20,675 shares and 20,685 issued and
outstanding, respectively(1)........................ 145 207 207
Additional paid-in capital............................... 161,655 227,378 227,383
Accumulated deficit...................................... (62,876) (383,598) (425,542)
Accumulated other comprehensive (loss) income............ (1,791) 1,794 1,309
Treasury shares, at cost, 0 shares as of March 31, 1999
and 2000, and 1,661 as of June 30, 2000................ -- -- (3,322)
-------- --------- ---------
Total stockholders' equity (deficit)..................... 127,133 (154,219) (199,965)
-------- --------- ---------
Total liabilities and stockholders' equity (deficit)..... $438,911 $ 159,207 $ 114,779
======== ========= =========
</TABLE>
---------------
(1) Reflects the one-for-five reverse stock split approved by the Company's
Board of Directors which was effected on June 26, 2000. All periods have
been restated to reflect the reverse stock split.
The accompanying notes are an integral part of these consolidated financial
statements.
B-3
<PAGE> 113
INFOGRAMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED THREE MONTHS
YEAR ENDED ENDED MARCH 31 ENDED
DECEMBER 31, MARCH 31, -------------------- JUNE 30,
1997 1998 1999 2000 2000
------------ ------------ -------- --------- ------------
<S> <C> <C> <C> <C> <C>
Net revenues............................................... $530,677 $105,767 $572,342 $ 375,569 $ 32,983
Cost of goods sold......................................... 315,134 57,092 329,959 296,301 16,150
-------- -------- -------- --------- ---------
Gross profit............................................. 215,543 48,675 242,383 79,268 16,833
Selling and distribution expenses.......................... 98,689 24,467 147,499 147,814 16,829
General and administrative expenses........................ 46,611 10,655 66,616 87,113 16,146
Research and development................................... 13,824 10,866 76,870 66,574 9,582
Royalty advance write-off.................................. 73,821 -- -- -- --
Restructuring and other charges............................ -- -- 17,479 37,948 11,081
Purchased research and development......................... 11,008 -- 5,000 -- --
SingleTrac retention bonus................................. 2,400 -- 1,680 -- --
Amortization of goodwill................................... 1,295 636 3,349 3,110 561
-------- -------- -------- --------- ---------
Operating (loss) income.................................. (32,105) 2,051 (76,110) (263,291) (37,366)
Interest expense........................................... (1,010) (557) (5,108) (17,167) (3,318)
Other expense.............................................. (1,065) (832) (207) (793) (384)
-------- -------- -------- --------- ---------
(Loss) income before (benefit from) provision for income
taxes.................................................. (34,180) 662 (81,425) (281,251) (41,068)
(Benefit from) provision for income taxes.................. (9,157) 304 (29,628) 40,882 876
-------- -------- -------- --------- ---------
Net (loss) income from continuing operations............. (25,023) 358 (51,797) (322,133) (41,944)
Discontinued operations:
Loss from operations of OZM.............................. -- -- (3,531) -- --
Loss on disposal of OZM.................................. -- -- (15,510) (477) --
-------- -------- -------- --------- ---------
Loss from discontinued operations........................ -- -- (19,041) (477) --
-------- -------- -------- --------- ---------
Net (loss) income before extraordinary item.............. (25,023) 358 (70,838) (322,610) (41,944)
Extraordinary item:
Gain on early extinguishment of debt, net of tax of
$1,312................................................. -- -- -- 1,888 --
-------- -------- -------- --------- ---------
Net (loss) income before dividends on preferred
stock................................................ (25,023) 358 (70,838) (320,722) (41,944)
-------- -------- -------- --------- ---------
Less dividends on preferred stock.......................... -- -- 226 -- --
-------- -------- -------- --------- ---------
Net (loss) income attributable to common
stockholders......................................... $(25,023) $ 358 $(71,064) $(320,722) ($ 41,944)
======== ======== ======== ========= =========
Basic and diluted (loss) income per share from continuing
operations............................................... $ (1.87) $ 0.03 $ (3.73) $ (19.58) $ (2.03)
Basic and diluted (loss) income per share from discontinued
operations............................................... -- -- (1.37) (0.03) --
Basic and diluted income per share from extraordinary
item..................................................... -- -- -- 0.11 --
-------- -------- -------- --------- ---------
Basic and diluted (loss) income per share.................. $ (1.87) $ 0.03 $ (5.10) $ (19.50) $ (2.03)
======== ======== ======== ========= =========
Weighted average shares outstanding(1)..................... 13,396 13,588 13,931 16,451 20,680
======== ======== ======== ========= =========
Net (loss) income before dividends on preferred
stock................................................ $(25,023) $ 358 $(70,838) $(320,722) $ (41,944)
Other comprehensive (loss) income:
Foreign currency translation adjustments................. (2,732) 1,169 (667) 1,817 572
Unrealized holding (loss) gain on securities............. (199) -- 11 1,768 (1,057)
-------- -------- -------- --------- ---------
Comprehensive (loss) income............................ $(27,954) $ 1,527 $(71,494) $(317,137) $ (42,429)
======== ======== ======== ========= =========
</TABLE>
---------------
(1) Reflects the one-for-five reverse stock split approved by the Company's
Board of Directors which was effected on June 26, 2000. All periods have
been restated to reflect the reverse stock split.
The accompanying notes are an integral part of these consolidated financial
statements.
B-4
<PAGE> 114
INFOGRAMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED THREE MONTHS
YEAR ENDED ENDED MARCH 31, ENDED
DECEMBER 31, MARCH 31, -------------------- JUNE 30,
1997 1998 1999 2000 2000
------------ ------------ -------- --------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income before dividends on preferred stock...... $(25,023) $ 358 $(70,838) $(320,722) $(41,944)
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization............................ 7,434 2,511 14,606 16,081 3,032
Write-off of investment.................................. -- -- 2,676 -- --
Purchased research and development....................... 11,008 -- 5,000 -- --
Royalty advance write-off................................ 73,821 -- -- -- --
Deferred income taxes.................................... (1,010) 1,010 (32,666) 48,806 876
Deferred income.......................................... (1,690) 187 21 (118) 3
Purchase of barter credits................................. -- -- -- -- (1,188)
Write-off of assets in connection with restructuring
charges................................................ -- -- 7,362 30,391 9,592
Sales and distribution fee............................... -- -- -- -- (440)
Loss from discontinued operations........................ -- -- 19,041 477 --
Extraordinary gain on General Atlantic Partners, LLC
(GAP) 0% subordinated convertible note................. -- -- -- 15,649 --
Amortization of discount on long-term debt............... -- -- -- 718 956
Accrued interest on Revolving Credit Facility............ -- -- -- 1,461 2,542
Write-off of deferred financing costs in connection with
the GAP securities exchange............................ -- -- -- 8,985 --
Write-off of deferred financing costs in connection with
the early extinguishment of Credit Agreement........... -- -- -- 3,188 --
Issuance of common stock in lieu of partial royalty
payment................................................ -- -- -- 4,208 --
Issuance of common stock pursuant to employee stock
purchase plan.......................................... -- -- -- 581 --
Changes in operating assets and liabilities:
Receivables, net....................................... (83,683) 60,175 (57,490) 73,576 13,929
Inventories, net....................................... (54,102) 6,896 (10,498) 100,448 7,288
Royalty advances....................................... (20,505) 5,870 814 9,195 --
Due to related party, net.............................. (349) 581 (17) 50 169
Prepaid expenses and other current assets.............. 2,206 (3,409) (5,884) 1,499 2,176
Accounts payable....................................... 38,607 (46,942) 47,956 (44,330) (24,231)
Accrued liabilities.................................... (3,699) (7,168) 14,169 1,754 (5,281)
Royalties payable...................................... 14,054 (7,037) (21,907) (4,036) 1,466
Income taxes payable................................... (3,804) (2,423) (1,133) (2,746) --
Income taxes receivable................................ (15,171) 4,487 8,711 (577) 1,346
Long-term liabilities.................................. (8,186) (666) 1,220 552 (1,223)
Other.................................................. 522 (2,043) (2,226) (2,549) (1,429)
-------- -------- -------- --------- --------
Net cash (used in) provided by operating
activities......................................... (69,570) 12,387 (81,083) (57,459) (32,361)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments................................... (259) -- -- -- --
Purchases of property and equipment........................ (18,269) (7,641) (22,607) (8,864) (839)
Sales of short-term investments, net....................... 4,613 -- -- -- --
Acquisitions, net of cash acquired of approximately $135,
$0, $1,678, $0 and $0, respectively...................... (5,833) -- (2,701) -- --
-------- -------- -------- --------- --------
Net cash used in investing activities................ (19,748) (7,641) (25,308) (8,864) (839)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under revolving credit facility,
net...................................................... 54,600 (26,600) 70,750 (27,052) 25,077
Issuance of Infogrames 5% subordinated convertible note.... 50,000 --
Issuance of General Atlantic Partners, LLC subordinated
note ("GAP")............................................. -- -- -- 20,000 --
Issuance of subordinated Cayre............................. -- -- -- 10,000 --
Issuance of common stock to Infogrames, net................ -- -- -- 48,677 --
Proceeds from exercise of warrants......................... 2,102 -- -- -- --
Proceeds from exercise of stock options.................... 786 114 376 146 5
Purchase of treasury shares................................ -- -- -- -- (2,322)
Issuance (redemption) of preferred stock................... -- -- 30,000 (30,000) --
Net cash provided by (used in) financing
activities......................................... 57,488 (26,486) 101,126 71,771 22,760
Effect of exchange rates on cash and cash equivalents...... (429) (644) 1,448 732 3,155
Net (decrease) increase in cash and cash equivalents....... (32,259) (22,384) (3,817) 6,180 (7,285)
Cash and cash equivalents -- beginning of period........... 71,867 39,608 17,224 13,407 19,587
Cash and cash equivalents -- end of period................. $ 39,608 $ 17,224 $ 13,407 $ 19,587 $ 12,302
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
B-5
<PAGE> 115
INFOGRAMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SERIES A SERIES A ACCUMULATED
CONVERTIBLE CONVERTIBLE COMMON ADDITIONAL RETAINED OTHER
PREFERRED PREFERRED STOCK COMMON PAID-IN EARNINGS COMPREHENSIVE
STOCK SHARES STOCK SHARES(1) STOCK CAPITAL (DEFICIT) (LOSS) INCOME
------------ ----------- --------- ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996............... -- $ -- 13,280 $132 $118,753 $ 32,627 $ 627
Issuance of stock in connection with the
acquisition of SingleTrac.............. -- -- 140 1 7,168 -- --
Exercise of warrants..................... -- -- 100 1 2,101 -- --
Exercise of stock options................ -- -- 60 1 784 -- --
Net loss................................. -- -- -- -- -- (25,023) --
Currency translation adjustment.......... -- -- -- -- -- -- (2,732)
Unrealized loss on securities............ -- -- -- -- -- -- (199)
-------- -------- ------ ---- -------- --------- -------
Balance, December 31, 1997............... -- -- 13,580 135 128,806 7,604 (2,304)
Issuance of stock options in connection
with the acquisition of SingleTrac..... -- -- -- -- 3,007 -- --
Exercise of stock options................ -- -- 20 1 113 -- --
Net income............................... -- -- -- -- -- 358 --
Currency translation adjustment.......... -- -- -- -- -- -- 1,169
-------- -------- ------ ---- -------- --------- -------
Balance, March 31, 1998.................. -- -- 13,600 136 131,926 7,962 (1,135)
Issuance of preferred stock.............. 120,000 30,000 -- -- -- -- --
Issuance of stock options in connection
with acquisitions...................... -- -- -- -- 1,356 -- --
Issuance of stock in connection with
acquisitions........................... -- -- 920 8 27,999 -- --
Exercise of stock options................ -- -- 35 1 374 -- --
Net loss................................. -- -- -- -- -- (70,838) --
Currency translation adjustment.......... -- -- -- -- -- -- (667)
Unrealized gain on securities............ -- -- -- -- -- -- 11
-------- -------- ------ ---- -------- --------- -------
Balance, March 31, 1999.................. 120,000 30,000 14,555 145 161,655 (62,876) (1,791)
Exchange of preferred stock for long-term
debt................................... (120,000) (30,000) -- -- -- -- --
Issuance of warrants to Infogrames....... -- -- -- -- 8,983 -- --
Issuance of warrants in connection with
revolving credit facility.............. -- -- -- -- 3,188 -- --
Issuance of common stock in lieu of
partial royalty payment................ -- -- 300 3 4,205 -- --
Issuance of common stock pursuant to
employee stock purchase plan........... -- -- 40 1 582 -- --
Issuance of common stock to Infogrames,
net.................................... -- -- 5,740 57 48,620 -- --
Exercise of stock options................ -- -- 40 1 145 -- --
Net loss................................. -- -- -- -- (320,722) --
Currency translation adjustment.......... -- -- -- -- -- 1,817
Unrealized gain on securities............ -- -- -- -- -- 1,768
-------- -------- ------ ---- -------- --------- -------
Balance, March 31, 2000.................. -- -- 20,675 207 227,378 (383,598) 1,794
Exercise of stock options................ -- -- 10 -- 5 -- --
Net loss................................. -- -- -- -- -- (41,944) --
Currency translation adjustment.......... -- -- -- -- -- -- 572
Unrealized loss on securities............ -- -- -- -- -- -- (1,057)
Treasury Shares.......................... -- -- -- -- -- -- --
-------- -------- ------ ---- -------- --------- -------
Balance, June 30, 2000................... -- $ -- 20,685 $207 $227,383 $(425,542) $ 1,309
======== ======== ====== ==== ======== ========= =======
<CAPTION>
TREASURY
TREASURY SHARES
SHARES COST TOTAL
-------- -------- ---------
<S> <C> <C> <C>
Balance, December 31, 1996............... -- $ -- $ 152,139
Issuance of stock in connection with the
acquisition of SingleTrac.............. -- -- 7,169
Exercise of warrants..................... -- -- 2,102
Exercise of stock options................ -- -- 785
Net loss................................. -- -- (25,023)
Currency translation adjustment.......... -- -- (2,732)
Unrealized loss on securities............ -- -- (199)
----- ------- ---------
Balance, December 31, 1997............... -- -- 134,241
Issuance of stock options in connection
with the acquisition of SingleTrac..... -- -- 3,007
Exercise of stock options................ -- -- 114
Net income............................... -- -- 358
Currency translation adjustment.......... -- -- 1,169
----- ------- ---------
Balance, March 31, 1998.................. -- -- 138,889
Issuance of preferred stock.............. -- -- 30,000
Issuance of stock options in connection
with acquisitions...................... -- -- 1,356
Issuance of stock in connection with
acquisitions........................... -- -- 28,007
Exercise of stock options................ -- -- 375
Net loss................................. -- -- (70,838)
Currency translation adjustment.......... -- -- (667)
Unrealized gain on securities............ -- -- 11
----- ------- ---------
Balance, March 31, 1999.................. -- -- 127,133
Exchange of preferred stock for long-term
debt................................... -- -- (30,000)
Issuance of warrants to Infogrames....... -- -- 8,983
Issuance of warrants in connection with
revolving credit facility.............. -- -- 3,188
Issuance of common stock in lieu of
partial royalty payment................ -- -- 4,208
Issuance of common stock pursuant to
employee stock purchase plan........... -- -- 583
Issuance of common stock to Infogrames,
net.................................... -- -- 48,677
Exercise of stock options................ -- -- 146
Net loss................................. -- -- (320,722)
Currency translation adjustment.......... -- -- 1,817
Unrealized gain on securities............ -- -- 1,768
----- ------- ---------
Balance, March 31, 2000.................. -- -- (154,219)
Exercise of stock options................ -- -- 5
Net loss................................. -- -- (41,944)
Currency translation adjustment.......... -- -- 572
Unrealized loss on securities............ -- -- (1,057)
Treasury Shares.......................... 1,661 (3,322) (3,322)
----- ------- ---------
Balance, June 30, 2000................... 1,661 $(3,322) $(199,965)
===== ======= =========
</TABLE>
---------------
(1) Reflects the one-for-five reverse stock split approved by the Company's
Board of Directors which became effective on June 26, 2000. All periods have
been restated to reflect the reverse stock split.
The accompanying notes are an integral part of these consolidated financial
statements.
B-6
<PAGE> 116
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Infogrames, Inc., formerly GT Interactive Software Corp., a Delaware
corporation (the "Company"), is a leading worldwide developer, publisher and
distributor of interactive entertainment software for use on various platforms,
including PCs, Sony PlayStation and Nintendo 64. The Company derives its
revenues primarily from the sale of its created, published, licensed and
purchased products to mass merchants, specialty software stores, computer
superstores and distributors located throughout North America and also in
various international locations. The Company was incorporated in September 1992
and commenced operations in February 1993. The Company has relied on support
from its parent, Infogrames Entertainment SA ("Infogrames SA") in the recent
past. The Company believes that it is Infogrames SA's present intention to
continue such support as Infogrames SA deems necessary to fund its operations
and its cash flows for the next twelve months.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany transactions and balances
have been eliminated.
Revenue Recognition
Revenue is recognized upon shipment of merchandise to customers. At the
time the revenue is recognized, a reserve is provided for expected future
returns net of the related cost of such items.
The Company is not contractually obligated to accept returns, except for
defective product. However, the Company may permit its customers to return or
exchange product and may provide pricing allowance for estimated returns, price
concessions and other allowances. Such allowance is reflected as a reduction to
accounts receivable when the Company expects to grant credits for such items.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks and highly liquid,
short-term investments with original maturities of three months or less at the
date acquired.
Inventories
Inventories are stated at the lower of cost (based upon the first-in,
first-out method) or market. Allowances are established (and reassessed
quarterly) to reduce the recorded cost of obsolete inventory and slow moving
inventory to its net realizable value.
Royalty Advances
During the fourth quarter of 1997, the convergence of marketplace forces
led the Company to reconsider its royalty advance evaluation process. Rapid
technological innovation, shelf-space competition, shorter product life cycles
and buyer selectivity have made it extremely difficult to determine the
likelihood of individual product acceptance and success. As a result, the
Company expensed royalty advances of approximately $73.8 million on products
that were in development or on sale as of December 31, 1997. The Company has,
effective January 1, 1998, changed its accounting for future royalty advances,
treating such costs as research and development expenses, which are expensed as
incurred. These changes created symmetry in accounting for both internally and
externally developed products. Multi-year output advances are expensed over the
development periods, in accordance with generally accepted accounting
principles.
B-7
<PAGE> 117
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill
Goodwill is currently amortized using the straight-line method over periods
not exceeding 5 years. Management reassesses quarterly the appropriateness of
both the carrying value and remaining life of goodwill, principally based on
forecasts of future undiscounted cash flows of businesses acquired. See Note 21
for information concerning the restructuring reserve, and related impairment
write offs of goodwill.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
range from three to seven years. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the estimated useful
lives of the related assets.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which requires the
use of the liability method of accounting for deferred income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates in effect for the years in which the
differences are expected to reverse.
Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107 "Disclosure About Fair
Value of Financial Instruments" requires certain disclosures regarding the fair
value of financial instruments. Cash and cash equivalents, accounts receivable,
accounts payable, accrued liabilities, royalties payable, revolving credit
facility and amounts due to and from related parties are reflected in the
consolidated financial statements at fair value because of the short-term
maturity of these instruments. The fair value of long-term debt closely
approximates its carrying value. The Company uses quoted market prices to
calculate these fair values, when available.
Investments
Management classifies equity securities as available-for-sale securities
under the provisions defined in the Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Management determines the appropriate classification of its investments at the
time of purchase and reevaluates such determination at each balance sheet date.
Available-for-sale securities are carried at market value with the unrealized
gains and losses reported as a component of accumulated comprehensive income.
The cost of investments sold is determined on the first-in, first-out method.
The Company also maintains equity investments under 20 percent of the
outstanding equity of the investee entity on the cost basis of accounting. The
Company evaluates these investments for impairment on a quarterly basis (See
Note 6).
Impairment of Long Lived Assets
The Company reviews long-lived assets, such as fixed assets and certain
identifiable intangibles to be held and used or disposed of, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If the sum of the expected cash flows,
undiscounted and without interest, is less than the carrying amount of the
asset, an impairment loss is recognized as the amount by which the carrying
amount of the asset exceeds its fair value, as defined in Statement of Financial
B-8
<PAGE> 118
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of."
Research and Development Costs
Research and development costs related to the design, development and
testing of new software products are charged to expense as incurred. Effective
January 1, 1998, research and development costs also include payments for
royalty advances to third-party developers on products that are currently in
development.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expense for the
year ended December 31, 1997, the three months ended March 31, 1998, the years
ended March 31, 1999 and 2000 and the three months ended June 30, 2000 amounted
to approximately $32.0 million, $7.9 million, $49.1 million, $64.0 million and
$5.0 million, respectively.
Foreign Currency
Assets and liabilities of foreign subsidiaries have been translated at
year-end exchange rates, while revenues and expenses have been translated at
average exchange rates in effect during the year. Resulting cumulative
translation adjustments have been recorded as accumulated other comprehensive
(loss) income.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires companies to recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. The Company will adopt SFAS No. 133 in the first
quarter of fiscal 2001, in accordance with the deferral provision in SFAS No.
137. The adoption of SFAS No. 133 will not have a material effect on the
Company's consolidated financial statements.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company is required to adopt SAB 101 no later than the fourth quarter of
fiscal 2001. Infogrames Inc. is currently evaluating the impact of SAB 101 on
the Company's results of operations and financial position.
In March 2000, the FASB issued Interpretation No. 44 (FIN No. 44),
Accounting for Certain Transactions involving Stock Compensation -- an
Interpretation of APB 25. FIN No. 44 clarifies (i) the definition of employee
for purposes of applying APB Opinion No. 25, (ii) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (iii) the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award, and (iv) the accounting for an exchange of stock compensation
awards in a business combination. FIN No. 44 is effective July 1, 2000, but
certain conclusions in this interpretation cover specific events that occur
after either December 15, 1998, or January 12, 2000. The adoption of certain of
the conclusions of FIN No. 44 covering events occurring during the period after
December 15, 1998 or January 12, 2000 did not have a material effect on the
Company's financial position and results of operations. The Company does not
expect that the adoption of the remaining conclusions will have a material
effect on the financial position or results of operations.
B-9
<PAGE> 119
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to classifications used in the current period.
Net Income (Loss) Per Share
Basic earnings per share ("EPS") is computed as net earnings after
preferred dividends divided by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur from common shares issuable through stock-based compensation plans
including stock options, restricted stock awards, warrants and other convertible
securities using the treasury stock method. The convertible debt, warrants and
all shares issuable under stock based compensation plans would be anti-dilutive
and therefore have not been considered in the diluted EPS calculation in the
years ended March 31, 1999 and 2000, and in the three months ended June 30,
2000, respectively.
Discontinued Operations
Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations -- Reporting Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB 30"), the consolidated financial statements of the Company
reflect the disposal of OZM as a discontinued operation. Accordingly, the
revenues, costs and expenses, assets and liabilities, and cash flows of this
business have been excluded from the respective captions in the Consolidated
Balance Sheets, Consolidated Statements of Operations, Consolidated Statements
of Comprehensive Income and Consolidated Statements of Cash Flows, and have been
reported through its date of disposition as "Loss from discontinued operations."
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 amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fiscal Year
Effective January 1, 1998, the Company changed its fiscal year end from
December 31 to March 31. Accordingly, the fiscal year ended March 31, 1998
represents three months of operations. Effective April 1, 2000, the Company
changed its fiscal year end from March 31 to June 30. Accordingly, the fiscal
period ended June 30, 2000 represents three months of operations. (See Note 23.)
Reverse Stock Split
On April 6, 2000, the Company's Board of Directors approved a one-for-five
reverse stock split of the issued and outstanding shares of the Company's common
stock, which became effective June 26, 2000. All periods have been restated to
reflect the reverse stock split.
Unaudited Interim Financial Information
The unaudited interim consolidated financial information for the three
months ended June 30, 1999 has been prepared on the same basis as the audited
consolidated financial statements. In the opinion of management, such unaudited
information includes all adjustments (consisting only of normal recurring
B-10
<PAGE> 120
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accruals) necessary for a fair presentation of this interim information. Such
unaudited consolidated interim financial data is presented in Note 22 to the
consolidated financial statements.
NOTE 2 -- PURCHASE OF MAJORITY INTEREST BY INFOGRAMES SA
As of December 31, 1999, Infogrames SA and subsidiaries purchased
approximately 60 percent of the voting stock of the Company through the
following transactions:
- On November 15, 1999, Infogrames SA purchased from the Company a $25
million principal amount Short-Term Senior Secured Note ("Short-Term
Note"). In connection with this transaction, the Company issued to
Infogrames SA warrants to purchase 10,000 shares of common stock at an
exercise price of $0.05 per share.
- On December 16, 1999, the Company consummated the following of
transactions with Infogrames SA and certain partnerships affiliated with
General Atlantic Partners, LLC ("GAP"). Infogrames SA, the founding Cayre
family, and GAP entered into further transactions as well.
- Infogrames SA purchased 6,711,701 shares of the Company's common stock
from the Cayre family, founders of GT Interactive Software Corp., for
$25.0 million and also purchased from the Cayre family $10 million of
subordinated notes ("Cayre Notes") of the Company.
- Infogrames SA purchased 5,714,286 shares of Common Stock from the Company
for $50 million ($8.75 per share) and $60.6 million principal amount of a
new 5% subordinated convertible note of the Company in exchange for $25
million in cash, the Cayre Notes, the Short-Term Note and $0.6 million
accrued interest. The new 5% subordinated convertible note is convertible
into common stock at $9.25 per share.
- The Company issued to GAP $50 million principal amount of non-interest
bearing subordinated convertible notes in exchange for 600,000 shares of
Series A Preferred Stock and $20 million of subordinated notes of the
Company, and accrued interest thereon, held by GAP. These notes are
convertible into common stock at $20.00 per share.
- Infogrames SA acquired from GAP warrants to purchase 900,000 shares of
common stock of the Company at an exercise price of $0.05 per share, for
nominal consideration.
As a result of these transactions, as of December 31, 1999, Infogrames SA
owns approximately 12 million shares of the Company's common stock.
The Company has relied on support from its parent, Infogrames SA, in the
recent past. The Company believes that it is Infogrames SA's present intention
to continue such support as Infogrames SA deems necessary to fund operations and
cash flows for the next twelve months.
NOTE 3 -- ACQUISITIONS
In January 1997, the Company acquired all of the outstanding capital stock
of Premier Promotion Limited, the parent company of One Stop Direct Limited, for
approximately $0.4 million in cash. This transaction was accounted for as a
purchase.
In October 1997, the Company acquired SingleTrac Entertainment
Technologies, Inc. ("SingleTrac"), a software developer, for cash and stock.
Total consideration, including acquisition costs, was approximately $14.7
million, of which $5.4 million was cash and the balance of the purchase price
was the issuance of 100,000 newly issued shares of the Company's common stock
and the assumption of approximately 100,000 stock options. The acquisition was
accounted for as a purchase. The purchase price was allocated to net assets
acquired, purchased in-process research and development ("R&D"), and goodwill
and other intangibles. Purchased in-process R&D includes the value of products
in the development stage and not considered to
B-11
<PAGE> 121
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
have reached technological feasibility and was, therefore, expensed.
Accordingly, approximately $11.0 million of acquisition cost was expensed in the
fourth quarter of 1997. In connection with the acquisition of SingleTrac on
October 15, 1997, the Company issued approximately 146,000 shares of its common
stock and assumed approximately 61,000 stock options.
In November 1998, the Company acquired One Zero Media, Inc. ("OZM"), an
Internet entertainment content company, in exchange for approximately 500,000
newly issued shares of the Company's common stock and approximately 100,000
stock options to purchase the Company's common stock. Total consideration,
including acquisition costs, was approximately $17.2 million, which was
allocated to net assets acquired and goodwill. The acquisition was accounted for
as a purchase, because it was the Company's intention to sell an ownership
interest in OZM. At March 31, 1999, the Company decided to sell OZM within the
next six months and therefore OZM is accounted for as a discontinued operation.
OZM was sold in July 1999. This resulted in a loss from discontinued operations
of $19.5 million, $0.5 million of which is recognized in the current fiscal
year. In connection with the acquisition of OZM on November 4, 1998, the Company
issued approximately 458,000 shares of its common stock and assumed
approximately 117,000 stock options.
In December 1998, the Company acquired Reflections Interactive Limited
("Reflections"), a developer of interactive entertainment software for computer
games, in exchange for approximately 460,000 newly issued shares of the
Company's common stock. Total consideration, including acquisition costs, was
approximately $13.5 million. The acquisition was accounted for as a purchase.
The purchase price was allocated to net assets acquired, purchased in-process
R&D and goodwill. Accordingly, $5.0 million of acquisition cost was expensed in
the quarter ended December 31, 1998. Additionally, the Company acquired Prism
Leisure Tontragervertriebs GmbH ("Prism"), a distributor of value-priced
software based in Germany, for nominal consideration. The acquisition was
accounted for as a purchase. The purchase price was allocated to net assets
acquired and goodwill. In connection with the acquisition of Reflections on
December 23, 1998, the Company issued approximately 457,000 shares of its common
stock. Goodwill, net of accumulated amortization, approximated $6.1 million and
$5.8 million for March 31, 2000 and June 30, 2000, respectively.
In December 1998, the Company formed GT Interactive European Holdings B.V.,
a European holding company, which acquired all of the outstanding capital stock
of Home Software Benelux B.V. ("Homesoft"), a distributor of entertainment
software, for approximately $1.0 million in cash. The acquisition was accounted
for as a purchase.
In December 1998, the Company purchased the assets of Legend Entertainment
Company ("Legend"), a developer of entertainment software. Total consideration,
including acquisition costs, was approximately $2.0 million. The purchase price
was allocated to goodwill. In connection with the asset purchase of Legend on
December 22, 1998, the Company issued approximately 9,000 shares of its common
stock. These shares are restricted from being sold until no later than December
22, 2002. Goodwill, net of accumulated amortization, approximated $1.5 million
and $1.4 million for March 31, 2000 and June 30, 2000, respectively.
NOTE 4 -- RECEIVABLES, NET
Receivables consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------- JUNE 30,
1999 2000 2000
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Trade accounts receivable........................... $179,823 $109,146 83,555
Royalties receivable................................ 17 178 --
-------- -------- -------
179,840 109,324 83,555
</TABLE>
B-12
<PAGE> 122
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31,
-------------------- JUNE 30,
1999 2000 2000
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Less: Allowance for doubtful accounts............... 10,713 23,337 23,081
Sales return reserve................................ 59,108 48,986 38,018
-------- -------- -------
$110,019 $ 37,001 $22,456
======== ======== =======
</TABLE>
NOTE 5 -- INVENTORIES, NET
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------- JUNE 30,
1999 2000 2000
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Finished goods....................................... $146,312 $77,677 $73,857
Return inventory..................................... 26,319 7,351 3,249
Raw materials........................................ 4,194 1,238 1,764
-------- ------- -------
176,825 86,266 78,870
Less: Obsolescence Reserve........................... 18,617 48,087 47,963
-------- ------- -------
$158,208 $38,179 $30,907
======== ======= =======
</TABLE>
The obsolescence reserve at March 31, 2000 includes an aggregate charge of
approximately $56.0 million recorded in that year relating to management's
decision to focus on certain product lines and exit others. This charge is
recorded in cost of sales and is part of the restructuring and reorganization of
the Company. See Note 21 for additional information relating to the
restructuring of the Company's operations.
NOTE 6 -- INVESTMENTS
In 1995, the Company invested $63,000 in Zomax Incorporated ("Zomax"), an
outsource provider of process management services to software publishers,
computer manufacturers and other producers of multimedia products. As of June
30, 2000 the Company held approximately 62,140 shares of Zomax at a market price
of $13.13 per share.
In 1996, the Company purchased for approximately $2.7 million in cash a
9.9% investment in, and entered into a multi-titled publishing agreement with
Mirage, a U.K. developer of entertainment software. Since the total of the
expected future cash flows is less than the carrying amount of the investment,
the Company recognized a loss of $2.7 million on its investment during fiscal
1999.
In 1996, the Company invested approximately $7.1 million in convertible
preferred stock of OddWorld, a developer of entertainment software, which is
convertible into approximately 50% of the common equity.
In 1997, the Company purchased for $225,000 in cash a 9.9% investment in
GameWizards, Inc., a developer of electronic and print-based strategy guides on
behalf of developers and publishers of software products.
B-13
<PAGE> 123
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------ JUNE 30,
1999 2000 2000
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Computer equipment.................................... $17,172 $17,527 $ 9,048
Machinery and equipment............................... 6,622 4,952 1,722
Capitalized computer software......................... 17,918 20,139 8,061
Furniture and fixtures................................ 7,059 5,513 5,212
Leasehold improvements................................ 7,733 4,041 3,310
------- ------- -------
56,504 52,172 27,353
Less: Accumulated Depreciation........................ 19,696 26,411 12,259
------- ------- -------
$36,808 $25,761 $15,094
======= ======= =======
</TABLE>
Depreciation expense for the year ended December 31, 1997, the three months
ended March 31, 1998 and the years ended March 31, 1999 and 2000 and the three
months ended June 30, 2000 amounted to approximately $6.1 million, $1.9 million,
$11.3 million, $13.0 million, and $2.5 million, respectively.
During the three months ended June 30, 2000, the Company wrote off total
net assets of $9.2 million. This decision was made in part with the Company's
strategic plan to reorganize and re-focus its business and its desire to exit
certain product lines. See Note 21 for additional information relating to
restructuring of the Company's operations
NOTE 8 -- ACCRUED LIABILITIES
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------ JUNE 30,
1999 2000 2000
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Restructuring reserve................................. $ 8,992 $10,209 $ 9,836
Accrued advertising................................... 2,414 1,389 307
Accrued professional fees............................. 1,251 983 1,900
Accrued salary and related costs...................... 4,602 5,007 4,018
Litigation reserve.................................... -- 2,400 2,750
Accrued freight and distributions..................... 5,890 2,611 1,236
Accrued consulting fees............................... -- -- 2,858
Other................................................. 12,356 14,524 10,166
------- ------- -------
$35,505 $37,123 $33,071
======= ======= =======
</TABLE>
See Note 21 for information on the details of the restructuring charge
recorded by the Company.
B-14
<PAGE> 124
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- INCOME TAXES
The components of the (benefit from) provision for income taxes are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED THREE MONTHS
YEAR ENDED ENDED MARCH 31, ENDED
DECEMBER 31, MARCH 31, ------------------ JUNE 30,
1997 1998 1999 2000 2000
------------ -------------- -------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Federal:
Current............................. $(10,308) $(407) $ -- $(6,612) $ --
Deferred............................ (1,265) 836 (23,563) 38,499 287
-------- ----- -------- ------- ----
(11,573) 429 (23,563) 31,887 287
-------- ----- -------- ------- ----
State and local:
Current............................. 185 36 -- --
Deferred............................ (1,726) 33 (4,202) 4,424 --
-------- ----- -------- ------- ----
(1,541) 69 (4,202) 4,424 --
-------- ----- -------- ------- ----
Foreign:
Current............................. 3,957 (194) 1,186 33
Deferred............................ -- -- (3,049) 4,538 589
-------- ----- -------- ------- ----
3,957 (194) (1,863) 4,571 $589
-------- ----- -------- ------- ----
Provision for (benefit from) income
taxes............................... $ (9,157) $ 304 $(29,628) $40,882 $876
======== ===== ======== ======= ====
</TABLE>
The reconciliation of the income tax provision (benefit) computed at the
Federal statutory rate to the reported provision for (benefit from) income taxes
is as follows:
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED THREE MONTHS
YEAR ENDED ENDED MARCH 31, ENDED
DECEMBER 31, MARCH 31, ------------------- JUNE 30,
1997 1998 1999 2000 2000
------------ -------------- -------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
(Benefit from) provision for income
taxes computed at Federal statutory
rate............................... $(11,963) $ 232 $(28,499) $(98,438) $(14,373)
Increase (decrease) in (benefit from)
provision for income taxes
resulting from:
State and local taxes, net of Federal
tax (benefit) provision............ (1,541) 36 (3,324) (10,969) (1,603)
Foreign taxes in excess of Federal
statutory rate provision
(benefit).......................... 9 (175) (512) 17,598 3,042
Purchased research and development... 4,293 -- -- -- --
Other, net........................... 45 211 2,707 (1,900) 312
Increase to deferred tax asset
valuation allowance................ -- -- -- 134,591 13,498
-------- ----- -------- -------- --------
(Benefit from) provision for income
taxes.............................. $ (9,157) $ 304 $(29,628) $ 40,882 $ 876
======== ===== ======== ======== ========
Effective income tax rate............ 27% 46% 36% 15% 2%
======== ===== ======== ======== ========
</TABLE>
B-15
<PAGE> 125
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
MARCH 31, JUNE 30,
-------------------- ------------
1999 2000 2000
------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
DEFERRED TAX ASSETS:
Inventory valuation.............................. $ 7,825 $ 20,454 $ 19,241
Deferred income.................................. 118 77 77
Sales return reserve............................. (302) 1,702 1,899
Tax loss carryforwards........................... 26,729 92,781 109,144
Restructuring reserve............................ 5,822 4,814 3,186
Other............................................ 8,614 14,763 14,542
------- --------- ---------
48,806 134,591 $ 148,089
------- --------- ---------
48,806 134,591 148,089
Less valuation allowance......................... -- (134,591) (148,089)
------- --------- ---------
Net deferred tax asset........................... $48,806 $ -- $ --
======= ========= =========
</TABLE>
As of June 30, 2000, the Company has combined net operating loss
carryforwards of approximately $285.8 million for tax purposes. These loss
carryforwards are available to offset future taxable income and will expire
beginning in the years 2011 through 2019. Under Section 382 of the Internal
Revenue Code, the Company's pre-ownership-change loss carryforwards are subject
to an annual limitation which could reduce or defer the utilization of these
losses.
The valuation allowance increased by approximately $13.5 million in 2000,
attributable to the net change in the deferred tax asset during the year,
thereby increasing the cumulative valuation allowance to $148.0 million. The
valuation increased by $134,591 in fiscal 2000, consisting of a valuation
allowance of $48,806 for the beginning deferred tax asset balance and a
valuation allowance of $85,785 for the net change in the deferred tax asset
during the year. A full valuation allowance has been recorded against the net
deferred tax asset because it is more likely than not that such asset will not
be realized in the foreseeable future.
The Company has not recognized a deferred tax liability of approximately
$1.1 million for the undistributed earnings of its 100 percent-owned foreign
subsidiaries as of June 30, 2000. The Company currently does not expect those
unremitted earnings to reverse and become taxable to the Company in the
foreseeable future. A deferred tax liability will be recognized when the Company
expects that it will recover those undistributed earnings in a taxable manner.
As of June 30, 2000, the undistributed earnings of these subsidiaries were
approximately $7.2 million.
NOTE 10 -- STOCKHOLDERS' EQUITY
On November 12, 1999, the Company's Board of Directors approved an
amendment to the Company's Amended and Restated Certificate of Incorporation
(the "Charter Amendment"), which increases the total number of shares of
authorized capital stock of the Company from 155 million shares to 305 million
shares. The Charter Amendment became effective on February 14, 2000. There is
currently authorized 300 million shares of the Company's common stock and five
million shares of the Company's Series A Convertible Preferred Stock. Refer to
Note 2 for stockholders' equity transactions relating to the purchase by
Infogrames SA of a majority interest in the Company.
B-16
<PAGE> 126
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997, March 31, 1998, 1999 and 2000 and June 30, 2000,
the Company had warrants outstanding to purchase an aggregate of approximately
251,000, 251,000, 246,000, 246,000 and 246,000 shares, respectively, of Common
Stock to content-providers at exercise prices (ranging from $42.50 to $70.00)
not less than the fair market value at the date of issue. Refer to Note 2 for
stockholders' equity transactions relating to the purchase by Infogrames SA of a
majority interest in the Company.
On June 26, 2000, the Company repurchased approximately 1.6 million shares
of its common stock in connection with severance agreements with certain of its
employees. The repurchased shares of common stock are held as treasury stock.
NOTE 11 -- STOCK OPTIONS
The Company has three stock option plans which began in 1995, 1997 and
2000, (the "Plans"). The Company accounts for these Plans under Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized.
Generally, under the Plans, options are granted to employees to purchase
shares of the Company's common stock at no less than the fair market value at
the date of the grant, vest over a period of four or five years and are
exercisable for a period of ten years from the grant date.
A summary of the status of the Company's Plans at December 31, 1997, March
31, 1998, 1999 and 2000 and June 30, 2000 and changes during the year ended
December 31, 1997, the three months ended March 31, 1998, the fiscal years ended
March 31, 1999 and 2000 and the three months ended June 30, 2000 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------
PRICE PER WEIGHTED AVERAGE
SHARES SHARE EXERCISE PRICE
-------------- ------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Outstanding at beginning of year....... 1,152 $ 0.20-117.50 $53.95
Granted................................ 881 1.80- 70.00 43.15
Exercised.............................. (54) 0.20- 46.90 14.45
Forfeited.............................. (268) 1.75-117.50 76.80
Expired................................ (54) 39.70- 88.75 56.30
------ ------------- ------
Outstanding at end of year............. 1,657 $ 0.20- 72.50 $45.65
====== ============= ======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------------
PRICE PER WEIGHTED AVERAGE
SHARES SHARE EXERCISE PRICE
-------------- ------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Outstanding at beginning of fiscal
year................................. 1,657 $ 0.20- 72.50 $45.65
Granted................................ 309 31.55- 39.70 34.15
Exercised.............................. (7) 0.90- 10.40 5.50
Forfeited.............................. -- -- --
Expired................................ (1) 1.75- 70.00 35.00
------ ------------- ------
Outstanding at end of fiscal year...... 1,958 $ 0.20- 72.50 $43.95
====== ============= ======
</TABLE>
B-17
<PAGE> 127
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------------
PRICE PER WEIGHTED AVERAGE
SHARES SHARE EXERCISE PRICE
-------------- ------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Outstanding at beginning of fiscal
year................................. 1,958 $ 0.20- 72.50 $43.95
Granted................................ 1,139 0.01-100.00 32.85
Exercised.............................. (40) 0.01- 39.70 7.40
Forfeited.............................. (99) 0.90- 70.00 46.20
Expired................................ (47) 1.75- 70.00 46.05
------ ------------- ------
Outstanding at end of fiscal year...... 2,911 $ 0.01-100.00 $40.10
====== ============= ======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 2000
---------------------------------
PRICE PER WEIGHTED AVERAGE
SHARES SHARE EXERCISE PRICE
-------------- ------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Outstanding at beginning of year....... 2,911 $ 0.01-100.00 $40.10
Granted................................ 415 9.40- 19.70 14.75
Exercised.............................. (61) 0.01- 10.40 2.35
Forfeited.............................. (1,049) 1.75-100.00 33.25
Expired................................ (321) 0.90-100.00 52.95
------ ------------- ------
Outstanding at end of year............. 1,895 $ 0.01- 72.50 $37.60
====== ============= ======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 2000
---------------------------------
PRICE PER WEIGHTED AVERAGE
SHARES SHARE EXERCISE PRICE
-------------- ------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Outstanding at beginning of year....... 1,895 $ 0.01- 72.50 $37.63
Granted................................ 526 9.38- 13.75 13.37
Exercised.............................. (10) 0.01- 10.38 0.50
Forfeited.............................. (85) 14.69- 70.00 32.31
Expired................................ (115) 0.88- 72.50 46.14
------ ------------- ------
Outstanding at end of year............. 2,211 $ 0.22- 70.00 $31.78
====== ============= ======
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options (in thousands):
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- --------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.22-10.94 146 9.0 $ 8.65 16 $ 2.17
$11.25-70.00 2,065 7.2 $33.42 1,278 $41.69
----- --- ------ ----- ------
2,211 1,294
</TABLE>
As of June 30, 2000, there were approximately 2,211,000 options outstanding
at prices ranging from $0.22 to $70.00, of which approximately 1,294,000 options
were exercisable at prices ranging from $0.22 to $70.00.
If compensation cost for these plans were determined consistent with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation," the Company's net income (loss) before
B-18
<PAGE> 128
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dividends on preferred stock and earnings per share would have been reduced to
the following pro forma amounts:
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED THREE MONTHS
YEAR ENDED ENDED MARCH 31, ENDED
DECEMBER 31, MARCH 31, --------------------- JUNE 30,
1997 1998 1999 2000 2000
------------ ------------ -------- --------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net (loss) income before
dividends on preferred
stock
As reported................ $(25,023) $ 358 $(70,838) $(320,722) (41,944)
Pro forma.................. (32,141) 217 (77,566) (320,937) (42,032)
Basic net (loss) income per
share
As reported................ $ (1.87) $0.03 $ (5.10) $ (19.50) $ (2.03)
Pro forma.................. $ (2.40) $0.02 $ (5.57) $ (19.51) $ (2.03)
Diluted net (loss) income per
share
As reported................ $ (1.87) $0.03 $ (5.10) $ (19.50) $ (2.03)
Pro forma.................. $ (2.40) $0.02 $ (5.59) $ (19.51) $ (2.03)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the year ended December 31, 1997, the three
months ended March 31, 1998 and the years ended March 31, 1999 and 2000, and the
three months ended June 30, 2000: no dividends will be paid for the entire term
of the option, expected volatility of 67.5% for 1997, the three months ended
March 31, 1998, the year ended March 31, 1999, and 81.0% for the year ended
March 31, 2000 and the three months ended June 30, 2000, risk-free interest
rates averaging 6.22% for 1997, 5.45% for the three months ended March 31, 1998,
4.74% for the year ended March 31, 1999, 5.82% for the year ended March 31, 2000
and 6.31% for the three months ended June 30, 2000, and expected lives of four
years in 1997, the three months ended March 31, 1998, the years ended March 31,
1999 and 2000, and the three months ended June 30, 2000. The weighted average
fair value of options granted was $19.45 in 1997, $19.15 in 1998, $14.30 in
1999, $9.30 in 2000 and $13.37 for the three months ended June 30, 2000.
NOTE 12 -- RELATED PARTY TRANSACTIONS
Purchase of majority interest by Infogrames SA
On November 15, 1999, Infogrames SA and/or its subsidiaries purchased from
the Company the Short-Term Note. In connection with this transaction, the
Company issued to Infogrames SA warrants to purchase 10,000 shares of common
stock of the Company at an exercise price of $0.05 per share.
On December 16, 1999, the Company consummated a number of transactions with
Infogrames SA and certain members of the founding Cayre family.
Infogrames SA purchased 6,711,701 shares of common stock from the Cayre
family, the founders of GT Interactive Software Corp., for $25.0 million in cash
and also purchased from the Cayre family $10.0 million of subordinated notes
(the "Cayre Notes") of the Company.
Infogrames SA purchased 5,714,286 shares of common stock from the Company
for $50 million in cash ($8.75 per share) and $60.6 million principal amount of
a new 5% subordinated convertible note of the Company (the "5% Note") in
exchange for $25 million in cash, the Cayre Notes, the Short-Term Notes and $0.6
million of accrued interest. Interest of $1.6 million was accrued on the 5% Note
through June 30, 2000. The 5% Note is convertible into common stock at $9.25 per
share.
B-19
<PAGE> 129
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of these transactions, as of December 31, 1999, Infogrames SA
owned approximately 12.42 million shares of the Company's common stock, or 60%
of the voting securities of the Company. Pursuant to the Securities Purchase
Agreement dated November 15, 1999 between the Company and Infogrames SA, the
Company was required to pay not more than $2.0 million of Infogrames SA's
attorney's and accountant's fees. As of June 30, 2000, $0.6 million remained
payable to Infogrames SA for these fees.
In connection with the assumption by Infogrames SA of the Company's credit
agreement as of February 15, 2000, the Company issued to Infogrames SA warrants
to purchase 45,000 shares of common stock at an exercise price of $0.05 per
share.
Purchases of product from Infogrames SA
During the three month period ended June 30, 2000, the Company purchased
$0.7 million of product from Infogrames SA, representing approximately 1% of
total purchases by the Company for such period. As of June 30, 2000, the Company
had approximately $1.9 million outstanding related to purchase of product from
Infogrames SA.
Transactions with former Shareholders and Directors
The following transactions occurred between the Company and the former
directors through their date of resignation, and accordingly, the information
presented is from April 1, 1999 through December 16, 1999, the date that
Infogrames SA purchased a majority interest in the Company.
Leases
In May 1995, GT Interactive Software (Europe) Limited, the Company's
European subsidiary, entered into a lease with respect to its then principal
executive offices with Marylebone 248 Realty LLC ("Marylebone 248"), an entity
controlled by Joseph J. Cayre, former Chairman Emeritus of the Board of
Directors and Jack J. Cayre, former Executive Vice president and a director of
the Company. This lease was terminated in August 1999. From April 1, 1999
through August 15, 1999, the Company paid approximately $119,000 in rent to
Marylebone 248.
Transactions with GoodTimes Home Video Corp. ("GTHV")
GTHV, a majority of whose stock was formerly owned by Joseph J. Cayre,
Stanley Cayre and Kenneth Cayre, performed certain assembly and packaging
services for the Company. The Company enters into arms length manufacturing
transactions with GTHV on an as needed basis. The total amount charged to
operations for manufacturing services for the year ended December 31, 1997
amounted to approximately $2.5 million. The Company made cash payments totaling
approximately $330,000 and $1.1 million to GTHV during the three months ended
March 31, 1998 and the year ended March 31, 1999, respectively. During 1996, the
Company sold approximately $3.5 million of software to GTHV at fair market
value. GTHV also performed certain assembly and packaging services for the
Company. From April 1, 1999 through December 16, 1999, the Company paid
approximately $260,000 in fees for such services. As of June 30, 2000, the
Company had no outstanding liabilities to GTHV.
REPS Agreement
In servicing its mass merchant accounts, the Company uses field
representatives supplied by REPS, a company owned by Joseph J. Cayre, Stanley
Cayre and Kenneth Cayre. REPS provides such services to the Company as well as
to third parties not affiliated with the Cayre family. The Company had an
agreement with REPS pursuant to which REPS supplied such services through May 1,
2000. The Company is currently operating on a month to month basis under the
terms of the expired agreement. The total amount charged to
B-20
<PAGE> 130
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations for these services amounted to approximately $4.8 million, $1.4
million and $4.1 million for the year ended December 31, 1997, the three months
ended March 31, 1998 and the year ended March 31, 1999, respectively. Prior to
entering into the REPS agreement with GTHV, from April 1, 1999 through December
16, 1999, the Company paid approximately $2.7 million in fees to REPS.
Travel Services
The Company occasionally hired Excel Aire Service, Inc. ("Excel") to
provide business travel services for its officers and employees. Excel leases
its planes from JT Aviation Corp. ("JTAC"), a company owned by Joseph J. Cayre.
Excel is not owned in whole or in part by any member of the Cayre family. Excel
provided air travel to the Company at an hourly rate and on an as needed as
available basis. During the year ended December 31, 1997, the three months ended
March 31, 1998 and the year ended March 31, 1999, the Company's aggregate air
travel fees paid to JTAC were approximately $370,000, $40,000, and $217,000,
respectively. During the year ended March 31, 1999, the Company paid
approximately $311,000 to Excel. From April 1, 1999 through December 16, 1999,
the Company paid approximately $69,000 to Excel.
The Company occasionally hired JC Aviation Corp ("JCAC"), a company owned
by Jack J. Cayre, Executive Vice President and Director of the Company, to
provide business transportation services for its officers. During the year ended
December 31, 1997, the Company paid approximately $26,000 to JCAC. There were no
payments made during any subsequent periods to JCAC.
ClientLogic Corporation
Transactions with ClientLogic Corporation ("ClientLogic"). The Company has
entered into agreements with ClientLogic (formerly doing business as SOFTBANK
Services Group) pursuant to which ClientLogic (i) provides toll-free customer
support for some of the Company's published products and (ii) takes direct
customer orders and provides fulfillment services for the Company, in each case
on a per service basis. Both agreements provide for automatic renewal on a month
to month basis upon expiration unless terminated by either party. During the
year ended December 31, 1997, the three months ended March 31, 1998 and the year
ended March 31, 1999, the Company had charged to operations approximately
$230,000, $41,000 and $251,000 respectively, in fees to ClientLogic. Jordan A.
Levy, a former director of the Company, is Vice-Chairman of ClientLogic.
RCS Computer Experience
From time to time, the Company purchases computer equipment from and sells
computer software to RCS Computer Experience, LLC ("RCS"). In June 1998,
Rockwell Computer Services, LLC, a company controlled by Joseph J. Cayre,
purchased approximately a 70% interest in RCS. During the year ended March 31,
1999, the Company paid approximately $24,000 to RCS and generated approximately
$54,000 in net revenues from RCS.
The Company has entered into agreements with an unaffiliated leasing
company for computer equipment. This leasing company purchases computer
equipment from various vendors including RCS. During the year ended March 31,
1999, the leasing company paid approximately $231,000 to RCS for equipment
leased by the Company.
The Company believes that the terms of the foregoing transactions are no
less favorable to the Company than could be obtained by the Company from
unrelated parties on an arm's-length basis.
Transactions between Infogrames UK Limited and GT Interactive Software
(Europe) Limited
GT Interactive Software (Europe) Limited, a wholly-owned subsidiary of
Infogrames, Inc. ("GT UK"), entered into a number of transactions with
Infogrames UK Limited ("Infogrames UK") relating to the
B-21
<PAGE> 131
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consolidation of its operations with Infogrames UK. Fixed assets having a net
book value of $722,000 were transferred to Infogrames UK for $626,000 during
fiscal 2000. The resulting loss is included in restructuring charges. Inventory
having a cost of $270,000 was transferred at original cost. Infogrames UK agreed
to assume the ongoing costs of running GT UK's office from March 1, 2000
including the salary costs of a number of employees who transferred to
Infogrames UK. Such salary charges totaled $265,000 and such charges that relate
to ongoing operations other than salaries totaled $94,000 for the month of March
2000. The lease on the UK office was formally assigned to Infogrames UK in June
2000, although the rent for this office has been borne by Infogrames UK from
March 1, 2000. $38,000 of such rent was re-charged to Infogrames UK for the
month of March 2000. A deferred rent liability of $203,000 arising from an
initial rent free period on the office was transferred to Infogrames UK.
Loans
Gregor Loan. On August 31, 1996, the Company extended a loan to Andrew
Gregor, a former Chief Financial Officer of the Company, in the principal amount
of $250,000. The loan, including interest, amounted to $290,000 and was forgiven
as part of Mr. Gregor's severance package and charged to restructuring charges
in the fourth quarter of fiscal 1999. See Note 21 for information concerning
other restructuring charges.
SingleTrac Loans. The Company has extended non-interest bearing loans to
three former employees of the Company who were former stockholders of
SingleTrac. The principal amount of each such loan is $100,000. Such loans
become due and payable at the earliest of the sale of their stock of the
Company, in November 1999 or six months following termination of the borrowers'
respective employment with the Company. Each of the borrowers has pledged 4,000
shares of the Company's common stock, as collateral security for the loans. One
loan was forgiven on July 9, 1999 pursuant to an amended employment agreement,
which provided for the loan forgiveness pursuant to termination of employment.
$20,000 of another loan has been partially earned by the former employee, and
the $80,000 balance repaid to the Company in May 2000. The Company intends to
pursue collection of the third loan, which is still outstanding.
Humongous Loan. The Company extended a demand promissory note to the
former President of Humongous, a wholly-owned subsidiary. The note bears
interest at a rate of 8.75% per annum and is secured by a residential first
mortgage and security interest in all shares of common stock of the Company
owned beneficially by such individual. The balance outstanding, including
interest, at June 30, 2000 is approximately $1.6 million. The Company is
currently negotiating a repayment schedule for this outstanding loan.
OZM Loan. The Company extended a loan to an employee of OZM in the
principal amount of $150,000. Such loan bears interest at 7 1/2% per annum and
is due in three equal annual installments commencing December 7, 1998.
NOTE 13 -- LEASES
The Company accounts for its leases as operating leases, with expiration
dates ranging from 2000 through 2012. Future minimum annual rental payments
under the leases are as follows for the fiscal years then ended:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2001........................................................ $ 5,737
2002........................................................ 4,820
2003........................................................ 4,304
2004........................................................ 3,920
2005........................................................ 3,340
Thereafter.................................................. 6,483
-------
$28,604
=======
</TABLE>
B-22
<PAGE> 132
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total rent expense charged to operations for the year ended December 31,
1997, the three months ended March 31, 1998, the years ended March 31, 1999 and
2000 and the three months ended June 30, 2000 amounted to approximately $4.9
million, $1.2 million, $7.3 million, $9.1 million and $1.0 million,
respectively.
NOTE 14 -- COMMITMENTS AND CONTINGENCIES
On January 21, 1997, the Company entered into a revolving credit agreement
(as amended, the "Old Credit Agreement") with certain banks expiring on December
31, 1998. On September 11, 1998, the borrowings under the Old Credit Agreement
were repaid and the Old Credit Agreement was terminated.
Simultaneously, on September 11, 1998, the Company entered with First Union
National Bank, as agent for a syndicate of banks (the "Banks"), into a new
revolving credit agreement (the "Credit Agreement") as subsequently amended,
expiring on March 31, 2000. Under the Credit Agreement, the Company borrowed
approximately $71 million for ongoing working capital requirements, letters of
credit and other general corporate purposes, secured by domestic accounts
receivable and inventory and other assets of the Company. To induce the Banks to
amend the Credit Agreement, the Company issued the Banks warrants to purchase,
at an exercise price of $0.05 per share, an aggregate of 150,000 shares of the
Company's Common Stock. Of these, warrants to purchase 55,000 shares of Common
Stock were immediately exercisable, warrants to purchase 50,000 shares of Common
Stock became exercisable on October 31, 1999 and warrants to purchase the
remaining 45,000 shares of Common Stock (the "Bank Warrants") became exercisable
on February 28, 2000 if the Credit Agreement was not repaid prior to that date.
As of February 15, 2000, Infogrames SA entered into an agreement with the
Banks, pursuant to which Infogrames SA assumed the Banks' interest in the Credit
Agreement. In connection with the assumption by Infogrames SA of the Credit
Agreement, (i) the maturity date was extended from March 31, 2000 to June 30,
2000, (ii) the interest rate, which was the Prime Rate plus 1.0% or LIBOR plus
2.5% at the option of the Company, was set at LIBOR plus 2.5%, (iii) a $250,000
amendment fee, which would have been payable to the Banks on March 31, 2000
unless the Credit Agreement was refinanced by February 16, 2000, was reduced to
$125,000 and paid to Infogrames SA, (iv) certain mandatory prepayment
restrictions and operational covenants were revised to be less restrictive and
(v) revisions were made to provide alternative letter of credit facilities to
the Company. In addition, the Bank Warrants were surrendered and cancelled and
warrants to purchase 45,000 shares of Common Stock, at an exercise price of
$0.05 per share, were issued to Infogrames SA.
On June 29, 2000, Infogrames SA and the Company amended the Credit
Agreement to increase the aggregate commitment available under the facility to
$125 million and to extend the maturity date to September 30, 2000.
At June 30, 2000, the Company had outstanding borrowings under the Credit
Agreement of approximately $98.5 million, and no letters of credit outstanding.
Outstanding borrowings under the Credit Agreement are classified as current in
the consolidated balance sheet as of June 30, 2000, accrued interest $2.5
million has been recorded but not yet paid under the Credit Agreement as of June
30, 2000.
Long term debt consists of the following at June 30, 2000:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
5% subordinated convertible note............................ $62,236
GAP 0% subordinated convertible notes....................... 37,084
-------
$99,320
=======
</TABLE>
The above indebtedness matures in full on December 16, 2004.
B-23
<PAGE> 133
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Refer to Note 2 for additional obligations of the Company incurred
concurrent with the Infogrames transaction.
NOTE 15 -- LEGAL PROCEEDINGS
Scavenger
On September 18, 1997, Scavenger, Inc. ("Scavenger"), a software developer,
filed a lawsuit against the Company in Supreme Court, New York County, claiming
that the Company breached a software development contract between the parties
dated November 28, 1995. Scavenger alleges that the Company, after paying $2.5
million in advances and accepting delivery of gold master disks for two computer
games, refused to pay any more advances, including advances relating to the
development of two additional games under the agreement. Scavenger is suing for
the remaining advances ($4.3 million) and for future royalties ($5 million), and
also seeks consequential damages for allegedly being forced out of business
($100 million) and losing contracts with unspecified third parties ($4 million)
as a result of the Company's alleged breach. The Company filed an answer and
counterclaim, in which it denies any liability to Scavenger and alleges, among
other things, that the contract was lawfully terminated when Scavenger failed to
deliver the two remaining games after receiving from the Company written notice
to cure its material breaches. By its counterclaim, the Company seeks damages
and restitution for at least $5 million on grounds of breach of contract and
unjust enrichment.
By order entered March 3, 2000, the Court granted Scavenger's motion for
partial summary judgment on its claim for $1.9 million allegedly due on the two
delivered games and judgment was entered on March 14, 2000 in the amount of $2.4
million (reflecting pre-judgment interest on the claim). The Company posted a
bond in the amount of the judgment and immediately appealed from this order and
judgment to the Appellate Division, First Department. On June 8, 2000, the
Appellate Division, First Department affirmed the order and judgment entered by
the Supreme Court. The Company has moved for leave to appeal to the Court of
Appeals. As of June 30, 2000 the Company accrued approximately $2.4 million
related to this judgement.
In its order of March 3, 2000, the Court denied Scavenger's motion for
partial summary judgment seeking $2.4 million on the two games never delivered.
In addition, the Court denied Scavenger's motion for leave to amend the
complaint to add claims for fraud and seeking damages of $100 million.
The Company moved for partial summary judgment seeking dismissal of the
claim for consequential damages ($75-125 million) and additional royalties ($5
million). By order entered June 21, 2000, the Court denied the Company's motion
and granted Scavenger leave to conduct an audit of royalties allegedly due to
Scavenger. The Company has perfected an appeal to the Appellate
Division -- First Department from that portion of the order which denied the
motion for partial summary judgment on the claim for consequential damages. That
appeal is expected to be heard in September 2000. The Company also moved for
reargument of the same portion of the order before the trial court. On September
7, 2000, on the record of oral argument, the trial court granted the Company's
motion to reargue with respect to Scavenger's fourth cause of action for
consequential damages ($100 million) and, on reargument, granted the motion for
partial summary judgment dismissing the claim. Scavenger intends to appeal. The
Company will withdraw the appeal it had filed with respect to this claim.
Finally, the Company has made a motion in the Supreme Court to dismiss the
second cause of action (seeking $2.4 million in royalty advances, plus interest)
on the ground that the Court's reasoning in granting Scavenger partial summary
judgment on the first cause of action requires dismissal of the second cause.
Scavenger has cross-moved for summary judgment on this cause, arguing that the
Court's ruling on the first cause of action should lead to judgment in favor of
Scavenger on the second cause. These motions were submitted September 1, 2000.
B-24
<PAGE> 134
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Herzog
In January, February and March 1998, ten substantially similar complaints
were filed against the Company, its former Chairman and its former Chief
Executive Officer, and in certain actions, its former Chief Financial Officer,
in the U.S. District Court for the Southern District of New York. The
plaintiffs, in general, purport to sue on behalf of a class of persons who
purchased shares (and as to certain complaints, purchased call options or sold
put options) of the Company during the period from August 1, 1996 through
December 12, 1997. The plaintiffs allege that the Company violated the federal
securities laws by making misrepresentations and omissions of material facts
that allegedly artificially inflated the market price of the Company's common
stock during the class period. The plaintiffs further allege that the Company
failed to expense properly certain prepaid royalties for software products that
had been terminated or had failed to achieve technological feasibility, or had
insufficient sales to recoup the paid advances, which misstatements purportedly
had the effect of overstating the Company's net income and net assets. Motions
were made by certain groups of plaintiffs for their appointment as lead
plaintiffs in the actions. On October 7, 1998, the Court appointed lead
plaintiffs and lead counsel to the plaintiffs in the actions. The plaintiffs'
consolidated and amended complaint was filed and served in early January 1999.
By order dated January 23, 1999, the plaintiffs were granted leave to file a
second consolidated and amended complaint, which added claims under Section
10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and Rule 10b-5 under the Exchange Act against the Company's former independent
auditors, Arthur Andersen LLP. The Company and Arthur Andersen LLP each filed
motions to dismiss the second consolidated and amended complaint. By order and
opinion dated November 29, 1999 the Court granted the motion to dismiss.
Plaintiffs have appealed from the dismissal of the action, and oral argument on
the appeal was held on June 8, 2000. On July 11, 2000, the Court of Appeals for
the Second Circuit issued an opinion and judgment reversing the dismissal of the
complaint as to the Company (but not as to Arthur Andersen LLP) and remanding
the action to the district court. On July 21, 2000, the Company filed with the
Court of Appeals a petition for rehearing with suggestion for rehearing en banc.
On September 1, 2000, the Court of Appeals denied the petition for rehearsing
and suggestion for rehearing en banc. Management believes that the ultimate
outcome of this matter will not have a material effect on the consolidated
financial position or results of operations.
James
On April 12, 1999, an action was commenced by the administrators for three
children who were murdered on December 1, 1997 by Michael Carneal at the Heath
High School in McCracken County, Kentucky. The action was brought against 25
defendants, including the Company and other corporations in the videogame
business, companies that produced or distributed the movie "The Basketball
Diaries", and companies that provide allegedly obscene internet content. The
complaint alleges, with respect to the Company and other videogame corporations,
that Carneal was influenced by the allegedly violent content of certain
videogames and that the videogame manufacturers are liable for Carneal's
conduct. The complaint seeks $10 million in compensatory damages and $100
million in punitive damages. The Company and approximately 10 other videogame
corporations have entered into a joint defense agreement and have retained
counsel. By order entered April 6, 2000, the Court granted a motion to dismiss
the complaint. Plaintiffs have filed a motion to vacate the dismissal of the
action. On June 16, 2000 the district court denied the motion to vacate. On June
28, 2000, plaintiffs appealed the dismissal of the action to the Court of
Appeals for the Sixth Circuit. Management believes that the ultimate outcome of
this matter will not have a material effect on the consolidated financial
position or results of operations.
Fenris
On March 12, 1999, Fenris Wolf Ltd. ("Fenris"), a software developer, filed
a lawsuit in New York Supreme Court claiming that the Company failed to
adequately pursue bundling opportunities for the software game "Rebel Moon
Rising MMX" and unlawfully rejected the ninth milestone deliverable for the
software
B-25
<PAGE> 135
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
game "Rebel Moon Revolution" under a development contract between the parties
dated June 26, 1996. The complaint asserts five claims of breach and intentional
interference, which seek $100,000 for the nonpayment and rejection of milestone
nine, $400,000 for the balance of payments under the contract, $775,000 for
alleged lost bundling opportunities, $775,000 for alleged intentional
interference with bundling arrangements and $500,000 for alleged interference
with contractual relations. In an October 20, 1999 opinion and order, the court
granted the Company's motion to dismiss three of the five claims so that only
the milestone nine contract and bundling claims remain. Fenris has filed a
notice of appeal from the dismissal of the $400,000 claim for the balance of
payments under the contract; and the Company has filed a counterclaim for breach
seeking to recover not less than the $800,000 in milestone payments advanced for
the development of "Rebel Moon Revolution." Fenris has moved for summary
judgment on its first cause of action ($100,000), and the Company has moved for
summary judgment dismissing the bundling claim. By order entered September 1,
2000, the Supreme Court denied in Fenris both Fenris' motion for partial summary
judgment on its first cause of action and the Company's motion for partial
summary judgment dismissing the bundling claim. Management believes that the
ultimate outcome of this matter will not have a material effect on the
consolidated financial position or results of operations.
Additionally, the Company is involved in various claims and legal actions
arising in the ordinary course of business, the ultimate resolution of which
management believes will not be material to the Company's results of operations
or financial conditions.
NOTE 16 -- EMPLOYEE SAVINGS PLAN
The Company maintains an Employee Savings Plan which qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
The plan is available to all U.S. employees who meet the eligibility
requirements. Under the plan, participating employees may elect to defer a
portion of their pretax earnings, up to the maximum allowed by the Internal
Revenue Service (up to the lesser of 15% of compensation or $10,000 for calendar
year 1999), with matching of 50% of the employee's contribution up to 6 percent
provided by the Company. Generally, the plan assets in a participant's account
will be distributed to a participant or his or her beneficiaries upon
termination of employment, retirement, disability or death. All plan
administrative fees are paid by the Company. Generally, the Company does not
provide its employees any other post retirement or post employment benefits,
except discretionary severance payments upon termination of employment. Plan
expense approximated $467,000, $187,000, $739,000, $530,000, and $200,000 for
the year ended December 31, 1997, the three months ended March 31, 1998, the
years ended March 31, 1999 and 2000, and the three months ended June 30, 2000,
respectively.
NOTE 17 -- ROYALTY ADVANCES
The Company has committed to pay advance royalty payments under certain
royalty agreements. These obligations are not guaranteed and are dependent, in
part, on the delivery of the contracted services by the licensor. Future advance
royalty payments due under these royalty agreements are as follows for the
fiscal years then ended:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2001........................................................ $10,984
2002........................................................ 850
2003........................................................ 100
Thereafter.................................................. --
-------
$11,934
=======
</TABLE>
B-26
<PAGE> 136
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18 -- CONCENTRATION OF CREDIT RISK
The Company extends credit to various companies in the retail and mass
merchandising industry for the purchase of its merchandise which results in a
concentration of credit risk. This concentration of credit risk may be affected
by changes in economic or other industry conditions and may, accordingly, impact
the Company's overall credit risk. Although the Company generally does not
require collateral, the Company performs ongoing credit evaluations of its
customers and reserves for potential losses are maintained.
The Company had sales constituting 46%, 47%, 40%, 35%, and 52% of net
revenue to two customers in the years ended December 31, 1997, the three months
ended March 31, 1998, the years ended March 31, 1999 and 2000 and the three
months ended June 30, 2000, respectively. Sales to one customer constituted 38%,
39%, 30%, 24%, and 37% of net revenue during the year ended December 31, 1997,
the three months ended March 31, 1998, the years ended March 31, 1999 and 2000
and the three months ended June 30, 2000, respectively, while sales to a second
customer constituted 8%, 8%, 10%, 11%, and 14% of the net revenue for the same
periods, respectively.
Accounts receivable due from three significant customers aggregated 48%,
43% and 48% of accounts receivable at March 31, 1999 and 2000 and the three
months ended June 30, 2000.
NOTE 19 -- OPERATIONS BY REPORTABLE SEGMENTS AND GEOGRAPHIC AREAS
The Company has two reportable segments: publishing and distribution.
Publishing is comprised of frontline, leisure and children's publishing.
Distribution constitutes the sale of the Company's and other publishers' titles
to various mass merchants and other retailers.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on operating income of these segments.
The Company's reportable segments are strategic business units with
different associated costs and profit margins. They are managed separately
because each business unit requires different planning, merchandising and
marketing strategies.
B-27
<PAGE> 137
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited summary represents the consolidated net revenues
and operating income (loss) by reportable segment for the year ended December
31, 1997, the three months ended March 31, 1998, the year ended March 31, 1999
and 2000 and the three months ended June 30, 2000:
<TABLE>
<CAPTION>
PUBLISHING DISTRIBUTION CORPORATE TOTAL
---------- ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Net revenues................................. 265,700 264,977 -- 530,677
Operating income (loss)...................... 55,629 50,295 (48,455) 57,469
Three months ended March 31, 1998:
Net revenues................................. 48,700 57,067 -- 105,767
Operating income (loss)...................... 7,884 9,151 (14,348) 2,687
Year ended March 31, 1999:
Net revenues................................. 299,400 272,942 -- 572,342
Operating income (loss)...................... 24,447 30,520 (103,569) (48,602)
Year ended March 31, 2000:
Net revenues................................. 252,301 123,268 -- 375,569
Operating income (loss)...................... 19,156 11,526 (252,915) (222,233)
Three months ended June 30, 2000:
Net revenues................................. 27,041 5,942 -- 32,983
Operating income............................. (5,990) (3,460) (16,274) (25,724)
</TABLE>
The following represents the reconciliation of operating income (loss) as
reported for reportable segments to consolidated totals for the year ended
December 31, 1997, the three months ended March 31, 1998, the year ended March
31, 1999 and 2000 and the three months ended June 30, 2000:
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED THREE MONTHS
YEAR ENDED ENDED MARCH 31, ENDED
DECEMBER 31, MARCH 31, --------------------- JUNE 30,
1997 1998 1999 2000 2000
------------ ------------ -------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating income (loss) as
reported for reportable
segments................... $ 57,469 $2,687 $(48,602) $(222,233) $(25,724)
Amortization of goodwill..... (1,295) (636) (3,349) (3,110) (561)
Restructuring and other
charges.................... (88,279) 0 (24,159) (37,948) (11,081)
-------- ------ -------- --------- --------
Operating (loss) income...... $(32,105) $2,051 $(76,110) $(263,291) $(37,366)
======== ====== ======== ========= ========
</TABLE>
Information about the Company's operations in the U.S. and other geographic
locations for the year ended December 31, 1997, the three months ended March 31,
1998, the year ended March 31, 1999 and 2000 and the three months ended June 30,
2000 are presented below.
B-28
<PAGE> 138
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OTHER
UNITED UNITED GEOGRAPHIC
STATES KINGDOM LOCATIONS TOTAL
-------- ------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1997:
Net revenues.................................. $423,197 $94,322 $13,158 $530,677
Operating (loss) income....................... (44,332) 10,204 2,023 (32,105)
Capital expenditures.......................... 2,257 15,889 123 18,269
Total assets.................................. 55,453 349,019 11,516 415,988
Three months ended March 31, 1998:
Net revenues.................................. $ 87,538 $14,132 $ 4,097 $105,767
Operating income (loss)....................... 1,270 (295) 1,076 2,051
Capital expenditures.......................... 144 7,462 35 7,641
Total assets.................................. 281,422 39,904 11,411 332,737
Year ended March 31, 1999:
Net revenues.................................. $469,670 $76,132 $26,540 $572,342
Operating (loss) income....................... (68,947) (13,666) 6,503 (76,110)
Capital expenditures.......................... 2,196 20,121 290 22,607
Total assets.................................. 374,084 49,296 15,531 438,911
Year ended March 31, 2000:
Net revenues.................................. $287,173 $70,748 $17,648 $375,569
Operating loss................................ (222,122) (37,793) (3,376) (263,291)
Capital expenditures.......................... 937 6,115 1,812 8,864
Total assets.................................. 138,783 10,749 9,675 159,207
Three months ended June 30, 2000:
Net revenues.................................. $ 30,405 $ 415 $ 2,163 32,983
Operating loss................................ (34,289) (1,200) (1,877) (37,366)
Capital expenditures.......................... 710 130 -- 840
Total assets.................................. $102,579 $ 7,060 $ 5,140 $114,779
</TABLE>
B-29
<PAGE> 139
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 20 -- SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED THREE MONTHS
YEAR ENDED ENDED MARCH 31, ENDED
DECEMBER 31, MARCH 31, ----------------- JUNE 30,
1997 1998 1999 2000 2000
------------ ------------ ------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Issuance of common stock in
connection with the acquisition of
SingleTrac........................ $7,169 $ -- $ -- $ -- --
Issuance of stock options in
connection with the acquisition of
SingleTrac........................ -- 3,007 -- -- --
Issuance of common stock in
connection with the acquisition of
OZM............................... -- -- 15,473 -- --
Issuance of stock options in
connection with the acquisition of
OZM............................... -- -- 1,347 -- --
Issuance of common stock in
connection with the acquisition of
Reflections....................... -- -- 12,279 -- --
Issuance of common stock in
connection with the acquisition of
Legend............................ -- -- 255 -- --
Issuance of stock options in
connection with the acquisition of
Legend............................ -- -- 9 -- --
Accrual for purchase price
adjustment for One Stop........... -- 3,095 -- -- --
Warrants issued in connection with
New Credit Agreement.............. -- -- -- 3,188 --
Warrants issued to GAP and acquired
by Infogrames SA.................. -- -- -- 8,833 --
Warrants issued in connection with
Short-Term Note................... -- -- -- 150 --
Discount on GAP 0% Subordinated
Convertible Note.................. -- -- -- 14,351 --
Deferred financing costs in
connection with Long-Term debt.... -- -- -- 4,776 --
Common stock issued in lieu of
partial royalty payment........... -- -- -- 4,208 --
Cash paid for income taxes.......... 10,243 2 11,118 2,713 --
Cash paid for interest.............. 1,802 727 5,826 7,536 --
</TABLE>
NOTE 21 -- RESTRUCTURING AND OTHER CHARGES
During December 1999, the Company's management approved and adopted a
formal plan (the "Restructuring Plan") relating to a reorganization of the
Company's Frontline publishing business, the shutdown of a substantial portion
of European publishing operations and outsourcing and downsizing of the
Company's distribution and assembly function. As a result of the implementation
of the Restructuring Plan, the Company has incurred restructuring and other
charges of approximately $37.9 million in fiscal 2000, mostly recorded in the
three months ended December 31, 1999. As a result of the implementation of the
Restructuring Plan, the Company has incurred approximately $17.6 million
relating to the write-off of goodwill due to the consolidation of the value
distribution division with the Company's publishing division, $12.1 million
relates the shutdown of European operations, including the write-off of all
goodwill other than the Reflections studio, $6.1 million relates to impaired
assets and $2.1 million relates to the planned severance of certain employees.
The liability at March 31, 1999 relates to the planned severance of 135
employees. As of March 31, 2000, the Company terminated 88 employees from the
administration and finance, manufacturing
B-30
<PAGE> 140
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and distribution and product development departments. During the three months
ended June 30, 2000 the Company recorded additional restructuring charges of
approximately $11.1 million. These charges relate to $0.4 million of goodwill
write-off, $9.4 million related to impaired assets and transition rent and $1.3
million of severance for 30 employees, mostly in administration and product
development. As of June 30, 2000, the Company terminated 81 additional
employees. The restructuring reserve at June 30, 2000 represents severance due
of approximately $7.4 million related to severance to be paid to 243 employees,
transition rent of $0.5 million and anticipated expenses to shut down European
operations of approximately $1.9 million. Management anticipates completing
restructuring activities by September 30, 2000.
Total restructuring charges of approximately $17.5 million in fiscal 1999
includes approximately $7.0 million of asset impairment charges, $635,000 of
additional rent for the transition period, and $9.8 million of severance for 135
employees, including executive officers, to be paid out over periods not to
exceed fifteen months. The restructuring reserve as of March 31, 1999 of
approximately $9.0 million represented severance due of approximately $8.4
million and transition rent due of $635,000. In connection with the
reorganization of the Company's Frontline business, the Company wrote off
approximately $3.3 million of Singletrac's goodwill. The remaining balance of
$600,000 related to future use of Singletrac's label. The majority of the
remaining asset impairment charges of approximately $3.8 million related to the
write-off of assets located at the Company's distribution center.
The following table sets forth adjustments to the restructuring reserve:
(in thousands)
<TABLE>
<CAPTION>
ADDITIONAL
BALANCE, RESTRUCTURING BALANCE,
MARCH 31, AND OTHER CASH MARCH 31,
1999 CHARGES WRITE-OFFS PAYMENTS 2000
--------- ------------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Severance........................... $8,357 $ 4,720 $ -- $(5,144) $ 7,933
Shutdown of European operations..... -- 3,128 -- (1,236) 1,892
Impairment charges.................. -- 29,783 (29,783) -- --
Transition rent..................... 635 317 -- (568) 384
------ ------- -------- ------- -------
$8,992 $37,948 $(29,783) $(6,948) $$10,209
====== ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL
BALANCE, RESTRUCTURING BALANCE,
MARCH 31, AND OTHER CASH JUNE 30,
2000 CHARGES WRITE-OFFS PAYMENTS 2000
--------- ------------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Severance............................ $ 7,933 $ 1,284 $ -- $(1,800) $7,417
Shutdown of European operations...... 1,892 -- -- -- 1,892
Impairment charges................... -- 9,592 (9,592) --
Transition rent...................... 384 205 -- (62) 527
------- ------- ------- ------- ------
$10,209 $11,081 $(9,592) $(1,862) $9,836
======= ======= ======= ======= ======
</TABLE>
B-31
<PAGE> 141
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 22 -- QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands, except per share
data)
Summarized quarterly financial data for the fiscal year ended March 31,
1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
-------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
Net revenues............................... $116,391 $116,151 $246,303 $ 93,497
Gross profit............................... 60,493 60,193 126,691 (4,990)
Operating income (loss).................... 4,112 3,034 33,706 (116,962)
Net income (loss) from continuing
operations............................... 1,803 1,369 17,332 (72,301)
Loss from discontinued operations.......... -- -- (560) (18,481)
Net income (loss) before dividends on
preferred stock.......................... 1,803 1,369 16,772 (90,782)
Basic net income (loss) per share from
continuing operations.................... $ 0.13 $ 0.10 $ 1.24 $ (4.97)
Basic net (loss) per share from
discontinued operations.................. $ -- $ -- $ (0.04) $ (1.27)
Basic net income (loss) per share.......... $ 0.13 $ 0.10 $ 1.20 $ (6.24)
Weighted average shares outstanding........ 13,612 13,618 13,949 14,555
Diluted net income (loss) per share from
continuing operations.................... $ 0.13 $ 0.10 $ 1.24 $ (4.97)
Diluted net (loss) per share from
discontinued operations.................. $ -- $ -- $ (0.04) $ (1.27)
Diluted net income (loss) per share........ $ 0.13 $ 0.10 $ 1.20 $ (6.24)
Weighted average shares outstanding........ 13,798 13,713 14,019 14,555
</TABLE>
Summarized quarterly financial data for the fiscal year ended March 31,
2000 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
-------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
Net revenues............................... $121,325 $ 91,426 $ 101,727 $ 61,091
Gross profit............................... 59,182 26,806 12,307 (24,027)
Operating loss............................. (3,709) (52,112) (94,943) (112,527)
Net loss from continuing operations........ (3,852) (56,060) (121,594) (140,627)
Loss from discontinued operations.......... -- (477) -- --
Net loss before extraordinary items........ (3,852) (56,537) (119,706) (140,627)
Gain from extraordinary item, net of tax of
$1,312................................... -- -- 1,888 --
Net loss before dividends on preferred
stock.................................... (3,852) (56,537) (119,706) (140,627)
Basic and diluted net loss per share from
continuing operations.................... $ (0.26) $ (3.80) $ (7.68) $ (9.66)
Basic and diluted net loss per share from
discontinued operations.................. $ -- $ (0.03) $ -- $ --
Basic and diluted net income per share from
extraordinary items...................... $ -- $ -- $ 0.11 $ --
Basic and diluted net loss per share....... $ (0.26) $ (3.83) $ (7.57) $ (9.66)
Weighted average shares outstanding........ 14,574 14,772 15,816 14,555
</TABLE>
B-32
<PAGE> 142
INFOGRAMES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized quarterly financial data for the three months ended June 30,
2000 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
JUNE 30,
------------
<S> <C>
Net revenues................................................ 32,983
Gross Profit................................................ 16,833
Operating loss.............................................. (37,366)
Net loss from continuing operations......................... (41,944)
Basic and diluted net loss per share from continuing
operations................................................ $ (2.03)
Basic and diluted net loss per share........................ $ (2.03)
Weighted average shares outstanding......................... 20,680
</TABLE>
The quarterly earnings per share information is computed separately for
such period. Therefore, the sum of such quarters per share amounts may differ
from the total for the year.
NOTE 23 -- SUBSEQUENT EVENTS
The Company entered into a merger agreement with Infogrames North America,
Inc., a wholly-owned subsidiary of Infogrames SA ("INA"), a Company under common
control, on September 6, 2000. The Company will acquire INA through the creation
of a wholly-owned subsidiary that will merge with and into INA, with INA
surviving the merger. Upon completion of the merger, INA will be a wholly owned
subsidiary of the Company.
B-33
<PAGE> 143
INFOGRAMES, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE -- CHARGED TO BALANCE --
BEGINNING COSTS AND END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Three months ended June 30, 2000................ $23,337 $ 1,510 $ (1,766) $23,081
======= ======= ======== =======
Year ended March 31, 2000....................... $10,713 $12,992 $ (368) $23,337
======= ======= ======== =======
Year ended March 31, 1999....................... $ 3,252 $11,429 $ (3,968) $10,713
======= ======= ======== =======
Three months ended March 31, 1998............... $ 4,379 $ 411 $ (1,538) $ 3,252
======= ======= ======== =======
Year ended December 31, 1997.................... $ 4,069 $ 4,106 $ (3,796) $ 4,379
======= ======= ======== =======
RESERVE FOR OBSOLESCENCE:
Three months ended June 30, 2000................ $48,087 $ 6,787 $ (6,911) $47,963
======= ======= ======== =======
Year ended March 31, 2000....................... $18,617 $38,953 $ (9,483) $48,087
======= ======= ======== =======
Year ended March 31, 1999....................... $15,574 $16,634 $(13,591) $18,617
======= ======= ======== =======
Three months ended March 31, 1998............... $16,016 $ 165 $ (607) $15,574
======= ======= ======== =======
Year ended December 31, 1997.................... $11,008 $ 5,883 $ (875) $16,016
======= ======= ======== =======
RESTRUCTURING RESERVE:
Three months ended June 30, 2000................ $10,209 $11,081 $(11,454) $ 9,836
======= ======= ======== =======
Year ended March 31, 2000....................... $ 8,992 $ 8,392 $ (7,175) $10,209
======= ======= ======== =======
Year ended March 31, 1999....................... $ -- $10,437 $ (1,445) $ 8,992
======= ======= ======== =======
</TABLE>
B-34
<PAGE> 144
EXHIBIT C
INFOGRAMES NORTH AMERICA, INC.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
AND FINANCIAL STATEMENTS
<PAGE> 145
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Infogrames North America, Inc.:
We have audited the accompanying consolidated balance sheets of Infogrames North
America, Inc. (a wholly-owned subsidiary of Infogrames Entertainment, SA) (the
"Company") and its subsidiary as of June 30, 2000, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years ended June 30, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about 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 audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Infogrames North America, Inc. and
its subsidiary at June 30, 2000, 1999 and 1998 and the results of their
consolidated operations, stockholders' equity (deficit) and their consolidated
cash flows for each of the three years ended June 30, 2000 in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
San Jose, California
August 25, 2000 (September 6, 2000 as to Note 16)
C-1
<PAGE> 146
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Accolade, Inc.:
We have audited the accompanying statements of operations, shareholders' deficit
and cash flows of Accolade, Inc. (the "Company") for the period April 1, 1999
through April 15, 1999 and for the year ended March 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about 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 audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations and cash flows of Accolade, Inc. for the
period ended April 1, 1999 through April 15, 1999 and for the year ended March
31, 1999 in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE & TOUCHE LLP
San Jose, California
August 25, 2000
C-2
<PAGE> 147
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Accolade, Inc.:
We have audited the accompanying statements of operations, shareholders' deficit
and cash flows of Accolade, Inc. (the "Company") for the year ended March 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express on opinion on these financial
statements based on our audit.
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 about 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, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Accolade,
Inc. for the year ended March 31, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick
June 26, 1998
Mountain View, California
C-3
<PAGE> 148
INFOGRAMES NORTH AMERICA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets as of June 30, 2000, 1999 and
1998...................................................... C-6
Consolidated Statements of Operations for the Years Ended
June 30, 2000, 1999 and 1998.............................. C-7
Consolidated Statements of Shareholders' Equity (Deficit)
for the Years Ended June 30, 2000, 1999 and 1998.......... C-8
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2000, 1999 and 1998.............................. C-9
Notes to Consolidated Financial Statements for the Years
Ended June 30, 2000, 1999 and 1998........................ C-10
</TABLE>
ACCOLADE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Statements of Operations for the Period from April 1, 1999
Through April 15, 1999 and for the Years Ended March 31,
1999 and 1998............................................. C-20
Statements of Shareholders' Equity (Deficit) for the Period
from April 1, 1999 Through April 15, 1999 and for the
Years Ended March 31, 1999 and 1998....................... C-21
Statements of Cash Flows for the Period from April 1, 1999
Through April 15, 1999 and for the Years Ended March 31,
1999 and 1998............................................. C-22
Notes to Financial Statements for the Period from April 1,
1999 Through April 15, 1999 and for the Years Ended March
31, 1999 and 1998......................................... C-23
</TABLE>
C-4
<PAGE> 149
INFOGRAMES NORTH AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
2000 1999 1998
--------- -------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 1,161 $ 1,218 $ --
Short-term investments.................................. 2,407 345 564
Accounts receivable, net of allowances of $5,017, $6,503
and $1,773 in 2000, 1999 and 1998, respectively...... 14,442 4,355 1,634
Accounts receivable -- related parties.................. 2,882 1,076 182
Inventories, net........................................ 1,668 3,957 933
Prepaid expenses and other.............................. 350 67 142
--------- -------- --------
Total current assets................................. 22,910 11,018 3,455
Property and equipment, net............................... 2,318 1,320 620
Intangible assets, net.................................... 33,790 51,932 13,464
Other assets.............................................. 48 17
--------- -------- --------
Total assets.............................................. $ 59,018 $ 64,318 $ 17,556
========= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdraft.......................................... $ 3,355 $ 6,213 $ 3,605
Line of credit.......................................... 31,139 -- --
Accounts payable........................................ 4,957 4,181 881
Accounts payable -- related parties..................... 28,641 3,641 2,586
Accrued liabilities, other.............................. 5,475 2,973 1,164
Royalties payable....................................... 2,706 1,644 114
--------- -------- --------
Total current liabilities............................ 76,273 18,652 8,350
Long-term debt -- related parties......................... 25,000 11,537 5,078
--------- -------- --------
Total liabilities.................................... 101,273 30,189 13,428
Commitments
Shareholders' equity (deficit):
Common stock, no par value; authorized 100 in 2000, 1999
and 1998; 100 shares outstanding in 2000, 1999 and
1998................................................. 1 1 1
Additional paid-in capital.............................. 65,901 90,901 41,801
Accumulated deficit..................................... (107,781) (56,839) (37,763)
Accumulated other comprehensive (loss) income........... (376) 66 89
--------- -------- --------
Total shareholders' equity (deficit)................. (42,255) 34,129 4,128
--------- -------- --------
Total liabilities and shareholders' equity (deficit)...... $ 59,018 $ 64,318 $ 17,556
========= ======== ========
</TABLE>
See notes to consolidated financial statements.
C-5
<PAGE> 150
INFOGRAMES NORTH AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
2000 1999 1998
-------- -------- -------
<S> <C> <C> <C>
Net revenues (including related party transactions amounting
to $6,466, $3,008 and $0 in 2000, 1999 and 1998,
respectively)............................................. $ 72,049 $ 50,121 $27,722
Cost of goods sold (including related party transactions
amounting to $5,589, $2,896 and $512 in 2000, 1999 and
1998, respectively)....................................... 46,873 34,174 21,328
-------- -------- -------
Gross profit........................................... 25,176 15,947 6,394
Operating expenses:
Selling and marketing expenses............................ 23,470 14,508 4,447
General and administrative expenses (including related
party transactions, amounting to $945, $191 and $256 in
2000, 1999 and 1998, respectively)..................... 11,699 5,577 3,567
Research and development(including related party
transactions amounting to $0, $436 and $2,192 in 2000,
1999 and 1998, respectively)........................... 19,632 4,373 2,412
In-process research and development....................... -- 3,940 --
Amortization of intangible assets......................... 12,845 6,850 4,841
Write-down of intangible assets........................... 5,564 -- --
Other operating income, net............................... (576) (391) (103)
-------- -------- -------
Total operating expenses............................... 72,634 34,857 15,164
-------- -------- -------
Loss from operations........................................ (47,458) (18,910) (8,770)
Interest income........................................... 20 648 46
Interest income --related party........................... -- 40 42
Interest expense.......................................... (1,220) (412) (133)
Interest expense --related party.......................... (1,909) (442) (559)
-------- -------- -------
Loss before income taxes.................................... $(50,567) $(19,076) $(9,374)
Provision for income taxes.................................. 375 -- --
-------- -------- -------
Net loss.................................................... $(50,942) $(19,076) $(9,374)
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
C-6
<PAGE> 151
INFOGRAMES NORTH AMERICA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL COMPREHENSIVE COMPREHENSIVE
--------------- PAID-IN ACCUMULATED INCOME INCOME
SHARES AMOUNT CAPITAL DEFICIT (LOSS) TOTAL (LOSS)
------ ------ ---------- ----------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, July 1, 1997....... 100 $ 1 $ 41,801 $ (28,389) $ -- $ 13,413
Net loss..................... (9,374) (9,374) $ (9,374)
Unrealized holding gains
(losses) on
securities -- net of
taxes...................... 89 89 89
--------
Total comprehensive loss..... -- -- -- -- -- -- $ (9,285)
--- --- -------- --------- ----- -------- ========
Balances, June 30, 1998...... 100 1 41,801 (37,763) 89 4,128
Net loss..................... (19,076) (19,076) $(19,076)
Acquisition of Accolade, Inc.
(Note 4)................... 49,100 49,100
Unrealized holding gains
(losses) on
securities -- net of
taxes...................... (23) (23) (23)
--------
Total comprehensive loss..... -- -- -- -- -- -- $(19,099)
--- --- -------- --------- ----- -------- ========
Balances, June 30, 1999...... 100 1 90,901 (56,839) 66 34,129
Capital distribution
resulting from the merger
of IEI and INA (Note 4).... (25,000) (25,000)
Net loss..................... (50,942) (50,942) (50,942)
Unrealized holding gains
(losses) on
securities -- net of
taxes...................... (442) (442) (442)
--------
Total comprehensive loss..... -- -- -- -- -- -- $(51,384)
--- --- -------- --------- ----- -------- ========
Balances, June 30, 2000...... 100 $ 1 $ 65,901 $(107,781) $(376) $(42,255)
=== === ======== ========= ===== ========
</TABLE>
See notes to consolidated financial statements.
C-7
<PAGE> 152
INFOGRAMES NORTH AMERICA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
2000 1999 1998
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(50,942) $(19,076) $(9,374)
Reconciliation of net loss to net cash used in operating
activities:
Depreciation and amortization.......................... 782 223 326
In-process research and development.................... -- 3,940 --
Amortization of intangible assets...................... 12,845 6,850 4,841
Write-down of intangible assets........................ 5,564 -- --
Changes in operating assets and liabilities:
Accounts receivable, net............................. (10,087) (2,721) 1,542
Accounts receivable, related party................... (1,806) (894) 26
Inventories, net..................................... 2,289 (3,024) (892)
Prepaid expenses and other........................... (283) 75 (105)
Other assets......................................... 48 (31) (17)
Accounts payable..................................... 776 3,300 (44)
Accrued liabilities, other........................... 2,502 1,809 (2,345)
Royalties payable.................................... 1,062 1,530 41
-------- -------- -------
Net cash used in operating activities............. (37,250) (8,019) (6,001)
-------- -------- -------
Cash flows from investing activities:
Purchases of investments.................................. (3,571) (964) (500)
Purchases of property and equipment....................... (2,047) (923) (73)
Sales of short-term investments........................... 1,067 1,002 25
-------- -------- -------
Net cash used in investing activities............. (4,551) (885) (548)
-------- -------- -------
Cash flows from financing activities:
Proceeds from short-term borrowings....................... 28,281 2,608 3,605
Proceeds from short-term borrowings, related party........ 25,000 1,055 2,320
Proceeds from long-term borrowings, related party......... (11,537) 6,459 624
-------- -------- -------
Net cash provided by financing activities......... 41,744 10,122 6,549
-------- -------- -------
Net (decrease) increase in cash and cash equivalents........ (57) 1,218 --
Cash and cash equivalents, beginning of period.............. 1,218 -- --
-------- -------- -------
Cash and cash equivalents, end of period.................... $ 1,161 $ 1,218 $ --
======== ======== =======
Noncash investing and financing activities:
Acquisition of Accolade, Inc. (Note 4):
Tangible assets acquired............................... $ -- $ 4,582 $ --
Intangible assets acquired............................. -- 49,256 --
Liabilities assumed.................................... -- (4,738) --
-------- -------- -------
Additional paid in capital............................. $ -- $ 49,100 $ --
======== ======== =======
Capital distribution in the form of promissory note
(Note 4)............................................. $ 25,000 $ -- $ --
======== ======== =======
Supplemental disclosure of cash flow information -- cash
paid during the year for:
Income taxes.............................................. $ -- $ 106 $ 18
======== ======== =======
Interest.................................................. $ 2,180 $ 112 $ 319
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
C-8
<PAGE> 153
INFOGRAMES NORTH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
1. FORMATION AND ORGANIZATION
In March 1996, Infogrames Entertainment, Inc. ("IEI"), a California
company, was formed through an acquisition by Infogrames Entertainment, SA (the
"Parent Company") of Ocean International Limited ("OIL"). The Parent Company
acquired substantially all of the issued and outstanding common stock of OIL,
which owned 100% of IEI. The Parent Company's formation and acquisition of IEI
was accounted for utilizing the purchase method of accounting.
In April 1999, the Parent Company, through one of its wholly owned
subsidiaries, California U.S. Holding, Inc. ("CUSH") acquired all of the issued
and outstanding common stock of Accolade, Inc. ("Accolade"). The Parent
Company's acquisition of Accolade was accounted for utilizing the purchase
method of accounting. On October 21, 1999, Accolade changed its name to
Infogrames North America, Inc. ("INA").
On March 1, 2000, OIL, pursuant to a merger agreement, transferred its
investment in IEI to INA in exchange for a $25,000,000 promissory note forming a
merged company under which INA (the "Company") was the surviving company. The
assets, liabilities and shareholders' deficit transferred were recorded at their
net book values as the companies were under common control. The reorganization
charge of $25,000,000 was recorded as a capital distribution.
The Company has relied on support from the Parent Company in the recent
past. The Company believes that it is the Parent Company's present intention to
continue such support as the Parent Company deems necessary to fund its
operations and its cash flows for the next twelve months.
2. BASIS OF PRESENTATION
The Company has presented the combined operations of IEI and INA as these
companies were under a common controlling Parent: Infogrames Entertainment, SA.
The periods included are as of June 30, 2000 and 1999 and for the year ended
June 30, 2000, June 30, 1999 (including Accolade, Inc. from its common control
date of April 16, 1999) and June 30, 1998. In addition, the accompanying
financial statements include the effects of utilizing push down accounting for
each of the acquired entities, IEI and INA. All intercompany transactions have
been eliminated.
3. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company is a developer, publisher, and distributor of interactive
entertainment software for use on various platforms, including PC's, Sony
PlayStation and Nintendo 64. The Company derives its revenues primarily from the
sale of its created, published, licensed and purchased products to mass
merchants, specialty software stores, computer superstores and distributors.
Revenue Recognition
Revenue is recognized upon shipment of merchandise to customers. At the
time the revenue is recognized, a reserve is provided for expected future
returns net of the related cost of such items.
The Company accepts product returns or provides markdowns or other credits
on varying terms in the event that the customer holds excess inventory of its
products. Software products as complex as those published by the Company may
contain undetected errors when first introduced or when new versions are
released. It is the Company's practice to accept returns of defective or damaged
products at any time. At the time of product shipment, the Company establishes a
return reserve which covers expected future returns and, if necessary, price
protection, stock balancing, and returns of defective or damaged products.
C-9
<PAGE> 154
INFOGRAMES NORTH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks and highly liquid
investments with original maturities of three months or less at the date
acquired.
Inventories
Inventories are stated at the lower of cost (based upon the first-in,
first-out method) or market. Allowances are established (and reassessed
quarterly) to reduce the recorded cost of obsolete inventory and slow moving
inventory to its net realizable value.
Royalty Advances
Royalty advances are treated as research and development expenses, which
are expensed as incurred.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets. Computer
equipment is depreciated over three years. Furniture and fixtures is depreciated
over five years. Leased telephone equipment and leasehold improvements are
depreciated over the lease term.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, which requires the
use of the liability method of accounting for deferred income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates in effect for the years in which the
differences are expected to reverse.
Short-Term Investments
Management classifies equity securities as available-for-sale securities
under the provisions defined in the Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities.
Management determines the appropriate classification of its investments at the
time of purchase and reevaluates such determination at each balance sheet date.
Available-for-sale securities are carried at market value with the unrealized
gains and losses reported as a component of accumulated comprehensive income.
Intangible Assets
Intangibles include primarily goodwill and other intangibles resulting from
the two acquisitions described in Note 4. Amortization is computed using the
straight-line method over an estimated useful life not to exceed five years.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, such as fixed assets and certain
identifiable intangibles to be held and used or disposed of, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If the sum of the expected cash flows,
undiscounted and without interest, is less than the carrying amount of the
asset, an impairment loss is recognized as the amount by which the carrying
amount of the asset exceeds its fair value, as defined in Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived
C-10
<PAGE> 155
INFOGRAMES NORTH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Assets to be Disposed Of. During 2000, the balance of intangible assets
and goodwill related to the acquisition of IEI of approximately $5,564,000 was
written off in accordance with Statement of Financial Accounting Standards No.
121.
Research and Development Costs
Research and development costs related to the design, development and
testing of new software products are charged to expense as incurred. Research
and development costs also include payments for royalty advances to third-party
developers on products that are currently in development.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expense for the
years ended June 30, 2000, 1999 and 1998 amounted to $12,538,000, $9,179,000 and
$2,331,000 respectively.
Comprehensive Income (Loss)
The Company adapted SFAS No. 130, Reporting Comprehensive Income, which
establishes standards for reporting and displaying comprehensive income.
Accumulated other comprehensive income (loss) presented in the accompanying
consolidated balance sheets consists of accumulated unrealized holding gains
(losses) on investments.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS No. 133"), establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires companies to recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. The Company will adopt SFAS No. 133 in the first
quarter of fiscal 2001, in accordance with the deferral provision in SFAS No.
137. The adoption of SFAS No. 133 will not have a material effect on the
Company's financial statements. Management is in the process of evaluating any
impact on the Company's financial condition or results of operations resulting
from these statements.
Significant Customers and Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. Cash and cash equivalents primarily consist of money
market accounts and cash in bank accounts. The Company performs ongoing credit
evaluations to reduce credit risk and maintains allowances for estimated
potential bad debt losses.
Certain Significant Risks and Uncertainties
The Company operates in the software industry, and accordingly, can be
affected by a variety of factors. For example, management of the Company
believes that changes in any of the following areas could have a significant
negative effect on the Company's future financial position, results of
operations and cash flows; ability to obtain additional financing; regulatory
changes; fundamental changes in the technology underlying software products;
market acceptance of the Company's products under development; development of
sales channels; litigation or other claims against the Company; the hiring,
training and retention of key employees; successful and timely completion of
product development efforts; and new product introductions by competitors.
C-11
<PAGE> 156
INFOGRAMES NORTH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Currency Translation
Foreign currency transaction gains and losses are included in net earnings
(loss).
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 amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
4. ACQUISITIONS
As described in Note 1, the Company was formed through an acquisition by
the Parent Company in March 1996. The Parent Company paid approximately
$70,000,000 to acquire substantially all of the outstanding common stock of OIL,
and approximately $25,000,000 of the $70,000,000 was allocated to the purchase
of IEI. IEI has utilized push down accounting for the $25,000,000 allocable
purchase price which was allocated to the net assets acquired on a fair market
value basis as follows (in thousands):
<TABLE>
<S> <C>
Tangible assets............................................. $ 746
In-process research and technology.......................... 100
Assembled workforce......................................... 200
Customer list............................................... 5,200
Goodwill.................................................... 23,056
Assumed liabilities......................................... (4,302)
-------
$25,000
=======
</TABLE>
Additionally as described in Note 1, in April 1999 the Parent Company
acquired substantially all of the outstanding common stock of Accolade through
CUSH. As a result of this acquisition, the financial statements reflect the
effect of the purchase accounting adjustments. The aggregate purchase price paid
for INA was $49,100,000 ($48,500,000 cash plus $600,000 of costs paid by the
Parent). The Company has utilized push down accounting for the $49,100,000
purchase price which was allocated to the net assets acquired on a fair value
basis as follows (in thousands):
<TABLE>
<S> <C>
Tangible assets............................................. $ 4,582
Developed technology........................................ 600
In-process research and technology.......................... 3,940
Assembled workforce......................................... 2,000
Franchises.................................................. 3,000
Goodwill.................................................... 39,716
Assumed net liabilities (including cash and short-term
investments of $266)...................................... (4,738)
-------
$49,100
=======
</TABLE>
The purchase price allocation and intangible valuation was based in
management's estimates of the after-tax net cash flows. Specifically, the
valuation gave consideration to the following: (i) the employment of a fair
market value premise excluding any Accolade-specific considerations which could
result in estimates of investment value for the subject assets; (ii)
comprehensive due diligence concerning all potential intangible assets including
trademarks/trade names, patents, copyrights, non-compete agreements, assembled
workforce, customer relationships and sales channel; (iii) the value of existing
technology was specifically addressed, with
C-12
<PAGE> 157
INFOGRAMES NORTH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a view toward ensuring the relative allocations to existing technology and
in-process research and development were consistent with the relative
contributions of each to the final product; and (iv) the allocation to in-
process research and development was based on a calculation that considered only
the efforts completed as of the transaction date, and only the cash flow
associated with said completed efforts for one generation of the products
currently in process.
As indicated above, the Company recorded a one-time charge of $3,940,000 in
1999 for purchased in-process research and development related to the Accolade
acquisition. The Charge related to the portion of these products, excluding
existing technology, that had not reached technological feasibility, had no
alternative future use and for which successful development was uncertain.
Management's conclusion that the in-process development effort had no
alternative future use was reached in consultation with the engineering
personnel from both Accolade and IEI.
5. SHORT-TERM INVESTMENTS
Short-term investments include investments which consist of equity
investments. The following summarizes the cost, unrealized holding gains
(losses) and fair market value of the investments held by the Company at June 30
(in thousands):
<TABLE>
<CAPTION>
JUNE 30,
----------------------
2000 1999 1998
------ ---- ----
<S> <C> <C> <C>
Cost........................................................ $2,783 $279 $475
Unrealized holding gains (losses)........................... (376) 66 89
------ ---- ----
Fair market value........................................... $2,407 $345 $564
====== ==== ====
</TABLE>
6. ACCOUNTS RECEIVABLE, NET OF ALLOWANCES
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
2000 1999 1998
------- ------- ------
<S> <C> <C> <C>
Trade accounts receivable.............................. $19,459 $10,858 $3,407
Less allowance for doubtful accounts................... (225) (1,013) (949)
Less price protection reserve.......................... (1,970) (3,880) (273)
Less sales return reserve.............................. (1,224) (538) (242)
Less allowance for co-op advertising................... (1,598) (1,072) (309)
------- ------- ------
$14,442 $ 4,355 $1,634
======= ======= ======
</TABLE>
7. INVENTORIES, NET OF ALLOWANCES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Finished goods........................................... $1,390 $4,138 $1,038
Raw materials............................................ 416 436 70
------ ------ ------
1,806 4,574 1,108
Less obsolescence allowance.............................. (138) (617) (175)
------ ------ ------
$1,668 $3,957 $ 933
====== ====== ======
</TABLE>
C-13
<PAGE> 158
INFOGRAMES NORTH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Computer equipment.................................... $ 5,443 $ 4,359 $ 846
Leased telephone equipment............................ 72 360 --
Furniture and fixtures................................ 657 407 266
Leasehold improvements................................ 193 159 45
Other................................................. 200 746 746
------- ------- -------
Total................................................. 6,565 6,031 1,903
Less accumulated depreciation and amortization........ (4,247) (4,711) (1,283)
------- ------- -------
$ 2,318 $ 1,320 $ 620
======= ======= =======
</TABLE>
Depreciation expense for the years ended June 30, 2000, 1999 and 1998
aggregated approximately $782,000, $223,000 and $326,000, respectively.
9. INTANGIBLE ASSETS, NET
Intangible assets at June 30 consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Developed technology............................... $ 600 $ 600 $ --
Assembled workforce................................ 2,000 2,200 200
Customer list...................................... -- 5,200 5,200
Franchises......................................... 3,000 3,000 --
Goodwill........................................... 39,716 58,472 18,754
-------- -------- --------
Total.............................................. 45,316 69,472 24,154
Accumulated amortization........................... (11,526) (17,540) (10,690)
-------- -------- --------
Intangible assets, net............................. $ 33,790 $ 51,932 $ 13,464
======== ======== ========
</TABLE>
Goodwill amortization for the years ended June 30, 2000, 1999 and 1998
aggregated approximately $12,845,000, $6,850,000 and $4,841,000, respectively.
10. INCOME TAXES
No federal or state income taxes were provided due to the Company's net
operating losses for the years ended June 30, 2000, 1999, and 1998. The
provision for income taxes for these periods represents current foreign tax
expense due to foreign tax withholding of $375,000 for the year ended June 30,
2000.
C-14
<PAGE> 159
INFOGRAMES NORTH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of the income tax provision (benefit) computed at the
federal statutory rate to the reported provision for (benefit from) income taxes
is as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
2000 1999 1998
-------- -------- -------
<S> <C> <C> <C>
Provision for (benefit from) income taxes computed at the
federal statutory rate.................................... $(17,698) $ (6,677) $(3,281)
Increase (decrease) in provision for (benefit from) income
taxes resulting from:
State and local taxes, including effects of expiring net
operating losses, net of federal tax benefit........... (431) 246 (228)
Foreign taxes............................................. 375 -- --
Nondeductible expenses.................................... 38 12 3
Increase in gross deferred tax assets due to
acquisition............................................ -- (11,311) --
Increase (decrease) to deferred tax asset valuation
allowance.............................................. 12,959 14,459 2,206
Research and development credits.......................... -- -- (13)
In-process research and development....................... -- 1,379 --
Goodwill amortization and write-offs...................... 5,132 1,892 1,313
-------- -------- -------
Provision for (benefit from) income taxes................... $ 375 $ -- $ --
======== ======== =======
Effective income tax rate................................... 0.7% --% --%
======== ======== =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
Company's deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
2000 1999 1998
-------- -------- -------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 33,682 $ 22,225 $ 9,038
Tax credit carryforwards.................................. 207 207 207
Allowance for doubtful accounts, allowance for co-op
advertising sales return reserves and price protection
reserves............................................... 2,002 2,372 709
Compensation and vacation accruals........................ 337 213 13
Inventory reserves........................................ 55 250 70
Other accrued expenses not currently deductible........... 1,173 444 --
Depreciation and amortization............................. 80 84 --
Deferred revenue.......................................... 120 400 97
-------- -------- -------
Total deferred tax assets................................... 37,656 26,195 10,134
Deferred tax liabilities -- acquisition related
intangibles............................................... (1,468) (2,966) (1,364)
-------- -------- -------
Total net deferred tax assets before valuation allowance.... 36,188 23,229 8,770
Less valuation allowance.................................... (36,188) (23,229) (8,770)
-------- -------- -------
Total deferred tax assets................................... $ -- $ -- $ --
======== ======== =======
</TABLE>
The valuation allowance increased by $14,459,000 from 1998 to 1999 and
increased by $12,959,000 from 1999 to 2000.
C-15
<PAGE> 160
INFOGRAMES NORTH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets have been fully reserved as the Company believes that,
due to its history of operating losses and the expiration dates of the
carryforwards, it is more likely than not that such benefits will not be
realized.
As of June 30, 2000, the Company has federal and state net operating loss
carryforwards of approximately $92,800,000 and $24,033,000, respectively. These
loss carryforwards are available to offset future taxable income and will expire
beginning in the years 2008 through 2020 for federal purposes and in the years
2001 through 2005 for state purposes. The extent to which the loss carryforwards
can be used to offset future taxable income may be limited, depending on the
extent of ownership changes within any three-year period as provided by the
Internal Revenue Code and applicable California state tax law.
11. RELATED PARTY TRANSACTIONS
The Company had significant related party transactions with Infogrames
Entertainment SA (the parent company), Infogrames Europe (company under common
control), Infogrames Interactive (company under common control) and Infogrames,
Inc. (company under common control). The transactions with Infogrames
Entertainment SA, Infogrames Europe, Infogrames Interactive, Infogrames, Inc.,
and with OIL included receivables and related interest for such items as airline
tickets, products, studio contacts and consultants, as well as long-term debt
and related interest expense. Infogrames Entertainment SA provided management
services to the Company for various administrative functions. The Company also
received licensing revenue and paid royalty expenses to Infogrames Europe and
received licensing revenue from Infogrames Entertainment SA. Infogrames
Interactive provided research and development for the Company on the production
of certain software titles. Additionally, the Company has a distribution
agreement with Infogrames, Inc. for the sale of personal computer equipment.
Such transactions are in the ordinary course of business at negotiated prices
comparable to those of transactions with other customers and suppliers.
On March 1, 2000, OIL transferred its investment in IEI to INA in exchange
for a $25,000,000 promissory note paying interest at 6.8% per annum with a
maturity date of March 1, 2005.
C-16
<PAGE> 161
INFOGRAMES NORTH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The transactions and balances with the related parties at June 30 consist
of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
2000 1999 1998
-------- -------- -------
<S> <C> <C> <C>
Infogrames Entertainment SA:
Accounts receivable....................................... $ 600 $ 119 $ 182
Accounts payable.......................................... 26,226 755 410
Long-term debt............................................ -- 11,537 5,078
Interest income........................................... -- 40 42
Interest expense.......................................... 1,370 442 559
Licensing revenue......................................... 2,250 -- --
Management fees........................................... 945 191 256
Infogrames Europe:
Accounts receivable....................................... $ 237 $ 802 $ --
Accounts payable.......................................... 1,876 2,453 2,176
Licensing revenue......................................... 2,178 3,008 --
Royalty expense........................................... 5,589 2,896 512
Infogrames Interactive:
Accounts receivable....................................... $ 7 $ 155 $ --
Accounts payable.......................................... -- 433 --
Research and development expense.......................... -- 436 2,192
OIL:
Accounts payable.......................................... $ 539 $ -- $ --
Long-term debt............................................ 25,000 -- --
Interest expense.......................................... 539 -- --
Infogrames, Inc.:
Accounts receivable....................................... $ 2,038 $ -- $ --
Revenue................................................... 2,038 -- --
</TABLE>
12. COMMITMENTS
The Company accounts for its leases as operating leases, with expiration
dates ranging from 2001 through 2012. Future minimum annual rental payments
under the leases are as follows for the fiscal years then ended (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
2001........................................................ $1,247
2002........................................................ 355
2003........................................................ 275
Thereafter.................................................. 92
------
$1,969
======
</TABLE>
Total rent expense charged to operations for the years ended June 30, 2000,
1999 and 1998 aggregated approximately $1,055,000, $463,000 and $200,000
respectively.
The Company has committed to pay advance royalty payments under certain
royalty agreements. These obligations are not guaranteed and are dependent, in
part, on the delivery of the contracted services by the
C-17
<PAGE> 162
INFOGRAMES NORTH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
licensor. Future advance royalty payments due under these royalty agreements are
as follows for the fiscal years then ended (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
-----------
<S> <C>
2001........................................................ $7,607
2002........................................................ 1,020
2003........................................................ 250
------
$8,877
======
</TABLE>
13. BANK LINE OF CREDIT
On March 20, 2000, the Company obtained a $35 million unsecured committed
revolving line of credit from Banque Nationale de Paris. The funds from this
revolving line of credit are to be used to finance the purchase of interactive
games. There was $31.1 million outstanding under this facility as of June 30,
2000. The revolving line of credit has a maturity date of September 30, 2000.
The stated interest rate is LIBOR plus 65 basis points.
14. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) Savings and Retirement Plan (the Plan) for
all employees who meet certain eligibility requirements. Participants may
contribute, on a pre-tax basis, between 1% and 15% of their annual compensation,
but not to exceed a maximum contribution amount pursuant to Section 401(k) of
the Internal Revenue Code. The Company is not required to contribute, nor has it
contributed, to the Plan for any of the periods presented.
15. MAJOR CUSTOMERS
Three customers accounted for 68%, 50% and 31% of accounts receivable at
June 30, 2000, 1999 and 1998. Customer A accounted for 17%, 13% and 10% for the
years ending June 30, 2000, 1999 and 1998, respectively. Customer B accounted
for 28%, 18% and 10% of accounts receivable for the periods ended June 30, 2000,
1999 and 1998, respectively. Customer C accounted for 23%, 19% and 11% for the
years ending June 30, 2000, 1999 and 1998, respectively. Two customers accounted
for 32% of net revenues in 2000, Customer A accounted for 21% and Customer B
accounted for 11% of net revenues. Customer A, accounted for 13% of net revenues
in 1999. No customers accounted for more than 10% of net revenues in 1998.
16. SUBSEQUENT EVENT
The Company entered into a merger agreement with Infogrames, Inc., a
company under common control, on September 6, 2000. Infogrames, Inc. will
acquire the Company through a merger. Infogrames, Inc. will create a
wholly-owned subsidiary that will merge with and into the Company. Upon
completion of the merger, the Company will be a wholly-owned subsidiary of
Infogrames, Inc.
* * * * *
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<PAGE> 163
ACCOLADE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1,
1999
THROUGH YEARS ENDED MARCH 31,
APRIL 15, ----------------------
1999 1999 1998
----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues................................................ $ 231 $45,730 $33,593
Cost of goods sold.......................................... 90 14,109 11,172
------- ------- -------
Gross profit........................................... 141 31,621 22,421
Operating expenses:
Selling and marketing expenses (excluding amortization of
deferred stock compensation)........................... 169 15,991 13,573
General and administrative expenses (excluding
amortization of deferred stock compensation)........... 4,026 2,872 2,365
Research and development (excluding amortization of
deferred stock compensation)........................... 689 12,619 12,560
Amortization of deferred stock compensation*.............. 291 180 --
------- ------- -------
Total operating expenses............................... 5,175 31,662 28,498
------- ------- -------
Loss from operations........................................ (5,034) (41) (6,077)
Other expense............................................... 5 483 712
------- ------- -------
Loss before income taxes.................................... (5,039) (524) (6,789)
Provision for income taxes.................................. -- 67 30
------- ------- -------
Net loss.................................................... $(5,039) $ (591) $(6,819)
======= ======= =======
---------------
* Amortization of deferred stock compensation:
Selling and marketing expenses............................ $ 8 $ 8 $ --
General and administrative expenses....................... 246 129 --
Research and development.................................. 37 43 --
------- ------- -------
$ 291 $ 180 $ --
======= ======= =======
</TABLE>
See notes to financial statements.
C-19
<PAGE> 164
ACCOLADE, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE PERIOD ENDED APRIL 15, 1999 AND
THE YEARS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRD STOCK COMMON STOCK DEFERRED
----------------- ---------------- STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT TOTAL
------- ------- ------ ------- ------------ ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, March 31, 1997............... 23,702 $33,285 13,287 $ 6,972 $ -- $(49,437) $(9,180)
Exercise of stock options.............. 42 6 6
Net loss............................... (6,819) (6,819)
------- ------- ------ ------- ----- -------- -------
Balances, March 31, 1998............... 23,702 33,285 13,329 6,978 -- (56,256) (15,993)
Exchange of preferred stock for new
Class A and Class B common stock..... (23,702) (33,235) 42,294 33,235 --
Issuance of new Series B preferred
stock, net of issuance costs of
$99.................................. 10,435 3,901 3,901
Conversion of WEA facility and the
senior debt into new Class A
shares............................... 13,244 6,622 6,622
Conversion of subordinated convertible
debt into new Series A preferred
stock................................ 13,492 6,524 6,524
Exercise of stock options.............. 89 13 13
Deferred stock compensation............ 979 (979) --
Amortization of deferred
compensation......................... 180 180
Net loss............................... (591) (591)
------- ------- ------ ------- ----- -------- -------
Balances, March 31, 1999............... 23,927 10,475 68,956 47,827 (799) (56,847) 656
Deferred stock compensation............ 301 (301) --
Amortization of deferred
compensation......................... 291 291
Net loss............................... (5,039) (5,039)
------- ------- ------ ------- ----- -------- -------
Balances, April 15, 1999............... 23,927 $10,475 68,956 $48,128 $(809) $(61,886) $(4,092)
======= ======= ====== ======= ===== ======== =======
</TABLE>
See notes to financial statements.
C-20
<PAGE> 165
ACCOLADE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1,
1999 TO YEARS ENDED MARCH 31,
APRIL 15, ----------------------
1999 1999 1998
----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(5,039) $ (591) $(6,819)
Reconciliation of net loss to net cash used in operating
activities:
Depreciation and amortization.......................... 20 580 678
Accrued interest added to convertible debt............. -- 47 580
Amortization of deferred stock compensation............ 291 180 --
Changes in operating assets and liabilities:
Receivables, net..................................... 85 (567) 1,500
Inventories, net..................................... 41 (17) 143
Prepaid expenses and other current assets............ (29) 256 (75)
Accounts payable..................................... (628) (129) 393
Accrued liabilities.................................. 3,565 (2,270) 1,405
Amount due WEA....................................... -- -- (37)
------- ------- -------
Net cash used in operating activities............. (1,694) (2,511) (2,232)
------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (26) (554) (507)
Other assets.............................................. -- 100 3
------- ------- -------
Net cash used in investing activities............. (26) (454) (504)
------- ------- -------
Cash flows from financing activities:
Cash overdraft............................................ 267 -- --
Borrowings, net........................................... -- (128) (134)
Issuance of subordinated senior debt...................... -- -- 2,000
Proceeds from exercise of stock options................... -- 13 6
Proceeds from issuance of preferred stock, net of issuance
costs.................................................. -- 3,901 --
------- ------- -------
Net cash provided by financing activities......... 267 3,786 1,872
------- ------- -------
Net (decrease) increase in cash and cash equivalents........ (1,453) 821 (864)
Cash and cash equivalents, beginning of period.............. 1,453 632 1,496
------- ------- -------
Cash and cash equivalents, end of period.................... $ -- $ 1,453 $ 632
======= ======= =======
Noncash financing activities:
Exchange of convertible preferred stock for new Class A
and Class B common stock............................... $ -- $33,235 $ --
======= ======= =======
Conversion of WEA facility and the subordinated senior
debt into new Class A shares........................... $ -- $ 6,622 $ --
======= ======= =======
Conversion of subordinated convertible debt into new
Series A preferred stock............................... $ -- $ 6,524 $ --
======= ======= =======
Supplemental disclosure of cash flow information -- cash
paid during the year for:
Income taxes.............................................. $ -- $ -- $ --
======= ======= =======
Interest.................................................. $ -- $ 558 $ 250
======= ======= =======
</TABLE>
See notes to financial statements.
C-21
<PAGE> 166
ACCOLADE, INC.
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM APRIL 1, 1999 THROUGH APRIL 15, 1999
AND THE YEARS ENDED MARCH 31, 1999 AND 1998
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Accolade, Inc. (the "Company") creates, markets and distributes interactive
entertainment software for a variety of hardware platforms.
Revenue Recognition
Revenue is recognized upon shipment of merchandise to customers. At the
time the revenue is recognized, a reserve is provided for expected future
returns net of the related cost of such items.
The Company is not contractually obligated to accept returns, except for
defective product. However, the Company may permit its customers to return or
exchange product and may provide pricing allowance for estimated returns, price
concessions and other allowances. Such allowance is reflected as a reduction to
accounts receivable when the Company expects to grant credits for such items.
Inventories
Inventories are stated at the lower of cost (based upon the first-in,
first-out method) or market. Allowances are established to reduce the recorded
cost of obsolete inventory and slow moving inventory to its net realizable
value.
Royalty Advances
Royalty advances are treated as research and development expenses, which
are expensed as incurred.
Advertising Costs
All advertising costs are expensed as incurred. Advertising costs, which
are included in sales and marketing expense, were $5,497,000, $4,375,000 and
$235,000 for the years ended March 31, 1999 and 1998 and for the period ended
April 15, 1999, respectively.
Depreciation
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from three to seven years. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or the estimated useful lives of the related assets.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, which requires the
use of the liability method of accounting for deferred income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates in effect for the years in which the
differences are expected to reverse.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, such as fixed assets and certain
identifiable intangibles to be held and used or disposed of, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If the sum of the expected cash flows,
undiscounted and
C-22
<PAGE> 167
ACCOLADE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
without interest, is less than the carrying amount of the asset, an impairment
loss is recognized as the amount by which the carrying amount of the asset
exceeds its fair value, as defined in Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of.
Research and Development Costs
Research and development costs related to the design, development and
testing of new software products are charged to expense as incurred. Research
and development costs also include payments for royalty advances to third-party
developers on products that are currently in development.
Stock-Based Compensation
The Company accounts for stock-based awards to employees using the
intrinsic method in accordance with Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and to nonemployees using the
fair value method in accordance with Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation.
Concentration of Credit Risk
The Company extends credit to various companies in the retail and mass
merchandising industry for the purchase of its merchandise which results in a
concentration of credit risk. This concentration of credit risk may be affected
by changes in economic or other industry conditions and may, accordingly, impact
the Company's overall credit risk. Although the Company generally does not
require collateral, the Company performs ongoing credit evaluations of its
customers and reserves for potential losses are maintained.
Certain Significant Risks and Uncertainties
The Company operates in the software industry, and accordingly, can be
affected by a variety of factors. For example, management of the Company
believes that changes in any of the following areas could have a significant
negative effect on the Company's future financial position, results of
operations and cash flows; ability to obtain additional financing; regulatory
changes; fundamental changes in the technology underlying software products;
market acceptance of the Company's products under development; development of
sales channels; litigation or other claims against the Company; the hiring,
training and retention of key employees; successful and timely completion of
product development efforts; and new product introductions by competitors.
Comprehensive Income
The comprehensive income (loss) is the same as net income (loss) for each
period presented.
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 amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to classifications used in the current period.
C-23
<PAGE> 168
ACCOLADE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SALE OF THE COMPANY
On April 15, 1999, Infogrames Entertainment SA, through a wholly-owned
subsidiary, California U.S. Holdings, Inc. ("CUSH"), acquired all of the
Company's outstanding shares of capital stock for $48.5 million in cash and the
Company became a wholly-owned subsidiary of CUSH. Concurrently with the closing
and change of control, the Company entered into various bonus agreements with an
officer for approximately $2.2 million. The bonuses were paid out of the
proceeds from the sale, and are included in the accompanying statement of
operations for the period from April 1, 1999 through April 15, 1999. Proceeds of
$2.5 million were subject to a holdback provision that was held in an escrow
account until April 13, 2000. In October 1999, the Company changed its name to
Infogrames North America, Inc. ("INA").
3. INCOME TAXES
No federal or state income taxes were provided due to the Company's net
operating losses for the years ended March 31, 1998, and 1999 and the period
from April 1, 1999 through April 15, 1999. The provision for income taxes for
these periods represents current foreign tax expense due to foreign tax
withholding of $30,000 and $67,000 for the years ended March 31, 1998 and 1999,
respectively.
The reconciliation of the income tax provision (benefit) computed at the
federal statutory rate to the reported provision for (benefit from) income taxes
is as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
2000 1999 1998
-------- ----- -------
<S> <C> <C> <C>
Provision for (benefit from) income taxes computed at
the federal statutory rate........................... $ (1,764) $(184) $(2,376)
Increase (decrease in provision for (benefit from)
income taxes resulting from:
State and local taxes, including effect of expiring
net operating losses, net of federal tax
benefit........................................... (118) 311 (232)
Foreign taxes........................................ -- 67 30
Stock compensation................................... 102 -- --
Nondeductible expenses............................... -- 31 4
Increase (decreased) to deferred tax asset valuation
allowance......................................... (12,311) 742 3,331
Research and development credits..................... -- (900) (727)
Reduction on gross deferred tax assets for net
operating loss and credit carryforwards due to
ownership change.................................. 14,091 -- --
-------- ----- -------
Provision for (benefit from) income taxes.............. $ -- $ 67 $ 30
======== ===== =======
Effective income tax rate.............................. --% (12.8)% (0.4)%
======== ===== =======
</TABLE>
C-24
<PAGE> 169
ACCOLADE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
Company's deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $ 12,619 $ 21,783 $ 20,649
Tax credit carryforwards......................... -- 3,147 2,247
Allowance for doubtful accounts, allowance for
co-op advertising, sales return reserves and
price protection reserves..................... 521 521 1,728
Compensation and vacation accruals............... 174 174 203
Inventory reserves............................... 132 132 50
Other accrued expenses not currently
deductible.................................... 106 106 244
-------- -------- --------
Total deferred tax assets.......................... 13,552 25,863 25,121
Less valuation allowance........................... (13,552) (25,863) (25,121)
-------- -------- --------
Total net deferred tax asset....................... $ -- $ -- $ --
======== ======== ========
</TABLE>
The valuation allowance increased by $742,000 from 1998 to 1999 and
decreased $12,311,000 from 1999 to 2000.
Deferred tax assets have been fully reserved as the Company believes that,
due to its history of operating losses and the expiration dates of the
carryforwards, it is more likely than not that such benefits will not be
realized.
4. SHAREHOLDERS' EQUITY
The Company completed a recapitalization effective April 1, 1998. Under the
terms of the recapitalization, all outstanding shares of convertible preferred
stock were exchanged for 42,294,000 new Class A and Class B common stock in
accordance with the conversion ratios applicable to each preferred stock series.
Also, in connection with this recapitalization, 9,649,412 shares of old Class A
and Class B common stock were exchanged on a one-for-one basis with new Class A
and Class B common stock.
In addition, the Warner-Elektra-Atlantic Corporation ("WEA") facility, in
the amount of $4,500,000, and the subordinated senior debt, in the amount of
$2,100,000, and related accrued interest, were converted into new Class A common
stock at $0.50 per share resulting in the issuance of 13,244,000 shares.
Furthermore, the subordinated convertible debt, in the amount of
$6,503,000, plus accrued interest of $21,000, was converted into 13,492,000
shares of new Series A preferred stock in accordance with the conversion ratio
outlined in the original note purchase agreement, $0.484 per share.
On August 21, 1998, the Company issued 10,435,000 shares of new Series B
preferred stock to the existing investors at $0.3833 per share for proceeds of
$4,000,000, less issuance costs of $99,000.
5. STOCK OPTIONS
In February 1995, the Company adopted the 1995 Stock Option Plan (the 1995
Plan) to succeed the 1985 Stock Option Plan (the 1985 Plan). Under the 1995
Plan, the Company grants stock options to employees and nonemployees at prices
not less than fair market value of the Company's common stock (as determined by
the Board of Directors) on the grant date. The options generally vest at the
rate of at least 25%
C-25
<PAGE> 170
ACCOLADE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
per year over a period of four years from the date of grant. Options generally
expire ten years from the grant date.
Stock option activity under the stock plans is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER PRICE EXERCISE
OF SHARES PER SHARE PRICE
--------- ---------- --------
<S> <C> <C> <C>
Outstanding at March 31, 1997....................... 3,085 $ $0.19
Granted............................................. 1,099 0.15 0.15
Exercised........................................... (42) 0.15 0.15
Canceled............................................ (1,307) 0.15 0.15
------ -----
Outstanding at March 31, 1998....................... 2,835 0.19
Granted............................................. 4,417 0.15 0.15
Exercised........................................... (89) 0.15 0.15
Canceled............................................ (1,379) 0.15-4.00 0.24
------ -----
Outstanding at March 31, 1999....................... 5,784 0.15
Granted............................................. 83 0.15 0.15
Exercised........................................... -- -- --
Canceled............................................ (5,867) -- --
------ ---------- -----
Outstanding at April 15, 1999....................... -- $ -- $ --
====== ========== =====
</TABLE>
In fiscal 1995 and 1998, certain officers of the Company were granted
nonqualified stock options to purchase a total of 6,900,000 and 856,000 shares
of common stock, respectively, outside of the Company's stock option plans at
$0.15 per share. Options were subject to acceleration of vesting should a
transaction that results in a change of control of the Company occur. As part of
the sale agreement, an officer's options to purchase 4,890,304 shares of common
stock were canceled in exchange for $1,353,528 in cash, representing the
approximate differential between the deemed fair value and the exercise price of
the underlying common stock. The payment made for the cancellation of the option
is included in the accompanying statement of operations for the period from
April 1, 1999 through April 15, 1999.
On April 2, 1999, the Board of Directors approved the acceleration of the
vesting of stock options held by employees based on length of service as
follows: 100% of all unvested options held by employees who had been with the
Company for one year or more would be accelerated immediately prior to a change
of control of the Company, 50% of all unvested options held by employees who had
been with the Company for more than six months but less than one year would be
accelerated immediately prior to a change of control of the Company and 25% of
all unvested options held by employees who had been with the Company for less
than six months would be accelerated immediately prior to a change of control of
the Company. The acceleration charge aggregated $281,000 for the period April 1,
1999 to April 15, 1999 which is included in the total amortization expense for
the period.
The Company recorded $301,000 and $979,000 for deferred stock compensation
representing the differential between the deemed fair value of the Company's
common stock and the exercise price at the period ended April 1, 1999 to April
15, 1999 and for the year ended March 31, 1999. Deferred stock compensation
expense is being amortized using the single option valuation approach.
The weighted average fair value of options granted was $0.04 for the year
ended March 31, 1998, March 31, 1999 for the period from April 1, 1999 through
April 15, 1999.
If compensation cost for these plans were determined consistent with
Statement of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation, the Company's pro forma net loss would have
C-26
<PAGE> 171
ACCOLADE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
been $(5,042,000), $(667,000) and $(6,876,000) for the period April 1, 1999
through April 15, 1999 and the years ended March 31, 1998 and 1999,
respectively. Such pro forma net loss assumes that the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions used for grants in the
years ended March 31, 1998 and 1999 and the period from April 1, 1999 through
April 15, 1999: no dividends will be paid for the entire term of the option;
risk-free interest rates ranged from 6.0% to 6.5% for the years ended March 31,
1998 and March 31, 1999 and for the period from April 1, 1999 through April 15,
1999; and expected lives of five years for the years ended March 31, 1998 and
March 31, 1999 and for the period from April 1, 1999 through April 15, 1999.
6. LEASES
Total rent expense charged to operations for the period from April 1, 1999
through April 15, 1999 and the years ended March 31, 1999 and 1998 and amounted
to approximately $30,000, $762,000 and $698,000, respectively.
7. LEGAL PROCEEDINGS
During fiscal 1997, a class action lawsuit was brought against the Company
by certain former Major League baseball players in the Superior Court of Los
Angeles County, California, charging that the Company's video game "Hardball 5"
uses the names and likenesses of the plaintiffs and other former Major League
baseball players, both living and dead, without their consent. "Hardball 5" was
produced by the Company and distributed by WEA. The complaint alleged causes of
action for statutory and common law interference with the right of publicity and
misappropriation of name and likeness, as well as for unjust enrichment. The
plaintiffs sought the following damages: $300,000 plus 8% of the gross sales of
"Hardball 5," unspecified general damages, interest, attorneys' fees, costs and
punitive damages. On April 12, 2000, the Company settled with the plaintiffs for
$850,000, of which $600,000 is covered by the insurer. The settlement was
accrued in the year ended March 31, 1999.
8. MAJOR CUSTOMER
The Company had sales constituting 98% of net revenue to one customer for
the period from April 1, 1999 through April 15, 1999 and 90% for the years ended
March 31, 1998 and 1999.
9. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) Savings and Retirement Plan (the Plan) for
all employees who meet certain eligibility requirements. Participants may
contribute, on a pre-tax basis, between 1% and 15% of their annual compensation,
but not to exceed a maximum contribution amount pursuant to Section 401(k) of
the Internal Revenue Code. The Company is not required to contribute, nor has it
contributed, to the Plan for any of the periods presented.
* * * * *
C-27
<PAGE> 172
EXHIBIT D
INFOGRAMES, INC.
PRO FORMA FINANCIAL STATEMENTS
<PAGE> 173
INDEX TO PRO FORMA FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Pro Forma Consolidating Balance Sheet............. D-3
Unaudited Pro Forma Consolidating Statements of
Operations................................................ D-5
Notes to Unaudited Pro Forma Condensed Consolidating
Financial Statements...................................... D-6
</TABLE>
D-1
<PAGE> 174
PRO FORMA COMBINED FINANCIAL STATEMENTS OF INFOGRAMES, INC. AND
INFOGRAMES NORTH AMERICA FOR THE PERIOD ENDED JUNE 30, 2000
INFOGRAMES NORTH AMERICA MERGER
On September 6, 2000, Infogrames, Inc. (the "Company") signed a definitive
merger agreement to merge with Infogrames North America, Inc. ("INA"). Under the
terms of the acquisition, which will be accounted for on an "as if pooled"
basis, the Company will issue 28 million shares of common stock of the Company
in exchange for all of INA's outstanding common shares and the conversion of up
to $125 million of debt into shares of the Company's common stock. The merger is
expected to be completed on October 2, 2000 or soon thereafter.
UNAUDITED PROFORMA CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 2000*
<TABLE>
<CAPTION>
ADJUSTED
INFOGRAMES, INFOGRAMES PROFORMA PROFORMA ADDITIONAL PROFORMA
INC. NORTH AMERICA ADJUSTMENTS BALANCE SHEET AMOUNTS BALANCE SHEET
----------- ------------- ----------- ------------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash
equivalents............ $ 12,302 $ 3,568 $ 15,870 $ 15,870
Accounts receivable,
net.................... 22,016 14,442 36,458 36,458
Accounts receivable --
related parties........ 440 2,882 (440)(1) 2,882 2,882
Inventories, net......... 30,907 1,668 32,575 32,575
Deferred income taxes.... 153 0 153 153
Income taxes
receivable............. 1,204 0 1,204 1,204
Prepaid and other current
assets................. 7,241 350 -- 7,591 7,591
-------- --------- ------- -------- --------
Total current assets... 74,263 22,910 (440) 96,733 96,733
Property, plant and
equipment, net......... 15,094 2,318 17,412 17,412
Investment in
subsidiaries........... 8,237 0 8,237 8,237
Goodwill, net............ 7,067 33,790 40,857 40,857
Other non-current
assets................. 10,118 -- 10,118 10,118
-------- --------- ------- -------- --------
Total Assets........... $114,779 $ 59,018 ($ 440) $173,357 $ 0 $173,357
======== ========= ======= ======== ========= ========
Liabilities:
Accounts payable......... $ 64,515 $ 4,957 $ 69,472 $ 69,472
Accrued liabilities...... 33,071 5,475 38,546 38,541
Royalty payable.......... 15,972 2,706 18,678 18,678
Revolving Credit
Facility............... 98,543 34,494 133,037 (98,543)(3) 34,494
Due to related party..... 1,026 28,641 (440)(1) 29,227 (28,201)(2) 1,026
Deferred royalty
income................. 58 0 58 58
-------- --------- -------- --------
Total current
liabilities.......... 213,185 76,273 (440) 289,018 (126,744) 162,274
Long-term debt........... 99,320 0 99,320 99,320
Long-term debt -- related
parties................ 0 25,000 25,000 (25,000)(2) 0
Other long-term
liabilities............ 2,239 0 2,239 2,239
-------- --------- -------- --------
Total liabilities...... 314,744 101,273 (440) 415,577 (151,744) 263,833
Stockholders' Equity:
Common Stock............. 207 1 208 152(3) 640
280(4)
Additional paid-in
capital................ 227,383 65,901 293,284 53,201(2) 444,596
98,391(3)
(280)(4)
Accumulated deficit...... (425,542) (107,781) (523,323) (533,323)
</TABLE>
D-2
<PAGE> 175
<TABLE>
<CAPTION>
ADJUSTED
INFOGRAMES, INFOGRAMES PROFORMA PROFORMA ADDITIONAL PROFORMA
INC. NORTH AMERICA ADJUSTMENTS BALANCE SHEET AMOUNTS BALANCE SHEET
----------- ------------- ----------- ------------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Accumulated other
comprehensive income... 1,309 (376) 933 933
Less: Treasury Stock..... (3,322) 0 (3,322) (3,322)
-------- --------- -------- --------
Total common
stockholders' deficit
and equity........... (199,965) (42,255) (242,220) 151,744 (90,476)
-------- --------- -------- --------
Total Liabilities and
Stockholders'
Equity............... $114,779 $ 59,018 ($ 440) $173,357 $ 0 $173,357
======== ========= ======= ======== ========= ========
</TABLE>
---------------
Proforma Additional Adjustment Explanations
(1) Reverse intercompany receivable / payable related to sales agent fee charged
to INA.
(2) Record the conversion of all INA intercompany debt to equity prior to the
merger.
(3) Record the conversion of all Infogrames, Inc. short-term debt (revolver) to
equity @ $6.50 per share.
(4) Record the issuance of 28 million shares at $0.01 par value.
* Financial Statements are presented on an "as if pooled" basis.
D-3
<PAGE> 176
PROFORMA COMBINED FINANCIAL STATEMENTS OF INFOGRAMES, INC.
AND
INFOGRAMES NORTH AMERICA FOR THE PERIOD ENDED JUNE 30, 2000
UNAUDITED PROFORMA CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE TWELVE MONTHS
ENDED JUNE 30, 2000*
<TABLE>
<CAPTION>
INFOGRAMES, PROFORMA PROFORMA
INC. INFOGRAMES NORTH AMERICA ADJUSTMENTS CONSOLIDATED
----------- ----------------------------------- ----------- ------------
12 MONTHS 12 MONTHS 5.5 MONTHS 7.5 MONTHS 12 MONTHS
ENDED ENDED ENDED ENDED ENDED
30-JUN-00 30-JUN-00 16-DEC-99 30-JUN-00 30-JUN-00 30-JUN-00
----------- --------- ---------- ---------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net Revenues................................ 287,227 72,049 59,855 12,194 (440)(1) 298,981
Cost of Goods Sold.......................... 250,308 46,873 30,411 16,462 266,770
-------- ------- ------ ------- --------
Gross Profit.............................. 36,919 25,176 29,444 (4,268) 32,211
Selling and distribution expenses........... 130,767 23,470 16,197 7,273 (440)(1) 137,600
General and administrative expenses......... 99,661 11,123 2,243 8,880 108,541
Research and development.................... 59,789 19,632 4,407 15,225 75,014
Restructuring and other charges............. 40,866 0 0 0 40,866
Write-down of intangible assets............. 0 5,564 0 5,564 5,564
Amortization of goodwill.................... 2,783 12,845 4,532 8,313 11,096
-------- ------- ------ ------- --------
Operating (loss) income..................... (296,947) (47,458) 2,065 (49,523) (346,470)
Interest income (expense)................... (18,233) (3,129) (835) (2,294) (20,527)
Other expense............................... (1,177) 20 10 10 (1,167)
-------- ------- ------ ------- --------
(Loss) income before provision for
(benefit from) income taxes............. (316,357) (50,567) 1,240 (51,807) (368,164)
(Benefit from) provision for income taxes... 43,868 375 2,707 (2,332) 41,536
-------- ------- ------ ------- --------
Net (loss) income from continuing
operations................................ (360,225) (50,942) (1,467) (49,475) (409,700)
Discontinued operations..................... (477) 0 0 0 (477)
-------- ------- ------ ------- --------
Net (loss) before extraordinary item........ (360,702) (50,942) (1,467) (49,475) (410,177)
Extraordinary item.......................... 1,888 0 0 0 1,888
-------- ------- ------ ------- --------
Net (loss) before dividends on preferred
stock..................................... (358,814) (50,942) (1,467) (49,475) (408,289)
-------- ------- ------ ------- --------
Less dividends on preferred stock........... (600) 0 0 0 600
-------- ------- ------ ------- --------
Net (loss) income........................... (358,214) (50,942) (1,467) (49,475) (407,689)
======== ------- ====== ======= ========
Basic and diluted (loss) income per share
from continuing operations................ (20.57) (5.80)
Basic and diluted (loss) income per share
from discontinued operations.............. (0.03) (0.01)
Basic and diluted (loss) income per share
from extraordinary item................... 0.11 0.03
-------------------------------------------- --------
Basic and diluted (loss) income per share... (20.49) (5.78)
======== ========
Weighted average shares outstanding......... 17,510 70,644
======== ========
</TABLE>
---------------
Proforma Adjustment Explanations
(1) Reverse intercompany sales agent fee charged to INA
* Financial Statements are presented on an "as if pooled" basis as if the
transaction occurred on the first day of the fiscal year.
Upon consummation of this merger transaction, debt will be converted to
equity resulting in annual savings of approximately $11.3 million in interest
expense.
D-4
<PAGE> 177
INFOGRAMES, INC. AND INFOGRAMES NORTH AMERICA, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: THE PERIODS COMBINED
The consolidated statements of operations of Infogrames, Inc., a Delaware
corporation (the "Company"), for the twelve months ended June 30, 2000 have been
combined on an "as if pooled" basis with the Infogrames North America,
Inc.("INA"), statements of operations for the same period as if the merger had
occurred as of the beginning of the period.
NOTE 2: PRO FORMA BASIS OF PRESENTATION
The pro forma adjustments made in connection with the development of the
proforma information have been made solely for purposes of developing such
proforma information as necessary to comply with the disclosure requirements of
the Securities and Exchange Commission. The Unaudited Pro Forma Combined
Consolidated Financial Statements do not purport to be indicative of the
combined financial position or results of operations of future periods or
indicative of the results of operations of future periods or indicative of the
results that actually would have been realized had the entities been a single
entity during the period.
The Unaudited Pro Forma Combined Statement of Operations for the twelve
months ended June 30, 2000 reflect the issuance of 28 million shares of the
Company's common stock in exchange for all of the outstanding common shares of
INA. The pro forma adjustments reflect the additional shares that would be used
in computing basic and diluted earnings per share as if the Merger had occurred
at the beginning of the period.
NOTE 3: PRO FORMA EARNINGS PER SHARE
The Unaudited Pro Forma Combined Consolidated Statements of Operations for
Infogrames, Inc., have been prepared as if the merger was completed at the
beginning of the periods presented. The pro forma basic net loss per share is
based on the combined weighted average number of shares of the Company.
The Pro Forma diluted loss per share is computed using the weighted average
number of the Company's common stock and dilutive common equivalent shares
outstanding during the period and the number of shares of the Company's common
stock to be issued in exchange. Common equivalent shares consist of the
incremental common shares issuable upon conversion of the exercise of stock
options and warrants using the treasury stock method. Common equivalent shares
are excluded from the computation if their effect is anti-dilutive. The combined
company had a pro forma net loss for all periods presented herein; therefore,
none of the options and warrants outstanding during each of the periods
presented were included in the computation of pro forma dilutive earnings per
share as they were anti-dilutive.
NOTE 4: PRO FORMA ADJUSTMENTS
The objective of the pro forma information is to show what the significant
effects on the historical financial information might have been had the
companies been combined for the periods presented. Pro Forma Adjustments
represents (1) the reversal of all intercompany receivables and payables related
to the sales agent fee charged to INA (2) conversion of all INA's intercompany
debt to equity prior to the merger (3) conversion of all the Company's
short-term debt (revolver) to equity at $6.50 per share and (4) exchange of 28
million of the Company's shares for all of INA's outstanding common stock. The
pro forma adjustments reflect the additional shares that would be used in
computing basic and diluted earnings per share as if the Merger had occurred at
the beginning of each period.
D-5
<PAGE> 178
EXHIBIT E
FAIRNESS OPINION
<PAGE> 179
[150 YEARS LOGO]
LEHMAN BROTHERS
September 6, 2000
The Special Committee of the Board of Directors
Infogrames, Inc.
417 Fifth Avenue
New York, NY 10016
Members of the Special Committee:
We understand that Infogrames, Inc. ("Infogrames" or the "Company")
proposes to enter into an agreement with Infogrames Entertainment SA ("ISA"),
California U.S. Holdings, Inc. ("CUSH") and Infogrames North America, Inc.
("INA"), pursuant to which (i) a wholly owned subsidiary of Infogrames will be
merged with and into INA, a wholly owned subsidiary of CUSH which in turn is a
wholly owned subsidiary of ISA, (ii) the shares of common stock of INA held by
CUSH will be converted into 28,000,000 shares of Infogrames common stock, and
(iii) all outstanding amounts under the $125 million credit agreement between
Infogrames as the borrower and ISA as the lender (the "Credit Agreement") shall
be cancelled in exchange for the issuance to CUSH of 19,685,000 shares of
Infogrames common stock (collectively, the "Proposed Transaction"). The terms
and conditions of the Proposed Transaction are set forth in more detail in the
Agreement and Plan of Merger dated September 6, 2000 (the "Merger Agreement") by
and among the Company, ISA, CUSH, and INA.
We have been requested by the Special Committee of the Board of Directors
of the Company (the "Special Committee") to render our opinion with respect to
the fairness, from a financial point of view, to the Company and its
stockholders other than ISA and its affiliates, of the consideration to be paid
by the Company in the Proposed Transaction. We have not been requested to opine
as to, and our opinion does not in any manner address, the Company's underlying
business decision to proceed with or effect the Proposed Transaction.
In arriving at our opinion, we reviewed and analyzed: (1) the Merger
Agreement and the specific terms of the Proposed Transaction, (2) publicly
available information concerning Infogrames that we believe to be relevant to
our analysis, including Infogrames' Annual Report on Form 10-K for the fiscal
year ended March 31, 2000, and a Transitional 10-K report for the period from
March 31, 2000 to June 30, 2000 including the audited and unaudited financial
statements contained in such report, (3) financial and operating information
with respect to the business, operations and prospects of Infogrames and INA
furnished to us by the Company and INA, including (i) a preliminary draft of the
audited financial statements of INA for the fiscal years ended June 30, 1998,
1999 and 2000, (ii) a preliminary draft of the audited financial statements of
Accolade Inc. for the fiscal years ended March 31, 1998 and 1999 and the period
from April 1, 1999 through April 15, 1999, and (iii) projections for INA and
Infogrames prepared by the respective managements of INA and Infogrames, (4) a
comparison of the historical financial results and present financial condition
of INA and Infogrames with those of other companies that we deemed relevant, (5)
a trading history of Infogrames common stock from September 1999 to the present
and a comparison of that trading history with those of other companies that we
deemed relevant, (6) a comparison of the financial terms of the Proposed
Transaction with the financial terms of certain other recent transactions that
we deemed relevant, and (7) the potential pro forma effect of the Proposed
Transaction on the future financial performance of the Company, including the
financial benefits of the cancellation of $125 million of indebtedness and the
operating synergies and strategic benefits expected to result from a combination
of the businesses of the Company and INA. In addition, we have had discussions
with the managements of Infogrames and INA concerning their respective
businesses, operations, assets, financial conditions and prospects and have
undertaken such other studies, analyses and investigations as we deemed
appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of
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such information and have further relied upon the assurances of management of
the Company that they are not aware of any facts or circumstances that would
make such information inaccurate or misleading. With respect to the financial
projections of the Company and INA, upon advice of the Company and INA,
respectively, we have assumed that such projections have been reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of the respective managements of the Company and INA as to the future
financial performance of the companies and that the Company and INA will perform
substantially in accordance with such projections. In arriving at our opinion,
we have conducted only a limited physical inspection of the properties and
facilities of the Company and INA and have not made or obtained any evaluations
or appraisals of the assets or liabilities of the Company or INA. Upon advice of
the Company and its legal and accounting advisors, we have assumed that the
Proposed Transaction will be a tax-free transaction to the Company and its
stockholders. Our opinion necessarily is based upon market, economic and other
conditions as they exist on, and can be evaluated as of, the date of this
letter.
In addition, we express no opinion as to the prices at which shares of
Infogrames common stock may trade at any time prior to or following the
consummation of the Proposed Transaction, and this opinion should not be viewed
as providing any assurance that the market value of the shares of Infogrames
common stock owned by the stockholders of the Company after consummation of the
Proposed Transaction will be in excess of the market value of the shares of
Infogrames common stock owned by such stockholders prior to such consummation.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the consideration to be paid
by the Company in the Proposed Transaction is fair to the Company and,
accordingly, to the stockholders of the Company other than ISA and its
affiliates.
This opinion is for the use and benefit of the Special Committee and is
rendered to the Special Committee in connection with its consideration of the
Proposed Transaction.
Very truly yours,
LEHMAN BROTHERS
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